Radio Spectrum and Financial Measurement
The technological advances of today have shifted the economic focus to many “knowledge & information” based industries. However, the financial measurement of digital transactions, and the use of “intangible assets”, such as radio frequency spectrum, remains problematic.
The presentation considered two aspects of spectrum financial measurement:
- the market dimension – a matrix approach to seeing which frequency bands are required and for what different purposes or uses
- the impact of different valuation methodologies of an intangible asset and the cost of using spectrum
The Market of Many
Different frequency bands, or ranges, command very different values. One way to try to simplify the analysis is to consider what we call the spectrum market matrix. The horizontal axis consists of all the different frequency bands, the vertical axis could contain a listing of some of the key factors, including the likely service uses. They might include for example: 1. location (the region such as the EU or country wide or local coverage), 2.the market (e.g. mobile or broadcasting or M2M), 3. ownership or right to use, including licenced or licence exempt applications such as Wi-Fi, 4. the technology of today, and in future, such as 5G. All these factors will affect funding or financing the required investment.
The ever increasing data flows and the demand for seamless digital connectivity to access the data whether in fixed, nomadic or mobile environments, has resulted in a massive increase in the demand and use of spectrum in certain bands. Some insight can be gained from comparison with shipping market, as new markets are being created using new value drivers reflecting technology changes and social needs. Spectrum is now the big local data transporter – analogous to a massive container ship, filled with thousands of containers, each one of which, containing a huge variety of different products and services. Further, the container ship travels within the shipping market subject to supply and demand, and freight market rates (currently very low) and across different sectors and submarkets.
New markets are being created using new value drivers reflecting technology changes and social needs. Traditionally, we looked at spectrum allocations in terms of service uses such as Land mobile, Fixed Services or Aviation. However, in future, the process of radio spectrum valuation is likely to require us to have a much broader understanding and knowledge of the complementary markets.
Valuations and Intangibles, and sharing
Spectrum auctions (mainly for mobile) by Governments, or rather managed by Regulators on behalf of Governments, have become one form of measurement, but these are not the only measurements. Further, these values have often varied greatly, such as £23 billion for the 3G prospects back in 2000 to £2.3 billion in 2014, and between different countries. The auction, planned by Ofcom later this year, will be very interesting and will highlight some of the difficulties inherent in the valuation process! Furthermore, valuations for other uses and other markets, such as broadcasting or spectrum released by public sector will not have precedents for benchmarking.
In effect, valuations of radio spectrum bands for future applications are problematic as often no proven business models exist, and implies:
- Measurement of economic benefits
- Measurement of intangible assets (which lacks physical substance)
- Measurement of values as distinct from goodwill
In an industry with a high proportion of intangible capital, where monetary transactions do not easily correspond/reflect value to users, accountants are faced with having to record transactions and values in the companies’ books and records. There is, therefore, a growing need and a challenge for the development of new and better standards of financial measurement.
A further key characteristic of sectors using radio spectrum is the lack of visibility of individual transactions and “spectrum use”. Spectrum will continue to be used as a key digital infrastructure component. There will be greater pressure to share the spectrum. This in turn requires trust between sharing partners and means we need new ways to measure and value shared spectrum usage.
The future is always uncertain and it may seem even more so at this time. On the other hand, great claims are being made for the Internet of Things (IoT) and 5G, with a massive growth in spectrum use for big data. It could also be argued that despite uncertainties this is a good time for new players to step in and invest in spectrum.
The real issue is the realisation that we do not yet have a robust methodology for measuring and valuing the huge intangible assets including spectrum that are in use or will be in use in future. The capital structure of communications companies has changed over the years from one based on high tangible network assets whose existence and values could relatively easily be measured and verified, to those of an intangible nature where valuations are effectively based on management’s estimates of future use. Rightly or wrongly we must live with these uncertainties. A single method of measurement may not suffice to reflect the undoubted financial impact and true value of radio spectrum as a vital economic force of ever increasing use.
Anna Coast and Bob Franklin of telcoconsulting www.telcoconsulting.co.uk
These and related issues will be discussed in at the forthcoming techUK seminar on 13 June 2017. To register please follow the link here.