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The telecom industry has seen a tremendous increase in interest in shared spectrum over the past year or so. Wi-Fi has been an amazing success, now carrying nearly 50% of wireless traffic in the U.S.. Moreover, the U.S. government has over 400 MHz of additional wireless spectrum it is planning to make available on a shared basis -- and likely much more after that. At industry conferences around the country, equipment providers, including Alcatel (NYSE:ALU), Google/Motorola Mobility (NASDAQ:GOOG), Qualcom (NASDAQ:QCOM) and others are eagerly explaining their forthcoming products to take advantage of this new spectrum. However, there has been less clarity about what the business models for shared spectrum service providers will look like. There is even less clarity as to when and how investors will commit money to shared spectrum [note: in the context of this article "shared spectrum" refers to spectrum, usually unlicensed (including white spaces and wi-fi), where numerous new users are possible at any time. It is not referring to coordinated sharing of licensed spectrum].

Service providers have trouble justifying building out infrastructure on shared spectrum. Other users sharing that same spectrum can potentially limit their access it. This makes is difficult to guarantee any level of quality of service or even know how many customers their network might support. At the same time, unlicensed spectrum eliminates the license as a barrier to entry. Therefore, if a service provider is successful in a specific market, another entrant can move into that same market and on that same spectrum. The new entrant can not only undercut the incumbent, but also reduce their share of available spectrum. These factors have made it difficult for investors to get excited about investing in service providers using shared spectrum. So far commercial service on shared spectrum has largely been limited to small operators in rural areas. These entrepreneurial service providers are often nimble enough to survive in these small markets where larger operators cannot. But these are generally niche markets.

One solution to jump-staring a viable shared spectrum business model would be for a third party to build out infrastructure on shared spectrum and lease it to multiple service providers. This would be similar role to that currently provided by tower operators to mobile operators. But instead of building the just the towers, they would also build and run the networks that multiple service providers could share. Service providers would largely handle marketing, billing, etc. much like wireless MVNOs. Well capitalized, the tower operators such as American Tower (NYSE:AMT) and Crown Castle (NYSE:CCI) are probably best positioned to fill this infrastructure role. However, the tower operators have shown little interest. This may be because they are typically highly leveraged and desire to keep their business low risk and their client base filled with large credit worthy mobile operators.

It appears that shared spectrum use will, at least for now, continue to be largely limited to short-range private networks -- as Wi-Fi is primarily used today. Shared spectrum is attractive for organizations to provide wireless capacity within and around small areas they control -- offices, restaurants, auditoriums etc. However, these networks are generally not open for public access -- only for those they want to serve -- customers, employees, etc. Moreover, they serve small areas where it's often feasible to offer wireline service. In this way, it's effectively serving as a "private wireline substitute" as opposed to the traditional goal of wireless -- offering connectivity where wireline is not viable. The social benefits of these networks fall short of networks that cover large areas and are open for public use.

Another possibility is that shared spectrum will simply be used by traditional wireless operators -- AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S), T-Mobile (TMUS), etc. -- for supplemental capacity during peak periods. They already have customers, lower cost of capital and economies of scale. But even these operators also have the same challenge of not knowing how much capacity they will have on the spectrum when they build out, which will likely cause them to be more cautions in building out than they would be with licensed spectrum. And use of shared spectrum by major operators will hardly unleash the flood of new entrepreneurs with new technologies that the government is hoping for.

No matter how the shared spectrum industry evolves, if it is successful, the real winners are likely to be the equipment providers. Any service provider will need equipment and given the challenges of the using the spectrum, they will be eager to use the most cost and spectrally efficient technologies.

Source: Is There An Attractive Business Model For Shared Spectrum?