1. Award of 3.4 GHz and 10 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…….Today……. Overview of Progress to Date…. Markets/Revenue Technical/Costs Financial/Valuation Economic Overview of Progress to Date…. Markets/Revenue Technical/Costs Financial/Valuation Economic

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

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

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 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 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 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 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 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 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 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 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 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 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. ScenariosScenarios 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? 9 top cities –18.4% of subscribers –1.7% of land area –1,140 subs / km 2 Other cities, towns and suburbs –55% of subscribers –15% of land area –390 subs / km 2 Rural areas –26.6% of subscribers –83.3% of land area –33.7 subs / km 2

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. ProgressProgress Technical Review Consultations with Industry Cost Model - First Pass Coverage and Propagation Spectrum and Capacity Implementation 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 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 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. ImplementationImplementation 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 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 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) 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 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 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 Revenues Working capital FORECAST FINANCIAL STATEMENTS Profit & loss account Balance sheet Sources & application of funds Cash flow FORECAST FINANCIAL STATEMENTS Profit & loss account Balance sheet Sources & application of funds Cash flow VALUATION MODEL

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

45. Financial Model Assumptions Licence term15 years Inflation 2.5 % (+1.9 average Earnings index) Working CapitalDebtors/Creditors - 30 days, Stock 0 Tax allowanceCapital allowance on equipment (25%) IRR20%

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

47. Professor Ian Jewitt Bristol University Economic Analysis

48. 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 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 Q P c1 c2 q1q2

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

51. New entry into market with existing suppliers Consumer surplus on increase in market served Producer surplus on increase in market served Cost saving/extra expense on displaced market share Consumer surplus on increase in market served Producer surplus on increase in market served Cost saving/extra expense on displaced market share

52. New entry into market with existing suppliers (2) Q P c1 c2 q1q2 initial output level

53. Relationship Between Economic Value and Profit EV not therefore generally equal to profitability How related? …...depends on assumptions of the effect of increased competition on the market EV not therefore generally equal to profitability How related? …...depends on assumptions of the effect of increased competition on the market

54. Modelling Assumptions Demand Conditions –Usual assumptions: OFTEL, KPMG,... –Linear demand –Constant Unit Costs Strategic Model –Base model, Cournot competition Demand Conditions –Usual assumptions: OFTEL, KPMG,... –Linear demand –Constant Unit Costs Strategic Model –Base model, Cournot competition

55. Economic Value per £ profit Additional entry into a market of size “m” when the degree of existing competition is “n” Proposition: If entrant has average of industry costs for a particular market then EV/Profit is decreasing with “n” and does not depend on “m” Additional entry into a market of size “m” when the degree of existing competition is “n” Proposition: If entrant has average of industry costs for a particular market then EV/Profit is decreasing with “n” and does not depend on “m”

56. Social versus Private Preferences Amount of Existing Competition Size of Market Private choice social choice

57. Illustrative EV per £ profit

58. ConsequencesConsequences Roll out to areas less served by current competition a higher social priority than private one

59. If...

60. ... then discounting later provision at 20%

61. Other Scenarios Operating costs of entrants differ from industry average –Differs in different markets Incumbents and strategic entry deterrence Operating costs of entrants differ from industry average –Differs in different markets Incumbents and strategic entry deterrence