10.22.10

Spectrum crisis or spectrum bubble?

Posted in Regulatory, Spectrum at 8:43 pm by timfarrar

I vividly remember attending the Cisco analyst conference in the fall of 1999, soon after I moved to the US, and being confronted by a rosy picture of ever increasing demand for telecoms equipment because of the dramatic growth in Internet traffic. I was moved to ask the question of whether in fact we were in a bubble, and if Cisco’s revenue trajectory would therefore end up resembling its logo. Perhaps unsurprisingly, I was never invited back to that particular event.

This evening I took the time to read Andrew Odlyzko’s seminal paper on Internet traffic growth in the 1990s. This paper explores the myth that Internet traffic was doubling every 100 days, which was a key contributor to the telecoms bubble of the late 1990s, and the subsequent loss of hundreds of billions of dollars of investors’ money. One of the highlights mentioned in Odlyzko’s paper was former FCC Chairman Reed Hundt writing in his book You Say You Want a Revolution that “[i]n 1999, data traffic was doubling every 90 days ….”. In reality, Internet traffic was growing rapidly, nearly doubling every year, but the growth rate from a short period of initial growth in 1995-96 had been erroneously equated to a long term growth rate. It was of course in everyone’s interests to promote this myth – it pumped up valuations, allowed startups to raise billions of dollars, and enabled politicians and others (such as Cisco) to claim credit for developing “the new economy”.

Thus it is particularly striking that we now see the current FCC Chairman using a flawed study to promote the “transformative moment we must seize” because “we are likely to see a 35X increase in mobile broadband traffic over the next 5 years” (based ironically to a significant extent on Cisco forecasts). We also see startups such as LightSquared and Clearwire raising (or at least trying to raise) billions of dollars on the back of their spectrum assets to build out new networks and realize the “extraordinary opportunity of communications technology” that the FCC Chairman envisages.

Of course it is true that mobile broadband demand is growing rapidly, just as Internet demand was growing rapidly in the late 1990s. However, perhaps we should pause and ask whether we are in danger of repeating some of the mistakes of a decade ago? When cellular operators, spectrum owners, equipment suppliers and regulators all have a vested interest in talking up the spectrum crisis, there has to be a danger of disappointment. I’ve already commented that spectrum might not be such a good investment and that the Clearwire auction looks to be going badly. There are even rumors that Clearwire is preparing for a round of significant layoffs. As a result I have to wonder whether we will look back at this moment in six months or a year, and conclude that yesterday’s FCC spectrum summit marked the point at which the spectrum bubble began to unwind.

6 Comments »

  1. ORBITRAX said,

    October 23, 2010 at 10:19 am

    Here I believe your basic analysis is flawed. In this case you are attempting to compare a finite resource that is highly regulated, to Telecom Equipment Infrastructure which is an infinite resource which serviced an industry which had become highly unregulated. I have often blamed the entire “Dot Com” bubble on the Federal Communications Commissions Telecommunications Act of 1996, where most telecommunications services were deregulated, and incumbent telecom providers were required to “wholesale” their underground “Spectrum” yo almost anyone who wanted to purchase a Cisco Switch and go into the Telecom business. The telecom incumbents were not “willing participants” and did not offer any sort of Virtual Network Operating environment like we see today in the mobile space via MNVO’s which simply wholesale the entire network infrastructure eco-system to a third-party. So investment capital poured into the Telecom ecosystem with competing companies dumping fibre into the ocean with very little national or international regulation. It was the “telecom gold rush”, where business plans were devised and sold on the back of a napkin at a neighborhood Denny’s. In the end, technology killed itself as huge leaps in capacity gains, outstripped even the aggressive growth curve of demand. Companies like JDSU provided low cost solutions that enabled multitudes of capacity gains in a given strand of fibre, which in turn crushed market based data transport economics to a point that thousands of strands of newly installed fibre went “unlit” and in many cases, resulted in uncompleted projects. Likewise companies like Tiernan introduced Digital Encoders into the Fixed Satellite Service. These encoders nearly quadrupled the available capacity on every Fixed Satellite in GSO orbit overnight. Satellite orders in the FSS segment plummeted, and Fixed Satellite Operators filed Bankruptcy in droves as technology provided not sequential gains, but meteoric gains in system capacity which devastated the supply side of the market equation. Sure the FSS industry had seen technology alter the overall availability of FSS services in the past when inter-satellite spacing requirements were halved from 5ยบ spacing, and then eventually halved yet again some years later. But, there was still huge upfront costs and time-to-market considerations. The launch of the Tiernan Digital Encoders effectively quadrupled the on-orbit FSS capacity in a matter of months.

    Terrestrial CMRS services also saw their share of improvements in spectral efficiencies from the air interface over the last decade, but capacity gains and implementation of advanced waveforms have usually been demand driven and implemented over a period of time through standardization. These improvements have been implemented because they are ultimately more cost effective than acquiring additional spectrum. Today, we employ advanced frequency-reuse techniques by deploying advance antenna beam-forming technologies, and by deploying base stations with a smaller coverage footprint, (pico cells) in order to effectively reuse the spectrum available. All of this is done because the technological improvements are ultimately cheaper than the acquisition of additional spectrum (if available at all in some markets).

    The problem with spectrum is there is no like substitute. There is no technology that will show up overnight and ultimately create “more spectrum” at a given frequency, that can be licensed. The spectrum is licensed and secured with payment of a fee. If 1996 were revisited today and the FCC were to declare that all the CMRS providers must wholesale spectrum to any interested party that came along. Then I would assure you that I would be purchasing NOKIA stock as soon as the market opened on Monday morning.

    Unlike a CLEC that raised a couple of million dollars and purchased a Cisco switch in 1998 to compete in a Local Exchange Market in which mobility of the phone number was not even a consideration. In the CMRS space, an operator must provide wide ranging roaming capabilities which will require O&O spectrum in the most highly populated markets in order to compete effectively. Those are the major markets where the spectrum crisis is upon us.

    Just as we have seen a consumer market transition away from the POTS landline telephone business model toward a “mobile only” telephony service, we will also see a transition away from the terrestrially provisioned broadband connection to a “Mobile-Only” broadband connection. I personally know of three households that have terminated their home based internet connection in lieu of a mobile phone only connection via their Iphones. The desktop computer market is in a steep decline in the consumer space, all you have to do is walk into a Best Buy and look at the change in the “product mix” on display as compared to 5 years ago.

    I personally have no home broadband connection anymore, I use a Verizon MiFi for internet access, it is mobile, and travels with me anywhere I go.

    There is no unwinding of a bubble, as the bubble has not even begun to form. As a matter of fact. If you went back and performed an analysis of spectrum capacity Mpbs, vs Cost per Mhz/POP vs Propagation Characteristics. You would find that the latest FCC CMRS auction spectrum provided spectrum at a significant discount to historical prices. in Auction 5 which ended in 1996, and Auction 73 which ended in early 2008. You will find that spectrum actually sells at a steep discount to 1996 levels using 1996 dollars. (Nextwave bid nearly 1 Billion dollars for 30Mhz at 1.9Ghz for the NYC BTA in Auction 5 which excluded Non-Designated Entities bidders vs. Verizon’s winning bid of $429MM for 12 Mhz at .7Ghz for the NYC BTA in Auction 73). If you want to call a bubble. That would have been the European UMTS auctions in 1999.

    ORBITRAX

  2. timfarrar said,

    October 23, 2010 at 12:48 pm

    One of the fundamental reasons for a bubble to form is when there is a widely held misperception about the balance between demand and supply. This does not necessarily require a step-change in demand or supply (e.g. commodity or housing price bubbles), but it is much more likely when you have a dramatic change in a market, as with the Internet bubble, due to emergence of substantial new demand, and huge growth in supply (due to technology advances), because perceptions may get out of step with reality (as in the “doubling every 100 days” myth).

    Thus one should immediately be cautious when we have talk of a 35x increase in demand over the next five years, especially when the consequences of this demand growth in terms of the need for additional spectrum can be changed significantly by virtue of a simple mathematical error in the FCC’s calculations.

    Spectrum demand growth could be significantly different to that projected in the FCC’s analysis with only small changes in behavior and/or pricing. For example, many people may well want to give up their fixed line DSL or cable connection for mobile broadband. However, if we still have pricing of $10 per Gbyte, as AT&T currently charges, not many people will be prepared to see their data usage double every year (as is implied by a 35x increase in demand over 5 years) reducing the need for more spectrum. On the other hand, if spectrum does end up becoming scarcer, then it simply won’t be in cellular operators’ interests to promote low margin (in terms of dollars per MHz) applications like fixed broadband replacement.

    Its certainly not the case that there is a bubble in spectrum prices to anything like the same extent as there was in the 2001 3G auctions, but that was another example of where expectations of demand growth were out of step with reality (as was LMDS spectrum pricing). However, I would argue that when everyone is saying there is a spectrum crisis, based on huge demand growth, the smart money should be on the opposite side of that trade. As they say “buy to the sound of cannons, sell to the sound of trumpets”.

  3. TMF Associates MSS blog » The spectrum bubble, one year on… said,

    October 11, 2011 at 2:14 pm

    [...] October last year I wrote about the supposed spectrum “crisis” and how the FCC’s Spectrum Summit likely [...]

  4. TMF Associates MSS blog » The next broadband battle… said,

    December 22, 2011 at 9:15 am

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  5. TMF Associates MSS blog » Complicated legal arguments…and simple math said,

    January 27, 2012 at 2:24 pm

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  6. TMF Associates MSS blog » The heat is on… said,

    April 17, 2012 at 4:53 pm

    [...] of this comes as attention finally seems to be turning to the fact that (as I’ve said for the last 18 months) the “spectrum crisis” is based on hyperbole from the wireless carriers (not to mention [...]

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