Andrew Seybold - A New Wireless Opportunity!
Great! Chairman Martin of the FCC has decided to auction more spectrum. It is called AWS III (Advanced Wireless Services) and it is made up of 25 MHz of spectrum from 2155 MHz to 2180 MHz. Spectrum is valuable, so perhaps I should bid on it. What are the rules? Well, according to the Chairman, I will have to build a network that will cover 50 percent of the U.S. population (not geography) within five years and 95 percent of the U.S. population within ten years (the end of the license term). And, by the way, if I am the winning bidder I will have to provide at least 786 Kbps data service to anyone who wants it for free. Of course, I can charge for data speeds higher than that.
Several companies have suggested a variation of this to the FCC. M2Z agrees with free Internet access to 95 percent of the U.S. population but wants the spectrum awarded to it for free, and it would fund the free Internet with advertising revenue, as would several others.
Okay, I am interested in bidding for all 25 MHz of spectrum, which on a nationwide basis has to be worth a lot of money regardless of the restrictions. So I run a few numbers before I bid to make sure I can make some money building out this network. First, what is the spectrum worth? Well, Verizon bought the 700 MHz C block that covers 285,620,445 pops (population), which is about 94 percent of the U.S. population, for just under $5 billion ($4,748,319,000). I know the 700 MHz spectrum is worth more because it covers more area with fewer cell sites, so I could probably win the AWS III spectrum for a nice round $3 billion.
Now, what will it cost me to build out a network and operate it for ten years? The first question is whether the network will be fully mobile (which means cell site hand-offs and a more extensive backend) or only for fixed services. In these competitive times, I had better figure on a fully mobile network to attract more customers, so I need to base the math on a full IP backend with hand-offs between cell sites.
How many cell sites will I need? It has been documented that I could cover 75 percent of the U.S. population on 700 MHz with 22,000 cell sites, and that at 2.5 GHz it would take 65,000 cell sites to cover the same 75 percent of the population. This means I will have to build a network of 80,000 cell sites. Some of these will be large, metro-area cell sites and some will be smaller (and therefore less expensive) cell sites. So I'll figure the network build at $20 billion for sites. Then I have to build the backend and provide backhaul to each site, which will have to be fiber or microwave because of the amount of bandwidth at each site. So the entire network and construction will cost me about $25 billion. Since I paid $3 billion for the license, my total capital expenditure for the network will be about $28 billion.
Perhaps I can fund this capital expenditure, but I also need to consider the ongoing or operating expenses for the network. Again using averages, I would guess site rental would come in at $800 per site, $500 per month for the backhaul and another $100 per month for maintenance. Doing the math, this means just the cell sites and backhaul will cost $114 million a month or a total of $1.37 billion a year. I haven't yet added in other items such as insurance, electricity at each site, technical and administrative staff, marketing and device purchases, but let's see what we have so far.
At the bottom of my spreadsheet, my total costs at the end of ten years to build and operate this network come to $43 billion (give or take a few billion). To keep the math easy, let's say the network will be available to 290 million people, but only toward the end of the license period. Until then, I will be offering services to a much smaller number of people--in year five, for example, I would have a potential of reaching 150 million (roughly 50 percent of the U.S. population). Most of those 150 million potential customers will already have a choice for fixed services of DSL, cable, perhaps fiber and even WiMAX on a 2.5 GHZ network. For mobility services, they would probably have a choice of three or four 3G wide-area networks and, perhaps, WiMAX. Of course, WiFi hotspots are another option.
I wonder how many of these potential customers would leave their existing network provider for free 786-Kbps service when most of them are getting 3 Mbps and higher services for less than $40 per month? If they elect to join my network for free, would they stop paying for the other service? How much advertising would I have to sell to make a profit? How would I attract (or sell up) services at higher speeds competing with three, five or even seven other providers? What would be better about my network? Would I have more device choices? Would I be able to offer a service that one no else could offer? In rural areas, would the advertising revenue even cover the monthly cost of operating my system?
Why would I pay $43 billion for the privilege of giving away 786-Kbps wireless services? For the privilege of competing with existing wired and wireless providers already engaged in a price war? In five years, 786 Kbps will feel like today's dial-up speeds. You know what? I think I will pass and not bid on this chunk of spectrum this time around. I will wait until the "lucky" bidder files for bankruptcy and pick up the spectrum and the network for pennies on the dollar. Perhaps then I will be able to make money either by operating the network or selling off pieces of it.
Andrew Seybold is an authority on technology and trends shaping the world of wireless mobility. A respected analyst, consultant, commentator, author and active participant in industry trade organizations, his views have influenced strategies and shaped initiatives for telecom, mobile computing and wireless industry leaders worldwide. www.andrewseybold.com
Comments (10) | Post a comment
Comments
Posted by Anonymous | July 10, 2008 - 1:32pm
Exactly. An all-data network from scratch is doomed against today's competition. Without current voice services bringing in all the revenue, I doubt many service providers could survive on data alone.
Posted by Anonymous | July 10, 2008 - 1:43pm
Thanks for your comment--if gives me a chance to, once again, restate something I wrote in 1998 which was "There is not a single, terrestial, data only network in the world that has ever made money" I have yet to have anyone prove to me that that statement is still not valid--voice pays the bills--and will continue to for a long, long time to come!
Andy
Posted by Anonymous | July 10, 2008 - 4:23pm
Good job! Kevin.
In the long run, US will go open wireless architecture and open spectrum to encourage openness, competition.
Posted by Anonymous | July 11, 2008 - 10:47am
A good angle from which to look at AWS3. The focus is currently inteference that M2Z's proposed TDD service in AWS3 would cause, so I'm not sure how much consideration has yet been applied to financial feasibility. Your total cost seems to be a fair swag to self-build a 2 GHz nationwide network from scratch. But I'd hope that a new entrant would be more creative in the way that is goes about deploying services in order to defer/reduce capital expenditures. Tower colos, managed microwave backhaul and RAN, outsourced OSS/BSS, customer care, logistics etc. Partnerships (open access?), sub-leases or other creative business models might provide bridging finance. Someone thinks they can make the sums work or else M2Z would not have received the venture funding that it has.... That said, I'm still on your side of the argument - achieving profitability on a nationwide data-only network (even putting aside the free service requirement) will be somewhat challenging! Will be interested to see if this goes anywhere.
Posted by Anonymous | July 11, 2008 - 12:32pm
Per Willi LU's comment...whenever the fiscal reality of mobile network infrastructure is raised, why do so many start parroting "open-access" as the paradigm that will make a wireless business plan work? Somebody still has to build and maintain a real, physical network. Open Access doesn't mean wireless broadband will suddenly appear for free out of the clear blue sky!
Good article Andy and thanks for always being the voice of logic on this topic.
Posted by Anonymous | July 11, 2008 - 12:58pm
Jonathan and Anonymous--thanks for your comments, I find the comment from Willie Lu to be interesting--open access does not mean FREE---we pay for wired access to the Internet today,in most cases--or somoene does in the case of "free" Wi-Fi access, and people are going to have to pay or accept ads for wireless access as well. As for opening things up for fair competition, keep an eye on areas such as San Franciso--the tri-city area (San Franciso, Oakland, and San Jose) have a total population of 3.5 million. Today, including DSL, Fiber, Cable, and Wireless (including MVNO's) they have a choice of 15 different service providers. Do the math and then ask yourself how 15 or more providers can survive in this type of market? There IS an issue where there is no broadband access but that cannot be economically "fixed" at 2.1 GHz, in order to even have a chance at success it will have to be at 700 MHz or the "white space" spectrum which is also now under consideration.
Jonathan, thank you for your kind words--they are appreciated--
Andy
Posted by Anonymous | July 11, 2008 - 1:59pm
Let's get through the AWS I or II Spectrum first.
The 20Mhz of 1700Mhz and 2100mhz spectrum will allow for far better coverage/penetration then any 2.5Ghz Based WiMAX systems.
Where is the WiMAX Forum on releasing AWS based FDD products?
Why hasn't any of the radio vendors ventured into providing a WiMAX based AWS FDD product-regardless of what the Forum thinks?.
With Canada releasing/auctioning their AWS (1700-2100Mhz)spectrum and allowing 3rd parties some unique access rights against the big Carriers create an opportunity for an AWS based WiMAX solution-Data Centric (Data/Video and VoiceIP) services.
WHat is needed, other then WiMAX approved FDD product to allow a new entrant to deploy a Broadband Wireless Network using the 4G capable AWS SPectrum in hand??
These new Service Providers with 700Mhz (limited 12Mhz) spectrum and AWS SPectrum have no real means of competing with the likes of Clearwire 2.5Ghz and future 700Mhz based LTE Cell Nets.
Also, what kind of Broadband Network can we deliver with the 12mhz of 700Mhz spectrum?
Jim
Posted by Anonymous | July 11, 2008 - 4:20pm
Andy,
Good reality check, as always. I agree with you that the same stumbling block seems to kill wireless venture after wireless venture: an optimistic view of costs.
Whether it be Amp'd or Helio underestimating Subscriber Acquisition Cost, or Philadelphia and Earthlink underestimating the required WiFi AP density, or the WiMAX community underestimating the WiMAX CapEx requirements, we seem to see it over and over.
Mix this with an optimistic view of technology performance, and you have a recipe for failure that gets cooked up time and again. As you said, wise investors will wait, and pick up the pieces for a song. I could have bought Iridium if I had only saved my allowances as a kid!
But we've all studied Adam Smith, and this irrational optimism is ultimately beneficial...so long as you're not the investor underwriting the risk!
I've popped in just to debate one point. You note that the 768Kbps free ride will seem woefully slow by the time a network is built. But if this is true, then it is a factor in support of the business model. The free data rate will be the "teaser" product, the loss-leader, the Costco sample stand that gets some people to upgrade to a paid service.
If, in contrast, 768Kbps is still considered adequate, then no premium subscriptions would be sold, and advertising becomes the single source of revenue.
I'm leery of current biz models that put too much stock in advertising. Ads are good in just a couple of business models: 1) you have low costs, 2) ads are just one of many revenue streams; and in any case, you need a wide audience before ad revenue can be substantial.
So when you ask:
"I wonder how many of these potential customers would leave their existing network provider for free 786-Kbps service when most of them are getting 3 Mbps and higher services for less than $40 per month?"
...I say "who cares?" What really matters is how many people can they attract to their premium service, and as you said, that's not going to be an easy challenge.
Posted by Anonymous | July 18, 2008 - 1:35pm
Andy,
It would be great if you would tell the folks reading your post of your affiliation with CTIA (the wireless industry association) and the other carriers (not enough just to say you are a "consultant"). Your criticisms of "business plan" behind the proposed AWS-3 rules are fine and hopefully Martin's auction of AWS-3, when it happens, will test the viability of any such approach. You also, of course, have every right to pass on making a bid or investing in a company that is bidding. However, pretending you are providing independent and objective analysis divorced from the relationship you have with the incumbents certainly pushes the limits on the credibility and the purpose of the post.
Posted by Anonymous | September 11, 2008 - 12:24pm
Andy's economics make pretty good sense to me. The Feds just want more Treasury dollars. They are going to run out of stuff to sell sometime, I guess.
The interference issues are more significant. Wonder what interference mechanism they are concerned with (IM in receiver front ends, broadband noise, both, something else, etc.)?
