After Day One of the AWS Spectrum Auction, the Price is Too High at $34 Billion

November 24, 2014 - Written By Phil Bourget

The spectrum auctions are in full swing, and we have a readout of some of today’s spending by America’s wireless service providers.  Sprint, run by the Japanese carrier Softbank, did not actively participate in the segment of the auction, if at all.  T-Mobile USA, also being owned and operated extra-nationally by Deutsche Telekom in Germany, also did not bid it up in the auction.  This left the two giants in American coverage, Verizon Wireless and AT&T, to bid away at the latest-offered spectrum.  Their budget, however, will be the surprising part. The two, because no names or licenses are given or revealed, have reportedly spent and bid up to 34 billion dollars.  The Federal Communications Committee is winning the most in the spectrum auction, because of some simple cost addition, provided in part by Joe Madden, who is the Principal Analyst at Mobile Experts LLC.  So, let’s crack these numbers down and see what the FCC is taking home at the end of the spectrum auction as of day one.

First, there’s the base $34 billion, which is for the towers themselves.  The towers are the physical signal senders that you see dotted around the nation, as well as headlines a bit ago (thanks, supposed government spy towers, by the way).  Each tower costs about $85,000 then, since there are 400,000 in the United States.  Sound fair?  Good.  Now onto the next set of numbers, but don’t forget the $34 billion, because we know how hard it’ll be. So, the next cost comes from the RAN, or Radio Access Network, costs.  The carrier must install both hardware and software to work with their customers’ devices.  RAN software is the communicator between the raw bandwidth and spectrum of a carrier, and the antennae of the cell phones and tablets (and all the other data-enabled devices offered) to actually give usable signal to browse, YouTube, stream, and all the other online things we love nowadays. There’s also the need for local installation of the software and hardware.  Sadly, the two silly men from AT&T most recent string of clever ‘we’re improving our network, city by city’ advertisements can’t be the only ones to make the new towers work.  There are fleets of workers that are hired wherever the RAN software and hardware must be installed and set up, so factor in some money spent there too.  These last two, the software / hardware and its installation should add up to around $31 billion, making our grand initial total sit at about $65 billion.  Yes, we said ‘initial’ total, since more money could be needed for different issues or additions that the carrier may face or choose to implement.

Now, how does $65 billion sound as a post-day-one total for some company to pay out, both to the FCC and others?  Too bad none of us have that kind of money laying around to cash in and get ourselves some spectrum, right?  Actually, that’s kind of the point. As Madden points out: “the strategy of the big bidders doesn’t pencil out anymore. Buying nationwide spectrum means that you’re investing billions of dollars for additional spectrum, mostly for locations that already have excess capacity (this is where people always insert an example such as Kansas, Nebraska or South Dakota). Additional capacity is needed for dense cities like San Francisco and Manhattan. There are specific buildings in Kansas and South Dakota that can use the spectrum, but only within the airport/convention center/stadium. Investing a king’s ransom for less than 1 percent of the square mileage of the United States doesn’t sound right.”

Madden is right, in that buying spectrum for that much money doesn’t make any sense, especially when a good portion of what is bought might never be activated or used.  Sprint And T-Mobile have been working with Wi-Fi providers to help offload traffic to Wi-Fi networks, so the spectrum stays free and usable whenever possible, which is a huge plus of Wi-Fi calling by the way.  But, that second method could cost around $10 billion, less than a sixth of the estimated price for setting up this latest batch of towers.  So why do the less expensive method? The biggest carriers might be, as many of us might have imaged, busting up the chance of future competition by simply owning everything they would need to operate.  Though, it could be that there is some huge-scale plan that none of us expect.  SkyNet perhaps?  The future will be the only messenger this time.  We will have to wait and see who ends up with spectrum and a huge tab to pick up.  Which carrier do you think will end up with the most, and how much higher do you think the cost for these towers will get?  Let us know down below.