It’s always good to read something that challenges conventional wisdom. So I enjoyed a press release that arrived in my inbox last week from UK-based Colaego Consulting. In an appropriately-titled article called ‘Heretical Thinking,’ the firm advised the mobile  industry to suspend its campaign for further spectrum to be released following the latest awards of 2.6GHz and ‘digital dividend’ (700/800MHz) airwaves, which are currently being sold off in Europe and elsewhere. Why? Because the way individual operators value new mobile spectrum is deemed to be dictated more by maintaining parity with its rivals than the ability to generate value for either its shareholders or the wider industry.

This, it is argued, effectively creates a spectrum ‘arms race,’ which is good for consumers as it means spectrum supply can outstrip capacity demands and lead to lower prices, but ultimately leads to a lower return on investment for operators. 

This is a controversial position in an industry currently obsessed with the ability to expand capacity in order to meet the rising demands of mobile broadband and other high-bandwidth data services. Colaego acknowledges that this is a valuable source of new revenue for operators, but notes that these new services are currently a long way from compensating for lower revenues from voice calls, reduced mobile termination rates and lower SMS revenues. Therefore, whilst there may be a demand for spectrum in terms of capacity – a key factor behind today’s inflated spectrum valuations – Colaego concludes that there is little demand for spectrum from an economic standpoint.

So how do operators currently approach the prospect of new spectrum? Colaego suggests the following scenario: 

The manner in which mobile operators value spectrum is to work out the additional value that could be generated from owning it. In simple terms it is the difference in the Net Present Value (NPV) of the business with and without the spectrum. If new spectrum is being offered at auction and operator A buys it whereas operator B does not, then operator B would be at a competitive disadvantage in terms of capacity or ease of building mobile broadband coverage. This would translate into reduced cash flow, for example through a loss of market share due to the lack of capacity to serve mobile broadband customers. If operator B were to acquire the spectrum, the reduction in revenue would not occur and this “saved” revenue drives the value of the spectrum. Therefore from an operator’s perspective the value of the spectrum is not driven by generating new cash flows but by preventing a reduction in existing cash flows.  This leads to the conclusion that if total mobile industry revenues do not increase, new spectrum is a bit like an arms race. 

 

And here comes the ‘heretical’ bit. What happens if no new spectrum is made available and a market becomes capacity constrained in terms of mobile broadband? Colaego reckons that mobile broadband prices will increase, return on deployed capital will increase, and an operator’s cash reserves will benefit from not having to shell out for expensive new licenses or network build-outs using the new spectrum. Furthermore, the likelihood of increased competition via new market entrants – always a goal for a regulator when selling-off new airwaves – is significantly reduced. This would mean bad news for consumers, who would face higher prices and less choice, but good news for an operator’s bottom line and their shareholder returns.

Critics would no doubt argue that market forces and the influence of regulators would ensure that this scenario is unlikely to unfold anytime soon. Nevertheless, evidence of the spectrum arms race – and its financial consequences –can be detected in markets such as India, whose recent 3G auctions saw operators shell out billions of dollars without any buyer seeming to arrive at a satisfactory outcome.

Clearly, a rethink on how spectrum is valued is required if operators are to efficiently satisfy ever-growing capacity demands. According to Colaego, it is important to highlight the differences between spectrum used for voice – where geographic coverage is key – and mobile broadband services. In the latter, coverage is a secondary concern as bandwidth can be concentrated on areas where users live and work. This means that network traffic is usually unevenly distributed across a network (Colaego estimates that only around 15-20 percent of a typical operator’s cells are affected by congestion). In this scenario, operators without mobile broadband spectrum could seek to offload traffic onto Wi-Fi (or via femtocells) or look to rent capacity from a rival in the areas where they need it.

Many operators may be looking at such alternatives in order to opt out of the arms race.

Matt Ablott, Senior Editorial Analyst

 
The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members