Fears of a spectrum shortage spark networks’ bidding frenzy

When US telecoms groups spent $44.9bn snapping up airwaves in a record-breaking auction of government-owned spectrum last month, it took many in the industry by surprise.

Most analysts had predicted the auction would raise a fraction of the amount, with some pencilling in estimates as low as $15bn.

The total haul is more than double the amount the government raised last time it auctioned airwaves in 2008, when the smartphone revolution was still in its infancy. Since then, there has been a surge in the number of consumers using their mobile phones to download videos and music, prompting fears that the US and some other developed countries could be facing a spectrum crunch.

Mobile data traffic has been growing at a blistering pace. By the end of last year, traffic stood at 2.5 exabytes a month, according to Cisco, more than double the amount in 2013. By 2019, Cisco predicts that it will have grown 10-fold to 24.3 exabytes a month. An exabyte is equal to 1bn gigabytes.

The primary reason for the predicted explosion in mobile data traffic is the shift in how people consume video. Generation Z — shorthand for those born from the mid-1990s onwards — are abandoning their parents’ television sets and desktop computers in favour of mobile phones. Content producers are following them.

Jonathan Chaplin, an analyst at New Street Research, says this has prompted a “fundamental step-change” in how the likes of Verizon and AT&T view their ability to cope with the surge in mobile data.

This explains why they were so willing to shell out billions in the auction, even though they have had to take on more debt and sell assets to fund the purchases.

If steel and oil were the commodities that defined the 20th century, then wireless spectrum is arguably the one needed by the internet industries that will dominate the next 100 years. And, as with oil, there is a finite amount. Yet analysts and experts are sharply divided on whether it will actually run out.

According to the US Federal Communication Commission’s models, demand for spectrum will eclipse supply some time in 2018. Mr Chaplin says Verizon, the largest wireless group by market share, is in the worst position. It accounts for about 40 per cent of industry revenues, but controls 17 per cent of spectrum capacity.

The situation is not as acute in developing markets, where smartphone penetration is still in its infancy, or in Europe, where a greater share of the population lives in urban areas. Cities and towns would be in a better position to cope with any spectrum crunch, because lots of traffic can be offloaded on to WiFi networks.

However, Marty Cooper, a US engineer who is widely credited with inventing the first real mobile phone, is adamant that there is not going to be a spectrum crunch. Instead, he says the telecoms industry will “find a way of using spectrum more efficiently”, just as the modern hybrid engines that power the Toyota Prius use less petrol.

Nokia Networks recently suggested that existing spectrum could be made a thousand times more efficient by 2020, by deploying new technology and using new frequency bands.

So why are telecoms companies willing to pay so much for spectrum? The industry insists it needs to grab as much as possible to satisfy users’ hunger for mobile data. But Mr Cooper suggests that they could be “hoarding” it to stop competitors from entering the market.

While the big US telecoms group are engaged in a race to buy more airwaves, some companies are taking an entirely different approach: building mobile phone networks that use no wireless spectrum at all.

Cablevision, the US cable operator, last month launched Freewheel, a mobile phone service that allows customers to make voice calls and download videos and music by solely using WiFi hotspots.

The service has huge limitations: the minute customers are outside the range of a hotspot, they will be unable to use their phone. They must also use a specially modified Motorola phone that is designed to work on the system.

Marty Cooper formulated the law of spectral efficiency.

“Cooper’s Law” states that the efficiency of spectrum has doubled every two-and-a-half years since Marconi made the first transatlantic wireless transmission in 1901.

Dismissing an imminent spectrum crunch, Mr Cooper says: “Spectrum is 1tn times more efficient than it was at the start of the century.

“We know enough to keep us going for another 50 years at least.”

Yet the trade-off is partly reflected in the price: $9.95 a month for Cablevision customers, on top of their regular monthly bill, or $29.95 for non-customers. That is a fraction of the cost of the most basic $50 plans on offer — which are also subject to strict caps on data usage.

Craig Moffett, an analyst at Moffett Nathanson, says of Freewheel: “The best way to view [it] is as a proof of concept. The service itself is unlikely to be financially material for either Cablevision or the wireless industry. The concept, however, is a big deal.”

If a larger cable group, such asComcast, were to follow suit with a service that was predominantly powered by WiFi hotspots, it would have “the potential to attract a meaningful number of customers”, Mr Moffett says.

“If priced aggressively, it could also be enormously deflationary for traditional cellular providers,” he adds.

That is a sobering thought for those companies that have just shelled out billions on spectrum.