Redefinition of 28GHz BFWA Licence Areas - Key Findings of Impact Analysis Presentation to BFWA Consultative Group Mason Communications 11 November 2003

-2-PFHX005O.PPT © Copyright Mason Group Ltd Format 1.Introduction 2.Modelling Process 3.Key Findings 4.Recommendations

1. Introduction

-4-PFHX005O.PPT © Copyright Mason Group Ltd Scope of Work – AY4467 A number of 28GHz BFWA licences remain unallocated following the initial licensing award exercises in 2000 and 2001 The RA is considering offering Licence 3 (of 3) in small coverage areas. Possible options are as follows: – Defining smaller regional licences by political areas (e.g. Local Authority or county boundaries) or by postcodes – Operators defining the licence areas – Licensing individual base stations Mason has completed a financial and market impact assessment in order to provide a detailed evaluation of the options Recommendations have been formed regarding the definition of licence areas as the basis for a further licence award process.

2. Modelling Process

-6-PFHX005O.PPT © Copyright Mason Group Ltd Modelling – Forecast the Business Case for each Licence Area within each Licensing Scenario Define assumptions: Discrete licence areas within each licensing scenario BFWA service portfolio BFWA target market Competing platforms BFWA service tariffs BFWA technical solutions Perform scenario analysis: Predict BFWA roll-out in each licence area (MapInfo) Forecast revenues Forecast costs Perform sensitivity analysis Value licence & form opinion on pricing mechanism. Cost Model Market Data Pricing Mechanism Technical Data Licence Areas Definition Revenue Model Financial Model

Modelling - Definition of Five Licensing Scenarios and Component Licence Areas -7- 1b. Authorities (327)1a. Regional Areas (10)1c. Hotspots (143) 2. Operator Areas (44)3. Base station Areas (3683)

-8-PFHX005O.PPT © Copyright Mason Group Ltd Modelling - Summary of Key Assumptions – Classical Urban Deployment AspectAssumption  BFWA Service Portfolio  High capacity, high quality, symmetric, uncontended data end user services  Some 512 kbit/s connections but mainly 1 Mbit/s, 2 Mbit/s and above  Based on earlier discussion with the RA, we have not modelled voice services  BFWA Target Market  Will generally serve the high end of the broadband market, targeting urban medium / large businesses in high-demand sectors (Education, Travel/Tourism, Media, Medical/Healthcare, Public Services, Business Services, Telecoms/IT)  Will also offer private circuits to other telcos in the area (e.g. mobile operators)  Competing Platforms  Will compete most intensively with other guaranteed bandwidth services (principally leased lines), and between themselves (including Your Communications), rather than with DSL/cable networks  Allowance made in the model for areas where DSL/cable is not available, where market assumptions have been varied in the model to show a slight increase in lower bandwidth customers  BFWA gains 10% of target market share after 15 years (not all connectable)  BFWA Service Tariffs  Tariffs based on an average gained from benchmarking current broadband prices  Model assesses varying market share based on a change in tariff, reflecting elasticity of demand.  Assumes a cross price/demand elasticity in the range –1.0 to –1.2  Technology  Could use Point-to-Multipoint (PMP) or Mesh Radio systems  PMP coverage radius max 4km; Mesh max hop length 2km

3. Key Findings

-10-PFHX005O.PPT © Copyright Mason Group Ltd Regional Areas 1a. Regional Areas (10)Findings  Each will contain several locations of high broadband demand. Economies of scale enable NPV to improve as coverage is expanded with additional Service Zones to an optimal limit  However, no realistic viable business case could be formed for any of the remaining regional licences in the present market climate  The current reserve prices for Regional Licence Areas dominate CAPEX and impact NPV. Operators have to pay a licence fee that covers towns where Service Zones will not be deployed  But even if no licence fee were applied, the business case would still be marginal (typically just +£0.5m NPV after 15 years)

-11-PFHX005O.PPT © Copyright Mason Group Ltd Small, Pre-Defined Licence Areas 1b. Authorities (327) 1c. Hotspots (143) Findings  The NPV results from Scenario 1b (Licence Areas based on Local Authorities) are very similar to the NPV results from Scenario 1c (Licence Areas based on RA-defined Hotspots)  This is because Service Zones within Licence Areas are typically forecasted to be at the same geographic locations. Typically one Service Zone per Licence Area  A small number of Licence Areas have positive NPV where there is very high broadband demand  By apply a licence fee on a ‘pro rata’ basis (scaled down according to area covered), fees are ‘more optimised’ e.g. Glasgow City UA contains 13% of Scotland’s businesses, and the associated G1 Service Zone covers 9.5% of Scotland’s businesses

-12-PFHX005O.PPT © Copyright Mason Group Ltd Operator Licence Areas 2. Operator Areas (44)Findings  Operator Areas containing several Service Zones in close proximity have a similar financial profile to Regional Licence Areas  Initially benefit from economies of scale, but relatively high licence charges impact NPV  Those few Operator Areas that have positive NPV only comprise one or two Service Zones and, thus, have relatively low licence charges. Profile is similar to small, pre- defined Licence Areas.

-13-PFHX005O.PPT © Copyright Mason Group Ltd Base Station Licence Areas 3. Base station Areas (3683)Findings  As with small pre-defined Licence Areas and the smaller Operator Areas, a small number of Licence Areas have positive NPV where there is very high broadband demand.  Licence charges are completely optimised. Only pay for businesses within the Service Zone in this model.

-14-PFHX005O.PPT © Copyright Mason Group Ltd 28GHz Business Case Issues Cost of Interconnection – A key sensitivity in the model is the cost of interconnection to Internet (transmission connection + Internet port) – BFWA operator must secure significant discounts on typical Internet interconnection charges to create a viable business – Implies that significant regional traffic concentration must occur, and/or that BFWA operator must have partnership with major telco Technology – With PMP, the number of target businesses that can be ‘seen’ from each base station is limited, which hinders penetration and effectively inflates the cost of service provision per subscriber – Mesh can alleviate this to a degree (higher connection rate) Tariffs – Tariffs charge cannot be raised due to elastic nature of cross-price elasticity of demand with leased line platforms

-15-PFHX005O.PPT © Copyright Mason Group Ltd 28GHz Optimal Business Case The optimal business case occurs under the following conditions: – An operator is able to target high broadband demand locations across BFWA Regions where there is the optimum mix of businesses – The licence charges for each location is minimised i.e. pay just for the businesses covered – The operator runs all the locations as a single business to benefit from operational economies of scale, particularly cost of interconnection to Internet. The market assumptions underpinning the business model have a strong impact on the business case viability

4. Recommendations

-17-PFHX005O.PPT © Copyright Mason Group Ltd Some considerations in designing licence areas (Consultation doc bfwacg-03-05) Business viability Ubiquitous coverage Spectrum efficiency Transparent non-discriminatory award process Minimal planning required Spectrum packaging.

-18-PFHX005O.PPT © Copyright Mason Group Ltd Considering business viability in isolation: To enable realisation of the conditions associated with the optimal business case: – Licence Areas need to be as small as possible so that an operator pays licence charges only for the businesses/area covered – Licence Area boundaries should ideally not be pre-defined, so that the optimum location of base station sites can be achieved by the operator – Operators must purchase multiple Licences across Regions to generate economies of scale.

-19-PFHX005O.PPT © Copyright Mason Group Ltd Fit between scenarios and the optimal business case: Our modelling suggests that Option 1a (existing BFWA regions) represents the least favourable business conditions of those considered, because of the variation in business density across relatively large geographical regions Adoption of Scenario 3 – Licence Individual Base Stations – would best enable realisation of the ideal business conditions for operators, however: – This will be the most difficult scenario to administer, due to co-ordination, administering the licence process etc. – Spectrum efficiency lower due to frequency co-ordination overhead – Operators would have to purchase a number of Licences to generate the necessary economies of scale Adoption of Scenario 1b – Licence by Local Authority / Unitary Authority would also enable realisation of the ideal conditions to a degree – Although frequency co-ordination issues still remain.

-20-PFHX005O.PPT © Copyright Mason Group Ltd Fit between scenarios and optimal business case (continued) Adoption of Scenario 1c would be difficult to implement, as it is difficult to predict and define Hotspot Areas – The process of defining hotspots is not transparent due to the assumptions that underpin the hotspot definition – the RA may be open to challenge from operators if RA defined hotspots do not match requirements of individual business cases – Different operator strategies will impact the preferred hotspot locations, meaning that pre-defined hotspots may be unattractive to some operators – Also changes in technology over the next 15 years may affect the definition of hotspots Adoption of Scenario 2 would also be complex to implement and manage – As with scenario 1c, different business drivers will mean that operator areas may vary and overlap, which will worsen the licensing and spectrum co-ordination problem.

-21-PFHX005O.PPT © Copyright Mason Group Ltd Conclusion regarding Licence Areas Licensing scenario 1a. Regional Licence Areas 1b. Authority Licence Areas 1c. ‘RA Hotspot’ Licence Areas 2. Operator Licence Areas 3. Base Station Licence Areas Administration & Technical Feasibility Business Viability

-22-PFHX005O.PPT © Copyright Mason Group Ltd Conclusion regarding Licence Pricing Based on market assumptions as defined in this presentation, we did not find that any of the remaining BFWA Regions had an NPV above £0.5million over 15 years, even with the Licence Fee set to zero Similarly, none of the smaller areas has an NPV above £400k In the present market climate, the value of the Licences for BFWA operation is difficult to quantify, even with the most optimistic business case assumptions Therefore, in Mason’s view, it is not presently possible to set a reserve price based on the potential value of BFWA business Mason’s view was that an ‘administrative’ price could be determined based on standard spectrum tariffs e.g. bandwidth used/area covered, in an equivalent way as for point-to-point links (e.g. using GHz fixed link costs as the basis) This would also be consistent with the possibility that an operator might buy the spectrum purely for backhaul, in which case the cost should be equivalent to standard point-to-point fees.

Radiocommunications Agency Redefinition of 28GHz BFWA Licence Areas – CG Pres The information contained herein is the property of Mason Communications Ltd and is provided on condition that it will not be reproduced, copied, lent or disclosed, directly or indirectly, or used for any purpose other than that for which it was specifically furnished. REVISION DATE PRESENTATION NUMBER CHECKED BY 11 Nov 2003 APPROVED BY O No. of Slides = 22 PREPARED BY PFHX005O.PPT P Handley ORIGINATOR