Friday, November 21, 2014

"Avoided Cost" As A Valuation Principle: Hempton's Essay On Spectrum, Globalstar, And Verizon $GSAT $VZ

This is the great Hempton post on the value of wireless spectrum,

"As towers have an identifiable capital and running cost (a cost structure well known to phone companies) spectrum has a definable value - defined by avoided cost.

The point here is that if you know the cost of the phone company and the amount of capital expenditure avoided you can work out the value of the spectrum to a phone company. The phone company can either buy more spectrum or build more towers. [To work this out accurately you would need a map of the US, demographic and phone usage data by small region and try to work out how you would serve them.]

If you have a lot of information to transmit you can save a lot of money buying spectrum rather than building towers - and hence your spectrum is worth a lot of money. It is worth more if (a) the people are difficult to serve or (b) there is a lot of people willing to pay for speed or reliability.

This is where the value of spectrum in billions of dollars comes from. It comes from avoided cost.

A phone company with a good spectrum position will be able to avoid a lot of costs and still provide a very good service. This will make it profitable. It will be able to charge more (as it has reliable coverage) and will not have to build a lot of towers."
About as close as you get to an airtight case in investing. GSAT looks like a zero.


James said...

Do you know if any of the bulls have responded specifically to Hempton's post? The bull case I've heard is (paraphrasing) that the spectrum isn't worth much now, but it will become valuable as wifi use grows and existing spectrum gets saturated.

Bloomberg had an article about Globalstar a month ago:

It was originally just a satellite phone company, but the satellites failed before they were supposed to and its contractor had a years-long delay in launching new one, which permanently crippled the biz. Reading between the lines, Globalstar's "pivoting" to spectrum seems like a last-ditch effort to save a failed investment.

Anonymous said...