It Just Makes Good Business Sense

Two costs lay heaviest on the balance sheets of traditional wireless carriers: infrastructure and spectrum.

Infrastructure involves the cellular radios and other hardware, permitting, tower space leases, backhaul, and many other costs. Infrastructure costs are mostly driven by the technology providers, the Ericssons and Huaweis of the world. They provide the hardware that is used in the base stations to send and receive cellular signals, transmit backhaul to the operating centers, and route traffic. In recent years, software defined radios have allowed the base stations to upgrade their technology not with hardware swaps, but with software upgrades. While these technology upgrades are simpler, the technology providers still want to cash in and thus charge enormously for those upgrades.

Cost pressure comes from licensed spectrum as well. Licensed spectrum is an extremely expensive resource. In 2015, traditional wireless providers spent $45 billion on spectrum in the United States. The $45 billion amount is more than 100 countries’ GDP. Spectrum is a valuable resource for a reason: it is the lifeblood of wireless voice and data connectivity. Consumers and businesses are willing to pay good money for that high data throughput and carriers need that licensed spectrum to provide it.
To remain profitable, licensed spectrum must be used by carriers for voice and data connections rather than other uses like machine connectivity.

Voice/data connectivity brings carriers the most revenue per Hz (a unit of measure used for amount of spectrum). In the industry, this logic is broken down using average revenue per user, or ARPU. It just makes good business sense for carriers to maximize ARPU, especially with the enormous weight of spectrum costs. It is for this very reason that carriers are shutting down their 2G networks.

Carriers must use that precious spectrum for the highest ARPU. Two factors will put additional pressure on carriers. The overall market of voice and data users will increase as will the amount of data each user will require. This only exacerbates the importance of using spectrum for highest ARPU purposes. It’s basic economics. Any deviation from that strategy will result in profit loss and punishment in terms of market share and on Wall Street. So, maximizing ARPU ripples throughout all of their business decisions regarding spectrum usage. And that’s as it should be. Businesses that do well serve their best customers well.

Download our Cellular Generations infographic to see how these forces will continue to drive carriers to sunset.