award of 3.4 ghz and 10 ghz licences fixed wireless access consultative committee 25th october 2000
TRANSCRIPT
Award of 3.4 GHz andAward of 3.4 GHz and10 GHz Licences10 GHz Licences
Fixed Wireless Access Consultative Committee25th October 2000
Today…….Today…….Today…….Today…….
Overview of Progress to Date…. Markets/Revenue Technical/Costs Financial/Valuation Economic
Overview of Progress to Date…. Markets/Revenue Technical/Costs Financial/Valuation Economic
2
20thNovember
Basic ProgrammeBasic ProgrammeBasic ProgrammeBasic Programme
Analysis(Stage 2)
Analysis(Stage 4)
Workshops
informationmemorandum
20thSeptember
steering group
industry group
6-8 weeks 4-6 weeks
**Late February!**
1 3
Analysis
Analysis overviewAnalysis overviewAnalysis overviewAnalysis overview
Qualitative MarketResearch
Cost Modelling
Market Modelling
Financial Modelling
EconomicAnalysis
Policy
Purpose of the QMRPurpose of the QMRPurpose of the QMRPurpose of the QMR
Consult with industry to:– Gather market intelligence– Test the assumptions made by the team– Inform the modelling exercise
Consult with industry to:– Gather market intelligence– Test the assumptions made by the team– Inform the modelling exercise
Progress to dateProgress to dateProgress to dateProgress to date
Contacted 30 companies 13 companies have been interviewed so
far, including:– Operators
BT, Firstmark, NTL, Atlantic, Tele2, Energis, FORMUS.
– Consultants
Albera Networks– Manufacturers
Lucent, Ericsson, Airspan, Harris Microwave, European Antennas
Contacted 30 companies 13 companies have been interviewed so
far, including:– Operators
BT, Firstmark, NTL, Atlantic, Tele2, Energis, FORMUS.
– Consultants
Albera Networks– Manufacturers
Lucent, Ericsson, Airspan, Harris Microwave, European Antennas
Looking forwardLooking forwardLooking forwardLooking forward
We are planning to carry out further interviews in Stage 2
Interview players in the banking world
We are planning to carry out further interviews in Stage 2
Interview players in the banking world
Industry Views:Industry Views:Services and target market Services and target market Industry Views:Industry Views:Services and target market Services and target market
Operators are planning to provide:– Always On link to the Internet– Voice telephony
Market share expectations 10-15% The principal target markets are:
– SMEs– SOHOs– Residential market
Operators are planning to provide:– Always On link to the Internet– Voice telephony
Market share expectations 10-15% The principal target markets are:
– SMEs– SOHOs– Residential market
Industry Views:Industry Views:Overview of Access TechnologiesOverview of Access TechnologiesIndustry Views:Industry Views:Overview of Access TechnologiesOverview of Access Technologies
Access Typical speeds* Target market
Leased lines
28/40 GHz>2 Mbps Corporate market
10 GHz
xDSL 64Kbps-4MbpsSMEs and SOHOs
High-end residential
3.4 GHz
ADSL
Cable modem
512 Kbps
ISDN/Dialup 128Kbps
Residential market
* Typically to be found (or soon to be found) in the market place
Access Typical speeds* Target market
Leased lines
28/40 GHz>2 Mbps Corporate market
10 GHz
xDSL 64Kbps-4MbpsSMEs and SOHOs
High-end residential
3.4 GHz
ADSL
Cable modem
512 Kbps
ISDN/Dialup 128Kbps
Residential market
* Typically to be found (or soon to be found) in the market place
Industry Views:Industry Views:Location of target marketLocation of target marketIndustry Views:Industry Views:Location of target marketLocation of target market
Prime location is suburban areas of cities, towns and business parks:– strong competition in city centres (fibre,
copper and in July 2001 ULL) – need to target densely populated areas to
achieve base station “fill factor” and adequate return
No business case to roll out in rural areas
Prime location is suburban areas of cities, towns and business parks:– strong competition in city centres (fibre,
copper and in July 2001 ULL) – need to target densely populated areas to
achieve base station “fill factor” and adequate return
No business case to roll out in rural areas
Industry Views:Industry Views:Operators’ strategies (1)Operators’ strategies (1)Industry Views:Industry Views:Operators’ strategies (1)Operators’ strategies (1) The spectrum will be complementary to
existing portfolio– e.g ASDL– Other spectrum e.g at 28GHz or 2GHz– To support overall strategy “Do not put all
your eggs in one basket” e.g Fibre,ULL
The spectrum will be complementary to existing portfolio– e.g ASDL– Other spectrum e.g at 28GHz or 2GHz– To support overall strategy “Do not put all
your eggs in one basket” e.g Fibre,ULL
Industry Views:Industry Views:Operators’ strategies (2)Operators’ strategies (2)Industry Views:Industry Views:Operators’ strategies (2)Operators’ strategies (2)
Rollout approach will :– start from existing points of presence– go where demand/population density is high– go where competition is not strong
Rollout approach will :– start from existing points of presence– go where demand/population density is high– go where competition is not strong
Industry View:Industry View:Regulatory & licensing matters (1)Regulatory & licensing matters (1)Industry View:Industry View:Regulatory & licensing matters (1)Regulatory & licensing matters (1)
Most operators would prefer a national licence
Regional licences would be wasteful The amount of spectrum can only really
support one licence holder Licence duration needs to be 15-20 years
Most operators would prefer a national licence
Regional licences would be wasteful The amount of spectrum can only really
support one licence holder Licence duration needs to be 15-20 years
Industry View:Industry View:Regulatory & licensing matters (2)Regulatory & licensing matters (2)Industry View:Industry View:Regulatory & licensing matters (2)Regulatory & licensing matters (2)
Some licence clauses would be acceptable, e.g.:– “Use It or Lose It” – Rollout clauses with deadlines & penalties– No backhaul on band
Service clauses would make the licence unattractive
Some licence clauses would be acceptable, e.g.:– “Use It or Lose It” – Rollout clauses with deadlines & penalties– No backhaul on band
Service clauses would make the licence unattractive
Industry Views:Industry Views:Auction vs Comp. SelectionAuction vs Comp. SelectionIndustry Views:Industry Views:Auction vs Comp. SelectionAuction vs Comp. Selection
Comparative selection is the preferred award mechanism– auctions are clear cut, but take money out of
the industry– comparative selection has the means to
ensure that the licence will be used
Comparative selection is the preferred award mechanism– auctions are clear cut, but take money out of
the industry– comparative selection has the means to
ensure that the licence will be used
Market & Revenue ModelMarket & Revenue ModelMarket & Revenue ModelMarket & Revenue Model
Objectives– addressable market sizing based on three
geographic areas• cities : nine UK cities modelled as one whole
• regional : remaining UK
• coverage assumptions consistent with cost model
– revenues generated• telephony, Internet access & value added
• strategies : new venture vs existing operator
Objectives– addressable market sizing based on three
geographic areas• cities : nine UK cities modelled as one whole
• regional : remaining UK
• coverage assumptions consistent with cost model
– revenues generated• telephony, Internet access & value added
• strategies : new venture vs existing operator
ScenariosScenariosScenariosScenarios
Cities– 9 demographic profiles
– cities have cost structures which differ from those in regions
– level of competition in access is markedly different to that in regions
Cities– 9 demographic profiles
– cities have cost structures which differ from those in regions
– level of competition in access is markedly different to that in regions
Regions– n x demographic profile
• modelled as one for Stage 2
– lower subscriber density
– lower competition in access
– significant backhaul costs
Regions– n x demographic profile
• modelled as one for Stage 2
– lower subscriber density
– lower competition in access
– significant backhaul costs
Geo-demographicsGeo-demographicsGeo-demographicsGeo-demographics
Demographic profiles by postal code– business sites
• site size (number of employees)
• industry sector
– residential
• lifestyle categories
National data on spend by subscriber type
Model OutputsModel OutputsModel OutputsModel Outputs
Series of revenue forecasts– city, regional, whole UK licence
Consistent assumptions with cost model Opex
– interconnect, other CoGS (e.g. CPE & installation)– marketing, SG&A costs
Subscriber forecast for input into cost model
Series of revenue forecasts– city, regional, whole UK licence
Consistent assumptions with cost model Opex
– interconnect, other CoGS (e.g. CPE & installation)– marketing, SG&A costs
Subscriber forecast for input into cost model
Market for Broadband ServicesMarket for Broadband ServicesMarket for Broadband ServicesMarket for Broadband Services
Schema forecasts a supply shortfall of 3 million by 2010
FWA model predicts a reduction in this shortfall
Schema forecasts a supply shortfall of 3 million by 2010
FWA model predicts a reduction in this shortfall
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Subscribers
Demand
Supply
Universal High-Speed Internet?Universal High-Speed Internet?Universal High-Speed Internet?Universal High-Speed Internet?
9 top cities– 18.4% of subscribers
– 1.7% of land area
– 1,140 subs / km2
Other cities, towns and suburbs– 55% of subscribers– 15% of land area– 390 subs / km2
Rural areas– 26.6% of subscribers– 83.3% of land area– 33.7 subs / km2
Next StepsNext StepsNext StepsNext Steps
In Stage 4– evaluate cities individually– generate revenues by regions if required– test sensitivities
• in concert with cost model– rollout plans– market share assumptions– price competition
• impact on subscribers, revenues & profits– feed into socio-economic benefit analysis
In Stage 4– evaluate cities individually– generate revenues by regions if required– test sensitivities
• in concert with cost model– rollout plans– market share assumptions– price competition
• impact on subscribers, revenues & profits– feed into socio-economic benefit analysis
ProgressProgressProgressProgress
Technical ReviewConsultations with IndustryCost Model - First PassCoverage and PropagationSpectrum and CapacityImplementation
Technical ReviewConsultations with IndustryCost Model - First PassCoverage and PropagationSpectrum and CapacityImplementation
Cost Model StructureCost Model StructureCost Model StructureCost Model Structure
Cost Model
NationalCityRegionalBuild InfrastructureLease InfrastructureBackhaul Options
Scenarios
EnterpriseSOHOResidential
Markets
ServicesData RatesQoSAvailability
Demands
AllocationRe-useCondition
Spectrum
ModulationMutiplexingStandards
Technologies
HardwareSitesInstallat ionCommissioning
System
Optical FibreTransportSwitchingBuildLeaseInterconnect
Infrastructure
CoverageCo-ordinationCo-locat ionInterferenceCapacityTraff icBER and QoS
Planning & Design
LicencingService LevelsNetwork ManagementPerformanceBillingSecurity & Disaster
Operations
INFLUENCINGFACTORS
COSTS
OUTPUTS
Coverage and Line of Sight Coverage and Line of Sight AssumptionsAssumptionsCoverage and Line of Sight Coverage and Line of Sight AssumptionsAssumptions
3.4 GHz 10 GHz
Geographical Coverage City and Region 40% 20%
Population Reach City 40% 20%
Population Reach Region 60% 40%
Alternative (Optimistic)
Geographical Coverage City 80% 80%
Geographical Coverage Region 60% 60%
Population Reach City 60% 60%
Population Reach Region 80% 80%
Propagation IndicationsPropagation IndicationsPropagation IndicationsPropagation Indications
Extensive engineering Even more so at 10 GHz Propagation modelling essential Selective subscriber targeting
Extensive engineering Even more so at 10 GHz Propagation modelling essential Selective subscriber targeting
Spectrum CapacitySpectrum CapacitySpectrum CapacitySpectrum Capacity
Modulation Efficiency 3.4 GHz
2 x 17 MHz = 34 MHz
10 GHz
2 x 30 MHz = 60 MHz
4 QAM 1.5 bit/s/Hz 51 Mbps 90 Mbps
16 QAM 2 bit/s/Hz 68 Mbps 120 Mbps
64 QAM 5 bit/s/Hz 170 Mbps 300 Mbps
Cell Structure and Spectrum Cell Structure and Spectrum ReuseReuseCell Structure and Spectrum Cell Structure and Spectrum ReuseReuse
F2
F1
F1
F2 F2
F1
F1
F2
F2
F1
F1
F2 F2
F1
F1
F2
F3
F1
F1
F3 F2
F4
F4
F2
F1
F3
F3
F1 F4
F2
F2
F4
Whole spectrum used in each cellFrequency Reuse = 100%
Half spectrum used in each cellFrequency Reuse = 50 %
F1 = f1, f5 - 1.75 MHz each (up and down)A
BA
F2 = f4, f8 - 1.75 MHz each (up and down)
F1 = f1, f3, f5, f7 - 1.75 MHz each (up and down)B
F2 = f2, f4, f6, f8 - 1.75 MHz each (up and down)
F3 = f3, f7 - 1.75 MHz each (up and down)
Controlled and Co-ordinated by: Tx Power, Back to Front Ratio, Antenna Downtilt
F3 = f2, f6 - 1.75 MHz each (up and down)
National Capacity - ExampleNational Capacity - ExampleNational Capacity - ExampleNational Capacity - Example
London
Cambridge
Derry
Belfast
Edinburgh
Cardiff
Liverpool
Manchester
Birmingham
Glasgow
Swansea
Newcastle upon Tyne
Oxford
Aberdeen
Carlisle
Bournemouth
Torbay
Leeds
Sheffield
Ipswich
Assume:50% of 250,000 Sq Km625 x 8 Km Cells4QAM ModulationSpectrum Reused 150 times
3.4 GHz and 10 GHz CombinedCapacity = 21 Gbps
Contention Ratio 20:1
‘Virtual’ Capacity = 420 Gbps
Services 3.4 and 10 GHzServices 3.4 and 10 GHzServices 3.4 and 10 GHzServices 3.4 and 10 GHz
3.4 GHz 16, 32 and 64 Kbps telephony 56 Kbps modem connectivity 2B+D ISDN 64 and 128 Kbps leased lines 128 and 512 Kbps packet data
10 GHz Fraction E1 2 x 2 Mbps with higher burst rates
3.4 GHz 16, 32 and 64 Kbps telephony 56 Kbps modem connectivity 2B+D ISDN 64 and 128 Kbps leased lines 128 and 512 Kbps packet data
10 GHz Fraction E1 2 x 2 Mbps with higher burst rates
ImplementationImplementationImplementationImplementation
Sites are getting difficult to identify and acquire GSM growth, UMTS and BFWA impact Long planning permission timescales Major cost factor for building infrastructure - rents are high Cost model is based on a mix of leased lines, microwave
backhaul links and dark fibre lease PoPs and Switching sites included Rollout - 150 sites per year is optimistic
Sites are getting difficult to identify and acquire GSM growth, UMTS and BFWA impact Long planning permission timescales Major cost factor for building infrastructure - rents are high Cost model is based on a mix of leased lines, microwave
backhaul links and dark fibre lease PoPs and Switching sites included Rollout - 150 sites per year is optimistic
Current Work: Current Work: Refine Cost ModelRefine Cost ModelCurrent Work: Current Work: Refine Cost ModelRefine Cost Model
Propagation modelling - typical scenarios Using high resolution databases (if available) Test and verify assumptions Outline planning and design Interference and co-ordination
Propagation modelling - typical scenarios Using high resolution databases (if available) Test and verify assumptions Outline planning and design Interference and co-ordination
Purpose of the financial modelPurpose of the financial modelPurpose of the financial modelPurpose of the financial model
Examine under what conditions, operators of FWA licences will have a viable business (Stage 2)
Evaluate sensitivity of the return to investors to licence fee (Stage 2)
Assess the sensitivity of the return to investors to other factors such as tariffs, sales volumes, operating costs and capital costs (Stage 4)
Examine under what conditions, operators of FWA licences will have a viable business (Stage 2)
Evaluate sensitivity of the return to investors to licence fee (Stage 2)
Assess the sensitivity of the return to investors to other factors such as tariffs, sales volumes, operating costs and capital costs (Stage 4)
Financial ModellingFinancial ModellingFinancial ModellingFinancial Modelling
MARKET RESEARCH
Sales volume
Sales prices
Debtor days
Creditor days
TECHNICAL ANALYSIS
Stock days
Capital costs
Operating costs
FINANCING
Loan repayment term
Loan interest rates
Interest on cash balance
MARKET RESEARCH
Sales volume
Sales prices
Debtor days
Creditor days
TECHNICAL ANALYSIS
Stock days
Capital costs
Operating costs
FINANCING
Loan repayment term
Loan interest rates
Interest on cash balance
RevenuesRevenues
Working capitalWorking capital FORECAST FINANCIALSTATEMENTS
Profit & loss accountBalance sheetSources & application of fundsCash flow
FORECAST FINANCIALSTATEMENTS
Profit & loss accountBalance sheetSources & application of fundsCash flow
VALUATION MODELVALUATION MODEL
High Level Financial OutcomesHigh Level Financial OutcomesHigh Level Financial OutcomesHigh Level Financial Outcomes
ARPU : Average Revenue Per UserARPU : Average Revenue Per User
High ARPU* Med CPU* Profitable?
High ARPU* Med CPU* Profitable?
New VentureNew Venture
Existing operatorExisting operator
CityCity RegionalRegional NationalNational
CPU : Cost Per UserCPU : Cost Per User
High ARPU* Low CPU* Profitable?
High ARPU* Low CPU* Profitable?
Low ARPU* High CPU* Profitable?
Low ARPU* High CPU* Profitable?
Low ARPU* High CPU* Profitable?
Low ARPU* High CPU* Profitable?
Economies of scale
Profitable?
Economies of scale
Profitable?
Economies of scale
Profitable?
Economies of scale
Profitable?
Financial Model AssumptionsFinancial Model AssumptionsFinancial Model AssumptionsFinancial Model Assumptions
Licence term 15 years
Inflation 2.5 % (+1.9 average Earnings index)
Working Capital Debtors/Creditors -30 days, Stock 0
Tax allowance Capital allowance on equipment (25%)
IRR 20%
Financial Model AssumptionsFinancial Model AssumptionsFinancial Model AssumptionsFinancial Model Assumptions
Financing D/E - 60/40IR - 9-10% (incl. banks' margin)Loan term - 10 years
No residual value assumed
Residual Value
Depreciation Straight line :Telecom equipment - 7 yearsIT equipment - 5 yearsFibre - 25 years
Economic AnalysisEconomic AnalysisEconomic AnalysisEconomic Analysis
Economic value rather than industry profit Industry profit a guide to economic value But an imperfect one
– Industry profit guides business plans– Industry profit guides bidding in e.g.
auctions
Important therefore to understand any divergence between profit and economic value
Economic value rather than industry profit Industry profit a guide to economic value But an imperfect one
– Industry profit guides business plans– Industry profit guides bidding in e.g.
auctions
Important therefore to understand any divergence between profit and economic value
Consumer and Producer SurplusConsumer and Producer SurplusConsumer and Producer SurplusConsumer and Producer Surplus
Q
P
c1
c2
q1 q2
The ObjectiveThe ObjectiveThe ObjectiveThe Objective
EV = CS + PS + a x R– a > 0 ?
Shadow price of funds– estimated in US at 0.3
EV = CS + PS + a x R– a > 0 ?
Shadow price of funds– estimated in US at 0.3
New entry into market with New entry into market with existing suppliersexisting suppliersNew entry into market with New entry into market with existing suppliersexisting suppliers
Consumer surplus on increase in market served
Producer surplus on increase in market served
Cost saving/extra expense on displaced market share
Consumer surplus on increase in market served
Producer surplus on increase in market served
Cost saving/extra expense on displaced market share
New entry into market with New entry into market with existing suppliers (2)existing suppliers (2)New entry into market with New entry into market with existing suppliers (2)existing suppliers (2)
Q
P
c1
c2
q1 q2
initial output level
Relationship Between Economic Relationship Between Economic Value and ProfitValue and ProfitRelationship Between Economic Relationship Between Economic Value and ProfitValue and Profit
EV not therefore generally equal to profitability
How related? …...depends on assumptions of the effect
of increased competition on the market
EV not therefore generally equal to profitability
How related? …...depends on assumptions of the effect
of increased competition on the market
Modelling AssumptionsModelling AssumptionsModelling AssumptionsModelling Assumptions
Demand Conditions– Usual assumptions: OFTEL, KPMG, ...– Linear demand– Constant Unit Costs
Strategic Model– Base model, Cournot competition
Demand Conditions– Usual assumptions: OFTEL, KPMG, ...– Linear demand– Constant Unit Costs
Strategic Model– Base model, Cournot competition
Economic Value per £ profitEconomic Value per £ profitEconomic Value per £ profitEconomic Value per £ profit
Additional entry into a market of size “m” when the degree of existing competition is “n”
Proposition: If entrant has average of industry costs for a particular market then EV/Profit is decreasing with “n” and does not depend on “m”
Additional entry into a market of size “m” when the degree of existing competition is “n”
Proposition: If entrant has average of industry costs for a particular market then EV/Profit is decreasing with “n” and does not depend on “m”
Social versus Private PreferencesSocial versus Private PreferencesSocial versus Private PreferencesSocial versus Private Preferences
Amount of Existing Competition
Size of Market
Private choice
social choice
Illustrative EV per £ profitIllustrative EV per £ profitIllustrative EV per £ profitIllustrative EV per £ profit
Profit number of competitors (less FWA) EVLondon (within the M25) 100 14 12 8.0West Midlands Conurbation 100 7 5 18.1Manchester Conurbation 100 8 6 15.3Glasgow 100 6 4 22.0Merseyside 100 5 3 28.1Bristol 100 7 5 18.1Newcastle - Sunderland 100 5 3 28.1Edinburgh 100 6 4 22.0West Yorkshire Conurbation 100 8 6 15.3Countryside 100 3 1 62.5
ConsequencesConsequencesConsequencesConsequences
Roll out to areas less served by current competition a higher social priority than private one
Roll out to areas less served by current competition a higher social priority than private one
If ... If ... If ... If ...
Profit number of competitors (less FWA) EVLondon (within the M25) 140 14 12 11.2West Midlands Conurbation 99 7 5 17.9Manchester Conurbation 100 8 6 15.3Glasgow 97 6 4 21.3Merseyside 100 5 3 28.1Bristol 100 7 5 18.1Newcastle - Sunderland 95 5 3 26.7Edinburgh 100 6 4 22.0West Yorkshire Conurbation 98 8 6 15.0Countryside 80 3 1 50.0
... then ... then ... then ... then
Profit EVCountryside then London 197 59London then Countryside 207 53
-4.8% 12.2%
discounting later provision at 20%
Other ScenariosOther ScenariosOther ScenariosOther Scenarios
Operating costs of entrants differ from industry average– Differs in different markets
Incumbents and strategic entry deterrence
Operating costs of entrants differ from industry average– Differs in different markets
Incumbents and strategic entry deterrence