Feature Article

October 29, 2013

When is Spectrum Too Expensive?

Whether Long Term Evolution 4G auctions will become a spectrum bubble is anybody’s guess at the moment. But industry observers with long memories will recall that vast overbidding nearly bankrupted leading European mobile service providers when 3G auctions were held.

There are some signs of price inflation in the Netherlands, Ireland, Taiwan, and Austria, and in the Czech Republic, for example. In Taiwan, bid prices were about three times what regulators set as the minimum price. The Czech Republic suspended its auction when prices grew too quickly.

The U.K. 4G spectrum auctions generally are considered reasonable, compared to Czech prices before the auction suspension. The May 2013 U.K. auction raised around EUR0.18/MHz/pop. The Czech auction had reached EUR0.25/MHz/pop, about 30 percent higher than the actual U.K. prices.

MHz per pop is a way of measuring capacity per person, and cost per megahertz per pop is a way of measuring spectrum cost, per unit of capacity, per person.

Even that pales in comparison to 3G auction prices in some markets, where past prices have been measured in tenths of cents, or full cents. In some cases, Western European 3G prices were measured in dollars.

Of course, the “right price” for spectrum hinges on any number of business and market factors.

Some recent 700-MHz spectrum in the U.S. market has sold for dollars per MHz pop, a “high” price by world standards. But that spectrum also has coverage and wall-penetrating advantages bidders believed justified the price.

Whether spectrum was acquired at prices “too high” can be determined only after the capacity is put into service and revenue generated by that spectrum can be assessed. Prices of dollars per MHz pop might be quite reasonable if the new spectrum allows a service provider to gain customers, raise profit margins or gross revenue, cut churn or create uniqueness.

In other words, 3G prices were an order of magnitude to two orders of magnitude above spectrum prices paid before, or after. To be sure, the value of spectrum generally is affected by the actual frequencies: lower frequencies are more valuable than higher frequencies.

That is a function of signal propagation, not bandwidth potential. Signals at lower frequencies attenuate less, and hence travel further, with better ability to penetrate walls. On the other hand, signals at higher frequencies are capable of providing much more bandwidth, using any specific coding technique.

Still, prices for 3G spectrum awarded in more recent auctions also was measured in the dollars per MHz pop. The 3G auctions in India provide a recent example.

Edited by Rory J. Thompson

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