Prospects for advanced mobile networks: Financials and market uptake

1
Prospects for advanced mobile networks
Financials and market uptake
Erik Bohlin Chalmers University of Technology,
Sweden
2
Outline of presentation

• Two cases to illustrate future financials
• 3G financials in Sweden
• Wireless/wired substitution economics

Bohlin Björkdahl / Financial analysis
3
Case 1 3G simulation
To exemplify with a detailed model prospects for
3G - model is of general applicability -
Swedish case is not skewed with large licensing
fees auctions
Financial results are based upon license
conditions incl network sharing and promises
made by applicants Model shows variation of
financial standing, but also challenges for all
Bohlin Björkdahl / Financial analysis
4
Cash flow model
Bohlin Björkdahl / Financial analysis
5
UMTS penetration
Number of users having at least one 3G device
Source BCG estimates from 2001 to 2010

• A decrease in penetration is expected after
  2011, due to the
• introduction of 4G

Bohlin Björkdahl / Financial analysis
6
Average Revenue Per User (ARPU) (2)

• Different ARPU due to different strategies, with
  flat rate

- From 39 to 56 per month
Tele2 39 Telia 44 Europolitan
Vodafone 56 HI3G 44 Orange Sverige 39
Bohlin Björkdahl / Financial analysis
7
UMTS set-up costs

• New base station/site costs approx. 111,000
• Reusing old base station/site costs approx.
  33,000
• Additional costs around 10
• Network sharing acc to license rules

Bohlin Björkdahl / Financial analysis
8
Example of a cost structure HI3G
- Estimates of HI3Gs cost structure - Costs over
15 years - Marketing and set-up costs are the
largest
Bohlin Björkdahl / Financial analysis
9
Tele2
Bohlin Björkdahl / Financial analysis
10
Telia
Bohlin Björkdahl / Financial analysis
11
Europolitan Vodafone
Bohlin Björkdahl / Financial analysis
12
HI3G
Bohlin Björkdahl / Financial analysis
13
HI3G

• To get a positive NPV, HI3G has to get
• an average ARPU of 74 per month or more, or
• an average market share of 27 or more, or
• an average OPEX of 145 million per year or less

Bohlin Björkdahl / Financial analysis
14
Orange Sverige
Bohlin Björkdahl / Financial analysis
15
Orange Sverige

• To get a positive NPV, Orange Sverige has to get
• an average ARPU of 56 per monthor more, or
• an average market share of 28 or more, or
• an average OPEX of 170 million per year or less

Bohlin Björkdahl / Financial analysis
16
Sensitivity analysis, ARPU
- ARPU, 10 per month less than in the base case
scenario
Bohlin Björkdahl / Financial analysis
17
Sensitivity analysis, ARPU
- ARPU, 10 per month more than in the base case
scenario
Bohlin Björkdahl / Financial analysis
18
Sensitivity analysis, UMTS penetration
- Half the penetration in the base case scenario
Bohlin Björkdahl / Financial analysis
19
Case 1 Conclusions

• No auction, but 3G still a challenge in Sweden
• Network sharing is a considerable cost saving
• Set-up cost is not biggest portion of total cost
• Incumbents will be less profitable than 2G
• Greenfielders will have an even harder time
• Market demand user benefits critical to
  business case

Bohlin Björkdahl / Conclusions
20
Case 2 Fixed to mobile substitution

• We would expect growth of mobile to lead to
• an initial increase in fixed network traffic
  (complementarities)
• then a decline in the fixed network
  (substitutions)

21
Case 2 Fixed to mobile substitution Simulation
example Assumptions

• Penetration very high in both fixed and mobile
  market
• Incumbent with fixed and mobile networks (all
  generations)
• Dominant in fixed market
• High market share (50) in 2G
• Usage patterns (2002)
• Traffic per user month
• mobile outgoing and incoming traffic 100 min.
  increase
• fixed to mobile c. 20 min. increase
• total outgoing traffic from fixed network c. 500
  minutes trend unclear, signs of decrease
• Thus, mobile still generates more traffic in
  fixed network than it substitutes for, but there
  are signs of a substitution effect

22
Case 2 Fixed to mobile substitution Base case
scenario selected assumptionsMarket share for
mobile networks
Note Relatively, slow initial adoption of 3G in
base case scenario
23
Case 2 Fixed to mobile substitution Assumptions
Price and price elasticity
Price per minute
Price elasticity for mobile
Competition will stimulate price
reductions Note Interconnect costs will decrease
proportionally. Fixed fees included.
Note Price elasticity will go up when price
difference is smaller
24
Case 2 Fixed to mobile substitution Assumption
ARPU Forecast
Voice will continue to dominate revenues for many
years!
Note Year 2002 known. Voice traffic based on
model (price etc.). Other traffic based on
assumptions
25
Case 2 Fixed to mobile substitution Assumption
degree of substitution
Note degree () of substitution increases as
prices are reduced! Also full substitution
(100) imply that there is a one-to-one
correspondence between traffic increase in mobile
and traffic reduction in the fixed network
26
Case 2 Fixed to mobile substitution Results
base case scenario
Lost revenues for incumbent will eat up increased
earnings in mobile!

• Lessons
• Fixed mobile substitution is a potential loss for
  incumbents
• Incumbents will seek to reduce losses
• Policy challenges will emerge

27
Case 2 Fixed to mobile substitution Lessons
learned

• Growth (line, traffic and earnings) will mainly
  in mobile networks
• Growth will be increasingly at the expense of
  fixed traffic substitution
• 3G will have a negative impact on incumbents
  earnings since
• increases in mobile earnings cannot fully
  compensate for fixed mobile substitution revenue
  losses
• increases in 3G earnings cannot compensate for
  decreases in 2G earnings
• this negative effect is even more dramatic if
• prices decrease rapidly
• 3G diffuse rapidly

28
Case 2 Fixed to mobile substitution Implications

• The loss due to rapid substitution holds for all
  networks
• 2G to 3G
• Fixed to mobile
• Incumbents will seek strategies that maximize
  their profits
• Incumbents will have strong incentives to delay
  substitution
• New pricing schemes may emerge
• fixed-mobile bundled
• flat-rate broadband including voice
• bundled 2G-3G

29
CONCLUSIONS

• We are moving towards a mobile knowledge economy
• Mobile contributes to economic growth possibly
  more than fixed (given right pricing)
• But advanced 3G networks are challenged on
  several fronts
• Wireless to wired substitution suggest that
  incumbent fixed operators will favor their fixed
  networks
• MOBILISING MAKING MOBILE WORK FOR EUROPE look
  for this EOI at CORDIS

30
Thank you!Questions?