Mobile Broadband Economics

8/7/2019 Mobile Broadband Economics

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Understanding

The

Profitability Dynamicsof Mobile Data

London, 16 November 2009

Informa Telecoms & Media

Broadband Traffic Management Conference

Rewheel


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Rewheel Who are we?

Leading specialists ofmobile datastrategy, profitability improvementand infrastructure sourcing

Founded in 2009, headquartered inFinland

Slide | 2www.rewheel.fi 2009 Rewheel

Earned the trust and satisfaction of leading industryplayers from Nordics, Western Europe, Central-Eastern

Europe, Middle East & Africa:


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Costs associated with mobile data

Traffic and subscriber independent fixed costsSpectrum licence fees*

Initial coverage investments (with initial capacity)

Recurring yearly expenditures (OPEX) linked to coverage

Above The Line (ATL) marketing communicationsOther various technical and non-technical overheads that can beassociated with mobile data


Non-network A&R costs: terminal subsidies, sales commissions, BTL

Busy Hour PDP context and Attached User capacity in PS Core network

Directly data traffic driven variable costsBusy Hour Throughput Capacity of Radio Access, Access Transmission,PS Core, PS backbone, Internet connectivity

Target of Bandwidth Management

* Except for certain markets having usage/carrier number based frequency fee components


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Directly data traffic driven costs

Capacity upgradesCAPEX

Pay as you grow

Radio, Access Transmission, PS Core, PS Backbone

Incremental earl ex enditures


OPEXVendor support & maintenance proportional to capacity

Vendor software release upgrades (e.g. yearly) - CAPEX

Leased line fees proportional to capacity

Electricity costs related to capacity (more base station hardware

consumes more)


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The initially under-utilised network capacities are nowsaturating. The primary driver of MBB production costswill be the CAPEX&OPEX for incremental network

capacity

ive3GNe

twork

CAPEX

RNCcapacity,ChannelElements

NodeBBaseband

PS Core,2nd WCDMA

CarriersRAN

Softwareversionupgrade

3rd WCDMACarriers

CapacityCAPEX

Slide | 5www.rewheel.fi 2009 Rewheel 2009 Rewheel

The initial 3G network configuration can accomodate a certain number of data subscribers without signiciantincremental capacity related expenditures. But soon additional CAPEX and OPEX will need to be spent for

every single subscriber added on the network, representing a major share of overall MBB producion costs.

Cumula

t

2007 2008 2009 2010 2011 2012

config,installation,

etc

o es

Backhaul

CoverageCAPEX

* Source Rewheel

one-off networkcapacity CAPEX of

adding a5GB/month user can

exceed 500 *


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Capturing marginal production costs

Incremental CAPEX[Paid one-off for upgrading the capacity]

Networkcosts

CAPEXDriven by change

in traffic level

Slide | 6www.rewheel.fi

After the inital network capacities are saturated, the growth of traffic will trigger substantialincremental CAPEX and increasing yearly OPEX. The CAPEX is driven by the change (growth)

of traffic demand, while the yearly (recurring) OPEX is driven by the actual traffic level.

Capacity

Increase in yearly OPEX[Permanent OPEX level increase]

Network capacityexpressed e.g. as traffic volumetransported in the busy hourat a certain user experience level

OPEXDriven bytraffic level


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Production cost of MBB highly depends on networkcapacity costs which are determined by many factors

Radio network density

Average cell capacity

Traffic geo-distribution

Radio network technology

HSDPA, HSPA, HSPA+, LTE

Access Transmission Technology

E1 or IP?Self built or leased?

Vendor platforms

HW ready for large capacity?

HW expansion needed when traffic grows?

Unitar vendor rices

?

ARPU/Month


Production costs directly depend on the targeted user experience. If operator decides to delayadding extra capacity, marginal production costs can be squeezed down dramatically. The

question is, until what point will the market tolerate the degrading broadband experience.

HW and SW Licence pricesSW upgrade prices

Support & Maintenance costs

Vendor pricing mechanisms

Pay (or Pray?) As You Grow?

Or software licences disconnected from traffic?

Target User QoS

1 Mbit/s vs 3 Mbit/s per user in the busy hour?

Or Best effort?

USAGE (MB/Month)

* Directly traffic driven variable network costs


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How much network cost does a data subscribertrigger?

ctlyDataTraffic

PEX&OP

EXper

bscriber

When adding asubscriber, the network

capacity needs to be

upgraded according toits data usage

Every year incremental

CAPEX needs to be

spent to keep up with

the subscirbers usage

increase

Network CAPEX

investments often

trigger recurringincremental operational

expenditures (e.g.

support fees)

OPEX

CAPEX


A single /Mbyte cannot adequately capture the cash implications of incremental data trafficon the network. The only way to frame the true cost dynamics is breaking down the high level

/Mbyte cost benchmark to one-off and recurring cost components.

YearlyDir

DrivenC

S

Year1 Year2 Year3 Year4 Year5 Year6


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"How Much Does a Subscriber Cost?" - CASH View - Per YearDirect CAPEX+OPEX triggered by a subscriber added in first year.

Including acquisition costs in first year, excluding retention costs in

subsequent years.

Smart phones

Low usage handhelds

Different mobile data subscriber segments can havevery different production costs

20% subscriber usagegrowth per year


Years

Cas

Mobile broadband bunded with fixed

Complementary connections

Substitutive

First time broadband

2009 Rewheel

The first year of typical PC connectivity user is characterised by heavy incremental networkcapacity investments and significant subscriber acquisition costs (sales commissions +

dongle/netbook/laptop subsidy)


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Operarors can live with temporarily losing moneyon mobile broadband susb acquisitions

Cumulative Cash Flow per Subscriber Added in first year

Including terminal subsidy and sales commission in first year. Excluding

retention costs in subsequent years.

low

Smart phones

Low usage handhelds



The CAPEX intensive nature of MBB turns the PC connectivity (heavier usage) subscriber cashflow negative in the 1st year. Operators accept to pay this price for gripping the long term

potential in mobile data.

Years

Cas

h



Substitutive



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Segment Level Cumulative Cash Flow from New Additions from the first

year on Existing Coverage Areas

Including terminal subsidy and sales commission

low

Smart phones

Low usage handhelds

But considering the overall segment level cash flowcontribution the outlook becomes grim



Years

Cashf



Substitutive


2009 Rewheel

While on subscriber level the cumulative cash flow turns positive in the 2nd year, this is notnecessarily true for the entire segement. Every year more money needs to be spent in capacity

upgrades an A&R expenditures than the cash generated by subs added in earlier years.


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Segment level cash flow is extremely sensitive toaverage usage per subs

hflow

hflow

hflow





The uncertainty of future demand of mobile data subscribers poses an enrmous profitabilityrisk for the operatos. In reality, operators will not afford to invest the required cash which

means the network congestion will dramatically degrade broadband user experience.

Years

C

as

Years

C

as

Years

C

as


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w

Segment Level Cumulative Cash Flow from New Additions from the first

year on Existing Coverage Areas

Including terminal subsidy and sales commission

ow

Smart phones

Low usage handhelds

Excluding A&R, CF turns acceptable



Years

Cash

fl

Years

Cas

hfl



Substitutive


2009 Rewheel

Combining the low margin, CAPEX intensive MBB business with extensive terminal subsidiesmay not be sustainable in the long run. Excluding acquisition & retention the picture looks

much nicer.

No subsidiesand salescommissions


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ashflow

ashflow

Manage cash flow by under investing in capacity?

1-2 Mbits/s 2-4 Mbits/s


Years

C

Years

C

2009 Rewheel

Positioning mobile broadband as a credible substitutive alternative to fixed (DSL or cable)broadband will require QoS of 3-4 Mbit/s in the medium term. Operators may choose to offer

lower user experience but by doing that they will run the risk of losing markets share.


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Some operators still tend to play down the severityof the capacity crunch

Argument The truth

Only very few base stations have reached their capacitylimits, most of them are running on very low utilisation. Sothere is still plenty of room for traffic growth withoutsignificant incremental network costs

Engineers are gradually adding hardware boards and heftysoftware licences to the majority of base stations. Thiskeeps the utilisation metric under control, while the datacapacity related expenditures take more and more share ofthe CTOs budget

Many central network elements are priced on a pay as yougrow basis. This means that incremental CAPEX needs tobe paid to the vendor for every additional Mbit/s peakcapacity, even if the base stations are under-utilised

So far there is no sign that the exponential traffic growthwould hurt o erators CAPEX to Sales ratios or rofitabilit

Most operators have been under-investing in capacity andstarted to cut non network ca acit related costs such as


KPIs like EBITDA & EBIT

3G coverage expansions, salaries ...). Thus the top level

financial KPIs can hide the fundamental economicalunsustainabilites unfolding below the surface

Many operators have been under-investing in capacitywhich is becoming apparent in recent customer satisfactionsurveys

The usage of normal users can be served in a profitableway. Manage bandwidth usage of heavy users and the

problem is solved

The share of data volume generated by heavy (p2p) usersis declining. Video usage (e.g. Youtube) is becoming

mainstream pushing average usage of normal mobilebroadband subscribers to 5+ GB.


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Technology black magic to maintain dataprofitability

Technology evolution step Promised benefits The truth

3.6, 7.2, 21, 42 Mbps HSPA HSPA evolution will multiply cell capacityby means of simple software upgradethus driving down production costs Peak speed Cell capacity

Throughput improvement can be

achieved only in very good radioconditions

Average cell capacity improvement willbe as low as 10-25% percent (steppingfrom 7.2 to 21Mbps peak speed)

These features have a hefty price, often


linked to the aggregate network

throughput (!)

HSPA+ MIMO MIMO technolgy nearly doubles spectralefficiency, reducing production costs

The number of base station radio units(most expensive hw) needs to bedoubled to enable MIMO. Thus costsaving is minimal

Sectorisation By adding more sectors, the existingspecturm can be reused, delaying newspectrum acquisition

Adding a new sector means buyingexpensive radio units into the basestations

New frequencies (2nd carrier) can beswitched on without buying additionalspectrum

No need for new spectrum in the next 2-3 years

True, but base station vendors ask ahefty price for so called carrier upgrades(either software or hardware)

LTE Cost/MB will be significantly less due tohigher spectral efficiency

Cost/MB is primarily determined by thevendors pricing mechanism and notspectral efficiency. As GSM and UMTSequipment sales decline, vendors will beforced to milk operators when they

upgrade to LTE


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Key takeaways

Serious economic unsustainability unfolding below the surface

Co-ordinated actions required on technology, supply chain andcommercial fronts

Technology Supply Chain Commercial

Proactively upgrade capacityto prevent degradation ofbroadband experience

Negotiate sustainableinfrastructure pricingmechanisms (preventingpray as you growsituations

Map out traffic demand andidentify minimum networkquality KPIs required tosatisfy expectations of massmarket

CapacityInvestments


Deploy performance andcapacity improvementfeatures and invest inplatform modernisations

Negotiate reasonable featurepricing mechanisms based onstrict cost/benefit appraisal

Maximise positive brandimpact of technology featuresby smart marketingcommunicattions

Deploy bandwidthmanagement capabilities

Before restricting end usertraffic, push infra vendors forGigabyte-ready capacitypricing mechanisms

Prevent massive customerturn-off due to overdegrading user experience(e.g. throttling speed tooearly or too much)

Deploy techology featuresnecessary for differentiatedtreatment of different marketsegments

Ensure that the cost of suchfeatures is in-line with theassociated economic benefits

Maximise ARPU bysegmented mobile datapropositions

Reconsider level of terminalsubsidies

TechnologyEvolution

UsageControl

CustomerSegmentation


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Thank you

check our mobile data

profitability insights at


insights.rewheel.fi

Documents

Mobile Broadband Economics