Day 4 Session 4

LRIC Cost Modeling:

Mobile Networks
Eric Tyson

Agenda

Accounting separation in mobile networks

Implementation of LRIC
Cost modelling in mobile networks
Banechmarks

Call termination: why it is different

All operators have a monopoly on call termination
Customer receiving a call chooses the network,
not the customer making a call
The cost of calling to the mobile network is not a
major influence when a person chooses a mobile
network
Mobile operators are therefore usually obliged at
least to offer call termination at cost oriented
charges

Cost Modelling in Mobile Networks

Costing principles are similar to fixed networks
The principles of cost causation as developed for
fixed network costing are applied
No formal principles have been established for
accounting separation for mobile operators unlike
for fixed operators
Adopting the principle of cost causation results in
only 2 cost accounts in mobile:
Network costs
Non Network costs

Business areas for costing purposes

Retail
Access
Network Core
Network

Retail
Network

Other
Costs
Fixed operator

Other
Costs
Mobile operator

The concept of an access network does not exist for

mobile networks

What is LRIC?
Long-run?
Telecoms networks typically have significant fixed costs
So a long-run view of marginal costs is appropriate

Incremental?
Economic theory suggests that competition will lower
prices towards marginal costs
Long-run marginal costs are difficult to measure, so
long-run incremental costs (LRIC) are generally used
Difference in cost between doing something and not
doing it

Fully-allocated costs (FAC)

All costs are distributed to respective services
Consistent with approach taken in company accounts

FAC and LRIC may produce similar results with an

established operator in a stable market
- Depending on the version of LRIC used

Top-down and bottom-up

Top-down models start with the operators
accounting cost data and try to identify the relevant
costs within the total
Require detailed knowledge of operators accounts
Usually constructed by operators

Bottom-up models
Model a hypothetical network that meets a given set of
service demands
Less dependent on data from the operator
Can be constructed by regulators

Scope of the model - operators

Top-down models one model per operator, by
definition
Bottom-up models hypothetical efficient operator
Efficiency depends on (amongst other things) scale
1/N approach
N = number of operators
competition between efficient operators will lead to even shares
over the long run
One model of an operator with a share of 1/N

Differentiated approach different circumstances for

different operators
Models for each operator, or for groups of similar ones

Scope of the model - services

All costs must be included in the model but some
costs are not appropriate to call termination
(interconnection) charges
All services must therefore also be included
Fewer services offered by mobile operators than
fixed operators i.e. no leased lines, ADSL etc
Not necessary to apportion the core network
capacity between so many services as with fixed
network cost model
Services converted to equivalent basis (e.g.
minutes), including SMS. MMS and GPRS

Scope of the model - technologies

Forward-looking view: assume that the best
available technology is used over time
Modern Equivalent Asset

Changes in Technology generation (2G/3G/LTE,

etc.)
Assume a reasonable transition
But new generation may be justified by new services e.g.
data
UK regulator applied a 2G ceiling

Licences, spectrum, etc.

Are they available to all operators?
Is it reasonable to recover excessive auction prices from
call termination?

Stylised Cost Structure

Non-network common costs

Network common costs

Voice common costs

CO costs
Call Origination

CT costs
Call Termination

Data costs
Data Services

Stylised LRIC+
LRIC+
LRIC+
Non-network common costs

Network common costs

Voice common costs

CO costs
Call Origination

CT costs
Call Termination

Increment = all traffic

Network coverage costs are included

LRIC
Data costs
Data Services

Stylised Pure LRIC (EC approach)

Non-network common costs

Network common costs

Voice common costs

CO costs
Call Origination

CT costs
Call Termination
Pure LRIC

Data costs
Data Services

Increment = terminating traffic only

Network coverage costs are not included

Pure LRIC
Total Service LRIC (LRIC+)
Increment is all network
services
Coverage network costs
usually included
Mark-ups to cover fixed and
common costs

Pure LRIC
Increment is termination
services only
Coverage network costs
excluded
No mark-ups
Intended to bring mobile
termination rates into line
with fixed levels

Common Cost
Common Cost is the cost which relates to all or a
group of services
HR
Finance
Senior Management

Different methods are available for incorporating

common cost
Ramsey Pricing
Equi-Proportionate Mark Up (EPMU)

Common Costs
Equi-Proportionate Mark-up (EPMU)
Allocates common cost in proportion to the direct and joint
costs already allocated to each service

Common cost
Network cost

o/g
call

i/c
call

onnet
call

Ramsey Pricing
Common cost
Ramsey pricing is based on
taxation theory
Common costs are allocated
based on price elasticity

Network cost

On-net and outgoing calls are

elastic as customer behaviour is
based on the cost of the call
Incoming calls are inelastic as
customers will make them
irrespective of the cost

Incoming calls are therefore used

to recover the majority of common
cost

o/g
call

i/c
call

onnet
call

Typical bottom-up mobile model structure

Model
controls

Inputs

Dimensioning

Costing

Base year
Results year
Cost of capital
Selected
results

Network
coverage
Subscriber
and traffic
volumes
Technical
inputs
Cost inputs

Radio access
network (RAN)
Backhaul and
core
transmission
Core network

Unit costs
Annualisation
Cost pools
Costs by
service

Network coverage
Single-sector (omni) sites
Cell radius

Cell radii vary with:

-

Three-sector site
-

Terrain (clutter) - Buildings,

trees mountains, etc.
Signal strength criterion
Indoor/outdoor

Sometimes categorised by
geotype: Urban, suburban,
rural, etc.
Own sites, or site sharing,
leasing

RAN Capacity
2G
Capacity can be
increased by adding:
Sectors directional
antennae to give more
than one cell per site
Transponders (TRX)
using more frequencies, if
available
Frequency bands, e.g.
adding a 1800MHz BTS
to a 900MHz site
More sites smaller cells

3G
Capacity can be
increased by adding:
Sectors directional
antenae to give more than
one cell per site
Carriers 3G uses wider
(5MHz) frequency bands
More sites smaller cells
Interference (within cell
and between cells is the
limiting factor)

Backhaul and transmission

Variety of technologies used:
Microwave, private circuit, point-to-point fibre, fibre rings,
satellite

Depends on:
Capacity required e.g. 3G, 4G, etc. require more
bandwidth
Availability of fixed network capacity at a reasonable price
Distances to be covered
Regulatory constraints e.g. entitlement to build fixed links

Core network
Numbers of items of core network equipment
required depends on:
Network architecture e.g. circuit-switched, vs packet
Volume drivers:
Traffic, e.g. erlangs, call attempts taking account of routing
factors
Coverage, e.g. a Base Station Controller (BSC) may be able to
handle a maximum number of base stations (BTS)
Subscribers, e.g. software for a MSC server (soft switch) may be
licenced by the number of subscribers served

Costing: Unit costs

Capital costs per item of equipment
Including import taxes, installation, etc.

Asset life how long would it be before the

equipment would need to be replaced?
Operating costs cost of maintaining and servicing
the network
Including power, transport, network planning and
management, etc.

Cost trends by how much are costs per item

expected to go up or down over time?

Costing: annualisation
An extreme example:
Year 1:

Network investment $1m

Network minutes 1,000
Average cost: $1,000 per minute

Year 2:

Network investment $0
Network minutes 1,000,000
Average cost: $0

Since the network investment may buy assets that

last for a number of years, the cost is usually
spread over that period
Equivalent to accounting depreciation charges
Usually straight line
Initial capital cost / asset life (years)

Annualisation: Economic Depreciation

Economic depreciation is widely considered to be
the option that best mimics behaviour in a
competitive environment
Charge more in the early years with falling demand and
asset prices
Charge more in later years with increasing demand and
asset prices

Drawbacks of ED
Complex to calculate
Requires a long time horizon (around 50 years)
Equivalent to the lifetime of the most durable assets (licences,
spectrum)

Alternatives to ED
Straight line
Adjusted straight line
Allow for asset price trends

Annuities
Fixed amount per year to repay an initial investment,
taking cost of capital into account

Tilted annuities
Allows for asset price trends

Sum-of-digits
Front-loads, or back-loads cost recovery

Costing: Cost pools and service costs

Network costs are combined into a smaller number
of categories (cost pools) for simplicity
Each cost pool contributes to one or more output,
e.g. paid minutes
Different types of traffic, e.g. voice minutes, SMS, data may
be converted to a single measure for simplicity, e.g. minuteequivalents

Unit costs can be calculated for each cost pool

Routing (or allocation) factors are applied to
calculate the use each service makes of each cost
pool, giving a total cost per unit of output (e.g.
minute)

Model Outputs
The cost models output 24 hour average costs
If time-dependent charges are required (e.g. peak,
off-peak, night-time, etc.) the retail tariff gradient
may be used
- Reflect the average price variation for retail calls

Where current interconnection charges is

significantly above cost
- Use 3-5 year Glide Paths rather than significant step
reductions
- Price reduces in steps

Network Externality Charges

An allowance, in addition to the call termination
costs, towards the costs of bringing new customers
onto the network
Gives callers the opportunity to call more people in
the future
Can be added to the mobile call termination charge
But difficult to calculate the correct amount not
cost-based

Mobile Interconnection Rate

Benchmarks

European Mobile Termination Rates

OECD Mobile Termination Rates

USD
0.180
0.160

05/05/2011
25/10/2012

0.140
0.120
0.100
0.080
0.060
0.040
0.020
-

More Mobile Termination Rates

Mobile Termination Rates for Non-OECD Countries, Q3 2012
16.00

14.00

Euro Cents per Minute

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Source: InterConnect analysis of operator

RIOs and regulator websites

Mobile Termination Rates MENA

Countries
6

Euro Cents per minute

0
Bahrain

Jordan

Morocco

Oman

Qatar

Saudi Arabia

Source - Regulator websites, operator RIOs and online sources 2013

Recent MTR Calculations

UK (Ofcom) April 2010
Pure LRIC: 4-year glide path from cents 5.01 to 0.58
Symmetry (same for all four/five MNOs after first year)
LRIC+ would have resulted in a rate of cents 1.75
Belgium (BIPT) April 2010
Pure LRIC: 3-year glide path to cents 1.00
Netherlands (Opta) April 2010
Pure LRIC: 2-year glide path to cents 1.20
Portugal (Anacom) April 2010
Interim determination: six quarterly reductions, taking
the rate to cents 3.5
Pure LRIC modelling under way
France (ARCEP) March 2011
Glide path to 0.8cents by 2013

Trend in EU Mobile Termination Rates

Source: BEREC MTR Snapshots 2010 - 2012