Mobile Broadband Economics

TM
Rewheel
Strategy Delivered
Understanding
The
Profitability Dynamics
of Mobile Data
London, 16 November 2009
Informa Telecoms & Media
Broadband Traffic Management Conference
© Rewheel
TM
Rewheel – Who are we? Rewheel

Strategy Delivered
Leading specialists of mobile data

strategy, profitability improvement
and infrastructure sourcing
Founded in 2009, headquartered in

Finland
Earned the trust and satisfaction of leading industry

players from Nordics, Western Europe, Central-Eastern
Europe, Middle East & Africa:
© 2009 Rewheel www.rewheel.fi Slide | 2

TM
Costs associated with mobile data Rewheel

Strategy Delivered
Traffic and subscriber independent fixed costs

Spectrum licence fees*
Initial coverage investments (with initial capacity)
Recurring yearly expenditures (OPEX) linked to coverage
Above The Line (ATL) marketing communications
Other various technical and non-technical overheads that can be
associated with mobile data
Directly subscriber number driven variable costs

Non-network A&R costs: terminal subsidies, sales commissions, BTL
Busy Hour PDP context and Attached User capacity in PS Core network
Target of Bandwidth Management
Directly data traffic driven variable costs

Busy Hour Throughput Capacity of Radio Access, Access Transmission,
PS Core, PS backbone, Internet connectivity
* Except for certain markets having usage/carrier number based frequency fee components

TM
Directly data traffic driven costs Rewheel

Strategy Delivered
Capacity upgrades
CAPEX
“Pay as you grow”
Radio, Access Transmission, PS Core, PS Backbone
Incremental yearly expenditures

OPEX
Vendor support & maintenance proportional to capacity
Vendor software release upgrades (e.g. yearly) - CAPEX
Leased line fees proportional to capacity
Electricity costs related to capacity (more base station hardware
consumes more)

The initially under-utilised network capacities are now TM
saturating. The primary driver of MBB production costs Rewheel

will be the CAPEX&OPEX for incremental network Strategy Delivered
capacity
Cumulative 3G Network
3rd WCDMA
Carriers
PS Core,
2nd WCDMA
RNC Carriers
capacity, RAN
CAPEX
Software
Channel
Elements version Capacity
upgrade
NodeB CAPEX
Baseband
NodeB initial HS Codes The incremental
config, Backhaul one-off network
installation, capacity CAPEX of
etc
adding a
5GB/month user can
exceed 500 €*
Coverage
CAPEX
2007 2008 2009 2010 2011 2012 * Source Rewheel
The initial 3G network configuration can accomodate a certain number of data subscribers without signiciant
incremental capacity related expenditures. But soon additional CAPEX and OPEX will need to be spent for
every single subscriber added on the network, representing a major share of overall MBB producion costs.

TM
Capturing marginal production costs Rewheel

Strategy Delivered
Network costs
CAPEX
Driven by change
in traffic level
Incremental CAPEX
[Paid one-off for upgrading the capacity]
OPEX
Driven by
traffic level
Increase in yearly OPEX
[Permanent OPEX level increase]
∆ Capacity Network capacity

expressed e.g. as traffic volume
transported in the busy hour
at a certain user experience level
After the inital network capacities are saturated, the growth of traffic will trigger substantial
incremental CAPEX and increasing yearly OPEX. The CAPEX is driven by the change (growth)
of traffic demand, while the yearly (recurring) OPEX is driven by the actual traffic level.
www.rewheel.fi Slide | 6
TM
Production cost of MBB highly depends on network

capacity costs which are determined by many factors
Rewheel
Strategy Delivered
Radio network density
Average cell capacity
Traffic geo-distribution
Radio network technology
HSDPA, HSPA, HSPA+, LTE
?
Access Transmission Technology
E1 or IP?
Self built or leased?
€/Month
Vendor platforms
HW ready for large capacity?
HW expansion needed when traffic grows?
ARPU
Unitary vendor prices
HW and SW Licence prices
SW upgrade prices
Support & Maintenance costs
Vendor pricing mechanisms
USAGE (MB/Month)
Pay (or Pray?) As You Grow?
Or software licences disconnected from traffic? * Directly traffic driven variable network costs
Target User QoS
1 Mbit/s vs 3 Mbit/s per user in the busy hour?
Or ”Best effort”?
Production costs directly depend on the targeted user experience. If operator decides to delay
adding extra capacity, marginal production costs can be squeezed down dramatically. The
question is, until what point will the market tolerate the degrading broadband experience.
TM
How much network cost does a data subscriber

trigger?
Rewheel
Strategy Delivered
When adding a
Yearly Directly Data Traffic
Driven CAPEX & OPEX per subscriber, the network OPEX
capacity needs to be
upgraded according to CAPEX Network CAPEX
its data usage investments of ten
trigger recurring
Subscriber
Every year incremental incremental operational

CAPEX needs to be expenditures (e.g.
spent to keep up with support f ees)
the subscirber’s usage
increase
Year1 Year2 Year3 Year4 Year5 Year6
A single €/Mbyte cannot adequately capture the cash implications of incremental data traffic
on the network. The only way to frame the true cost dynamics is breaking down the high level
€/Mbyte cost benchmark to one-off and recurring cost components.
TM
Different mobile data subscriber segments can have

very different production costs
Rewheel
Strategy Delivered
"How Much Does a Subscriber Cost?" - CASH View - Per Year
Direct CAPEX+OPEX triggered by a subscriber added in first year.
Including acquisition costs in first year, excluding retention costs in
subsequent years.
20% subscriber usage

growth per year
Smart phones
Low usage handhelds

Cash
Mobile broadband bunded with fixed
Complementary connections
Substitutive
First time broadband
Years
The first year of typical PC connectivity user is characterised by heavy incremental network
capacity investments and significant subscriber acquisition costs (sales commissions +
dongle/netbook/laptop subsidy)
TM
Operarors can live with temporarily losing money

on mobile broadband susb acquisitions
Rewheel
Strategy Delivered
Cumulative Cash Flow per Subscriber Added in first year
Including terminal subsidy and sales commission in first year. Excluding
retention costs in subsequent years.

growth per year
Smart phones
Cash flow
Low usage handhelds
Substitutive
Years
The CAPEX intensive nature of MBB turns the PC connectivity (heavier usage) subscriber cash
flow negative in the 1st year. Operators accept to pay this price for gripping the long term
potential in mobile data.
TM
But considering the overall segment level cash flow

contribution the outlook becomes grim
Rewheel
Strategy Delivered
Segment Level Cumulative Cash Flow from New Additions from the first
year on Existing Coverage Areas
Including terminal subsidy and sales commission

growth per year
Smart phones
Low usage handhelds

Cash flow
Substitutive
Years
While on subscriber level the cumulative cash flow turns positive in the 2nd year, this is not
necessarily true for the entire segement. Every year more money needs to be spent in capacity
upgrades an A&R expenditures than the cash generated by subs added in earlier years.
TM
Segment level cash flow is extremely sensitive to

average usage per subs
Rewheel
Strategy Delivered
10% subscriber usage 20% subscriber usage 30% subscriber usage
growth per year growth per year growth per year
Cash flow
Cash flow
Cash flow
Years Years Years
The uncertainty of future demand of mobile data subscribers poses an enrmous profitability
risk for the operatos. In reality, operators will not afford to invest the required cash which
means the network congestion will dramatically degrade broadband user experience.
TM
Excluding A&R, CF turns acceptable Rewheel

Strategy Delivered
Segment Level Cumulative Cash Flow from New Additions from the first
year on Existing Coverage Areas
Including terminal subsidy and sales commission

growth per year
Smart phones
Low usage handhelds

Cash flow
Cash flow
Mobile broadband bunded with fixed No subsidies
and sales
commissions
Substitutive
Years Years
Combining the low margin, CAPEX intensive MBB business with extensive terminal subsidies
may not be sustainable in the long run. Excluding acquisition & retention the picture looks
much nicer.
TM
Manage cash flow by under investing in capacity? Rewheel

Strategy Delivered
1-2 Mbits/s 2-4 Mbits/s
Cash flow
Cash flow
Years Years
Positioning mobile broadband as a credible substitutive alternative to fixed (DSL or cable)

broadband will require QoS of 3-4 Mbit/s in the medium term. Operators may choose to offer
lower user experience but by doing that they will run the risk of losing markets share.
TM
Some operators still tend to play down the severity

of the capacity crunch
Rewheel
Strategy Delivered
Argument The truth

Only very few base stations have reached their capacity Engineers are gradually adding hardware boards and hefty
limits, most of them are running on very low utilisation. So software licences to the majority of base stations. This
there is still plenty of room for traffic growth without keeps the ”utilisation” metric under control, while the data
significant incremental network costs capacity related expenditures take more and more share of
the CTO’s budget
Many central network elements are priced on a pay as you

grow basis. This means that incremental CAPEX needs to
be paid to the vendor for every additional Mbit/s peak
capacity, even if the base stations are under-utilised
So far there is no sign that the exponential traffic growth Most operators have been under-investing in capacity and
would hurt operators’ CAPEX to Sales ratios, or profitability started to cut non network capacity related costs (such as
KPIs like EBITDA & EBIT 3G coverage expansions, salaries ...). Thus the top level
financial KPIs can hide the fundamental economical
unsustainabilites unfolding below the surface
Many operators have been under-investing in capacity

which is becoming apparent in recent customer satisfaction
surveys
The usage of normal users can be served in a profitable The share of data volume generated by heavy (p2p) users
way. Manage bandwidth usage of ”heavy” users and the is declining. Video usage (e.g. Youtube) is becoming
problem is solved mainstream pushing average usage of ”normal” mobile
broadband subscribers to 5+ GB.

TM
Technology ”black magic” to maintain data

profitability
Rewheel
Strategy Delivered
Technology evolution step Promised benefits The truth

3.6, 7.2, 21, 42 Mbps HSPA HSPA evolution will multiply cell capacity
by means of simple software upgrade
thus driving down production costs Peak speed ≠ Cell capacity
Throughput improvement can be

achieved only in very good radio
conditions
Average cell capacity improvement will

be as low as 10-25% percent (stepping
from 7.2 to 21Mbps peak speed)
These features have a hefty price, often

linked to the aggregate network
throughput (!)
HSPA+ MIMO MIMO technolgy nearly doubles spectral The number of base station radio units
efficiency, reducing production costs (most expensive hw) needs to be
doubled to enable MIMO. Thus cost
saving is minimal
Sectorisation By adding more sectors, the existing Adding a new sector means buying
specturm can be reused, delaying new expensive radio units into the base
spectrum acquisition stations
New frequencies (”2nd carrier”) can be No need for new spectrum in the next 2- True, but base station vendors ask a
switched on without buying additional 3 years hefty price for so called carrier upgrades
spectrum (either software or hardware)
LTE Cost/MB will be significantly less due to Cost/MB is primarily determined by the
higher spectral efficiency vendor’s pricing mechanism and not
spectral efficiency. As GSM and UMTS
equipment sales decline, vendors will be
forced to ”milk” operators when they
upgrade to LTE
TM
Key takeaways Rewheel

Strategy Delivered
Serious economic unsustainability unfolding below the surface
Co-ordinated actions required on technology, supply chain and

commercial fronts
Technology Supply Chain Commercial

Proactively upgrade capacity Negotiate sustainable Map out traffic demand and
Capacity to prevent degradation of infrastructure pricing identify minimum network
Investments broadband experience mechanisms (preventing quality KPIs required to
”pray as you grow” satisfy expectations of mass
situations) market
Deploy performance and Negotiate reasonable feature Maximise positive brand
Technology capacity improvement pricing mechanisms based on impact of technology features
Evolution features and invest in strict cost/benefit appraisal by smart marketing
platform modernisations communicattions
Deploy bandwidth Before restricting end user Prevent massive customer
management capabilities traffic, push infra vendors for turn-off due to over
Usage ”Gigabyte-ready” capacity degrading user experience
pricing mechanisms (e.g. throttling speed too
Control early or too much)
Deploy techology features Ensure that the cost of such Maximise ARPU by
necessary for differentiated features is in-line with the segmented mobile data
Customer treatment of different market associated economic benefits propositions
Segmentation segments
Reconsider level of terminal
subsidies

TM
Thank you Rewheel

Strategy Delivered
check our mobile data

profitability insights at
insights.rewheel.fi

Mobile Broadband Economics

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London, 16 November 2009

Informa Telecoms & Media

Broadband Traffic Management Conference

Rewheel – Who are we? Rewheel

Leading specialists of mobile data

Founded in 2009, headquartered in

Earned the trust and satisfaction of leading industry

© 2009 Rewheel www.rewheel.fi Slide | 2

Costs associated with mobile data Rewheel

Traffic and subscriber independent fixed costs

Directly subscriber number driven variable costs

Target of Bandwidth Management

Directly data traffic driven variable costs

© 2009 Rewheel www.rewheel.fi Slide | 3

Directly data traffic driven costs Rewheel

Incremental yearly expenditures

© 2009 Rewheel www.rewheel.fi Slide | 4

saturating. The primary driver of MBB production costs Rewheel

2007 2008 2009 2010 2011 2012 * Source Rewheel

© 2009 Rewheel www.rewheel.fi Slide | 5

Capturing marginal production costs Rewheel

∆ Capacity Network capacity

Production cost of MBB highly depends on network

How much network cost does a data subscriber

Every year incremental incremental operational

Year1 Year2 Year3 Year4 Year5 Year6

Different mobile data subscriber segments can have

20% subscriber usage

Low usage handhelds

Mobile broadband bunded with fixed

First time broadband

Operarors can live with temporarily losing money

20% subscriber usage

Low usage handhelds

Mobile broadband bunded with fixed

First time broadband

But considering the overall segment level cash flow

20% subscriber usage

Low usage handhelds

Mobile broadband bunded with fixed

First time broadband

Segment level cash flow is extremely sensitive to

Years Years Years

Excluding A&R, CF turns acceptable Rewheel

20% subscriber usage

Low usage handhelds

First time broadband

Manage cash flow by under investing in capacity? Rewheel

1-2 Mbits/s 2-4 Mbits/s

Positioning mobile broadband as a credible substitutive alternative to fixed (DSL or cable)

Some operators still tend to play down the severity

Argument The truth

Many central network elements are priced on a pay as you

Many operators have been under-investing in capacity

© 2009 Rewheel www.rewheel.fi Slide | 15

Technology ”black magic” to maintain data

Technology evolution step Promised benefits The truth

Throughput improvement can be

Average cell capacity improvement will

These features have a hefty price, often

Key takeaways Rewheel

Serious economic unsustainability unfolding below the surface