• Mental Accounting and Internal Use of Spectrum Valuation
  • July 1, 2011
  • Law Firm: Keller and Heckman LLP - Washington Office
  • Only in Mr. Roarke's library on Fantasy Island will you find a "Blue Book" of internal use spectrum value. Since such a book does not exist, how can you value spectrum that you and the FCC licensee know can be used only for internal communication purposes? Possible answer - "Mental Accounting."

    "Mental Accounting" has been described as: "[T]he process whereby people code, categorize and evaluate economic outcomes...There are [two] values attached to any transaction...Acquisition value is the money that one is ready to part with for physically acquiring some good. Transaction value is the value one attaches to having a good deal. If the price that one is paying is equal to the mental reference price for the good, the transaction value is zero. If the price is lower than the reference price, the transaction utility is positive." http://en.wikipedia.org/wiki/Mental&under;accounting.

    Kimberly M. Randolph identifies in her article, "Spectrum Licenses: Valuation Intricacies," two approaches for valuing FCC licenses: the "Market Approach" and the "Income Approach." The Market Approach, according to Randolph, involves valuing an asset "based on the prices of actual transactions for similar assets." Randolph cites primary market data (Spectrum Auctions) and Secondary Market transactions (M&A Data) as tools to estimate the Market Approach value. The Income Approach examines the revenues, expenses and income derived from the license, and may apply discounts, to estimate value when the Market Approach cannot be used. "Regardless of the approach... a calculation of the implied price per MhzPop multiple is often used to test the reasonableness of the concluded value."

    http://www.srr.com/article/spectrum-licenses-valuation-intricacies

    What about valuing spectrum that, as a practical matter, has not and will not be commercialized to generate revenues through subscriptions, such as AMTS (217/219 MHz); 220-222 MHz; Narrowband PCS (901/930/940 MHz); 800/900 MHz; MAS (928/959, 932/941 MHz) and 2.3GHz?

    The parties could agree on a fair market value. "Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts."

    http://taxes.about.com/od/taxglossary/g/FairMarketValue.htm

    However, the definition presumes a market exists, while the spectrum mentioned above has a very limited market or no market. Mental accounting techniques might just help. Items to consider in these scenarios include cost savings, increased efficiencies (i.e., leverage current human capital to generate revenue), enhanced growth or expansion, tax savings, and cost of not doing the deal.

    If the price you pay fits your budget, and the transaction utility is positive to you, does it matter what you paid for the license? In the end, isn't that what you care about?