The digital dividend Allocating 700MHz spectrum to mobile operators
Stefan Zehle, CEO, Coleago
Consulting Ltd
June 2013
1 About Coleago Consulting
2 The APT band plan
3 The LTE handset eco-system
4 Auctioning 700MHz spectrum
Agenda
© Copyright Coleago 2013
2
A specialist telecoms management
consulting firm
About Coleago Consulting
© Copyright Coleago 2013
3
Coleago offers specialist advisory services to the
telecoms industry
© Copyright Coleago 2013
4
Spectrum
Valuation and
Auctions
Marketing &
Customer
Management
Interconnect &
Accounting
Separation
Business
Transformation &
Cost Reduction
Strategy and
Business
Planning
Improving
Network
Performance
Due Diligence Digital Content &
Media
Training
Coleago offers experience based consulting
Strategy projects require the
highest levels of expertise and
experience
Our projects are only delivered by
industry professionals with at least
15 years experience and many with
over 20 years, often at CxO level
We do not employ any juniors or
analysts
5
Traditional
Consulting
Firm Model
Junior Consultant
Senior Consultant
Manager
Senior
Manager
s
Partne
r
Analyst
Coleago’s consultants are experts in strategic
planning
Business texts written by the founders
of Coleago Guide to Business Planning
named Outstanding Academic
Title
Authored by Graham Friend and
Stefan Zehle - two directors of
Coleago,
Named as one of the
"Outstanding Academic Titles,
2009 (Business and
Economics)" by Choice, the US
academic review journal.
Source: Choice
www.lib.uwo.ca/news/business/2009/12/23/out
standingacademictitles2009businesseconomics
.html
6
© Copyright Coleago 2013
We offer a range of innovative telecoms training
courses
The Mini
Telecoms
MBA
War Gaming &
The Dragons‘
Apprentice &
Coaching
Finance for
Non-Financial
Managers
Regulatory
Courses
Investment
Appraisal &
Excel
Modelling
7
© Copyright Coleago 2013
The APT band plan adds a significant
amount of sub-1GHz spectrum
The APT band plan
© Copyright Coleago 2013
8
APT 700MHz FDD Band 28 and TDD Band 44
© Copyright Coleago 2013
9
703 – 748 MHz 758 – 803 MHz
FDD Mode – 3GPP Band 28
45 MHz 45 MHz
703 – 803 MHz
TDD Mode – 3GPP Band 44
100 MHz
The FDD band plan appears to be preferred
© Copyright Coleago 2013
10
Latin America:
Widespread
FDD adoption
APT FDD
auction:
Australia in Feb
‘13, New
Zealand in Q4
2013
China: TDD
adoption
planned but not
finalised
India: March
13, APT FDD
adopted
Japan: APT FDD
allocated in
2012
Middle East &
Africa: Interest
in APT FDD
Other digital dividend band plans
© Copyright Coleago 2013
11
USA, Canada and
Caribbean
Europe
US 700MHz band plan which consists
of 3GPP bands 12, 13, 14, 17
3GPP Band 20
Russia Non-3GPP 2x30MHz 700MHz FDD
How not to do it: The US 700MHz band plan
© Copyright Coleago 2013
12
A B C D E A B C C DPS
BB
PC
NBC D
PS
BB
PC
NB
6 6 6 6 6 6 6 6 11 5 5 6 11 5 5 6
Mobile Tx TDD Base TX Base Tx Base Tx Mobile Tx Mobile Tx
69
8M
Hz
71
6 M
Hz
72
8 M
Hz
74
6 M
Hz
75
6 M
Hz
76
8 M
Hz
77
7 M
Hz
78
8 M
Hz
79
8 M
Hz
8-6
MH
z
Band 12
Band 17
Band 13 Band 13 Band 13 Band 13Band 12
Band 17
Lower 700 Upper 700
Early adoption: incorporated in all LTE handsets sold in North America
Technology barriers to competition due to what are in effect the
operator proprietary band 17 (AT&T) and band 13 (Verizon)
Inefficient use of spectrum, today only 2x20MHz usable vs. 2x45 for
APT
Europe: Only 2x30MHz available in band 20
Allocated in a number of European countries
Handsets with band 20 are sold since 2012
2x30MHz allocation poses problems in four player markets
© Copyright Coleago 2013
13
791 – 821 MHz 832 – 862 MHz
3GPP Band 20
30 MHz 30 MHz
Russia: Could it still move to APT?
The 2x30MHz 700MHz band plan is not harmonised
Close to the 700MHz APT band plan apart from mobile
transmit
© Copyright Coleago 2013
14
Mobile
Transmit
Centre Gap Mobile
Receive
Russia 720 MHz to 750
MHz = 30 MHz
750 MHz to
761 MHz
761 MHz to
791 MHz = 30
MHz
APT Band
Plan
703 MHz to 748
MHz = 45 MHz
748 MHz to
758 MHz
758 MHz to
803 MHz = 45
MHz
Middle East and Africa
United Arab Emirates adopted the APT band plan in May
2013, but using only part of the band
The UAE is adopting the 2 x 30 MHz channel plan for the
700 MHz band, consisting of 703–733 MHz (uplink) paired
with 758 – 788 MHz (downlink).
Considerable interest in APT band plan in Africa.
© Copyright Coleago 2013
15
LTE band combinations matter
The LTE handset eco-system
© Copyright Coleago 2013
16
Chipsets are not the problem, band combinations are
Qualcom’s RF360 mobile chip announced at the MWC
this year, supports:
– LTE-FDD, LTE-TDD, WCDMA, EV-DO, CDMA 1x,
TD-SCDMA and GSM / EDGE
– In 40 different LTE bands
However, this does not mean that all will be available
in a single handset.
– Handset manufacturers and operators have to make
choices
– Today the number of LTE bands that can be
switched on is limited to 6 bands
© Copyright Coleago 2013
17
What matters are band combinations within in a
region
The 3GPP bands used in Region 2 and Region 3 are not the
same
Region 2 devices will not sell in Region 3
Region 3 has to generate its own economies of scale
© Copyright Coleago 2013
18
Key LTE candidate bands differ between Regions 2
and 3
Region 3 – Asia & Australia
FDD
Band 1 (2100 MHz)
Band 3 (1800 MHz)
Band 5 (850 MHz)
Band 7 (2600 MHz)
Band 8 (900 MHz)
Band 28 (APT 700M Hz)
TDD
Band 34/a & Band 39/f
Band 40 (3.5 GHz)
Band 28 (3.6 GHz)
Band 44 (APT 700 MHz)
Region 2 – South America
FDD
Band 2 (1900 MHz)
Band 5 (850 MHz)
Band 7 (2600 MHz)
Band 10 (ext. AWS / 3G Americas)
Band 25 (E1900 MHz)
Band 26 (E850 MHz U)
Band 27 (E850 MHz L)
Band 28 (APT 700 MHz)
© Copyright Coleago 2013
19
Band combinations in devices are market specific
Samsung GALAXY S4
2.5G (GSM/ GPRS/ EDGE): 850 /
900 / 1800 / 1900 MHz
3G (HSPA+ 42Mbps): 850 / 900 /
1900 / 2100 MHz
4G (LTE Cat 3 100/50Mbps): up to
6 different band sets (dependent
on market)
© Copyright Coleago 2013
20
VoLTE is an important element of the APT band plan
Today LTE does not support voice
and requires CFSB.
700MHz is useful for rural coverage
but without CSFB also requires
presence of 900MHz GSM / HSPA
in the RAN.
Handset native CSFB will be
available in early / mid 2014, i.e. in
about the same time frame as
handsets with APT 700MHz.
Rural coverage could be build with
700MHz LTE only, but cost of LTE
handsets may be a challenge in the
short term.
© Copyright Coleago 2013
21
Band aggregation adds further complexity
LTE band aggregation is already
available. The benefits are:
– High maximum potential speeds
– Some capacity gains through
trunking efficiency
Which bands are aggregated and
when is driven by regional market
demand.
700MHz APT aggregation roadmap
is yet to be defined.
© Copyright Coleago 2013
22
70
0 M
Hz
700 M
Hz
2.6
GH
z
Mb
ps
Technology maker or technology taker?
Technology makers
Large markets are technology
makers.
Volumes are large enough to
specify handsets with the
desired band combinations
Large operators can create
their own device eco-system,
such as AT&T, Verizon, China
Mobile
Technology takers
Most countries fall into this
category.
The best strategy is to observe
developments and be a fast
follower.
Produces the benefits of new
bands and technology as early
as possible
Allows consumers to benefit
from scale economies
generated in larger markets
© Copyright Coleago 2013
23
Regulators should time an spectrum allocation or auction process
accordingly, be ready to start the process but avoid rushing ahead.
Issues for spectrum auctions and
other allocation mechanisms
Auctioning 700MHz spectrum
© Copyright Coleago 2013
24
Sources of spectrum value
© Copyright Coleago 2013
25
In-building
coverage
Relevant for low band spectrum, more
consistent coverage
Geographic
coverage
Cost effective LTE coverage in low
density areas
Blocking
value
Block other operator from acquiring
spectrum
Capacity More capacity result in a better user
experience
Headline
speed claim
Maximum speeds which can be
advertised
Site-build
avoidance
Cheaper geographic coverage with sub 1-
GHz bands and avoid site densification
Technology
migration
Relevant for migration to LTE, particularly
from HSPA
Key value of
700MHz
Policy objectives and implications for 700MHz LTE
© Copyright Coleago 2013
26
Access to
mobile
broadband
Affordable
mobile
broadband
LTE deployed in as many
bands as possible to use
spectrum efficiently
Rural LTE coverage
LTE lowers the cost per
bit, but only if devices can
use it
Harmonised devices with
multiple LTE bands
Competition
in urban
and rural
Allocate spectrum to
multiple operators
Avoid technology barriers
to competition
Consider the 700MHz
band plan choice and
allocation of spectrum
in the context of a)
current spectrum
holdings in all bands
and b) technology
deployment within
these bands.
The rationale for freeing up the 700MHz spectrum
The economic benefits of
freeing up spectrum for mobile
broadband are well
documented.
The cost of moving TV
broadcast is more than offset by
the economic gain that would be
generated if the spectrum is
used for mobile broadband.
Part of the incremental
economic gains comes from
lower prices for consumers.
Potential gains run into $
billions, i.e. are measured in %
of GDP.
This implies that the spectrum is
actually used.
Implies that operators can
deploy 700MHz LTE cost
effectively
Implies competition to drive
down prices © Copyright Coleago 2013
27
The Australian APT 700MHz auction in this context
Potential gains?
Is the spectrum is actually
used?
Can operators deploy the
700MHz band as cost
effectively?
Is there competition to drive
down prices?
Between AU$ 7bn and
AU$10bn
2x15MHz of 2x45 unsold
Only Telstra obtained 2x20MHz,
can deploy at lowest cost,
Optus obtained only 2x10MHz
One operator, Vodafone, did not
obtain any spectrum and the
leading operator Telstra
increased its competitive
advantage, thus reducing
competition © Copyright Coleago 2013
28
700/800MHz auction prices paid vs. Australian
reserve
© Copyright Coleago 2013
29
1.28
0.91
0.58
0.49
0.81
0.56
0.88
0.37
0.65
0.73
1.35
- 0.20 0.40 0.60 0.80 1.00 1.20 1.40
USA - 2/2008
Germany - 5/2010
Sweden - 3/2011
Spain - 7/2011
Italy - 9/2011
Portugal - 12/2011
France - 12/2011
Denmark - 6/2012
UK - 2/2013
Average 700/800MHz
Australia Reserve…
US$ / MHz / Pop
700/800MHz auction reserve prices compared
© Copyright Coleago 2013
30
0.00
0.09
0.13
0.25
0.30
0.30
0.32
0.49
0.47
0.56
0.60
0.80
1.35
- 0.1
0
0.2
0
0.3
0
0.4
0
0.5
0
0.6
0
0.7
0
0.8
0
0.9
0
1.0
0
1.1
0
1.2
0
1.3
0
1.4
0
Germany - 5/2010
Netherlands - 12/2012
Denmark - 6/2012
Sweden - 3/2011
UK - 2/2013
Switzerland - 2/2012
Finland - Q4/2013
Spain - 7/2011
Canada - Q4/2013
Portugal - 12/2011
France - 12/2011
Italy - 9/2011
Australia - 5/2013
US$ / MHz / Pop
Lessons learned from the Australian 700MHz auction
High reserve prices are not a good
approach to spectrum auctions
They have a market distorting effect
Regulators might do not achieve
their policy objectives
Even if a large amount of money is
raised up-front this may reduce
overall economic value in the long
term
© Copyright Coleago 2013
31
Considerations for spectrum auction rules
© Copyright Coleago 2013
32
Market
competitiveness
Policy objectives
Existing total
spectrum
holdings
RAN sharing
Sub-1 GHz
spectrum
holdings
Demand for
Spectrum Number of
operators in a market
Supply of Spectrum
2x45 MHz of 700MHz
spectrum
Allocation / auction
design
Case study New Zealand
Two established operators
Vodafone and Telecom NZ
Over 40% revenue market share
each
Wide coverage
Cash flow positive
Recent new entrant 2degrees
Still limited coverage
Cash flow negative
Inferior spectrum holdings
12% revenue market share
New market entry
Considered unlikely
© Copyright Coleago 2013
33
New Zealand
4.2 million pops
Low population
density
High cost of
coverage
Policy objectives, auction rules, and reserve prices
Policy objectives
Raise money from the auction
Maintain effective competition with
a three player market
Rural broadband coverage
Reserve prices for spectrum
Vodafone and Telecom NZ can pay
out of cash flow
2degree needs to raise finance
Resulting auction rule
Proposed spectrum cap of
2x15MHz
In theory each operator obtains an
equal share of 700MHz spectrum
If high reserve prices are set
Would affect 2degrees
disproportionally because 2degrees
may not be able to afford 2x15MHz
Potential outcome: 2degrees
obtains 2x10MHz, one operator
2x20 and one operator 2x15MHz © Copyright Coleago 2013
34
For LTE wide spectrum allocations are preferable
© Copyright Coleago 2013
35
LTE deployment cost and spectral
efficiency considerations
For LTE wide band allocations have
advantages.
An LTE eNodeB costs the same
regardless of the amount of
spectrum deployed
Deploying 2x5 MHz costs the
nearly same as deploying 2x20MHz
A wider band provides slightly
better throughput per MHz of
spectrum
Cost
per
MH
z d
eplo
yed
2x5 2x10 2x15 2x20
Spectrum allocated to one
operator
Economics of Deploying LTE
Effect of uneven spectrum allocation
© Copyright Coleago 2013
36
2degrees Vodafone or Telecom
NZ
2x10 MHz 2x20MHz
$ 4k per MHz deployed $ 2k per MHz deployed
75 Mbps 150 Mbps
Competitive imbalance increased
Potential
auction outcome
Cost to deploy
eNodeB $80k
Access speed
claim
The societal value of allocating 700MHz spectrum
The return to the community from
spectrum auctions goes well
beyond any direct payment made to
government for spectrum.
Implicitly all governments recognise
the trade-off between spectrum
fees and wider goals.
Otherwise they would simply
auction off monopolies which would
undoubtedly bring the highest direct
receipts.
© Copyright Coleago 2013
37
Unfettered spectrum auctions are problematic
“In short, to maximise consumer
welfare, spectrum allocation should
avoid being distracted by side
issues like government licence
revenues.”
“[T]he ratio of social gains [is of] the
order of 240-to-1 in favour of
services over licence
revenues…Delicate adjustments
that seek to juice auction receipts
but which also alter competitive
forces in wireless operating
markets are inherently risky. A
policy that has an enormous impact
in increasing licence revenues need
impose only tiny proportional costs
in output markets to undermine its
social utility.”
Hazlett and Munoz, “What Really Matters in
Spectrum Allocation Design”, 2010
© Copyright Coleago 2013
38
Competition is now the main concern in auction
design
Wireless markets are mature. At the
maturity stage of the industry life
cycle we can expect consolidation
but not new market entry, at least at
network level.
Ensuring competitive markets with
the existing number of operators
becomes a policy goal.
“In a highly concentrated industry
with large margins between price
and incremental cost of existing
wireless broadband services, the
value of keeping spectrum out of
competitors’ hands could be very
high”. Submission of the United States
Department of Justice before the Federal
Communications Commission (April 11,
2013)
© Copyright Coleago 2013
39
Competition considerations in 700MHz auctions
Low band spectrum holdings
confer particular competitive
advantage
APT 700MHz spectrum is the only
near term solution for sub-1GHz
LTE in a reasonably wide band
Allocate spectrum in a manner
which does reduce competition
while at the same time maximising
the benefit of a wide band
In 700MHz spectrum auctions
spectrum floors and caps may be
appropriate
Consider taking all sub-1 GHz
spectrum into account © Copyright Coleago 2013
40
Key take aways
Summary
© Copyright Coleago 2013
41
Key take aways
The APT band plan is being widely adopted.
The 2x45MHz allocation adds a significant amount of rare low band
spectrum.
For Asia, the region 3 handset eco-system matters, not Latin America, and
handsets with 700MHz APT will only become available in mid 2014.
Most countries are too small to be technology makers, i.e. they are
technology takers.
Regulators should time an spectrum allocation or auction process
accordingly, be ready to start the process but avoid rushing ahead.
The impact on competition has emerged as a key concern in 700MHz
spectrum auction design.
High reserve prices are likely to reduce the societal value of the digital
dividend spectrum.
© Copyright Coleago 2013
42