Presentation to Remy Cointreau on Key Strategic Issues

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UMTS UK Spectrum Auction for Third Generation
Mobile Communications
N M ROTHSCHILD SONS LIMITED March 1998
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IMPORTANT NOTICE This presentation has been
prepared on behalf of the Radiocommunications
Agency by NM Rothschild Sons Limited
(Rothschild), as financial advisor in
connection with the possible allocation of
spectrum for UMTS (UMTS Spectrum) by auction
(the Auction). The presentation (which is for
information purposes only) is made available on
the express understanding that it will only be
used by the recipient for the sole purpose of
assisting the recipient in deciding whether it
wishes to proceed with a further investigation
of possible participation in the Auction. The
presentation is not intended to form the basis of
any investment decision or other evaluation or
any decision to participate in the Auction and
should not be considered as a recommendation by
the Secretary of State, the Radiocommunications
Agency, Rothschild or its other advisors to any
recipient of the presentation to participate in
the Auction. Each person to whom this
presentation is made available must make its own
independent assessment of the potential value of
an allocation of UMTS Spectrum after making such
investigation as he may deem necessary in order
to determine whether to participate in the
Auction. All information contained in this
presentation is subject to updating, modification
and amendments. While the information contained
in the presentation is believed to be accurate,
it has not been independently verified by
Rothschilds and none of the Radiocommunications
Agency, Rothschild or any or any of its other
advisors or any of their respective directors,
partners, officers or employees make any
representation or warranty (express or implied)
nor accept any responsibility as to, or in
relation to, the accuracy or completeness of the
information contained in the presentation or any
other written or oral information made available
to any interested party or its advisors (and no
one is authorised to do so on behalf of any of
them) and any liability in respect of any
such information or any inaccuracy therein, or
omission therefrom, is hereby expressly
disclaimed. In particular, but without prejudice
to the generality of the foregoing, no
representation or warranty is given as to the
achievement or reasonableness of any future
projections, estimates, prospects or returns
contained in this presentation. The presentation
does not constitute an offer or invitation to
participate in the Auction, nor does it
constitute the basis of any contract which may
be concluded in respect of any allocation of UMTS
Spectrum. Recipients are not to construe the
content of this presentation, or any other
communication by or on behalf of
the Radiocommunications Agency, Rothschilds, or
any of its other advisors, as legal, tax or other
advice. Accordingly, cash recipient should
consult its own professional advisors as to
legal, tax and other matters concerning any
potential participation in the Auction or any
allocation of UMTS Spectrum.
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Agenda

• The UK Opportunity
• What is UMTS?
• The Current UK Market
• Specific Questions
• Next Steps

4
Introduction

• The UK Government aims to hold an auction for
  licences to operate UMTS services in 155MHz of
  spectrum in the 2GHz band
• UMTS technology offers advanced services such as
  real-time video conferencing, fast mobile
  connection to the internet and simultaneous voice
  and data transmission
• The auction is being run by the
  Radiocommunications Agency (RA), the body which
  manages and allocates radio spectrum in the UK.
• Rothschilds is the RAs financial adviser in the
  auction
• This auction offers one of the first
  opportunities in the world to secure spectrum for
  UMTS services

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The UK Opportunity

• In the first part of 1999, the UK Government
  intends to auction at least three new licences
  for the development of third generation mobile
  services
• The United Kingdom and Japan represent the first
  opportunities in the world to secure spectrum
  specifically for UMTS / IMT 2000 - the new global
  standard for mobile communications
• This should represent a springboard for UMTS
  opportunities across Eurasia and potentially the
  world
• The United Kingdom is an ideal point of entry
  for UMTS in Europe spectrum auctions and
  licensing processes are expected to take place in
  other European countries after the UK
• The auction represents an opportunity to exploit
  fixed / mobile convergence
• Access to mobile services and spectrum will soon
  become a business need for software, IT and even
  broadcasting houses
• New entrants to the UK market are actively
  encouraged

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What is UMTS?

• Universal Mobile Telecommunications Services
  (UMTS) is the European element of the global
  IMT-2000 family
• UTRA (UMTS Terrestrial Radio Access) has been
  adopted in Europe as the radio interface
  standard, with an almost identical system in
  Japan
• Roaming across Europe, Japan and other Asian
  countries should be possible, with potential for
  US roaming, subject to development of a common
  standard by the standardisation organisations
  (ETSI, ARIB and T1P1)
• It is the evolutionary next step from second
  generation digital systems and can be combined
  with existing GSM systems on dual band terminals
• It is forecast to revolutionise mobile
  communications in the same way the Internet is
  revolutionising telecoms and IT
• It should provide fast, secure and truly
  universal voice and data transmission (it
  provides up to 2Mbps), breaking down the barriers
  between fixed and mobile telecommunications,
  broadcasting and information technology

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UMTS Services

• UMTS is intended to support the following new
  high speed, interactive services for mobile
  phones, mobile terminals and laptops
• real time high quality video conferencing
• fast Internet and corporate intranet access,
  regardless of location (Web page photo UMTS
  0.4 secs/ GSM 83 secs/ fixed line 28 secs)
• broadcasting and audio on demand
• on-line banking and shopping
• enhanced quality voice, fax and e-mail
• in-car real time navigational systems
• a virtual office on one line - with simultaneous
  voice and data services make calls, receive
  faxes and remain on office network simultaneously

Working prototypes have already been developed by
manufacturers
Source UMTS Forum, Technology Aspects Group
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Convergence

• UMTS represents an opportunity to break the mould
  in the UK
• The UMTS design offers unprecedented
  opportunities to build a mobile network with
  fixed line capabilities - including all
  PSTN/ISDN services
• Growth of both data and mobile systems is proven
  separately combined, the growthopportunities
  should be even greater
• UMTS should permit the Virtual Home Environment
  (VHE) to become a reality, with just one
  personal identifier per subscriber, and access to
  UMTS facilities available to subscribers over
  both mobile and fixed networks

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UMTS - Technical standards

• Data rates
• Up to 384 kbps for wide area / high mobility data
  - sufficient for high speed quality mobile video
  conferencing
• Up to 2 Mbps for local area / low mobility data
• Comparison fastest Internet access is currently
  around 56kbps on analogue systems, 128kbps on
  ISDN
• Spectrum Allocation
• 155 MHz made available cleared by 2002
• 2x60 MHz paired, 35 MHz unpaired, both in 2GHz
  bands (in accordance with International
  Telecommunications Union)
• Consensus ETSI Decision - For UTRA (UMTS
  Terrestrial Radio Access)
• W-CDMA mandated for paired spectrum, TD/CDMA for
  unpaired

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Why the United Kingdom?

• The UK should form a blueprint for rolling out
  networks across Europe - For new entrants it will
  be a bridgehead into Europe
• The UK Government actively encourages a
  competitive market and is looking at sensible
  measures to remove barriers to entry
• The spectrum auction will be open to all -
  incumbents and new entrants - on a fair basis
• It is unlikely that BT and Cellnet will be
  permitted to bid separately
• The possibility of permitting new entrants to
  roam onto existing networks to provide voice
  coverage is being investigated
• Rollout obligations will be set at a realistic
  level (potentially 80 population or about 10
  geographical coverage at 144kbps by 31 December
  2007)
• The UK market remains capable of much further
  development .

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The UK Market (1)

• Higher penetration rates in Europe - through
  fixed/mobile convergence point the way to what
  is achievable

45
Scandinavia High substitution of mobile for fixed
Mobile Penetration ()
40
Finland
France
35
Germany
Italy
Spain
30
Sweden
UK
25
20
Europe Lower penetration and substitution less
advanced
15
10
5
0
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Source FT Mobile Communications
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The UK Market (2)

• Whilst penetration is average for Europe, the
  fixed/mobile convergence uplift is yet to occur,
  potentially renewing the rate of market growth ...

120
Growth over last 12 months
100
Austria
Greece
Ireland
Italy
80
Opportunity
Netherlands
60
Switzerland
Spain
Finland
40
Germany
Norway
Sweden
UK
20
Denmark
0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Mobile Penetration (1st January 1998)
Source FT Mobile Communications
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The UK Market (3)
The UK presents both fixed and mobile growth
opportunities.
45
Finland
Mobile Penetration ( of population)
40
Norway
Sweden
35
30
Denmark
25
Italy
20
Austria
15
Switzerland
UK
Portugal
Ireland
Germany
Spain
Netherlands
10
Estonia
France
Belgium
Greece
Lithuania
Hungary
Slovakia
Czech Rep
5
Slovenia
Ukraine
Poland
Croatia
Romania
Latvia
Macedonia
Albania
0
Bulgaria
Serbia
0
10
20
30
40
50
60
70
80
Turkey
Bosnia-Herz
Moldova
Fixed Penetration - ( of population)
Belarus
Source FT Mobile Communications , Public Network
Europe 1998 Year Book
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Q A (1)

• When will UMTS be introduced in the UK?
• Trials should commence in 2000, with operators
  beginning to roll out networks in 2002, hence the
  need for licensing certainty next year.
  Widespread availability is anticipated around
  2005
• Are there operational efficiencies with GSM?
• UMTS and GSM technologies may be seen as
  complementary rather than competing. Dual band
  handsets are expected to be able to route voice
  and low-data traffic onto GSM, retaining UMTS
  spectrum for high-data applications

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Q A (2)

• When will additional spectrum for UMTS become
  available?
• The UK intends only to allocate additional
  spectrum for terrestrial UMTS when it is
  designated by international (and preferably
  global) agreement. If any UMTS spectrum were to
  made available it would have to be allocated in a
  fair and transparent manner, bearing in mind the
  minimum spectrum required by any operator
• Will refarming (spectrum re-use) be permitted?
• There is no current intention to refarm existing
  cellular spectrum unless this is in line with
  international agreements. UMTS technology will
  only be licensed for use in spectrum designated
  in Europe for UMTS, which does not at present
  include spectrum held by the existing cellular
  operators

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Q A (3)

• How many licences will there be in the UK?
• Currently we anticipate between three and five
• How long will the licences last?
• The Government is considering suggestions ranging
  from 15 to 25 years
• How will the auction take place?
• The auction methodology is still being decided.
  There is likely to be a pre-qualification round
  in which Candidates financial and technical
  capability to roll out a network will be
  assessed. This would be followed by a
  competitive auction, probably based solely on
  price. The auction rules will be prescribed by
  Regulations issued under a Statutory Instrument
  further to the Wireless Telegraphy Bill 1998

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Q A (4)

• Can licences be traded?
• The Wireless Telegraphy Bill does not permit
  secondary trading. In any event, there are
  likely to be use it or lose it roll-out
  obligations attached to licences to ensure that
  networks are built
• Are consortium bids permitted?
• Yes, but it is unlikely that exclusive
  arrangements with equipment, service or content
  providers will be permitted
• Can I bid as part of more than one consortium?
• Almost certainly not. Shareholdings in more than
  one consortium would risk collusion and conflicts
  of interest.
• Who is running the auction?
• The Radiocommunications Agency is responsible for
  the management and allocation of radio spectrum
  in the UK, and is thus running the auction.
  Rothschilds is financial adviser to the Agency.

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Next Steps

• Further information on the opportunity can be
  found through
• Multimedia Communications on the Move
• Dedicated Auction Web-site www.open.gov.uk/radioc
  om/
• Rothschilds (Gerry Spring or James Vaux) 44
  171 280 5000(springg_at_rothschild.co.uk /
  vauxj_at_rothschild.co.uk)
• Radiocommunications Agency (Jeremy Clayton) 44
  171 211 0133(claytonj_at_ra.gtnet.gov.uk)
• Membership of UMTS Auction Consultative Group