Posts Tagged Mobile
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)
– D&A €40 (ignoring spectrum amortization)
– Tax €20 (i.e., 30%)
+ D&A €40
=Gross Cash Flow €86
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;
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?
The United States has recently ended (March 2008) the auction of 5 blocks (see details below) of the analog TV spectrum band of 700-MHz. More specifically the band between 698 – 763 MHz (UL) and 728 – 793 MHZ (DL), with a total bandwidth of 2×28 MHz. In addition a single band 1×6 MHz in 722 – 728 MHz range was likewise auctioned. The analog TV band is expected to be completely vacated by Q1 2009.
The USA 700 MHz auction result was an impressive total of $19.12 billion, spend buying the following spectrum blocks: A (2×6 MHz), B (2×6 MHz), C (2×11 MHz) and E (1×6 MHz) blocks. The D (2×5 Mhz) block did not reach the minimum level. A total of 52 MHz (i.e, 2×23 + 1×6 MHz) bandwidth was auctioned off.
Looking with European eyes on the available spectrum allocated per block it is not very impressive (which is similar to other US Frequency Blocks per Operator, e.g., AWS & PCS). The 700 MHz frequency is clearly very economical for radio network coverage deployment in particular compared the high-frequency AWS spectrum used by T-Mobile, Verizon and Sprint. However, the 6 to 11 MHz (UL/DL) is not very impressive from a capacity sustainance perspective. It is quiet likely that this spectrum would be exhausted and rapidly leading to a significant additional financial commitment to cell splits / capacity extensions.
This $19.12 billion for 52 MHz translates to $1.22 per MHz spectrum per Population @ 700 MHz.
This should be compared to following historical auctions
* $0.56/MHz/Pop @ 1,700 MHz in 2006 US AWS auction
* $0.15/MHz/Pop (USA Auction 22 @ 1999) to $4.74/MHz/Pop (NYC, Verizon).
* $1.23/MHz/Pop Canadian 2000 PCS1900 Auction of 40MHz.
* $5.94/MHz/Pop UK UMTS auction (2001) in UK auctioning a total of 2×60 MHz FDD spectrum (TDD not considered).
* $7.84/MHz/Pop German UMTS auction in 2001 (2×60 MHz FDD, TDD not considered).
(Note: the excesses of the European UMTS auctions clearly illustrates a different time and place).
What is particular interesting is that Verizon “knocked-out” Google by paying $4.74 billion for the nationwide C-block of 2×11 MHz. “Beating” Google’s offer of $4.6 billion.
However, Google does not appear too sadened of the outcome and …. why should they! Google has to a great extend influenced the spectrum conditions allowing for open access (although it remains to be seen what this really means) to the C spectrum block; The USA Federal Communications Commission (FCC) has proposed to apply “open access” requirements for devices and applications on a the nation wide spectrum block C (2×11 MHz).
Clearly Google should be regarded as the winner of the 700 MHz auction. They have avoided committing a huge amount of cash for the spectrum and on-top having to deploy even more cash to build and operate a wireless network (i.e., which is really their core business anyway).
Googling the Business Case
Google was willing to put down $4.6 billion for the 2×11 MHz @ 700 MHz. Let’s stop up an ask how their business case possible could have looked like.
At 700 MHz, with not too ambitious bandwidth per user requirements, Google might achieve a typical cell range between 2.5 and 4 km (Uplink limited, i.e., user equipment connection to base station). Although in “broadcast/downlink” mode, the cell range could be significantly larger (and downlink is all you really need for advertisement and broadcast;-).
Assume Google’s ambition was top-100 cities and 1-2% of the USA surface area they would need at least 30 thousand nodes. Financially (all included) this would likely result in $3 to $5 billion network capital expense (Capex) and a technology driven annual operational expense (Opex) of $300 to $500 million (in steady-state). On top of the spectrum price.
Using above rough technology indicators Google (if driven by sound financial principles) must have had a positive business case for a cash-out of minimum $8 billion over 10 years, incl. spectrum and discounted with WACC of 8% (all in all being very generous) and annual Technology Opex of minimum $300 million. On top of this comes customer acquisition, sales & marketing, building a wireless business operations (obviously they might choose to outsource all that jazz).
… and then dont forget the customer device that needs to be developed for the 700 MHz band (note GSM 750 MHz falls inside the C-band). Typically takes between 3 to 5 years to get a critical customer mass and then only if the market is stimulated.
It would appear to be a better business proporsition to let somebody else pay for spectrum, infrastructure, operation, etc… and just do what Google does best … selling advertisments and deliver search results … for mobile devices … maybe even agnostic to the frequency (seems better than wait until critical mass has been reached at the 700 MHz).
But then again … Google reported for full year 2007 a $16.4 billion in advertising revenues (up 56% compared to the previous year).(see refs Google Investor Relations). Imagine what this could be if extended to wireless / mobile market. Still lower than Verizon’s 2007 full year revnue of $23.8B (up 5.5% from 2006) but not that much lower considering the difference in growth rate.
The “successfull” proud owners (Verizon, AT&T Mobility, etc….) of the 700 MHz spectrum might want to keep in mind that Google’s business case for entering wireless must have been far beyond the their proposed $4.6 billion.
The former analog TV spectrum auction has been divided UHF spectrum into 5 blocks:
Block A: 2×6 MHz bandwidth (698–704 and 728–734 MHz); $3.96 billion
Block B: 2×6 MHz bandwidth (704–710 and 734–740 MHz); $9.14 billion dominated by AT&T Mobility.
Block C: 2×11 MHz bandwidth (746–757 and 776–787 MHz) Verizon $4.74 billion
Block D: 2×5 MHz bandwidth (758–763 and 788–793 MHz) No bids above the minimum.
Block E: 1×6 MHz bandwidth (722–728 MHz)Frontier Wireless LCC $1.26 billion
Backhaul, which is the connection between a radio node and the core network, is providing mobile-wireless operators possible with the biggest headache ever (apart from keeping a healthy revenue growth in mature markets 😉 … it can be difficult to come by in the right quantities and can be rather costly with conventional transmission cost-structures … Backhaul is expected to have delayed the Sprint WiMAX rollout of their Xohm branded wireless internet service. A Sprint representative is supposed to have said: “You need a lot of backhaul capacity to do what’s required for WiMax.” (see forexample WiMax.com blog)
What’s a lot?
Well … looking at the expected WiMAX speed per Base Station (BS) of up-to 50 Mbps (i.e., 12 – 24x typical backhaul supporting voice demand), it is clear that finding suitable and low-cost bachaul solutions might be challenging. Conventional leased lines would be grossly un-economical at least if priced conventionally; xDSL and Fiber-to-the-Premises (FTTP) infrastructure that could support (economically?) such bandwidth demand is not widely deployed yet.
Is this a Sprint issue only? Nope! …. Sprint cannot be the only mobile-wireless operator with this problem – for UMTS/HSPA mobile operators the story should be pretty much the same (unless an operator has a good and modern microwave backhaul network supporting the BS speed).
Backhaul Pains – Scalability Issues
The backhaul connection can be either via a Leased Line (LL) or a Microwave (MW) radio link. Sometimes a MW link can be leased as well and might even be called a leased line.
With microwave (MW) links one can easily deliver multiples of 2.048 Mbps (i.e., 10 – 100 Mbps) on the same connection for relative low capital cost (€500 – €1,000 per 2.048 Mbps) and low operational expense. However planning and deployment experience and spectrum is required.
In many markets network operators have been using conventional (fixed) leased lines, leased from incumbent fixed-line providers. The pricing model is typically based on an upfront installation fee (might be capitalized) and a re-occurring monthly lease. On a yearly basis this operational expense can be in the order of €5,000 per 2.048 Mbps, i.e., 5x to 10 x the amount of a MW connection. Some price-models trade-off the 1-off installation fee with a lower lease cost.
Voice was the Good for Backhaul; Before looking at the broadband wireless data bandwidth demand its worth noticing that in the good old Voice days (i.e., GSM, IS95, ..) 1x to 2x 2.048 Mbps was more than sufficient to support most demands on a radio base station (BS).
Mobile-Wireless Broadband data enablers are the Bad and quickly becoming the Very Ugly for Backhaul; With the deployment of High Speed Packet Access (HSPA) on-top of UMTS and with WiMAX (a la Sprint) a BS can easily provide between 7.2 to 14.4 Mbps or higher per sector depending on available bandwidth. With 3 sectors per BS the total supplied data capacity could (in theory … ) be in excess of 21 Mbps per radio Base Station.
From the perspective of backhaul connectivity one would need at least an equivalent bandwidth of 10x 2.048 Mbps connections. Assuming such backhaul lease bandwidth is available in the first instance, with conventional leased line pricing structure, such capacity would be very expensive, i.e., €50,000 per backhaul connection per year. Thus, for 1,000 radio nodes an operator would pay on an annual basis 50 million Euro (Opex directly hitting the EBITDA). This operational expense could be 8 times more than a voice-based operational leased-line expense.
Now that’s alot!
Looking a little ahead (i.e., next couple of years) our UMTS and WiMAX based mobile networks will undergo the so-called Long-Term Evolution (LTE; FDD and TDD based) with expected radio node downlink (i.e., base station to user equipment) capacity between 173 Mbps and 326 Mbps depending on antenna system and available bandwidth (i.e., minimum 20 Mhz spectrum per sector). Thus over a 3-sectored BS (theoretical) speeds in excess of 520 Mbps might be dreamed of (i.e., 253x 2.048 Mbps – and this is HUGE!:-). Alas across a practical real-life deployed base station (on average) no more than 1/3 of the theoretical speed should be expected.
“Houston we have a problem” … should be ringing in any CFO / CTO’s ears – a. Financially near-future developments could significantly strain the Technology Opex budgets and b.Technically providing cost-efficient backhaul capacity that can sustain the promised land.
A lot of that above possible cost can and should be avoided; looking at possible remedies we have several options;
1. High capacity microwave backhaul can prevent the severe increase in leased line cost; provided spectrum and expertise is available. Financially microwave deployment has the advantage of being mainly capital-investment driven with resulting little additional operational expense per connection. It is expected that microwave solutions will be available in the next couple of years which can provide connection capacity of 100 Mbps and above.
Microwave backhaul solutions are clearly economical. However, it is doubtful that LTE speed requirements can be met even with most efficient microwave backhaul solutions?
2. Move to different leased line (LL) pricing mechanisms such as flat pricing (eat all you can for x-Euro). Changing the LL pricing structure is not sufficient. At the same time providers of leased-line infrastructure will be “forced” (i.e., by economics and bandwidth demand) to move to new types of leased bandwidth solutions and architectures in order to sustain the radio network capabilities; ADSL is expected to develop from 8(DL)/1(UL) Mbps to 25(DL)/3.5(UL) Mbps with ADSL2+; VDSL (UL/DL symmetric) from ca. 100 Mbps to 250 Mbps with VDSL2 (ITU-T G.993.2 standard).
Clearly a VDSL2-based infrastructure could support today’s HSPA/WiMAX requirements, as well as the initial bandwidth requirements of LTE. Although VDSL2-based networks are being deployed around Europe (and the world) it is not not widely available.
Another promising mean of supporting the radio-access bandwidth requirements is Fiber to the Premises (FTTP), such as for example offered by Verizon in certain areas of USA (Verizon FiOS Service). With Gigabit Passive Optical Network (GPON, ITU-T G.984 standard) maximum speeds of 2,400 Mbps (DL) and 1,200 Mbps (UL) can be expected. If available FTTP to the base station would be ideal – provided that the connection is priced no higher than a standard 2.048 Mbps leased line to day (i.e., €5,000 benchmark). Note that for a mobile operator it could be acceptable to pay a large 1-off installation fee which could partly finance the FTTP connection to the base station.
Cost & Pricing Expectations
It is in general accepted by industry analysts that broadband wireless services are not going to add much to mobile operators total service revenue growth. In optimistic revenue scenarios data revenue compensates for stagnating/falling voice revenues. EBITDA margins will (actually are!) under pressure and the operational expenses will be violently scrutinized.
Thus, mobile operators deploying UMTS/HSPA, WiMAX and eventually (in the short-term) LTE cannot afford to have its absolute Opex increase. Therefore, if a mobile-wireless operator has a certain backhaul Opex, it would try to keep it at the existing level or reduce it over time (to mitigate possible revenue decline).
For the backhaul leased-capacity providers this is sort of bad news (or good? as it forces them to become economically more efficient) …. as they would have to finance their new fixed higher-bandwidth infrastructures (i.e., VDSL or FTTP) with little additional revenue from the mobile-wireless operators.
Economically it is not clear whether mobile-wireless cost-structure expectations will meet the leased-capacity providers total-cost of deploying networks supporting the mobile-wireless bandwidth demand.
However, for the provider of leased fixed-bandwith, providing VDSL2 and/or FTTP to the residential market should finance their deployment model.
With more than 90% of all data traffic being consumed in-house/in-door and with VDSL2/Fiber-to-the-Home (FTTH) solutions being readily available to the Homes (in urban environments at least) of business as well as residential customers, will mobile-wireless LTE base stations be loaded to the extend that very-high capacity (i.e., beyond 50 Mbps) backhaul connections would be needed?