Spectrum valuation & strategy
It is important to understand the costs related to new spectrum band and bandwidth alternatives when creating a spectrum strategy that may include participation in 700 MHz, 3.5 GHz or 26 GHz 5G auctions or in re-auctioning of 900, 1800 or 2100 MHz bands.
Omnitele supports operators in such spectrum strategy definitions by delivering spectrum valuation services. Omnitele reviews and rates all possible spectrum alternatives and delivers cost predictions required to achieve network quality and business targets given present and possible new network assets. The choices made with respect to the Radio Access Network (RAN) asset deployment are key to the spectrum valuation process.
Radio Access Network
A Radio Access Network may be viewed as a production environment rendering a connectivity product or service with the following product features:
- Coverage defines the locations, including (deep) indoor areas, where customers are able to consume the connectivity product.
- Quality quantified by accessibility, retainability, mobility, availability and integrity of data throughput delivered by the connectivity product.
- Capacity determines the total level of consumption that can be sustained without impairing product quality through for example congestion or limiting of data throughput.
The following resources may be regarded as the means of production for the connectivity product:
- Technology provides means to further increasing channel capacity (as per Shannon’s theorem) by increasing bandwidth and/or signal to noise ratios. These approaches include more advanced coding, modulation and antenna configuration schemes as well as advanced radio access technologies like 5G NR, which delivers a higher spectrum efficiency and thus more bits/sec/Hz for lower costs.
- Topology describes the total number and distribution of the radio base stations that constitute a cellular mobile radio network. Topology also involves design decisions for small cells like pico-, and femto-cells, multilayer networks, and heterogeneous system architectures.
- Spectrum specifies the total bandwidth of radio frequencies that an operator is licensed to transmit and is an essential asset to the operator, as it provides the primary means for delivering the connectivity product to its customers.
Spectrum valuation methods
The value of spectrum follows from the level of expenditure in the optimal combination of RAN production assets that result in revenue maximisation. There are various methodologies for weighting the investment in spectrum versus investment in topology, two of which are:
- Producer surplus on account of additional spectrum. This is the present value of the expenditure on network production assets during the next years without additional spectrum of certain bandwidth minus the present value of the expenditure on the network production assets during the next years with this additional spectrum of certain bandwidth. (ITU, 2017)
- The Cobb-Douglas production function that gives the total network capacity according to “A yα zβ”, where y is associated with the total amount of available spectrum and z is associated with topology represented by the total number of radio base stations. Parameters α and β are ratios for changes in minutes of usage divided by changes in spectrum and number of radio base stations respectively. (ITU, 2017)
The producer surplus approach reckons with a discounted cash flow methodology. Here the value of a spectrum licence is calculated from the net present value of the cash flows an operator projects will generate with the additional spectrum during the licence period. The applied discount rate is the weighted average cost of capital (WACC). The WACC reflects the cost needed to obtain funding for investments in production assets from a combination of equity and debt components. The WACC for mobile networks is determined per market and is controlled by the national telecom regulator. It may range from 6% to 16% depending on the maturity of the market. For reasons of convenience, an operator may use the generated EBITDA as an approximation of generated net cash flows.
The net present value is the difference between today’s value of future EBITDAs and today’s value of the investments in RAN production assets, including radio spectrum required to generate the projected EBITDA figures. EBITDA is directly related to the operator’s revenue, which is determined by the usage or traffic of the network. This is highly correlated with the coverage, quality and capacity levels rendered by the network.
Different combinations of spectrum and topology assets may yield the coverage, quality and capacity levels, which generate the projected EBIDTA figures. In general, the more spectrum is available, the less radio base stations are required.
The value of a certain spectrum holding is now determined by the difference in the net present values of alternative spectrum and topology investment options, where the difference between the options is the spectrum asset in question. Normally, a baseline scenario is calculated, which omits additional spectrum licenses and only uses existing spectrum and investments in topology to enhance network coverage, quality and capacity.
Omnitele’s expertise in spectrum valuation
Omnitele has supported its customers in spectrum valuation exercises with the following set of four deliverables.
- Cost model
Omnitele delivers a cost model that incorporates the costs for technology and topology assets. This model calculates the most efficient set of assets to reach coverage, quality and capacity targets. Inputs to Omnitele’s cost model include:
- Market developments including handset capabilities
- Technology developments
- Competitive environment
- Regulatory environment
- Business projections and company performance
- Scenario building
Omnitele defines all the inputs for a cost model iteration with respect to a selected spectrum scenario. A scenario includes the applied traffic model, the targets for coverage, quality and capacity as well as spectrum allocation alternatives. A baseline scenario is also included.
- Scenario analysis
Omnitele applies its predictive analytics methodology for determining the necessary technology and topology assets for each of the defined investment scenarios. An analysis includes forecasting of future traffic demands and determining the optimal combination of spectrum and topology assets.
The output of each spectrum scenario prediction is the optimised Total Cost of Ownership (TCO) for the network dimensioning relative to the simulated scenario. Omnitele’s proprietary methodology assures a minimal TCO as the predicted technology and topology assets represent an optimised combination to reach the set quality targets.
- Spectrum valuation
Omnitele determines the technical value of spectrum as a delta TCO. This technical value of the delta frequency band is derived by either comparing the outcome of a specific spectrum scenario prediction to a base line scenario without any additional frequencies, or to an alternative spectrum holding scenario. This TCO value of a specific spectrum holding may subsequently be use as the expenditure part in the eventual NPV calculation, which then also requires the inclusion of projected EBITDA figures.
However, since all spectrum scenarios will realise identical coverage, quality and capacity targets, EBITDA projections are equal for all simulated spectrum holding scenarios. Therefore, the predicted delta TCO will give a relative value of a particular spectrum holding compared to another one. A full NPV calculation is subsequently required in order to obtain an absolute monetary value of a certain spectrum scenario.
ITU. 2017. Methodologies for valuation of spectrum. Technical report. http://handle.itu.int/11.1002/pub/8106272d-en
Arnold van Holten
+31 (646) 376 215