The economic perspective of the mobile networks in Europe Dimitris Katsianis (University of Athens∗ , GR), Ilari Welling, Maria Ylönen1 (NOKIA, FI), Dimitris Varoutas, Thomas Sphicopoulos (University of Athens, GR), Nils Kristian Elnegaard, Borgar T. Olsen (Telenor, NO), Lucien Budry2 (Swisscom, CH) ∗
National and Kapodistrian University of Athens Department of Informatics and Telecommunications, Panepistimiolopis, Athens, Greece
[email protected]
1
Introduction
Over the next years, about 70 licenses for UMTS (Universal Mobile Telecommunication System) spectrum will be distributed in Europe, either through auctions or comparative hearings. Now, more than ever, mobile operators are making critical decisions, which will shape their business over the next ten years. The main challenge is to maximize investment efficiency to provide next-generation, mobile data services, at announced speeds of up to 2 Mbps. Such systems, generally referred to as IMT-2000 or UMTS, are expected to emerge in 2001 in Japan and in Europe, hence the intense preparations in progress at the manufacturing, regulatory, and operator levels. The European ACTS project TERA (Techno-Economic Results from ACTS, AC364 [1]) is among the first groups in the world to publish figures [2][3][4][5] on the economic feasibility of next-generation mobile systems for mobile operators in Europe. This article presents the techno-economic perspective of these technologies aiming to provide guidelines for strategies in the move towards broadband mobile services. The analysis has been carried out during 2000 and is based on 3G roll-out scenarios in two “typical” European countries with contrasting profiles. The first is a large (population: 60 million) country with moderate mobile penetration of about 40% in 2000. The second is a “fast-track” smaller country (population: 4 million) in which mobile penetration is around 60% today and slated to grow to 80% in upcoming years. The objectives are to compare both incumbents’ and newcomers’ (greenfield) business cases in these two country types. The techno-economic evaluation is followed by a sensitivity analysis in order to identify the impact of the important parameters as the operator’s market share and overall level of demand for nextgeneration mobile systems. Following an overview of the current context and the different paths, which may be taken toward 3rd generation mobile systems, the general approach and main assumptions adopted for the business case have been described. The deployment area, the selected network architecture evolution, the services offered, the demand, and the related tariffs have been included. Final results are presented and discussed. A complete glossary of acronyms is provided at the end of this article.
2
Context and evolution paths
Today, Europe’s prevalent digital cellular GSM standard provides mobile telephony and low rate data services. Current trends are toward the emergence of new operators, lower tariffs for both traffic and terminals, as well as new services (location specific) and new types of terminals including dual band and dual mode, one-touch handsets for children, communicators, and palm pilots [6]. HSCSD, or High Speed Circuit-Switched Data, a GSM upgrade introduced, supports data rates of up to 57.6 kbps by grouping 4 GSM time slots. HSCSD was first commercially launched in August 1999 in Finland. A new terminal is required for the customer. GPRS, or General Packet Radio Service, another enhanced GSM technology introduced in 2000, supports up to 115.2 kbps packet switched mobile data alongside circuit-switched telephony.
1 2
No longer with Nokia No longer with Swisscom
1
Hardware upgrading is required for the present GSM core network, as well as a new terminal for the user. EDGE, or Enhanced Data for GSM Evolution, which includes advanced versions of HSCSD (EHSCSD) and GPRS (EGPRS), may be introduced as of 2001. Since EDGE uses a different coding scheme providing 48 kbps per time slot for an overall rate of up to 384 kbps, extra hardware and software must be added to the HSCSD or GPRS systems. Again, a new terminal for the user is required. Commercial UMTS is expected to go into operation for mobile telephony and data services at up to 2 Mbps for a stationary customer, 384 kbps for customers with high mobility (120 km/h) and 128 kbps for customers at full speed (500 km/h). Early on, UMTS will serve only hot spots at rates of up to 384 kbps, while GPRS or EDGE systems should be used for full coverage. Once again, the user will be required to change terminals, a fact, which must not be neglected by the operator. Figure 1 illustrates these different evolution paths which are the main alternatives options for a GSM operator.
circuit hard- & soft-ware upgrade ( new coding: 48 kbps/slots) 4 GSM time slots software upgrade + new terminal
5
EHSCSD
5
144 kbps
HSCSD
4
4; 5; 6
new network + new terminal
57.6 kbps
GSM
UMTS
6 9.6 kbps / 14.4 kbps
1; 6 new network + new terminal
1; 2 ;3
GPRS
hard- & soft-ware upgrade + new terminal (14.4 kbps per slot)
115.2 kbps
2 2; 3
new coding (48 kbps/slots)
packet 1999
EGPRS
2001
EGPRS
3 384 kbps
2000
2 Mbps (stationary) 384 kbps (120 km/h) 144 kbps (500 km/h)
384 kbps
2002
Figure 1 - Mobile evolution steps It is pointed out that that, while the intermediate steps are overlaid onto a GSM network, the UMTS technology requires full buildout from scratch. Incumbent operators may, however, re-use existing GSM sites. This is the major advantage of an incumbent operator in order to provide advance multimedia mobile services.
3
3.1
The business case
General Assumptions
As initial estimations [5][7] have ruled out short-term profitability for UMTS, a 10-year time frame, spanning the period 2000 to 2009 has been chosen. In order to calculate discounted cash flows, which take into account the time value of money, a discount rate of 10% has been selected. This value is a mean value among the major European Telecommunication Operators. The first step was the gathering of information on tariffs and market penetration of both fixed broadband and mobile services in various European countries. Existing forecasts for UMTS services were gathered, and an analytical market model was developed [8]. Parallel to service information gathering, the proposed radio and core network architectures were derived from public sources like ETSI UTRA documentation (drafted on the basis of work conducted within the ACTS/FRAMES project [9]) and relevant ACTS projects such as RAINBOW [10].
2
For the UMTS case study, two kinds of operators have been studied. In the first case, it is assumed that an existing GSM operator implements GPRS as an evolutionary path towards UMTS. In 2002, it starts the UMTS service, where both voice and data services are offered. In the second case, a new operator (possibly a fixed network operator) invests directly in UMTS in a competitive environment. The options will be described in more detail in the architecture section. 3.1.1
Area studied.
The profitability of advanced mobile services is tested in two different kinds of European countries. One is a typical Nordic country (later referred to as the small country) with relatively low population density and high mobile penetration. The other area represents a central or southern European country with higher population density and lower mobile penetration (later called the large country). In both cases, the areas are composed of a dense downtown zone surrounded by a less dense peripheral zone, and a larger suburban area. Note that the zones are not necessarily contiguous; the dense urban zone is taken to represent the most dense areas of the country, the five or six largest cities, for example. The urban areas are assumed to surround these most dense zones, and the suburban area covers the rest of the country, to the exception of rural areas. As mentioned previously, since UMTS is expected to be deployed in hot spots, it is assumed that rural areas will be covered using techniques such as GPRS and EDGE, which can re-use existing GSM infrastructure. The final UMTS coverage is about 80% of the total population. Thus, the population of the covered area is some 4 million in the small country and 60 million in the large country. The GSM penetration is assumed to saturate in 80% (in terms of mobile phone owners, not in terms of number of terminals) in 2009. 3.1.2
Regulatory environment
The role of the NRA (National Regulatory Authority) is of key importance for several cost parameters in UMTS deployment. Firstly, the choice of assignation mechanism impacts heavily on the cost of entry, as illustrated by two extreme examples, those of Finland and United Kingdom. In the first case, licenses were awarded through a comparative hearing process to four operators for a minimal annual fee covering administrative costs. In the second case, auctions were held in order to assign five licenses, with one license open for bidding by new entrants only. The resulting fees, on the order of 8 billions € per operator, are to be paid up front. To focus more strictly on the operators’ infrastructurerelated business cases, the case of comparative hearings as the basis of the calculations has been chosen. In the large country, the fee is 10 € per inhabitant, payable over a 10-year period in equal installments (independently of the duration of the license). The yearly fee is thus 60 M€. In the small country (2€/inhabitant), the yearly fee is 800 k€. The case of auctions has been cover through the sensitivity analysis. Certain service obligations following comparative hearings have been also taken into account in this study. In particular, the coverage of 60% of the population within 3 years as the most expected European practice, is ensured, by scheduling deployment in the suburban areas in 2005. This approach leads to an overall coverage of over 80% of the population. Regarding roaming agreements, it has been assumed that the new entrant is allowed to seek such agreements for calls in areas in which it has no infrastructure and pays an interconnection fee of 2€ per call to the incumbent operator. 3.2 3.2.1
Telecommunication Mobile Services GPRS
For GPRS, an average bitrate of 40 kbits is assumed, on a “best effort” basis. Many of the applications will be WAP (Wireless Application Protocol) based, e.g. e-mail and different kinds of location-specific services. The GPRS technically enables operators to provide packet switched data at rates ranging from 14.4 to 115 kbps, depending on the number of channels used and the service quality. However, because using more than two time slots requires more complex terminals, and enhanced channel coding only works in good radio conditions, it is reasonable to expect average bit rates on the order of 40 kbits or lower. The main application is Internet access, and since GPRS uses dynamic allocation schemes, the user can be billed on a per-volume basis rather than according to call duration. 3.2.2
UMTS
The UMTS Forum [7] has listed a broad range of services, which should be made available with the advent of UMTS systems. They are summarized in Table 1. 3
Type of service
Professional customers
Residential/SOHO
Audio & video broadcasting
Specialized programs (medical, sales digital TV promotions...)
Asymmetrical exchanges, consultation
Internet, intranet, tele-activities
customers
games, VOD, NOD, Internet, e-commerce, tele-learning, driving
Voice
telephone, voice mail
Data
e-mail, file transfers
Symmetric image
assistance
telephone, voice mail
Video telephony, conferencing
communications
e-mail
video telephony
Table 1 - UMTS applications according to the UMTS Forum. It is also recalled that the data rates available for the different services depend on the zone and speed of the user, as illustrated in Table 2. Picocell
Zone Max. bitrate
User speed
Microcell
Macrocell
In-building,
Urban
1-2 Mbps
384 kbps; 1 Mbps, low 384 kbps
downtown
Stationarypedestrian
Semi-urban, rural
mobility
120 km/h
500 km/h
Satellite Rural
9.6 kbps
384 kbps (SUMTS)
120 km/h
Table 2 – Available bitrates in different areas. According to their requirements in terms of delay, bit error rate or other criteria, these services will utilize bearer services, which have been defined for UMTS. For the model, we deal with a limited number of such bearer services, with their associated bit rates, as listed below in Table 3. Although UMTS bearer services have been defined in the literature as real-time (low constrained delay, LCD) or non-real time (unconstrained delay, UDD), the more restrictive LCD bearer service only has considered. Voice services are assumed to remain on the operator’s GSM network, which is upgraded appropriately. User data rate
64 kbps (symmetric)
128 kbps (symmetric) 384 kbps (asymmetric) 1 Mbps (asymmetric)
Table 3 - Offered UMTS bitrates. 3.3
Market forecast
Since the most probable evolutionary path for the incumbent involves GPRS, we first evaluate uptake of GPRS services starting in 2000 and then we consider uptake of UMTS services starting in 2002 in the dense urban and urban areas. Roll-out in suburban areas is an input parameter, since it may vary according to national regulator obligations. Since regulators are planning to actively promote a competitive context for next-generation mobile services, a market sharing by 4 operators is
4
reasonable. Regarding market share evolution, the incumbent starts with 31% market share in 2000, and finishes with 25% market share in 2009, while the new entrant starts with 5% market share in 2002 and finishes with 25% in 2009, which is a relatively optimistic scenario for the latter. To evaluate the data rates to be handled by 3rd-generation mobiles systems, it is important to identify the different types of customers [8], since their calling patterns and usage differ. An example of segmentation is the following, n corporate users, with intensive and almost entirely professional use, primarily during office hours; n business users, less intensive use than corporate users; n SOHO/telecommuters, professional and private use, during the day and in the evening; n advanced residential customers, primarily private use, evenings and weekends; n mass market, last arrived on the market, low use (i.e. stay within flat-rate limits). For the purposes of this business case, corporate and business users are combined with professionals in one segment; advanced residential and SOHO customers in another, and mass market is handled as a segment of its own. Thus we consider three main market segments: professional or business users, advanced residential/SOHO, and mass market. 3.3.1
Uptake of GPRS services
The demand curves for GPRS [8], which reflect a synthesis of European market forecasts, are applied to the defined areas, yielding the year-end customer numbers (the demand curve is illustrated in Figure 2). 3.3.2
Uptake of UMTS
In the time frame 2000-2005, it is expected that operators will initially focus attention on the lucrative professional market segment. UMTS services become attractive to the residential/SOHO market with a slight delay, and then the mass market. The following curves illustrate the central scenario for UMTS, also recalling the demand for GPRS, which flattens as customers migrate from GPRS to UMTS. GPRS and UMTS penetration 100%
% of total population
GPRS 80%
64 kbps symmetric 128 kbps symmetric
60%
384 kbps asymmetric 1 Mbps asymmetric
40%
Voice
20% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year Figure 2 - Demand for UMTS and GPRS services as percentages of total population. 3.3.3
Tariffs
Tariff schemes for next-generation mobile services were devised, based on information from different European countries for fixed telephony, broadband Internet access, and mobile telephony and data. They are summarized below, along with usage assumption [8].
5
These tariffs take into account the competitive context (4 operators) and rapidly falling prices for broadband wireline services. 3.3.3.1 GPRS For GPRS, the IP service is comparable to Internet access via cable or ADSL, in the sense that the «attached» mode means the terminal is «always on». However, the data rates offered are similar to or lower than modem rates using the PSTN. Considering an added value for mobility, an initial monthly flat fee of 20€ appears reasonable. Volume or transaction based billing could also be implemented. Our business case assumptions are summarized Table 4. Mbytes per day
Connection fee
Monthly flat rate
Residential
0.25
10
20
Mass market
0.1
Business
0.5
Robot
10
20
10
0.01
20
10
20
Table 4 - GPRS volumes and tariffs (in €) Uplink traffic is considered negligible. A 10% reduction per year has been applied for the first two years, then 5% for two years, then the tariffs remain stable. Connection fee reduction is 5% per year. 3.3.3.2 UMTS The Table 5 lists the services considered and pricing proposals, based on the tariffs of existing services [11] plus a 50% premium for mobility Mbytes per
Connection fee
Price per
128/144 kbps
1
2
25
30
GPRS + symmetry
384 kbps
4
50
35
GPRS + data
1 Mbps asymmetric
5
70
75
ADSL+ mobility
64 kbps symmetric symmetric
asymmetric
day
45
month 45
Reference
ISDN + mobility
speed
Table 5 - UMTS Volumes and Tariffs (in €) Flat-rate tariff schemes for next-generation mobile services were devised, based on information from different European countries for fixed telephony, broadband Internet access, and mobile telephony and data. They are summarized below, along with usage assumptions. These tariffs take into account the competitive context (4 operators) and rapidly falling prices for broadband wireline services. A 10% reduction per year is expected for the first two years, then 5% for two years, then remain stable. The connection fee reduction is 5% per year as well as for GPRS. 3.3.4
Customer service, marketing and promotion.
With the introduction of broadband mobile services, we assume additional personnel for customer care (services and billing). Marketing and advertising costs are estimated to be approximately equal to 1 €/inhabitant for both GPRS and UMTS. Because subscribers must change terminals when adopting GPRS, then UMTS services, the operator may find it necessary to subsidize the purchase of terminals. We include a marketing and advertising budget, as well as a subsidy for the purchase of GPRS terminals. A 15% churn figure was taken into account to compute the number of terminals to be subsidized. 3.4
Network architectures and upgrades
GPRS dimensioning is based on the current structure of the GSM network. Hardware and software
6
upgrades have been taken into account, as required by the new technologies and additional user load. In UMTS, the radio dimensioning procedure takes into account first coverage then capacity. Analytically: 3.4.1
Upgrade for GPRS
The basis for GPRS is the current GSM network, comprised primarily of base stations, base station controllers (BSC), mobile switches (MSCs), home and visitor location registers (HLR, VLR), as well as the transmission links from BS to BSC and from BSC to MSC. GPRS requires the addition of TRXs to handle the increased traffic load. The TRX’s need to be upgraded in order to enable GPRS services. It is assumed that only software upgrade is needed, and is actually performed at the BSC level but in some systems, hardware upgrades might also be required. The increased traffic load is assumed to require addition of TRX’s. The cost of a GSM TRX (including installation) is 10 K€. The number of additional TRX’s is computed according to the existing capacity and additional packet data user load. The GPRS network architecture (upgrade from GSM to GPRS) is illustrated in Figure 3:
Packet subsystem GSM mobile
BSS BSC
SIM card
BTS
Internet Internet (TCP/IP) (TCP/IP)
SGSN
NSS
GGSN
MSC HLR
Updates in existing network elements
Landline Ntw (PSTN/ISDN) (PSTN/ISDN)
Figure 3 Upgrade from GSM to GPRS The packet subsystem is a new part of the network. It consists of equipment providing packet traffic related functions. The following elements must be added to the core network in order to reuse the existing GSM infrastructure. The SGSN Serving GPRS Support Node (for 100,000 customers), which is connected to one or several BSCs, and handles data call management, traffic and billing information. A GGSN Gateway GPRS Support Node is needed (10,000 attached customers), for handling interconnection with other networks (IP, X25, etc.) as well as firewall, billing, and routing information functions. Furthermore we consider one Domain Name Server per SGSN On the other hand we include to the initial cost the CG Charging Gateway one per 250,000 customers GRPS customers (100,000 in the attached mode). For the operation and maintenance of the GPRS network an OMC – G (Operation and Maintenance Center for GPRS) is needed for 1 million subscribers. In order to manage the sharing of radio resources and retransmission of faulty data over the radio, we consider 1 PCU (Packet Control Unit) per BSC initially, and then an additional PCU per 64 Mbps of throughput. Upgrading PCU capacity over time is probably not a viable solution, as it demands several on-site visits. It is also required in most all countries, one Legal Interception Gateway for 1 million subscribers. In addition, software upgrades to the HLR are necessary. The model considers the following positioning of these elements (Table 6):
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GSM structure
GPRS hardware
GPRS software
BSC
PCU
BSS software
MSC
BTS
SGSN, GGSN, DNS, CG, OMC-G, LGI Additional TRX
HLR upgrade, MSC upgrade, management upgrade TRX upgrade
Table 6 – Model of the elements 3.4.2
Upgrade for UMTS
Since UMTS can utilize many of the GSM network's elements, in an incumbent operator's UMTS network there are both kind of elements. Radio equipment will initially accommodate UMTS, EDGE, GPRS and GSM, to ease the migration from GSM to UMTS. Such an upgraded network is illustrated in the Figure 4. A pure UMTS network would not have GSM BTSs and BSCs.
GSM mobile
Co-sited GSM + WCDMA
Packet subsystem Internet Internet (TCP/IP) (TCP/IP)
SGSN
BSC GGSN
SIM card
GSM / WCDMA mobile
WCDMA mobile
MSC
BTS
HLR
Landline Landline Ntw Ntw (PSTN/ISDN) (PSTN/ISDN)
WCDMA BS WCDMA RNC
WCDMA BSS
IN
Figure 4 - UMTS Architecture The following elements are necessary to offer UMTS services: The Base Station Subsystem BSS is comprised of specific Base Stations (BS: 3 sectors, 5 MHz to 15 MHz duplex each) and Radio Network Controllers (RNC: one per 256 BSs). The RNCs are connected to the UMTS SGSN, which may be common to GPRS and UMTS in some cases. In our model two different components are used as 3G SGSN. For the Network SubSystem (NSS) it must be added to the core network a UMTS SGSN one per 100,000 customers, for 12 Mbps of throughput; For the operations and maintenance an OMC as one system for 1 million subscribers. In the case of an incumbent operator, other components, such as the DNS, GGSN, MSC, HLR, and billing system can be shared with GPRS. The greenfield operator naturally has to acquire all those network elements. In that case, the dimensioning rules mentioned in the previous paragraphs have been used. 3.5
Radio dimensioning for UMTS
The radio dimensioning procedure takes into account first coverage then capacity. This process is entirely independent from the existing GSM infrastructure. To ensure physical coverage, we start with the cell radius determined from representative link budgets calculated in the uplink, which is more restrictive since the transmitter power from the mobile is lower than that of the base station. The cell radii in different area types have been listed in Table 7.
8
Cell radius (km) for 80% indoor coverage probability
Data rate
Dense urban Urban
64 kbps 0.39 0.97
Suburban
1.56
128 /144 kbps 384 kbps 1 Mbps 0.38
0.30
0.28
0.97
0.73
0.70
1.55
1.17
0.94
Table 7 - Cell radius per services and area Since the highest rate to be offered is 1024 kbps, we consider a cell radius of 0.28 km in the dense urban area, 0.7 km in the urban, and 0.94 km in the suburban area. Note that these cell radius are greater than those of existing GSM cells. This means that, for the incumbent operator, we assume that no new site buildout is required for coverage. The new entrant, however, must invest in the sites as well. It is assumed that full coverage is built in a year before the start of service (2001 in dense urban and urban areas, 2002 in suburban areas). According to the data rate required, the existing number of BTS sites and sectors and the maximum number of users, we compute the data rate per square kilometer, i.e. the available capacity. This capacity is matched against that computed from the demand curves and the usage patterns, and when the user load exceeds the offered capacity, it is necessary to add network components.
4
Techno-Economic Definitions
The objective of a business case for this network is to estimate investments, revenue, operating cost, general administration cost and taxes. The network is expected to generate revenue for the life of the product. Deducted from the revenue stream are depreciation, operating cost, general administration cost and taxes. The business case is assessed according to four conventional criteria, Net Present Value (NPV), Internal Rate of Return (IRR), cash balance, and payback period. The Net Present Value (NPV) is today's value of the sum of resultant discounted cash flows (annual investments and running costs), or the volume of money which can be expected over a given period of time. If the NPV is positive, the project earns money for the investor. It is a good indicator for the profitability of investment projects, taking into account the time value of money or opportunity cost, which is expressed in the discount rate (10% in the present case). The Internal Rate of Return (IRR) is the interest rate resulting from an investment and income (resultant net cash flow) that occur over a period of time. If the IRR is greater than the discount rate used for the project, then the investment is judged to be profitable. This criterion is especially useful in comparing projects of different type and size. The Internal Rate of Return gives a good indication of “the value achieved” with respect to the money invested. The Cash Balance (accumulated discounted Cash Flow) curve generally goes deeply negative because of high initial investments. Once revenues are generated, the cash flow turns positive and the Cash Balance curve starts to rise. The lowest point in the Cash Balance curve gives the maximum amount of funding required for the project. The point in time when the Cash Balance turns positive represents the Payback Period for the project.
5
Main Economics Results
The four Scenarios were investigated in order to provide guidelines for incumbent and greenfield (new entrant) mobile operators present in two types of European markets: on one hand, a small country with high mobile penetration and a high propensity to adopt 3G technologies, and on the other, a large country with a lower penetration of mobile customers and a “slower” take-up rate of mobile terminals. The main techno-economic results are net present value (NPV), internal rate of return (IRR), and payback periods. The investment project that is presented here, was studied using the tool which was developed by European Project ACTS 364/TERA [1], [4]. We also studied the sensitivity of the NPV to
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market share, and overall service penetration. 5.1
Net present value and Internal rate of return
With four operators sharing the market, the customer base appears sufficient to achieve a positive NPV over the study period in all four cases. The IRR is higher than the 10% discount rate, which shows that the investment is sound over this period. Table 8 summarizes the economic results of the two basic scenarios (large and small country) for both the incumbent and new entrant.
NPV (M€) IRR
Rest Value (M€) Pay-back period
Number of customers 2009 Investments (M€)
Incumbent Small
Incumbent Large
Greenfield Small
Greenfield Large
357
4,961
90
1,992
8
112
26% 6.8
29%
14%
17%
28
327
6.7
8.3
8.0
1,100,000
14,600,000
800,000
11,500,000
364
3,773
417
4,194
Running costs (M€)
564
10,127
421
7,113
Investment per connected customer ( €)
340
260
500
360
ARPU per month over the study period ( €)
42
42
60
60
Table 8 - Summary of the economic results for operators with 25% end market share. The following figures (Figure 5 and Figure 6) illustrate the revenues, investments and cash balance of all scenarios. Significant investments are required during the second year of the project in order to install the UMTS BTSs in urban and suburban areas. The lowest point of the cash balance indicates the amount of investment funding required from the operator. Comparing the two cases (incumbent and greenfield) in large and small countries shows that the maximum need for funding is quite significant especially for a large country: 4.6 billion € in the larger country for an incumbent, and 5.4 billion € for a new operator. Respectively, for a small country the maximum finance needed is 0.44 and 0.55 billion €. The average revenue per user (ARPU) during the study period is higher in the case of the greenfield operator because the income from voice traffic is not shared with the GSM network as it is in the case of the incumbent. The incumbent also has GPRS subscribers with lower monthly spending.
10
15000 Revenues GL Revenues IL Investments IL 10000
Investments GL Cash Balance GL Cash Balance IL
M Euros
5000
0
-5000
-10000 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Figure 5 - Economics of the Large Country case ( I=incumbent, G=greenfield, S=small, L=large)
1200
Revenues GS Revenues IS
1000
Investments IS Investments GS
800
Cash Balance GS
600
M Euros
Cash Balance IS 400 200 0 -200 -400 -600 -800 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Figure 6 - Economics of the Small Country case (I=incumbent, G=greenfield, S=small, L=large) Since the previous figures have different scales, we present the results for all cases together (Figure 7) to more clearly emphasize the differences in cash balances. In all cases (Figure 7), the slopes of the cash balance curves at the end of the period indicate good future earning potential. The case of large country has much more potential revenues than the same investment in a small country due to the greater potential market size (60 million instead of 4 million inhabitants covered by a UMTS system). The one that has significant importance is to compare the “investment project” in the same area for an incumbent and a “greenfield” operator. The percentage difference in cash balance between the operators in a small country in 2009 exceeds 80%. For a large country the difference is around 70%.
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14000 Cash Balance GL 12000 Cash Balance IL 10000 Cash Balance IS 8000
Cash Balance GS
M Euros
6000 4000 2000 0 -2000 -4000 -6000 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Figure 7 – Cash Balance Curves for all the cases (I=incumbent, G=greenfield, S=small, L=large).
Figure 8 illustrates economic features for all cases. Taking into account the same tariffs for all cases, the incumbent's payback period is almost 6.8 years; for the greenfield it is more than eight (8.3) years in a small country. In a large country, incumbent is still (as in the small country) the “winner”, while greenfield demands larger investments and thus longer time for full payback. The fact that the existing infrastructure can be partially reused, favors the incumbent operator. The payback period for an incumbent is 6.7 years and for a greenfield it is around eight years. However, the 7-year pay back period may appear long to certain decision-makers. In a competitive environment, this greater payback period could be the turning point for the failure of a greenfield project. A critical comment could be that the investing operator should be powerful enough to survive for eight years without any real profits. It is clear that, under the conditions described above, the operator will have to either accept a delayed return on investment while maintaining attractive tariffs, or raise tariffs, with the risk of reducing its customer base.
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NPV - IRR - Payback Period 6000
35 4961
5000
26
29
30 25
M Euros
4000 17
20
3000 14
15 1992
2000 6.8
6.7
8.3
8
1000
10
IRR (%) Pay-back period (years)
NPV IRR PayBackPeriod
5
357 90 0
0 Incumbent S
Incumbent L
Greenfield S
Greenfield L
Figure 8 - NPV – IRR – Payback Period (All cases) The final techno-economic results concerning the NPV (Figure 8 and Table 8) and the IRR show the overall difference between the two different operators. The NPV for an incumbent operator is almost 300% (small country) and 150% (large country) greater than the NPV for the greenfield operator. The IRR in the two cases for the incumbent is 26% and 29%, and for the greenfield 14% and 17% respectively. This is the crucial point for strategic decisions. The lowest accepted IRR value for a telecommunication operator varies proportionally according to its investment strategy and potential economic situation. A general conclusion that could be acceptable concerning the IRR is that the investment of an incumbent operator is not as risky as that of the greenfield operator, in absolute values. In the small country the discounted investment per connected customer for the incumbent is 344€ and 498€ for the greenfield, and in the large country it is 259€ for the incumbent and 364€ for the greenfield (Table 8). In general, large countries cover more subscribers with high-capacity demand as well as a high willingness to pay. Even if the large country is more cost-sensitive, the investment strategy will depend on the demand for high capacity. This is especially true for narrowband speeds but could be profitable (and more interesting for the customer) at broadband capacities as well within the next few years. It can generate good revenues mainly because it is offering not only one service (multimedia UMTS services), but also a wide palette of already existing Internet services. In addition, UMTS offer the operators the ability to present new service sets to their customers and potentially to the whole Internet community, based on the Internet platform. However, the combination of a higher price per subscription for a higher capacity service and a potential increase in penetration compared to the penetration of a lower capacity service can increase the total revenue in both cases (incumbent or not). The appearance of new services can increase the penetration of new customers. 5.2
Sensitivity analysis of Market share
In the actual performance of the analysis telecommunications network operators very often resort to plain discounted cash flow analyses and simple sensitivity analyses when assessing their business cases [12]. These traditional approaches are often unable to capture the flexibility of the decisionmakers to adapt and revise later decisions in response to unexpected market developments. Sensitivity analysis consists of study the impact of single parameter without any correlation to other parameters. NPV and IRR, as financial ratio, have been used as criterion for the sensitivity analysis. The sensitivity results are presented after the identification and the ranking of the four most possible parameters (with 95% confidence) with greatest impact on NPV and IRR, which are the tariff factors, the market share, the license fee and the BTS cost.
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The sensitivity calculations have been performed on NPV and IRR indicators for each scenario (large and small country, incumbent and newcomer operators). Figure 9 and Figure 10 illustrate indicatively four of these eight combinations. Table 9 presents the parameters, which have the most impact on NPV or IRR based on one of the sensitivity analysis. Our purpose is to present a ranking of four parameters, which give the biggest changes on the NPV or the IRR. The NPV or IRR middle value corresponds to the base value of the parameter. For instance in Figure 9, NPV base value is 4,961 M€ (with 25% Market share in 2009) and for Market share in 2009 equal to 30% (High value) the NPV reaches the value of 4,916+4,121=9082 M€. Furthermore, multipliers are used for the variation of values of UMTS tariff and BTS cost by a convenient way (i.e. 0.4 means 40% of the base value). Uncertain parameter
Low Base High
UMTS tariff multiplier UMTS license fee [€] (large)
0.4 0
Market Share in 2009
UMTS license fee [€] (small) UMTS BTS cost multiplier (84 – 156 k€)
10% 25%
30%
0 0.7
150 1.3
1 10 2 1
1.6 150
Table 9 Sensitivity Ranges
5,000 4,000 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 -4,000 -5,000 UMTS tariff multiplier I
Market Share in 2009 I
Low value
-4,277
-3,425
200
857
-3,188
-3,866
204
911
High value
4,121
1,142
-2,961
-857
3,035
1,188
-3,301
-911
UMTS licence fee I
UMTS BTS UMTS tariff cost multiplier G multiplier I
Market Share in 2009 G
UMTS licence fee G
UMTS BTS cost multiplier G
Figure 9 Sensitivity analysis results. Change in NPV compared to nominal situation (4,961 M€) in case of large country both for Incumbent (I) and Greenfield (G) case.
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15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00%
UMTS BTS UMTS cost multiplier licence fee I I
UMTS tariff multiplier G
UMTS BTS Market Share UMTS cost multiplier in 2009 G licence fee G G
UMTS tariff multiplier I
Market Share in 2009 I
Low value
-13.32%
-11.89%
0.15%
7.44%
-11.72%
-17.26%
0.13%
4.77%
High value
10.27%
2.90%
-10.46%
-5.54%
7.48%
3.44%
-10.79%
-4.18%
Figure 10 Sensitivity analysis results. Change in IRR compared to nominal situation (14%) in small country both for Incumbent (I) and Greenfield (G) case.
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Conclusion and Discussion
The techno-economic prospects for a newcomer and especially for an incumbent operator planning to deploy the UMTS technology are found to be quite positive according to this study. Specifically, the following elements were identified to have major consequences on the profitability of this new business: •
•
•
•
Regulatory decision to promote competition: By deciding to open the UMTS market to at least four competing operators, regulators are hoping that the competitive dynamics will work to offer the widest range of services to the most customers possible at least cost. Our results show that market share at the end of the study period is of major importance. Net Present Value of the large country business case is improved by 1,200 M€ (or 3.5% for IRR) for an increased of 5% in the market share in 2009. Cost of licenses: The sensitivity analysis on this parameter show that license cost and therefore the license assignation mechanism (auction or comparative hearings) can seriously deteriorate the business case since the payback period can be delayed by more than a year, together with significantly decreasing NPV. License fee increasing from 10 to 150 €/inhabitant (based on the UMTS auction in United Kingdom, where the average cost per UMTS license has reached the level of 122 €/inhabitant), decreases the NPV by 66% for incumbent. Therefore, the regulatory framework can affect the strategy for the UMTS deployment. A highly competitive environment following the assignation procedure will lead to a real battlefield for profitability in the lucrative urban areas. Tariffing of voice and data services: The business case used fixed network data tariffs as a basis for UMTS tariffs. It was shown that the overall tariff level ranks first over service penetration and market share as the most significant factor for UMTS profitability. This result is logical since, in NPV calculation, the tariff level directly impacts total revenues, whereas all other parameters, like the service penetration level and market share, affect the number of customers, and hence also the costs. Nonetheless, it must not be construed that operators are free to hike tariffs as required to achieve a positive result. Indeed, the competitive contexts and dropping prices for fixed network services will severely limit their room to manoeuvre in this area. Investment schedule: Due to the fact that operators deploy overdimensioned equipment in a competitive market situation, using a coverage rather capacity approach the cost of BTS equipment incurs a heavy financial burden to be supported for 8-10 years. This coverage approach is a limited factor and leads to larger investments in the pre-service year.
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In conclusion, UMTS operators will have not very much latitude to roll out their networks. Heavy investments are required early on in order to cover the most dense areas, and then once again for the suburban areas. Competitive pressure will keep tariff levels low, and operators will need to consolidate their market assumptions with extreme care in order to evaluate the payback period. Lastly, they must have enough financial resources to stay in debt for a long period of time. ACKNOWLEDMENTS The authors would like to thank all the partners of ACTS 364/TERA for their useful support and discussions.
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Reference
[1]
http://www.telenor.no/fou/prosjekter/tera/index.htm
[2]
L.A. Ims et al, “Multiservice Access Network Upgrading in Europe: A techno-economic analysis”, IEEE Comm. Mag. , vol. 34, no 12, December 1996, pp. 124- 134
[3]
A. Zaganiaris et al, “A methodology for achieving life-cycle costs of optical access networks-from RACE 2087/TITAN,” Proc. 11th Annual Conference European Fibre Optic Communications and Networks, June 1993, The Hague, the Netherlands.
[4]
L.A. IMS, “Broadband Access Networks Introduction strategies and techno-economic evaluation, Telecommunications Technology And Applications Series, Chapman & Hall 1998, ISBN 0 412 828200
[5]
D. Katsianis et al, “The economics of next generation mobile systems”, XIIIth International Symposium on Services and Local accesS (ISSLS 2000), Stockholm, Sweeden June 18-23, 2000.
[6]
Donal O’ Mahony, “UMTS: The Fusion of Fixed and Mobile Networking”, IEEE Internet Computing January-February 1998, pp. 49-56
[7]
UMTS Forum, Report #5, 1998.
[8]
Anne Cerboni et al, “Evaluation of demand for next generation mobile services in Europe”, Third European Workshop On Techno-Economics For Multimedia Networks And Services, Aveiro 14 –16 December 1999.
[9]
http://www.infowin.org/ACTS/RUS/PROJECTS/FRAMES/index.html
[10]
http://www.infowin.org/ACTS/RUS/PROJECTS/ac015.htm
[11]
Kjell Stordahl, Leif Aarthun Ims, Marianne Moe, “Broadband market - the driver for network evolution”, Proc Networks 2000, Toronto, Canada, September 10-16, 2000.
[12]
Investment Decisions: The certainty case in Copeland, T E, Weston, J F. Financial Theory and Corporate Policy. Addison-Wesley Publishing Company, Reading Massachussets, 1992.
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Acronyms
BSC BSS BTS EDGE ETSI FDD Gb GGSN GPRS GSM HLR HSCSD MSC
Base Station Controller Base Station Subsystem Base Transceiver Station Enhanced Data for GSM Evolution European Telecommunications Standards Institute Frequency Division Duplex Interface Gb between BCS and SGSN Gateway GPRS Support Node General Packet Radio Service Global System for Mobile communications Home Location Register High Speed Circuit Switched Data Mobile Switching Center
NSS OMC-R RNC RNS SGSN TDD TRX UMTS UTRAN VLR WAP W-CDMA WRC
Network Subsystem Operations & Maintenance Radio Network Controller Radio Network Subsystem Serving GPRS Support Node Time Division Duplex Transmitter-receiver Universal Mobile Telecommunication Service UMTS Terrestrial Radio Access Network Visitor Location Register Wireless Applications Protocol Wideband Code Division Multiple Access World Radio Conference
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BIOGRAPHIES
D. KATSIANIS (
[email protected]) received the Informatics degree and the M.Sc. in Signal Processing and Computational Systems from the University of Athens. He is a research fellow with the Optical Communications Group, University of Athens, participating in European R&D projects in Photonic as well as Horizontal domains. He has worked as an expert scientific advisor for OTE S.A. (Hellenic Telecom) in networking aspects concerning simulation of ATM networks, Management in an Optical network and Telecommunication Investment Analysis, participating in several Eurescom projects. He is also a consulting partner with several firms in the field of techno-economic & network design studies, participating in ACTS projects AC226 OPTIMUM and AC364 TERA as well as IST 25172-TONIC. His research interests are broadband communications and methodology of network design with techno-economic aspects. D.VAROUTAS (
[email protected]) received the Physics degree and the M.Sc. in electronics and radiocommunications from the University of Athens. He is a research fellow with the Optical Communications Group, University of Athens, participating in numerous European R&D projects in the RACE, ACTS, Telematics and IST framework. He is also a consulting partner with several firms in the field of technoeconomic studies and R&D projects. He is an adviser in several organizations including EETT (Greek NRA for telecommunications) in the fields of licensing, spectrum pricing and legislation. His research interests are components modeling, optical and microwave communications and techno-economic evaluation of network architectures and services. T.SPHICOPOULOS (
[email protected]) received the Physics degree from the University of Athens in 1976, the D.E.A. degree and Doctorate in electronics from the University of Paris VI in 1977 and 1980 respectively, the Doctorat Es Science from the Ecole Polytechnic Federal de Lausanne in 1986. From 1977 to 1980 he was with Thomson-CSF and at 1980 he joined the Electromagnetic Laboratory of EPFL. Since 1980, he is with the Optical Communications Laboratory of the University of Athens. Currently is a professor at Department of Informatics at the same university. He is author or co-author of almost 70 scientific papers in the fields of Telecommunications and Optical Communications. He has participated in a number of European and National projects and he has been auditor and evaluator of RACE and ACTS projects. He is an adviser in several organizations including EETT (Greek NRA for telecommunications). Mr. ILARI WELLING (
[email protected]) received his M.Sc. degree in telecommunication engineering from the Helsinki university of technology in 1996. He joined the Nokia Research Center in 1995, where he has been studying the techno-economic aspects of telecommunication networks. Recently he has been working on the European Union projects AC364 TERA and on IST 25172 TONIC in which he is the project manager. Mr. Welling has authored/co-authored several international journal articles and has presented papers in papers in conferences in field of telecom techno-economics. He has co-authored a book Broadband Access Networks: Introduction strategies and techno-economic evaluation" published by Chapman&Hall in 1998 (ISBN 0-41282820-0).
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