The future of spectrum pricing S Zehle Coleago 24 jan 17 sz

The future of pricing spectrum
Stefan Zehle
CEO, Coleago Consulting Ltd
+44 7974 356 258
stefan.zehle@coleago.com
www.coleago.com
Forum Global 3rd Annual Middle East and North
Africa Spectrum Management Conference
Dubai, 24th of January 2017

A specialist telecoms management
consulting firm
About Coleago Consulting
© copyright Coleago 2017 1
The Future of Pricing Spectrum

Since 2001, Coleago has offered a wide range of advisory services to
the telecom industry
2© copyright Coleago 2017
Strategy & Business Planning
 Strategy Development, Marketing Strategy
 MVNO and Multi-Brand Wholesale Strategy
 Business Planning and Business Modelling
Telecoms Regulation & Interconnect
 Accounting Separation, Regulatory Price
Control
 Interconnect Cost Modelling, RIO
 Regulatory Consultations
Business Transformation & Cost
Reduction
 Cost Reduction
 Mobile Network Sharing
 Restructuring and Turnaround
Transaction Services
 Commercial Due Diligence
 Tower Due Diligence
 Preparation of Information Memorandum
Spectrum Valuations and Auctions
 Spectrum Strategy
 Spectrum Valuation for Auctions
 Spectrum Auction Bid Strategy and Execution
 Beauty Contest Bid Books
Mobile Network Sharing
 Mobile Network Sharing
 Managed Services and Outsourcing
 Tower Due Diligence
 Network Audit

Coleago has carried out over 70 spectrum consultation, valuation,
auction and beauty contest licence projects
Completed in 2015-16
 South Africa – 800, 2600MHz
 Ghana – 800MHz
 Russia – 1800MHz
 UK - 3.4, 3.5, 3.9GHz
 Ukraine – 2100MHz
 Argentina – 900, 1800, 700MHz,
AWS
 Canada - AWS-3 and 2.5GHz
 Bangladesh – 700, 1800, 2100MHz
 Guatemala – 3.5GHz
Completed in 2013-14
 Canada – 700MHz
 Paraguay - multi-band
 Oman - 800MHz & 2.6GHz
 Belgium - 800MHz
 New Zealand - 700MHz
 Myanmar - greenfield
 Australia - 700MHz & 2.6GHz
 UK - 800MHz & 2.6GHz
 Sri-Lanka - 1800MHz
3
© Copyright Coleago 2016 - www.coleago.com
© copyright Coleago 2017

Forum Global 3rd Annual Middle East
and North Africa Spectrum Management
Conference, 24th of January 2017
The future of pricing spectrum
4
Stefan Zehle
CEO, Coleago Consulting Ltd
+44 7974 356 258
stefan.zehle@coleago.com
www.coleago.com

There is little mobile service revenue growth and in many markets
industry revenue declines in nominal and real terms
5
Source: ML BoA Global Wireless Matrix Oct 2016

The growth in data traffic far outpaces growth in revenue; there is
little incremental revenue from data
 In mobile markets world-wide, mobile
data growth is exponential. This growth
is likely continue.
 However, revenue growth - if any - is
minimal compared to the growth in
data volume.
 The notion that investment in LTE
generates much additional revenue is
erroneous.
6
0
100
200
300
400
500
600
700
1 2 3 4 5 6 7
Revenue
Data traffic
Relationship between mobile revenue
and mobile data volume (illustrative)
Years
TrafficVolumeandRevenue

Over time mobile operators use more spectrum to cope with the
increase in data traffic
7
220
340
525
585
645
685
865 885
1155
0
200
400
600
800
1000
1200
1998 2002 2010 2012 2016 2017 2018 2019 2020
MHzSpectrum used by mobile in ITU Region 1
900 - B 8 1800 - B 3 2100 - B 1 2600 - B 7
2600 - B 38 800 - B 20 700 - B 28 1500 - B 32
3500 - B 42 3700 - B 43 700 - B 67 600 - B TBC

Mobile market revenue per MHz of spectrum used to produce the
revenue is declining, example Canada
8
81
55
53
50
36
0
10
20
30
40
50
60
70
80
90
2007 2008 2012 2014 2015
CN$millionperMHz
Revenue per MHz of spectrum deployed

Many governments benchmark against prices paid for spectrum in
past auctions to set prices for new spectrum and licence renewal
Band MHz
800MHz – B20 60
700MHz – B28 60
900MHz – B8 70
600MHz - TBC 90
Are prices paid for digital dividend
800MHz (band 20) an indication of the
price that should be charged for
 assigning 700MHz (band 28),
 assigning the future 600MHz, and
 renewing 900MHz (band 8)?
9

The value of spectrum to an operator depends on the value it brings
to an operator’s business in terms of future cash flow
Band MHz
800MHz – B20 60
700MHz – B28 60
900MHz – B8 70
600MHz - TBC 90
10
First opportunity to provide wide geographic
LTE coverage
In some markets ability to deprive competitors
of access to the spectrum (blocking value)
No coverage value, only capacity value
Keep GSM / 3G going for a few years, later
additional LTE capacity
No coverage value, only capacity value
The value of incremental sub 1-GHz spectrum to use for LTE is lower with
each increment

Setting prices for spectrum by benchmarking against results from
past auctions is deeply flawed
Band MHz
800MHz – B20 60
700MHz – B28 60
900MHz – B8 70
600MHz - TBC 90
Total sub 1 GHz 280
The maths doesn’t stack up
 Let’s assume operators paid US$ 0.50 per MHz
per pop for 800MHz spectrum, i.e. US$ 30 per
pop for the band.
 If all spectrum is charged at the same rate, the
cost of sub-1GHz spectrum to the industry would
be US$ 140 per pop, an increase of 467%.
 Whereas
– revenue increases are nowhere near that
number and
– in most markets there is also no significant
increase – and in many cases decreases - in
free cash flow, excluding investment in
spectrum (EBITDA less tangible CAPEX less
corporation tax)
11

Prices paid in the past are no indication of the value of spectrum to
operators in future assignments, example Germany
12
800MHz B20
2010
900MHz B8
2015
700MHz B28
2015
€0.24 /
MHz / pop
€0.23 /
MHz / pop
€0.73 /
MHz / pop
Prices paid at auction for sub-1 GHz spectrum in Germany

The total annual equivalent cost of all spectrum should be below 10%
of industry revenue
 The annual equivalent cost of an up-
front spectrum fee can be calculated
using an annuity formula.
 To this annualised licence fee amount
the following needs to be added to
arrive at the total annual equivalent
cost of spectrum:
– Ongoing annual spectrum fees
– Microwave spectrum fees
13
The annuity calculation formula
Annualised cost = cost of capital / (1 - (1 / (1 + cost of capital)) ^ years of licence)
 The total annual equivalent
cost of all spectrum held by
the industry should be below
of industry revenue.
 Where policy makers value
other policy goals, such as
rural coverage, the annual
cost should be below 5%.

If the cost of spectrum is to be 10% of revenue and revenue is not
growing, then the cost per MHz of spectrum has to decline
14

Regardless of the business case, cash is not unlimited: Mobile
broadband deployment may be affected by high spectrum fees
15
Demand for Mobile
Broadband and
Spectrum Need
Up-Front Prices
Paid for Spectrum
Licences
LTE Deployment
and Backhaul
Capex
Tangible (Network)
and Intangible
(Spectrum) Capex
Revenue
EBITDA
Free Cash Flow
Impact on
Operators Balance
Sheet
Cash Flow Return
on Investment -
CFROI
Annual Spectrum
Fees
The consequence: The only
way to maintain returns is to
reduce investment
Other Opex
minus
minus
minus
equals
Corporation Tax
minus

Governments must align their expectations of revenue from spectrum
sales with the economic reality of the mobile business
16
Little real revenue
growth
More spectrum
used to produce
the revenue
Revenue per MHz
of spectrum
declines
Increase in CAPEX
to deploy the
spectrum
Increase in OPEX
for backhaul
The cost of spectrum
in terms of US$ per
MHz must decline
Network costs do
not decline

Questions?
17

The future of spectrum pricing S Zehle Coleago 24 jan 17 sz

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