Economics of Network Sharing

T-Mobile International AG & Co. KG Confidential and ProprietaryAll rights reserved. No part of this report may be reproduced in any material form

without the written permission of the copyright owner.

Economics ofNetwork Sharing

Network Sharing Strategy ForumLondon, September 24th, 2008

Kim Kyllesbech LarsenNetwork Economics, T-Mobile International

2

Why share your network?

OPEX Saving (ca. 30%)Capex prevention (>30%)

Personnel efficiency

Network effic

iencyEnvironmental Improvements

Customer benefits

OPEX prevention

Operational efficiency

Less spectrum demand

Extended coverage

“cheap” M&A alternative

T-Mobile International AG & Co. KG Confidential and ProprietaryAll 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

A sharing anecdote.

Initial discussion with Orange NL started in mid ‘01.

JV operational from mid ‘02 to ‘04.- Common 3G rollout organization (Opex and Capex).

- Common pool of GSM locations for co-locating 3G Equipment (Opex).

- Common Site Acquisition & Site Build (Capex/Opex).

- Shared ancillary & transmission (Capex).

JV closed down in YE ‘04.- Key expertise remained in the respective organizations (staff resistance).

- Differences in rollout strategies (divergence from original expressed strategies).

- TMNL’s policy not to use battery backup for UMTS nodes made ancillary sharing redundant.

- Detailed analysis showed utilizing own existing GSM infrastructure (standalone) for 3G co-location provided lower cost and invest than sharing with another operator.

Oct ‘07 T-Mobile acquire Orange; network consolidation started.

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.


4

Stages of sharing benefits?

Rollout Phase Steady State Renewal /

Obsolescence

Capex savings Opex prevention

Little Capex benefits Opex savings Significant write-off Re-structuring cost

Capex savings Opex savings Opex prevention Minor write-off Re-structuring cost

< 5 years 4 – 8 years

UMTS LTE

> 7 years


GSM/UMTS

5

Network sharing – opportunity.

Where are we today?- Operators have built national radio infrastructures in parallel.

- Multiple cost …

Why?- Competition – coverage was a key market differentiator

- Regulatory – the licence required it

Now!- Coverage – less of a differentiator.

- Services – the real differentiator.

- Cost is now a key driver!!


6

Network sharing – the pressure.

Cost?- Around 55% of the Operators Network Opex is in the RAN infrastructure.

- Sharing reduces Opex pressure.

- Sharing reduces Capex pressure. Upgrade costs – 2G refresh, mast upgrades.

Replacement costs – LTE.

An opportunity to improve Profitability

But!- Technical problems may raise marketing, service and billing issues

- Regulatory requirements - separate operating frequencies

However- Sharing would help to reduce the amount of base stations


7

10,0009,0008,0007,0006,0005,0004,0003,0002,0001,0000

Sites

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ulat

ed R

even

ue

The ugly tail.


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

Low profitability sites

30% Top Sites ≈ 80% revenue

Remaining 5,000 sites takesless than 10% revenue

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 Impact1

PersonnelTransmissionSite LeasesMaintenance & RepairServicesOther Costs

Cost TypeSynergies

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.

= Low

= High

Total Synergy -

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

9

Characteristics of 1-only operator with MVNO.

Legend:TRX: Transmitter/Receiver (RF-part)PA: Power AmplifierATM: Transmission switchOMC-R: Operation and Maintenance Center Radio networkChannel Elements: Data processors for different servicesRNC: Radio Network Controller controlling the Node-Bs

ChannelElements

TRXOp 1

Individual Power, Airco, Cabinet, Alarm,…

PAOp 1

XXXX

RNC

Node-BOp 1 (1 of 3 sectors)

CoreOp 1

OMC-ROp 1

AT

MT

ran

sm.Iub

Since prior to UMTS deployment all possible (and impossible) sharing scenarios have been discussed and studied in detail.

CoreMVNO


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Characteristics of Node-B (RAN) sharing (1/2).

Node-BNode-B

Shared

RNC

CoreOp 2

CoreOp 1

Shared Iub SharedChannelElements

TRXOp 2

TRXOp 1

Shared PartsPower, Airco, Cabinet, Alarm,…

AT

M t

rans

m.

Configuration exampleNote other transmission schemes could be deployed

XXXX

E.g. RNC at anyMSC location

XXXX

Shared

RNC

Iur

Node-B (1 of 3 sectors)

Node-B

PAOp 2

PAOp 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-Rshared

OMC-ROp 1

OMC-ROp 2

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Characteristics of Node-B (RAN) sharing (2/2).

Node-BNode-B

Shared

RNC

CoreOp 2

CoreOp 1

Shared Iub SharedChannelElements

TRXOp 2

TRXOp 1

Shared PartsPower, Airco, Cabinet, Alarm,…

AT

M t

rans

m.

Configuration exampleNote other transmission schemes could be deployed

XXXXE.g. RNC at any

MSC location

XXXX

Shared

RNC

Iur

Node-B (1 of 3 sectors)

Node-B

PAOp 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-Rshared

OMC-ROp 1

OMC-ROp 2

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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

= Low = HighSynergy Potential

Antenna


-

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Annual RAN Opex (€m) 335Operator B % of total RAN Cost Opex %Saving Saving

Personnel Costs 18% 60 40% 24Transmission 4% 15 0% 0

Site Rental 54% 180 40% 72Services 12% 40 40% 16

Other Costs 12% 40 20% 8Total 335 36% 120

Annual RAN Opex (€m) 400Operator A % of total RAN Cost Opex %Saving Saving

Personnel Costs 15% 60 40% 24Transmission 20% 80 0% 0

Site Rental 45% 180 40% 72Services 10% 40 40% 16

Other Costs 10% 40 20% 8Total 400 30% 120

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€)


14

Network sharing example– uncertainties.…Whilst the saving potential is substantial keep in mind:


20% Personnel Costs

60% Site Rental

13% Services 7% Other Costs

- Landlord accepts a cut in lease income, i.e., two operators under same lease.

- Lease cost asymmetry, e.g., 1 party has GSM & UMTS, the other only UMTS.

- Labor laws.- Staff resistance.- Loss of key

resources.- JV overhead.

- Termination of existing contracts.

- Supplier mismatch.- Internal contract

synergies being violated.

- Legal aspects of contract sharing.

- Complexity.

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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

Leasetermination

70

Personnelcost

25

Othercost

15

AssetWrite-off

>100

>270oneoff

120

(In m€)

In cost-reduction scenarios count onat least twice the annual Opex savings

in restructuring cost.


annualsaving

16

….and the real world is not symmetric.

Operator A Operator B40% 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 locations5,000 locations


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80 – 600+ Mbps

40 -300E1

LTE

Backhaul sharing – mobile broadband challenge


<2 E1

GSMGPRS

4 Mbps<4 E1

EDGE

8 Mbps <6E1

R99

12 Mbps

1st gen.

HSPA

<12E1

24 Mbps

2nd gen.

<20E1

40 Mbps

High-Capacity Microwave radios (100Mbps (today) – 1 Gbps with mm-wave band)Leased Line

Fiber-to-Premise (Base Station/Hub)

………

Sharing benefit

HighLow

Note: E1 = 2.048 MbpsAbove display is for illustration only purposes.

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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).


19

Why not to share your network?

Strategic lock-inDeal complexity

Asymmetric benefits High restructuring cost

Coordination overhead

Competitive disadvantages

Integration complexity

Growth limitationsAsset write-off

Regulatory scrutiny

Loss of independence


Staff resistance

Dis-entanglementvery complex

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Thank you for your attention.

[email protected] +31 6 2409 5202

Technology

Economics of Network Sharing