Original URL: http://www.theregister.co.uk/2008/03/06/700_mhz_auction/
Will the US 700 MHz auction be remembered for dismembering wireless?
High spectrum price could lead to catastrophe
Posted in Wireless, 6th March 2008 13:39 GMT
Faultline has not covered much of the 700 MHz auction, not wanting to read into it too much, and seeing that it is not yet clear how much of it is directly about networks which carry video or other forms of entertainment, which is our chosen territory.
But now, as it approaches its end, we find that a review of all the content written about it during the past three years shows us that there is a potential series of disasters on the horizon, created by this auction.
It is, after all, only $20bn, and presumably the financial and telecommunications businesses around the US can support an outlay of that type, even if some of it is wasted, undersold, or fails to create a new telecommunications landscape. But the build out costs associated with all that spectrum, when added to the $13.7bn spent on the AWS spectrum sold 18 months ago, means that the amount at stake is likely to be capex and spectrum costs of almost double the two amounts – say $65bn. That’s another matter.
There are two ways to think of this, as money well spent to change the landscape of US wireless communications, or as a future build out burden that might kill many smaller operations and lean back towards monopoly US services.
But there are some disquieting issues that remain unresolved on the latest round of spectrum, and commentators seem to have been billing 700 MHz as “beachfront” spectrum – an expression coined by the FCC – which is a cure-all for every wireless ailment, the biggest of which are bringing broadband data speeds and mobile internet to the handset; bringing entertainment networks to the handset and taking the handset out to the far reaches of the US continent, promising a further reach, and better, more available networks.
But what might it mean instead of that? Here’s a few scenarios that while not contradicting those aims, might also emerge.
- The traditional US rural incumbent could be pushed out of business by the reach of the 700 MHz spectrum, with the resulting push towards greater US telecommunications monopoly, not less.
- Some buyers of the 700 MHz spectrum (depending on who they are) may find that they have overpaid, and that combined with costs of build out and the rising costs of US debt, that may push them out of contention as a player.
- The auction may trigger copycat auctions around the world and set a precedent that has as negative a global affect as the European 3G auctions in 2000.
Rather than go through the various guesses of who may or may not win the different lots of A through E, perhaps it is better to have a think about just how this spectrum may be applied. The auction says that the 700 MHz band licenses can be used for fixed or mobile two way networks or for broadcast only one way, though clearly the unpaired 6 MHz Block E license is designed purely for broadcast. And the networks can be built out in either FDD or TDD technologies, which broadly speaking favor either voice or data, cellular or WiMAX, but which can be used for both. The two applications of two way cellular and mobile TV are both mentioned specifically by the FCC documentation.
The reason that we say that there may immediately be some downside for successful bidders, is that 700 MHz is really not a cure all form of spectrum. It is not much good for use in Urban areas, because its main attribute, and the reason it was chosen for analog TV in the first place, is that it can travel long distances without degradation, interference or fading.
But the longer carrier waves travel, the more difficult it is to tame them. Remember 1 MHz of spectrum will carry the same amount of data as any other 1 MHz – so the payload for these licenses whether they be 5, 6, 10 or 11 MHz, is the same in 700 MHz spectrum as they would be in 2.5 GHz (which Sprint holds in abundance). But of course 2.5 GHz is nothing like as good at propagation as 700 MHz. We are not suggesting that the Sprint spectrum, roughly 90 MHz wide, is worth the same amount per MHz as the 700 MHz, but there is a relationship. If you take an urban area, you need a lot of base stations just because of the number of people that require a voice or a data connections at any point in time. So the base stations have to be close together regardless of propagation and penetration characteristics.
Because of the shorter wave form of the 2.5 GHz, the spectrum will form far more distinctive edges to any given cell. Once the signal runs out of power, it runs out quickly and does not continue echoing off into the distance. That’s not quite the same with 700 MHz, which has to be de-powered to work in urban environments.
But you cannot apply the same price per MHz for each member of the population to a valuation of spectrum, when that spectrum is capable of such different things, and sometimes we worry that investors do just that.
A 90 MHz slice of the 2.5GHz spectrum like Sprint’s can deliver 90 MHz worth of data at any given point. And in an urban environment the base stations have to be as close together for 700 MHz as they would be for 2.5 GHz. Propagation is not the issue, it’s the number of voices or data transactions likely in an area that defines network planning constraints.
Where the equation goes wrong for someone like Sprint is that the 2.5 GHz base stations cannot be further away from a handset than its radio can reach without using up its battery in a few minutes. Battery is especially wasted if the device needs excessive signal amplification, so there is a natural maximum distance apart, that a radio engineer can work out for you, for two way, mobile 2.5 GHz base stations, regardless of how many people are connected to them. This is what is partially undermining Sprint right now, the question of how it reaches the long distances between Urban centers with its build out and still look like a national network.
There is an equation here. What we have been taught to think by the build up to this auction is that the best spectrum is that which goes the furthest and goes through walls. But if this spectrum is the most valuable then 450 MHz would be more valuable than 800 MHz, and it's not. The reasons for this are a combination of political and historical reasons and plain physics.
On the flip side, if you have spectrum that goes too far, then you can only use it once, or it will interfere with neighboring cells. You can turn down its power, and the handsets themselves re-calculate power requirements on the fly in the milliseconds after finding a base station, but that seems a waste.
So the best spectrum is perhaps that which carries far enough, but not so far that when you put lots of cells close together in an urban area (because of the high number of separate connections you need to support) they interfere with each other. In the end most networks will end up with the same number of base stations in urban areas, so they have a practical distance apart not due to propagation capabilities at all, but due to population spread during peak hours.
The next door base station is built so that the transmitter facing its neighbor uses adjacent, but not identical spectrum and should not interfere with it. It's the base station after that or the one after that where an excessive signal will create interference. So at any given point in history, based on how many people have mobile phones in a given area and how often they use them and what they use them for, which of course is different in every country, there may be an optimal piece of spectrum. If so, is that 700 MHz right now? Or perhaps after all this is not the case?
What we are after is spectrum which does the best job of traveling the natural distance that urban base stations need to be apart to support traffic, but which can also reach remote rural towns in as few hops as possible.
Obviously the radiated power used can be adjusted, high power for long distance, and lower power for shorter distance. Underlying modulations can also change and carry more data or less, depending on error correction requirements etc… Of course urban areas can’t really be too low power, because then signals won’t go through buildings. This is worse for shorter wavelengths, so worse for 2.5 GHz than for 700 MHz. But this makes a minor difference.
Things are very different in a one way network, like a mobile TV network. There it is straight forward, the optimal power is high. Actually even that’s not true, not where two different areas have different frequencies for the same TV channels, multi-frequency networks. But in this auction the FCC envisages a single frequency network for Block E, so the more power, the better the reach, the less transmitters, the cheaper the build – fairly straightforward.
But it all changes if the application involves two way communications, then base stations in a town needs power turned to the optimal level, which in 700 MHz will be low.
Spectrum economics is such that you have an increase in price at any point in history where this sweetspot appears, which right now people are saying is 700 MHz. In this instance because it is deemed to be so valuable it is sold in smaller chunks of 5, 6, 10 or 11 MHz not great big 90 MHz chunks like Sprint has.
Of course getting 10 MHz or 20 MHz may lead to a great network, but it may get saturated in urban areas or else it requires lots and lost of base stations, which must be tuned to avoid interference issues.
One way, single frequency networks can be set up with 25 kilometer diameters as cells. Two way is a function of battery, antenna, both at the base station and the handset, and the spectrum itself. How long is that? Again it depends on modulation scheme, FEC etc,, but in 700 MHz this can be anything from the 25 km distance, as long as you have flat ground, no obstructions like trees or open water, and no terrain or atmospheric issues but when these conditions are against you it can be a little as twice the urban distances and even in 700 MHz might go as low as 5km to 8 km.
One analyst reckoned that 700 MHz in rural locations could have as large a cell radius as 3.5 times larger than 2.5 GHz or instance, and obviously the cellular community understands this because they have networks in the neighboring 800 Mhz.
A cell differential like that can mean that urban areas can be covered with one 700 MHz base station for thirteen 2.5 GHz sites. So in the cites they are roughly the same, and in the country they are anything but.
But of course 450 MHz might support 40 or 50 Km circumference. So that makes it ideal to use 2.5GHz in urban centers, and 450 MHz in rural markets. So why are they both worth far less than 700 MHz. One reason is equipment availability.
Increasingly in the world of cellular there are such combinations in existence already. A device may have a radio operating in 800 MHz, 900 MHz, 1.9 GHz and shortly 1.7 GHz, 2.1 GHz and 2.5 GHz, all potentially in the same device. This has come about because of the different global spectrum allocations, and the historic drift towards more dense cellular network making use of shorter and shorter wavelengths. So why is it suddenly “de rigueur” to start the spectrum direction off in a different direction towards longer wave lengths.
In the end it is more likely that a fat 2.5 GHz (90 MHz wide) will become the best way to transmit large chunks of two way mobile internet access in a town, and that networks will eventually emerge combining that with longer wavelengths (lower MHz) out of town. There are lots of combinations possible.
Which leads us to one of the first points we made, that 700 MHz is fundamentally a rural get out clause for operators that “already have” networks. It makes rural build out cheaper, more effective, and it can happen more rapidly. So that in turn makes if more valuable to companies that already have nationwide wireless networks. As a result AT&T and Verizon are likely to be the major bidders.
If they are not the major bidders, companies will have had to outbid them either for smaller regional build outs, or worse still for nationwide reach. The worst thing that can happen is that someone other than those two gets a national license and tries to build a flat 700 MHz network for both urban and rural wireless. That would be inherently less profitable than the way in which AT&T or Verizon would use the spectrum, and may lead to investors immediately realizing that they have overbid, leading to downward pressure on their share value.
The other worst case situation is that a company is successful which already has spectrum and a build out program. That just puts an unsupportable burden on their capex, with two build outs and fresh spectrum to pay for, the same result.
But in a way the success of AT&T and Verizon in these auctions is perhaps a worse scenario still, not for the rival bidders, but for US telecommunications as a whole. They have both acquired a number of local incumbent operators in the recent past, and while it might have been reasonable for such a mopping up operation to continue into the future, the availability of 700 MHz spectrum for rural wireless becoming available to these two giants, may make it preferable that instead of offering prosperous roaming agreements to the 100s of local incumbents throughout the US, the two major RBOCs could just reach into their territories with cheap 700 MHz build outs and snatch their customers away just as profitably.
This leaves us with the scenario that AT&T and Verizon will be getting bigger both in terms of the overall efficiency of their networks and their ability to add more advanced data features, at the same time as accelerating the de-stabilization of local incumbents for their consumption by merger or by simple competition. At the same time companies that do NOT have the ability to create a two tier network, may have felt the need to jump on the 700 MHz bandwagon and outbid the two giants in some markets, who may find that instead of beachfront spectrum, they have less profitable, best for rural spectrum, that does not automatically enable the mobile internet in the way that Google has convinced the world it would.
And the FCC, by listening to Google and talking this spectrum up as “mobile internet” spectrum, hyping the auction for the benefit of the US government coffers, and by ignoring the voices that called for the auction to favor rural operators, it may have moved the US telecommunications significantly closer to a duopoly, which will have the opposite effect to all of its “open” rhetoric.
What situation does this leave Verizon in, fighting a rampant AT&T, and if it wins significant spectrum during the auction, having the dual problem of moving its future network over to LTE from CDMA, something it has already committed to, at the same time as harnessing the 700 MHz spectrum. That would mean that sometime in the next few years Verizon might begin to look more and more like Sprint, fighting on too many fronts, and pilloried for overspending on capex.
AT&T would have cheaper LTE devices that are backward compatible with its existing networks, while Verizon would have to pay handset makers for a special device to “bridge” what are two alien networks, again similar to the Sprint situation.
The FCC also has to run another auction, given the failure of the Public Safety element of the auction, so it is also no closer to a terrestrial roaming cellular network for civil emergencies. It may have to give that spectrum away in return for build out promises.
Finally the auction may have set a blueprint for government wireless spectrum valuations that will spread like wildfire throughout the Western World, with every European government putting its 700 MHz spectrum on the block between now and 2012 at too high a price, hiking the cost of mobile broadband beyond any near term viable level, shutting out mobile TV, mobile internet and the wireless entertainment market.
The only hope in all of this, for the US through Sprint, and across Europe through a variety of 2.5 GHz and 3.5 GHz license holders, is the WiMAX community. But this will be hampered by being networks based for the most part on a single slice of spectrum with only urban build outs likely to be profitable – leaving the rural wireless broadband for sometime in the future.
Over the coming weeks we plan to return to this issue of spectrum valuation and look first in detail at the outcome of the US auction, and its likely impact on corporate operator valuations both there and abroad.
Copyright © 2008, Faultline (http://www.rethinkresearch.biz/)
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