8/7/2019 Mobile Broadband Economics
1/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Understanding
The
Profitability Dynamicsof Mobile Data
London, 16 November 2009
Informa Telecoms & Media
Broadband Traffic Management Conference
Rewheel
8/7/2019 Mobile Broadband Economics
2/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Rewheel Who are we?
Leading specialists ofmobile datastrategy, profitability improvementand infrastructure sourcing
Founded in 2009, headquartered inFinland
Slide | 2www.rewheel.fi 2009 Rewheel
Earned the trust and satisfaction of leading industryplayers from Nordics, Western Europe, Central-Eastern
Europe, Middle East & Africa:
8/7/2019 Mobile Broadband Economics
3/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Costs associated with mobile data
Traffic and subscriber independent fixed costsSpectrum licence fees*
Initial coverage investments (with initial capacity)
Recurring yearly expenditures (OPEX) linked to coverage
Above The Line (ATL) marketing communicationsOther various technical and non-technical overheads that can beassociated with mobile data
Slide | 3www.rewheel.fi 2009 Rewheel
Non-network A&R costs: terminal subsidies, sales commissions, BTL
Busy Hour PDP context and Attached User capacity in PS Core network
Directly data traffic driven variable costsBusy Hour Throughput Capacity of Radio Access, Access Transmission,PS Core, PS backbone, Internet connectivity
Target of Bandwidth Management
* Except for certain markets having usage/carrier number based frequency fee components
8/7/2019 Mobile Broadband Economics
4/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Directly data traffic driven costs
Capacity upgradesCAPEX
Pay as you grow
Radio, Access Transmission, PS Core, PS Backbone
Incremental earl ex enditures
Slide | 4www.rewheel.fi 2009 Rewheel
OPEXVendor support & maintenance proportional to capacity
Vendor software release upgrades (e.g. yearly) - CAPEX
Leased line fees proportional to capacity
Electricity costs related to capacity (more base station hardware
consumes more)
8/7/2019 Mobile Broadband Economics
5/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
The initially under-utilised network capacities are nowsaturating. The primary driver of MBB production costswill be the CAPEX&OPEX for incremental network
capacity
ive3GNe
twork
CAPEX
RNCcapacity,ChannelElements
NodeBBaseband
PS Core,2nd WCDMA
CarriersRAN
Softwareversionupgrade
3rd WCDMACarriers
CapacityCAPEX
Slide | 5www.rewheel.fi 2009 Rewheel 2009 Rewheel
The initial 3G network configuration can accomodate a certain number of data subscribers without signiciantincremental capacity related expenditures. But soon additional CAPEX and OPEX will need to be spent for
every single subscriber added on the network, representing a major share of overall MBB producion costs.
Cumula
t
2007 2008 2009 2010 2011 2012
config,installation,
etc
o es
Backhaul
CoverageCAPEX
* Source Rewheel
one-off networkcapacity CAPEX of
adding a5GB/month user can
exceed 500 *
8/7/2019 Mobile Broadband Economics
6/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Capturing marginal production costs
Incremental CAPEX[Paid one-off for upgrading the capacity]
Networkcosts
CAPEXDriven by change
in traffic level
Slide | 6www.rewheel.fi
After the inital network capacities are saturated, the growth of traffic will trigger substantialincremental CAPEX and increasing yearly OPEX. The CAPEX is driven by the change (growth)
of traffic demand, while the yearly (recurring) OPEX is driven by the actual traffic level.
Capacity
Increase in yearly OPEX[Permanent OPEX level increase]
Network capacityexpressed e.g. as traffic volumetransported in the busy hourat a certain user experience level
OPEXDriven bytraffic level
8/7/2019 Mobile Broadband Economics
7/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Production cost of MBB highly depends on networkcapacity costs which are determined by many factors
Radio network density
Average cell capacity
Traffic geo-distribution
Radio network technology
HSDPA, HSPA, HSPA+, LTE
Access Transmission Technology
E1 or IP?Self built or leased?
Vendor platforms
HW ready for large capacity?
HW expansion needed when traffic grows?
Unitar vendor rices
?
ARPU/Month
Slide | 7www.rewheel.fi 2009 Rewheel
Production costs directly depend on the targeted user experience. If operator decides to delayadding extra capacity, marginal production costs can be squeezed down dramatically. The
question is, until what point will the market tolerate the degrading broadband experience.
HW and SW Licence pricesSW upgrade prices
Support & Maintenance costs
Vendor pricing mechanisms
Pay (or Pray?) As You Grow?
Or software licences disconnected from traffic?
Target User QoS
1 Mbit/s vs 3 Mbit/s per user in the busy hour?
Or Best effort?
USAGE (MB/Month)
* Directly traffic driven variable network costs
8/7/2019 Mobile Broadband Economics
8/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
How much network cost does a data subscribertrigger?
ctlyDataTraffic
PEX&OP
EXper
bscriber
When adding asubscriber, the network
capacity needs to be
upgraded according toits data usage
Every year incremental
CAPEX needs to be
spent to keep up with
the subscirbers usage
increase
Network CAPEX
investments often
trigger recurringincremental operational
expenditures (e.g.
support fees)
OPEX
CAPEX
Slide | 8www.rewheel.fi 2009 Rewheel
A single /Mbyte cannot adequately capture the cash implications of incremental data trafficon the network. The only way to frame the true cost dynamics is breaking down the high level
/Mbyte cost benchmark to one-off and recurring cost components.
YearlyDir
DrivenC
S
Year1 Year2 Year3 Year4 Year5 Year6
8/7/2019 Mobile Broadband Economics
9/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
"How Much Does a Subscriber Cost?" - CASH View - Per YearDirect CAPEX+OPEX triggered by a subscriber added in first year.
Including acquisition costs in first year, excluding retention costs in
subsequent years.
Smart phones
Low usage handhelds
Different mobile data subscriber segments can havevery different production costs
20% subscriber usagegrowth per year
Slide | 9www.rewheel.fi
Years
Cas
Mobile broadband bunded with fixed
Complementary connections
Substitutive
First time broadband
2009 Rewheel
The first year of typical PC connectivity user is characterised by heavy incremental networkcapacity investments and significant subscriber acquisition costs (sales commissions +
dongle/netbook/laptop subsidy)
8/7/2019 Mobile Broadband Economics
10/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Operarors can live with temporarily losing moneyon mobile broadband susb acquisitions
Cumulative Cash Flow per Subscriber Added in first year
Including terminal subsidy and sales commission in first year. Excluding
retention costs in subsequent years.
low
Smart phones
Low usage handhelds
20% subscriber usagegrowth per year
Slide | 10www.rewheel.fi 2009 Rewheel
The CAPEX intensive nature of MBB turns the PC connectivity (heavier usage) subscriber cashflow negative in the 1st year. Operators accept to pay this price for gripping the long term
potential in mobile data.
Years
Cas
h
Mobile broadband bunded with fixed
Complementary connections
Substitutive
First time broadband
8/7/2019 Mobile Broadband Economics
11/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Segment Level Cumulative Cash Flow from New Additions from the first
year on Existing Coverage Areas
Including terminal subsidy and sales commission
low
Smart phones
Low usage handhelds
But considering the overall segment level cash flowcontribution the outlook becomes grim
20% subscriber usagegrowth per year
Slide | 11www.rewheel.fi
Years
Cashf
Mobile broadband bunded with fixed
Complementary connections
Substitutive
First time broadband
2009 Rewheel
While on subscriber level the cumulative cash flow turns positive in the 2nd year, this is notnecessarily true for the entire segement. Every year more money needs to be spent in capacity
upgrades an A&R expenditures than the cash generated by subs added in earlier years.
8/7/2019 Mobile Broadband Economics
12/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Segment level cash flow is extremely sensitive toaverage usage per subs
hflow
hflow
hflow
10% subscriber usagegrowth per year
20% subscriber usagegrowth per year
30% subscriber usagegrowth per year
Slide | 12www.rewheel.fi 2009 Rewheel
The uncertainty of future demand of mobile data subscribers poses an enrmous profitabilityrisk for the operatos. In reality, operators will not afford to invest the required cash which
means the network congestion will dramatically degrade broadband user experience.
Years
C
as
Years
C
as
Years
C
as
8/7/2019 Mobile Broadband Economics
13/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
w
Segment Level Cumulative Cash Flow from New Additions from the first
year on Existing Coverage Areas
Including terminal subsidy and sales commission
ow
Smart phones
Low usage handhelds
Excluding A&R, CF turns acceptable
20% subscriber usagegrowth per year
Slide | 13www.rewheel.fi
Years
Cash
fl
Years
Cas
hfl
Mobile broadband bunded with fixed
Complementary connections
Substitutive
First time broadband
2009 Rewheel
Combining the low margin, CAPEX intensive MBB business with extensive terminal subsidiesmay not be sustainable in the long run. Excluding acquisition & retention the picture looks
much nicer.
No subsidiesand salescommissions
8/7/2019 Mobile Broadband Economics
14/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
ashflow
ashflow
Manage cash flow by under investing in capacity?
1-2 Mbits/s 2-4 Mbits/s
Slide | 14www.rewheel.fi
Years
C
Years
C
2009 Rewheel
Positioning mobile broadband as a credible substitutive alternative to fixed (DSL or cable)broadband will require QoS of 3-4 Mbit/s in the medium term. Operators may choose to offer
lower user experience but by doing that they will run the risk of losing markets share.
8/7/2019 Mobile Broadband Economics
15/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Some operators still tend to play down the severityof the capacity crunch
Argument The truth
Only very few base stations have reached their capacitylimits, most of them are running on very low utilisation. Sothere is still plenty of room for traffic growth withoutsignificant incremental network costs
Engineers are gradually adding hardware boards and heftysoftware licences to the majority of base stations. Thiskeeps the utilisation metric under control, while the datacapacity related expenditures take more and more share ofthe CTOs budget
Many central network elements are priced on a pay as yougrow basis. This means that incremental CAPEX needs tobe paid to the vendor for every additional Mbit/s peakcapacity, even if the base stations are under-utilised
So far there is no sign that the exponential traffic growthwould hurt o erators CAPEX to Sales ratios or rofitabilit
Most operators have been under-investing in capacity andstarted to cut non network ca acit related costs such as
Slide | 15www.rewheel.fi 2009 Rewheel
KPIs like EBITDA & EBIT
3G coverage expansions, salaries ...). Thus the top level
financial KPIs can hide the fundamental economicalunsustainabilites unfolding below the surface
Many operators have been under-investing in capacitywhich is becoming apparent in recent customer satisfactionsurveys
The usage of normal users can be served in a profitableway. Manage bandwidth usage of heavy users and the
problem is solved
The share of data volume generated by heavy (p2p) usersis declining. Video usage (e.g. Youtube) is becoming
mainstream pushing average usage of normal mobilebroadband subscribers to 5+ GB.
8/7/2019 Mobile Broadband Economics
16/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Technology black magic to maintain dataprofitability
Technology evolution step Promised benefits The truth
3.6, 7.2, 21, 42 Mbps HSPA HSPA evolution will multiply cell capacityby means of simple software upgradethus driving down production costs Peak speed Cell capacity
Throughput improvement can be
achieved only in very good radioconditions
Average cell capacity improvement willbe as low as 10-25% percent (steppingfrom 7.2 to 21Mbps peak speed)
These features have a hefty price, often
Slide | 16www.rewheel.fi 2009 Rewheel
linked to the aggregate network
throughput (!)
HSPA+ MIMO MIMO technolgy nearly doubles spectralefficiency, reducing production costs
The number of base station radio units(most expensive hw) needs to bedoubled to enable MIMO. Thus costsaving is minimal
Sectorisation By adding more sectors, the existingspecturm can be reused, delaying newspectrum acquisition
Adding a new sector means buyingexpensive radio units into the basestations
New frequencies (2nd carrier) can beswitched on without buying additionalspectrum
No need for new spectrum in the next 2-3 years
True, but base station vendors ask ahefty price for so called carrier upgrades(either software or hardware)
LTE Cost/MB will be significantly less due tohigher spectral efficiency
Cost/MB is primarily determined by thevendors pricing mechanism and notspectral efficiency. As GSM and UMTSequipment sales decline, vendors will beforced to milk operators when they
upgrade to LTE
8/7/2019 Mobile Broadband Economics
17/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Key takeaways
Serious economic unsustainability unfolding below the surface
Co-ordinated actions required on technology, supply chain andcommercial fronts
Technology Supply Chain Commercial
Proactively upgrade capacityto prevent degradation ofbroadband experience
Negotiate sustainableinfrastructure pricingmechanisms (preventingpray as you growsituations
Map out traffic demand andidentify minimum networkquality KPIs required tosatisfy expectations of massmarket
CapacityInvestments
Slide | 17www.rewheel.fi 2009 Rewheel
Deploy performance andcapacity improvementfeatures and invest inplatform modernisations
Negotiate reasonable featurepricing mechanisms based onstrict cost/benefit appraisal
Maximise positive brandimpact of technology featuresby smart marketingcommunicattions
Deploy bandwidthmanagement capabilities
Before restricting end usertraffic, push infra vendors forGigabyte-ready capacitypricing mechanisms
Prevent massive customerturn-off due to overdegrading user experience(e.g. throttling speed tooearly or too much)
Deploy techology featuresnecessary for differentiatedtreatment of different marketsegments
Ensure that the cost of suchfeatures is in-line with theassociated economic benefits
Maximise ARPU bysegmented mobile datapropositions
Reconsider level of terminalsubsidies
TechnologyEvolution
UsageControl
CustomerSegmentation
8/7/2019 Mobile Broadband Economics
18/18
RewheelTM
Strategy Delivered
RewheelTM
Strategy Delivered
Thank you
check our mobile data
profitability insights at
Slide | 18www.rewheel.fi 2009 Rewheel
insights.rewheel.fi