No One Escapes Supply and Demand

By: Allen Nogee, Principal Analyst, In-Stat
( 1 Nov 2009 )

Now that we look back at the causes of the worst economic disaster since the great depression, it isn’t hard to see what led to the fall, a large part of which was caused by real estate. In Phoenix, where I am located, fast growth led home builders to the belief that if they built more houses, there would always be enough people to buy them. As more people bought homes, investors also bought homes and made money as prices appreciated. In some way, the US government even fueled this growth by changing regulations so that people in the lower income levels could also share the American dream of home ownership, making way for a home to be purchased with no money down.

As long as the highly-leveraged property continued to increase in value, the house-of-cards remained intact, and lenders, investors, and home-owners all made money. Homebuilding hastened appreciated home values until things had accelerated to a point where it wasn't a sustainable model and a tipping point was reached. The rest is a matter of history.

So, those of you that know I cover wireless might be asking, how does the real estate bubble relate to wireless? Actually, some of the similarities are startling. After spending billions of dollars to deploy 3G services, they are now rushing to deploy so-called 4G services including WiMAX and LTE. WiMAX started the push as a way to compete with 3G since some of its key players had been squeezed out of the 3G bandwagon, in one form or another. Next, LTE appeared as a way for the conventional operators to compete with WiMAX and grab wireless real estate before others could make use of it. The only part missing is this; where are all the mobile applications that require ten’s of megabits-per-second of bandwidth?

As wireless networks are made faster, operators have been forced to use higher and higher frequencies, which at one time weren't even considered usable. While technology has advanced allowing these frequencies to be used, the laws-of-physics haven't changed, meaning that as wireless data rates increase, more and more base stations will be required to provide the same service level as current 3G. Ericsson has recently said that an LTE network may require roughly triple the number of base stations compared to 3G.

Today’s 3G networks were financed mostly through voice revenues, but voice revenues are dropping. While 3G revenues are growing, at this time they only represent a small portion of total revenue. When LTE arrives late this year, operators will have to choose whether to charge higher rates for 4G services than their current 3G services, drop the price of 3G services, or just make the transition to 4G services and charge the same as they do for 3G services, with the hope of gaining customers. If they charge more for 4G, will subscribers pay more for high data speeds they really can't make use of?

The foundation of the real estate disaster was built when lenders, investors, and home-owners assumed that demand for housing could not end abruptly. Wireless operators need to guard against a similar outcome when they build out their networks far ahead of demand. If nothing else, the real estate collapse and resulting turmoil shows what can happen when an industry gets too far ahead of itself. No industry, including real estate or the fast-growing wireless industry is immune from the economics of supply and demand.