Research Notes

What Europe can learn from why American mobile operators paid $81 billion for mid-band spectrum

With total revenues coming in at just below $81 billion, the 5G C-band spectrum auction exceeded expectations of $30-50 billion. Total total bids were $94 billion of which $13 billion goes to clear satellite incumbents from the band. The auction itself is a record-setter for the FCC, and it accounts for 42 percent of the FCC’s total auction receipts since it started auctions in 1994. The amount, however, still falls short of the €110 billion European operators paid in 2000 for 3G spectrum – and soon thereafter the 3G bubble burst. European operators realized they overpaid. This note explains why the US and EU are different and why the 5G spectrum garnered the right price.

Radio spectrum refers to the electro-magnetic frequencies in the air which transmit communications signals. Mobile operators purchase the rights to transmit these signals at spectrum auctions. Historically they purchased licenses for frequencies associated with 2G (GSM), subsequently 3G spectrum (UMTS), then 4G (LTE), and presently 5G (NR). In the past, regulators established which frequencies could be used for which technologies, and they could not be interchanged. Today spectrum is sold on a more flexible and neutral basis, giving operators leeway to use different spectra like tools in a toolbox. Spectrum auctions are complex and continued work to improve them earned a Nobel prize for economists which designed the Federal Communications Commission’s auctions, as this note explains: Some mobile operators may find it difficult to understand why the Nobel Prize in Economics was awarded for innovation in spectrum auctions.

5G marks an important shift in network intelligence which can be likened to hot and cold water faucets in a bathtub. 5G allows operators to combine different types of spectrum in different ways at different times adjusting the amount of hot and cold to get the right temperature, so to speak. Compared to earlier technological generations, 5G is offers unprecedented network intelligence and expands the technological toolbox to solve more complex tasks more efficiently. As operators acquire more and different types of spectrum, the toolbox becomes more varied and intelligent.

Historically, the frequency bands could not be substituted for different technologies and tasks, but 5G changes that. It is a smart network that allows the integration of different frequencies to solve various tasks flexibly. In the same way as upgrading tools helps a carpenter perform more sophisticated jobs, 5G helps operators turn dumb networks into smart ones.

In the old days, the quality of a network was the result of how much money an operator spent on infrastructure. In the future, the quality of a network will be determined by an operators spectrum sophistication—how well the engineers design the network with the resources they have. Chosing the right Chief Technology Operator will be a critical for an operator’s success.  

4 reasons why C-band bids were so high

There are important economic, financial, and political factors which account for the price of spectrum. There are a few at play in the C-band auction which demonstrate why the US and EU are different.

  1. Scarcity. The supply of spectrum is critical to building a mobile network. Policymakers control the supply of spectrum through administrative allocation and licensing. Auctions may occur infrequently, and if operators need spectrum, they will try their luck to buy spectrum from other operators—pending regulatory approval. Compared to other countries, the US had very little mid-band spectrum available for purchase. This scarcity in part drove up the price. 
  2. Quality. Not all spectrum is the same. Different bands have different physical properties, making it more or less economical for different uses. C-band spectrum is called the “Goldilocks” band because it is so versatile. 5G allows operators high throughput across long distances and is spectrum which can be deployed in both urban and rural setting. The quality of the spectrum also influences the price.  
  3. Length of License. In the US, the license length is essentially unlimited. In Europe, on the other hand, spectrum life is capped. After 15 to 20 years, European operators must renew their license, or they lose the ability to operate their networks. The American model offers greater support to operators to build larger, more advanced networks. This long life increases the time over which the investment in spectrum can be amortized. The long life of the license also influences the price of spectrum.
  4. Interest Rate. The price of money today is extremely low and accessing money is relatively easy. This means that operators can borrow money cheap to buy spectrum to build the networks of the future. This proposition increases the amount and sophistication of network investment and planning, for not all the cash needs to be ready today. European operators do not have this flexibility as they have a fixed period of time to build the network and recover its cost. American operators are willing to pay more for the licenses because they have a longer time to use and and because they can get favorable financing if they need it.

The American model is like buying a house. It is a long-term investment which owners expect the value to appreciate to exceed the upfront costs of purchase. American operators can behave like “home-owners” and continue to invest and upgrade the house because they expect its value to appreciate. By contrast, by limiting the spectrum purchase to just 15-20 years, European mobile operators are “home renters”. They have less time and incentive to invest and upgrade. They main objective is covering costs rather than increasing the value of the investment. Nations make a choice in the business mode they use for spectrum, and we can see stark differences between the US and many European countries.  

Consider the case in 2013 in Norway when Tele2 expected to renew their spectrum at auction. However a new and competing operator ICE acquired it, and Tele2 was left with a large network, many customers, and no spectrum to serve them.

Some have called the C-band spectrum the “beachfront”, as if it’s expensive, exclusive real estate overlooking the water where only a few people can live. However, considering the long length of the license and the value of 5G network technology, the investment in C-band is more like affordable housing which enables a multitude of people to live. The spectrum licenses that US mobile operators purchased in the C-band auction allows them to provide advanced telecommunications services to all Americans at competitive prices for many years in the future.

What Europe learn from the C-band auction

European policymakers’ short spectrum life and narrow political focus prioritizing low consumer price over network quality has a negative impact on investment and technological development in the region. Europe is almost 2 years behind the United States in 5G rollout, and the investment level is half of the U.S, both in per capita investment and in nominal dollars or euros. Europe is unlikely to improve the investment picture without updating its regulatory regime.

It is not pre-ordained the Europe should be a laggard in the connected network industries. Indeed, around year 2000, the EU was the world leader. It was first in the world with 2G, and many European countries were leaders in 3G. Things started slipping with 4G, and many European countries lost their competitive edge in mobile wireless leadership. Today the US, China, South Korea, and Japan lead the 5G pack with most European nations 2 years or more behind.  Nevertheless, European policymakers continue to proclaim technological and regulatory prowess while the region falls further behind. Here are five reasons why Europe has already lost the 5G race: Five Nordic Prime Ministers signed an agreement on 5G. European policymakers care less about the health of mobile operators. They prefer the political payoff to consumers, promising them a seemingly better option of low prices for lower quality networks

US policy, on the other hand, envisioned its mobile market to facilitate private actors to build national networks and increase the range and types of tools for the toolbox or to increase the amount of spectrum. It’s no surprise that the US was world leader in 4G and has a leading role in 5G. On top of that, Americans are further along in adopting products and services that will be part of 5G networks. Strand Consult observed in April 2018 in this research note. American consumers are already buying 5G products and services while the EU falls further behind on networks and innovation. Europe continues to fall behind in this domain as well. In the past, Europeans could have bought a phone from 6 European manufacturers; today there are none.  Indeed, the greater part of Europeans’ mobile expenditure goes to the Apple and the iPhone., Despite waves of EU regulation purported to help Europe, US firms have only gotten stronger, and in the process, Brussels has fatally weakened European telecommunications. Margrethe Vestager’s many lawsuits, subsequently overturned in court, have been a gift to big tech.

In any event, for the moralizing of the Europeans, the fact remains that US consumers increasingly enjoy advanced mobile wireless networks; they consume more data and services with more advanced devices. As such, consumers have lower unit cost of network consumption lower than Europeans. With each success generation of mobile technology, the same set of services comes as a lower price to consumers, while new services are added.

US spectrum auctions are about equipping mobile operators with more tools for the toolbox. In Europe, auctions are like life-support services, letting mobile operators renew their licenses so they don’t have to shut down their networks as we saw in Norway with Tele2.

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