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Award of 3.4 GHz and 10 GHz Licences

Award of 3.4 GHz and 10 GHz Licences. Fixed Wireless Access Consultative Committee 25th October 2000. Steve Jones Radiocommunications Agency Introduction. James Kinsley WS Atkins Management Consultants Overview. Today……. Overview of Progress to Date…. Markets/Revenue Technical/Costs

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Award of 3.4 GHz and 10 GHz Licences

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  1. Award of 3.4 GHz and10 GHz Licences Fixed Wireless Access Consultative Committee 25th October 2000

  2. Steve Jones Radiocommunications Agency Introduction

  3. James Kinsley WS Atkins Management Consultants Overview

  4. Today……. • Overview of Progress to Date…. • Markets/Revenue • Technical/Costs • Financial/Valuation • Economic

  5. 20th November 20th September information memorandum 1 2 3 6-8 weeks 4-6 weeks Analysis Workshops Basic Programme steering group Analysis (Stage 2) Analysis (Stage 4) **Late February!** industry group

  6. Policy Qualitative Market Research Market Modelling Economic Analysis Cost Modelling Financial Modelling Analysis overview

  7. Bérangère Mira-Smith WS Atkins Management Consultants Qualitative Market Research

  8. Purpose of the QMR • Consult with industry to: • Gather market intelligence • Test the assumptions made by the team • Inform the modelling exercise

  9. Progress to date • Contacted 30 companies • 13 companies have been interviewed so far, including: • Operators BT, Firstmark, NTL, Atlantic, Tele2, Energis, FORMUS. • Consultants Albera Networks • Manufacturers Lucent, Ericsson, Airspan, Harris Microwave, European Antennas

  10. Looking forward • We are planning to carry out further interviews in Stage 2 • Interview players in the banking world

  11. Industry Views:Services and target market • Operators are planning to provide: • Always On link to the Internet • Voice telephony • Market share expectations 10-15% • The principal target markets are: • SMEs • SOHOs • Residential market

  12. Industry Views:Overview of Access Technologies

  13. 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

  14. Industry Views:Operators’ strategies (1) • The spectrum will be complementary to existing portfolio • e.g ASDL • Other spectrum e.g at 28GHz or 2GHz • To support overall strategy “Do not put all your eggs in one basket” e.g Fibre,ULL

  15. Industry Views:Operators’ strategies (2) • Rollout approach will : • start from existing points of presence • go where demand/population density is high • go where competition is not strong

  16. Industry View:Regulatory & licensing matters (1) • Most operators would prefer a national licence • Regional licences would be wasteful • The amount of spectrum can only really support one licence holder • Licence duration needs to be 15-20 years

  17. 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

  18. Industry Views:Auction vs Comp. Selection • Comparative selection is the preferred award mechanism • auctions are clear cut, but take money out of the industry • comparative selection has the means to ensure that the licence will be used

  19. Nick Blades Schema Market Modelling

  20. Market & Revenue Model Objectives addressable market sizing based on three geographic areas cities : nine UK cities modelled as one whole regional : remaining UK coverage assumptions consistent with cost model revenues generated telephony, Internet access & value added strategies : new venture vs existing operator

  21. Scenarios • Cities • 9 demographic profiles • cities have cost structures which differ from those in regions • level of competition in access is markedly different to that in regions • Regions • n x demographic profile • modelled as one for Stage 2 • lower subscriber density • lower competition in access • significant backhaul costs

  22. Geo-demographics • Demographic profiles by postal code • business sites • site size (number of employees) • industry sector • residential • lifestyle categories • National data on spend by subscriber type

  23. 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

  24. Market for Broadband Services • Schema forecasts a supply shortfall of 3 million by 2010 • FWA model predicts a reduction in this shortfall

  25. Universal High-Speed Internet? • Rural areas • 26.6% of subscribers • 83.3% of land area • 33.7 subs / km2 • Other cities, towns and suburbs • 55% of subscribers • 15% of land area • 390 subs / km2 • 9 top cities • 18.4% of subscribers • 1.7% of land area • 1,140 subs / km2

  26. Next Steps In Stage 4 evaluate cities individually generate revenues by regions if required test sensitivities in concert with cost model rollout plans market share assumptions price competition impact on subscribers, revenues & profits feed into socio-economic benefit analysis

  27. Abdul Ladak WS Atkins Telecommunications Infrastructure Rollout Cost Model

  28. Progress • Technical Review • Consultations with Industry • Cost Model - First Pass • Coverage and Propagation • Spectrum and Capacity • Implementation

  29. Cost Model Structure

  30. Cell Radius Assumptions

  31. Coverage and Line of Sight Assumptions

  32. Propagation Indications • Extensive engineering • Even more so at 10 GHz • Propagation modelling essential • Selective subscriber targeting

  33. Spectrum 3.4 GHz

  34. Spectrum 10 GHz

  35. Spectrum Capacity

  36. Cell Structure and Spectrum Reuse

  37. National Capacity - Example Assume: 50% of 250,000 Sq Km 625 x 8 Km Cells 4QAM Modulation Spectrum Reused 150 times 3.4 GHz and 10 GHz Combined Capacity = 21 Gbps Contention Ratio 20:1 ‘Virtual’ Capacity = 420 Gbps

  38. Services 3.4 and 10 GHz 3.4 GHz • 16, 32 and 64 Kbps telephony • 56 Kbps modem connectivity • 2B+D ISDN • 64 and 128 Kbps leased lines • 128 and 512 Kbps packet data 10 GHz • Fraction E1 • 2 x 2 Mbps with higher burst rates

  39. Implementation • Sites are getting difficult to identify and acquire • GSM growth, UMTS and BFWA impact • Long planning permission timescales • Major cost factor for building infrastructure - rents are high • Cost model is based on a mix of leased lines, microwave backhaul links and dark fibre lease • PoPs and Switching sites included • Rollout - 150 sites per year is optimistic

  40. Current Work: Refine Cost Model • Propagation modelling - typical scenarios • Using high resolution databases (if available) • Test and verify assumptions • Outline planning and design • Interference and co-ordination

  41. Saule Zhonkebayeva WS Atkins Management Consultants Financial Modelling

  42. Purpose of the financial model • Examine under what conditions, operators of FWA licences will have a viable business (Stage 2) • Evaluate sensitivity of the return to investors to licence fee (Stage 2) • Assess the sensitivity of the return to investors to other factors such as tariffs, sales volumes, operating costs and capital costs (Stage 4)

  43. Financial Modelling Revenues MARKET RESEARCH Sales volume Sales prices Debtor days Creditor days TECHNICAL ANALYSIS Stock days Capital costs Operating costs FINANCING Loan repayment term Loan interest rates Interest on cash balance FORECAST FINANCIALSTATEMENTS Profit & loss account Balance sheet Sources & application of funds Cash flow Working capital VALUATION MODEL

  44. High Level Financial Outcomes City Regional National • Economies of scale • Profitable? • High ARPU* • Med CPU* • Profitable? • Low ARPU* • High CPU* • Profitable? New Venture • High ARPU* • Low CPU* • Profitable? • Low ARPU* • High CPU* • Profitable? • Economies of scale • Profitable? Existing operator ARPU : Average Revenue Per User CPU : Cost Per User

  45. Licence term 15 years IRR 20% Inflation 2.5 % (+1.9 average Earnings index) Working Capital Debtors/Creditors -30 days, Stock 0 Tax allowance Capital allowance on equipment (25%) Financial Model Assumptions

  46. Financing D/E - 60/40 IR - 9-10% (incl. banks' margin) Loan term - 10 years Depreciation Straight line : Telecom equipment - 7 years IT equipment - 5 years Fibre - 25 years Residual Value No residual value assumed Financial Model Assumptions

  47. Professor Ian Jewitt Bristol University Economic Analysis

  48. Economic Analysis • Economic value rather than industry profit • Industry profit a guide to economic value • But an imperfect one • Industry profit guides business plans • Industry profit guides bidding in e.g.auctions • Important therefore to understand any divergence between profit and economic value

  49. Consumer and Producer Surplus P c1 c2 q1 q2 Q

  50. The Objective • EV = CS + PS + a x R • a > 0 ? • Shadow price of funds • estimated in US at 0.3

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