Saturday, April 20, 2019

Spectrum Prices are Dropping Because Business Model Requires Lower Prices

Some regulators are going to be shocked to find out that the historically high value of spectrum used for mobile communications is unsustainable. Bidders now have many reasons to value even needed spectrum at lower rates than in the past.

And the reasons have everything to do with supply and demand. End user and customer demand for use of internet data keeps climbing. So one might think spectrum prices also must keep climbing. Not so, because supply and demand is changing.

It is increasingly possible to use spectrum more efficiently. Small cell architectures, for example, allow more intensive spectrum reuse.

Also, an order of magnitude more spectrum is going to be commercialized, and that spectrum will feature wider channels that are more spectrally efficient. Coding also is more efficient. It is easier to aggregate unlicensed spectrum, which becomes a functional substitute for licensed spectrum.

Mergers will mean that specific companies will find they have more available spectrum to use. And new spectrum sharing techniques mean previously unusable spectrum becomes available.

Also, the characteristics of millimeter wave spectrum mean that more effective bandwidth is possible for every megaHertz of available spectrum

In other words, if ways to use fair amounts of spectrum without a license become possible; if the physical supply of spectrum grows substantially and the cost of using small cell architectures grows, we should expect lower spectrum prices.

To make an analogy, spectrum is beachfront property, but we are making more beach. Over the past few years, some have worried about the cost of 5G spectrum, although spectrum prices are dropping, generally speaking, in part because there is a huge increase in supply, and because mobile operators must now more carefully weigh the cost of new spectrum against expected financial return.  

Also, firm strategies now vary. Some firms believe use of unlicensed spectrum will be more important. Others substitute small cells for additional spectrum. Some need additional spectrum more urgently than others, based on present holdings.

On the demand front, if it becomes clear that revenue per bit continues to decrease, then the ability to wring revenue out of any fixed amount of spectrum decreases as well. That means mobile operators simply cannot afford to pay higher prices for spectrum, as the expected return on those assets is effectively lower.

If average revenue per account keeps dropping, then average cost to supply bandwidth also has to decrease. Architecture can help. But spectrum prices also must drop.

Demand also is affected by the fact that early adopters tend to spend more than later adopters. That applies to whole regions and countries as well as between regions and countries. Later adopters are lighter users, either for behavioral reasons (they use the internet less) or for cost reasons (they have less money to spend on internet access).

The big takeaway is that we should expect spectrum prices to fall, as demand increases dramatically.

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