Mun: Gold and spectrum

By Kyung Mun

Kyung Mun

I came across an interesting statistic the other day. About 30-35% of gold supply comes from recycled gold. In other words, 65-70% of gold supply comes from new production – dug up out of the earth to be refined and used for various industrial and financial uses. In times of financial crisis or uncertainty, investors look to gold as a safe haven for capital preservation, and new production picks up in pursuit of rising demand.

In mobile communication, just like in precious metals, we are constantly in search of more supply of spectrum (and strategic locations where antennas can be mounted). Based on a recent flurry of activities around spectrum policy, it looks as if we may have an ample supply of new spectrum for mobile communication in the future. In addition to the on-going 600MHz Incentive Auction, we see potential rulings that may bring large swaths of spectrum for mobile use in the 28GHz, 37GHz, 39GHz, and even 12GHz Multichannel Video Distribution and Data Service (MVDDS) bands in the US. This is on top of the proposed unlicensed and shared spectrum use in the 3.5GHz and 60 GHz bands. With this seemingly abundant supply of wireless spectrum, one may ask whether we have a constrained supply, and whether investment in licensed spectrum today will bring an equitable return, say 10-20 years out.

While some new entrants will look to enter the wireless business with an "asset light" strategy like MVNO or "Wi-Fi First," the history has shown that owning "hard" assets like spectrum and network equipment will hold value long term – though network assets will presumably depreciate over time as newer technologies get deployed to gain a better economics. As an owner of hard assets, a wireless operator can "refarm" the spectrum with a newer technology to benefit from a better spectral efficiency. To "refarm," of course one must first own it.    

While the industry sorts out coexistence issues with incumbent players in the various spectrum bands, including military, satellite operators, and other wireless ISPs, the industry will look to harness the more immediate spectrum opportunities in the unlicensed bands. In our recent study on Carrier Wi-Fi and LTE-U, we forecast a significant shift in carrier spend towards unlicensed LTE technologies to better harness the unlicensed bands in the near term. 

Mobile operators want to anchor customers on LTE in licensed bands, and use unlicensed bands to dramatically reduce their cost per bit. Think of it as gold plating…you can use a strong metal like steel to carry the load, while you use gold on the outside for corrosion resistance, quality and value.

Warren Buffett famously stated that gold is not his choice for wealth creation, as it "being neither of much use nor procreative." Unlike gold, spectrum offers a "procreative" quality when it's combined with innovations in technology -- together they create higher wireless data capacity. It can be recycled (like gold) to keep producing more value. Based on a wide array of players showing interest in various spectrum initiatives and mobile technology development, it looks as if the demand for the core commodity will remain robust.

Why is most gold demand satisfied with new production instead of recycled gold? Because digging for gold is cheaper than buying old jewelry from Aunt Bessie. It's the same in wireless spectrum. The FCC has concluded a stage in the "reverse auction" at 600 MHz, with an intention of setting a price to clear spectrum for recycling. But the $86B asked by broadcasters is far too high to match the business case for wireless services. Mobile operators would be better served by "mining" for new spectrum above 20 GHz.

Kyung Mun is a seasoned technology strategy and product development professional 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. Over the course of his career, Kyung has contributed to the advancement of mobile communication and telecom industry and learned from colleagues at Motorola, Texas Instruments, Alcatel-Lucent, CableLabs, and a few start-ups in between.