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Joe Madden |
Like all of you, I'm watching the AWS-3 auction with interest. The precise identity of the bidders and the details of specific licenses won't be revealed for some time, but the daily announcements about total dollar value are fascinating. The U.S. Federal Communications Commission will be raking in more than $34B when the bidding is closed.
The staggering total dollar value leads a Spreadsheet Guy like me to calculate a few things. Thirty-four billion dollars: For the 400,000 cell sites in the U.S. market, that's $85,000 per tower. Don't forget that after you buy the spectrum, you have to cough up more cash for the RAN hardware and software, plus local installation costs. Call it a total initial investment somewhere in the range of $65B.
What if the same $65B was spent on a combination of Wi-Fi, small cells, and fiber? That would be a tremendous amount of capacity…far more than the AWS-3 spectrum brings all by itself.
It strikes me that the strategy of the big bidders doesn't pencil out anymore. Buying nationwide spectrum means that you're investing billions of dollars for additional spectrum, mostly for locations that already have excess capacity (this is where people always insert an example such as Kansas, Nebraska or South Dakota). Additional capacity is needed for dense cities like San Francisco and Manhattan. There are specific buildings in Kansas and South Dakota that can use the spectrum, but only within the airport/convention center/stadium. Investing a king's ransom for less than 1 percent of the square mileage of the United States doesn't sound right.
One alternative would be to spend $10B on the fiber assets and small cells to provide great HetNet coverage in major cities across the country. In this scenario, the additional capacity would be located where it's needed and there would be no wasteful spending on extra capacity for the wide open spaces. With small cells, spectrum is a renewable resource...it can be re-used in every building and the same license can be stretched to much higher capacity than a macrocell deployment.
Another alternative would be to spend very little on additional 4G assets, and partner with the cable consortium to offload mobile data and voice services via Wi-Fi. Sprint and T-Mobile are already testing these waters, using LTE as an anchor service and partnering with emerging companies for Wi-Fi calling plans.
There are very smart people running Verizon and AT&T Wireless. So why are they willing to spend so much to grab this spectrum? Like Mark Twain said, "Buy land, they're not making it anymore." A hundred years ago, the railroad barons laughed at this joke and then followed Twain's advice.
The big operators know that someday the FCC will run out of spectrum to auction off. They believe that holding the spectrum is strategically important to their long-term future, and they are betting $30B+ on it. It's possible that new apps and massive video delivery will actually create a requirement for more than the existing 150-180 MHz of spectrum held by each big player today...but we are still miles away from using that existing spectrum in most locations.
Conspiracy theorists would say that AT&T and Verizon keep buying every nationwide spectrum block so that they can prevent any viable competitors from catching them. It's more about monopolizing the spectrum than about their need for the spectrum itself. That's possible--but, to me, it seems more likely that Verizon and AT&T have long-term plans to use massive spectrum resources to compete with fiber, DSL, and cable in the general market for broadband services.
It's hard to understand these inflated spectrum prices in the short term, but there are rational explanations in each company's vague long term vision. American mobile operators are investing big in licensed spectrum because they want to be the railroad barons of the 21st century.
Joe Madden is Principal Analyst at Mobile Experts LLC. Mobile Experts is a network of market and technology experts that provide market analysis on the mobile infrastructure and mobile handset markets. He provides market forecasts for handset, DAS, small cell, and base station markets, with in-depth research down to the nitty gritty details of frequency bands and power levels. Mr. Madden graduated, cum laude, from UCLA in 1989 and is a Silicon Valley veteran. He has survived IPOs, LBOs, divestitures, acquistions, and mergers during his 24 years in mobile communications.