The 1990s were dominated by talk of the ‘Digital Highway’, and the ’noughties saw the building of those highways through a combination of cable and fibre optic technology. A significant part of the bursting of the telecoms/dotcom bubble in the early 2000s was the result of too much capacity, too early, on those newly-built highways. The economic model was temporarily broken and telecommunications for a while ceased to be the darling of investors and financiers.
After the industry had picked itself up, thoughts turned to the avenues that promised the possibility for above-average growth and for technology to play a role in opening up new markets relatively quickly and cheaply when compared with traditional infrastructures. In the previous decade wireless had proved to be a highly disruptive technology as far as voice was concerned. The market had been created and, most important of all, consumers and businesses alike had become very comfortable with the constant – if not demanding – always-on, mobile, ubiquity. The stage was set for the next development of this platform – wireless broadband.
The proliferation of mobile data devices, such as the iPad and the Blackberry, using 2.5 and 3G (and soon LTE/4G) wireless technology is, of course, generating a great deal of user take-up. Some substitution of fixed terminals is already occurring as users develop the habit of using the same device at home and the office as on the move, but, in Europe at least, service quality is an issue as networks built primarily for voice traffic buckle under the strain of carrying bandwidth-hungry applications such as video streaming. Meanwhile the fixed network owners, even though slowed by investment constraints, are building “next generation” backbones and fibred access networks to provide blisteringly fast data speeds and bandwidth to support all manner of video and data communications as user expectations grow exponentially.
There are many aspects of convergence, but in a collision sense there is therefore a growing convergence of wired and wireless communications vectoring the same community of broadband users. In Europe and other developed economic regions this has already led to corporate consolidation as fixed and mobile operators alike seek customer retention in packaging services over a combination of platforms – cable, mobile, satellite – and sometimes all three (eg Sky). Consolidation may not, however, avoid the looming battle between the networks for the core of broadband customers. It seems likely that this will become particularly intense once 4G/LTE mobile technology becomes the new standard, and data speeds and network capacity over mobile networks become serious enough to offer a comparable standard of quality to fixed. Even then price will be affected by market elasticity; the size of the investment by network operators on both sides of the (wired/wireless) line, and the period over which they are able to write down their investment, will have a significant impact on their relative competitiveness.
So, as investors in wireless networks fight to be among the leaders in this next phase of technological evolution, it is worthwhile stepping back to look at some of the fundamental differences in the physical, legal, regulatory and competitive position of wireless operators compared to their wireline (ie fixed) counterparts.
The key physical difference is that: fixed operators build and/or own their key transmission media – fibre or coaxial cables and copper; whereas wireless operators use a key asset, spectrum, which, according to international convention (both legally and per the ITU), they cannot own in legal terms but which they enjoy under licence from the State (directly or through a regulatory authority).
Spectrum is a finite or so-called ‘scarce’ resource and although new techniques such as cognitive radio are capable of making the use of spectrum more efficient, there is increasing pressure on regulators of the airwaves to find more spectrum useable for commercial purposes. Most often that involves trying to prise open the grip of the country’s state broadcasting, military, emergency or security services on spectrum suitable for services like mobile broadband and mobile TV. Unlike consumable resources like hydrocarbons, a band of spectrum can never be depleted; but, while not consumable its useable capacity is nevertheless finite. So, as applications proliferate, spectrum is subject to ever-increasing demand.
In order to ensure such a scarce asset is not squandered, regulators, in the more developed markets at least, have very often considered auctions as the best mechanism to determine market values and to maximise value for money for the State, while at the same time ensuring that the award process benefits those with the financial resources required to meet social and economic objectives such as coverage obligations.
The competition for spectrum created by this market-led approach has meant that spectrum is increasingly regarded as a key strategic asset for the telecom industry, much as patents are for the technology industries. Like patents, spectrum licences are usually granted for fixed periods, and their valuation is perhaps part art, part science. There are also some essential differences between the two, not least in the regulator’s ability to terminate a licence for non-performance of its material terms, whereas a patent holder primarily lives only in fear of the patent being challenged by a competitor and overturned by a court of law. Certainly spectrum rights have not developed to the point where the full “indicia” of legal ownership are conferred on the spectrum holder (although the tradability of spectrum is growing in some parts of the world), who only enjoys conditional and limited tenure on terms dictated by the State or via its regulatory agency.
There is another unique aspect to spectrum that makes it unlike many other forms of legal property (though not real estate) - interference. Whether at an international or national level, interference and its consequences are such an important feature of wireless telegraphy that regulators are almost universally charged with acting to prevent and protect against it. The ITU rule book, the Radio Regulations, has a whole chapter dedicated to it, and the EU Framework Directive requires member states to encourage efficient use and ensure effective management of radio frequencies. Some national legislation falls short of a wholehearted commitment to protect licensees; indeed the UK regime surprisingly has no overarching requirement to prevent harmful interference affecting them. Instead this is dealt with at the licensing level by imposing technical requirements on adjacent licensees designed to prevent such interference occurring, eg through the use of guardbands and out-of-block emission limits or block edge masks, as well as coordination amongst licensees. These are the magic arts of radio spectrum engineering.
However, despite these technical mechanisms, interference issues will arise and in some cases they could lead to legal action against regulators. This seems particularly likely as regulators move to open up more spectrum for commercial use and close the gaps between different bands. Regulators typically have a wide margin of discretion and so such challenges may be risky, but where a substantial investment is at stake and is threatened by radio interference, licensees may have no alternative but to take defensive action in the courts.
The relative scarcity of spectrum is having other competitive effects which could lead to legal consequences. This is particularly apparent in relation to the trend in auctions over the last decade. Since its inception the European Commission was warning that “the ever-increasing demand for the finite supply of available radio spectrum will lead to conflicting pressures to accommodate the various groups of radio spectrum users”.
This situation is manifesting itself in various guises, such as:
All of these types of challenge might conveniently be summarised under the general heading - lack of due process or of natural justice. National legal and regulatory regimes will continue to have their own individualised approaches to such matters, but in essence, the cases tend to centre around these core issues. Governments or regulators may complain that in some cases incumbents are using legal mechanisms to delay spectrum liberalisation and forestall competition, but they only have themselves to blame if they allow legal or procedural defects to creep in and thus give complainants the ammunition with which to attack.
So we come back to this essential fact. Spectrum has some unique abilities – it may be lacking in the bandwidth of fibre (so far) – but it is highly manoeuvrable, relatively low cost and satisfies the Heineken principle in “refreshing the parts others (networks, not beer) cannot reach”. It is this adaptability and ubiquity that makes it so attractive and valuable. No wonder corporate financiers, venture capitalists and investors are looking with ever more diligence at the availability (how can we get it?), quality (is it in the right band and suitable for which technology?), exclusivity (how much competition will we face?) and durability (how long can we keep it?) of spectrum as key elements in valuing wireless-based businesses.
Given all the factors above, and the essential role wireless and mobile broadband in particular will have to play in bringing high-speed, low-cost, communications to the developing as well as the developed world, it seems that competition for “mission-critical” spectrum can only intensify and its pricing can only increase.