PwC Spectrum: Timing is Everything

7/30/2019 PwC Spectrum: Timing is Everything

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Timing is everything releasing the value o spectrum 1

pwc

Timing is everythingReleasing the value o spectrumA PwC perspective or telecommunications,media and technology executives

Telecommunications,Media and Technology


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2

Contents

Summary 1

Introduction 2

The changing spectrum landscape 4

Lessons rom previous auctions 5

Using previous auction experience to benchmarkthe value o spectrum today 7

Three pillars o spectrum valuation 9

The relationship between spectrum value and auction prices 10

Conclusions 12

...we estimate that spectrum released

across Western and Eastern Europe may

etch some 40bn at auction, or just under

50 per mobile subscriber in Europe.


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The timing could not be more challenging.

Tough nancial conditions mean that

companies ace a dicult assessment

o the benets and costs o acquiring

spectrum:

How valuable is the rst mover advan-

tage to companies who ace a bleak

economics outlook and tough capital

constraints?

How long can investors and manage-

ment wait or payback or new services

ollowing upront cash payments or

spectrum?

It is thereore evermore important orpotential bidders to think hard about thevalue o spectrum, in terms o the directvalue rom the delivery o new services,the opportunity cost o not acquiringspectrum and the impact on their overallcompetitive position.

We present a clear ramework that helpscompanies make a robust decision onwhether to bid or spectrum and howmuch to pay.

Using this ramework, we estimate thatspectrum released across Westernand Eastern Europe has a valueo some 40bn, or 50 per mobilesubscriber in Europe. This wouldrequire telecommunications operators,broadcasters and other interested biddersto secure capital amounting to 8% othe market capitalisation o the leadingtelecoms and media companies in Europe.

This is a signicant sum in an economicenvironment that shortens time horizonsor investments and constrains the capitalrequired to und bids.

Summary

There will be signicant awards o spectrum bandwidth over the next ewyears in a range o countries across the world as regulators seek to promotethe ecient use o spectrum. The release o the 3G expansion band and theanalogue TV spectrum are two o the most signicant awards. This spectrum is

expected to be used by telecoms companies and broadcasters, and potentiallyothers, to help acilitate the launch o new communications services including4G mobile services, high speed wireless internet services and high denitiontelevision services.


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PricewaterhouseCoopers2

1 Introduction

Providers o wireless services will have greater access to the airwaves thanever beore as new spectrum capacity is released on the switch to digitalbroadcasting and the award o the 3G expansion band. Access to newcapacity will enable the expansion o existing, and the introduction o new,

wireless services. These include more digital terrestrial television channels instandard and high denition and aster and more reliable internet and otherdata services on mobile phones and other portable devices. Eventually theseservices will enhance customers experience o wireless services and heralda new era o converged innovation and competition between providers. Manynew services require new network deployments and technology developmentsand hence may not be ready or commercial launch until ater 2012.

Wireless communications services,

such as radio, television and mobiletelecommunications, are provided

using varying requency ranges within

the electromagnetic spectrum. Due to

intererence issues at low requencies and

limited signal range at high requencies,

the spectrum which is most suitable or

broadcasting and telecommunications is

ocused on the so called sweet spot o

requencies. This is illustrated in Figure 1. As

this bandwidth is a scarce commodity, it isgenerally licensed by regulatory authorities,

oten through an auction process.

National regulatory authorities are adopting

dierent approaches to the release and

award o this spectrum rom competitive

auctions where the highest bidder wins to

administrative processes where spectrum is

awarded or no direct ee and operators bear

the cost o key licence obligations. Auctionsand administrative allocation processes are

due to take place at increasing pace over

the next ew years. The structure and timing

o the release o spectrum has a very large

impact on the sums o money companies

ultimately pay. This is demonstrated by the

award o the original 3G licences across

Europe which began in 2000.

The recent auction o 700MHz spectrumin the US in 2008 demonstrated the valuethat companies expect new wirelessservices to bring. Although this took placebeore the economic downturn took hold,auction proceeds reached some US$19bn,or US$75 or every mobile subscriber inthe US.

Figure 1: The electromagnetic spectrum and the sweetspot

Source: Ocom, PricewaterhouseCoopers

3 30

Increasing range

Decreasing bandwidth

VLF

VeryLow

Frequency

Low

Frequency

Medium

Frequency

High

Frequency

VeryHigh

Frequency

UltraHigh

Frequency

SuperHigh

Frequency

ExtremelyHigh

Frequency

LF

Longwaveradio

Mediumwaveradio

FMradio

Satellitebroadcasting

Wi-Fi

3GGSM LTE

Sweetspot

TV

MF HF VHF UHF SHF EHF

Decreasing range

Increasing bandwidth

300 3 30 300 3 30 300

KHz MHz GHz


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Figure 2: Checklist or assessing spectrum value and auction prices

Source: PwC analysis

Launch of new products and services

Cost savings

Franchise fee

Efficiency of the auction

Uniqueness of the opportunity

Market forces

Factors driving the relationships between value

and auction prices:

Key value considerations for self and competitors:

How much is it

worth to me and

my competitors?

How much do I

need to bid

to win?

The economic downturn presents

regulators, Governments and companies

with dicult and immediate decisions over

the award o spectrum.

On the one hand, regulators believe thattimely release o spectrum provides certainty

over access and incentivises the early

development o new services. The value

o new services deployed using auctioned

spectrum will be determined over the entire

lie o the licence, by which time the outlook

may be more positive than at present.

On the other hand, bidders may take a

more short-term view. The prospect o

paying large sums today or spectrum

that might not generate cash fow returns

until some time in the uture may not be

attractive against a backdrop o cost

cutting, limited investment in todays

services and shortened time horizons

or assessing the pay back rom any

investment in new services.

I regulators continue to press ahead withtheir objective o auctioning spectrumover the next ew years, companies maybe orced to pay signicant sums or anasset that has no immediate benet to

their bottom line today. This is a questionor Governments to consider as theyconsider the appropriate timing o thevarious award processes.

In this paper we help companies breakthrough this complexity by setting outa commercial and pragmatic approachto spectrum valuation and bidding. Thishelps companies to answer two important

questions: (1) should I bid or thisspectrum?; and i the answer is yes, (2)how much should I bid?

Figure 2 sets out a checklist thatcompanies should ollow whenundertaking assessments o the valueand prices o spectrum. We discuss eachaspect in turn.


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2 The changing spectrum landscape

The competitive landscape and economic environment in which spectrum

awards take place is changing, a shit that encompasses the increased use o

auctions and a change in the competitive dynamics between bidders.

In early spectrum awards many regulatorsallocated and licensed spectrum orspecic types o service. Spectrumoered or GSM mobile would onlyattract interest rom companies lookingto provide GSM services. This meantregulators were eectively determining,and thereore restricting, the types oservices consumers could access. We arenow seeing an increase in demand or the

use o spectrum driven by an increase inapplications and an increase in the supplyo spectrum driven by the shit in policyand move towards market allocation.Regulators are adopting less prescriptiveapproaches by oering spectrum licenceson a technology and service neutralbasis, thereby allowing market orcesto shape the allocation o spectrum to

technologies and services. Put simply, thebidder oering the most wins, and usesthe spectrum or whichever services itchooses to oer.

Convergence is changing the competitivedynamics between bidders radically,widening the range o interested parties.This makes it harder or bidders to predicthow much they may need to bid orspectrum given the range o potentialuses and bidders competing with them. Atthe same time, partnerships are becomingever present in the value chain as a wayo sharing risk, cost and knowledge.Deciding when to compete or partnerwill be a critical decision or any bidder,navigating competition law issues alongthe way.

Convergence is changing the competitive

dynamic between bidders radically,widening the range o interested parties


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3 Lessons rom previous auctions

The US FCC held its 2008 auction o 700MHz (spectrum released by the switchover todigital television) spectrum in Oct 2007 (Auction 73). Over 200 bidders qualied to takepart in the auction, which lasted or two months over 260 rounds o bidding.

The auction was expected to attract a lot o interest rom bidders or two reasons:

1. 700MHz has relatively attractive propagation characteristics compared to mostspectrum previously available; and

2. The FCC planned to allow the spectrum to be used on technology neutral grounds.Licences could be used or xed, mobile, and broadcast uses, including xed andmobile wireless commercial services; xed and mobile wireless uses or private,internal radio needs; and mobile and other digital broadcast needs.

A key issue in the auction was the FCCs requirement that the winner o the largestbandwidth lot or sale (Block C) would have to provide open access to all devices andapplications. This would prevent an operator rom oering exclusive services using thisspectrum and aimed to provide assurance to companies like Google that customerswould have ready access to their services without limitations imposed by the operator

o the spectrum. This condition created uncertainty over the value o the spectrum tothe winner because they needed to consider how the independent strategies o otherapplication and device providers could impact on their own strategy or monetisingthe spectrum.

The auction raised US$19bn, with Verizon Wireless paying US$9.6bn and AT&T $6.6bn.

In order to decide on whether to bid or the spectrum or not, companies needto determine the value o spectrum to their business. This requires them to bemindul o the lessons o the past, in particular the challenges o estimating therevenue potential o spectrum usage.

Figure 3: Case Study: US auction o 700MHz in 2008

Source: FCC and PwC analysis

It remains to be seen in the US whether

the returns will justiy the price paid or

spectrum. However, the sheer size o the

nancial commitment underlines how

important it is or market players to be

certain o the value o spectrum they are

buying. The risk is that they over-pay or

miss out on other opportunities that could

have been unded by the capital usedto bid or spectrum. Awards o urther

spectrum at this requency are expected

across Europe and although no awards

have yet taken place in Asia, South Korea,

or example, is expected to open up its700MHz band in 2012.

2.6GHz spectrum awards have takenplace recently and generated signicantsums. The prices paid have been lowerthan the 700MHz auctions in the US,refecting the less attractive propagationcharacteristics o this spectrum.

Scandinavia led the way with the auctiono this spectrum, with awards in Norwayand Sweden. The Hong Kong Governmentraised HK$1.5bn rom its sale o the 3Gexpansion in January 2009.

There are two key awards taking placeacross dierent countries: the spectrumreleased ollowing digital switchoverwhich is particularly valuable given itslower requency and thereore attractivepropagation characteristics and the 3Gexpansion band which was historicallyreserved or mobile services and is now

being released as the uptake o 3G

services has expanded.

Figure 3 below summarises the

recent US auction held by the Federal

Communications Commission (FCC)

o 700MHz spectrum which generated

auction proceeds o US$19bn.


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Figure 4: Four key steps in spectrum bid preparation


Map out currentspectrum costsacross organisation,in aggregate andby service, whereappropriate

Identiy potentialkey changes to thescope and deliveryo existing services

Identiy potential

scope o newservices planned orlaunch

Understand nancialconstraints andbudgets or servicesand spectrum

Dene assessmentcriteria

Apply three screensto determinespectrum strategy1) Which service?,2) Delivery options?

and 3) Spectrumauction?

Set out variablesthat can be fexedto deliver dierentquality and scopeo services

For each serviceexplore alternativedelivery options(spectrum or nospectrum)

Estimate the value

o the service andcost o deliveryunder dierentalternatives

Map out theauction timeline

Identiydependenciesand other externalactors or related

projects/initiatives

Map out valueto sel and otherbidders basedupon dierentmethodologies(cost and return)and spectrumrequired basedupon range otechnology andmarket assumptions

Set up bid team

and governancearrangements

Rehearse what i scenarios

Step 1:

Requirements

Step 2:

Planning

Step 3:

Assessment

Step 4:

Bidding

A holistic view o the value o spectrum...

will go a long way to shape inormed

commercial decisions.

Adopting a holistic view o the value othe spectrum under consideration inlight o other spectrum requirements andalternative technology will go along way toshape inormed commercial decisions and

to avoid these risks.

Figure 4 below sets out the steps that weadvise companies to ollow to evaluatetheir spectrum requirements and auctionstrategies. The valuation o spectrumis a critical component o planning and

decision-making throughout the process.


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4 Using previous auction experience tobenchmark the value o spectrum today

The results o previous spectrum auctions can be used to guide the value ospectrum, with a healthy dose o caution and interpretation. The diculties invaluing spectrum are underlined by the prices paid in previous awards. Figure5 below shows the average price paid per MHz per capita in selected auctions

over the past ten years.

UKGermany

Netherlands

Austria

Taiwan

SingaporeGreece BelgiumDenmark

Israel Georgia

Czech RepublicSwitzerland

BulgariaEstoniaSweden (4G)Latvia

Norway

Nigeria

Norway (4G)0

20

40

60

80

100

120

140

160

180

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Eurocen

tsperMHzpercapita

500

US (4G)

Canada (4G)

Figure 5 shows that it is dicult to use

any single simple metric as the basis

o spectrum value, as there is a range

o actors that infuence the prices

paid at auctions. We have developed a

benchmarking model as a guide to uture

values, drawing on past experience and a

high level analysis o the relevant actors

driving value.

It is dicult to use any single simple metric

as the basis or spectrum value.

Figure 5: Comparison o trends in spectrum prices is difcult across markets

Source: PwC analysis using publicly available sources


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This approach aims to estimate an indicative value or the digital dividend (450-862MHz) and the 3G expansion band (2,500-2,690MHz) which will be licensed acrossEurope over the next ew years.

Our starting point is the prices paid or similar spectrum in recent spectrum auctions ona price per MHz per capita. For example:

In May 2008, Sweden auctioned the 3G expansion band raising 225m or 0.13 per

MHz per capita. We use this benchmark as a guide to the value o the 3G expansionband; and

In March 2008 the US auctioned 700MHz raising $19bn, or 0.83 per MHz percapita. We use this benchmark as a guide to the value o the digital dividend.

We have controlled or key actors that drive dierences in the value o spectrumacross countries:

Average Revenue Per User (ARPU) rom mobile services;

A measure o mobile market concentration (Herndahl Index);

Fixed-line broadband penetration; and

Mobile penetration.

We recognise that these actors are more applicable to the mobile telecoms sector incomparison to broadcasting. However, in our view mobile operators are more likely todrive the ultimate prices paid or spectrum compared to broadcasters, when they arecompeting or the same spectrum.

These actors have been weighted in their application to the benchmarks, based onour view o their relative importance in driving spectrum valuation value. For example,

ARPU was assigned the highest weighting because it approximates the value o

consumers willingness to pay or mobile services, which drives cash fows supportingthe value o spectrum.

We have thereore taken our base price per MHz per capita, adjusted it or the keyactors described above or each territory and then multiplied by the population andassumed bandwidth or each country.

We estimate that the spectrum awards o the digital dividend and the 3G expansion band

in Europe are worth 40bn. Around 10bn is attributable to the 3G expansion band and

30bn to the digital dividend, refecting the more attractive propagation characteristics o

the digital dividend.

This valuation is designed to providean indication o the quantum o valueattributable to this new spectrum. Thisapproach can be used by companies asa sense check to their own valuations.However, bidders in auctions should

conduct a much more detailed analysiswhen assessing how much they areprepared to pay, as many other actorswill come into play in addition to those wehave described above.

Figure 6 below sets out a simple methodology to value the upcoming spectrum releasedat analogue switcho and allocation o the 3G expansion band.

Figure 6: Estimating the value o uture European spectrum awards using past auction

experience



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5 Three pillars o spectrum valuation

Spectrum can be valued in three main ways:

1. Value arising rom the launch o new products and services made possibledirectly rom acquiring spectrum;

2. Cost savings arising as a direct result o acquiring spectrum; and

3. The ranchise ee, or the ability to protect existing business as a result oacquiring spectrum.

1. New products and services

Launching new products and services involves a number o technology choices.Whatever these may be, it is vital to have a well-dened and robust business plan thatclearly sets out the service oering and its anticipated revenues and costs.

O particular importance is the relationship between assumed pricing o products

and services and the valuation o spectrum. Pricing should determine the value ospectrum independently, rather than the other way round. The prices that consumers

are willing to pay or services determine the protability and hence value associated with

new services. For example, companies may want to build market share by adopting

penetration pricing in the early stages o launch o new products, and this will impact

on the value o spectrum in the context o supporting this particular business model. A

relevant example would be the success o the mobile broadband oering rom UK mobile

network operators, which is driving signicant capacity requirements. Operators are

likely to require urther spectrum to meet consumer demand or bandwidth penetration

pricing has been adopted which may limit revenue generation, which in turn may impose

a constraint on how much operators are willing to pay or additional spectrum.

2. Cost savings

The release o the Digital Dividend opens up opportunities to provide cheapercoverage networks and in-building coverage. For example, this spectrum can providecost savings or mobile operators based on their current products and services, andconsumer demand. Using spectrum at lower requency compared to spectrum currentlyused by mobile operators may generate signicant network costs savings. Furthermore,

a multi territory spectrum acquisition strategy may also generate urther cost savingsthrough economies o scale on both network equipment and handsets.

An additional opportunity to make cost savings is to share spectrum and inrastructure

i.e. a network/tower-sharing agreement. For example, tower-sharing exists in Canada,

where the regulator cited environmental reasons or requiring incumbent operators to

share their masts with new entrants. In the UK, T-Mobile and 3 are developing a site

sharing deal covering their 3G networks. Operators with high market shares seeking to

collaborate should however be aware o the potential or legal challenge on competition

and regulatory grounds.

3. Franchise ee

The ranchise ee represents the loss in value to an operator i it does not acquirespectrum. We believe that a signicant proportion o the large sums paid in the early 3Gauctions were likely to have represented a ranchise ee. Underpinning the bids wasa need to protect existing GSM mobile businesses against the threat o new entrantswho would oer more enhanced services using 3G technology, potentially making GSMservices redundant at a aster rate than operators had been assuming.

There may also be brand value rom being considered at the oreront o mobile

innovation and technology. Brand perception has an impact on retail success.Experience shows that operators may ace customer churn i they stand by while otherplayers in the market migrate to more advanced technologies. So operators who areslow to adopt more advanced technologies risk losing a signicant proportion o theirexisting revenues and stranding existing investments in customers and networks.


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Figure 7: Factors aecting auction prices


6 The relationship between spectrum valueand auction prices

The price paid to acquire spectrum does not necessarily equate to the valuethat each winner places on the spectrum it has acquired. In most auctions theprice paid is usually the nal bid o the losing bidder rather than the highestprice the winner may have been prepared to pay. In addition, there are a

number o other key actors that will impact on auction prices summarised inFigure 7 below.

Auction

Prices

Auction

design

Number of

licences or lots

Marketing

Experience

and

preparation

Competition

between

firms

Market

sentiment

Technology

neutrality

Threat of

new entrants

Toe hold

Marketforce

s

Uniquenesso

fth

eopp

ortun

i

ty

E

ffic

iency

ofth

eauc

tion


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Uniqueness o the opportunity

The valuation o spectrum in use in a specic territory may not capture the value o atoe hold strategy. This is relevant to companies who operate across multiple territories.By acquiring the same spectrum across dierent territories a company may be able to

realise benets rom economies o scope and scale. For example, the early 3G auctionsin the UK and Germany resulted in higher spectrum prices than in subsequent auctions.Bidders realised there was value rom leveraging economies o scale and scope acrosscountries. Once the toe-hold strategy was established subsequent bids were basedonly in the incremental value o the opportunity in the specic territory and may haveeven discouraged competition rom other bidders who did not secure spectrum inearlier auctions.

The arrival o new entrants means that incumbents need to consider the ranchiseee element o their bid very careully, as this provides a greater threat to their existing

business. In this scenario, the ranchise ee will represent a key actor infuencing theprice they may have to pay or spectrum.

In addition, i it is expected that the auction represents the one time chance to securespectrum competition may be more intense. However, regulators are increasinglylooking to establish secondary markets or spectrum which may enable new entrants,or example, to secure access to spectrum ater the initial auction.

Market orces

The 3G auctions in the UK and Germany took place at the height o the dot com bubble.This positive market sentiment drove high expectations on uture service revenueswhich may have had an impact on spectrum values. In the present economic climate weexpect the opposite to be true. Given new services are potentially some time away romcommercial launch, auction bids should be based on expectations about the economicclimate in the long term. However, the economic downturn is constraining the capitalavailable to companies or new investments. I companies are unable to access capitalto und auction bids this may reduce their ability to bid up to their own valuations.Indeed new entrants may nd it particularly dicult to raise capital to und bids.

In concentrated markets, competition or spectrum may be greatest and thereorebidders are more likely to be orced to bid up to their own spectrum valuations. Inaddition, bidders are more likely to have similar valuations or the spectrum i theirbusiness models are themselves similar. In less concentrated markets there is likely tobe more dierentiation between bidders own valuations.

Eciency o the auction

Regulators are looking at increasingly complex auction designs to ensure that the pricesbidders pay refect their underlying valuations to ensure that bidders with the highest

valuations prevail. As Governments come under increasing pressure to raise unds,spectrum auctions may be perceived as a good way to generate income.

In the past, regulators have held auctions where more licences were being awardedthan bidders participating. This leads to depressed auction values. Regulators areincreasingly looking to maintain competition or spectrum in auctions by, dynamicallyadjusting the number o lots or licences in response to bidders interest, or by ensuringthey market upcoming auctions aggressively to generate interest and to ensure theyunderstand the number o interested participants.

Regulators have in the past included obligations as part o spectrum licences, or

example, time bound minimum coverage requirements. This can orce winners to makeuneconomic investment decisions that should be actored into spectrum valuation model.


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7 Conclusions

The spectrum due or release across Europe is prime real estate which will beacquired by telecoms and media companies to enhance customer experienceso existing services and launch new services. We estimate that the spectrumhas a value o some 40bn, representing 8% o the market capitalisation o

the leading telecoms and media companies in Europe. This is a signicantinvestment in the current economic climate; companies ability to pay may beconstrained particularly as the benets o acquiring spectrum are more likely tobe realised in the medium- to long-term.

Industry convergence widens the range

o potential bidders, making it harder to

predict likely motivations and strategies,

and oers up opportunities to partner.

Valuation is considered to be more o an

art than a science. Given the wide range

o actors infuencing spectrum value,the application o sound judgement tocomplex models becomes more importantthan ever. This will enable interested

parties to achieve the best possibleeconomic outcome in the midst osignicant uncertainty.


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The economic downturn presents

regulators, Governments and

companies with dicult and immediatedecisions over the award o spectrum.

We help companies break through the

complexity by setting out a commercial

and pragmatic approach to spectrum

valuation and bidding.


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Inormation & Communications

Paul Rees

+ 44 (0) 20 721 34644

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Technology

Raman Chitkara

+1 (408) 817 3746

[email protected]

Entertainment & Media

Marcel Fenez

+1 246 (852) 2289 2628

[email protected]

This publication has been prepared or general guidance on matters o interestonly, and does not constitute proessional advice. You should not act upon theinormation contained in this publication without obtaining specic proessionaladvice. No representation or warranty (express or implied) is given as to the accuracyor completeness o the inormation contained in this publication, and, to the extentpermitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do

not accept or assume any liability, responsibility or duty o care or any consequenceso you or anyone else acting, or reraining to act, in reliance on the inormationcontained in this publication or or any decision based on it.

2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers

reers to PricewaterhouseCoopers LLP (a limited liability partnership in the United

Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other

www.pwc.co.uk/telecoms

www.pwc.co.uk/valuations

www.pwc.com/eandm

Simon Harris

+44 (0) 20 7804 9413

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Darren Waterman

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David Lanceeld

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Authors:

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PwC Spectrum: Timing is Everything