Site and Network Sharing Cost Reducing Strategies for Rolling Out 3G Networks

November 2001
Stphane Baziak Coleago Consulting Ltd www.coleago.com
1

Comments of an investor about site and network sharing The impact is uncertain The benefit is a reduction in CAPEX Sharing does allow operators to potentially realise the value of their assets but by sharing they are degrading the value of a potentially valuable tactical asset Sharing could potentially be negative for an incumbent with a strong tactical asset in terms of the network which is costly and increasingly difficult to replicate In general the pros and cons of sharing is not clear although the immediate city reaction to a sharing agreement is likely to be positive

Licence cost in Europe

A verage U M T S lic en c e c os t
1 4 0 ,0 0 1 2 0 ,0 0 1 0 0 ,0 0 8 0 ,0 0 6 0 ,0 0 4 0 ,0 0 2 0 ,0 0 0 ,0 0
s l en ay a e ce y d k y n d ar an an an an u om m ec al ga ri d ai

U M T S li ce n ce co st p e r ca p ita (E U R )

an

tu

Sp

gi

re

ed

st

It

Fr

or

rl

or

Sw

el

en

er

ze it U ni te d

Fi

he

et

Sw

in

gd

nl

rl

Network cost estimation in Europe

A v e ra g e U M T S n e tw o rk co st e stim a tio n
( R e g re ssio n a n a ly sis b a se d o n a n n o u n ce d co sts, p o p u la tio n a n d a re a )
6 000 000 000
Finland: 15 pop/sqkm Norway: 14 pop/sqkm

7 0 ,0 0 6 9 ,5 0
Sweden: 20 pop/sqkm Germany: 230 pop/sqkm UK: 244 pop/sqkm

5 000 000 000 4 000 000 000 3 000 000 000

6 9 ,0 0 6 8 ,5 0 6 8 ,0 0

U M T S n e tw o r k co s t e stim a ti o n (E U R ) E stim a ti o n p e r ca p ita (E U R )

2 000 000 000 1 000 000 000 0

ce y ec N e et It h er a ly la N nd or s w P or a y tu g a Sp l ai S U Sw w e n n i t i tz d e ed er n K la in nd g d om a k ri m ar d iu an n n

6 7 ,5 0 6 7 ,0 0 6 6 ,5 0

st

la

ra

in

el

en

er

re

Network cost estimation in Europe (cont d) Low population density regions generate higher costs

<50 pop/sqkm

> 500 pop/sqkm

Coverage requirements in Europe

U M T S co v e r a g e r e q u ir e m e n ts
100% 90% 80% A u s t r ia B e lg iu m D e nm ark F ra nce G e rm a n y G re e ce N e t h e r la n d s N o rw a y P o rtu g a l S p a in Sw e d e n S w it z e r la n d U n it e d K in g d o m

P o p u latio n co v erag e

70% 60% 50% 40% 30% 20% 10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

D a te

Network sharing - Opportunities Reduce network cost or spread investment in time to improve balance sheet and enhance ability to raise finance Reduce time to market and start to recoup from investment as early as possible Rollout environmentally friendly networks Enhance 3G footprint even if at present the industry emphasises services instead of geographical coverage as for 2G

Network sharing - Risks Loose the total control of network coverage, capacity and quality that have been key in 2G differentiation and bet on the success of 3G services delivery only Loose efficiency in the joint rollout and operation of the shared network Regulatory issues Pick the wrong partner

Network sharing - Decision factors Financial strength and ability to raise finance Magnitude of cost savings that can be achieved Short term advantages vs. long term drawbacks Risks of non-network sharing
Orange in Sweden with 3G Infrastructure Services (Europolitan / HI3G) and Svenska UMTS Nt (Tele2 / Telia) Vodafone (incumbent) and Mobilcom (new entrant) in Germany with T-Mobil / Viag Interkom (incumbent/incumbent) and E-Plus / Group 3G (incumbent/new entrant)

Regulatory aspects No changes in licence terms but adequate interpretation from regulator after consultation Site sharing is generally allowed and even encouraged to limit planning and environmental impact Higher level of network sharing is generally allowed provided that competition is not reduced but stimulated by a faster and wider introduction of 3G services In some countries the regulator insist that operators remain in control of the rollout and operation of their networks by maintaining separate networks

10

Regulatory aspects (contd) Problems may arise with the definition of coverage obligation of geographical areas
The coverage obligations for the area are the same for the two operators The coverage obligations for the area are different for two operators There are no coverage obligations for the area for the two operators

11

Main factors influencing cost savings Network sharing technical solution Partnership and assets available for sharing Coverage requirements Capacity requirements Population density

12

R99 network architecture (3GPP TS 23.002)

PSTN IP Networks
Gi

GMSC AuC

GGSN

C
HLR

Gc Gr
EIR

D G
VLR
B

Gn

Gp

F
VLR
B

Gf
SGSN

MSC

CN

E A

MSC

Gs

Gb

IuCS

IuPS Iur

BSC

RNC

RNC

Abis
BTS BTS NB

Iubis
NB

BSS
Um Iuu
ME

RNS (RAN)

SIM-ME i/f
USIM

Cu
SIM

or

MS

13

Network cost breakdown Network cost can be broken down in

Core Network equipment cost Service Platform equipment cost Radio Access Network equipment cost Transmission equipment cost Infrastructure and Rollout cost

The Core Network and Service Platform equipment costs are mainly function of the number of subscribers and of the traffic The Radio Access Network and Transmission equipment costs and the Infrastructure and Rollout cost are mainly function of the number of subscribers, of the traffic and of the coverage area
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New entrant network cost structure

Germany - New Entrant 2.85 bn EUR

5% 24%

36%

Core Network Cost Radio Access Network Cost Billing System Cost Services Platform Cost Network Management System Cost Network Rollout Cost Transmission Cost

29% 2% 4%

0%

15

Incumbent network cost structure Savings realised from 2G network reuse

Germany - Incumbent 2.36 bn EUR
2%

30%
Core Network Cost Radio Access Network Cost Billing System Cost Services Platform Cost Network Management System Cost Network Rollout Cost Transmission Cost

46%

14% 2% 5% 1%

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2G network reuse CN
With R99 the 2G CN can be reused and 2G subscribers will be migrated gradually to 3G Major CN evolution will appear with R4 and R5 (all IP) Operators need to have clear roadmaps and upgrade paths and shall only invest in a new CN when 3G traffic really takes off

RAN
Most of the 2G sites can be reused In urban areas where physical space for equipment is limited existing 2G cabinets shall be swapped for higher capacity / smaller footprint 2G cabinets to allow new 3G cabinets or for new 2G / 3G cabinets In urban areas antennas shall be swapped for wide band or dual band antennas

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Network sharing - Technical solutions overview Site sharing Antenna sharing Grid sharing RAN sharing (NB and RNC) Full MVNO Geographical network sharing (national roaming) Technology sharing (UMTS/EGPRS/GPRS)

18

Network sharing - Site sharing

GMSC

GGSN

GGSN

GMSC

MSC/VLR

HLR

SGSN

SGSN

HLR

MSC/VLR

NB

NB

RNC

RNC

NB

NB

19

Comments on site sharing Site sharing is a good practise well developed for 2G (co-location) and generally allowed and even encouraged by regulators for 3G to limit planning and environmental impact An estimation states that for the UK 60% of the sites have at least two 2G tenants Site sharing always needs to be considered on the top of other higher level of network sharing Site sharing (co-location) ratio shall increase naturally with the number of operators

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Network sharing - Antenna sharing

GMSC

GGSN

GGSN

GMSC

MSC/VLR

HLR

SGSN

SGSN

HLR

MSC/VLR

NB

NB

RNC

RNC

NB

NB

21

Shared antenna configuration examples

UMTS single band antenna

UMTS/GSM1800 wide band antenna

UMTS/GSM1800 wide band antenna Two in One

2 x2 Couplers (6 dB loss ~ 75% interference load) 1 x 2 Couplers (3dB loss ~ 50% interference load)

GSM1800 A

GSM1800 A UMTS B UMTS B

UMTS B

UMTS A

UMTS A

UMTS A

22

Network sharing - Grid sharing

GMSC

GGSN

GGSN

GMSC

MSC/VLR

HLR

SGSN

SGSN

HLR

MSC/VLR

NB

NB

RNC

RNC

NB

NB

23

Network sharing - RAN sharing

GMSC

GGSN

GGSN

GMSC

MSC/VLR

HLR

SGSN

SGSN

HLR

MSC/VLR

RNC

NB

NB

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Comments on RAN sharing RAN Sharing is standardised by 3GPP Some vendors have already announced the availability of equipment for 2002 but not all of them even if they claim that they can be ready in few months The number of supported NB is a limiting factor for the dimensioning of RNC and therefore the shared RNC solution shall be carefully analysed even in low capacity areas

25

Network sharing - Full MVNO

HLR

HLR

GMSC

GGSN

GMSC

GGSN

MSC/VLR

SGSN

RNC

NB

NB

26

Comments on Full MVNO The Full MVNO solution raises the questions of spectrum pooling and mobile network codes

27

Network sharing - Geographical network sharing

GMSC

GGSN

GGSN

GMSC

MSC/VLR

HLR

SGSN

SGSN

HLR

MSC/VLR

RNC

RNC

NB

NB

NB

NB

28

Network sharing - Technology sharing (UMTS/EGPRS/GPRS)

GMSC

GGSN

GGSN

GMSC

MSC/VLR

HLR

SGSN

SGSN

HLR

MSC/VLR

RNC

BSC

NB

NB

BTS

BTS

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Network sharing CAPEX modelling Inputs

Network sharing solution Partnership (two incumbents, two new entrants, one incumbent and one entrants) Sharing areas (urban, suburban, rural) Coverage requirements and rollout speed 3G adoption rate and market share Network dimensioning rules Network cost estimation rules

Outputs
Cumulative CAPEX Savings

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CAPEX - Germany, RAN sharing in rural areas only, new entrant / incumbent
Germany - RAN sharing in rural areas - New entrant / Incumbent
2 500 000 000 50% 45% 2 000 000 000 40% 35% 1 500 000 000 CAPEX 30% 25% 1 000 000 000 20% 15% 500 000 000 10% 5% 0 2001 2002 2003 2004 2005 2006 2007 2008 Year 2009 2010 2011 2012 2013 2014 2015 0%

New entrant Incumbent Savings new entrant Savings incumbent

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CAPEX - Germany, RAN sharing in all areas, new entrant / incumbent

Germany - RAN sharing in all areas - New entrant / Incumbent
2 500 000 000 60%

2 000 000 000

55%

50% 1 500 000 000 CAPEX 45% 1 000 000 000 40% New entrant Incumbent Savings new entant Savings incumbent

500 000 000

35%

0 2001 2002 2003 2004 2005 2006 2007 2008 Year 2009 2010 2011 2012 2013 2014 2015

30%

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CAPEX - Sweden, RAN sharing in suburban and rural areas, incumbent / incumbent
Sweden - RAN sharing in suburban and rural areas - Incumbent / Incumbent
700 000 000 50% 45% 600 000 000 40% 500 000 000 35% 30% 25% 300 000 000 20% 15% 10% 100 000 000 5% 0 2001 2002 2003 2004 2005 2006 2007 2008 Year 2009 2010 2011 2012 2013 2014 2015 0% Incumbent Savings incumbent

400 000 000 CAPEX 200 000 000

33

CAPEX - Sweden, RAN sharing in suburban and rural areas, new entrant / incumbent
Sweden - RAN sharing in suburban and rural areas - New entrant / Incumbent
700 000 000 50% 45% 600 000 000 40% 500 000 000 35% 30% 25% 300 000 000 20% 15% 10% 100 000 000 5% 0 2001 2002 2003 2004 2005 2006 2007 2008 Year 2009 2010 2011 2012 2013 2014 2015 0%

400 000 000 CAPEX

New entrant Incumbent Savings new entrant Savings incumbent

200 000 000

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Quantifying cost savings and learning from modelling Depending on scenario savings can vary up to 45 % Savings depend on the existing assets to be shared Savings are always better for new entrants

35

Key challenges for successful network sharing business model Make a decision rapidly that effectively enables network sharing to reduce time to market Pick the right partner Develop an efficient joint network rollout and operation scheme Prepare coverage and capacity expansion plans (which may include network splitting at a later stage)

36

Make a decision rapidly It takes time to rollout a network Late decision makers might not get the full financial and technical benefits of network sharing Develop models now Be prepared to share

37

Pick the right partner Incumbents already have assets to share Incumbents with large subscriber bases might have early capacity expansion requirements Target market segments of partner shall be different in order to advantage co-operation and not competition Working with the same vendors helps

38

Joint network rollout and operation - Non-shared vs. shared network development cycles
Business Planning Technical Planning Implementation O&M Optimisation

Business Planning

Partnership Negotiation Technical Planning Implementation

O&M Optimisation

- Turnkey? - Outsourcing? - Joint venture? - MoU?

39

Joint network rollout and operation - Turnkey Classical model for network rollout for non-shared networks Good alternative if both operators can manage efficiently the vendor No example yet

40

Joint network rollout and operation - Outsourcing The Infrastructure Company model is a more recent model
Own, build and manage Capital funding is released through co-location and outsourcing Risk is reduced through funding, asset ownership and service level agreement

Need to have multiple customers The metrics used are co-location ratio and revenue per site and tenant Examples
Crown Castle International, SpectraSite, American Tower KPN Mobile recent announcement for tower auction
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Joint network rollout and operation - Outsourcing (contd)

Towercos - Tower Growth
14 000

12 000

10 000

8 000 Towers

6 000

SpectraSite American Tower Crown Castle International

4 000

2 000

0 1997 1998 Year 1999 2000

42

Joint network rollout and operation - Outsourcing (contd)

Towercos - Site Rental Revenue Growth
350 000

300 000

250 000 Revenue USD ('000)

200 000

150 000

SpectraSite American Tower Crown Castle International

100 000

50 000

0 1997 1998 Year 1999 2000

43

Joint rollout and network operation - Joint venture In essence the model is for an operator to create its own Infrastructure Company In the long term new partners with know-how or assets can be introduced
Construction Companies Utilities

This type of Infrastructure Company could provide services to other operators Examples in Sweden
3G Infrastructure Services AB (Europolitan / HI3G) Svenska UMTS Nt AB (Tele2 / Telia)

44

Joint network rollout and operation - MoU Requires good co-ordination between operators and cultural changes Examples
MoU mmO2 / One2One (UK - Site Sharing) MoU T-Mobil / Viag Interkom (Germany - Site Sharing) MoU mmO2/KPN Mobile (Netherlands - RAN Sharing) MoU E-Plus / Group 3G (Germany - RAN Sharing) Voicestream / Cingular (USA - Site Sharing)

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Coverage and capacity expansion Network sharing shall not compromise coverage and capacity expansion possibilities When 3G takes off operators might want to differentiate with coverage and capacity Reduced geographical coverage and low capacity network might not be very attractive for MVNOs and operators seeking geographical network sharing (e.g. national roaming) Maintaining logical separate networks offers maximum flexibility for coverage and capacity expansion

46

Capacity expansion in urban areas Network capacity expansion has to be considered at an early stage in urban areas and depends on available Urban spectrum
2 x 15 MHz

Urban Macrocell 2 RF carriers

Urban Macrocell 1 RF carrier

2 x 10 MHz

Macrocell 2 RF carriers + Microcell 1 RF carrier

Urban Microcell 1 RF carrier Suburban Macrocell 2 RF carriers Suburban Cell splitting Macrocell 2 RF carriers

2 x 15 MHz

Suburban Macrocell 1 RF carrier

2 x 10 MHz

Suburban Macrocell 2 RF carriers

Suburban Cell splitting Macrocell 2 RF carriers

47

Capacity expansion in urban areas - Hybrid Fiber Radio Hybrid Fiber Radio is an attractive technology for shared microcells and capacity expansion in urban areas
OPT/RF Remote Antenna Units (RAUs) RF/OPT Master Unit (MU) NB 1 RAU 1

NB 2 Dark Fiber

RAU 2

NB n

RAU p

Central Office

Antenna sites

48

Capacity expansion in urban areas - Hybrid Fiber Radio (cont d) Shared HFR microcells advantages include
Low radiated power and low visual impact A wide range of cheap supporting structures can be used (lamp posts, traffic lights, etc.) Flexible capacity allocation from central office (RAU can be used as single cells for capacity or in simulcast for coverage)

Operators facing strong environmental regulations (Switzerland, Italy) might consider shared HFR microcells as a primary roll-out strategy in urban areas
Loose macrocell grid for vehicular mobiles and building upper floors coverage Tight microcell grid for pedestrian mobiles Up to 2 RF carriers per microcell?
49

Impact of network sharing on competition and consolidation Network sharing introduces a broad range of business models from the traditional infrastructure based mobile operator model to the full MVNO model and therefore contributes to enhance competition Incumbents with a large subscriber base, strong tactical assets and financially healthy benefit less from network sharing Network sharing may contribute to consolidation but non-network sharing may also Regulators have a role to play

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Conclusion Significant CAPEX savings that enhance a 3G business case can be achieved with network sharing The success of network sharing depends highly on the ability of the operator to establish a solid partnership with the right partner and to adopt an efficient joint network rollout and operation scheme Operators remaining in control of their networks have a better chance to differentiate with coverage and capacity at a later stage and network splitting shall remain an open option

51

Conclusion (contd) Even if general conclusions can be drawn about network sharing operators shall make their decision based on detailed business modelling as the success of a 3G depends on many factors

52