Spectrum Valuation: Implications for Sharing and Secondary Markets

Abstract

How much is electromagnetic spectrum worth? Appropriate metrics and methodologies for valuing spectrum would help policymakers seeking to ensure that spectrum resources are used efficiently and network operators, service providers, and end-users planning wireless-related investment. Valuing spectrum is difficult for several reasons: as a factor input, spectrum value is not directly observed but implied by the value of wireless goods and services; spectrum rights are highly differentiated, resulting in highly differentiated values; and secondary spectrum markets are under-developed and segmented, limiting the availability and comparability of market transactions as indicators of spectrum value. Furthermore, the continued growth in wireless services and networks of all types and further advances in wireless technologies enabling more dynamic and granular spectrum sharing are transforming the supply and demand conditions for RF spectrum. The challenge of valuing spectrum, enabling secondary markets, and incentivizing more efficient dynamic spectrum sharing involves multiple chicken-egg problems. An impediment to the development of secondary markets could be the lack of good market data for valuing spectrum which is needed by would-be participants in such markets. Were such markets to exist, spectrum value could be estimated by the marketplace transaction data. Moreover, without liquid secondary markets for spectrum, investors in wireless networks have difficulty embracing dynamic, shared spectrum access as a strategy for provisioning for their spectrum needs (either for acquiring additional spectrum or off-loading excess resources). Today, the most common unit for valuing spectrum resources is $/MHz-POP derived from dividing the value of a spectrum transaction by the total population in the coverage area of the license times the MHz of frequency included. Traditionally, spectrum value has been observed in spectrum auctions, M&A transactions involving the transfer of spectrum usage rights, or from infrequent secondary market activity. This was a viable approach when the fungibility of spectrum resources was limited by technical, market, and regulatory factors that constrained the commodification of highly differentiated spectrum resources. With the transition to 5G, smaller cell architectures, and the emergence of IoT, new spectrum usage patterns are arising and enabling more granular, multi-dimensional, virtualized spectrum management (in terms of frequency, location, time, etcetera). In a world of increasing spectrum sharing, dynamic spectrum access, and commercial applications of higher frequencies for wireless service, $/MHz-POP may be an increasingly noisy indicator of spectrum value. Moreover, past market transactions may be less comparable for newly allocated high frequencies and novel spectrum sharing models. In this paper, we consider how changing technology, markets and policy are enabling the commoditization of spectrum resources and explore what that implies for traditional spectrum value metrics that are used to project auction proceeds and value spectrum transactions. We explain how more granular techniques for managing spectrum may contribute to spectrum efficiency and facilitate and sustain more liquid secondary markets, more closely aligning spectrum valuations with efficient factor pricing. This, in turn, is likely to reduce artificial scarcity rents and potentially lower average opportunity costs for accessing spectrum.

Keywords: Spectrum, Valuation, Broadband, 5G, Wireless, Policy

JEL Classification: L5, K23, L96, L82, L86