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