CBRS Auction Update: Overlapping EBS Coverage May Impact Price More Than Population Density

CBRS auction (FCC Auction #105) bidding seems to deviate from the traditional trend of license territories in more densely populated territories clearing higher prices than those in less densely populated areas. Instead, pricing appears to be impacted by the availability of substitutable mid-band spectrum, primarily EBS, in the particular market. The deviation from pricing based on population density could have a significant impact on traditional spectrum license valuation metrics.

Traditionally, the FCC’s auctions of spectrum designated for use in mobile networks have gathered interest from a few dozen participants (23 to 70 participants in the previous five FCC auctions). Large national and regional wireless companies dominated bidding, and a predictable relationship between prices and demography persisted. Generally, densely populated urban areas garnered the highest prices based on the industry’s common yardstick of $/MHz/POP, which relates amounts paid to the depth of spectrum acquired and the resident population of a particular geography. The more densely populated areas generally also have more industry, and hence, higher incomes. A culmination of factors has broadened the field of CRBS auction participants to include more members of non-traditional groups including:

• Cable companies that view 5G as a competitive broadband technology are seeking to add mobile wireless services to their offerings. 
• New commercial IoT networks seek to meet growing industrial demand for remote sensing and control capabilities.
• Some industry verticals, such as owners of critical infrastructure like electrical utilities, are developing private LTE networks where commercial networks cannot meet their security needs.
• Consolidation in the last decade among wireless internet service providers (WISPs) have produced entities with balance sheets and borrowing capacity necessary to compete for the auctioned spectrum for the first time.

These new participants have varied industrial use-cases for the CBRS spectrum that are often hyper-local. Consequently, to date, the CBRS auction has departed somewhat from the traditional price/population-density relationship with many of the most valuable counties on a $/MHz/POP basis located in more sparsely populated regions. Figure 1 below shows CBRS Priority Access License (“PAL”) pricing on a $/MHz/PoP basis with higher $/MHz/PoP in darker shades.

Figure 1: FCC Auction 105 (CBRS) $/MHz/POP by County

Figure 2 below shows population density with more dense areas in darker shades. The strong traditional relationship between population density and $/MHz/PoP is weak in the CBRS auction.

Figures 2: 2018 U.S. County Population Density

The breakdown in the traditional relationship between population density and $/MHz/PoP has several potential causes, including:

• The encumbrance of the CBRS PALs on the coasts by prioritized use in Naval radar may reduce demand for the band in coastal counties, which are among the most populous.
• Hyper-local demand from non-traditional bidders with specific industrial use cases driving-up prices in areas traditional wireless companies are less interested in bidding for
• EBS spectrum availability reduced competition in more populated regions. Through its merger with Sprint, T-Mobile now controls approximately 85% of EBS licenses through leases with the educational institutions that own them. Many of these are in more densely populated regions. It is possible that New T-Mobile is less motivated to bid for additional mid-band CBRS spectrum in areas in which it already has mid-band EBS coverage. In these areas, amongst the national wireless carriers, only AT&T and Verizon remain to compete, lowering the prices.

Given the relatively limited use of Navy radar, we suspect the unusual CBRS auction results are primarily a result of EBS supply in the region. Simply put, the New T-Mobile may not be bidding for CBRS in areas; it has lots of EBS/BRS spectrum. In those areas, the bidding is only between AT&T and Verizon. The EBS map in Figure 3 below supports this hypothesis. Lower than expected CBRS bidding occurs disproportionately in areas with less EBS coverage. A similar phenomenon is observable in the unusually high relative CBRS prices in Puerto Rico, compared to past auctions. Higher than expected CBRS prices in Puerto Rico may be explained by the fact that the C-band auction will not include Puerto Rico, reducing the supply of mid-band spectrum.

Figure 3: National EBS Licenses

But what about the other CBRS bidders? The CBRS auction rules allow any one entity to control a maximum of 4 out of the 7 licenses in any county. It may be that for many of the secondary bidders, PALs in the most heavily populated counties are already prohibitively expensive on an absolute basis (but not necessarily on a $/MHz/PoP basis). In this case, the supply is mostly being divided only by AT&T and Verizon, resulting in lower prices on a $/MHz/PoP basis. Considering that many of the secondary bidders have far less capital than the national operators, it is plausible that the absolute prices in more populated countries are higher than they can afford. Figure 4 below shows total proceeds by county, with higher proceeds in darker shades.

Figure 4 FCC Auction 105 (CBRS) Gross Proceeds by County

Additional upcoming mid-band spectrum auctions – C-band (FCC Auction 107) scheduled to start in December, and the EBS overlay auction in 2021 will tell us more. Are we now moving to a world where spectrum value is driven more by the availability of substitute spectrum than the population density and other demographic factors of the coverage areas?