Allocating 700MHz spectrum to mobile...

The digital dividend Allocating 700MHz spectrum to mobile operators

Stefan Zehle, CEO, Coleago

Consulting Ltd

June 2013

1 About Coleago Consulting

2 The APT band plan

3 The LTE handset eco-system

4 Auctioning 700MHz spectrum

Agenda

© Copyright Coleago 2013

2

A specialist telecoms management

consulting firm

About Coleago Consulting


3

Coleago offers specialist advisory services to the

telecoms industry


4

Spectrum

Valuation and

Auctions

Marketing &

Customer

Management

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Accounting

Separation

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Transformation &

Cost Reduction

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Business

Planning

Improving

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Performance

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Coleago offers experience based consulting

Strategy projects require the

highest levels of expertise and

experience

Our projects are only delivered by

industry professionals with at least

15 years experience and many with

over 20 years, often at CxO level

We do not employ any juniors or

analysts

5

Traditional

Consulting

Firm Model

Junior Consultant

Senior Consultant

Manager

Senior

Manager

s

Partne

r

Analyst

Coleago’s consultants are experts in strategic

planning

Business texts written by the founders

of Coleago Guide to Business Planning

named Outstanding Academic

Title

Authored by Graham Friend and

Stefan Zehle - two directors of

Coleago,

Named as one of the

"Outstanding Academic Titles,

2009 (Business and

Economics)" by Choice, the US

academic review journal.

Source: Choice

www.lib.uwo.ca/news/business/2009/12/23/out

standingacademictitles2009businesseconomics

.html

6


We offer a range of innovative telecoms training

courses

The Mini

Telecoms

MBA

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Courses

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Modelling

7


The APT band plan adds a significant

amount of sub-1GHz spectrum

The APT band plan


8

APT 700MHz FDD Band 28 and TDD Band 44


9

703 – 748 MHz 758 – 803 MHz

FDD Mode – 3GPP Band 28

45 MHz 45 MHz

703 – 803 MHz

TDD Mode – 3GPP Band 44

100 MHz

The FDD band plan appears to be preferred


10

Latin America:

Widespread

FDD adoption

APT FDD

auction:

Australia in Feb

‘13, New

Zealand in Q4

2013

China: TDD

adoption

planned but not

finalised

India: March

13, APT FDD

adopted

Japan: APT FDD

allocated in

2012

Middle East &

Africa: Interest

in APT FDD

Other digital dividend band plans


11

USA, Canada and

Caribbean

Europe

US 700MHz band plan which consists

of 3GPP bands 12, 13, 14, 17

3GPP Band 20

Russia Non-3GPP 2x30MHz 700MHz FDD

How not to do it: The US 700MHz band plan


12

A B C D E A B C C DPS

BB

PC

NBC D

PS

BB

PC

NB

6 6 6 6 6 6 6 6 11 5 5 6 11 5 5 6

Mobile Tx TDD Base TX Base Tx Base Tx Mobile Tx Mobile Tx

69

8M

Hz

71

6 M

Hz

72

8 M

Hz

74

6 M

Hz

75

6 M

Hz

76

8 M

Hz

77

7 M

Hz

78

8 M

Hz

79

8 M

Hz

8-6

MH

z

Band 12

Band 17

Band 13 Band 13 Band 13 Band 13Band 12

Band 17

Lower 700 Upper 700

Early adoption: incorporated in all LTE handsets sold in North America

Technology barriers to competition due to what are in effect the

operator proprietary band 17 (AT&T) and band 13 (Verizon)

Inefficient use of spectrum, today only 2x20MHz usable vs. 2x45 for

APT

Europe: Only 2x30MHz available in band 20

Allocated in a number of European countries

Handsets with band 20 are sold since 2012

2x30MHz allocation poses problems in four player markets


13

791 – 821 MHz 832 – 862 MHz

3GPP Band 20

30 MHz 30 MHz

Russia: Could it still move to APT?

The 2x30MHz 700MHz band plan is not harmonised

Close to the 700MHz APT band plan apart from mobile

transmit


14

Mobile

Transmit

Centre Gap Mobile

Receive

Russia 720 MHz to 750

MHz = 30 MHz

750 MHz to

761 MHz

761 MHz to

791 MHz = 30

MHz

APT Band

Plan

703 MHz to 748

MHz = 45 MHz

748 MHz to

758 MHz

758 MHz to

803 MHz = 45

MHz

Middle East and Africa

United Arab Emirates adopted the APT band plan in May

2013, but using only part of the band

The UAE is adopting the 2 x 30 MHz channel plan for the

700 MHz band, consisting of 703–733 MHz (uplink) paired

with 758 – 788 MHz (downlink).

Considerable interest in APT band plan in Africa.


15

LTE band combinations matter

The LTE handset eco-system


16

Chipsets are not the problem, band combinations are

Qualcom’s RF360 mobile chip announced at the MWC

this year, supports:

– LTE-FDD, LTE-TDD, WCDMA, EV-DO, CDMA 1x,

TD-SCDMA and GSM / EDGE

– In 40 different LTE bands

However, this does not mean that all will be available

in a single handset.

– Handset manufacturers and operators have to make

choices

– Today the number of LTE bands that can be

switched on is limited to 6 bands


17

What matters are band combinations within in a

region

The 3GPP bands used in Region 2 and Region 3 are not the

same

Region 2 devices will not sell in Region 3

Region 3 has to generate its own economies of scale


18

Key LTE candidate bands differ between Regions 2

and 3

Region 3 – Asia & Australia

FDD

Band 1 (2100 MHz)

Band 3 (1800 MHz)

Band 5 (850 MHz)

Band 7 (2600 MHz)

Band 8 (900 MHz)

Band 28 (APT 700M Hz)

TDD

Band 34/a & Band 39/f

Band 40 (3.5 GHz)

Band 28 (3.6 GHz)

Band 44 (APT 700 MHz)

Region 2 – South America

FDD

Band 2 (1900 MHz)

Band 5 (850 MHz)

Band 7 (2600 MHz)

Band 10 (ext. AWS / 3G Americas)

Band 25 (E1900 MHz)

Band 26 (E850 MHz U)

Band 27 (E850 MHz L)

Band 28 (APT 700 MHz)


19

Band combinations in devices are market specific

Samsung GALAXY S4

2.5G (GSM/ GPRS/ EDGE): 850 /

900 / 1800 / 1900 MHz

3G (HSPA+ 42Mbps): 850 / 900 /

1900 / 2100 MHz

4G (LTE Cat 3 100/50Mbps): up to

6 different band sets (dependent

on market)


20

VoLTE is an important element of the APT band plan

Today LTE does not support voice

and requires CFSB.

700MHz is useful for rural coverage

but without CSFB also requires

presence of 900MHz GSM / HSPA

in the RAN.

Handset native CSFB will be

available in early / mid 2014, i.e. in

about the same time frame as

handsets with APT 700MHz.

Rural coverage could be build with

700MHz LTE only, but cost of LTE

handsets may be a challenge in the

short term.


21

Band aggregation adds further complexity

LTE band aggregation is already

available. The benefits are:

– High maximum potential speeds

– Some capacity gains through

trunking efficiency

Which bands are aggregated and

when is driven by regional market

demand.

700MHz APT aggregation roadmap

is yet to be defined.


22

70

0 M

Hz

700 M

Hz

2.6

GH

z

Mb

ps

Technology maker or technology taker?

Technology makers

Large markets are technology

makers.

Volumes are large enough to

specify handsets with the

desired band combinations

Large operators can create

their own device eco-system,

such as AT&T, Verizon, China

Mobile

Technology takers

Most countries fall into this

category.

The best strategy is to observe

developments and be a fast

follower.

Produces the benefits of new

bands and technology as early

as possible

Allows consumers to benefit

from scale economies

generated in larger markets


23

Regulators should time an spectrum allocation or auction process

accordingly, be ready to start the process but avoid rushing ahead.

Issues for spectrum auctions and

other allocation mechanisms

Auctioning 700MHz spectrum


24

Sources of spectrum value


25

In-building

coverage

Relevant for low band spectrum, more

consistent coverage

Geographic

coverage

Cost effective LTE coverage in low

density areas

Blocking

value

Block other operator from acquiring

spectrum

Capacity More capacity result in a better user

experience

Headline

speed claim

Maximum speeds which can be

advertised

Site-build

avoidance

Cheaper geographic coverage with sub 1-

GHz bands and avoid site densification

Technology

migration

Relevant for migration to LTE, particularly

from HSPA

Key value of

700MHz

Policy objectives and implications for 700MHz LTE


26

Access to

mobile

broadband

Affordable

mobile

broadband

LTE deployed in as many

bands as possible to use

spectrum efficiently

Rural LTE coverage

LTE lowers the cost per

bit, but only if devices can

use it

Harmonised devices with

multiple LTE bands

Competition

in urban

and rural

Allocate spectrum to

multiple operators

Avoid technology barriers

to competition

Consider the 700MHz

band plan choice and

allocation of spectrum

in the context of a)

current spectrum

holdings in all bands

and b) technology

deployment within

these bands.

The rationale for freeing up the 700MHz spectrum

The economic benefits of

freeing up spectrum for mobile

broadband are well

documented.

The cost of moving TV

broadcast is more than offset by

the economic gain that would be

generated if the spectrum is

used for mobile broadband.

Part of the incremental

economic gains comes from

lower prices for consumers.

Potential gains run into $

billions, i.e. are measured in %

of GDP.

This implies that the spectrum is

actually used.

Implies that operators can

deploy 700MHz LTE cost

effectively

Implies competition to drive

down prices © Copyright Coleago 2013

27

The Australian APT 700MHz auction in this context

Potential gains?

Is the spectrum is actually

used?

Can operators deploy the

700MHz band as cost

effectively?

Is there competition to drive

down prices?

Between AU$ 7bn and

AU$10bn

2x15MHz of 2x45 unsold

Only Telstra obtained 2x20MHz,

can deploy at lowest cost,

Optus obtained only 2x10MHz

One operator, Vodafone, did not

obtain any spectrum and the

leading operator Telstra

increased its competitive

advantage, thus reducing

competition © Copyright Coleago 2013

28

700/800MHz auction prices paid vs. Australian

reserve


29

1.28

0.91

0.58

0.49

0.81

0.56

0.88

0.37

0.65

0.73

1.35

- 0.20 0.40 0.60 0.80 1.00 1.20 1.40

USA - 2/2008

Germany - 5/2010

Sweden - 3/2011

Spain - 7/2011

Italy - 9/2011

Portugal - 12/2011

France - 12/2011

Denmark - 6/2012

UK - 2/2013

Average 700/800MHz

Australia Reserve…

US$ / MHz / Pop

700/800MHz auction reserve prices compared


30

0.00

0.09

0.13

0.25

0.30

0.30

0.32

0.49

0.47

0.56

0.60

0.80

1.35

- 0.1

0

0.2

0

0.3

0

0.4

0

0.5

0

0.6

0

0.7

0

0.8

0

0.9

0

1.0

0

1.1

0

1.2

0

1.3

0

1.4

0

Germany - 5/2010

Netherlands - 12/2012

Denmark - 6/2012

Sweden - 3/2011

UK - 2/2013

Switzerland - 2/2012

Finland - Q4/2013

Spain - 7/2011

Canada - Q4/2013

Portugal - 12/2011

France - 12/2011

Italy - 9/2011

Australia - 5/2013

US$ / MHz / Pop

Lessons learned from the Australian 700MHz auction

High reserve prices are not a good

approach to spectrum auctions

They have a market distorting effect

Regulators might do not achieve

their policy objectives

Even if a large amount of money is

raised up-front this may reduce

overall economic value in the long

term


31

Considerations for spectrum auction rules


32

Market

competitiveness

Policy objectives

Existing total

spectrum

holdings

RAN sharing

Sub-1 GHz

spectrum

holdings

Demand for

Spectrum Number of

operators in a market

Supply of Spectrum

2x45 MHz of 700MHz

spectrum

Allocation / auction

design

Case study New Zealand

Two established operators

Vodafone and Telecom NZ

Over 40% revenue market share

each

Wide coverage

Cash flow positive

Recent new entrant 2degrees

Still limited coverage

Cash flow negative

Inferior spectrum holdings

12% revenue market share

New market entry

Considered unlikely


33

New Zealand

4.2 million pops

Low population

density

High cost of

coverage

Policy objectives, auction rules, and reserve prices

Policy objectives

Raise money from the auction

Maintain effective competition with

a three player market

Rural broadband coverage

Reserve prices for spectrum

Vodafone and Telecom NZ can pay

out of cash flow

2degree needs to raise finance

Resulting auction rule

Proposed spectrum cap of

2x15MHz

In theory each operator obtains an

equal share of 700MHz spectrum

If high reserve prices are set

Would affect 2degrees

disproportionally because 2degrees

may not be able to afford 2x15MHz

Potential outcome: 2degrees

obtains 2x10MHz, one operator

2x20 and one operator 2x15MHz © Copyright Coleago 2013

34

For LTE wide spectrum allocations are preferable


35

LTE deployment cost and spectral

efficiency considerations

For LTE wide band allocations have

advantages.

An LTE eNodeB costs the same

regardless of the amount of

spectrum deployed

Deploying 2x5 MHz costs the

nearly same as deploying 2x20MHz

A wider band provides slightly

better throughput per MHz of

spectrum

Cost

per

MH

z d

eplo

yed

2x5 2x10 2x15 2x20

Spectrum allocated to one

operator

Economics of Deploying LTE

Effect of uneven spectrum allocation


36

2degrees Vodafone or Telecom

NZ

2x10 MHz 2x20MHz

$ 4k per MHz deployed $ 2k per MHz deployed

75 Mbps 150 Mbps

Competitive imbalance increased

Potential

auction outcome

Cost to deploy

eNodeB $80k

Access speed

claim

The societal value of allocating 700MHz spectrum

The return to the community from

spectrum auctions goes well

beyond any direct payment made to

government for spectrum.

Implicitly all governments recognise

the trade-off between spectrum

fees and wider goals.

Otherwise they would simply

auction off monopolies which would

undoubtedly bring the highest direct

receipts.


37

Unfettered spectrum auctions are problematic

“In short, to maximise consumer

welfare, spectrum allocation should

avoid being distracted by side

issues like government licence

revenues.”

“[T]he ratio of social gains [is of] the

order of 240-to-1 in favour of

services over licence

revenues…Delicate adjustments

that seek to juice auction receipts

but which also alter competitive

forces in wireless operating

markets are inherently risky. A

policy that has an enormous impact

in increasing licence revenues need

impose only tiny proportional costs

in output markets to undermine its

social utility.”

Hazlett and Munoz, “What Really Matters in

Spectrum Allocation Design”, 2010


38

Competition is now the main concern in auction

design

Wireless markets are mature. At the

maturity stage of the industry life

cycle we can expect consolidation

but not new market entry, at least at

network level.

Ensuring competitive markets with

the existing number of operators

becomes a policy goal.

“In a highly concentrated industry

with large margins between price

and incremental cost of existing

wireless broadband services, the

value of keeping spectrum out of

competitors’ hands could be very

high”. Submission of the United States

Department of Justice before the Federal

Communications Commission (April 11,

2013)


39

Competition considerations in 700MHz auctions

Low band spectrum holdings

confer particular competitive

advantage

APT 700MHz spectrum is the only

near term solution for sub-1GHz

LTE in a reasonably wide band

Allocate spectrum in a manner

which does reduce competition

while at the same time maximising

the benefit of a wide band

In 700MHz spectrum auctions

spectrum floors and caps may be

appropriate

Consider taking all sub-1 GHz

spectrum into account © Copyright Coleago 2013

40

Key take aways

Summary


41

Key take aways

The APT band plan is being widely adopted.

The 2x45MHz allocation adds a significant amount of rare low band

spectrum.

For Asia, the region 3 handset eco-system matters, not Latin America, and

handsets with 700MHz APT will only become available in mid 2014.

Most countries are too small to be technology makers, i.e. they are

technology takers.

Regulators should time an spectrum allocation or auction process

accordingly, be ready to start the process but avoid rushing ahead.

The impact on competition has emerged as a key concern in 700MHz

spectrum auction design.

High reserve prices are likely to reduce the societal value of the digital

dividend spectrum.


42

Questions

Stefan Zehle,

MBA

Tel: +44 7974 356 258

[email protected]

CEO, Coleago Consulting

Ltd

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