Spectrum Licenses’ Value Will Increase

The recent announcement of Sprint’s acquisition of Nextel and Alltel’s announcement yesterday of its acquisition of Western Wireless (equity up more than 70% in the past year) bring into sharp focus the valuation of spectrum licenses. These legal rights to use spectrum are the foundation of wireless service companies. Many smaller wireless transactions with valuable spectrum are also under consideration in the suddenly hot telecommunications mergers and acquisitions market.And it’s not just M&A that requires spectrum valuation. New wireless equities and debt securities are under review. On January 26, the FCC starts an auction of Broadband PCS spectrum, with scores of applicants bidding for hundreds of licenses.Also, the FCC is nearing completion of a complex exchange of spectrum with Nextel with spectrum valued in the billions of dollars.By all accounts, spectrum values have risen over the past year. The S &P 500 wireless services index is up about 50% from early 2004. Valuations continue to increase. Naturally, investors, lenders, and corporate executives ask: Has the value of spectrum peaked, or will it continue to rise?Experts apply sophisticated quantitative techniques to value spectrum precisely. Spectrum licenses have multi-year pricing cycles, having generally peaked in 1996, 2000, and now are again on the upswing. From trough to peak, the value of a license may vary by tenfold or more. With such volatility, valuing a license is extraordinarily difficult.Spectrum licenses are not uniform in quality and thus hardly uniform in valuation. Different portions of the radio magnetic spectrum have physical characteristics making them more or less attractive for different applications ranging from mobile telephony to fixed satellite services. Spectrum licenses also vary by restrictions on uses, the specific width of the sliver of spectrum, the geographic area covered, the extent of sharing the spectrum with other designated users, limits on power usage, and the level of protection from interference from adjacent licensees.Spectrum license values also vary based on historic usage and perceptions of the ease of future use. Past revenue streams associated with usage, such as a television broadcast license, obviously structure the value of the license. But the valuation of most wireless licenses are strongly influenced more by expectations of future uses.Wireless spectrum demand increases inexorably, and does not have oscillating cycles corresponding to spectrum valuations. These cycles reflect changes in expectations of future demand, not changes in current demand.Spectrum is at the center of rapid technological change. Many spectrum licenses will not be used five years from now exactly as today. But no one knows which new technologies will be available in the future, what revenues they can generate, or how costly they will be, or how rapidly they will be adopted.Based on these expectations of future demand, in which direction are spectrum values headed?Some factors suggest caution on future price increases. In 1999 and 2000, businesses bid tens of billions of dollars in European broadband spectrum auctions only to beg for relief less than two years later. Further, the supply of commercial spectrum is not fixed, and our federal government is bringing spectrum previously under federal use into the commercial sector. Substantially increased use of unlicensed spectrum and new compression technologies further help reduce demand for commercial licensed spectrum.But the expanded supplies and flexibilities of commercial spectrum will only soften, but not eliminate, the enormous surge in demand for wireless services that raises the valuation of commercial licenses.Wireless industry revenue growth rates in recent years have been approximately 20% annually. Unlicensed spectrum has accounted for some, but hardly all, of this growth. Experts estimate continuation of the trend of double-digit growth rates for wireless devises are far as the eye can see. From a base of practically no economic value twenty years ago, wireless services today account for approximately one percent of the national economy.Wireless services are almost certain to continue to grow more rapidly than the remainder of the economy for the next many years, raising spectrum values and wireless equities along the way. Last year’s 50% growth in wireless services equities will not often repeat, but the underlying value of spectrum, after accounting for volatility around a trend, should continue to grow in the long run.A former FCC commissioner,Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.

Spectrum Licenses’ Value Will Increase

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