Telecoms.com periodically publishes expert third-party insights on the industry’s most pressing issues. In this piece, the 5G World team invited Analyst Gerardo Mantilla to share his knowledge and experience on spectrum management around the challenges and new market opportunities for 5G.
Since the telecommunications opening in America, which began around the year 2000, the spectrum allocation policy has been evolving. In many Telecommunications Laws several methods were established. The spectrum allocation processes were based on Spectrum Auction and Beauty Contest. These last by compliance or assessment of parameters. In the beginning, the method used for the assignment by the majority of the regulators were Spectrum Auction. Where the clear intention was to obtain as many resources as possible from those interested in exploiting mobile services.
In some countries, these processes reached large sums of money in the market and announced as a great achievement by governments and regulators. But truth is, this did not necessarily translate into the establishment of the necessary networks for the provision of mobile services. There were even cases in some countries, where after the assignment the operators did not invest in telecommunications networks or provide services. They simply used that spectrum, as an investment they hoped to resell later for a profit.
Subsequently, the regulators reacted to this situation, using spectrum allocation models based on the parameter evaluation method, trying to exchange the spectrum for compliance with coverage obligations. With the intention of improving infrastructure and service access by users.
An example of these cases was Venezuela- where regulators used a mixed method of fixed base price and coverage obligations. In this case, the operators paid for the 3G spectrum bands, in the 1900 MHz bands, an amount of $120 Million and had the fulfilment of coverage obligations, derived from spectrum allocation.
However, this resulted in mobile networks with ample coverage, that is, the operators tried to obtain country cover with as few base stations as possible, but covering large amounts of land. As a result, the operators complied with their coverage obligations, but on the other hand, the number of base stations was extended throughout the territory but their concentration in the high traffic areas was very fair to offer a quality service.
Subsequently, with data services such as those used in 3G and 4G technology, operators realized that they needed to increase the number of base stations per covered area and thus offer better connection speeds. In some countries, operators increased the base stations number per covered area. In others, they managed to obtain a greater amount of spectrum to compensate for a low number base stations on interest area.
In some cases, the decision to compensate for the use of more spectrum with a lower base stations number was taken because of restrictions found in some markets for the establishment of base stations, in addition to the time required for their construction. In 2005 discussions began on the possible damage to health due to excess exposure to radio-electric emissions.
This resulted in operators having great difficulty installing their base stations in populated areas, especially on the residential building’s terraces. Therefore, the need to compensate for this difficulty with the allocation of additional spectrum for these networks became more evident.
But some regulators did not understand this situation and imposed policies of spectrum allocation caps, called Spectrum Caps. With which, it established a maximum spectrum amount that an operator can have in the market. Also with the intention of distributing the spectrum in an equitable manner and ensuring real market competition, in addition to allowing the entry of new players on the mobile market.
However, the spectrum is a limited resource and the mobile market has raised a lot of interest beyond traditional mobile operators, so more space was introduced in the market for new competitors, who could use the established networks operators and compete in equal conditions. From there arise, Mobile Virtual Network Operators, in many countries such as Mexico, Chile, Colombia and others.
However, these policies, although have brought benefits to customers and mobile operators, have saturated the telecommunications market. In addition to this, the regulatory policy and the mobile market that has been investment-intensive have limited the profit margins of mobile operators. In some cases, their EBITDA in percentage terms has fallen by more or less 10% or 20% in recent years.
The fall in the profit margins of the investors on the mobile market has brought as a consequence that the mobile operator’s investment capacity on establishment new telecommunications networks such as 5G, has been limited. It is enough to analyze their numbers and the discourse in different discussion forums such as the latter, held at the beginning of December 2018, Argentina, by the GSMA. Where many mobile operators, expressed little interest in moving forward with the deployment of 5G, at least until expecting a return on investment of 4G networks.
However, some countries such as Mexico, Chile, Brazil and Colombia, its regulators have expressed interest in leading the 5G deployments. But for this, the spectrum policy allocation must take a turn that takes into consideration all these elements that have been mentioned previously.
For all this, we consider that the way in which the radio-electric spectrum is valued must change. As well as, the allocation processes and real objective of these allocations have evolved, and understanding that the market needs is a real boost so that investors can have clear incentives to carry out the 5G network deployments.
In this sense, our vision on spectrum prices is that it should deprive the investment incentive instead of obtaining a higher price for the spectrum. Therefore, our methodology is based on a projection of users, market share, income, CAPEX and OPEX, with which obtain an estimate the spectrum price.
This estimate considers the real spectrum price, made up of three clear elements: the initial payment derived from spectrum auction or its allocation, the investment in coverage obligations and the additional taxes derived from spectrum exploitation.
Understanding, the spectrum granting is an incentive to obtain greater revenues from the Treasury and National Regulatory Authority. However, the ultimate goal of each assignment is to improve access to services by telecommunications users. In addition, the increase in investments by operators. This has a greater advantage in the economy of developing countries than that obtained by the payment of spectrum allocations.
This is why we believe that establishing the spectrum valuation based on the investments of the operators, bring greater benefits to the countries economies, since it has a positive impact on direct and indirect jobs, better services coverage that directly impact the economic development of the areas that are not economically attractive for operators.
In another point of view, if changes or fiscal incentives are established for operators due to investments increase, the benefit of investments is directly transferred to the country’s real economy. What brings greater benefits compared to increase in regulator and country budget. These are benefits that end up being more direct, creating jobs and improving coverage that directly impacts the population economy. Without having to wait for the government to distribute the economic benefit obtained from the spectrum auctions.
As mentioned above, our methodology assesses the spectrum based on the investments made by the operator through the years of licenses duration. An example of this is that the spectrum assessment methodology that we propose allows obtaining an investment commitment from the operator. Holding this investment to the spectrum allocation, which favours the investments increase in exchange for a financial benefit or spectrum price reduction.
For example, suppose that the operator commits to making investments in the order of $ 50 Million, in the first 5 years of 5G network deployment. But if it is established that the regulator follows up on this investment commitment, in order to guarantee compliance, tax benefits may be fixed in the next year, such as a 1% discount on the tax payment, in exchange for an increase of 10% the initial investment. Even if the operator does not comply with the investment commitments, an increase in the tax payment of a similar or slightly higher percentage may also be established, in order for the operator to value maintaining its investment commitment.
Obviously, this is an innovative change in regulatory policy and, intrinsically, it must be evaluated whether the current regulation allows it or not, in each country where it is desired to implement. But it is a new way of guiding regulatory policy in general terms, to really guarantee the key factor of any regulation of services, which is to encourage investment levels.
Of course, we understand that, like any change, this will have favourable and unfavourable opinions from different parties involved in the country’s economic policy, particularly where this new regulatory model is evaluated. However, we are sure that the economic benefit in the country will be much greater, than if only a base price is established to obtain the spectrum, but it is not promoted beyond what the operator plans to invest.
For most countries, the increase of investments is key for the economic development, but understanding also, that the economic benefit of operators is limited to the amount of population that each country possesses, its average income per person and the GDP of the country in question. In addition, telecommunications has an important specific weight in the GDP of the countries.
If necessary, to increase these investments without promoting telecommunications services high prices, it is crucial to establish better policies to encourage investment. In such a way, that this investment incentive is not entirely transferred in an increase in prices to customers, which translates into a lower possibility for the population to access telecommunications services.
This strengthens our vision, that the spectrum prices, rather than a collection element, is an element that encourages investment, offers a balance of accessible prices to the population and an attractive return on investment that increases the interest of investors in terms of telecommunications. The balance of these elements is fundamental, understanding that these three elements that have been mentioned must be balanced in an attractive way.
We have discussed this with regulators and operators. We have sent our regulatory vision in this regard to regulators and operators in Latin America, such as Mexico, Colombia, Peru, Argentina, Brazil and Chile. For what we would like to highlight the case of Colombia. Where is currently discussing a modification to ICT Law? Where the ICT Minister, Sylvia Constant in a recent statement has acknowledged and quote textually “the spectrum should be used as a tool to close gaps and not as a collection instrument”.
In another order of ideas, it is not coincidental that the business model of 5G is only mobile telephony and smartphones. That market is saturated, with penetrations close to 100% and with a recent deployment of 4G. The true 5G market is the Internet of Things, IoT, specifically connected cars, smart cities, smart health services and the connected industry or IoT. That should be the focus of the regulators and operators for which it is necessary to have a broad vision.
5G new markets
However, in order to exploit these new markets by telecommunications operators, there must be a clear vision of the issue on the part of telecommunications regulators and other governments.
For there to be an increase in investments by mobile operators, there must be an increase in the market, which is only possible for a greater number of customers in the mobile services, which is not possible, since, in most of the countries, mobile telephony penetration is between 90% and 120%. Obviously, in the markets with greater penetration, there are customers with two or more lines from different operators.
On the other hand, there are new customers or markets that use mobile telephony services. This is where the true potential of this 5G technology is, which opens a new market, not explored, with new connection needs and willing to set payment for the services provided.
The difficulty is that operators must offer innovative solutions and become what they have always wanted but not achieved, go beyond the barrier of an actor that only deploys the network on which high-value services are lent by other actors such as Google, Facebook, Apple and others.
With 5G, operators have this possibility, but for this, they must leave the box, think and face 5G deployment, in a different and risky way. This vision is critical, and the present moment is crucial. However, this makes it necessary to work together between regulators and operators.
It is necessary to leave the natural conflicts between these actors to face joint work. As in the Chile case, where aspects such as Spectrum Caps are still discussed, an inefficient and restrictive investment policy. In this sense, regulators must provide all the possible elements to create the regulatory and market environment for operators to take advantage of these conditions, in a differential and innovative way.
An example of this is the themes of connected cars. If there is no joint work between the automotive industry, mobile operators, telecommunications regulators and automotive associations, you can miss the opportunity of what really lies at the centre of 5G advantages.
If 5G implemented, in a country that wants to lead its deployment, but has not specified that there is a similar launch of connected cars, the 5G deployment will not provide the necessary benefits to operators to maintain the technological deployment.
On the other hand, the spectrum selection to assign is fundamental because if only the allocation of the 3.5 GHz band is made, the deployment will not be fast enough due to the number of base stations that must be established. For that, the use of the 600 MHz band is key, because this band will allow offering greater coverage, although at speeds lower than 3.5 GHz.
This situation leads us to conclude that the successful 5G deployment involves a joint spectrum allocation in different frequency bands. That is, it is not enough just to assign the 600 MHz bands or assign the 3.5 GHz band. Or in the worst case, the 600 MHz band should not be assigned to some operators and the 3.5 GHz band should be assigned to different ones. Because this will not allow you to take advantage of 5G technology.
This is why this 5G issue, is more complex than have seen that is being discussed in different forums in the industry, the statements of those responsible for regulators and opinion articles, which can be accessed in the specialized media communication.
In short, having the elements that have been presented in this document is a start to address the 5G deployment properly. With a broad vision and defined objectives, with the intention of using the infrastructure deployment and operators investment in achieving a positive impact on the countries economy and life quality from people.
5G is here, are you ready? Visit 5G World on June 11-13, 2019 in London, which will bring together the 5G ecosystem to define the next steps toward 5G rollout and monetization.