Licensed spectrum: saviour or false hope?
We're really enjoying reading the qualitative feedback from our survey. One recent comment from the chief architect at a major European pure-play mobile operator has stirred some internal debate at STL headquarters. In responding to our agree/disagree on James Enck's Ten Things I [the investor] Hate About You [the operators], he says:
I agree with most statements for a fixed telco. I do not think they apply equally for a mobile operator. Mobility is built using licensed spectrum, which is mastered by mobile operators, and no one else, certainly not by Yahoo, Skype etc.
This is a common view held across the mobile industry. It is clearly true to a degree -- and certainly from a historical perspective. The question is to what degree, and how strong a force is licensed spectrum in keeping the mobile ecosystem closed and controlled going forwards?
In answering this question, we'd pick five issues:
- Is licensed spectrum going to remain scarce and without realistic alternatives?
- Are the divisions between wide-area and local wireless networks going to persist?
- What is it the users really value in their mobile communications devices, and are these functions dependent on the spectrum gatekeeper?
- Even if the bottleneck exists, is it of any value?
- Are the growth areas in communications bottlenecked by wide-area network owners?
Our belief is that whilst licensed spectrum remains a barrier to entry, it is increasingly wrong to assume that this is going to result in strong shareholder returns.
Supply and alternatives are increasing, depressing the asset value
Firstly, there are spectrum reviews underway in key markets such as the USA and UK. The EU is looking into spectrum liberalisation. Considerable amounts of prime UHF spectrum are likely to be released within the next few years. CDMA450 offers a number of interesting prospects. The mid 2GHz area is being slowly filled. Technology in the high-frequency point-to-point domain continues to improve. Tradeability and flexibility of spectrum use is likely to increase. Free riders like broadcast TV are being questioned hard on whether this is a good use of the airwaves. In other words, supply is increasing, and all other things being equal that depresses the price and strategic value of the asset.
All this is before radical new technologies like mesh networking come along. Deep-pocketed players like Motorola and Intel are betting on WiMax, and between them know how to make the silicon and electromagnetic voodoo work. There are plenty of people with an interest in weakening the operator hold over distribution.
There are also MVNOs run by large fixed operators like BT who are strongly incentivised to use their long-running contracts to suck value out of the mobile system and return it to fixed network operators.
FMC makes Wi-Fi a more viable competitor to core revenues
Secondly, there's a huge amount of effort going into FMC solutions. These take out the airlink-layer issues of multiple network technologies. There are existing and unannounced companies working on solving the provisioning and roaming problems. Then the arbitrageurs like Truphone are moving in to re-skin the devices and change the balance of power, redirecting the users to non-operator services when Wi-Fi is available.
The users value mobility, but not at the expense of everything else
Next, it isn't obvious that mobility per se is the #1 thing that users always care about. For teens, it is as much the privacy, personalisation and social status of mobile phones as the ability to communicate from anywhere. Indeed, as those youths are increasingly confined to controlled indoor environments where WiFi will be a free alternative, the relative premium of mobility is likely to decrease. If the three key mobile web needs are indeed now, new and near, only the last is truly mobility-centric.
Market events suggest the value of the walled garden is approaching zero
Even if the licensed spectrum bottleneck exists, the recent market moves with 3 in the UK with the X series, as well as T-Mobile's earlier Web'n'Walk product, suggest that the market is moving towards a more open Internet-centric structure. A tollbooth without a fence is just a folly, not a turnpike. Users can walk around it.
The growth is in personal-area devices
Finally, as the Chief Software Architect of Motorola, John Waclawsky, put it at the last Telco 2.0 event, the value is migrating from wide-area networks to local-area ones. The next wave of value creation is in local access and communication, particularly with billions of devices and artifacts that have not yet been widely networked (e.g. iPods, watches, wallets, key fobs, etc.). This reflects out earlier post on the GSMA's near-field communications efforts.
All in all, we say that the licensed spectrum point of control is not as strong as operators would like to believe. The bigger picture looking at all the control factors in the value chain isn't any better. The result of this belief in the existence of a competition-repelling force field is widespread complacency about the need to re-think the business model.
By the way, we're pushing on for 500 responses (thank you!) -- but if you haven't done so yet, go complete the survey before is closes this Friday. Only those who fill in the survey (and not just your name and email address!) get posted the results. 10 minutes well spent, I promise.