the future of spectrum pricing s zehle coleago 24 jan 17 sz

The future of pricing spectrum

Stefan ZehleCEO, Coleago Consulting Ltd+44 7974 356 [email protected]

www.coleago.com

Forum Global 3rd Annual Middle East and North Africa Spectrum Management Conference

Dubai, 24th of January 2017

A specialist telecoms management consulting firm

About Coleago Consulting

© copyright Coleago 2017 1The Future of Pricing Spectrum

Since 2001, Coleago has offered a wide range of advisory services to the telecom industry

2© copyright Coleago 2017

Strategy & Business Planning Strategy Development, Marketing Strategy MVNO and Multi-Brand Wholesale Strategy Business Planning and Business Modelling

Telecoms Regulation & Interconnect Accounting Separation, Regulatory Price

Control Interconnect Cost Modelling, RIO Regulatory Consultations

Business Transformation & Cost Reduction Cost Reduction Mobile Network Sharing Restructuring and Turnaround

Transaction Services Commercial Due Diligence Tower Due Diligence Preparation of Information Memorandum

Spectrum Valuations and Auctions Spectrum Strategy Spectrum Valuation for Auctions Spectrum Auction Bid Strategy and Execution Beauty Contest Bid Books

Mobile Network Sharing Mobile Network Sharing Managed Services and Outsourcing Tower Due Diligence Network Audit

The Future of Pricing Spectrum

Coleago has carried out over 70 spectrum consultation, valuation, auction and beauty contest licence projects

Completed in 2015-16 South Africa – 800, 2600MHz Ghana – 800MHz Russia – 1800MHz UK - 3.4, 3.5, 3.9GHz Ukraine – 2100MHz Argentina – 900, 1800, 700MHz,

AWS Canada - AWS-3 and 2.5GHz Bangladesh – 700, 1800, 2100MHz Guatemala – 3.5GHz

Completed in 2013-14 Canada – 700MHz Paraguay - multi-band Oman - 800MHz & 2.6GHz Belgium - 800MHz New Zealand - 700MHz Myanmar - greenfield Australia - 700MHz & 2.6GHz UK - 800MHz & 2.6GHz Sri-Lanka - 1800MHz

3© Copyright Coleago 2016 - www.coleago.com

© copyright Coleago 2017The Future of Pricing Spectrum

Forum Global 3rd Annual Middle East and North Africa Spectrum Management Conference, 24th of January 2017

The future of pricing spectrum


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Stefan ZehleCEO, Coleago Consulting Ltd+44 7974 356 [email protected]

www.coleago.com

There is little mobile service revenue growth and in many markets industry revenue declines in nominal and real terms


5Source: ML BoA Global Wireless Matrix Oct 2016

The growth in data traffic far outpaces growth in revenue; there is little incremental revenue from data

In mobile markets world-wide, mobile data growth is exponential. This growth is likely continue.

However, revenue growth - if any - is minimal compared to the growth in data volume.

The notion that investment in LTE generates much additional revenue is erroneous.


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0

100

200

300

400

500

600

700

1 2 3 4 5 6 7

RevenueData traffic

Relationship between mobile revenue and mobile data volume (illustrative)

Years

Traf

fic V

olum

e an

d R

even

ue

Over time mobile operators use more spectrum to cope with the increase in data traffic


7

220340

525585

645 685

865 885

1155

0

200

400

600

800

1000

1200

1998 2002 2010 2012 2016 2017 2018 2019 2020

MHz

Spectrum used by mobile in ITU Region 1

900 - B 8 1800 - B 3 2100 - B 1 2600 - B 72600 - B 38 800 - B 20 700 - B 28 1500 - B 323500 - B 42 3700 - B 43 700 - B 67 600 - B TBC

Mobile market revenue per MHz of spectrum used to produce the revenue is declining, example Canada


8

81

55 5350

36

0

10

20

30

40

50

60

70

80

90

2007 2008 2012 2014 2015

CN$

milli

on p

er M

HzRevenue per MHz of spectrum deployed

Many governments benchmark against prices paid for spectrum in past auctions to set prices for new spectrum and licence renewal

Band MHz800MHz – B20 60700MHz – B28 60900MHz – B8 70600MHz - TBC 90

Are prices paid for digital dividend 800MHz (band 20) an indication of the price that should be charged for assigning 700MHz (band 28), assigning the future 600MHz, and renewing 900MHz (band 8)?


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The value of spectrum to an operator depends on the value it brings to an operator’s business in terms of future cash flow

Band MHz800MHz – B20 60700MHz – B28 60900MHz – B8 70600MHz - TBC 90


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First opportunity to provide wide geographic LTE coverageIn some markets ability to deprive competitors of access to the spectrum (blocking value)

No coverage value, only capacity value

Keep GSM / 3G going for a few years, later additional LTE capacity

No coverage value, only capacity value

The value of incremental sub 1-GHz spectrum to use for LTE is lower with each increment

Setting prices for spectrum by benchmarking against results from past auctions is deeply flawed

Band MHz800MHz – B20 60700MHz – B28 60900MHz – B8 70600MHz - TBC 90Total sub 1 GHz 280

The maths doesn’t stack up Let’s assume operators paid US$ 0.50 per MHz

per pop for 800MHz spectrum, i.e. US$ 30 per pop for the band.

If all spectrum is charged at the same rate, the cost of sub-1GHz spectrum to the industry would be US$ 140 per pop, an increase of 467%.

Whereas– revenue increases are nowhere near that

number and– in most markets there is also no significant

increase – and in many cases decreases - in free cash flow, excluding investment in spectrum (EBITDA less tangible CAPEX less corporation tax)


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Prices paid in the past are no indication of the value of spectrum to operators in future assignments, example Germany

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800MHz B202010

900MHz B82015

700MHz B282015

€0.24 /MHz / pop

€0.23 /MHz / pop

€0.73 /MHz / pop

Prices paid at auction for sub-1 GHz spectrum in Germany


The total annual equivalent cost of all spectrum should be below 10% of industry revenue

The annual equivalent cost of an up-front spectrum fee can be calculated using an annuity formula.

To this annualised licence fee amount the following needs to be added to arrive at the total annual equivalent cost of spectrum:– Ongoing annual spectrum fees – Microwave spectrum fees


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The annuity calculation formulaAnnualised cost = cost of capital / (1 - (1 / (1 + cost of capital)) ^ years of licence)

The total annual equivalent cost of all spectrum held by the industry should be below of industry revenue.

Where policy makers value other policy goals, such as rural coverage, the annual cost should be below 5%.

If the cost of spectrum is to be 10% of revenue and revenue is not growing, then the cost per MHz of spectrum has to decline


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Regardless of the business case, cash is not unlimited: Mobile broadband deployment may be affected by high spectrum fees


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Demand for Mobile Broadband and Spectrum Need

Up-Front Prices Paid for Spectrum

Licences

LTE Deployment and Backhaul

Capex

Tangible (Network) and Intangible

(Spectrum) Capex

Revenue

EBITDA

Free Cash Flow

Impact on Operators Balance

Sheet

Cash Flow Return on Investment -

CFROI

Annual Spectrum Fees

The consequence: The only way to maintain returns is to

reduce investment

Other Opex

minus

minus minus

equals

Corporation Tax

minus

Governments must align their expectations of revenue from spectrum sales with the economic reality of the mobile business


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Little real revenue growth

More spectrum used to produce

the revenue

Revenue per MHz of spectrum

declines

Increase in CAPEX to deploy the

spectrum

Increase in OPEX for backhaul

The cost of spectrum in terms of US$ per MHz must decline

Network costs do not decline

Questions?


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