Uncertainty now is growing in almost every part of the telecom and service provider business model, as end user demand changes, as products mature and prices drop and competition grows.
That is evident in the area of spectrum value as well, where recent spectrum auctions have diverged from expected sales values. In the past, mobile operators also have paid too much for spectrum.
Recent U.S. spectrum auctions show mobile service providers being much more cautious about what they are willing to spend on buying spectrum licenses. The same trend was evident in recent spectrum auctions in India as well.
In part, that is likely due to a perception that there are other ways of sourcing additional capacity, from aggregating unlicensed spectrum to use of smaller cells to shared spectrum or acquiring assets already awarded, but not yet in use. In some markets, spectrum trading also is a solution.
But it also is possible that the perceived value of spectrum--still high--also has to match with expectations about the amount of revenue incremental spectrum can generate. If operators believe 100 new units will not drive the same amount of revenue as in the past, then their willingness to invest in spectrum will be less, on a per-unit basis.
Also, coming physical supply is disruptive, to say the least. All presently-licensed mobile spectrum, plus all Wi-Fi spectrum, plus new shared spectrum, amounts to about 2,600 MHz in the U.S. market. The actual mobile and Wi-Fi spectrum is closer to 800 MHz to 1,000 MHz.
But the Federal Communications Commission is releasing an order of magnitude more physical spectrum; much unlicensed; with possibly two orders of virtual capacity increases; plus spectrum sharing; plus small cells; plus better radios, is bound to be disruptive.
Supply and demand is at work, in other words. And if supply increases by
So how much will 5G change service provider spectrum valuation and asset models? Quite a lot. In fact, say consultants at Deloitte, “5G changes everything,” they say. That might be a bit of hyperbole, but the point is that there is greater uncertainty, for several reasons.
For starters, it is an underestimated fact that the value of spectrum licenses is part of the equity value of any public mobile service provider company.
Spectrum licenses account for “an average 35 percent of the assets of US WSPs (wireless service providers), and close to 20 percent of WSPs elsewhere, according to consultants at Deloitte.
But present valuations are assigned at original purchase value, and therefore might actually be different in an era of growing spectrum need and supply. At one level, the potential mismatch is easy to illustrate.
The value of assets for which an operator overpaid represents more value than similar assets for which an operator paid less, even if the assets acquired at lower cost might be equally, or more, valuable. So accounting “fiction” is at work.
Still, historically, rights to use mobile spectrum have been fundamental drivers of the ability to be in the business and earn revenue. But there are new questions in the 5G and coming eras, as the supply of spectrum (physical and virtual) is changing by orders of magnitude.
And how does one account for the value of being able to offload traffic to Wi-Fi? That avoided capital investment is worth something, but how much? And even if valuable, can it be reflected in an assessment of equity value?
Scarcity also matters. Historically, mobile spectrum has had value in two or more ways. It has been the necessary precondition for conducting business and satisfying demand. But it also has been a means of denying competitors access.
Licensed spectrum has been a driver of scarcity, and therefore equity value.
Deloitte argues the value of spectrum is presently undervalued. On the other hand, one might argue that so much new spectrum is coming, and the ways to use unlicensed spectrum also multiplying, that old rules of thumb about value and pricing do not work so predictably.
Cable operators, for example, clearly see lots of value in using their distributed public Wi-Fi nodes as infrastructure for their new mobile services. The “Wi-Fi first” access model does reduce either capex or wholesale capacity purchases or both.
And though the correlation is not linear, since mobile operators can increase capacity in other ways, the amount of spectrum a mobile operator can deploy is linked to the amount of revenue it earns. But each contestant has other assets to deploy (capital, brand, scale), so the relationship is not linear and causal.
In each market, some operators earn more revenue than others, for reasons including, but not limited to, the amount of spectrum they can deploy.
The point is that it is no clear whether spectrum presently is undervalued or not. The harder question is how to value such assets in the future, when the amount of supply--ignoring quality issues--is going to increase by an order of magnitude, and the effective capacity is going to increase by possibly two orders of magnitude.
Qualitative changes also will matter. Most internet of things apps will not require much bandwidth. And much bandwidth presently consumed across the backbone might in the future be cached and processed at the edge of the network. That will shift the bandwidth demand curve in significant ways.
On the other hand, if mobile networks are to challenge fixed networks as platforms for consumer internet access, then lots of cheap new bandwidth will be necessary, so mobile alternatives can offer comparable bandwidth and prices. Lower bandwidth costs are coming, in the mobile area, driven by platform improvements, more and more-efficient spectrum assets, use of small cells and shared, unlicensed and aggregated spectrum options.
If mobile bandwidth traditionally has been an order of magnitude more expensive than fixed network bandwidth, then it is obvious that, to compete, mobile bandwidth has to be as capacious and affordable as fixed network bandwidth.
Up to this point, mobile cost per gigabyte has been as much as an order of magnitude more costly than fixed network cost per gigabyte. That is going to change.
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