# GSM – Gone So Much … or is it?

• A Billion GSM subscriptions & almost $200 Billion GSM revenue will have gone within the next 5 years. • GSM earns a lot less than its “fair” share of the top-line, a trend that will further worsened going forward. • GSM revenue are fading out rapidly across a majority of the mobile markets across the Globe. • Accelerated GSM phase-out happens when pricing level of the next technology option relative to the GDP per capita drops below 2%. • 220 MHz of great spectrum is tied up in GSM, just waiting to be liberated. • GSM is horrific spectral in-efficient in comparison to today’s cellular standards. • Eventually we will have 1 GSM network across a given market, shared by all operators, supporting fringe legacy devices (e.g., M2M) while allowing operators to re-purpose remaining legacy GSM spectrum. • The single Shared-GSM network might survive past any economical justification for its existence merely serving legal and political interests. Gone So Much … GSM is ancient, uncool and so 90s … why would anybody bother with that stuff any longer … its synonymous with the Nokia Handset (which btw is also ancient, uncool and so 90s … and almost no longer among us thanks to our friend Elop …). In many emerging markets GSM-only phones are hardly demanded or sold any longer in the grey markets. Grey market that make up 90% (or more) of handset sales in many of those emerging markets. Moreover, its not only AT&T in the US talking about 2G phase-out but also an emerging market such as Thailand is believed to be void of GSM within the next couple of years. A bit of Personal History. Some years ago I had the privilege to work with some very smart people in the Telecom Industry on merging two very big mobile operations (ca.140 million in combined customer base). One of our cardinal spectrum strategic and technology arguments were the gain in spectral efficiency such a merger would bring. Anecdotally it is worth mentioning that the technology synergies and spectrum strategic ideas largely would have financed the deal in shear synergies. In discussions with the country’s regulator we were asked why we could not “just” switch off GSM? Then use that freed GSM spectrum for new cellular technologies, such as UMTS and even LTE. Thereby gaining sufficient spectral efficiency that merging the two business would become un-necessary. The proposal would have effectively turned off the button of a service that served at ca. 70 Million GSM-only (incl, EDGE & GPRS) subscribers (at the time) across the country. Now that would have been expensive and most likely caused a couple or thousands of class action suits to the beat. Here is how one could have thought about the process of clearing out GSM for something better (though overall its is more for richer and poorer). There is no “just …press the off button”, as also Sprint experienced with their iDEN migration. Our thoughts (and submitted Declarations) were that by merging the two operators spectrum (and sites pool) we could create sufficient spectral capacity to support both GSM (which we all granted was phasing out) and provide more capacity and customer experience for the Now Generation Technology (i.e., HSPA+ or 4G as they like to call it in that particular market … Heretics! ;-). A recent must read GigaOM blog by Keith Fitchard “AT&T begins cannibalizing 2G and 3G networks to boost LTE capacity” describes very well the aggressive no-nonsense thinking of US carriers (or simply desperation or both) when it comes to the quest for spectrum efficiency and enhanced customer experience (which co-incidentally also yields the best ARPUs). It is worth mentioning that more than 2×110 Mega Hertz is tied up in GSM, Up-to 2×35 MHz at 900MHz (if E-GSM has been evoked) and 2×75 MHz at 1800MHz (yes! I am ignoring US GSM band plans, they are messed up but pretty fun nevertheless … different story for another time). Being able to re-purpose this amount of spectrum to more spectral efficient cellular technologies (e.g., UMTS Voice, HSPA+ and LTE) would clearly leapfrog mobile broadband, increase voice capacity at increased quality, and serve the current billions of GSM-only users as well as the next billion un-connected or under-server customer segments with The Internet. The macro-economical benefits being very substantial. 220 MHz of great spectrum is tied up in GSM, just waiting to be liberated. Back in the days of 2003 I did my first detailed GSM phase-out techno-economical analysis (a bit premature one might add). I was very interested in questions such as “when can we switched off GSM?”, “what are the economical premises of exiting GSM?”, “Why do operators today still continue to encourage subscriber growth on their GSM networks?”, “Today … if you got your hands on GSM usable spectrum, would you start a GSM operation?”, “Why?” and “Why not?”, etc.. So why don’t we “just” switch off GSM? and let go of that old in-efficient cellular technology? How in-efficient? you may ask? … Pending a little bit on what state the GSM is in, we can have ca. 3 times more voice users in WCDMA (i.e., UMTS) compared to GSM with Adaptive Multi-Rate (AMR) codec support. Newer technology releases supports even more dramatic leaps in voice handling capabilities. Data? what about cellular data? That GSM, including its data handling enhancements GPRS and EDGE, is light-bits away from the data handling capabilities of WCDMA, HSPA+, LTE and so forth is at this point a well establish fact. Clearly GSM is horrific spectral in-efficient in comparison to later cellular standards such as WCDMA, HSPA(+) and LTE(+) and its only light (in a very dark tunnel) is that it is supported at lower frequencies (i.e., more economical deployment in rural areas and for large surface area countries). Though today that no longer unique as UMTS and LTE are available in similar or even lower frequency ranges. … of course there are other economical issues at plays as well, which we will see below. Why do we still bother with a 27+ year old technology? a technology that has very poor spectral efficiency in comparison with later cellular technologies. GSM after all “only” provides Voice, SMS and pretty low bandwidth mobile data (while better than nothing, still very close to nothing). Well for one thing! there is of course the money thing? (and we know that that makes the world go around) ca. 4+ Billion GSM subscriptions worldwide (incl. GPRS & EDGE) generating a total GSM turnover of 280+ Billion US$.

In 2017 we anticipate to have a little less than 3 Billion GSM subscriptions generating ca. 100+ Billion US$. So ….a Billion GSM subscriptions and almost 200 Billion US$ GSM revenue will have dis-appeared within the next 5 years (and for the sake of mobile operators hopefully replaced by something better).

In this trend APAC, takes its lion share of the GSM subscription loss with ca. 65% (ca, 800 Million) of the total loss and ca. 50% of the GSM top-line loss (ca. 100 Billion US$). The share of GSM revenue is rapidly declining across (almost) all markets; The GSM revenue as share of the total revenue (as well as in absolute terms) rapidly diminishes, as 3G and LTE are introduced and customer migrate to those more modern technologies. If the should be any doubts GSM does not get its fair share revenue compared to its share of the subscriptions (or subscribers for that matter): While the above data does contain two main clusters, it still pretty well illustrates (what should be no real surprise to any one) that GSM earns back a lot less than its “fair” share (whatever that really means). And again if anyone would be in doubt that picture will be grimmer as the we fast forward to the near future; Grim, Grimmer, Grimmest! Today GSM earns a lot less than its “fair” share of the top-line, this trend will be further worsened going forward. So we can soon phase-out GSM? Right? hmmmm! Maybe not so fast! Well while GSM revenue has certainly declined and expected to continue the decline, in many markets the GSM-only (e.g., here defined as a customers that only have GSM Voice, GPRS and/or EDGE available) customers have not declined in proportion to the related revenue might fool us to believe. The above statistics illustrates the GSM-only subscription share of the total cellular business. There is more to GSM than market and revenue share … and we do need to have a look at the actual decline of GSM subscriptions (or unique users which is not per se the same) and revenue; The GSM revenue are expected to massively free fall over the next 5 years! However, also observe (in the chart above) that we need to sustain the network and its associated cost as a considerable amount of customers remain on the network, despite generating a lot less top line. As we have already seen above, in the next 5 years there will be many markets where GSM subscription and subscriber share will remain reasonable strong albeit the technology’s ability to turn-over revenue will be in free-fall in most markets. Analyzing data from Pyramid Research (actual & projection for the period 2013 to 2017), including other analyst data sets (particular on actual data), extrapolating the data beyond 2017 by diffusion models approximating the dynamics of technology migration in the various market, we can get an idea about the remaining (residual) life of GSM. In other words we can make GSM phase-out projections as well as get a feel for the terminal revenue (or residual value) left in GSM. Further get an appreciation of how that terminal value compares to the total mobile turnover over the same GSM phase-out period. The chart below provide the results of such a comprehensive analysis. The colored bars illustrate the various years of onset of GSM phase-out; (a) the earliest year which is equal to the lower end of light-blue bar is typically the year where migration off GSM accelerates, (b) the upper end of the light-blue bar is a most-likely year where after GSM no longer would be profitable, and (c) the upper end of the red bar illustrates the maximum expected life of GSM. It should be noted that the GSM Phase-out chart below might not be shown in its entirety (particular right side of the chart). Clicking on the Chart itself will display it in full. Taking the above GSM phase-out years, we can get a feeling for how many useful years GSM has left in terms of economical-life and customer life-time defined as which event comes first of (i) less than 1 Million GSM subscriptions or (ii) 5% GSM market-share. 2014 has been taken as the reference year; It should be noted that the Useful Life-span of GSM chart above might not be shown in its entirety (particular right side of the chart). Clicking on the Chart itself will display it in full.  AREAS #MARKETS GSM – REMAINING LIFE Western Europe 16 4.1 +/- 3.3 years Asia Pacific 13 6.4 +/- 5.0 years Middle East & Africa 17 11.0 +/- 6.2 years Central Eastern Europe 8 6.9 +/- 4.8 years Latin America 19 6.6 +/- 3.7 years That Western Europe (and US which has not been shown here) has the most aggressive time-lines for GSM phase-out should come as no surprise. The 3G/UMTS has been deployed there the longest and the 3G price level to GDP has come down to a level where there is hardly any barrier for most mobile users to switch from GSM to UMTS. Also the WEU region has the most extensive UMTS coverage which also removes the GSM to UMTS switching barrier. Central Eastern Europe average is pulled up (i.e., longer useful life) substantial by Russia and Ukraine that shows fairly extreme laggardness in GSM phase-out (in comparison with the other CEE markets). For Middle East and Africa it should be noted that there are two very strong clusters of data distinguishing the Gulf States from the African Countries. Most of the Gulf States have only a very few years of remaining useful life of GSM. In general the GSM remaining life trend can be described fairly well with the amount of time UMTS has been in a given market (i.e., though smartphone introduction did kick-start the migration from GSM more than anything else), the extend of UMTS coverage (i.e., degree of pop and geo coverage) and the basic economics of UMTS. In my analysis I have assumed 4 major triggers for GSM phase-out; 1. Analysis shows that once the 3G (or non-2G) ARPU is below 2% of the nominal GDP per capita an acceleration of migration away from GSM speeds up. I have (somewhat arbitrarily) chosen 1% as my limit where there is no longer any essential barrier of customer migrating off GSM. 2. When GSM penetration is below 5% as a decision point for converting (by possible subsidies) GSM customers to a more modern and efficient technology. This obviously does depend on total customer base and the local economical framework and as such is only a heuristics rather than a universal rule. 3. Last but not least, my 3rd criteria for phasing out GSM is when its base is below 1 million subscriptions (i.e., typically 500 to 800 thousand subscribers). 4. Last but not least, before complete phase-out of GSM can commence, operators obviously need to provide the alternative technology (e.g., UMTS or LTE) coverage that can replace the existing GSM coverage. This is in general only economical if comparable frequency range can be used and thus for example for UMTS coverage replacement of GSM in many cases re-farming/re-purposing 900MHz from GSM to UMTS. This last point can be a very substantial bottleneck and show stopper for migration from GSM to UMTS, particular in rural areas or in countries with very substantial rural populations on GSM. Interestingly enough, extensive data analysis on more than 70 markets, shows that the GSM phase—out dynamics appears to have little or no dependency on (a) the 2G ARPU level, (b) 2G ARPU level relative to 3G ARPU and (c) handset pricing (although I should point out that I have not had a lot of data here to be firm in this conclusion, in particular reliable data for grey market handset pricing across the emerging markets is a challenge). One of the important trigger points for onset of accelerated GSM phase-out is the pricing level of the next technology (e.g., 3G) option relative to the GDP per capita. Migration decision appears less to do with the legacy price of the old technology or old technology price relative to new technology pricing. Above chart illustrates an analysis made on 2012 actual data for more than 70+ markets all across WEU, CEE, APAC, EMEA and LA (i.e., coinciding with markets covered by Pyramid Research). It is very interesting to observe the dynamics as the markets develop into the future and the data moves towards the left indicating more affordable 3G pricing (relative to GDP per capita) and increasingly faster GSM phase-out as is evident from the chart below providing the same markets as above but fast forwarded 5 years (i.e., 2017). Firstly the GSM ARPU level across most markets is below 2% of a given markets GDP per capita. There is no clear evidence in the country data available that the GSM ARPU development has had any effect on slowing down or accelerating GSM phase-out. Most likely an indication that GSM has reached (or will reach shortly) a cost level where customers become insensitive. Conceptually we can visualize the GSM phase-out dynamics in the following way were as the 3G gets increasingly affordable (which may or should include the device cost depending on taste), GSM phase-out accelerates (i.e., moving from right to left in the illustrative chart below). While the chart illustration below is more attuned to emerging market migration dynamics of GSM phase-out it can of course with minor adaptations be used for other more balanced prepaid-postpaid markets. We should keep in mind that unless the mobile operators new technology coverage (e.g., UMTS, LTE, ..) at the very least overlap the GSM coverage, the migration from GSM to UMTS (or LTE) will eventually stop. This can in countries with a substantial rural population in particular become a blocking stone for an effective 100% migration. Resulting in large areas and population share that will remain underserved (i.e., only GSM available) and thus depend on an in-efficient and ancient technology without the macro-economical benefits (i.e., boost of rural GDP) new and far more efficient cellular technologies could bring. That’s all fine … what a surprise that customers wants better when it gets affordable (like to have wanted that even more when it was not affordable)… and that affordability is relative is hardly a surprising either. In order for an operator to make an informed opinion about when to switch off GSM, it would need to evaluated the remaining business opportunity, or residual GSM value, against the value for re-purposing the GSM spectrum to a better technology, i.e., with a superior customer experience potential, and with a substantial higher ARPU utilization. Counting from 2014, the remaining life-time aka terminal aka residual GSM revenue will be in the order of 850 Billion US$ … agreeable an apparently dramatic number … however, the residual GSM revenue is on average no more than 5% of total cellular turnover and for many countries a lower than that. Actual 45 markets out of the 73 studied will have a terminal GSM revenue lower than 5%.

The chart below provides an overview of the Residual GSM Revenues in Billion of US$(on a logarithmic scale) and the percentage of Residual GSM value out of the total cellular turnover (linear scale) for 75 top markets spread across Western Europe, Central Eastern Europe, Asia Pacific, Middle East & Africa, and Latin America. Do note that the GSM Terminal Revenue chart above might not be shown in its entirety (right side of the chart). Clicking on the Chart itself will display it in full. It is quiet clear from the above chart that, apart from a few outliers, GSM revenue are fading out rapidly across a majority of the mobile markets across the globe. Even if the residual GSM topline might appear tempting, it obviously need to be compared to the operating expenses for sustaining the legacy technology as well as considering that a more modern technology would create higher efficiency (and possible ARPU arbitrage) and therefor mitigate margin decline sustaining more traffic and customers. Emerging APAC MNO Example: an emerging market in APAC has 100 Million subscriptions and ca. 70 Million unique cellular user base.One of the Mobile Network Operators (MNO) in this market has approx. 33% market share (revenue share slightly larger). in 2012 its EBITDA margin was 42%. Technology cost share of overall Opex is 25% and for the sake of simplicity the corresponding GSM cost share is in 2012 assumed to be 50% of the Total Technology Opex. As the business evolves it is assumed that the GSM cost base grows slower than non-GSM technology cost elements. This particular market has a residual GSM revenue potential of approx. 4 Billion US$ and the MNO under the loop has 1.3 Billion US$remaining GSM revenue potential. Our analysis shows that the GSM business would start to breakdown (within the assumed economical framework or template) at around 5 Million GSM subscriptions or 3.5 Million unique users. This would happen around 2019 (+/- 2 years, with a bias towards earlier years) and thus leave the business with another 3 to 5 years of likely profitable GSM operation. See the chart below. This illustration shows (not surprisingly) that there is a point where even if the phasing-out GSM turns-over revenue, from an economical perspective it makes no sense for a single mobile operator to keep its GSM network alive for a diminishing customer base and even faster evaporating top-line. In the example above it is clear that the MNO should start planning for the inevitable – the demise of GSM. Having a clear GSM phase-out strategy as soon as possible and targeting GSM termination no later than 2018 to 2019 just makes pretty good sense. Looking at risks to the dynamics of the market development in this particular market there is a higher likelihood of no-profit being reached earlier rather than later. Would it make sense to startup a new GSM business in the market above? Given the 3 to 5 years that the existing mobile operators have to meet retire GSM before it becomes un-profitable, it hardly make much sense for a Greenfield operator to get started on the GSM idea (seem to be better ways for spending cash). However, if that Greenfield operator could become The GSM Operator for all existing MNO players in the market, allowing those legacy MNOs to re-purpose their existing GSM spectrum (and possible with a retro-active wholesale deal), then maybe in the short term it might make a little sense. However, it quiet frankly would be like peeing in your trousers on a cold winter day, it will be warm for a short while but then it really gets cold (as my Grandmother used to say). What GSM strategies makes really sense in its autumn days? Quit clearly GSM Network Sharing would make a lot of sense economically and operationally as it would allow re-purposing of legacy spectrum to more modern and substantially more efficient cellular technologies. The single Shared-GSM network would act as a bridge for legacy GSM M2M devices, extreme laggards and problematic coverage areas that might not be economical to replace in the shorter – medium term. Thus mobile operators could then solve possible long-term contractual obligations to businesses and consumers having fringe devices connecting with GSM (i.e., metering, alarms, etc..). The single Shared-GSM network might very well survive for a considerable time past any economical justification for its existence merely serving legal and political interests. Thanks to Stein Erik Paulsen who pointed this problem out for GSM phase-out. I am not (too) hanged up about the general Capex & Opex benefits of Network Sharing in this context (yet another story for another day). The compelling logical step of having 1 (ONE) GSM network across a given market, shared by all operators, supporting the phase-out of GSM while allowing to re-purpose legacy GSM spectrum for UMTS/HSPA and eventually LTE(+), is almost screamingly obvious. This furthermore would feed a faster migration pace and phase-out as legacy spectrum would be available for re-purposing and customer migration. Of course Regulatory authorities would need to endorse such a scenario as it de-facto would result in a smelling-like creating a monopolistic GSM operator albeit serving all in a given market. The Regulatory Authority should obviously be very interested in this strategy as it would ensure substantial better utilization of scarce spectral resources. Furthermore, not only gaining in spectral efficiency but also winning the macro-economical boost from connecting the unconnected and under-served population groups to mobile data networks, and by that, the internet. ACKNOWLEDGEMENT I have made extensive use of historical and actual data from Pyramid Research country data bases. Wherever possible this data has been cross checked with other sources. In my opinion Pyramid Research have some of the best and most detailed mobile technology projections that would satisfy even the most data savvy analysts. The very extensive data analysis on Pyramid Research data sets are my own and any short falls in the analysis clearly should only be attributed to myself. # Wireless Broadband Access (BWA) Greenfield Ambition… (from March 2008) In case you are contemplating starting a wireless broadband, maybe even mobile broadband, greenfield operation in Europe there will be plenty of opportunity the next 1 to 2 years.Will it be a great business in Western Europes mature market? – probably not – but it still might be worth pursuing. The mobile incumbants will have a huge edge when it comes to spectrum and capacity for growth which will be very difficult to compete against for a Greenfield with comparable limited spectrum.Upcoming 2.50 GHz to 2.69 GHz spectrum (i.e., 2.6 GHz for short) auctions, often refered to as the UMTS extension band spectrum, are being innitiated in several European countries (United Kingdom, The Netherlands, Sweden, etc..). Thus, we are talking about 190 MHz of bandwidth up for sale to the highest bidder(s). Compared this with the UMTS auction at the 2.1 GHz band which was 140 Mhz. The European Commission has recommended to split up the 190 MHz into 2×70 MHz for FDD operations (basically known as UMTS extension band in some countries) and a (minimum ) 1×50 MHz part for TDD operation. In general it is expected that incumbent mobile operators (e.g., Vodafone, T-Mobile, KPN, Orange, Telefonica/O2, etc..) will bid for the 2.6 GHz FDD spectrum, supplementing their existing UMTS 2.10 GHz spectrum mitigating possible growth limitation they might foresee in the future. The TDD spectrum is in particular expected to be contended by new companies, greenfield operations as well as fixed-line operators (i.e, BT) with the ambition to launch broadband wireless access BWA (i..e, WiMAX) networks. Thus, new companies which intend to compete with today’s mobile operators and their mobile broadband data proporsitions. Furthermore, just as mobile operators with broadband data competes with fixed broadband business (i.e., DSL & cable); so is it expected that the new players would likewise compete with both existing fixed and mobile broadband data proporsitions. Obviously, new business might not limit their business models to broadband data but also provide voice offerings. Thus, the competive climate would become stronger as more players contend for the same customers and those customer’s wallet. Let’s analyse the Greenfields possible business model as the economical value of starting up a broadband data business in mature markets of Western Europe. The analysis will be done on a fairly high level which would give us an indication of the value of the Greenfield Business model as well as what options a new business would have to optimize that value. FDD vs TDD Spectrum The 2.6 GHz auction is in its principles assymetric, allocating more bandwidth to FDD based operation than to TDD-based Broadband Wireless Access (BWA) deployment; 2×70 MHz vs 1×50 MHz. It appears fair to assuming that most incumbent operators will target 2×20 MHz FDD which coincide with the minimum bandwidth target for the Next-Generation Mobile Network (NGMN)/Long-Term Evolution (LTE) Network vision (ref: 3GPP LTE). For the entrant interested in the part of the 1×50 MHz TDD spectrum would in worst case need 3x the FDD spectrum to get an equivalent per sector capacity as an FDD player, i.e., 2×20 MHz FDD equivalent to 1×60 MHz TDD with a frequency re-use of 3 used by the TDD operator. Thus, in a like-for-like a TDD player would have difficulty matching the incumbants spectrum position at 2.6 GHz (ignoring the incumbant having a significantly stronger spectrum position from the beginning). Of course better antenna systems (moving to re-use 1), improved radio resource management, higher spectral efficiency (i.e., Mbps/MHz) as well as improved overall link budgets might mitigate possible disadvantage in spectral assymmetry benefiting the TDD player. However, those advantages are more a matter of time before competing access technologies bridge an existing performance gab (technology equivalent tit-for-tat). Comparing actual network performance of FDD-based UMTS/HSPA (High-Speed Packet Access) with WiMAX 802.16e-2005 the performance is roughly equivalent in terms of spectral efficiency. However, in general in Europe there has been allocated far more FDD-based spectrum than TDD-based which overall does result in a considerable capacity and growth issues for TDD-based business models. Long-Term Evolution (LTE) path is likely to be developed both for FDD and TDD based access and equivalent performance might be expected in terms of bits-per-second to Hz performance. Thus, it is likely that a TDD-based network would become capacity limited sooner than a mobile operator having a full portfolio of FDD-based spectrum (i.e., 900 MHz (GSM), 1800 MHz (GSM), 2,100 MHz (FDD UMTS) and 2,500 MHz (FDD – UMTS/LTE) to its disposition. Therefore, a TDD based business model could be expected to look differently than an incumbants mobile operators existing business model. The Greenfield BWA Business Case Assume that Greenfield BWA intends to start-up its BWA business in a market with 17 million inhabitants, 7.4 million households, and a surface area of 34,000 km2. The Greenfield’s business model is based on house-hold coverage with focus on Urban and Sub-Urban areas covering 80% of the population and 60% of the surface area. It is worth mentioning that the valuation approach presented here is high-level and should not replace proper financial modelling and due dilligence. This said, the following approach does provide a good guidance to the attractiveness of a business proporsition. Greenfield BWA – The Technology Part The first exercise the business modeller is facing is to size the network needed consistent with the business requirements and vision. How many radio nodes would be required to provide coverage and support the projected demand – is the question to ask! Given frequency and radio technology it is relative straightforward to provide a business model estimate of the site numbers needed. Using standard radio engineering framework (e.g., Cost231 Walfish-Ikegami cell range model (Ref.:Cost321)) a reasonable estimate for a typical maximum cell range which can be expected subject to the radio environment (i.e, dense-city, urban, sub-urban and rural). Greenfield BWA intends to deploy (mobile) WiMAX at 2.6 GHz. Using the standard radio engineering formula a 1.5 km @ 2.6 GHz Uplink limited cell range is estimated. Uplink limited implies that the range between the Customer Premise Equipment (CPE) and the Basestation (BS) is shorter than the other direction from BS to CPE. This is a normal situation as the CPE equipment often is the limiting factor in network deployment considerations. The 1.5-km cell range we have estimated above should be compared with typical cell ranges observed in actual mobile networks (e.g., GSM900, GSM1800 and UMTS2100). Typically in dense-city (i.e., Top-3 cities) areas, the cell range is between 0.5 and 0.7 km depending on load. In urban/metropolitan radio environment we often find an average between 2.0 – 2.5 km cell range depending on deployed frequency, cell load and radio environment. In sub-urban and rural areas one should expect an average cell range between 2.0 – 3.5 km depending on frequency and radio environment. Typically cell load would be more important in city and urban areas (i.e., less frequency dependence) while the frequency will be most important in sub-urban and rural areas (i.e., low-frequency => higher cell range => fewer sites; higher frequency => lower cell range => higher number of sites).The cell range (i.e., 1.5 km) and effective surface area targeted for network deployment (i.e., 20,000 km2) provides an estimate for the number of coverage driven sites of ca. 3,300 BWA nodes. Whether more sites would be needed due to capacity limitations can be assessed once the market and user models have been defined. Using typical infrastructure pricing and site-build cost the investment level for Western Europe (i.e., Capital expenses, Capex) should not exceed 350 million Euro for the network deployment all included. Assuming that the related network operational expense can be limited to 10%(excluding personnel cost) of the cumulated Capex, we have a yearly Network related opex of 35 million Euro (after rollout target has been reached). After the the final deployment target has been reached the Greenfield should assume a capital expense level of minimum 10% of their service revenue. It should not take Greenfield BWA more than 4 years to reach their rollout target. This can further be accelerated if Greenfield BWA can share existing incumbant network infrastructure (i.e., site sharing) or use independent tower companies services. In the following assume that the BWA site rollout can be done within 3 years of launch. Greenfield BWA the Market & Finance Part Greenfield BWA will target primarily the house-hold market with broadband wireless access services based on the WiMAX (i.e., 802.16e standard). Voice over IP will be supported and offered with the subscription. Furthermore, the Greenfield BWA intends to provide stationary as well as normadic services to the house-hold segment. In addition Greenfield BWA also will provide some mobility in the areas they provide coverage. However, this would not be their primary concern and thus national roaming would not be offered (reducing roaming charges/cost). Greenfield BWA reaches a steady-state (i.e., after final site rollout) customer market-share of 20% of the Household base; ca. 1.1 million household subscriptions on which they have a blended revenue per household €20 per month can be expected. Thus, a yearly service revenue of ca. 265 million Euro. From year 4 and onwards a maintenance Capex level of 25 million Euro is kept (i.e., ca. 10% of revenue). Greenfield BWA manage its cost strictly and achieve an EBITDA margin of 40% from year 4 onwards (i.e, total annual operational cost of 160 million Euro). Depreciation & Amortisation (D&A) level is kept at a level of$40 million annually (steady-state). Furthermore, Greenfield Inc has an effective tax rate of 30%.

Now we can actually estimate the free cash flow (FCF) Greenfield Inc would generate from the 4th year forward:

(all in million Euro)
Revenue €265
-Opex €158
=EBITDA €106
– D&A €40 (ignoring spectrum amortization)
– Tax €20 (i.e., 30%)
+ D&A €40
=Gross Cash Flow €86
-Capex €25
=FCF €61

assuming zero percent FCF growth rate and operating with a 10% (i.e., this could be largely optimistic for a pure Greenfield operation. Having 15% – 25% is not unheard off to reflect the high risks) Weighted Average Cost of Capital (i.e., WACC) the perpetuity value from year 4 onwards would be €610 million. In Present Value this is €416 million, net €288 million for the initial 3 years discounted capital investment (for network deployment) and considering the first 3 years cumulated discounted EBITDA 12 million provides

a rather weak business case of ca. 140 million (upper) valuation prior to spectrum investment where-of bulk valuation arises from the continuation value (i.e., 4 year onwards).

Alternative valuation would be to take a multiple of the EBITDA (4th year) as a sales price valuation equivalent; typically one would expect between 6x and 10x the (steady-state) EBITDA and thus €636 mio (6x) to €1,000 mio (10x).

The above valuation assumptions are optimistic and it is worthwhile to note the following;

1. €20 per month per household customer should be seen as optimistic upper value; lower and more realistic might not be much more than €15 per month.
2. 20% market share is ambitious particular after 3 years operation.
3. 40% margin with 15% customer share and 3,300 radio nodes is optimistic but might be possible if Greenfield BWA can make use of Network Sharing and other cost synergies in relation to for example outsourcing.
4. 10% WACC is assumed. This is rather low given start-up scenario. Would not be surprised that this could be estimated to be as high as 15% to 20%.If point 1 to 4 lower boundaries would be applied to above valuation logic the business case would very quickly turn in red (i.e., negative); leading to the conclusion of a significant business risk given the scope of above business model.Our hypothetical Greenfield BWA should target paying minimum license fee for the TDD spectrum; upper boundary should not exceed €50 million to mitigate too optimistic business assumptions.The City-based Operation Model

Greenfield BWA could choose to focus their business model on the top-10 cities and their metropolitan areas. Lets assume that by this 50% of population or house-holds are captured as well as 15% of the surface area. This should be compared with the above assumptions 80% population and 60% surface area coverage.

The key business drivers would look as follows (in paranthesis the previous values have been shown for reference).

Sites 850 (3,300) rollout within 1 to 2 years (3 years).
Capex €100 mio (€350) for initial deployment; afterwhich €18 mio (€25).

Customer 0.74 mio (1.1)
Revenue €178 mio (€264)
EBITDA €72 mio (€106)
Opex €108 mio (€160)
FCF €38 mio (€61)
Value €210 mio (€140)

The city-based network strategy is about 50% more valuable than a more extensive coverage strategy would be.

Alternative valuation would be to take a multiple of the EBITDA (3rd year) as the sales price valuation equivalent; typically one would expect between 6x and 10x the (steady-state) EBITDA and thus €432 mio (6x) to €720 mio (10x).

Interestingly (but not surprising!) Greenfield BWA would be better of focusing on smaller network but in areas of high population density is financially more attractive. Greenfield BWA should avoid coverage based rollout strategy known from the mobile operator business model.

The question is how important is it for the Greenfield BWA to provide coverage everywhere? if their target is primarily households based customers with normadic and static mobility requirements then such a “coverage where the customer is” business model might actually work?