A common methodology used by regulators for spectrum valuation is avoided cost modelling. This is based on the calculation of the potential cost reduction that an operator could expect if additional spectrum is available in its spectrum portfolio following an award process.  The cost savings arise from the possibility of using the extra spectrum as a means of enhancing capacity or extending coverage without incurring additional costs of physical infrastructure roll-out.

The avoided-cost value of a particular spectrum band is calculated assuming that the operator views the spectrum as a marginal bandwidth.  The operator first forms a view of the total bandwidth that it is likely to have in its portfolio in the long run, taking into account the opportunity to acquire new spectrum in an upcoming auction (or trade).  The total cost of deploying and operating the network given this additional amount of spectrum is then computed.  Subsequently the spectrum band that the operator plans to acquire in the auction is removed (partially or wholly) from this portfolio, and a new network cost based on this new (reduced) spectrum portfolio is calculated. The cost difference between the two spectrum scenarios effectively becomes the difference in radio access network costs.

The costs of the radio access network under each spectrum scenario are calculated in three steps:

  • Demand determination – This involves estimating an operator’s mobile data traffic demand from the country’s mobile data traffic based on the operator’s market share in the different regions. The operator’s regional traffic is in turn split across the different geotypes, which are defined by population density.
  • Network dimensioning – The traffic for each geotype along with the operator’s network roll-out plan and coverage obligations dictate the extent of the 3G and LTE physical infrastructure required in the radio access network. The number of 3G and LTE base stations and the supporting backhaul connections are determined using these inputs, technical network parameters such as assumed transmission capability for each component, and the amount of spectrum available to the operator.  The outputs from this step are the volume of infrastructure for each year of the spectrum licence period.
  • Network costing – The annualised unit cost of each component on the 3G and LTE radio networks is then applied to the outputs from the network dimensioning step to derive the implied total cost for each year of operation during the licence period. The annualised cost includes both capital and operating expenditure.  The total annualised costs are then discounted with an appropriate cost of capital and summed to compute the net present value of radio access network costs.

The figure below provides a simple illustration of the avoided cost modelling approach.