United States: Substantial Licensed Spectrum Deficit (2015-2019): Updating The FCC's Mobile Data Demand Projections

This report was prepared for the CTIA – The Wireless Association.

I. INTRODUCTION

Five years ago the Federal Communications Commission projected a licensed spectrum deficit of almost 300 MHz by 2014.¹ Using the FCC's own formula and approach, we update that forecast and find that by 2019, the U.S. will need more than 350 additional MHz of licensed spectrum to support projected commercial mobile wireless demand. Accordingly, over the next five years the United States (U.S.) must increase its existing supply of licensed broadband spectrum by over 50 percent.²

This analysis relies on current projections that demand for wireless broadband capacity, even after accounting for offload to unlicensed services, will increase by six-fold by 2019. Our predictions suggest that just under half of this new demand can be met by increased deployment of cell sites and improved technology, particularly a heavier reliance on 4G and LTE Advanced technologies. In the past six years, wireless operators have invested over $160 billion and, even with additional spectrum, a similar financial commitment will be necessary to enhance and expand networks to help meet significantly higher data volumes.³

After accounting for this increased investment by carriers in network technology and infrastructure, we estimate that by 2019 net data demand will increase more than three-fold over 2014 levels. This remaining increase in demand will need to be met by additional licensed spectrum allocations. Importantly, if demand increases faster than expected, if technology deployments lag, or if cell site deployment slows, even more licensed spectrum will be needed. Finally, even if over 350 MHz is repurposed to mobile broadband in the next five years, that spectrum will not address the even greater demand that we expect in 2020 and beyond.

II. BACKGROUND

A. Spectrum Demand

As demands for wireless services increase, so do the demands for licensed spectrum to provide those services. Over the past four years, increases in U.S. mobile data traffic demand have met the FCC's data growth expectations.⁴ According to Cisco, historic mobile data traffic for North America has increased over 11-fold from 49 petabytes per month in 2010 to 563 petabytes per month by 2014.⁵ Applying the FCC's growth expectations for 2010 to 2014 to Cisco's 2009 figure implies a projected 562 petabytes per month by 2014 for North America.⁶ This is consistent with Cisco's 2014 reported data demand of 563 petabytes per month.⁷

By current estimates and projections, the total volume of mobile data will increase substantially in the next five years.⁸ Cisco estimates that by 2019 U.S. mobile data traffic will reach 3.6 exabytes per month, which is a seven-fold increase from 2014.⁹ See Figure 1. This increase in traffic will be driven by an increasing number of users (including machine users), more mobile connections per user, and growing demand for faster speeds and more intensive data consuming services, such as mobile video. By 2019, mobile users are expected to increase by 21 million to 290 million, mobile connections will increase by over 600 million to over 1 billion, and mobile video traffic will represent 75 percent of total traffic.¹⁰

Although some portion of this increased demand can be met by increasing capital expenditures to deploy new technologies, offload to unlicensed networks, and investment in further network build-out, additional licensed spectrum will also be necessary. Cisco estimates that by 2019, 91 percent of U.S. mobile data traffic will be 4G LTE, up from 72 percent in 2014.¹¹ These 4G LTE technologies will likely almost double capacity over current 3G technologies.¹²

Moreover, Cisco also estimates that by 2019, twice as much wireless data will be offloaded to unlicensed spectrum as is carried on the macro networks using licensed spectrum.¹³ This is up from 2014, when 30 percent more data was offloaded than was carried by macro networks. See Figure 1, above. Accommodating this additional capacity demand will require both additional licensed wireless broadband spectrum and capital expenditures.

B. Adding Capacity: Spectrum Versus Infrastructure Complementarity

For wireless broadband networks, there is a necessary balance between the amount of infrastructure and spectrum used. Spectrum-based services require a combination of spectrum and infrastructure to operate. In provisioning a given level of capacity for a network, once the network technology is chosen, up to a point, network operators still face a trade-off between the amount of spectrum and the number of cell sites deployed.¹⁴ At a minimum, a mobile wireless network requires enough cell sites and related infrastructure¹⁵ to cover its entire service area¹⁶ with adequate capacity and sufficient spectrum to carry projected traffic loads. From that point, carriers must increase capacity by either adding additional spectrum or building more infrastructure.

The process of adding more cells, particularly small cells, is time consuming and expensive, and grows increasingly expensive as networks become more capacity constrained. Operators must obtain leases, permits, and attachment rights; install equipment; obtain backhaul; and integrate new cells with the existing network. This requires capital for the construction and equipment and ongoing expense costs for the lease, backhaul, and maintenance. Moreover, obtaining new cell site locations where needed to relieve traffic growth, and ensuring there is sufficient backhaul to support additional cell sites, becomes increasingly difficult. As network density increases, this is particularly the case in urban areas with strict zoning requirements.

The exact mix of spectrum and infrastructure depends on the relative cost of the two inputs. As the value of spectrum increases, wireless service providers are likely to deploy additional infrastructure to more intensively use the available spectrum. Likewise, as it becomes more difficult and increasingly costly to add capacity through infrastructure, it becomes more efficient to use additional spectrum to increase network capacity. Although some portion of the growing demand for wireless services will be met through increase in capital intensity, more spectrum will also be required given the sheer amount of additional data on the networks.¹⁷

To keep up with increasing demands, carriers will have to continue investing heavily in their network infrastructure, as they have done in the past. From January 1992 to December 2002, wireless carriers spent just over $193 billion dollars on capital expenditures, or roughly $17.5 billion annually. From January 2003 to December 2013, this figure grew to just under $315 billion dollars, or roughly $28.6 billion annually. This represents a roughly 60 percent increase.¹⁸ This spending continued at this level as carriers spent over $32 billion in capital investment in 2014.¹⁹ On top of those capital expenditures, carrier investments in purchasing licensed spectrum from FCC auctions total $87.3 billion, which does not include currently licensed spectrum that was originally licensed outside of the auction process or sold on the secondary market.²⁰ Although continued capital investment in mobile wireless is essential, as shown below, it will not be sufficient to meet the growing demand for wireless capacity.

C. U.S. Spectrum Deficit

In 2010, the FCC in its National Broadband Plan targeted approximately 300 MHz of spectrum to be reallocated to mobile broadband within five years, and a total of 500 MHz of spectrum to be reallocated to wireless by 2020.²¹ The President subsequently supported the FCC's call for an additional 500 MHz of spectrum.²² According to the FCC's analysis, making 300 MHz available by 2014 would create over $100 billion in economic value for the country.²³ While growth in data demand has kept up with the FCC's projections,²⁴ spectrum reallocations have not.

As we previously estimated, of the 300 MHz of spectrum the FCC identified as needed by this year, only 149 MHz has been reallocated.²⁵ On net, however, there are only an additional 98.5 MHz available in comparison to 2010.²⁶ This suggests that the U.S. has met roughly 30 percent of the FCC's five-year spectrum target, creating an even larger future spectrum deficit to be made up by 2020.

Up until now, the industry has worked to meet this data demand with less spectrum than suggested by the FCC in 2010. Over the past five years carriers have met the growing demand for mobile wireless data using a combination of the previously licensed and deployed spectrum and larger capital expenditures. Carriers have been able to deploy spectrum, including the original AWS-1 and 700 MHz allocations that were licensed but generally not yet available for deployment by 2010.²⁷ Moreover, the increase in data demand was not uniform, as the FCC's model implicitly assumed. As consumers increased their usage, peak busy hour usage continued to grow, but not necessarily in the traditional voice busy hour peaks.²⁸ With the explosive growth of data and video, and the shift to relatively more usage in non-peak times, it will become increasingly difficult for carriers to meet new capacity demands in the future.

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Footnotes

1. Note, the National Broadband Plan states for 300 MHz of spectrum to be made available by 2015. See FCC, "Connecting America: The National Broadband Plan," Chapter 2, March 2010, at p. 10.

2. There is currently 645.5 MHz of spectrum licensed for broadband. Coleman Bazelon and Giulia McHenry, "Mobile Broadband Spectrum: A Vital Resource for the U.S. Economy," Prepared for CTIA, May 11, 2015, at p. 1 ("Bazelon and McHenry, 2015").

3. CTIA, "2014 Data Survey Results: CTIA Survey Documents Dramatic U.S. Wireless Performance," June 17, 2015, at p. 2.

4. FCC, "Mobile Broadband: The Benefits of Additional Spectrum," October 2010. In its 2010 analysis, the FCC used a blended projection based on Cisco, Coda, and Yankee Group projections. At the time, Cisco's expectations were the highest, equivalent to 773 petabytes per month by 2014. See "Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2009-2014," Cisco, February 9, 2014, Table 7.

5. For 2010 data, see "Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2010- 2015," Cisco, February 1, 2011, Table 9. For 2014 data, see "Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2014-2019," Cisco, February 3, 2015, Table 6.

6. Calculation: 16 petabytes per month in 2009 x 35x growth from data through 2014 ≈ 562 petabytes per month in 2014. The FCC assumes growth in data by 2014 would be 3506%. See FCC, "Mobile Broadband: The Benefits of Additional Spectrum," October 2010, at p. 23. Cisco projected 16.022 petabytes per month of data for North America in 2009. See "Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2009-2014," Cisco, February 9, 2014, Table 7.

7. "VNI Mobile Forecast Highlights, 2014-2019: North America," Cisco, available at http://www.cisco.com/assets/sol/sp/vni/forecast_highlights_mobile/index.html#~Country (last accessed June 16, 2015). In 2014 the U.S. accounted for 532 petabytes per month of data, or almost 95 percent of all North America traffic. See "VNI Mobile Forecast Highlights, 2014-2019: United States America," Cisco, available at http://www.cisco.com/assets/sol/sp/vni/forecast_highlights_mobile/index.html#~Country (last accessed June 16, 2015).

8. For instance, Ericsson also forecasted a rapid growth in data demand. See "Traffic Exploration Data Traffic – Mobile PC/Router/Tablet and Smartphone," available at http://www.ericsson.com/TET/trafficView/loadBasicEditor.ericsson (last accessed June 18, 2015).

9. Robert Pepper, "Cisco Visual Networking Index (VNI) Forecast: Mobile Data Traffic Update, 2014- 2019 (Focus on U.S.)," Cisco, February 3, 2015, at slide 5. Cisco's definition of mobile data traffic includes devices such as feature phones, smartphones, laptops, tablets, M2M, and other portable devices. Applications include web/data/VoIP, video, audio streaming, and file sharing. See "Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2014-2019," Cisco, February 3, 2015, Table 6. Our analysis suggests that Cisco's 4-year out data projections from 2009 through 2011 were roughly 15 percent higher than realized data demand. We account for this discrepancy in our projections below. See discussion at Section III.B.1 for more details.

10. Robert Pepper, "Cisco Visual Networking Index (VNI) Forecast: Mobile Data Traffic Update, 2014- 2019 (Focus on U.S.)," Cisco, February 3, 2015, at slide 6.

11. As indicated by Figure 1, the magnitude of Cisco's overall projections is largely driven by their projections of LTE growth. See Robert Pepper, "Cisco Visual Networking Index (VNI) Forecast: Mobile Data Traffic Update, 2014-2019 (Focus on U.S.)," Cisco, February 3, 2015, at slide 21.

12. See Table 2 below.

13. Cisco predicts that 66 percent of U.S. mobile data traffic will be offloaded to WiFi networks in 2019. In addition, Cisco estimates that by 2019 63 percent of U.S. mobile device connections will be 4G LTE, up from 41 percent in 2014. See Robert Pepper, "Cisco Visual Networking Index (VNI) Forecast: Mobile Data Traffic Update, 2014-2019 (Focus on U.S.)," Cisco, February 3, 2015, at slides 15, and 23.

14. The driving innovation behind mobile wireless networks is cellular architecture. By dividing the geographic footprint of radio base stations into small areas, the same frequencies can be reused in non-adjoining cells. When additional capacity is required, this principle can continually be applied by dividing existing cells into smaller and smaller cells, up to a point.

The data capacity of a wireless cell site is roughly dependent on the amount of spectrum and the network technology deployed, regardless of its geographic coverage area. (With very small cells, total capacity may be smaller. See, Richard Clarke, "Expanding Mobile Wireless Capacity: The Challenges Presented by Technology and Economics," Telecommunications Policy (2013), p. 6.) Based on its data capacity, a cell site can only cover a fixed number of subscribers in a given area before the quality of service deteriorates. By varying the power of a cell site, its wireless capacity can be spread over a wide geographic footprint if a cell site covers a large area—as would be the case in rural or suburban deployment—or it could cover a small geographic area—as would be the case in a dense urban deployment.

15. The physical infrastructure of a network includes transmission equipment for cell sites, network backhaul facilities and routing equipment.

16. Depending on the propagation characteristics of the spectrum deployed—how the wavelength travels—and the maximum power levels allowed by license, a cell site will have a maximum coverage radius. Within this coverage area, the actual range of a cell is based on design factors such as transmission power levels chosen and various other engineering choices.

17. Increasing capital intensity is also known as deepening the wireless network. Others have recognized that such deepening will not be sufficient to meet future growing demands. See, for example, Richard Clarke, "Expanding Mobile Wireless Capacity: The Challenges Presented by Technology and Economics," Telecommunications Policy (2013).

18. All numbers are reported in 2013 constant dollars. See CTIA, "That Didn't Take Long..." CTIA Blog, March 4, 2015, available at http://blog.ctia.org/2015/03/04/that-didnt-take-long/ (last accessed June 19, 2015).

19. Figure reported in 2014 dollars. See CTIA, "2014 Data Survey Results: CTIA Survey Documents Dramatic U.S. Wireless Performance," June 17, 2015, at p. 5.

20. For various auction results, see http://wireless.fcc.gov/auctions/default.htm?job=auctions_home. Figure includes auction results for 700 MHz, AWS-1, PCS, H-Block, and AWS-3. This does not include Auction 5: Broadband PCS C Block, which sold for $10.1 billion.

21. FCC, "Connecting America: The National Broadband Plan," Chapter 5, March 2010, at p. 10. We describe the FCC's methodology in more detail at Section III.A.

22. "Presidential Memorandum: Unleashing the Wireless Broadband Revolution," The White House, Office of the Press Secretary, June 28, 2010; and FCC, "Mobile Broadband: The Benefits of Additional Spectrum," FCC Staff Technical Paper, October 2010, at p. 2.

23. FCC, "Mobile Broadband: The Benefits of Additional Spectrum," October 2010, at p. 2.

24. As described above, wireless mobile data traffic for North America in 2014 was 563 petabytes per month, whereas using the FCC's 2010 growth factor expectations projected that mobile data traffic would be 562 petabytes per month by 2014 for North America.

25. Bazelon and McHenry, 2015, at p. 8. The added spectrum includes 10 MHz of PCS H-Block, 65 MHz of AWS-3, 20 MHz of WCS, 14 MHz of SMR, and 40 MHz of AWS-4. The National Broadband Plan identified all of this spectrum, except the PCS H-Block and SMR. See FCC, "Connecting America: The National Broadband Plan," Chapter 5, at pp. 76-77.

26. Bazelon and McHenry, 2015, at pp. 7-9. The FCC estimated 547 MHz of available spectrum in 2010, including 194 MHz of BRS/EBS spectrum and 23 MHz of "other spectrum". The BRS/EBS was reduced to 156.5 MHz when the FCC updated its spectrum screen, reducing the total spectrum inventory by 37.5 MHz (194 MHz – 156.5 MH). We also excluded the 23 MHz of "other spectrum" from our revised inventory, but added 10 MHz of G-Block spectrum that had not been counted for a net reduction of 13 MHz. After this 50.5 MHz (37.5 MHz + 23 MHz – 10 MHz) is netted out, the net added spectrum is 98.5 MHz (149 MHz – 50.5 MHz).

27. It typically takes at least several years from the time a licensed spectrum band is reallocated and assigned to the point at which the spectrum is ready for a deployment. Among other issues, relocating incumbent users, developing handsets and network equipment, as well as planning and building the network all take substantial time. Moreover, carriers have to carefully plan spectrum deployments in order to have spectrum available for transitions from one technology generation to another.

28. One analyst has recently compared current wireless networks to mullets, carrying business traffic in the front (during the day) and video and gaming traffic around back (at night). Mitch Wagner, "Networks Are Like Mullets," LightReading, June 15, 2015, available at http://www.lightreading.com/carrier-sdn/sdn-technology/networks-are-like-mullets/d/d-id/716284 (last accessed June 18, 2015). This is a relatively new phenomenon for mobile providers, which has increased the level of traffic during historically off-peak hours. The rise in mobile video demand is also consistent with the rapid, and somewhat unforeseen, shift to tablet devices.

Acknowledgement: We acknowledge the valuable contributions of many individuals to this report and to the underlying analysis. Specifically, we are indebted for contributions from Ann Murray, Stephen Kline, and Stephen Lagos.

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