Mobile networks face 400% price hike for 2G

There is growing concern that these costs could be passed on to consumers in the form of higher mobile phone bills.

The networks were allocated 2G spectrum in the 1980s and the fee they pay hasn't changed since then.

However, Ofcom's new fee structure will ensure that the operators pay substantially more to hold on to their 900MHz and 1800MHz spectrum allocation, which can now also be used for 3G and 4G services.

It has been suggested that the proposal is a result of the 4G auction, finalised in February this year, which didn't raise as much money as anticipated: £2.3 billion, rather than the £3.5 billion predicted by George Osborne.

The hikes haven't yet been confirmed, but should the new charges be approved, Vodafone and O2 will be hit the hardest. Their annual bill will soar from £15.6m to £83.1m and continue increasing every year.

Though they've not been shy about voicing their displeasure this week, the mobile operators agreed to pay the market rate for their 2G in December 2010.

However, with annual fees set to run into the hundred millions for at least one operator, they have every reason to dispute Ofcom's market value during the consultation period.

Making networks pay

In 1985, Racal (Vodafone) and Cellnet, were allocated part of the 900MHz spectrum, which would allow them to run their GSM-based mobile network.

Then, in 1990, Orange and Mercury also wanted in and were given bands at 1800MHz, with Vodafone and Cellnet also getting some of the higher speeds.

A decade later, the 3G auction revealed just how valuable a commodity radio spectrum had become: it raised £22.47 billion. BT Cellnet, Orange, One2One and Vodafone Airtouch were the four UK networks to get a slice of the action.

As a result, in 2010 the Government issued a Direction, which meant Ofcom had to revise the fees the operators pay for their licences in order to 'reflect full market value'.

The proposed fees calculated by the regulator are based on the value of the spectrum, £25 per MHz at 900 and £15m per MHz at 1,800.

However, Ofcom seems to have missed the fact that the operator's holdings are not equal, so Vodafone and Telefonica will be paying market value for a holding that can't be used for 4G.

Should the operators not be willing to fork out the higher fees, they can either sell their holding or return it to Ofcom for auction.

Consultation over the proposal is open until the 19th December, so it's unlikely that the network operators will simply roll over and agree the new charging structure.

No surprise

Despite Ofcom only releasing the proposed charges earlier this month, the network operators have been aware of a potential pay increase for the best part of four years.

The original suggestion to increase the fees for radio spectrum was published in the 2009 Carter report and again during the 4G auction proposals in 2010.

What's more, they also had an inkling as to how much the market value of their holdings would be when they placed their bids in the 4G auction.

So, while the mobile operators are claiming that the hikes are as a result of the Government's unrealistic estimate of how much would be raised by the 4G auction, they have been aware of the changes for some time.

This hasn't stopped the media focusing on the potential of shock price hikes for consumers though.

It's also helped to paint the network operators in a good light as they can claim to be fighting on the behalf of consumers against Government incompetence.

Making consumers pay

A move to shift the blame for any of their own price increase to Ofcom, or even the Government, seems to be working already.

"Our concern is that it will be mobile users who are left to foot the bill [for the fee hikes] and it isn't clear if there will be any direct benefits to them," Adam Kirby of Uswitch said.

Having said that, this is one of the first times the networks have had an opportunity to have their say.

They've only had chance to respond to the consultation from October 10th, so it does make sense that they're only voicing their displeasure now.

The operators are well aware that Ofcom is unable to drop the hikes, as they need to make 2G spectrum tradeable.

But even in the event that the regulator does cut the fees slightly, the mobile networks still have a fall guy for their price increases.

The end result is likely to see the UK mobile network operators sending their prices soaring, only to blame Ofcom and the Government, while claiming that they did everything they could to fight against the higher spectrum fees.

A win-win situation.