telcoconsulting recently presented a paper entitled “valuation and pricing” at the techUK Spectrum Policy Forum on spectrum sharing within the 3.8-4.2 GHz band, which highlighted our initial thoughts on this complex subject.
Valuations of a spectrum band typically considers the specification of the frequency band, its location (country or geographic area), and allocations of the band to sectors, such as mobile or satellite sectors. A standard economic analysis then considers factors such as supply and demand (increasingly in “many or multiple horizontal and vertical markets”), licence duration, technology, product characteristics and its substitutability.
However, in the case of spectrum sharing, the issues do not so easily fit within a standard regulatory and market analysis framework. More importantly, we believe these difficulties are compounded by the lack of appropriate mechanisms for financial measurement of radio spectrum in its current and future shared use.
The Spectrum Policy Forum was concerned with the 3.8-4.2GHz band, but the subject of sharing could have covered other likely candidate bands for 5G usage. Would spectrum sharing help or hinder the “commercial models” envisaged by 5G? Without repeating various claims for the huge values of 5G to consumers, the 5G commercial models, their investment requirements and profitability remains largely uncertain.
Traditionally, spectrum valuations are carried out using three broad measures: (1) An Auction approach as a regulated proxy for market rates, (2) A Business case evaluation – using Discounted Cash Flows, which compute the net effect of the spectrum acquisition on the operators’ cash flows and bottom line, and (3) Benchmarking or “other” operators’ costs or “other” auction prices. In summary, the toolkit for financial and commercial analysis available to public and private organisations is arguably quite limited. Such limitations will, in time, become even more pronounced as business transactions increase in complexity following spectrum sharing proposals and the development of more innovative technology.
The UK regulator, Ofcom consultation document has proposed that the 3.8-4.2 GHz (“Opportunities for Innovation”) spectrum band becomes the first “starter” or “candidate band”, access to which will be differentiated into three tiers: Tier 1, Current incumbent use; Tier 2, Geographic licences; and Tier 3, Opportunistic spectrum access. Ofcom has so far remained silent, on the contractual and financial details underpinning the three access levels. What is clear, however, is the policy intention to introduce the a “sharing” mechanism into the licensing process, which would “intensify” the usage of this range of spectrum bands.
For a new three-tiered approach, it seems to us that a more bottom-up approach, or disaggregated measurement range of valuations, costs and prices will be essential.
The need for new and more innovative financial measurement methods is now urgent for digital industries. The intangible asset, often defined as “an asset that has no physical substance”, such as radio spectrum, underpins a large proportion of our economic activity. Companies’ annual reports show significant intangible assets, which underpin the financing of large long-term debt levels. In the coming years, the value and importance of Radio spectrum will grow.
A key question is how can public institutions and businesses improve valuation and financial measurement methods, including financial transparency, to get ready for the next wave of consumer demands (wanting greater value for their money), and face challenges brought about by new technology and complex spectrum allocation decisions?
And finally, looking at our sharing “starters” menu –, a few concluding thoughts:
- Sharing implies business models that allow access without exclusive rights;
- Sharing of rights as well as obligations involve assessing costs and benefits;
- Sharing frameworks can be very different when licensees, for example, compete;
- Commercial sharing requires an accurate measurement of value, costs and investment requirements;
- Greater transparency on intangible assets is needed to provide market confidence, and to help us all to improve our search for better measurements of costs and benefits for our global industry and for the millions of customers who pay.
Anna Coast and Bob Franklin
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