Award of 3.4 GHz andAward of 3.4 GHz and10 GHz Licences10 GHz Licences

FWACC13th December 2000

Steve JonesIntroduction

IntroductionIntroductionIntroductionIntroduction

www.radio.gov.uk 26th January 2001

www.radio.gov.uk 26th January 2001

James KinsleyOverview

Today…….Today…….Today…….Today…….

Overview of Programme to Date…. Scenarios modelled Summary of preliminary findings Markets/Revenue Report Technical/Costs Report Financial/Valuation Report Economic Report Way forward

Overview of Programme to Date…. Scenarios modelled Summary of preliminary findings Markets/Revenue Report Technical/Costs Report Financial/Valuation Report Economic Report Way forward

13thDecember

2

11thDecember

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

Licence ScenariosLicence ScenariosLicence ScenariosLicence Scenarios

Look at a range of business cases

48 licence scenarios !!

Defined generic licence types New and existing operators

Look at a range of business cases

48 licence scenarios !!

Defined generic licence types New and existing operators

Main Licence Scenarios x 6Main Licence Scenarios x 6Main Licence Scenarios x 6Main Licence Scenarios x 6

New

Venture

New

Venture

Existing operatorExisting operator

CityCity RegionalRegional NationalNational

Main Licence ScenariosMain Licence ScenariosMain Licence ScenariosMain Licence Scenarios

City = 9 cities combined = area of 4,500 km2

Regional = rest of the country - City = area of 240,000 km2

National = City + Regional

City = 9 cities combined = area of 4,500 km2

Regional = rest of the country - City = area of 240,000 km2

National = City + Regional

Licence ScenariosLicence ScenariosLicence ScenariosLicence Scenarios

Defined generic licence types New and existing operators 4 cellular configurations

Defined generic licence types New and existing operators 4 cellular configurations

Licence Scenarios x 24Licence Scenarios x 24Licence Scenarios x 24Licence Scenarios x 24

New

Venture

New

Venture

Existing operatorExisting operator

CityCity RegionalRegional NationalNational

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

Licence ScenariosLicence ScenariosLicence ScenariosLicence Scenarios

Defined generic licence types New and existing operators 4 cellular configurations Basic and optimistic (“lucky break”) cases

Defined generic licence types New and existing operators 4 cellular configurations Basic and optimistic (“lucky break”) cases

Licence Scenarios x 48Licence Scenarios x 48Licence Scenarios x 48Licence Scenarios x 48

New

Venture

New

Venture

Existing operatorExisting operator

CityCity RegionalRegional NationalNational

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

A

B

C

D

BasicBasic

“Lucky”“Lucky”

BasicBasic

“Lucky”“Lucky”

BasicBasic

“Lucky”“Lucky”

BasicBasic

“Lucky”“Lucky”

BasicBasic

“Lucky”“Lucky”

BasicBasic

“Lucky”“Lucky”

Preliminary Findings (1):Preliminary Findings (1):Limiting factorsLimiting factorsPreliminary Findings (1):Preliminary Findings (1):Limiting factorsLimiting factors Size of spectrum - this dictates:

– subscriber density that is supportable (i.e. market share is not really limited by competition from other access technologies or by subscriber take-up), and therefore…….

– …..nature of overall usage (i.e. “infill”/complementary);– …..initial targeting of customers (“cherry-picking”,

because demand is likely to exceed supply)….– “upgradeability” - an increased hunger for bandwith from

the customer base over time will effect overall viability of the business case of the spectrum on offer

– number of licences per region (i.e. 1-2); Backhaul costs - these are high, unless you use microwave

Size of spectrum - this dictates:– subscriber density that is supportable (i.e. market share is

not really limited by competition from other access technologies or by subscriber take-up), and therefore…….

– …..nature of overall usage (i.e. “infill”/complementary);– …..initial targeting of customers (“cherry-picking”,

because demand is likely to exceed supply)….– “upgradeability” - an increased hunger for bandwith from

the customer base over time will effect overall viability of the business case of the spectrum on offer

– number of licences per region (i.e. 1-2); Backhaul costs - these are high, unless you use microwave

Preliminary Findings (2):Preliminary Findings (2):Limiting FactorsLimiting FactorsPreliminary Findings (2):Preliminary Findings (2):Limiting FactorsLimiting Factors Rural areas unattractive to operators Banks cautious about lending to sector

– FSA letter sent to banks following review by FSA of 34 banks’ exposure to telecoms sector. (FT 8/12/00)

– “Banks are capping the amount of exposure to this sector” (FT 8/12/00)

– banks expect conditions to improve in about 6 - 9 months

Rural areas unattractive to operators Banks cautious about lending to sector

– FSA letter sent to banks following review by FSA of 34 banks’ exposure to telecoms sector. (FT 8/12/00)

– “Banks are capping the amount of exposure to this sector” (FT 8/12/00)

– banks expect conditions to improve in about 6 - 9 months

Preliminary Findings (3):Preliminary Findings (3):City vs Regional vs NationalCity vs Regional vs NationalPreliminary Findings (3):Preliminary Findings (3):City vs Regional vs NationalCity vs Regional vs National

Regional licences (i.e. assuming no rural roll-out) and national licences are viable….

Regional licence is more attractive than National licence….

City licence is not viable– high capital costs (i.e. more base stations)

associated with smaller cell radius– assumption of no microwave backhaul

Regional licences (i.e. assuming no rural roll-out) and national licences are viable….

Regional licence is more attractive than National licence….

City licence is not viable– high capital costs (i.e. more base stations)

associated with smaller cell radius– assumption of no microwave backhaul

Preliminary Findings (4):Preliminary Findings (4):Cellular configurationsCellular configurationsPreliminary Findings (4):Preliminary Findings (4):Cellular configurationsCellular configurations 4 cellular configurations - allows us to model

the relative impact on the main business case scenarios of different cell radii:– lower (infrastructure) costs and lower (subscriber)

revenues

vs

– higher (infrastructure) costs and higher (subscriber) revenues

[NB: A & B are more profitable than C & D]

4 cellular configurations - allows us to model the relative impact on the main business case scenarios of different cell radii:– lower (infrastructure) costs and lower (subscriber)

revenues

vs

– higher (infrastructure) costs and higher (subscriber) revenues

[NB: A & B are more profitable than C & D]

Preliminary Findings (4):Preliminary Findings (4):New vs Existing OperatorsNew vs Existing OperatorsPreliminary Findings (4):Preliminary Findings (4):New vs Existing OperatorsNew vs Existing Operators Business cases for new operator and

existing operator are broadly comparable– new operator will have more ambitious

aspirations than existing operators, thus revenues will be higher, especially in the early years

– ...new operator will have a higher cost base, which goes someway to redress their advantage in terms of higher revenues

Business cases for new operator and existing operator are broadly comparable– new operator will have more ambitious

aspirations than existing operators, thus revenues will be higher, especially in the early years

– ...new operator will have a higher cost base, which goes someway to redress their advantage in terms of higher revenues

Preliminary Findings (6):Preliminary Findings (6):Licence ConfigurationLicence ConfigurationPreliminary Findings (6):Preliminary Findings (6):Licence ConfigurationLicence Configuration

This is clearly critical to the success of the award programme….

No business case for a combined City licence Licence configuration based on (artificial)

geographical boundaries/regions is inappropriate…. ……configuration based around a detailed knowledge

of potential subscriber locations, is critical Further discussion on configuration of licences later

in this presentation….

This is clearly critical to the success of the award programme….

No business case for a combined City licence Licence configuration based on (artificial)

geographical boundaries/regions is inappropriate…. ……configuration based around a detailed knowledge

of potential subscriber locations, is critical Further discussion on configuration of licences later

in this presentation….

Bérangère Mira-SmithQualitative Market Research

ProgressProgressProgressProgress

Interviewed a further 10 companies– Operators

Eurobell, Internet Central, Balloon-A-Gram

– Manufacturers

Adaptive broadband, PipingHot Networks, Tandberg TV

– Banks

Royal Bank of Scotland, Citibank, Deutsche Bank, and Bank of America

Interviewed a further 10 companies– Operators

Eurobell, Internet Central, Balloon-A-Gram

– Manufacturers

Adaptive broadband, PipingHot Networks, Tandberg TV

– Banks

Royal Bank of Scotland, Citibank, Deutsche Bank, and Bank of America

Industry Views:Industry Views:Services and target market Services and target market Industry Views:Industry Views:Services and target market Services and target market

Services– Always-On/Fast link to the Internet– Voice telephony

Market share expectations – Large operators 10-15%– Small operators ‘00s or ‘000s of subscribers

Target markets– Primarily SMEs and SOHOs– High-end residential market

Services– Always-On/Fast link to the Internet– Voice telephony

Market share expectations – Large operators 10-15%– Small operators ‘00s or ‘000s of subscribers

Target markets– Primarily SMEs and SOHOs– High-end 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

3.4/10 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

3.4/10 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) For large operators the spectrum will be

complementary to existing portfolio– e.g ASDL; other spectrum e.g at 28GHz or

2GHz; and support overall strategy “do not put all your eggs in one basket”

Smaller operators will only have FWA

For large operators the spectrum will be complementary to existing portfolio– e.g ASDL; other spectrum e.g at 28GHz or

2GHz; and support overall strategy “do not put all your eggs in one basket”

Smaller operators will only have FWA

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

highest– But above all go where competition is not

strong to establish footprint

Rollout approach will :– Start from existing points of presence– Go where demand/population density is

highest– But above all go where competition is not

strong to establish footprint

Industry View:Industry View:Regulatory & licensing matters (1)Regulatory & licensing matters (1)Industry View:Industry View:Regulatory & licensing matters (1)Regulatory & licensing matters (1)

Large operators want a national licence Small operators want a regional licence

(but wasteful at boundaries) The amount of spectrum can only support

one licence holder Licence duration needs to be 15-20 years

Large operators want a national licence Small operators want a regional licence

(but wasteful at boundaries) The amount of spectrum can only 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 might be clear cut but take money out

of the industry– comparative selection has the means to

ensure that the licence will be used– the banking community would not support an

auction

Comparative selection is the preferred award mechanism– auctions might be clear cut but take money out

of the industry– comparative selection has the means to

ensure that the licence will be used– the banking community would not support an

auction

Nicholas BladesMarket Scenarios

Market & Revenue ModelMarket & Revenue ModelMarket & Revenue ModelMarket & Revenue Model

Objectives– addressable market sizing based on three

geographic areas• cities : nine UK urban centres modelled as one whole

• regional : remaining UK suburban areas

• coverage assumptions consistent with cost model

– revenues generated• telephony, Internet access & value added

• service take-up tailored to match max. subscriber density– focus on most profitable subscribers / services

Objectives– addressable market sizing based on three

geographic areas• cities : nine UK urban centres modelled as one whole

• regional : remaining UK suburban areas

• coverage assumptions consistent with cost model

– revenues generated• telephony, Internet access & value added

• service take-up tailored to match max. subscriber density– focus on most profitable subscribers / services

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

FWA’s Position in the MarketFWA’s Position in the MarketFWA’s Position in the MarketFWA’s Position in the Market

FWA is small component of overall broadband market– limited spectrum– large number of

competing service providers

• over 100 service providers for DSL

• cable modem available to 50% of households

FWA is small component of overall broadband market– limited spectrum– large number of

competing service providers

• over 100 service providers for DSL

• cable modem available to 50% of households

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Broadband Subscribers (million)

Maximum Take-up of FWA

Other Access Technologies

SensitivitiesSensitivitiesSensitivitiesSensitivities

Spectrum usage and build assumptions– limits the services and subscribers which can

be addressed– restricts market share aspirations

Rollout impact– denser networks take longer to rollout– revenues come on stream later– impact on return?

Spectrum usage and build assumptions– limits the services and subscribers which can

be addressed– restricts market share aspirations

Rollout impact– denser networks take longer to rollout– revenues come on stream later– impact on return?

Nat - Sensitivity to Build Nat - Sensitivity to Build AssumptionsAssumptionsNat - Sensitivity to Build Nat - Sensitivity to Build AssumptionsAssumptions

0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Half spectrum per cell - baseline cell size

Full spectrum per cell - baseline cell size

Half spectrum per cell - reduced cell size

Full spectrum per cell - reduced cell size

Result of Spectrum AllocationResult of Spectrum AllocationResult of Spectrum AllocationResult of Spectrum Allocation

Lack of spectrum limits the maximum subscriber density achievable– spectrum driven subscriber density below the

market share objectives assumed for most scenarios

– operators will focus on the highest margin customers• lower likelihood of small businesses and residential

customers being addressed

Lack of spectrum limits the maximum subscriber density achievable– spectrum driven subscriber density below the

market share objectives assumed for most scenarios

– operators will focus on the highest margin customers• lower likelihood of small businesses and residential

customers being addressed

Abdul LadakInfrastructure Rollout

Cost Model

Stage 2 WorkStage 2 WorkStage 2 WorkStage 2 Work

Outline Planning and Dimensioning Outline Design Infrastructure and Rollout Costing Radio Modelling Further Work - Stage 4

Outline Planning and Dimensioning Outline Design Infrastructure and Rollout Costing Radio Modelling Further Work - Stage 4

Outline Planning and DimensioningOutline Planning and DimensioningOutline Planning and DimensioningOutline Planning and Dimensioning

UK Footprint (1991 Census Data)

20,000 Sq. Km = 56% Population

therefore reasonable to assume

40,000 Sq. Km = 70% Population

Capacity PlanningCapacity PlanningCapacity PlanningCapacity Planning

Half Spectrum Full Spectrum

F = 3.5 MHz (3.4 GHz) or 7 MHz (10 GHz) F = 7 MHz (3.4 GHz) or 14 MHz (10 GHz)

Cell CapacityCell CapacityCell CapacityCell Capacity

Band Cell Structure Capacity

3.4 GHz A 21 Mbps

3.4 GHz B 42 Mbps

10 GHz A 42 Mbps

10 GHz B 84 Mbps

Assuming:

4QAM or QPSK

Traffic and ServicesTraffic and ServicesTraffic and ServicesTraffic and Services

3.4 GHz Service

2 x 32K POTS + IP 512K Downlink / 128K Uplink

Contention Ratio Subscribers per Cell4:1 20010:1 40020:1 800

10 GHz Services

Contention Ratio Subscribers per CellISDN 2B+D N/A 50128K Leased Lines N/A 20Fraction E1 up to 2 Mbps 4:1 50Fraction E1 up to 2 Mbps 10:1 150Fraction E1 up to 2 Mbps 20:1 300

ISDN and leased lines are not considered viable services at 3.4 GHz due to lack ofspectrum.

Design ModelsDesign ModelsDesign ModelsDesign ModelsA total of four design models have been created and costed. Cellular configurations foreach are defined as follows:

A = half spectrum per cell - normal cell sizeB = full spectrum per cell - normal cell sizeC = half spectrum per cell - reduced cell sizeD = full spectrum per cell - reduced cell size

Normal cell radius is shown in the table below:

3.4 GHz 10 GHzCity 8 Km 3 KmRegional 15 Km 8 KmRural 25 Km 15 Km

Reduced cell radius is shown in the table below:

3.4 GHz 10 GHzCity 3 Km 1 KmRegional 7 Km 3 KmRural 10 Km 7 Km

SubscribersSubscribersSubscribersSubscribers

CellularConfiguration

3.4 GHz2x32K POTS +

512/128 K

10 GHzISDN 2B+D

10 GHz128K Leased

10 GHzUp To 2 Mbps

A City 16,800 7,500 3,000 45,000A Regions 40,800 9,000 3,600 54,000Total A 57,600 16,500 6,600 99,000B City 33,600 15,000 6,000 90,000B Regions 81,600 18,000 7,200 108,000Total B 115,200 33,000 13,200 198,000C City 120,000 67,300 26,920 403,800C Regions 188,800 64,100 25,640 384,600Total C 308,800 131,400 52,560 788,400D City 240,000 134,600 53,840 807,600D Regions 377,600 128,200 51,280 769,200Total D 617,600 262,800 105,120 1,576,800

Outline Design ArchitectureOutline Design ArchitectureDesign Model ADesign Model AOutline Design ArchitectureOutline Design ArchitectureDesign Model ADesign Model A

2 x E1 (3.4 GHz)4 x E1 (10 GHz)

Add/Drop Mux

PTOPSTN

SDH RINGATM BACKBONE

CARRIERHUB

ACCESSCONCENTRATOR

ATM SWITCH

ST = SUBSCRIBER TERMINALSSME, CORPORATE, MULTI-TENANT

BS = BASE STATION SHELFCONTROLLERS, RF MODULES

STST

ST

ST

ST

BS

BS

BS

BS

BS

10 x E1 (3.4 GHz)1 x T3 (10 GHz)

Outline Design ArchitectureOutline Design ArchitectureDesign Models C and DDesign Models C and DOutline Design ArchitectureOutline Design ArchitectureDesign Models C and DDesign Models C and D

AC

STST

ST

ST

ST

BS

BS

BS

BS

BS

AC

AC

Backbone

Switch

2/4/8 E1s

1/2 T3s

““Lucky Break”Lucky Break”““Lucky Break”Lucky Break”

3.4 GHz and 10 GHz Site Sharing Low Site Acquisition Overheads Maximised Economies of Scale Rock Bottom Equipment Prices Increased Microwave Backhaul No Dark Fibre Lease Discounted Rate for Backbone Bandwidth

3.4 GHz and 10 GHz Site Sharing Low Site Acquisition Overheads Maximised Economies of Scale Rock Bottom Equipment Prices Increased Microwave Backhaul No Dark Fibre Lease Discounted Rate for Backbone Bandwidth

Backhaul ProportionsBackhaul ProportionsBackhaul ProportionsBackhaul Proportions

Normal

Lucky Break

Radio Modelling - Radio Modelling - ITU-R 525/526/530ITU-R 525/526/530Radio Modelling - Radio Modelling - ITU-R 525/526/530ITU-R 525/526/530

High Resolution (2m) 3D Data

CitySuburban Region 1Suburban Region 2

Radio Coverage - CityRadio Coverage - CityRadio Coverage - CityRadio Coverage - City

City Centre - Building Height = 100m

3.4 GHz

10 GHz

Radio Coverage - RegionRadio Coverage - RegionRadio Coverage - RegionRadio Coverage - Region

Suburban Region 1 - Building Height = 35m

3.4 GHz

10 GHz

Radio Coverage - RegionRadio Coverage - RegionRadio Coverage - RegionRadio Coverage - Region

Suburban Region 2 - Building Height = 32m

10 GHz

The Way It Works…ConceptuallyThe Way It Works…ConceptuallyThe Way It Works…ConceptuallyThe Way It Works…Conceptually

Radio Modelling - Interference ITU-R 452Radio Modelling - Interference ITU-R 452Radio Modelling - Interference ITU-R 452Radio Modelling - Interference ITU-R 452

3.4 GHz

Class 1 Subscriber Antenna Mask

Back-to-Front Ratio or Side and Back Lobes Reduced by:-

0 dB :81% Interference10 dB:54% Interference20 dB:2% Interference

Conclusions and What Next ?Conclusions and What Next ?Conclusions and What Next ?Conclusions and What Next ?

Cell structure ‘D’ works….provided.. Optimum cell radius = reduced cell radius 16QAM is reasonable Target dense subscriber regions FDD vs TDD - co-existence Access Technologies co-existence Spectrum surveys and interference

Cell structure ‘D’ works….provided.. Optimum cell radius = reduced cell radius 16QAM is reasonable Target dense subscriber regions FDD vs TDD - co-existence Access Technologies co-existence Spectrum surveys and interference

Saule ZhonkebayevaFinancial Modelling

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

Model sensitivities to spectrum allocation

Examine under what conditions, operators of FWA licences will have a viable business

Model sensitivities to spectrum allocation

Financial ModellingFinancial ModellingFinancial ModellingFinancial Modelling

COST DATA

Capital Expenditure

Licence Value

Operating Costs

MARKET DATA

Revenue

Direct Costs

Operating

Margin

FORECAST FINANCIALSTATEMENTS

Profit & loss accountBalance sheetSources & application of fundsCash flow

VALUATION

IRR - 18 %

FINANCINGLoan repayment term

Loan interest rates

Financing Charges

Licence Valuation (base case)Licence Valuation (base case)Licence Valuation (base case)Licence Valuation (base case)

New

Venture

New

Venture

Existing operatorExisting operator

CityCity RegionalRegional NationalNational

Not ViableNot Viable

Not ViableNot Viable

ViableViable

ViableViable

ViableViable

ViableViable

Licence Valuation (“lucky break”)Licence Valuation (“lucky break”)Licence Valuation (“lucky break”)Licence Valuation (“lucky break”)

New

Venture

New

Venture

Existing operatorExisting operator

CityCity RegionalRegional NationalNational

Not ViableNot Viable

ViableViable

ViableViable

ViableViable

ViableViable

ViableViable

Ian JewittEconomic Analysis

The Economic ObjectiveThe Economic ObjectiveThe Economic ObjectiveThe Economic Objective

EV = CS + PS + a x LV– a > 0 ?– Shadow price of funds

• estimated in US at 0.3

– Appropriately Discounted?• Discount EV at different rate than used in market and

financial models?

EV = CS + PS + a x LV– a > 0 ?– Shadow price of funds

• estimated in US at 0.3

– Appropriately Discounted?• Discount EV at different rate than used in market and

financial models?

Consumer and Producer SurplusConsumer and Producer SurplusConsumer and Producer SurplusConsumer and Producer Surplus

Quantity

Price

marginal cost

CS

PS

p

q

Efficient EntryEfficient EntryEfficient EntryEfficient Entry

Q

P

cost entrant

cost existing

q1 q2

A

B

EV = A+B+C

C

initial supply

Inefficient EntryInefficient EntryInefficient EntryInefficient Entry

Q

P

cost entrant

cost existing

q1 q2

A

B

EV = A-B

initial supply

Modelling AssumptionsModelling AssumptionsModelling AssumptionsModelling Assumptions

But predicted market shares must be modelled

Demand and Cost Conditions– Usual assumptions: OFTEL, KPMG, ...– Linear demand– Constant Unit Costs

Strategic Model– Base model, Cournot competition

But predicted market shares must be modelled

Demand and Cost Conditions– Usual assumptions: OFTEL, KPMG, ...– Linear demand– Constant Unit Costs

Strategic Model– Base model, Cournot competition

Competition with other means of Competition with other means of access. access. Competition with other means of Competition with other means of access. access.

The market is for access, it competes with other products/bandwidth.

Leads to consideration of vertically differentiated products.

The market is for access, it competes with other products/bandwidth.

Leads to consideration of vertically differentiated products.

Number of Licences: Competition Number of Licences: Competition versus Bandwidthversus BandwidthNumber of Licences: Competition Number of Licences: Competition versus Bandwidthversus Bandwidth

Splitting spectrum enhances competition at lower (bandwidth) end of market.

Possibly at expense of competition at the upper (bandwidth) end of the market.

Splitting spectrum enhances competition at lower (bandwidth) end of market.

Possibly at expense of competition at the upper (bandwidth) end of the market.

Number of Licences: Competition Number of Licences: Competition versus Bandwidth (II)versus Bandwidth (II)Number of Licences: Competition Number of Licences: Competition versus Bandwidth (II)versus Bandwidth (II)

Effect of increasing number of licences

0

1

2

3

4

5

6

1 2 3 4 5 6

number of licences

total bandwidth supplied price incumbent price licencees

Summary of AimsSummary of AimsSummary of AimsSummary of Aims

Aim to get licences to firms which have lowest costs of providing access.

To enhance competition. Especially in areas where it is currently

weak. Especially in areas where close substitute

services are not available.

Aim to get licences to firms which have lowest costs of providing access.

To enhance competition. Especially in areas where it is currently

weak. Especially in areas where close substitute

services are not available.

Nicholas BladesWay Forward and

Spectrum Packaging

Influencing Factors (1)Influencing Factors (1)

Business case– modelling can point to the key drivers in the business case– will not cover all of the possible variants– shows that a business case is possible not that it will be the one

used by any potential bidder Rollout

– licence clauses and packaging should enable as wide a roll-out as possible in terms of consumer coverage, not geographical coverage

– avoid sterilising areas containing customer concentrations that any spectrum package winner will not address

Spectrum efficiency

– don’t break up the licences into too many packages so that spectrum is wasted

Influencing Factors (2)Influencing Factors (2)Influencing Factors (2)Influencing Factors (2) Market Sentiment

– operators are likely to borrow to pay for both a licence and the network capex

– the level and the terms of lending are critical to understanding what the financial markets will support

– although analysis may point to one licence value, this assumes that there is a highly liquid capital market

Simple and robust process– the configuration and process should be driven by the influencing

factors– tempered with pragmatic approach to a workable process

Enhance competition– not as dominant a requirement in the cities and suburbs where xDSL

and cable modem will provide choice in the delivery of broadband

Market Sentiment– operators are likely to borrow to pay for both a licence and the network

capex– the level and the terms of lending are critical to understanding what the

financial markets will support– although analysis may point to one licence value, this assumes that

there is a highly liquid capital market Simple and robust process

– the configuration and process should be driven by the influencing factors

– tempered with pragmatic approach to a workable process Enhance competition

– not as dominant a requirement in the cities and suburbs where xDSL and cable modem will provide choice in the delivery of broadband

Way Forward:Way Forward:Main Outputs from Stage 5Main Outputs from Stage 5Way Forward:Way Forward:Main Outputs from Stage 5Main Outputs from Stage 5

Allow viable business cases to bid Avoid sterilisation of rural areas

– allows rural cases to be explored by the market : Rural White Paper

Efficient spectrum usage Simple and robust process

Allow viable business cases to bid Avoid sterilisation of rural areas

– allows rural cases to be explored by the market : Rural White Paper

Efficient spectrum usage Simple and robust process

Spectrum Package(s) Delivery Processes

Influencing factors Inputs from Stage 4 Modelling

Influencing factors Inputs from Stage 4 Modelling

Five Options for Spectrum Five Options for Spectrum Packaging (1)Packaging (1)Five Options for Spectrum Five Options for Spectrum Packaging (1)Packaging (1)

National Licences

– one to four depending on whether 3.4 & 10GHz are packaged together

Regional (“Critical Mass”) Licences

– creating areas of critical mass, not just using a standard regional definition

“Hot Spots”

– licences for metropolitan areas (cities and suburbs) have proved viable in the Stage 2 analysis

– viability of each hotspot can be tested further

• packages likely to sell? - market test

– further work needed to define approach to rural areas

National Licences

– one to four depending on whether 3.4 & 10GHz are packaged together

Regional (“Critical Mass”) Licences

– creating areas of critical mass, not just using a standard regional definition

“Hot Spots”

– licences for metropolitan areas (cities and suburbs) have proved viable in the Stage 2 analysis

– viability of each hotspot can be tested further

• packages likely to sell? - market test

– further work needed to define approach to rural areas

Five Options for Spectrum Five Options for Spectrum Packaging (2)Packaging (2)Five Options for Spectrum Five Options for Spectrum Packaging (2)Packaging (2)

No sale at present

– reflect market sentiment

– wait until more spectrum is available Use for purpose other than FWA

No sale at present

– reflect market sentiment

– wait until more spectrum is available Use for purpose other than FWA

Stage 4 ModellingStage 4 ModellingStage 4 ModellingStage 4 Modelling

Model 3.4 GHz and 10 GHz separately increase granularity of modelling and

focus on a few likely scenarios, selecting those with combination of:– best business case– highest EV

look at impact of inclusion of rural areas, as well as effect of de-averaged pricing

look at impact of price declines

Model 3.4 GHz and 10 GHz separately increase granularity of modelling and

focus on a few likely scenarios, selecting those with combination of:– best business case– highest EV

look at impact of inclusion of rural areas, as well as effect of de-averaged pricing

look at impact of price declines

Ian JewittAward Process

The Process?The Process?The Process?The Process?

Variables under consideration are:– Licence Configurations– Means of Payment– Conditions on Licences– Method of Assignment

Variables under consideration are:– Licence Configurations– Means of Payment– Conditions on Licences– Method of Assignment

The Process? (II)The Process? (II)The Process? (II)The Process? (II)

Licence Configuration– National– Regional – Other

• Hotspots

• Critical mass

Licence Configuration– National– Regional – Other

• Hotspots

• Critical mass

The Process? (III)The Process? (III)The Process? (III)The Process? (III)

Means of Payment– Cash up front?– Annual fees?– Royalties?

Conditions on Licences– Roll out conditions?

• Penalties

• Credits

– Use-it-or-lose-it?

Means of Payment– Cash up front?– Annual fees?– Royalties?

Conditions on Licences– Roll out conditions?

• Penalties

• Credits

– Use-it-or-lose-it?

The Process? (IV)The Process? (IV)The Process? (IV)The Process? (IV)

Method of Assignment– Auction

• pre-qualification?

• sealed tender, ascending open ...

– Comparative Selection• criteria ...

– Hybrids• comparative selection with fee as one criteria

• incentives for roll out

– First-come-first-served (in rural areas?)

– Lottery

Method of Assignment– Auction

• pre-qualification?

• sealed tender, ascending open ...

– Comparative Selection• criteria ...

– Hybrids• comparative selection with fee as one criteria

• incentives for roll out

– First-come-first-served (in rural areas?)

– Lottery