16 Pages Posted: 1 Apr 2012 Last revised: 30 Aug 2012
Date Written: March 31, 2012
Radio spectrum is a scarce resource and understanding its economic value is crucial to managing it efficiently. Estimating the value of radio spectrum, however, creates challenges not found in valuing most other assets. For goods that are traded regularly, looking to market comparables and adjusting for unique features, as one would adjust the price of a house for the number of rooms it contains, usually provides a good indication of value. This is because market participants have strong incentives to factor in all relevant information about value when arriving at a transaction price. For goods that are not traded often — think of a nuclear power plant — market comparables will not work. In these cases, a discounted cash flow (DCF) analysis incorporating all available relevant information is often the best approach. Spectrum is somewhat of a special case; market transactions provide some relevant information about value, but require adjustments that are usually best quantified through DCF modeling.
Spectrum value is absolutely critical to policy analysis, as well as to making investment choices in the private sector. For example, by law the costs of reallocating government users must be covered by auction receipts, so reasonable expectations of auction receipts are a crucial input into spectrum management decisions. Without understanding the value of spectrum for different uses, one cannot appropriately understand what spectrum should be reallocated. The first part of the paper will catalog spectrum valuations used in public policy and private investment and dispute resolution settings. These valuations will be categorized by the underlying analytic technique used. The wide range of valuations and techniques used provide a strong argument for better understanding of spectrum value and its drivers.
Finally, to demonstrate how these theories work in practice, we discuss several illustrative empirical examples. In particular, we empirically observe differences in value across regional markets; the changes in spectrum value over time as revealed in the stock prices of firms holding substantial spectrum assets; and the implications of the tradeoff between spectrum value and capital expenditures in infrastructure. Our analysis offers an important contribution for both public policy and private investment. This paper develops a framework for understanding the expected value of a spectrum license for potential investors, and provides insights for regulators on when to reallocate spectrum from a lower to a higher valued use so as to maximize value of spectrum licenses.
Keywords: Radio Spectrum
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