The Challenges in Valuing 5G Spectrum A discussion of the commercial and technical challenges of 5G spectrum valuation February 2018
The Challenges in Valuing 5G Spectrum Valuing 5G spectrum in theory is straightforward Introduction Valuing 5G spectrum is, in theory, straightforward. The value of 5G spectrum is simply the difference between the value of a business with the spectrum (the with spectrum case ) and the value of the business without (the no spectrum case ). The basic principle is shown in the Exhibit below. The value of the business is typically estimated from a Free Cash Flow forecast for the duration of the licence which may be anywhere from 10 years to a licence into perpetuity. The spectrum valuation task was challenging enough for 3G and more recently 4G technologies. However, valuing spectrum for 5G deployments presents operators with even greater challenges. In this paper we highlight some of the main challenges we have encountered on recent 5G spectrum valuation projects. Exhibit 1: Spectrum valuation basic principles Source: Coleago The first major challenge is in defining suitable revenue and traffic categories Commercial 5G valuation challenges The first major challenge is in defining suitable revenue and traffic categories which will provide the basis for a valuation. Whilst most operators typically forecast a single class of revenue and traffic when valuing spectrum under a 4G scenario this is no longer appropriate for 5G. Increasingly the industry is focusing on three main traffic types. These are Enhanced Mobile Broadband (embb), Massive Machine Type Communications (mmtc) and Ultra Reliable Low Latency Communication (urllc) and are depicted in the Exhibit below. Copyright 2018 1
Exhibit 2: 5G revenue and traffic classes IMT 2020 (5G) Vision Low frequency/wide bandwidth Coverage and capacity embb Enhanced Mobile Broadband High frequency/very wide bandwidth Extremely high data rates (e.g. 24.25-27.5, 37-43.5 GHz) Smart City Gbytes in a second Smart home / building Voice Future IMT 3D video, UHD screens Work & play in the cloud Augmented reality Industry automation Mission critical applications Self driving car mmtc Mass ive Machine Type Communications Low frequencies Wider / deeper coverage Source: Recommendation ITU-R M.2083-0, 09 2015 urllc Ultra Reliable and Low Latency Communication Low frequencies preferred Coverage & reliability Source: ITU-R Operators are relatively comfortable modelling the revenue streams and traffic flows for embb The use of small cells for mmwave spectrum will raise challenging questions for the mobile business model mmtc modelling and forecasting is more challenging Operators are relatively comfortable modelling the revenue streams and traffic flows for embb as these are often treated as an extension of current 3G and 4G mobile broadband services. Major questions remain however such as how quickly will 5G devices become mass market and what bands will they support, what levels of traffic will a 5G customer generate and how much more will they be prepared to pay? If the 4G experience is anything to go by, the answer is probably not much and deploying embb is likely to be a largely defensive, value protection strategy for operators. embb is also likely to be the category in which mmwave bands are deployed. Whilst the coverage of low frequency spectrum may be measured in hundreds of metres and multiple kilometres, depending on the topography and frequency, the mmwave spectrum in the 20, 30, 40GHz and above ranges are measured in a few 10s of metres at best. The deployment of this spectrum will require an entirely new model of deployment based on small cells, potentially using street furniture such as lampposts for example or other similar platforms. The cost of providing coverage based on small cells will be very high and there will undoubtedly be elements of a natural monopoly before the issues of interference and even the physical space for multi-operator deployments are considered. The deployment of 5G spectrum suitable for embb will therefore require potentially entirely new business models for deployment such as neutral host networks, partnerships with local authorities for access to street furniture and so on. Operators therefore face major uncertainty over the potential coverage footprint for embb, whether coverage can provide a basis for competitive advantage as well as the cost of deployment. There are also questions over whether the traditional mode of licensing and unique spectrum rights remain appropriate. mmtc modelling and forecasting is more challenging. Operators can draw some insights from existing machine-to-machine (MTM) services, revenue and traffic levels but the key challenge is how to take a measured view of the current hyperbole surrounding developments in the Internet of Things. Industry commentators enjoy discussing endless potential use cases and often attach significant revenue streams to them. During the heady days of the Dot Com Boom of the late 90s operators attempted to guess what specific 3G services would be offered in 10 years time and modelled how Copyright 2018 2
much customers would spend on them. The results were over inflated revenue forecasts and consequently, very high prices paid at auction for spectrum. This lead to a significant destruction of shareholder value and lowered the returns on capital employed that, in some cases, have still not recovered. Operators are less sanguine these days and no longer attempt to forecast on the basis of individual use cases The major challenge will be in what to assume about the operators position within the IoT value chain Operators will need to contemplate potential revenue streams for the currently unimaginable Operators are less sanguine these days and no longer attempt to forecast on the basis of individual use cases. mmtc services are expected to be low in terms of data volume demands and so are unlikely to be demanding in terms of network capex for capacity. As a result, the number of connected devices and their traffic requirements are likely to be second order concerns although operators will still have to make assumptions. Coverage levels will be a more important decision, and this will partly depend on the availability of spectrum in low frequency bands below 1 GHz. However, the business case for new site deployment solely for mmtc is likely to be non-existent and so most will simply deploy on their existing grids. The major challenge will be in what to assume about the operators position within the IoT value chain, and whether additional revenues should be included over and above simply providing the pipe. Revenues today from MTM services represent a very small proportion of total revenue for most operators and so in valuing 5G spectrum most operators are likely to adopt a conservative approach to developing their commercial forecasts. Those that are too young to remember the Dot Com Boom may well be tempted to include more aggressive revenue forecasts! Forecasting embb and mmtc will be challenging but the challenges will be small compared to those presented by urllc. The use cases for urllc seem today to be largely in the realms of science fiction making meaningful revenue projections close to impossible. However, services that were considered fanciful at the time of the 3G spectrum auctions in Europe are now mainstream and so operators will need to contemplate potential revenue streams for the currently unimaginable. In summary, operators must now develop forecasts for different classes of traffic and most will base their forecasts on three main categories. The uncertainty and complexity of developing these forecasts becomes progressively more complex as operators move from embb to mmtc and finally urllc. Not only will forecasting traffic be challenging but the underlying business models and revenue levels will also be equally complex. Technical modelling will need to take into account a wide range of different frequencies if confidence is to be established in the spectrum valuation range The mmwave bands will require an entirely new approach to spectrum deployment modelling Technical 5G spectrum valuation challenges The value of any specific 5G spectrum band will partly depend on whether alternative, substitute bands are available. In the long term the current bands typically held by operators and used for 2G, 3G and 4G services will be migrated to 5G. The speed at which spectrum can be re-farmed will depend on vendor roadmaps for equipment and device availability and the appropriate upgrade paths. Engineers developing their network models will therefore need to consider all the currently available bands which, in Europe for example, typically include 800, 900, 1800, 2100 and 2600 MHz and in the case of some markets such as Ireland, 3.5 GHz and in others 700 MHz. In addition, engineers will need to include other bands identified as potential bands for 5G such as 26 GHz as well as frequencies in the 30 and 40 GHz ranges and beyond. Consideration may also need to be given to 1400 MHz and possibly 450 MHz. A network model may well need to accommodate as many as 15 different bands adding to the complexity of the network modelling challenge. From a valuation perspective the business planner will have to make assumptions about what future bands will become available for 5G and when and whether they are likely to acquire them and at what price, if they are to develop a robust view on the value of 5G bands today. The mmwave bands will require an entirely new approach to spectrum deployment modelling based on small cell deployments and possibly shared networks. Practical, field-level cell sizes and spectral efficiency assumptions, as opposed to theoretical predictions, will be required and engineers will have virtually no real-world data upon which to base their forecasts. The benefits of massive MIMI may only be realised for Copyright 2018 3
high band spectrum in dense urban and urban environments and engineers will have to consider the implications for network dimensioning. One of the biggest challenges will be in developing the short to medium term network forecasts as operators migrate from 4G to 5G technologies. The backward compatibility of 5G to 4G will need to be considered with potentially dynamic re-farming of spectrum and cell resources between technologies during the transition period. Summary The ink of operators signatures on their 4G spectrum licences has only just dried and yet they must now confront the challenges of valuing 5G spectrum. The main challenges facing operators will be in developing multiple classes of traffic and revenue forecasts and resisting the hyperbole surrounding the IoT. On the technical side one of the major challenges will be in developing the technical models for mmwave and small cell deployments. More than ever operators must adopt a pragmatic approach to forecasting and keep in mind the words of the British Economist, John Maynard Keynes, that it is better to be roughly right, than precisely wrong. About Coleago is a specialist telecoms strategy consulting firm and advises regulators and operators on issues relating to spectrum, regulation and network strategy. If you would like to discuss any of the issues raised in this paper, then please contact one of ur specialists. Stefan Zehle, MBA CEO, Tel: +44 7974 356 258 stefan.zehle@coleago.com Graham Friend, MA, M.Phil., (Cantab), ACA Managing Director, Tel: +41 79 855 1354 graham.friend@coleago.com Scott McKenzie, BE, MBA (Oxon) Director, Tel: +44 7825 294 576 scott.mckenzie@coleago.com Copyright 2018 4