Mobile operators’ spectrum appetite shifting to higher bands

Author: Martyn Roetter
Published: 2016-10-25

A stark lesson from the ongoing US Federal Communications Commission (FCC) auction of 600 MHz frequencies is a sharp drop in the market valuation of sub-1GHz spectrum. How much, or in this context how little, mobile operators are prepared to pay for usage rights in the lower frequencies appears to have changed considerably since the heady days of the 700 MHZ auction back in 2008. A shift in wireless demand from blanket nationwide coverage to higher capacity in “hot spots”, and the prospects of a lot of new high-frequency spectrum being cleared for 5G, may be driving this change.

Traditionally, low frequencies such as 700 MHz and 800 MHz have commanded substantially higher prices in terms of dollars per MHz per unit of population (MHz-POPs) than higher spectrum frequencies such as 1.8 GHz, 2.1 GHz, 2.5 GHz, and 3.5 GHz. Sub-1GHz bandwidth’s higher prices compared to higher frequency bands have been attributed to their propagation characteristics, which enable a larger area to be covered with fewer base stations, therefore at much lower capital expenditure costs than at higher frequencies.

But with the large operators having achieved a nationwide footprint using their sub-1 GHz spectrum, network development has shifted towards providing substantial additional capacity within relatively small urban areas. Here networks are under pressure due to heavy demand for bandwidth-intense video applications. In these hot spots, high frequencies, which provide much higher capacity, are of greater value than sub-1GHz frequencies. Their shorter propagation ranges reduce the risk they will cause interference while, thanks to their short wavelengths, they can effectively exploit techniques for capacity and performance enhancements such as MIMO (multiple-input and multiple-output), or multiple transmit and receive antennas.

The 600 MHz incentive auction has a unique structure and a complex set of conditions. Its goal is to transfer broadcast spectrum now in the hands of free-to-air broadcasters to wireless operators via a market mechanism—auctions—managed by the FCC. The auction proceeds through successive stages. In each stage, if a preceding stage is unsuccessful, a Reverse Auction takes place in which broadcasters provisionally sell their regional 6 MHz licenses to establish how much spectrum will be available for wireless operators to acquire, and the target price or the clearing cost.

Wireless operators then bid on this spectrum in a Forward Auction. The forward auction ends when demand no longer exceeds supply and bidding activity stops. If the sum of these bids is insufficient to meet broadcasters’ demands the auction proceeds to a next stage in which the amount of spectrum available to wireless operators, and the targeted clearing costs, are reduced.

In Stage 1, bids in the forward auction totaled only $22.5 billion after 27 rounds, far short of the more than $88 billion required to pay the $86 billion broadcasters were asking for 126 MHz of spectrum. Stage 2 concluded unexpectedly on October 19, 2016 after only one round of bidding that raised $21.5 billion. This was less than half of the $56.5 billion asking price for 114 MHz of broadcast spectrum — of which 90 MHz would be for licensed use at a price of $0.88 per MHz-POP.

One widely-cited expectation is that the 600 MHz auction will be successfully concluded, perhaps in Stage 4, with 84 MHz of spectrum cleared and operators paying about $30 billion for 70 MHz of bandwidth for licensed use, or a price of $1.37 per MHz-POP. This compares favorably to an average price in the earlier 700 MHz auction of $1.22 per MHz-POP. But this now seems increasingly unlikely and the auction may only be successful if broadcasters are willing to accept payments amounting to significantly lower prices per MHz-POP. Otherwise it will fail.

Broadcasters’ hopes and wireless operators’ appetites for 600 MHz spectrum seem far apart.

Comments 2

  1. The key to valuation is how soon the buyer of spectrum needs to move and the appetite for regulatory approval. AT T and Verizon appear to be prime candidates, with major spectrum challenges in major markets, but they have the highest degree of regulatory risk and are in the midst of a strategic shift regarding their spectrum utilization paths going forward.

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