How much is spectrum worth? 5G technology is widening the gap between how telecom companies value spectrum and its actual market value
Spectrum is at the core of wireless service providers’ business. But with 5G networks on the way, those providers—and investors—need to rethink how they value spectrum. Accurate valuation allows telecoms to make better-informed decisions about new technologies and improve their operational capabilities.
Introduction: Assessing assets
Spectrum is a unique asset. It reduces costs, increases performance, is in finite supply, and never wears out. So why does the investment community minimize its importance when valuing telecom companies? One reason may lie in the way telecom companies themselves value and manage spectrum.
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Valuing large portfolios of spectrum assets is an enormously complex endeavor, and it will soon become considerably more so. In light of this, we believe, both wireless service providers (WSPs) and investors need to rethink how they assess spectrum assets. Accurate valuation is no longer simply a matter of considering frequency and bandwidth in relation to coverage and data capacity—it increasingly depends on factors such as newly available frequencies, advances in technology, innovative ownership models, and the advent of 5G networks.
Despite the challenges, a properly valued spectrum portfolio offers real advantages to both WSPs and investors. As we argue in Spectrum portfolios in a 5G world, our full report on spectrum valuation, accurate valuation allows WSPs to optimize their spectrum purchases, make better-informed decisions about new technologies, and improve their operational capabilities and financial options. The wider investment community can benefit, too, by gaining a more precise sense of WSPs’ true enterprise value, which can serve, in turn, as the basis for better investment and financing decisions.
Why spectrum valuation matters
Over the past decade, data traffic over mobile networks has exploded, growing far faster than the increase in available spectrum.1 As a result, spectrum has risen in value, as WSPs try to keep up with the demand for data and the need to increase network capacity and improve services. And yet WSPs continue to account for their spectrum holdings at the original purchase price, whether bought two years or two decades ago. Even though spectrum licenses make up a major portion of WSPs’ assets—an average 35 percent of the assets of US WSPs, and close to 20 percent of WSPs elsewhere2—the “true” value of most WSPs’ spectrum portfolios remains significantly understated both in absolute terms and as a percentage of each company’s asset base.
As spectrum continues to increase in value, the gap between how companies currently value spectrum and its actual market value will only grow. Closing that gap through proper valuation of spectrum holdings offers two distinct advantages.
First, it enables WSPs to gain a better understanding of their current spectrum portfolios, uncovering hidden value and enabling them to optimize their network operations. This in turn will allow them to devise a more successful strategy for managing their portfolios and purchasing new spectrum as technologies, markets, ownership models, and needs change. This is particularly critical as WSPs begin to build out their 5G networks, and as the driver of spectrum value shifts from boosting data capacity and services to the development of new uses for spectrum and new ways of owning and managing it.
Second, proper spectrum valuation provides the investment community with a more realistic sense of WSPs’ current financial strength and potential for future growth. Investors have long discounted the importance of spectrum auctions—indeed, the stock market largely ignores their outcome, no matter how large the licensing deals are.3 A more accurate sense of spectrum value would enable investors to better value WSPs as a whole, while providing companies access to new financing opportunities based on spectrum assets that could significantly lower their overall capital costs.
So how should spectrum be valued?
The fair market value of spectrum, long-held or newly licensed, depends on a variety of factors, some of them longstanding and others a function of new technologies and new ownership structures. None of the relevant factors exists independently of each other: Properly valuing a spectrum portfolio inevitably involves taking into account how each factor affects each holding, and how each holding relates to other holdings within the broader portfolio.
Longstanding valuation factors. The most basic valuation constant has always been spectrum frequency and bandwidth, and a few straightforward rules still apply. Larger blocks of contiguous spectrum, for example, are more efficient than an equal amount of fragmented spectrum, and a WSP needs a combination of lower- and higher-frequency spectrum to provide efficient coverage and capacity. Even unused spectrum can have considerable value, as it lets companies migrate to new technologies faster, giving them considerable advantages in time-to-market and customer satisfaction.
Other factors that have long affected spectrum value include the degree to which certain frequencies may be impaired by interference, whether incumbent users need to be cleared from a frequency band, and the availability of end-user devices and network equipment that can support a new frequency.
New ownership models. Opportunities to make greater use of the commonly used low- and mid-band spectrum available to WSPs on an exclusively licensed basis are limited. So the Federal Communications Commission (FCC) has recently allocated more spectrum that can be used in two innovative access schemes.
Some spectrum has been opened up for use on an entirely unlicensed basis. While companies are already employing these bands for applications such as Wi-Fi and microwave ovens, WSPs can now incorporate them into their portfolios—but only under certain restrictions, and often at far lower power levels than that used in regular wireless communications networks.4 These factors will greatly reduce the sought-after performance benefits of unlicensed spectrum.
The FCC is also considering ownership models that would allow WSPs to share certain bands of licensed spectrum with their current users.5 Such deals would give WSPs secondary rights to these spectrum bands, and to use them at greater power levels than unlicensed spectrum. But they would be constrained by geography, time- or availability-based restrictions, interference concerns, and technological feasibility. As with unlicensed spectrum, the rules, regulations, and equipment needed to coordinate the use of shared spectrum are still being defined and will likely largely determine the value of the spectrum used in these ownership models.
Newly available higher frequencies. In a further effort to make more spectrum available, the FCC is also opening up higher-frequency, millimeter wave (mmWave) bands for licensing.6 While these bands suffer from their inability to maintain signal strength over distances above a few hundred meters, and from other physical limitations, they will likely prove instrumental in applications such as wireless “last mile” broadband coverage to homes and businesses.
Determining the value of mmWave frequencies won’t be easy. Given their potential, especially as WSPs begin to implement 5G technologies, prices on the secondary market have shot up by a factor of 10 in just the past two years. But proper valuation of these frequencies will depend on how quickly and broadly WSPs can put them into service such that their use adds significantly to revenue and thus justifies investment in them, and the degree to which regulatory and legislative decisions affect their implementation.
The advent of 5G
Put bluntly, 5G changes everything. No longer will one device communicate with one cell tower and switch from tower to tower as the user moves. Instead, devices will be able to communicate simultaneously with several towers, over different frequencies and using different radio protocols, opening up the potential for far faster and more responsive wireless communications and the means to fully build out the Internet of Things. Once implemented, 5G will serve as the critical infrastructure for autonomous vehicles, industrial automation, first-responder communications, mobile health, and other network-intensive applications.
Two key technologies underpinning 5G—multi-connectivity and carrier aggregation—will allow WSPs to combine different frequencies in new ways to offer far faster speeds and improved performance. Multi-connectivity enables traffic from multiple sites and across different technologies to be combined at the handset, allowing WSPs to combine licensed and unlicensed spectrum and thus use different frequencies for different user needs. Carrier aggregation lets WSPs combine relatively fragmented, disparate bands of spectrum into a larger and more efficient block of spectrum and, thus, gain the advantages that large blocks have over disparate smaller blocks.
As WSPs begin to implement 5G solutions, these critical new technologies may profoundly change the role of every holding in their spectrum portfolios. This in turn will motivate WSPs to rethink their spectrum portfolios and how they use and value the individual spectrum assets within their portfolios.
Keeping pace with 5G
5G is on the verge of bringing about the most dramatic change the wireless communications industry has faced since its inception. New technologies are coming into play, the demands placed on carriers’ networks will multiply in complexity and scope, and competition will intensify.
With the right portfolio and spectrum strategy, WSPs can serve their customers better, achieve a lower cost structure, move into new markets and technologies faster, and attract investment from the financial community. Conversely, an undisciplined approach to spectrum management can hinder a company’s performance and competitive prospects for years to come.
The wireless industry is evolving fast. Are you keeping up?