When Spectrum Prices Get Too High, Bidders Respond

High spectrum prices might encourage Verizon Wireless and possibly other mobile service providers to use the other tools at their disposal to increase effective bandwidth.

The hope of getting such high prices also might encourage TV broadcasters to withhold their spectrum from relicensing unless high prices are offered.

At the same time, possible Federal Communications Commission spectrum set-aside policies could contribute to lower prices paid by smaller firms, and higher pirces potentially paid by Verizon and AT&T.

But high spectrum prices represent danger, and will encourage AT&T and Verizon to use the other tools at their disposal to increase capacity.

As always, high prices encourage users to become more creative about using alternative and substitute products.

Verizon isn't as hungry for spectrum as it once was, in part because prices have gotten too high, Verizon CFO Fran Shammo suggested at a J.P. Morgan investor conference.

Shammo said that given the premium at which spectrum went in the most recent AWS-3 auction increases the value of alternative approaches, such as adding more small cells.

"I think that the AWS-3 auction has given the FCC a little bit of a challenge around unintended consequences," Shammo said.

Basically, the high AWS-3 prices likely encourage TV broadcasters to hold out selling their licenses unless they get similar, or even higher prices. That means less spectrum will be made available.

At the same time, with the Federal Communications Commission also considering bidding rules that would further reduce the amount of spectrum available to major carriers, the gains Verizon could make are further limited, and likely also work to push prices higher.

"When you bid up spectrum so high and now you have broadcasters sitting on the sidelines thinking their spectrum is worth a certain amount of money, and then you have where the FCC is trying to draft the rules around favoring some carriers over others, I think you have a problem,"  Shammo said.

Unlike the recent spectrum auctions in India, where service providers virtually had to acquire new licenses to support their present operations, and therefore had to spend whatever it took to do so, Verizon and some other U.S. mobile service providers will not “need” to rely on spectrum purchases to expand bandwidth.

As always, assuming a reasonable amount of physical spectrum is available, service providers can use network architecture to effectively reuse existing spectrum, and take advantage of offloading to Wi-Fi more extensively.