How much is too much for specialized mobile radio spectrum?
Once again, deep pockets prevailed in the recent government auction for 900 MHz SMR spectrum. The biggest license winners were Geotek (181 licenses for $31 million), Nextel (177 licenses for $29 million), and PageNet (126 licenses for $45 million). In total, 1,020 mobile radio licenses reaped $212 million for the U.S. Treasury, or slightly more than $20,000 per channel. While these prices may seem high when compared with recent SMR transactions, the true test of value will be the license winners’ ability to quickly construct their networks and generate revenues from mobile communications subscribers.
900 MHz licensing
The 900 MHz licenses were first made available in 1986, when the FCC used a lottery process to award spectrum in the top 50 metropolitan markets. Although the licenses in Los Angeles, New York and other top metropolitan areas were soon acquired, more than one half of all 900 MHz licenses were returned to the commission because the owner failed to meet the construction and loading requirements. Thus, the spectrum which nobody wanted in 1986, is the same spectrum which reaped more than $200 million for the U.S. Treasury in 1996.
Historically, the construction and development of 900 MHz networks were handcuffed by minimal equipment choices, uncertainty about future licensing, and available spectrum for dispatch communications in the 800 MHz band. So, what trends and events have increased the value of 900 MHz spectrum?
The primary event which has increased spectrum value is the certainty of the licensing process. No longer will 900 MHz SMR systems be restricted to isolated islands in major metropolitan areas. Market forces, rather than government licensing regulations, will determine the extent of 900 MHz coverage from here forward. Another significant factor influencing spectrum value is a decade of steady growth in dispatch services. SMR operators added more than 1.5 million subscribers in the past ten years while increasing their annual service revenues to $550 million in 1995. Subscriber growth has been the primary driver of congestion across SMR networks. Operators need new frequencies to accommodate future growth. Finally, the widespread acceptance of wireless communications into the mainstream has increased the inherent value of all wireless communications spectrum.
Market values of comparable spectrum
Malarkey Taylor-Economic Management Consultants International Inc. believes that the most appropriate measurement of SMR value is one that considers the future earning potential of each SMR channel. On average, license winners paid $20,000 per channel-a price which is well above the going market rate for SMR spectrum. In The State of SMR and Digital Mobile Radio: 1996, MTA-EMCI tracked the relevant ranges for recent SMR acquisitions and found that SMR companies often pay a premium (i.e. $80,000 to $100,000 per channel) for large blocks of heavily loaded 800 MHz SMR spectrum in prime metropolitan markets. In smaller metropolitan markets, the going rate for loaded SMR channels ranges from $40,000 to $60,000 per channel. Given these ranges, it is apparent that the average 900 MHz auction winner already has spent one fifth to one half of the total business value just for the operational license. Of course, several market-specific factors such as market demographics, competition, trunking efficiencies and mobile radio penetration rates directly influence spectrum value.
Future mobile communications services
The high level of license concentration into the hands of Geotek and Nextel provides a glimpse into future 900 MHz services. Nextel and Geotek already have announced their intentions to provide a blend of voice and data services over spectrally-efficient digital SMR networks. Introductory pricing for Nextel and Geotek services ranges from $25 per month for the most basic dispatch service to $80 per month for the most advanced voice and data services available on the market today. The introductory dispatch prices reflect a 50 percent premium over the national average for dispatch communications services. Other license winners also will attempt to generate higher than historical SMR revenues through the development of innovative, wide area services. High auction values mandate higher revenue streams than the current market is experiencing.
Licensing fees will compel license winners to accelerate the construction of their networks, the development of innovative service offerings and the enhanced revenue streams resulting from these service offerings. A flurry of network construction is likely to occur during the next two years, especially since many license winners already have chosen their equipment supplier. Geotek manufacturers its own infrastructure equipment while Nextel equipment is primarily supplied by Motorola, and RAM Mobile Data’s Mobitex equipment will be supplied by Ericsson.
Time will tell the true value of spectrum
The construction, service development, customer acquisition and resulting revenue streams will determine whether auction winners paid too much for their licenses. Future 900 MHz operators have accepted a higher degree of risk with respect to the value of their business-they are basking on a combination of continued mobile communication service growth and strong revenue streams to support their capital outlay decisions.
By Stephen A. Virostek
Senior Consultant for MTA-EMCI
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