Award of 3.4 GHz and 10 GHz Licences

1. Award of 3.4 GHz and10 GHz Licences FWACC 13th December 2000

2. Steve Jones Introduction

3. Introduction • www.radio.gov.uk • 26th January 2001

4. James Kinsley Overview

5. 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

6. 11th December 20th September information memorandum 1 2 3 6-8 weeks 4-6 weeks Analysis Workshops 13th December Basic Programme steering group Analysis (Stage 2) Analysis (Stage 4) **Late February!** Industry group

7. Licence Scenarios • Look at a range of business cases 48 licence scenarios !! • Defined generic licence types • New and existing operators

8. Main Licence Scenarios x 6 City Regional National New Venture Existing operator

9. Main 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

10. Licence Scenarios • Defined generic licence types • New and existing operators • 4 cellular configurations

11. Licence Scenarios x 24 City Regional National A B C D A B C D A B C D New Venture A B C D A B C D A B C D Existing operator

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

13. Licence Scenarios x 48 City Regional National Basic Basic Basic A B C D A B C D A B C D New Venture “Lucky” “Lucky” “Lucky” Basic Basic Basic A B C D A B C D A B C D Existing operator “Lucky” “Lucky” “Lucky”

14. Preliminary Findings (1):Limiting 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

15. Preliminary Findings (2):Limiting 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

16. Preliminary Findings (3):City 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

17. Preliminary Findings (4):Cellular 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]

18. Preliminary Findings (4):New 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

19. Preliminary Findings (6):Licence 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….

20. Bérangère Mira-Smith Qualitative Market Research

21. Progress • 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

22. Industry Views: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

23. Industry Views:Overview of Access Technologies

24. Industry Views:Location 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

25. Industry Views: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

26. Industry Views: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

27. Industry View: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

28. Industry View: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

29. Industry Views:Auction 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

30. Nicholas Blades Market Scenarios

31. Market & 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

32. Model 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

33. FWA’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

34. Sensitivities • 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?

35. Nat - Sensitivity to Build Assumptions 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 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

36. Result 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

37. Abdul Ladak Infrastructure Rollout Cost Model

38. Stage 2 Work • Outline Planning and Dimensioning • Outline Design • Infrastructure and Rollout Costing • Radio Modelling • Further Work - Stage 4

39. Outline Planning and Dimensioning UK Footprint (1991 Census Data) 20,000 Sq. Km = 56% Population therefore reasonable to assume 40,000 Sq. Km = 70% Population

40. Capacity Planning Half Spectrum Full Spectrum F = 7 MHz (3.4 GHz) or 14 MHz (10 GHz) F = 3.5 MHz (3.4 GHz) or 7 MHz (10 GHz)

41. Cell Capacity Assuming: 4QAM or QPSK

42. Traffic and Services

43. Design Models

44. Subscribers

45. Outline Design ArchitectureDesign Model A

46. Outline Design ArchitectureDesign Models C and D

47. “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

48. Backhaul Proportions Normal Lucky Break

49. Radio Modelling - ITU-R 525/526/530 High Resolution (2m) 3D Data City Suburban Region 1 Suburban Region 2

50. Radio Coverage - City City Centre - Building Height = 100m 3.4 GHz 10 GHz