Privilege does not always mean money. It could also mean duty, cost, lost financial opportunity and a barrier to change. The recent example from the British Royal Family, when Prince Harry and his wife Meghan appear to have traded some royal privileges for financial independence, shows this. Mobile technologies in the 1990s brought a new type of privilege: ownership of licensed spectrum. 2G spectrum was allocated exclusively to companies, which call themselves mobile telecom operators, and run a specific business model. Following the success of 2G, spectrum for 3G, 4G, and sometimes even 5G, was in most countries allocated practically to the same industry, which continues operating on similar principles as the 2G telecoms did in the 1990s.
While the 3G and 4G spectrum moves helped to expand mobile consumer internet in a major way, they have not worked so well for those with the privilege, the telecom spectrum owners themselves. I am keen on telecom success, transformation and shareholder value creation. For that reason let me say the following. Perhaps this is the time to realize that privilege of one particular industry with one particular business model to own most or all of the licensed commercial spectrum does not mean an automatic win. Instead it could mean obligations, regulations, costs, unclear future commitments, along with reduced ability to compete and change. Perhaps this is the time to realize that 5G will require more change and diversity in business models. Perhaps telecoms and their shareholders may realize that the most efficient business model for using licensed spectrum may evolve over time, and the best way to grow shareholder value is to pursue the best model at each time rather than aiming for the best protection of the old model.
Earlier this month I agreed to help the government of the Czech Republic to explore innovative ways for allocating spectrum. Let me give you more thoughts and some historical perspective in the short story below.
We are in the year 1991. Barely two years after the downfall of the communist regime EuroTel, the only company to gain the exclusive right to use the national spectrum and thus the opportunity to build the first mobile network using the so-called 1G technology, enters the Czech market. Two processes of historical significance begin to unfold almost simultaneously in the Czech Republic: the journey to freedom, democracy and free markets, but also the journey to a digital society, in which both people and inanimate objects can communicate with each other regardless of their geographical location. Both processes are inspired by the world’s leading economy, the United States. A key investor in EuroTel comes from the U.S., but not only that. Inspired by the U.S. policy the Czech government entrusts certain radio frequencies to one particular company on the entire territory of the country for an extensive period of time. In return it asks for the construction of a network and provision of certain services.
In 1996 the Czech Republic awards the so-called 2G or GSM licences. EuroTel gets one automatically. RadioMobil was chosen as the second operator. Its key investor, Deutsche Telekom, represents the largest European economy. Licences are granted in so-called ‘beauty contests’. Those, who gain them, simultaneously gain tremendous advantages. They know which technologies to invest in, because that is decided upfront. They know which services to offer, because this is also set. They know that competition will be strongly limited, in the beginning to only two nationwide players. Moreover, they know that the authorities will consider the market as competitive, and hence they will avoid strict regulations, at least in short-term.
This situation, which played out similarly in other countries, made telecommunications a privileged industry worldwide in the 1990s. As builders of key infrastructures, the new mobile operators effectively obtain protection against competition, but they are also viewed as innovators, which deserve protection against excessive regulation. Their initial phenomenal success is not so much due to luck or groundbreaking innovations on the telecom industry’s side; instead it is a direct consequence of the benefits of the generally available GSM technology, demand for GSM services, but crucially also the spectrum allocation, which was not necessarily based on free-market principles. In 1995, the GSMA, one of the most influential global industrial associations, is founded.
However, the new millennium brings radical changes. The stock market bubble bursts and investors start avoiding telecoms. Governments realize that privileges granted to telecoms led to excessive profits, and they start to regulate, impose various fees and taxes, encourage new market entrants etc. This leads to the entry of the third mobile operator, Oskar, to the Czech market. Furthermore, the governments realize that the mobile operators will desperately need 3G spectrum, and they devise an idea to sell it in auctions. This may appear as a free-market move at the first glance, but appearance does not always match reality. The auction conditions are usually set in a way, which practically grants the majority of the new spectrum to the existing mobile operators. That said governments and regulators can significantly influence the price of the spectrum, for example by limiting the spectrum supply or differentiating the quality of the offered blocks. This way the UK government was for example able to raise almost £23bn in its 3G auction in the year 2000.
Telecom operators are being forced to focus on costs. The first area to cut is long-term risky investments in innovations. Innovators leave the telecom industry exactly at the moment when the newly built communications infrastructure gives a rise to social networks and internet services. The large telecoms give up practically without a fight, passing this market opportunity to global tech companies such as Apple, Google, Facebook or Netflix. Users are excited about the new services and the only thing they demand from the operators is cheaper and better-quality data. The operators respond by 4G investments, which begin to unfold in the Czech Republic at the beginning of the past decade. However, 4G is far from a solution for telecoms. Mobile data becomes a commodity. Instead of appreciating it, consumers often voice their frustration from quality, price or both. In the European stock market, telecoms become one of the worst performing industries of the past two decades.
We are now in the year 2019. The Czechs watch mobile videos as often as they drive their cars. The world is talking about 5G, driverless cars, robots in factories and remote surgeries. However, no one knows how exactly this new economy will work. While Facebook, Netflix, Instagram and other innovations were extremely popular right at the beginning, it is hard to imagine true human excitement from the facts that we may lose our work to robots, human-driven cars may be banned and an essential surgery will be performed by a surgeon far away from us.
We are in the year 2020 and the Czech Ministry of Industry and Trade asks for a deeper review of the 5G spectrum licensing process. Is such a review warranted? Let’s look at things in the following way. Past spectrum allocations had a material impact on telecoms, the internet, consumer markets as well as the entire economies, especially in emerging markets. That said it was hard to deviate from globally recognized standards for spectrum allocation. However, today we know that the past spectrum allocation models were far from free-market based, and they did not lead to the creation of a meaningful secondary market in spectrum. While these methods brought some positive initial results for the nations, such as a boom in 2G networks, wide-spread availability of mobile data and proceeds from the spectrum auctions, they also led to cummutation of licensed spectrum in hands of an industry, which is currently quite unpopular with both investors and innovators.
5G and possibly 6G are highly likely to become ground-breaking technologies in the same way that 2G and 4G were, although we are yet to understand how exactly this will work. The fierce competition between the US and China, which is relatively well-known due to the stories around Huawei, is an indication of this. In addition, we are expecting a number of essential new developments. Wireless communications will partially re-focus away from consumer smartphones towards many industries ranging from energy, robotics up to healthcare. Although the role of today’s telecoms in the future economy is not entirely clear, it appears unlikely that they could thrive without fundamental transformation.
In the current 5G auction the Czech government will be awarding low-frequency spectrum in the 700MHz range and high-frequency spectrum in the 3.4-3.6GHz range. The low-frequency spectrum is suitable for deep territorial coverage, also in the rural areas. Sharing of such networks is therefore sensible for economic and practical reasons. This could be done for example by building an open-access wholesale network for basic data services. Such a shared network could be used for example in the energy industry, for smart cities, for smart property management, in agriculture, in health monitoring etc. It would give various companies an opportunity to sell connected devices directly to the customers. The high-frequency spectrum is meanwhile suitable for transmitting substantial amounts of data over short distances, including for example in indoor areas. Building of full national coverage is practically impossible. To fully utilize the precious high-frequency spectrum it is therefore desirable to achieve some flexibility of its allocation in different regions, but also over time, between different users etc. It is possible to achieve this by supporting a secondary market in spectrum, regional reallocation of unused spectrum, using the so-called dynamic spectrum access or other methods.
The right decision about 5G spectrum allocation is important for competitiveness of the Czech national economy. It is no longer possible to simply copy spectrum allocation models from other countries, because the position and interests of different countries and regions are not uniform. The Czech government and telecom regulator should in my view support a model, which will lead to the best possible utilization of the 5G spectrum by businesses that want to provide all different kinds of services nation-wide, but also by businesses that need high-quality private local networks.
The government spectrum policy in my view should not be aimed to support or oppose the ‘interests’ of the current telecom industry. Instead, spectrum and other policies should provide incentives to the telecoms to build infrastructure in the most efficient way and to innovate in digital services. In other words, they should ideally reward progressive behavior in telecoms. When necessary, regulation may also need to address market failures, demonstrated for example through high pricing and low spectrum utilization.
The example of the world’s first voluntary telecom incumbent structural separation into O2 CZ and Cetin shows that the Czech Republic has the ability to set trends in global telecommunications, and reorganise its telecom assets to better suit the future needs. While most European countries have so far taken relatively conservative approach towards 5G spectrum allocation, the Czech Republic has once again an opportunity to address this issue with an open mind. Other countries including the U.S. are already experimenting in this area. That said the Czech Republic still has the opportunity to be among the world’s first countries to adopt an innovative model of 5G spectrum allocation, which would trigger fundamental progressive transformational changes in its communications market. Such model may not only boost spectrum utilisation and access of businesses to secure and reliable connectivity, hence positively impacting the industry and the economy, but it can also trigger positive transformational and ultimately value-creative changes in the telecom sector itself. Meanwhile, any fundamental digital service innovation in telecoms would reduce the industry’s reliance on what some critics would call relatively high prices of raw mobile data in the Czech Republic.
Founder, DIGITECCS Associates