Maravedis: Small cells will end mobile market's obsession with sub-1GHz spectrum

Adlane Fellah

   Adlane Fellah

During these early stages of commercial LTE development, the mobile industry has been fixated on low frequency spectrum, sometimes to the point of madness. Of course, sub-1GHz frequencies are desirable for covering large areas affordably and are ideal for first wave roll-outs of new networks. Verizon Wireless (NYSE:VZ) has achieved 4G coverage in 700MHz on a scale that was undreamed-of in the early days of 3G. However, low frequencies rapidly run out of capacity, which is why the investment markets, and many carriers, have become too dazzled by their appeal in recent years. Now, thanks to the cellcos' new preoccupation--small cell networks--the pendulum is set to swing the other way.

Indeed, two-thirds of small cell base stations will be deployed in bands above 2.2GHz by 2016,  compared to fewer than 40 percent in 2013, according to the latest research report by Maravedis-Rethink entitled "Transforming the Mobile Data Network: Operator strategies for profitable small cell networks 2012-2016". This will help drive investment in public access small cells of almost $4 billion by 2016.

Over the past few years, spectrum above 2GHz has been deeply undervalued. Auctions in Europe have seen digital dividend licences around 800MHz selling for several times the price of 2.6GHz franchises. And holders of large amounts of higher band frequencies have often failed to find buyers, as Clearwire (NASDAQ:CLWR) and NextWave discovered in the US. But the focus on sub-1GHz was too narrow and short term; 4G carriers are already acknowledging that they will soon run out of capacity and are scrabbling for any additional spectrum they can--even in non-ideal bands like 2.3GHz WCS, as seen at AT&T (NYSE:T).

Cellcos are starting to look more favorably on the 2.3GHz/2.6GHz LTE spectrum and even at 3.5GHz, never before considered to be suited to mobile networks. Both of these areas promise high capacity and international roaming potential and will gain sharply in value over the next two years--by at least three times by 2015 when sold at auction, possibly more on the open market, according to Maravedis-Rethink estimates.

The main driver for the rising value attached to high frequency spectrum is the advent of the small 3G/4G cell, which addresses the main disadvantages of airwaves above 2GHz, their limited range and poor indoor penetration. Small, public access base stations, whether outdoors or indoors, are designed to be close to the user, delivering high capacity to a small group. Their adoption will increase the usage, and the value, of spectrum of 2.3GHz and above.

A key motivation for carriers to invest in high frequency or multiband small cells will be the ability to free up the vast capacity in high bands for mobile services.  According to the study, which interviewed about 65 tier one cellcos, many carriers are looking for a fivefold increase in 3G/4G capacity by deploying underused bands.

The report forecasts that deployment of public access small cells, for 3G and 4G, will rise from under 30,000 in 2011 to 11.3 million in 2016, amounting to a capex spend of almost $4 billion, up ten-fold in a five-year period. This leap in mobile capacity will enable new revenue streams, andit  will be partly driven by the availability of more spectrum, including a potential 100MHz in the 3.5GHz band.

However, the sheer numbers are the least important factor. 4G and HetNet roll-outs will only deliver business benefits and new services if they are planned effectively to unleash the maximum amount of capacity and spectral efficiency, which means harnessing underused frequencies in order to change the economics of 4G spectrum and data services. Over half of operators that have started deploying LTE in 2012 believe they will have run out of capacity before 2015, or even earlier, if they do not obtain more spectrum or squeeze more performance out of what they have. The latter effort focuses heavily on using small cells to augment capacity and reusing frequencies, but new spectrum will be essential too.

This has not only made operators appreciate bands around 2.5GHz again, but also consider 3.5GHz, which is underused for wireless services, but available on a near-global basis, usually at low cost. Interest has been heightened by the FCC's proposal to open up this spectrum for mobile broadband, and specifically for small cells, raising the potential of a global roaming band for metrocells (though US carriers are likely to have to share with incumbent federal agencies).

Some carriers are discussing the idea of running small cell layers in TDD spectrum, which is well suited to data-only applications, while macrocells continue to support voice and coverage in FDD. That would help them harness often underused TDD frequencies, either in 2.5GHz or 3.5GHz. Such solutions will shift the balance of spectrum in which LTE is deployed towards higher frequencies and boost their value. Wise operators will move quickly to secure their 2.5GHz and 3.5GHz assets before the price goes up, positioning themselves for strong economics once they deploy small cells and HetNet.

Source: Maravedis-Rethink Transforming the Mobile Data Network: Operator strategies for profitable small cell networks 2012-2016

The graph above shows how small cell plans and trials in 2012 focus on adding capacity in spectrum bands where carriers already run 3G or 4G, particularly 1.8GHz, AWS and 2.1GHz. Over 40 percent of small base stations deployed are in this range, while about one-third are in the range from 2.2GHz to 3GHz, primarily in the 2.5/2.6GHz 4G spectrum. In contrast, by 2016, a far larger percentage of deployed small cells will live above 2.2GHz, with 35 percent in 2.2GHz to 3GHz, and 31 percent above 3GHz.

Adlane Fellah is the CEO of Maravedis.

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