Technology's Most Valuable "Natural Resource"

For many years, I’ve been telling people about a natural resource that technology has created.

If you Google my name, you’ll find stacks of articles from me talking about it, dating as far back as a decade ago.

I’m talking about the electromagnetic spectrum.

It’s a strange idea, thinking of it as a “natural resource.” It’s not something that can really be consumed. Rather, it’s more a capacity that fills up, and the limits are set by the government.

The portion of the electromagnetic spectrum that falls under the classification of “radio spectrum” is measured from wavelengths of the gigantic 3 kHz to the almost microwave 300 GHz. Within this range, tons of different wireless communications technologies have to be licensed.

Technologies that must be licensed include marine and air travel communications and navigations, broadcast radio and television, cellular communications, satellite communications, GPS, radio astronomy, meteorology, and dozens of others.

The FCC’s radio frequency allocation chart looks like the craziest patchwork quilt you’ve ever seen, and licenses within certain ranges in the spectrum are worth a bloody fortune.

As of November 22, the latest round of auctions for FCC spectrum licenses raised $34 billion.

If that’s difficult to wrap your mind around, let me add some detail: That amount of money is larger than the GDP of more than a hundred countries across the globe, and it’s simply for the permission to use a certain part of the radio frequency.

What’s more, this round of auctions isn’t even finished, and the numbers keep climbing.

The Latest Auctions

These auctions happen with some regularity, and whoever obtains a hot license obtains a lot of power.

The last auction took place between January and February of 2014, for example. In that offering, the “H-block” of wireless spectrum went up for auction. There were 167 rounds of bidding between 23 interested parties, but one bidder walked away with 176 licenses at the cost of $1.56 billion.

The H-block was reserved for fixed and mobile wireless services, including broadband, and the licenses were located in 176 economic areas, including the Gulf of Mexico.

The winner? Dish Network (NASDAQ: DISH).

Compared to this current auction, that was small potatoes.

In fact, the record for most money raised in a single auction was in 2008, when the FCC pulled down $18.9 billion for 1,090 licenses in various blocks within the 700 MHz band.

This time around, 1,303 licenses in the “advanced wireless spectrum,” also known as AWS-3, are up for grabs, and this auction is smashing records.

More than 70 parties are bidding, including AT&T (NYSE: T), Verizon (NYSE: VZ), America Movil (NASDAQ: AMOV), and T-Mobile (NYSE: TMUS).

To the average person, it might be difficult to understand why these licenses would be worth any more than others.

The explanation, however, is rather simple: They represent the biggest opportunity for wireless carriers to expand their coverage in the last six years. Since open wireless spectrum is an increasingly scarce commodity, companies offering wireless data services have to fight tooth and nail to offer services beyond what they already offer.

Five years ago, erstwhile FCC chairman Julius Genachowski alerted the world that this was all part of a “spectrum crisis.” Consumer demand for wireless data services was rising so fast that there was practically no way to accommodate demand.

It was rising to the point where any and every bit of underutilized spectrum had to be repurposed to allow more connections and handle more traffic.

Mobile data use has grown 18-fold over the year 2000, and last year had 81% year-over-year growth.

The only way to prevent poor service for consumers is to increase capacity, so every company wants to improve their license holdings.

What’s more, because these blocks are organized by geographic region, some are worth fantastically more than others.

A block in New York City, for example, is rumored to have sold for $1.19 billion on its own. It’s kind of like real estate.

What Can a Small-Time Investor Do?

When a company holds wireless licenses, it’s holding onto something more valuable than gold.

Conceivably, a consortium or company could sink a couple billion dollars into the acquisition of a set of licenses, boost the value of its company immediately, and then sell either the company or the licenses for a profit.

Think of it as license flipping.

It’s what Qualcomm (NASDAQ: QCOM) did with its ill-fated MediaFLO streaming TV service in 2011.

The MediaFLO service was supposed to stream television over the 700 MHz wireless band, but after it launched and failed, Qualcomm sold its licenses to AT&T for $1.93 billion.

It won the licenses in two auctions in 2002 for approximately $144 million. In short, Qualcomm made a billion dollars for failing to launch a wireless TV company.

Familiarize yourself with the list of FCC radio spectrum license holders, and single out smaller companies that have licenses in major metropolitan areas. That’s one way to find hidden value.

There’s another way, too.

The proceeds from the FCC’s AWS-3 auction will go toward the funding of FirstNet.

This is something we’re going to cover in greater depth in the near future, but it’s a whole new wireless network specifically for first responders and emergency personnel.

It’s a major undertaking that’s been in the works since the early days of the Obama administration. And this whole new world of opportunity is coming soon.

This auction will help determine the outcome of this new first responder network, which will then open up a wave of new tech and tech investments.

Good Investing,

Tim Conneally

 @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.