How much should be paid for a new telecom license?

The French government has recently opened the bidding for the country’s fourth 3G license. Reserve price is set at 240 million EUR (about $339 million), and France Telecom said it will appeal against the license fee, because it’s too low compared to what the incumbent operators have paid.

The new operator will have to spend a significant amount of money on marketing and network build-out to get its piece of the action in the highly penetrated market. Therefore, there are some critical questions that should be answered at this point: How much spectrum does an operator need to secure its strategic position and how much should it be prepared to pay for it?

The challenges of answering these simple questions.

As a result of current trends in mobile data, the evolution of technology and the changing spectrum landscape, the European mobile industry faces important and complex business decisions. The result of these decisions will shape the future strategies of mobile operators for the next 10 to 20 years.

Answering these simple questions is extremely challenging as each answer raises further questions and issues. To answer the first question, how much spectrum do we need, we must first understand:

• what the future demand for mobile broadband is likely to be?
• whether there will there be sufficient industry capacity to meet future demand?
• if capacity is constrained how will this impact individual operator performance?
• what type of spectrum is best suited to meet demand?
• what technology should we deploy where and when?
• can demand be met through alternative strategies such as off loading traffic onto a fixed network?
• if we do not acquire the spectrum who else will and how will this impact our performance?

High levels of uncertainty make developing answers harder still

Developing answers to any question in relation to spectrum is further complicated by the very significant levels of uncertainty the industry faces. Forecasts for future levels of mobile broadband data demand vary dramatically and there is no certainty as to when new technologies such as LTE and MIMO will be available and in what frequency bands.

MNO’s need to consider the strategic implications of this changing landscape to secure their long-term position in the market. This positioning should address the high degree of uncertainty over the following key issues and challenges:

1. Data demand is growing exponentially with HSPA PC dongle penetration increasing rapidly and contributing to  net additions.
2. Data revenue growth is catching up.
3. The spectrum landscape is chaging dramatically
4. The regulatory approach is shifting towards neutrality.

The threat of new entrants. Increased competition is a possibility.

As happens in the French case, National regulatory authorities are concerned with levels of competition to ensure that customers benefit in terms of quality and range of services and price. The release of additional spectrum is often used as a vehicle for introducing additional competition.

Very few late entrants in the mature voice and SMS markets have been successful in establishing critical mass and creating value for their investors. However, these new entrants have destroyed considerable value for other players in the market. Whilst it is unlikely that the voice and SMS markets will attract new entry, the growing mobile data market and the trend towards convergence may encourage some players to bid for spectrum.

The introduction of new competition can have a very significant impact on the valuations of incumbents. Existing operators are therefore prepared to pay significant premiums for spectrum to prevent new entrants from acquiring it and entering the market. This premium is nearly always the most significant element of spectrum value. However, many regulatory bodies are setting maximum spectrum caps to prevent blocking and this will reduce the value of the spectrum considerably.

If new entry is inevitable then it will not have an impact on spectrum valuations but it will have an impact on the market and existing players. Operators should already be thinking about how they will contend with new market entry.

Although spectrum caps may make it difficult to block new market entry the ability to secure the maximum amount of available spectrum may imply less spectrum is available for other existing players. Reducing the ability of others to compete through reduced capacity could confer competitive advantage and create a source of value from the spectrum.

Case you want to get additional detail on how we support our clients in spectrum auctions, licenses bid and business modeling, feel free to drop me an email. Enjoy your holidays.

CVA