High-frequency spectrum is growing in importance to mobile operators

Spectrum has traditionally been thought of as being of value to mobile operators due to improving either service coverage or capacity, or both. While high-frequency spectrum provides roughly equivalent capacity per MHz to low-frequency spectrum,1  the low-frequency spectrum has always carried a significant premium due to also offering substantial coverage benefits, including more cost-effective ‘capacity in the coverage layer’ for mobile data services. However, while the factors making low-frequency spectrum particularly valuable continue to hold true, its scarcity is reducing in many markets as the 700MHz band starts to be released. Other factors, such as the growing importance of data speeds, begin to increase the relative importance of high-frequency spectrum (where availability of larger contiguous blocks makes delivery of very-high-speed mobile data services possible).

Data speeds are becoming more important to consumers and drive operators’ network strategies

For several years mobile operators have marketed their services based on peak download speeds theoretically achievable on their networks. Although this approach continues to be useful for operators, mobile subscribers now consider average data speeds to be among the most important factors in assessing the quality of the service offered to them by different operators. Perceptions of adequate data speeds are influencing consumer choice. For example, Analysys Mason’s Connected Consumer Survey 2016 found that 18% of respondents considering churning to another provider were doing so because of experiencing poor data speeds with their current provider.

This measure of user experience is therefore becoming increasingly valuable to operators and driving their network strategies, most notably in terms of spectrum usage. Similarly, we have observed that average data speeds are starting to form a key part of some mobile operators’ marketing messages. For example, at the time of writing, the homepage of UK mobile operator EE focused very heavily on promotion of data speeds, claiming as its main headline: “IT’S OFFICIAL: Our 4G network is 50% faster than any other”, with reference to results from Speedtest.net and EE being named winner of the “Fastest Mobile Network Award 2015”. In general, these types of marketing messages are becoming increasingly ‘front of mind’ for mobile operators.

The commercial value associated with quality of service is hard to replicate without the right spectrum

Providing this better user experience can lead to additional revenues for operators, for example through an increased share of gross additions or through higher ARPU, as well as other potential benefits such as cost savings related to subscriber acquisition and retention activities. Having more spectrum helps operators to deliver this better user experience. In particular, aggregating spectrum into larger downlink carriers raises peak data speeds but also more generally helps to provide the higher average speeds valued by many users. 

The top- and bottom-line benefits described above are commonly referred to as the commercial value of spectrum and sit alongside the network cost savings that spectrum can generate for providing a given level of coverage or capacity, commonly referred to as the technical value of the spectrum. In other words, while additional spectrum increases capacity per site to result in fewer sites being required (technical value) it also increases the operator’s service offering from each site resulting in a network performance improvement, which leads to a commercial value.

It can be hard for operators to achieve these commercial benefits without having sufficient spectrum. In particular, the cost of improving network performance (i.e. increasing average user speeds) without new spectrum may be so high that it is unprofitable to attempt to do so. Hence the speeds that an operator offers in practice are likely to be determined by how much spectrum it acquires. This is illustrated in Figure 1, which shows that by offering higher data speeds an operator can increase revenues from R1 to R2, but that this may only be able to be achieved profitably with additional spectrum and resulting network costs C2 rather than with costs C3 using only existing spectrum.

Figure 1: Illustration of the commercial benefits that additional spectrum can offer [Source: Analysys Mason, 2016]

Understanding this value is crucial for operators to acquire the spectrum they need without the risk of overpaying for it

The above considerations should feed into mobile operators’ assessments of spectrum requirements and hence spectrum acquisition plans. To gain a competitive advantage, operators will require large amounts of spectrum in harmonised bands, which means using high-frequency spectrum. This means that there is now significant commercial value attached to high-frequency spectrum and we expect this to continue to be the case for the foreseeable future. Although low-frequency spectrum will always be more valuable on a per-MHz basis, it is arguable that this value premium is starting to narrow as the market shifts towards achieving further increases in speeds.

Operators need to be able to accurately assess the commercial value associated with providing better service quality, including higher average data speed services to their customers. The risk is that otherwise they may miss out on spectrum to competitors placing greater emphasis on commercial value or, alternatively, could overpay for spectrum if commercial value is overstated, without reflecting increased costs associated with increasing subscriber volumes. Similarly, this higher willingness to pay for high-frequency spectrum is an area that is also important for regulators to understand when designing effective spectrum auctions.

Analysys Mason has been very focussed on understanding these issues in detail as part of its spectrum valuation projects with operators and regulators around the world and can therefore offer important insight to our clients. For more information about our services, please contact Mark Colville, Principal.

1 In this context we refer to low-frequency spectrum as spectrum below 1GHz and high-frequency spectrum as spectrum above 1GHz.