Spectrum Auctions: The New Price of Spectrum

For years I have maintained that spectrum is the currency of commercial wireless networks. The AWS-3 auctions have certainly proven that. This spectrum is not even in a most advantageous portion of the radio spectrum when compared to 600 MHz, 700 MHz, or 800 MHz but that does not seem to matter. The auction has raised more than 44 billion dollars so far for an amount of spectrum that shouldn’t get network operators excited but they are, I guess. The AWS-3 auction is for the following spectrum:

1, 614 licenses available, a total of 65 MHz of spectrum

1695-1700 5 MHz non-paired
1700-1710 10 MHz non-paired
1755-1760 paired with 2155-2160 10 MHz
1760-1765 paired with 2160-2165 10 MHz
1765-1770 paired with 2165-2170 10 MHz
1770-1780 paired with 2170-2180 20 MHz While the bidding has slowed, the auction will not officially close until there is at least one round where no new bids are received. At that point, the FCC will announce the winners and when the dust settles we will find out who bid the most for which portions of the spectrum in which areas of the United States. Spectrum is valued by calculating the price per MHz of population covered for each given area. In 1998, during Spectrum Auction 73 the FCC auctioned what is known as the 700-MHz band, which included a total of 56 MHz of paired spectrum and 6 MHz on unpaired spectrum. That auction brought in a total of just less than $19 billion in new revenue for the government. The AWS spectrum requires more cell sites per square mile of coverage and does not provide the same level of inbuilding coverage as the 700-MHz band, yet the 50 MHz of paired spectrum and 15 MHz of unpaired spectrum have brought in bids totaling more than $44 billion.

It should be no surprise that the paired spectrum is going for a lot more than the non-paired spectrum since it is not clear whether a TDD (Time Division Duplex) system can survive next to an FDD (Frequency Division Duplex) system or vice-versa. With TDD the mobile and cell sites share the same spectrum and the transmissions are allocated different time slots. With FDD, the mobile devices transmit up to the cell site on one portion of spectrum and the cell site transmits to the device on the other. Both TDD and FDD systems work in the LTE world but to my knowledge there have never been TDD and FDD systems co-existing in the same portion of spectrum.

What is driving this increased pricing for spectrum? Most of the reasons are obvious. The advent of broadband and streaming video has increased demand for bandwidth and many municipalities are making it more and more difficult to add cell sites, one of only a few ways to increase network capacity. The others are to acquire more spectrum and add it to existing sites, make use of LTE spectrum aggregation, which means tying two different portions of spectrum together to gain either better speed or more capacity, off-loading customers to Wi-Fi access points where possible, and the use of smaller, less obtrusive cell sites including femtocells within a home or business.

Some network operators need additional spectrum more than others. T-Mobile is in the worst spectrum position and it has been buying up the A and B lower 700-MHz blocks from smaller network operators, refarming 3G networks to LTE and, of course, showing up at auctions. Dish Network is either a wannabe network operator or a company that wants to amass spectrum to then turn around and use as currency to entice a merger or acquisition.

Finally, the AWS-3 auction is the last auction prior to the 600-MHz “incentive” auction that has already been delayed once and will probably be delayed again. This is the first time the federal government has attempted to make those being cleared off the spectrum partners in the process. The idea is to reward TV stations that are willing to give up their 6 MHz of bandwidth in the 32 and higher Channels of the TV spectrum, paying them for the spectrum out of the proceeds of the auction. In order for the incentive part of this auction to work, each and every TV station in the United States that operates on Channel 48, for example, will have to opt in. If they do not, two things will happen. First, the 6 MHz of spectrum now occupied by Channel 48 in the areas that do not opt in will remain on the air and therefore that 6 MHz of spectrum will not be available on a nationwide basis. Next, the FCC can force the remaining Channel 48 stations to relocate lower in the band. However, I think this would be met with a number a lawsuits and remember that the National Association of Broadcasters (NAB) has a very strong and active lobby in place in the nation’s capital.

All of the above reasons help propel the AWS-3 auctions to record highs. While spectrum prices are being driven up, the wireless industry is also involved in a pricing war or three.T-Mobile and Sprint started this new set of pricing wars, hoping to push AT&T and Verizon into having to follow suit, which for the most part they have been doing. While I am not an economist, it will be interesting to see how the combination of higher spectrum prices and pricing wars will affect each of the top four players, as well as the tier two and three players. A number of these smaller players have already sold some of their spectrum, some have been purchased by a larger network operator, and others have shed some of their coverage to concentrate on prime areas. Most of these companies cannot afford to engage in pricing wars nor can they stand up for long at an auction with prices never before seen for spectrum in the United States.

There is also the issue of if and how four tier one networks all survive during these times, and then, if someone would really buy up spectrum and try to launch a new wireless network. I personally think the federal government made two mistakes when it comes to mergers. The first was the AT&T and T-Mobile proposed deal that fell apart because the feds did not want to see it happen, costing AT&T billions of dollars in funding and spectrum to fund the merger termination terms of the contract. More recently there was talk that Sprint, under its new owner, was interested in T-Mobile. Sprint has more spectrum today than any other U.S. wireless network operator but is generally considered to be the network with the poorest coverage. T-Mobile has good coverage where it has spectrum.

It will be interesting to see where the bidding settles out for the AWS-3 auction and who won what for how much. This auction reminds me of the auctions held in Europe where the various governments had really high minimum prices on the spectrum they put up for grabs. The network operators had to pay the price and it hurt their bottom lines for a few years. In the end this probably stymied both 3G and 4G growth for awhile. The AWS-3 auction is different in that the minimum payment for spectrum was blown through on the first or second round of bidding and the bids keep racking up amazing amounts.

It seems strange to me that bidders are willing to pay these prices, because as soon as this spectrum is built out it will face slowdowns and perhaps even service disruptions. This is because the more capacity that is added to the networks, the more bandwidth seems to be consumed. Network operators, because of the pricing wars, have been upping their “Gigabytes per month” allocations when only a few years ago they were trying to eliminate their initial unlimited data plans. Further, the FCC and several network operators are still working through the issue of “throttling” high-data use customers when they exceed certain amounts of data per minute, hour, or day. There is not enough radio spectrum available to serve all of the people who want to stream video all of the time.

Granted the industry is finding more efficient technologies such as LTE, and something being called 5G but not defined. They continue to build out more cell sites closer together and off-load customers to Wi-Fi and/or femtocells whenever possible. However, regardless of what is accomplished, customers want more, faster access for their own devices. If that comes at the cost of someone else’s data being slower, so be it. As long as they get what they want, and at a cheaper price, they will be happy, but how long can this spiral of pricing, capacity, and speed continue?

Conclusions

One of the unexpected results of the AWS-3 auction will be the congressional glee at being able to pay down more of the national debt. This means that ALL spectrum going forward is available, at least according to Congress, to fill the U.S. coffers. Systems that exist to serve others, designed to save lives and property, to enable our armed forces to communicate with each other, and spectrum that is used for pushing the limits of physics, are all in jeopardy. If those in Congress believe they can simply grab more spectrum and auction it for this kind of money, no spectrum is safe, no matter what it is used for.

As long as people don’t understand that spectrum is a finite resource and that where spectrum is located within the Radio Spectrum makes a difference, the more vulnerable all of our spectrum becomes. Some who do not understand a thing about spectrum will listen to those who have the money to insist that there are new technologies that will enable shared use of portions of the spectrum, even if that technology is still being developed. What happens when non-technical people get ahead of themselves? Look at what the United Kingdom has decreed. By 2016 LTE technology will replace all public safety communications in the United Kingdom. Never mind that voice over LTE will not have been proven by then, that mission-critical voice communications standards won’t be completed until 2018, and that no one really knows if LTE can, in practice, replace existing public safety mission-critical communications.

Within the Wireless, Internet, and computer communities there have been many feeding frenzies of one form or another over the years—a “must have” or a “it’s coming real soon now” new technology that will change the way we all work. In reality there have been some: the BlackBerry, iPhone, 3G, and LTE 4G broadband technology. However, for each of these there have been many failures: the Palm handheld, the first laptop computers, the Newton, Metricom, dial-up wireless data, and many, many more.

Perhaps it is time to put the brakes on the “more of everything” mentality we seem to be buying into this year and get back to walking one step at a time toward a future that is really possible and not built on hype and false expectations. The insane price for spectrum evident with the AWS-3 spectrum will change the wireless landscape forever, at least in the United States.

Andrew M. Seybold