For the average wireless provider in the U.S., the book value of spectrum assets makes up anywhere from 30 to 50 percent of its total asset value. That’s a lot — and yet the market value of some of these assets may actually be significantly higher. That’s likely because demand for mobile data continues to rise unabated, and new technologies, ownership models, and the advent of 5G are impacting the value of the spectrum holdings in every provider’s portfolio.
These market dynamics aren’t just causing spectrum values to increase. They are also likely changing the relative potential of individual spectrum holdings, and thus the fair market value of these holdings. This, in turn, may make it just as important for providers to examine the role and worth of their existing holdings as it is to pursue new holdings that complement the portfolio.
Why does spectrum valuation matter? Two reasons: first, getting it right can help providers better manage their spectrum assets to compete more effectively. Second, it can significantly impact a provider’s enterprise value, creating the opportunity for renewed investor interest and providing improved access to investment capital. In short, it’s likely never been more important for providers and investors to value spectrum assets properly.
The Growing Complexity of Spectrum Valuation
Wireless providers typically hold their spectrum assets at book value for the simple reason that U.S. accounting rules require them to do so, even though spectrum prices have been trending upwards. While the outcomes of individual spectrum auctions can vary due to timing, demand considerations, and the specific characteristics of the spectrum bands being auctioned, the auction price per MHz-pop, a common industry metric for valuing spectrum, has increased significantly over time.
For example, in 1995, the Federal Communications Commission auctioned off two 15-MHz spectrum blocks for $0.51 per MHz-pop. In contrast, in 2015 a 10-MHz block of spectrum was auctioned off for 5.7 times that price, at $2.91 per MHz-pop. This far exceeds the changes in the Dow Jones Industrials Average, the S&P500 and the Case-Shiller property index over the same timeframe, which were 4.3, 4.1 and 2.1 times their 1995 levels, respectively.
As we move into the 5G era, with new spectrum bands, technologies and ownership models coming into play, estimating spectrum value will likely become even more complex. The value of any given band could become increasingly dependent on each provider’s particular situation — its demand needs, implementation timing, deployed technologies, and the role of individual bands within its broader portfolio of licensed, unlicensed and shared spectrum.
Consider how new 5G technologies such as carrier aggregation and multi-connectivity may soon change the value of specific spectrum bands. Typically, large blocks of contiguous spectrum offer greater operational efficiency than equal amounts of non-contiguous spectrum. Carrier aggregation, however, can let providers combine relatively fragmented, disparate bands of spectrum virtually, into a single larger and more efficient block. Similarly, multi-connectivity can allow providers to use different frequencies to improve management of data traffic on their networks, combining lower frequencies — with their better propagation characteristics — with higher frequencies, which offer faster speeds and greater capacity.
Both technologies can have a significant impact on the operational value of a provider’s current spectrum holdings, and thus on its financial value as well. To understand and capture these potential changes in value, providers should consider tightly coupling their technical and operational spectrum portfolio planning with their financial planning to align technical roadmaps and operational plans with the financial value drivers of the underlying spectrum bands. Putting the spectrum portfolio to use for its “highest and best purpose” — based on how its unique combination of bands are deployed in concert with each other — can be a critical factor in how effectively a provider can position itself and finance its operations for competitive advantage in a 5G world.
Uncovering Financial Benefits
What impact could proper spectrum valuation have on how the broader investment community values a wireless provider? Since spectrum typically makes up a large percentage of providers’ assets, and fair market value for this spectrum may be increasingly diverging from book value, the stock market may not give providers proper credit for these assets. For example, our research indicates that major spectrum auctions seem to have less effect on the share prices of providers than do company acquisitions of similar size. Thus, the market appears to have a better handle on valuing company acquisitions than spectrum acquisitions — no surprise, considering just how difficult it can be to determine how a newly acquired spectrum holding will affect a provider’s performance, and thus its financial value.
The financial virtues of a properly valued spectrum portfolio can extend well beyond boosting a provider’s enterprise value. With a clear understanding of the value of specific blocks of spectrum and of their spectrum portfolio as a whole, providers can engage in a range of asset-based financing opportunities to reduce the cost of capital for a variety of projects such as network expansion, innovation and additional spectrum license purchases.
Wireless providers that can properly estimate and communicate the value of their spectrum portfolios may have an edge with investors as the financial community gains a better understanding of the true potential of those assets. This can open up both strategic and financial opportunities, such as the leasing of spectrum to gain access to its associated revenue streams, or the trading of specific spectrum bands to strengthen the overall portfolio.
Spectrum Strategy in a Changing World
Understanding the value of a spectrum portfolio is no easy task. It involves understanding many complex, interconnected factors: market value, technological evolution, the integration of individual spectrum bands, ownership models, regulation and more. And it should be performed in a dynamic environment where technologies and user demand are changing rapidly — and as the advent of 5G profoundly reshapes the competitive landscape.
Yet a properly valued spectrum portfolio can be critical for wireless providers to successfully carry out their strategic objectives, and for investors to recognize their true financial potential.
For a more detailed explanation of the challenges and benefits of proper spectrum valuation, see our full report.