why lte-only operators need to buy 700mhz?

TECHNO-COMMERCIAL PLANNING AND TRANSACTION ADVISORY IN TELECOMS, MEDIA AND TECHNOLOGY SINGAPORE I NEW DELHI

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850MHz holdings are not adequate for handling combined traffic from VoLTE and mobile data in non-metro markets - the cost of purchasing 700MHz is lower than CSFB payouts to partner operators. Incumbents may be more effective in consolidating urban market revenues rather than competing for rural revenues, given the competitive offerings and required assets.

Why LTE-only operators need to buy 700MHz?

2 CAPITEL: WHY LTE-ONLY OPERATORS NEED TO BUY 700MHZ?

1. LTE-only operators need to carry voice calls as VoLTE1, or fallback on partner networks for CSFB2 VoLTE and CSFB. Unlike incumbent operators, LTE-only operators need to carry voice as VoLTE traffic, or else use partner operator networks for circuit switched fallback of voice on underlying GSM bands (900MHz, 1800MHz), or 3G bands (2100 MHz).

2. Tier 2 and Tier 3 / Rural markets will have access to 10MHz-15MHz

spectrum for carrying VoLTE and mobile data traffic

Spectrum deployment. LTE-only entrants have multi-layer spectrum deployment architecture. Such a deployment model means that:

• Metro cities and tier 1 cities will have access to 850MHz, 1800MHz and 2300MHz, with a total of 30MHz spectrum available for downlink. This is because the grid density of towers is high in these cities and at almost any area, coverage from all three bands is available

• Tier 2 cities will primarily have access to 850MHz and 1800MHz, although 2300MHz is deployed on the cell site. This is because the cell radius of 2300MHz is limited, and operators can deploy 2300MHz except in dense urban areas. This means that calls initiated indoors will typically have access to only 15MHz of spectrum

• Tier 3 towns and villages will primarily have access to only 850MHz, which is ~10MHz in all circles. Using 45,000 sites to cover 6,00,000 villages means that only few towns and villages will have access to two or three bands, and a majority of areas will primarily have coverage from only one band

Figure 1: Available spectrum band by type of markets

Source: Capitel analysis, industry inputs

1 VoLTE: Voice over LTE 2CSFB: Circuit Switched Fallback

~350m!

~800m !

~3,000m!

Spectrum in Tier 3 and Rural markets!

Spectrum in !Tier 2 markets!

Spectrum in Metro and Tier 1 markets !

850MHz

1800MHz

2300MHz

10MHz 15MHz 30MHz

850MHz

1800MHz

2300MHz


Tier 2 and Tier 3/Rural areas are important. LTE-only entrants are expected to disrupt voice market and gain primary SIM share in tier 2 markets and tier3/rural markets using this proposition. In this context, it becomes imperative for the VoLTE service, or CSFB fallback to be seamless in these areas. As illustrated, for all of tier 3 towns and villages, and for majority of tier 2 towns, the primary spectrum band for carrying VoLTE traffic will be 850MHz. Densification of 2300MHz for tier 3 towns and rural areas will be Capex intensive and also need fiber for backhaul. Also, for the Tier 3 towns and rural areas, unless the CSFB partner network is on 900MHz GSM, in some cases there is a possibility of call drops and inadequate coverage for CSFB fallback that will be reflected in poor customer experience.

3. The existing spectrum holding is not sufficient to carry combined

traffic from VoLTE calls and mobile data usage VoLTE traffic. The VoLTE traffic will depend on the deployed codecs – T-Mobile reportedly uses AMRWB3 codecs with a 23.8Kbps-coding rate, and our estimates are based on this rate, along with a scenario for a lower coding rate of 12.6Kbps (reportedly used by Verizon and AT&T), Figure 2: Requirement of additional spectrum for LTE-only operators Type of market and coding rate scenarios, MHz

Source: Capitel analysis

Spectrum requirement. The spectrum requirement in metro and tier 1 markets is led by mobile data capacity, whereas that for tier 2 markets and tier 3 markets is led by VoLTE capacity. We estimate that LTE-only entrants need at least 5MHz of additional low frequency band spectrum in tier 3/rural areas, and at least 10MHz of downlink spectrum (or 20MHz of TDD

3 Adaptive Multi-Rate Wideband

14.3 9.1

9.9

7.6

6.8

5.0

23.8kbps 12.6kbps

Tier 3 markets

Tier 2 markets

Metro /Tier1 markets


spectrum) in metro and tier 1 market. Such spectrum requirement will be more pronounced in circles with large geographical area as the grid planning in these markets is likely to result in the coverage situation illustrated in Figure 1 for tier 3 and rural markets. Our current model does not assume a high share of video calling, although with VoLTE traction, it is expected that video calls will also account for a high share of traffic. The coding rates for video calls will be significantly higher, and experience from US market suggests that a video call will consumer 6-8 MB data per minute. This will put further pressure on the network, and result in additional spectrum requirement

4. Fallback on partner networks is an option for voice calls, however, it

is cheaper to buy 700MHz than paying operators for CSFB

CSFB Payouts. Reportedly, the CSFB payouts are structured at INR0.25 per minute, and we estimate the CSFB payouts at various mix of CSFB to VoLTE traffic share, as illustrated in Figure 3. For a sample category A circle, we estimate that the payouts can vary from INR720 mn per annum to INR 7,200 mn per annum, for a 20% subscriber market share. Purchase of 700MHz. We annualize the payouts for 700MHz spectrum, along with network deployment investments. Comparing this with CSFB payouts, we find that if less than 36% of voice traffic is carried as CSFB (and more than 64% as VoLTE), then its beneficial to use a CSFB partner network. However, if the CSFB share is greater than 36%, then it is economically better to purchase 700MHz spectrum.

Figure 3: Payouts for 700MHz (annualized spectrum + network) vs. CSFB

Source: Capitel analysis, TRAI, Company reports

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%!

Annual CSFB payout Annualized Spectrum + Network cost for 700MHz

% Voice traffic on CSFB

Better to buy 700MHz Better to use CSFB

36%+


In the initial few years, the share of CSFB is expected to be high as the penetration of VoLTE devices grows, and the CSFB payouts will be significant. Also, to make the network future-proof for future VoLTE traffic including voice and video calls, it appears that purchase of 700MHz will be an important consideration in relevant circles. One option can be the densification of the network using 1800MHz and 2300MHz in tier 2 markets, and also tier 3 markets. Although we have not modeled the financial implication of such densification, we expect that the time and investment required for densification of LTE networks beyond metros and tier 1 markets will be considerable.

5. We expect LTE-only entrants to buy 700MHz and 2300/2500MHz in

select markets

Given the above scenario, we expect that there will be a strong consideration for purchase of 700MHz and 2300MHz/2500MHz in select markets. The selection of markets will be determined by multiple parameters including:

• Expected mobile data and VoLTE traffic • Deployed number of sites, and spectrum plan • Geographical area of circle • Demographic mix of circle • Voice MoU per sub in the circle, among other factors

6. Incumbent operators are better positioned in urban markets

VoLTE response. Not all operators are planning to have a response to VoLTE offerings. We expect a majority of competitive responses to be centered in metro and tier 1 market where there is adequate spectrum in high frequency bands such as 1800MHz and 2300MHz for LTE services. The incumbent operators have a CSFB fallback on their own networks to manage call drops, especially with deployment of voice call continuity options. Auction purchase, incumbents. We expect the bid response from LTE focused incumbents to be defensive, with 700MHz purchase in select circles. However, such a purchase may not allow for a competitive VoLTE response in tier 2 and tier 3 / rural markets, and the utility of such 700MHz can be marginal, and led by marketing gains. Incumbents have an option to focus primarily on metros and tier 1 markets, where a better VoLTE and mobile data response can be developed, at the cost of losing market share in tier 2 and tier 3 / rural markets. Broadband-led response. Some of the incumbent operators have clearly adopted an urban-focused approach, including bundling of FTTx services to target household level ARPU rather than competing only on mobile. It would appear that incumbents have a better chance at consolidating urban market revenues rather than competing for rural revenues, given the competitive offerings and required assets.


Capitel is a leading advisor on major investment and planning decisions by service providers, global institutional investors and policy makers in Telecoms, Media and Technology. We have advised on multi-billion dollar transactions and investments plans, and serve a client base located in the U.S., Asia and Europe. Our clients trust us to provide independent, objective advice to maximize their investment returns and policy objectives.

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Follow up contacts for this paper

Pankaj Agrawal Singapore

Puja Goyal New Delhi

[email protected] +65 8617 3262 +91 995 890 1085

[email protected] +91 959 976 6311

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Copyright © 2016. The information contained herein is the property of Capitel Partners and is provided on condition that it will not be reproduced, copied, lent or disclosed, directly or indirectly, nor used for any purpose other than that for which it was specifically furnished. Capitel Partners has exercised due care and caution in preparing this paper. Information stated or used in this paper has been obtained by Capitel Partners from sources that it considers reliable. However Capitel Partners does not guarantee the accuracy or completeness of any information and would not be responsible for any errors or omissions or for the results obtained from the use of such information. Capitel Partners would not be liable for investment decisions that may be based on the views expressed in its paper.

why lte-only operators need to buy 700mhz?

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