Economics of Network Sharing

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Presented at Network Sharing Strategy Forum London 24 09 2008

Published in: Technology, Economy & Finance

Economics of Network Sharing

  1. 1. Economics of Network Sharing Network Sharing Strategy Forum London, September 24th, 2008 Kim Kyllesbech Larsen Network Economics, T-Mobile International
  2. 2. Why share your network? OPEX Saving (ca. 30 % ) Capex prevention (>30%) Personnel efficiency Network efficiency Environmental Improvements Customer benefits OPEX prevention Operational efficiency Less spectrum demand Extended coverage “ cheap” M&A alternative T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Rollout speed
  3. 3. A sharing anecdote. <ul><li>Initial discussion with Orange NL started in mid ‘01. </li></ul><ul><li>JV operational from mid ‘02 to ‘04. </li></ul><ul><li>Common 3G rollout organization (Opex and Capex). </li></ul><ul><li>Common pool of GSM locations for co-locating 3G Equipment (Opex). </li></ul><ul><li>Common Site Acquisition & Site Build (Capex/Opex). </li></ul><ul><li>Shared ancillary & transmission (Capex). </li></ul><ul><li>JV closed down in YE ‘04. </li></ul><ul><li>Key expertise remained in the respective organizations (staff resistance). </li></ul><ul><li>Differences in rollout strategies (divergence from original expressed strategies). </li></ul><ul><li>TMNL’s policy not to use battery backup for UMTS nodes made ancillary sharing redundant. </li></ul><ul><li>Detailed analysis showed utilizing own existing GSM infrastructure (standalone) for 3G co-location provided lower cost and invest than sharing with another operator. </li></ul><ul><li>Oct ‘07 T-Mobile acquire Orange; network consolidation started. </li></ul>3G-sharing in The Netherlands – T-Mobile – Orange joint venture. The Financials for network sharing was reasonable, however the case for closing down was better. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.
  4. 4. Stages of sharing benefits? Rollout Phase Steady State Renewal / Obsolescence <ul><li>Capex savings </li></ul><ul><li>Opex prevention </li></ul><ul><li>Little Capex benefits </li></ul><ul><li>Opex savings </li></ul><ul><li>Significant write-off </li></ul><ul><li>Re-structuring cost </li></ul><ul><li>Capex savings </li></ul><ul><li>Opex savings </li></ul><ul><li>Opex prevention </li></ul><ul><li>Minor write-off </li></ul><ul><li>Re-structuring cost </li></ul>UMTS LTE T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. GSM/UMTS < 5 years 4 – 8 years > 7 years
  5. 5. Network sharing – opportunity. <ul><li>Where are we today? </li></ul><ul><li>Operators have built national radio infrastructures in parallel. </li></ul><ul><li>Multiple cost … </li></ul><ul><li>Why? </li></ul><ul><li>Competition – coverage was a key market differentiator </li></ul><ul><li>Regulatory – the licence required it </li></ul><ul><li>Now! </li></ul><ul><li>Coverage – less of a differentiator. </li></ul><ul><li>Services – the real differentiator. </li></ul><ul><li>Cost is now a key driver!! </li></ul>T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.
  6. 6. Network sharing – the pressure. <ul><li>Cost? </li></ul><ul><li>Around 55% of the Operators Network Opex is in the RAN infrastructure. </li></ul><ul><li>Sharing reduces Opex pressure. </li></ul><ul><li>Sharing reduces Capex pressure. </li></ul><ul><ul><li>Upgrade costs – 2G refresh, mast upgrades. </li></ul></ul><ul><ul><li>Replacement costs – LTE. </li></ul></ul><ul><li>An opportunity to improve Profitability </li></ul><ul><li>But! </li></ul><ul><li>Technical problems may raise marketing, service and billing issues </li></ul><ul><li>Regulatory requirements - separate operating frequencies </li></ul><ul><li>However </li></ul><ul><li>Sharing would help to reduce the amount of base stations </li></ul>T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.
  7. 7. The ugly tail. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Half the mobile network captures ca.10% of the revenue – Top 10% of the sites captures 50% (or more) of the revenue. 50% revenue ≈ 1,000 sites 30% Top Sites ≈ 80% revenue Remaining 5,000 sites takes less than 10% revenue Low profitability sites
  8. 8. Network Sharing GSM, UMTS, LTE and WiMax will provide significant Opex synergies in the form of sustainable savings as well as cost prevention. Opex synergies by sharing. Cost Distribution Synergy Potential Overall Cost Impact 1 Personnel Transmission Site Leases Maintenance & Repair Services Other Costs Cost Type Synergies 1 Expected impact relative to relevant cost structure. 2 Mobile Network with > 80% Micro waves in Backhaul , 3 Mobile Network with more than 90% Leased lines, 4 Mobile Network size dependent as well as slightly dependent on macro-economical factors; 5 Varies with network size and macro-economical factors, 6 Services relates to 3rd party services. Depends on degree of outsourcing and, 7 around 50% relates to power consumption and range is driven by network size. = High <ul><li>Total Synergy </li></ul>- 10% to 15% 5% 2 to 24% 3 35% to 45% 4 5% to 15% 5 10% -20% 6 5% to 15% 7 50% to 60% T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Shared by two = Low
  9. 9. Characteristics of 1-only operator with MVNO. Legend: TRX : Transmitter/Receiver (RF-part) PA : Power Amplifier ATM : Transmission switch OMC-R : Operation and Maintenance Center Radio network Channel Elements : Data processors for different services RNC : Radio Network Controller controlling the Node-Bs Channel Elements TRX Op 1 Individual Power, Airco, Cabinet, Alarm,… PA Op 1 X X X X RNC Node-B Op 1 (1 of 3 sectors) Core Op 1 OMC-R Op 1 ATM Transm. I ub Since prior to UMTS deployment all possible (and impossible) sharing scenarios have been discussed and studied in detail. Core MVNO T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.
  10. 10. Characteristics of Node-B (RAN) sharing (1/2). Node-B Node-B Shared RNC Core Op 2 Core Op 1 Shared I ub Shared Channel Elements TRX Op 2 TRX Op 1 Shared Parts Power, Airco, Cabinet, Alarm,… ATM transm. Configuration example Note other transmission schemes could be deployed X X X X E.g. RNC at any MSC location X X X X Shared RNC I ur Node-B (1 of 3 sectors) Node-B PA Op 2 PA Op 1 Legend: TRX : Transmitter/Receiver (RF-part), PA : Power Amplifier, ATM : transmission switch, OMC-R : Operation and Maintenance Center Radio network, Channel Elements: data processors for different services, RNC : Radio Network Controller controlling an amount of Node-Bs. OMC-R shared OMC-R Op 1 OMC-R Op 2
  11. 11. Characteristics of Node-B (RAN) sharing (2/2). Node-B Node-B Shared RNC Core Op 2 Core Op 1 Shared I ub Shared Channel Elements TRX Op 2 TRX Op 1 Shared Parts Power, Airco, Cabinet, Alarm,… ATM transm. Configuration example Note other transmission schemes could be deployed X X X X E.g. RNC at any MSC location X X X X Shared RNC I ur Node-B (1 of 3 sectors) Node-B PA Op 1 & 2 Legend: TRX : Transmitter/Receiver (RF-part), PA : Power Amplifier, ATM : transmission switch, OMC-R : Operation and Maintenance Center Radio network, Channel Elements: data processors for different services, RNC : Radio Network Controller controlling an amount of Node-Bs. OMC-R shared OMC-R Op 1 OMC-R Op 2
  12. 12. More than 50% of all Network Related TCO comes from site-related operational and capital expenses. Total cost of ownership synergies. Site Rental Energy Operate & Maintain Leased Transmission Resources Site-related Opex Radio Node Ancillary Transmission Build / Civil Works Resources Site-related Capex Opex + Annualized Capex = TCO Synergy Potential Antenna T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. - = Low = High
  13. 13. Network sharing example– cost reduction. 2 Operators with each 10,000 site locations intending to share 80% of existing pool and decommission 8,000 site locations. A is leased line based B is Micro Wave based 120 30 90 …… . 120 Yr1 Yr2 Yr3 Yr10 Opex Synergy per Operator “ Easily” between 30% and 36% (relevant) Opex saving by RAN sharing (In m€) T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.
  14. 14. Network sharing example– uncertainties. …Whilst the saving potential is substantial keep in mind: T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. 20% Personnel Costs 60% Site Rental 13% Services 7% Other Costs <ul><li>Landlord accepts a cut in lease income, i.e., two operators under same lease. </li></ul><ul><li>Lease cost asymmetry, e.g., 1 party has GSM & UMTS, the other only UMTS. </li></ul><ul><li>Labor laws. </li></ul><ul><li>Staff resistance. </li></ul><ul><li>Loss of key resources. </li></ul><ul><li>JV overhead. </li></ul><ul><li>Termination of existing contracts. </li></ul><ul><li>Supplier mismatch. </li></ul><ul><li>Internal contract synergies being violated. </li></ul><ul><li>Legal aspects of contract sharing. </li></ul><ul><li>Complexity. </li></ul>
  15. 15. Network sharing example– restructuring cost. Decommission 8,000 site locations and sharing 10,000 sites gives a steady-state Opex saving of €120M per operator - But there is no such thing as a free meal: 60 Remove & Restore Lease termination 70 Personnel cost 25 Other cost 15 Asset Write-off >100 >270 one off 120 (In m€) In cost-reduction scenarios count on at least twice the annual Opex savings in restructuring cost. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. annual saving
  16. 16. … .and the real world is not symmetric. Operator A Operator B T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. 40% market share 20% market share Cover 98% of country Cover less than 50% of country Incumbent status Greenfield / new-entrant status Leased-line based backhaul MW-based backhaul Relative old equipment New equipment Multiple suppliers No supplier match Less efficient More efficient GSM & UMTS UMTS only 15,000 locations 5,000 locations
  17. 17. Backhaul sharing – mobile broadband challenge T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. ……… Note: E1 = 2.048 Mbps Above display is for illustration only purposes. 80 – 600+ Mbps 40 - 300 E1 LTE <2 E1 GSM GPRS 4 Mbps <4 E1 EDGE 8 Mbps <6 E1 R99 12 Mbps 1 st gen. HSPA <12 E1 24 Mbps 2 nd gen. <20 E1 40 Mbps High-Capacity Microwave radios (100Mbps (today) – 1 Gbps with mm-wave band) Leased Line Fiber-to-Premise (Base Station/Hub) Sharing benefit High Low
  18. 18. Network sharing – summary. Network Sharing can significantly reduce Opex costs and capital requirements. High restructuring costs and write-offs may not be (financially) acceptable (short to medium term). Mobile broadband (HSPA, LTE,..) requirements may force network sharing thereby reducing backhaul investments. Changed mindset by the operators and regulators is required (i.e., network not a competitive differentiator). T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.
  19. 19. Why not to share your network? Strategic lock-in Deal complexity Asymmetric benefits High restructuring cost Coordination overhead Competitive disadvantages Integration complexity Growth limitations Asset write-off Regulatory scrutiny Loss of independence T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Staff resistance Dis-entanglement very complex
  20. 20. Thank you for your attention. [email_address] M +31 6 2409 5202

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