Spectrum pricing is a function of supply and demand. Over the course of recent 5G spectrum auctions, regulators demonstrated, yet again, their influence on the outcome. Italy and Taiwan are two examples which set a record valuation for the 3.5 GHz auction. This year, we will see one of the largest auctions ever: the CBRS auction scheduled to start in June [Note 1]. There are a few characteristics that make this auction unique. However, for spectrum valuation, uniqueness ads an undesired element of uncertainty. Here, I outline some factors that impact the CBRS spectrum valuation.
The CBRS Auction is Big!
The CBRS auction has 22,631 licenses available for sale based in 3,233 service areas (counties). For comparison, auction 103 for the 39 and 42 GHz bands offers 14,144 licenses. Other recent auctions are even smaller: 3,072 licenses in auction 101 for the 28 GHz band; and 2,909 licenses in auction 102 for the 24 GHz band.
Interestingly, no other country runs auctions as big as the US. China assigns spectrum. Canada auctions spectrum over large service areas. India, Brazil, Russia, all have their internal conditions that do not lend to running large auctions.
The large number of licenses and small service areas means that new bidders could emerge to challenge large mobile network operators. This will increase the level of uncertainty to all bidders. Auction bidders will need to weigh their strategies very carefully.
Valuation of US Auctions
Traditionally, spectrum prices in the US fetch higher value than other countries. This is a function of supply and demand: auctions with many bidders result in higher valuation, whereas those with few bidders barely exceed the reserve price. US auctions have traditionally attracted many bidders, more so than auctions in other countries. The CBRS auction promises to follow this trend for the populated areas. The large number of licenses, spectrum characteristics and type of participating players will lead to new competitive dynamics. The market has never seen such dynamics before.
Technical Regulations
The CBRS band has unique technical limits on emissions, and controls on deployment and operational parameters. The small cell deployment model attracts new entrants: cable and wireline service providers, enterprises and neutral hosts. Mobile network operators are not compelled to bid on assets outside the urban areas where demand on wireless services is low and the cost of services is high. Small service providers and WISPS have an incentive to participate because of the low entry fees. All these will lead to new competitive dynamics that will depend on the type of service area.
Deployment Requirements
Spectrum licenses specify deployment requirements that service providers have to meet. Bidders have to factor such costs along with their ability to monetize new services. We have seen markets where these requirements exceed the value of the licenses won in the auction. It is an easy trap to fall into. This raises the importance of discipline and need to prepare in advance an auction strategy.
High Variability in Pricing
County-sized service areas will result in high variability in pricing. Price of high-population counties where demand exceeds supply will be high. Rural areas where demand is low and number of bidders is small will result in low valuation.
To illustrate, 26 counties account for 25% of the population. The top 152 counties contain half the population. These counties could result in 70% of the auction proceeds. The 1,000 least populated counties may not contribute more than 1% of the total auction value. Hence, the CBRS auction will feature very high variability in pricing.
Bidders Perspective
Mobile service providers, cable companies, enterprises, neutral hosts, investors, spectrum speculators and others would be interested in CBRS due to its unique structure. Valuation will depend on the use case for each category of bidders. This adds a layer of complexity.
To illustrate, enterprises may simply opt to operate in the 80 MHz of GAA spectrum so they have low incentive to win in the 70 MHz PAL auction. Investors and speculators will be closely looking at the prospects of a secondary market and of spectrum leasing. Cable companies have a business case in MVNO traffic offload.
Still, I believe that the mobile network operators are best positioned to bid on this spectrum. While CBRS does not have all the favorable characteristics for MNOs, there are use cases that limit such shortcomings. For instance, MNOs would use CBRS as a secondary downlink. This mitigates potential technical and quality shortcomings of CBRS.
Concluding Thoughts
I like to point out two aspects that impact the rate of adoption:
- The availability of 5G networks [see The 5G Roadmap in Simple Terms for more details on technology selection]; and
- The cost of enterprise private networks [see here for cost analysis of private wireless networks].
Xona Partners has assisted on spectrum auction planning and valuation. Contact me for if interested in valuation or planning for CBRS.
Note 1: Due to Coronavirus outbreak, the FCC delayed the auction to July. There is a possibility of future delays as the situation evolves. I will cease to update this article, but feel free to contact me for questions.