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March 24, 2020

Kerrisdale Capital on the Consumer Impact of Spectrum Prices

The quality and affordability of mobile broadband services directly depend on the radio spectrum governments license to operators. Some government policies, both direct and indirect, result in high costs associated with spectrum access. A 2019 study by the Global System for Mobile Communications (GSMA) presents strong evidence that high spectrum prices cause adverse consumer outcomes; including slower data speeds and lower coverage levels.

I am Sahm Adrangi of Kerrisdale Capital. In my work at Kerrisdale Capital, I Sahm Adrangi, investigate, analyze, and publish reports on companies that we short or believe may fail and have discussed spectrum valuations in the past.

The Effect of High Spectrum Prices on Consumers

Mobile communications have over 5 billion subscribers worldwide. General-purpose technology is vital to innovation in all industries and sectors, driving business competitiveness and productivity growth. Moreover, it can help improve living standards on a broad level.

While more studies are needed to narrow down the connection between spectrum prices and consumer impact, GSMA reveals evidence that inflated prices and limited access to new technologies may have a negative effect on developing and developed countries alike. This includes:

  • Limited Network Coverage: There is compelling evidence that in developed countries, high spectrum prices have a significantly negative impact on 4G coverage. This was also true of 3G and 4G networks in developing countries.
  • Decreased Network Quality: In both developing and developed countries, a more costly spectrum was a significant contributor in reducing the network quality experienced by consumers. 3G download and upload speeds have been negatively affected in the long-term in developing countries.
  • Potentially Increased Consumer Prices: Although researchers say further studies are needed to determine the extent, it is known that increased spectrum prices linked to higher consumer prices for voice and data technology in developing countries.

Driving Factors in Spectrum Prices

In general, conditions such as current and expected revenues per user and market penetration, drive spectrum prices. High prices may also be the outcome of competition between established and ambitious service providers. However, the report speculates that high rates are also associated with the way spectrum is managed by a regulating body or government. This includes:

  • Limiting the supply of spectrum
  • Bad award rules
  • The setting of high reserve prices
  • And an unclear spectrum roadmap.

Government policies often increase spectrum prices. When there is a single “vendor” of spectrum - in this case, the government - they effectively have the market cornered and can exploit it to increase auction profits.

In Conclusion

Spectrum prices are impacted by more than “depleting” megahertz and spectrum availability. In fact, thanks to better technology, spectral efficiency and network capacity may double in the next five years without requiring any additional spectrum. I am Sahm Adrangi and companies like Kerrisdale Capital do our part in short activism by investigating challenging questions that may be misunderstood by the market.

Who is Sahm Adrangi?

Sahm Adrangi is the Founder and CIO of Kerrisdale Capital Management. He first made a name for himself by shorting and exposing fraudulent Chinese companies, several of which were ultimately investigated by the SEC. Today, Mr. Adrangi continues his work as a short activist by publishing research on under-followed longs and overhyped shorts.


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