Has the recent FCC spectrum auction signaled a spectrum asset price bubble just like 3G?
There is a note of triumphalism in the FCC announcement that they raised $44.9bn from their auction of 65 MHz of radio spectrum in the 1695-2180 MHz range. Do these prices fairly reflect future revenues from the use of this spectrum? Or are we seeing faint echoes of the infamous 3G auctions?
The result of the FCC AWS-3 auction has come as a big surprise. It raised over four times its reserve value. ATT spent $18.2bn, Dish TV spent $13.3bn and Verizon spent $10.4bn. The average price per MHz works out at $690m per MHz. At the UK 3G spectrum auction in 2000 Vodafone paid around $338m per MHz for its 3G spectrum in the 2 GHz region (although for a smaller cellular market). The DTI raised over four times more than they were expecting.
There are parallels as well as difference between now and the 3G auction period. Both periods are characterised by a higher than normal M&A activity. Both tapped into large flows of capital from relatively loose monitory conditions. In the UK 3G auction prices were buoyed up by a new entrant TIW which later became “3”. In the US AWS-3 auction Dish is a new entrant bidder. The delight of the US Administration at raising so much money has its parallels with the delight of the various EU Governments when the 3G auction raised massively more than they were expecting. In neither case was a concern raised that paying over the odds may have some down-sides extending well beyond the mobile company bidders themselves.
There are also differences between the two periods. The most significant is that in 2000 the mobile market was still expanding in terms of penetration and services revenue growth. In 2015 the mobile industry finds itself fighting to hold onto what they have got. This makes it all the more important to dig in to see what is really going on with what appears, on the surface, to be irrational behavior.
Are the US mobile companies behaving irrationally? All of the winning companies at the FCC auction have massive debt on their balance sheet. An average price of $690m per MHz paid at the FCC auction will allow the auditors of the two current mobile companies to more readily accept those companies revaluing existing spectrum holdings to make their asset to debt ratios look much rosier. This gives the financial markets more confidence to support even larger levels of borrowing. But it is creating a cultural inside the mobile companies to treat their spectrum more like a Van Gogh painting than a resource to be exploited to its maximum to improve services to consumers. This has profound implications for the future. There is no better example of a divergence of purpose than future spectrum sharing. There are huge efficiency gains possible from spectrum sharing but sharing spectrum is unhelpful in sustaining the spectrum scarcity needed to prop-up dizzy spectrum valuations. Should the needs of the financial industry (funding the mobile companies) trump the needs of a national digital economy to squeeze more out of a scarce natural spectrum resource? The question is more complex than the framing of the question might imply. Better wireless networks need both more spectrum and more capital. Perhaps in favour of the current wave of consolidation will be less need to depend upon inflated values of spectrum to attract new investment. But even that is not clear cut as less competition may dull the drive to invest.
The one thing the FCC have absolutely got right with its AWS-3 auction is that more than half the proceeds are to be ploughed back into the industry through various initiatives to improve the US broadband infrastructure. In contrast all of the 3G auction proceeds in 2000 passed straight into the national exchequers. The result was to suck out around £80 Bn from the EU mobile industry in a single year. The inevitable result was to drive the sector into a recession. There was no money left in the capital investment tank to accelerate the roll out of national 3G networks. The supply industry and consumers seriously lost out. So perhaps the current triumphalism of the FCC has a far sounder basis than the misplaced triumphalism of the EU governments straight after the infamous 3G auctions 15 years ago.