Viability Assessment of 40GHz Fixed Wireless Access in the UK Market

1. Broadband Fixed Wireless Access 40GHz BFWACG(00)36Market and financial modelling Preliminary Findings Industry Consultative Group 14 July 2000

2. Contents • Background • 40GHz BFWA market • Market & financial assessment • Conclusions • Next steps

3. Study objectives The objective of this study has been to assess whether a market for 40GHz in the UK is viable. This has been carried out through: • consultation with operators, vendors and other interested parties • market modelling - estimating potential revenues from businesses and households at a detailed county level • financial modelling - to determine the extent that the overall 40GHz business will be profitable for operators

4. Conclusions from phase one INDUSTRY CONSULTATION • There is interest in the market • The 40GHz market appears to be broader than 28GHz with both business and residential segments and telecoms and broadcast services • Internet is expected to be the key revenue driver by most respondents and broadcast revenues also expected to be important • Butthe overall service composition appears uncertain • No respondent suggested delaying the licensing • There is still uncertainty about timing, equipment costs and when and if economies of scale will be achieved MARKET ASSESSMENT • Total revenues for 2004 were estimated (indicative only)

5. Contents • Background • 40GHz BFWA market • Market & financial assessment • Conclusions • Next steps

6. Market definition • The KPMG market assessment model assumes 40GHz BFWA will address the following: Characteristic 28GHz 40GHz Data rates > 64 kbps > 64 kbps Services voice, data (internet) voice, data (internet), Broadcast business and residential business - size: SMEs and medium to large corporates - size: focused on SMEs Target customers - region sub-urban and urban - region: sub-urban Availability Q1 2001 Q1 2002 Technology PMP PMP Geographic coverage UK UK Usage access only i.e. no backhaul access only i.e. no backhaul • Our market assessment also assumes: • that 40GHz provides complementary services to 28GHz i.e. does not take market share from 28GHz • the cell radii or reach of the two technologies are the same

7. BFWA addressable market Large • bandwidth • speed of roll-out • cost FIBRE • speed of roll-out • cost • availability • cost? 28GHz Medium BFWA Small • speed of roll-out • bandwidth • availability • cost 40GHz Very Small CABLE ADSL SATELLITE Residential Urban Suburban Rural

8. Contents • Background • 40GHz BFWA market • Market & financial assessment • Conclusions • Next steps

9. Market and financial model overview Residentialtelecoms model Business model Residentialbroadcast model • county • industry sector • size of business • SOHOs • county • household • county • household Level of analysis • coverage of fibre, cable, ADSL, BFWA & Satellite • potential market • market share • average business spend • coverage of ADSL, BFWA & cable • potential market - broadband telecoms • market share • average b’band internet spend • coverage of ADSL, BFWA, cable & DTT • potential market- pay TV pen. • market share • average pay TV spend Key inputs Outputs • number of business units • revenue per customer • average price • number of households • revenue per household • average price • number of households • revenue per household • average price Revenue per subscriber & Number of subscribers Financial model • capex e.g. base stations, CPE • opex e.g. marketing, core network, SGA • one-off costs e.g. launch • IRR analysis • sensitivity analysis • regional analysis Key inputs Outputs

10. Market model results

11. Market model base case results • substantial revenues projected for business telecoms market • SOHO telecoms market revenues significant • residential market revenues sizeable (broadcast and telecoms)

12. Financial model

13. Key changes to 28GHz methods • Broadcasting costs introduced e.g. server, head end, set top boxes and programming costs • New costs associated with residential customers e.g. launch costs • Increase in business capacity requirements from 2mbps to 4mbps • Base station expenditure increases

14. Results - medium market scenario • Business telecoms - profitable • Business and residential telecoms - marginally profitable • Business, residential and SOHO telecoms - positive IRR • Total telecoms residential broadcasting - negative IRR

15. Contents • Background • 40GHz BFWA market • Market & financial assessment • Conclusions • Next steps

16. Conclusions • Business telecoms appears to be a profitable market • The addition of SOHO and residential markets under both base and high case scenarios result in businesses where it appears difficult to realise significant profits, given current cost assumptions • The financial model results are highly sensitive to the costs of CPEs, base stations and launch. Equipment costs and base stations are especially uncertain

17. Contents • Background • 40GHz BFWA market • Market & financial assessment • Conclusions • Next steps

18. Next steps • Further sensitivity analysis • Discuss results with RA • Finalise results • Regional analysis