The impact of technical and service neutrality

Transcription

1 The impact of technical and service neutrality A report for the Ministerie van Economische Zaken 13 October 2009 Communications, media and entertainment

2 DISCLAIMER: This report and the research and investigations necessary to compile it were carried out by PA in accordance with instructions from the Netherlands Ministry of Economic Affairs and were prepared exclusively for its sole benefit and use. There are a number of assumptions which PA relied on to come to its conclusions and therefore this report should not be used as a substitute for your own research and due diligence. It should not be considered to comprehensively cover all potential options and outcomes. It does not constitute a recommendation by PA for any particular product, service or outcome and should not be used by to make any purchase and/or investment decisions. You should always make your own enquiries and undertake your own adequate due diligence. Accordingly, PA does not assume any responsibility or liability for this report and requests that you do not use information contained in this report without PA's written consent. PA Knowledge Limited 2009

3 Executive summary The Netherlands Ministry of Economic Affairs is interested in the impact of the introduction of technology and service neutrality in the spectrum bands 900, 1800, 2100 and 3500 MHz. It has asked PA to consider the following questions. Are current licensees technically able and is it for them commercially viable to use the benefits that technology neutral licenses provide until the date the licenses expire? Only the mobile operators are able to take advantage of technology neutrality within the timescales constrained by the expiry of the licences. Technically the options available to mobile operators are implementing UMTS in 900 MHz and LTE in 900, 1800 and 2100 MHz. It is not likely that Worldmax will have an alternative to mobile WiMAX e at 3500 MHz in the timeframes defined by the licences. Not all of the available technical options make commercial sense. Only LTE in 2100 MHz (when it does not duplicate the roll out of an LTE network at 2600 MHz) is likely to generate a payback for investors within the timeframes of the licence. However operators may opt to begin roll out of UMTS at 900 MHz, complementing their existing networks at 2100 MHz, in the expectation that the outcome of the reauction of 900 MHz spectrum will not radically alter their spectrum holdings. Would this situation change if T-Mobile handed back some of its licenses in the near future? Under the current spectrum allocations, MEZA is proposing T-Mobile can obtain only 2 x 5 MHz of 2600 MHz spectrum. Under these circumstances, T-Mobile would be more likely to take advantage of technology neutrality and use its 2100 MHz spectrum to support LTE. In theory, T-Mobile could follow KPN and return some of the spectrum it obtained through playing a role in the consolidation of the Netherlands communications market. If T-Mobile were to hand back the 2100 MHz spectrum it obtained along with its purchase of Orange, the option of taking advantage of technology neutrality would be less attractive. T-Mobile would instead have access to a greater quantity (2 x 12.5 MHz) of 2600 MHz spectrum. It would therefore be less likely to take advantage of technology neutrality, and more likely to reserve 2100 MHz for UMTS and introduce LTE at 2600 MHz. What would be the impact on the competitive dynamics in the market of making the existing licenses technology and service neutral? The introduction of technology and service neutrality is unlikely to have a significant impact on competitive dynamics in the market. The mobile operators have natural advantages from the frequencies they have been allocated, and the subscriber bases, networks and organizations they have developed over the past two decades. Technology and service neutrality will expand the options available to the incumbent mobile operators, and may therefore improve their competitive position with regard to a new entrant or Worldmax. But 1

4 this additional competitive benefit is likely to be negligible in comparison with the advantages they already enjoy. At present Worldmax is not considered a challenger to the incumbent mobile operators, but it is likely to face considerable competitive pressures as its service and pricing strategy converges with the mobile operators. The natural advantages held by the mobile operators, rather than the introduction of technology and service neutrality, will make it difficult for Worldmax to develop its position in the market. Similarly new entrants using the 2600 MHz band alone will find it difficult to compete with the mobile operators. What are the technical and economic differences between the 3500 MHz band and the 2600 MHz band? When comparing the 2600 and 3500 MHz bands against technical and economic criteria, the 2600 MHz spectrum is more attractive to operators than 3500 MHz spectrum MHz is at the heart of the future development of wireless communications as a result of its assignment as an extension band for 3GPP. It also offers more attractive propagation characteristics compared with 3500 MHz, and enables lower cost rollout as a result. Historical valuations of spectrum show that the market values 2600 MHz between four and 400 times higher than 3500 MHz spectrum MHz may enable wideband services using the 80 MHz of spectrum held by Worldmax, but services using this type of spectrum are likely to have niche appeal, within the timeframes of Worldmax s licence. 2

5 Contents Executive summary 1 1 Background to the questions Moves towards technology and service neutrality Spectrum allocation in the Netherlands Technology options available to operators 7 2 Responses to the Ministry s questions Realising the benefits of technology neutrality Impact of handing back spectrum holdings Impact on competition of making licences technology and service neutral Comparing the 2600 MHz with the 3500 MHz band 20 Appendix A: Frequency allocations from national frequency register 26 A MHz frequency allocations 26 A MHz frequency allocations 27 A MHz frequency allocations 29 A MHz frequency allocations 30 Appendix B: About PA Consulting Group 31 3

6 1 Background to the questions This section presents background information to the issues that MEZA is considering, in particular: Moves towards technology and service neutrality Spectrum allocation in the Netherlands Technologies available when considering the issues raised by MEZA. 1.1 Moves towards technology and service neutrality This section defines technology and service neutrality, and shows how the regulatory environment is changing to embrace these concepts What is technology and service neutrality? The European Union recognises that spectrum is a valuable resource for its member states. The Wireless Access Policy for Electronic Communications Networks (WAPECS) concept, developed by the Radio Spectrum Policy Group (RSPG) of the European Commission, provides the framework to support the European Union s policy goal of using spectrum resources to promote competitiveness. The WAPECS concept promotes the use of spectrum to enable any technology to deliver all services, subject to technical co-existence requirements tailored to each band, and is defined as: a framework for the provision of electronic communications services within a set of frequency bands to be identified and agreed between European Union Member States in which a range of electronic communications networks and electronic communications services may be offered on a technology and service neutral basis, provided that certain technical requirements to avoid interference are met, to ensure the effective and efficient use of the spectrum, and the authorisation conditions do not distort competition. 1 WAPECS signals a change in approach to regulation of spectrum, from 'command and control' to using the market to device the most appropriate usage. This approach requires removal of technology and usage constraints, and enables spectrum to migrate towards applications that place the highest value on its usage. This approach enables regulators to offer technology- and service-neutral authorisations to let spectrum users choose the best technologies and services to apply in a frequency band. 2 1 Opinion on Wireless Access Policy for Electronic Communications Networks (WAPECS), Radio Spectrum Policy Group, 23/11/2005, p.2 2 Proposal for a Directive of the European Parliament and of the Council amending Directives 2002/21/EC on a common regulatory framework for electronic communications networks and services, 2002/19/EC on access to, and interconnection of, electronic communications networks and services, and 2002/20/EC on the authorisation of electronic communications networks and services, European Commission, COM(2007) 697, 13/11/2007, p. 17 4

7 1.1.2 The response in the Netherlands The Ministry of Economic Affairs (Ministerie van Economische Zaken, MEZA) is interested in understanding the impact of changing licence conditions on the Netherlands mobile market. At present the licences awarded to operators in the Netherlands specify the services that can be provided in the spectrum band, and the technology that can be used to support the service. The Netherlands Frequency Plan also specifies the use of each band. MEZA now aims to increase emphasis on market-based mechanisms for the assignment of spectrum, in particular service neutrality and technology neutrality subject to specific band considerations and local circumstances As a consequence MEZA intends to give current licensees of GSM (900MHz and 1800MHz), UMTS (2100 MHz) and 3500 MHz 3 spectrum the opportunity to make their licenses more flexible in that no specific technology or service is prescribed. The Ministry needs to know whether it is likely that the licensees can actually use their spectrum for new services and technologies in such a way that it distorts competition between incumbent licensees and new entrants, taking into account the limited duration of their current licenses. The Ministry of Economic Affairs has already issued a report on the market effects of flexible frequency policy. This report has been consulted by the Ministry of Economic Affairs and resulted in the need to answer the following questions. 1. Are each of the current licensees of 900/ 1800/ 2100/ 3500 MHz spectrum (KPN, T-Mobile, Vodafone and Worldmax), from the point of view that they are an average efficient undertaking, technically able and is it for them commercially viable to use the benefits that technology neutral licenses provide until the date the licenses expire? 2. KPN recently handed back some of its licenses to the Dutch State. It may be possible that T- Mobile is also going to hand back some of its licenses in the near future. Would that have any impact on the conclusions drawn in question 1? 3. Does making the existing licenses (900/ 1800/ 2100/ 3500 MHz) technology and service neutral, taking into account the limited duration of their current licenses, result in a significant impact on competition between existing licensees (of 900/ 1800/ 2100/ 3500 MHz spectrum) and between existing licensees and new entrants in the 2600 MHz spectrum entrant? 4. Is the 3500 MHz band economically and technically comparable with the 2600 MHz band, from the point of view of an average efficient undertaking (given the possibility to make their licenses more flexible), taking into account the limited duration of the 3500 MHz licence? This report summarises our view of the issues raised by these questions. 3 References to Worldmax's operations in the 3500 MHz band refer to its 80 MHz block. More general references to the 3500 MHz band refer to the 200 MHz block available between MHz. 5

8 1.2 Spectrum allocation in the Netherlands To understand the impact of technical and service neutrality on existing licensees it is important to understand who currently holds which spectrum and what future spectrum will become available. This section details which operators hold spectrum and how it is currently used, and also discusses future spectrum allocations Current spectrum allocations There are currently four operators in the Netherlands licensed to offer public wireless services. The Netherlands three mobile operators, KPN, T-Mobile and Vodafone, hold licences in the 900, 1800 and 2100 MHz frequency bands. The mobile operators use these frequencies to support GSM and UMTS networks. Worldmax is the only operator that holds spectrum in the 3500M Hz frequency band, which it uses to support its WiMAX e network in central Amsterdam. The wireless communications market in the Netherlands has recently undergone consolidation, with two mobile licence holders withdrawing from the market: KPN acquired Telfort in June 2005 T-Mobile acquired Orange s spectrum and subscriber base in October In August 2009 KPN handed back the 1800MHz and 2100MHz spectrum frequencies it gained along with the Telfort acquisition. Table 1 summarises the spectrum allocations currently held by the four public wireless operators (Appendix A includes full details of the spectrum allocations). Allocations MHz KPN T-Mobile Vodafone Worldmax 900 MHz 2 x x 10 2 x MHz 2 x 20 2 x x MHz Paired 2 x x 20 2 x Unpaired 1 x 5 1 x 10 1 x MHz x 80 Table 1: Current spectrum allocations at 900, 1800, 2100 and 3500 MHz Source: PA Consulting Group analysis of National Frequency Register of the Netherlands The licences held by the mobile operators expire at different times: The 900 and 1800 MHz spectrum licences expire on 26/02/ The 2100 MHz spectrum licences expire on 01/01/ MEZA is currently preparing a decision regarding the extension of the 1800 MHz and egsm licences. A decision regarding the extension of these licences has not yet been made. However for the purposes of this assessment, we have assumed they will not be renewed, and will expire on 26/ 02/ 2013 along with the 900 MHz spectrum. 5 Source: National Frequency Register. Please see Appendix A. 6

9 The licence for 3500 MHz spectrum held by Worldmax expires on 16/12/ Future spectrum allocations There is 190 MHz of spectrum available at 2600 MHz. MEZA intends to auction this spectrum in In line with the Europe-wide specifications on harmonisation in the 2600 MHz band, the Netherlands plans to auction this spectrum with block size assignments of 5 MHz and duplex spacing of 120 MHz for Frequency Division Duplex (FDD) spectrum. 6 Figure 1 shows the spectrum blocks in this band and the positioning of FDD and Time Division Duplex (TDD) spectrum. FDD TDD FDD PMSE Radio Astronomy 2500 MHz 2690 MHz Figure 1: Spectrum available at 2600 MHz 7 Source: Radio Spectrum Committee MEZA aims to allocate spectrum in a way that can, if required, reflect demand for a larger number of TDD and consequently reduce the allocation of FDD blocks. In an attempt to encourage competition, MEZA is proposing a cap of: 55 MHz on the amount of spectrum that the three incumbent mobile operators can acquire in total. This total is made up of 20 MHz for KPN, 25 MHz for Vodafone, and 10 MHz for T-Mobile 40 MHz on the total amount of spectrum that any other operator can acquire. As a result at least three new entrants will be able to acquire spectrum in the 2600 MHz band in addition to the incumbent mobile operators. Digital dividend spectrum in the frequency range MHz will become available in some European countries from 2012, but at the time of writing the timescale for its availability in the Netherlands is uncertain. 1.3 Technology options available to operators Spectrum owners have a variety of options for technologies that may be deployed in the 900, 1800, 2100 and 3500MHz frequency bands if technology neutrality was applied to the licenses. This section 6 "Final Draft Commission Decision on the harmonisation of the MHz frequency band for terrestrial systems capable of providing electronic communications services in the Community", RSCOM08-02, Radio Spectrum Committee, 02/03/ The auction of the 2600 MHz band will also include a sub-band at MHz. This band could be used for LTE TDD, but PA Consulting Group is not aware of technology developments focusing on this area. This report focuses on the MHz band as a result. 7

10 summarises the technologies and the timeframes in which the equipment will be available for the two major technology standards groups, 3GPP and WiMAX GPP standards group The 3GPP family includes: GSM, first deployed in the Netherlands in 1992 UMTS technology, launched in the Netherlands in 2004 Long Term Evolution (LTE), generally considered as 4G technology. 8 Table 2 shows the availability of UMTS network equipment and devices at different frequencies. Frequency Band Network Availability Device Availability 900 MHz Now Now 1800 MHz Not planned Not planned 2100 MHz Now Now 2600 MHz Not planned Not planned 3500 MHz Not planned Not planned Table 2: Timetable for availability of UMTS network equipment and handsets Source: PA Consulting Group analysis based on industry sources UMTS networks are currently in operation in most countries around the world at 2100 MHz. UMTS networks at 900MHz in Europe are have only recently become a possibility as moves towards technology neutrality have opened up this option for operators. Consequently there are fewer examples of deployment, most of which are in Finland and Estonia, but also in Hungary. Handsets supporting UMTS at 900 MHz are available now, but the commercial services available at present support USB data dongles only, extending the reach of UMTS data services outside of the major conurbations. Major manufacturers are not planning developing UMTS at 1800MHz. This option may become available at some point in the future, but its availability is likely to be limited and subject to local demand. PA Consulting Group is not aware of any plans to develop network infrastructure and deploy UMTS at 2600 MHz 9. Instead, operators are intending to use this spectrum to deploy the successor technology 8 The ITU has extended the definition of IMT-2000 to include E-UTRAN (otherwise known as LTE systems) as well as WiMAX e in 3GPP Release 8, as specified in ITU recommendation ITU-R M GPP Release 10 is expected to include the respective evolutions of LTE and WiMAX, LTE-Advanced and WiMAX m. These evolutions are expected to meet the requirements of ITU-Advanced. E-UTRAN/ LTE uses OFDMA technology rather than the CDMA Direct Spread used by UMTS. 9 ETSI has recently produced technical specifications for UMTS at 2600 MHz, with both FDD and TDD profiles. However the development of a profile does not automatically lead to development of and demand for infrastructure. 8

11 UMTS, known as LTE. LTE has the advantage that it can be deployed in a variety of channel bandwidths from 1.4 MHz to 20 MHz, whereas UMTS supports only a 5 MHz channel bandwidth. As a result LTE is more adaptable, and is likely to be available in 1800 MHz frequencies as shown in Table 3. Frequency Band Network Availability Handset Availability 900 MHz / MHz / MHz / MHz / MHz Not planned Not planned Table 3: Timetable for availability of LTE network equipment and handsets Source: PA Consulting Group analysis based on industry source Mobile operators in Europe are gearing up to deploy LTE in the 2600 MHz band as it comes available across Europe. Where it is already available, in Sweden and Norway, operators and vendors are working together to deploy in other bands as well. Telenor and Tele2 are cooperating to deploy LTE at 2600 MHz, and will also combine their 900 MHz spectrum assets to support LTE. Other mobile operators are also planning to use the 1800 MHz spectrum to deploy LTE. The W-CDMA variant of UMTS generally used in Europe requires paired FDD spectrum, i.e. uplink and downlink channels separated by a specified frequency. There are limited deployments of variants of UMTS that use unpaired TDD spectrum. Examples include: T-Mobile in the Czech Republic, which deployed a TD-CDMA network to address the residential internet access market, using 1900 MHz spectrum. China Mobile, which is rolling out a network using the TD-SCDMA standard in the 1800MHz and 2000 MHz bands. LTE equipment using TDD spectrum is very likely to be available in significant volumes as a result of demand from network operators in China requiring an evolution path for TD-SCDMA, but availability is likely to be later than LTE in FDD WiMAX technology WiMAX has emerged as a viable technology and is now incorporated into the IMT-2000 family alongside more established technologies such as UMTS ITU World Radiocommunication Conference-07 (WRC-07) saw mobile WiMAX included in the IMT-2000 family as the sixth technology 10 China Mobile, which is rolling out a TD-SCDMA network, is cooperating on LTE tests with Verizon and Vodafone. Global Mobile Suppliers Association Information Paper claims that LTE TDD is promising to be commercially available , but PA expects it be at least 2 years later than LTE FDD. 9

12 standard. WiMAX uses an air interface based on Orthogonal Frequency-Division Multiple Access (OFDMA) technology, in common with LTE technology. WiMAX has been taken-up for manufacture and implementation by vendors and operators around the world, initially for fixed access. The two most common standards are: d, which supports only fixed services, and is available for use with both paired and unpaired spectrum e, extending capability into mobile services, but is often used to support fixed services because it offers better performance than d. It is not compatible with d. There are numerous deployments of WiMAX in the 3500 MHz band; indeed, Worldmax operates a WiMAX e network in its spectrum allocation. WiMAX equipment is at present not available in any of the bands owned by the mobile operators, and WiMAX equipment manufacturers are not planning to develop equipment compatible with these bands. This is unlikely to change as the mobile operators are likely to pursue the 3GPP development path that supports the transition to LTE. 11 T-Mobile and Vodafone have all either begun or are testing LTE in critical markets adjacent to the Netherlands: T-Mobile Germany is trialling LTE in 2009 and anticipates deployment in T-Mobile Austria has launched a 60 site pilot LTE network and anticipates service launch in Vodafone Germany is testing LTE in digital dividend spectrum and anticipates deployment from KPN has also been quoted as deciding that WiMAX is not appropriate for the market in the Netherlands following trials and proposing to roll out LTE in The opportunity for WiMAX in these bands will therefore be limited. At present only TDD versions of WiMAX e are available for 3500 MHz and for 2600 MHz as well as a profile at 2300 MHz that is used in South Korea. However the WiMAX Forum has defined FDD profiles for WiMAX e and vendors are considering developing FDD versions. Table 4 summarises network and device availability for WiMAX e technology. Frequency Band Network Availability Device Availability 900 MHz Not planned Not planned 11 KPN, T-Mobile and Vodafone are all members of the Next Generation Mobile Network Alliance (NGMN), established to define operators requirements for next generation technology. NGMN claims it does not hold a preference for a specific technology, but accepts as a working assumption that the 3GPP LTE project will be one of the most likely vehicles for the delivery of NGMN radio design. Next Generation Mobile Networks Beyond HSPA and EVDO, NGMN Alliance, 05/12/2006, p. 68. All are also members of the GSM Association. 12 Global Mobile Suppliers Association Information Paper, 26/08/2009, counts these commitments among 39 worldwide 13 KPN schiet wimax af en kiest voor lte, 01/10/

13 Frequency Band Network Availability Device Availability 1800 MHz Not planned Not planned 2100 MHz Not planned Not planned 2600 MHz Now Now 3500 MHz Now Now Table 4 : Timetable for availability of WiMAX e network equipment and devices Source: PA Consulting Group analysis based on industry sources Alternative technologies There are alternative technologies that may be used in these spectrum bands. However it is unlikely that an alternative to either 3GPP or WiMAX will be deployed in Europe in the foreseeable future. The alternative offered by CDMA and Flash-OFDM has been integrated into LTE as Qualcomm has abandoned development of Ultra Wide Band (UWB) technology and opted to support LTE. Nextgeneration PHS technology that is being deployed by Willcom in Japan in the 2500 MHz band is unlikely to feature outside of Japan at the least and east Asia at its most extensive. The remainder of this report considers only 3GPP and WiMAX technologies as viable options for operators in the Netherlands. 11

14 2 Responses to the Ministry s questions The section presents PA Consulting Group s responses to the questions that the Ministry has asked us to consider. 2.1 Realising the benefits of technology neutrality The Ministry is interested in whether the four holders of 900MHz, 1800MHz, 2100 MHz and 3500 MHz spectrum licences: Are technically able to use the benefits that technology neutral licence provider until the date the licences expire Would find it commercially viable to use the benefits of technology neutrality in their spectrum holdings until the date the licenses expire Technology neutrality opens options to the mobile operators only The impact of introducing technology neutrality would vary between the mobile network operators KPN, Vodafone and T-Mobile, and the wireless local loop operator Worldmax. The mobile operators are technically able to use the benefits of technology neutrality in their spectrum holdings. The options available to the mobile operators are: For existing 900Mhz spectrum holders to deploy UMTS and LTE in that range For existing 1800Mhz spectrum holders to deploy LTE in that range For existing 2100 MHz spectrum holders to deploy LTE in that range. 14 This suggests that implementing technology neutrality provides technically feasible options for KPN, T- Mobile and Vodafone to make use of new technologies in the spectrum ranges they hold. Worldmax is unlikely to find a suitable alternative technology to WiMAX e in the 3500 MHz spectrum frequencies within the timeframes of its licence. The MHz band has been identified as an expansion band for LTE. But there vendors have not announced concrete plans to address this requirement. This option will not be available to Worldmax before Table 5 shows the technology options available to licence holders in the spectrum bands they hold, and the timing of availability of network equipment and multimode handsets that support service in that band. 14 The reference to E-UTRAN in 3GPP Release 8 extends the scope of IMT-2000 to include LTE systems. LTE-Advanced is expected to meet the requirements of ITU-Advanced, as is WiMAX m, and they therefore require technology neutrality to be implemented in 2100 MHz spectrum bands. 12

15 UMTS LTE WiMAX Network Devices Network Devices Network Devices 900MHz Now Now /11+ Not planned Not planned 1800MHz Not planned Not planned /11+ Not planned Not planned 2100MHz Now Now /11+ Not planned Not planned 3500MHz Not planned Not planned Not planned Not planned Now Now Table 5 : Assumed availability of network equipment and handsets for different technologies Source: PA Consulting Group analysis based on industry sources Only 2100 MHz spectrum offers a commercially viable opportunity for taking advantage of technology neutrality The test of commercial viability is whether an appropriate return on the investment can be achieved in timeframes that are limited by the expiry of the spectrum licences. Under specific circumstances the 2100 MHz band offers a commercially viable opportunity for operators to take advantage of technology neutrality. However it does not follow that operators will follow this path alone. Instead operators may pursue refarming of 900 MHz spectrum to deploy UMTS despite the licences expiring prior to payback being achieved. Table 6 shows the four possible options that the mobile operators have for taking advantage of technology neutrality, and shows the indicative payback period for each option. Spectrum Licence expiry Technology Likely launch Indicative payback period 900 MHz 26/ 02/ 2013 UMTS years 26/ 02/ 2013 LTE years 1800 MHz 26/ 02/ 2013 LTE years 2100 MHz 01/ 01/ 2017 LTE years Table 6 : Commercial viability of taking advantage of technology neutrality Source: PA Consulting Group analysis The 2100 MHz spectrum is superficially the most attractive option for operators as they would have a five year window of opportunity prior to the expiry of the 2100 MHz licence to deploy an alternative technology. However, if an operator decides to implement LTE at 2600 MHz spectrum as well, the payback period for LTE extends to 10 years, exceeding the licence expiry date. Using 2100 MHz to support LTE spectrum fulfils a similar role to 2600 MHz spectrum, offering high capacity to manage traffic in urban areas, and therefore duplicates resources to address the same market. There are also strong incentives for the operators to try to retain UMTS in the 2100 MHz band. UMTS offers operators an upgrade path that supports the delivery of high speed services to end users. HSPA 13

16 upgrades to UMTS can maintain increases in data rates, up to a claimed 84 Mbps and possibly beyond. 15 Although this is less than the 300 Mbps claimed for LTE, HSPA offers operators a tried and stable technology. UMTS may therefore offer sufficient data rates for the mass market, and operators will be keen to keep using their investment in UMTS networks in the 2100 MHz band. However if an operator does not secure an allocation of 2600 GHz spectrum and chooses to deploy LTE in 2100 MHz alone, then the business case is more positive. With LTE users generating revenue only from the 2100 MHz network, payback is reduced to five years. This may be an appropriate conclusion for KPN alone, if it is able to convert its leading position in the current market into an equally strong position in the LTE market. Conversely T-Mobile and Vodafone may find it difficult to justify investing in LTE at 2100 MHz before the expiry of the licence. Technology neutrality may offer the opportunity for using alternatives in the 1800 MHz band, but the structure of spectrum holdings makes it unattractive for deployment. Each operator has multiple spectrum assets of 2 x 2.2 MHz. LTE is a potential option as it can operate in channel bandwidths from 1.4 MHz. However the relatively small spectrum available means that operators will not be able to offer the high data rates that contiguous spectrum blocks at 2100 GHz or 2600 GHz would enable. With fixed traffic overheads, and no gain from diverse frequency scheduling, operators would be realising speeds closer to 10 Mbps from LTE at 1800 MHz. Operators are therefore unlikely to take advantage of technology liberalisation in the 1800 MHz band unless the spectrum assets are made contiguous Operators may opt to use technology neutrality to roll out UMTS in the 900 MHz band sooner rather than later The prospect of re-auction of 900 MHz spectrum may encourage operators to wait until these issues are resolved before making investment decisions. However operators may balance the possibility of losing spectrum with the opportunity offered by deploying high speed data services in 900 MHz, and decide the risk is worth taking. Operators may decide that the short time remaining of the 900 and 1800 MHz licences are not obstacles to deployment of alternatives: 900 MHz spectrum is a complement to both the existing UMTS network at 2100 MHz, and a LTE deployment at 2600 GHz. It enables operators to extend coverage into less dense suburban and rural areas Lower frequencies require fewer base stations, reducing the investment burden The 900 MHz spectrum may be more valuable to the incumbent operators than to a new entrant to the mobile market 15 Technical overview and performance of HSPA and WiMAX: How the performance of HSPA and Mobile WiMAX compare in theory and in practice, Ericsson June 2009, p. 4 14

17 The incumbents may therefore expect to win back most if not all of this spectrum at auction, and post-auction spectrum trading provides the opportunity for the operators to address any complications in spectrum allocation arising from the auction. UMTS may be more attractive for implementation at other frequencies than LTE. Demand for LTE is likely to be limited until at least 2014 to laptop users with USB dongles or datacards, or with LTE chipsets built into their devices. Integration of LTE into handsets and its take-up and use by the mass market will take time. An independent market forecast expects that, by 2015, only 8% of Western Europe mobile subscribers will use LTE services. 16 This type of user may be more likely to want to use the higher speed services enabled by the spectrum available in 2600 MHz spectrum, and more likely to be concentrated in urban areas. In addition, UMTS can be built out using the existing core network and services, and therefore minimises the investment requirement, should operators be looking for ways to reduce expenditure. However some operators may be reluctant to refarm 900 MHz spectrum: Vodafone has a relatively small quantity (2 x 5.2 MHz) of 1800 MHz spectrum. Losing 10 MHz of 900 MHz spectrum to UMTS may cause congestion in the Vodafone network by limiting the GSM capacity available to users. However the switch in usage from GSM 900 and 1800 MHz networks to UMTS 2100 MHz networks may reduce the relevance of this issue Congestion may also be an issue for KPN. It claims average usage of its GSM network as a percentage of total capacity is 95%. 17 KPN also has an extensive GSM infrastructure, with over 4,500 base stations in operation. Reducing the quantity of GSM spectrum may affect its quality of service. T-Mobile, with its smaller subscriber base, less extensive investment in 900 MHz GSM equipment, and significant quantity of 1800 MHz spectrum, may therefore be the most likely candidate for taking advantage of technology neutrality in the 900 MHz band. 2.2 Impact of handing back spectrum holdings KPN has recently handed back some of the spectrum holdings it acquired along with Telfort. T-Mobile also played a role in consolidating the mobile market in the Netherlands, acquiring Orange in October T-Mobile acquired the following spectrum assets along with Orange: 2 x 5Mhz of spectrum in the 900Mhz band 2 x 15Mhz spectrum in the 1800Mhz band 2 x 10Mhz of paired and 1 x 5MHz unpaired spectrum in the 2100 MHz band. It is possible that T-Mobile may also decide to hand back some the spectrum assets it obtained along with Orange. This would not affect the technical ability of T-Mobile to take advantage of technology neutrality, but it may have an impact on the commercial attractiveness of technology neutrality. 16 Global Mobile Broadband: Market Potential for 3G LTE, Analysis, 20/01/2008, p. 17 KPN Annual Report 2008, p

18 MEZA has decided to implement a spectrum cap on the incumbent mobile operators, and to vary that cap according to the amount of spectrum held by the operators. Table 7 summarises the spectrum available to T-Mobile under different scenarios. Allocations MHz With Orange spectrum Without Orange spectrum 2100 MHz Paired 2 x 20 2 x 10 Unpaired 1 x 10 1 x MHz 2 x 5 MHz 2 x 12.5 MHz Table 7: T-Mobile's spectrum holdings at 2100 and 2600 MHz under different scenarios Source: PA Consulting Group analysis Retaining Orange's spectrum may make T-Mobile more likely to take advantage of technology neutrality, as it may make the option of using 2100 MHz for LTE more attractive. Refarming half of its 2100 MHz spectrum may not inhibit T-Mobile s ability to offer wideband mobile data services to users in the Netherlands, as the Orange spectrum holdings are not contiguous to T-Mobile s own spectrum holdings. Therefore the combined spectrum holdings may not confer any advantage in terms of the bandwidth available to a wideband services. T-Mobile could still use 2 x 10 MHz for UMTS, and use the additional 2 x 10 MHz block for LTE. Conversely the attractiveness of the 2600MHz spectrum may decrease, with the narrow allocation of spectrum for LTE inhibiting T-Mobile s ability to take advantage of the benefits of LTE by offering wideband services. In theory T-Mobile may hand back Orange's 2100 MHz spectrum. This may make using the 2600 MHz for implementing LTE more attractive. Handing back Orange's 2100 MHz spectrum may reduce the amount of 2100 MHz spectrum held by T-Mobile by half. It would then have the smallest holding of 2100 MHz spectrum of all the operators, and may be more reluctant to take advantage of technology neutrality by using 2100 MHz spectrum to deploy LTE. T-Mobile may be more likely to use the 2600 MHz spectrum for LTE as its spectrum allocation would increase to 2 x 12.5 MHz. This may make the 2600 MHz band more attractive for implementing LTE as T-Mobile could use this spectrum to offer wideband services. 2.3 Impact on competition of making licences technology and service neutral The Ministry has asked whether making the existing licences (900/1800/2100/3500 MHz) technology and service neutral, taking into account the limited duration of their current licenses, would result in a significant impact on competition between existing licensees (of 900/1800/2100/3500 MHz spectrum) and between existing licensees and new entrants in the 2600 MHz spectrum entrant. This section examines the possible impacts of making licences technology and service neutral, in particular: The impact on Worldmax The impact on the ability of new entrants to establish their operations The impact on the dynamic between the incumbent mobile operators. 16

19 2.3.1 Worldmax may see its ability to differentiate eroded At present Worldmax service is limited to the Amsterdam areas and is limited to offering fixed wireless access. The company states its proposition is to offer users: on-the-go broadband internet and access to data-intensive applications, like online multimedia, video downloads, mobile TV, and streaming media. 18 At present download speeds range from 512kbps to 12Mbps and there is no download volume limit. The company offers services using USB dongles enabling broadband wireless access for laptop users, and fixed services for PC users using a desktop wireless modem. Worldmax is therefore taking up a distinctive position in the market, offering users a flexible service that enables them to enjoy the attributes of their fixed broadband service - high speeds, unlimited downloads along with the convenience of a wireless service. The introduction of service neutral licences would open the mobile market to Worldmax. The company is not well positioned to taking advantage of this opportunity in the short term as: It does not have the network coverage to compete with the mobile operators, and is unlikely to generate the coverage required to establish a mobile service using 3500 MHz The device range for 3500 MHz networks is limited to data dongles. However Worldmax and other new entrants using WiMAX may benefit from the backing of Intel, sponsoring the development of the market for embedded WiMAX devices to increase the attach rate of its chipsets. This would create an installed base of users interested in mobile broadband access using WiMAX. Worldmax may therefore be able to take advantage of service neutrality to develop its niche as a broadband internet access service provider. In comparison the mobile operators service offerings are consistently more expensive, as Figure 2 shows. Mobile operators' services also come with download limits. KPN for example presents its service as offering speeds up to 7.2 Mbps but prices the services according to the data volume downloads, for example 400MB for 16.81, 1 GB for 33.61, 2.5 GB for 50.42, and unlimited volumes for T-Mobile and Vodafone have similar download limits on their services services/ 17

20 Monthly price per Mbps WorldMax T-Mobile Vodafone Service speed Mbps Figure 2 : Comparison of monthly cost per Mbps of download speed between Worldmax, T-Mobile and Vodafone Source: Operators, PA Consulting Group analysis Of course, the mobile operators can provide a national and indeed international service for users, whereas Worldmax's service is at present only available in central Amsterdam. However this pricing strategy suggests mobile operators current preference to avoid flat rate, unlimited download services that are positioned as equivalent to fixed line services. Such a pricing approach would be likely to result in far greater network utilisation and could cause congestion, having an adverse impact on their core services relating to voice calls. The implementation of technology neutrality would open up the 900 and 1800 MHz bands to UMTS and/ or LTE. This may release additional capacity to support mobile data services and lead to mobile operators reassessing their pricing strategy. The result may be that Worldmax s ability to differentiate on price and service is eroded as the mobile operators reduce prices and remove caps on data volumes. This challenge to Worldmax would have to be considered against the potential benefits to users of far wider availability of this type of pricing model. However the timeframes for these changes are uncertain. The incumbent mobile operators may be likely to resist what could be considered potential commoditization of data services for as long as possible rather than promote it to address what is a weak competitive challenge. Worldmax s position may become more difficult to sustain, but this is likely to be the result of its position as a small operator using a niche technology competing with three major mobile operators, rather than the introduction of technology and service neutrality. 18

21 2.3.2 Incumbent operators may be able to respond to new entrants attempts to disrupt the market The auction of 2600 MHz spectrum offers at least three new entrants the opportunity to challenge the incumbent mobile operators. It is not clear who these new entrants might be or what they would offer, but a new entrant may want to use a disruptive business model to establish itself, for example: Content-driven operator, using the spectrum to develop a content-driven quadplay, promoting TV or other content as the core of its service Pure wireless broadband operators, in evidence in the Norwegian and Swedish auctions, targeting both fixed and mobile users with data-oriented wireless services Technical investors, aiming to secure spectrum to increase the attach rate of their own IP or products. For example Qualcomm is using spectrum assets in the US to develop its own mobile TV network with the aim of increasing the penetration of its technology. The introduction of technology neutrality may enable the incumbent operators to address the challenge offered by new entrants. Incumbents would have an advantage over new entrants in having 900 and 1800 MHz spectrum to increase capacity and extend coverage for high speed data services using UMTS and/ or LTE. This may enable the mobile operators to respond through lower cost or better value services. New entrants face a significant challenge to establish their position in the market, but the introduction of technology and service neutrality is unlikely to be the main cause of their difficulties. These issues are unlikely to arise within the timeframes of the 900 and 1800 MHz licences, and even before the expiry of the 2100 MHz licence. The incumbents are more likely to use their new spectrum holdings at 2600 MHz to offer services that address the challenge of disruptive business models. The natural advantages conferred by the mobile operators' existing spectrum assets, subscribers, networks and systems are likely to outweigh any benefits the mobile operators can realise from technology and service neutrality Competition between the mobile incumbents is unlikely to be affected significantly Technology and service neutrality is unlikely to change the competitive dynamics between the incumbent mobile operators to any great extent. It is unlikely that the mobile operators will use access to the fixed market to gain advantage. KPN already has a well developed fixed line infrastructure, and the strategies of the Vodafone and T-Mobile do not indicate they are likely to use wireless networks to address fixed customers: In similar markets to the Netherlands such as the UK or Austria, T-Mobile has not established a fixed line equivalent service, instead relying on the additional benefits offered by mobility to attract users. Only in countries where wireline networks are less developed has T-Mobile used wireless networks to deliver fixed services with any success; for example T-Mobile s 1900 MHz CDMA network in the Czech Republic met unsatisfied demand for low cost internet access 19

22 Where Vodafone is addressing the fixed line market in Europe it has used local loop unbundling (in Spain or Italy) or wholesale DSL (in the UK) to connect to customers. In addition, the Netherlands is relatively well-served by wireline networks, including fibre access at low prices, which offer a more appropriate method of delivering high speed broadband services than wireless networks. The options opened up by technology neutrality are available to all the incumbent mobile operators. All are likely to implement UMTS and LTE, rather than using technology neutrality to diverge from 3GPP. All hold spectrum in 900, 1800 and 2100 MHz and most likely in 2600 MHz as well. The operators hold different quantities of spectrum, which may allow an operator to gain an edge by using its additional capacity to offer wideband services its competitors cannot support. An operator may therefore choose to differentiate itself in the market by using technology neutrality to position itself as the Netherlands premium wireless broadband network service provider. However with the mobile market approaching maturity, these differences are unlikely to have a significant and long-lasting effect on the competitive dynamic among the mobile operators. 2.4 Comparing the 2600 MHz with the 3500 MHz band The Ministry has asked whether the 3500 MHz band is economically and technically comparable with the 2600 MHz band, from the point of view of an average efficient undertaking (given the possibility to make their licenses more flexible), taking into account the limited duration of the 3500 MHz licence. This section compares different aspects of the bands, including: Their technical characteristics The value placed on them by markets and the drivers behind the valuations Technical comparison PA Consulting Group has compared the 2600 MHz and 3500 MHz bands by assessing: The quantity of spectrum available The cell size required for networks using these bands The technology options available to operators. There are clear differences in the quantity of spectrum available, the cell size required for networks and the technology options available to operators in the 2600 MHz and 3500 MHz bands. More spectrum is available at 2600 MHz, and it includes both FDD and TDD spectrum. Cell sizes at 3500 MHz are 40% smaller than cell sizes at 2600 MHz. Whereas WiMAX is the only technology option for holders of 3500 MHz spectrum, LTE is also available at 2600 MHz. The 2600 MHz band is clearly more attractive, and this may well drive up the price of the spectrum. Table 8 compares the technical characteristics of the 2600 and 3500 MHz bands. 20

23 2600 MHz 3500 MHz Spectrum available FDD spectrum Maximum 140 MHz - TDD spectrum Minimum 50 MHz 80 MHz at present in the Netherlands Total spectrum available 190 MHz 80 MHz at present in the Netherlands Up to 200MHz depending on other users eg radar, amateur radio Cell area km2 for a WiMAX network in different environments Dense urban Urban Suburban Rural Technology availability WiMAX e Network equipment - 1H 2010 Now Devices - 2H H 2011 LTE Network equipment - 1H 2010 No plans Devices - 2H H 2011 Table 8 : Comparison of technical aspects of 2600 and 3500 MHz spectrum Source: PA Consulting Group Markets in Scandinavia recognise the different commercial attractiveness of 2600 and 3500 MHz Of all of the European countries, only Norway and Sweden have carried out auctions of 2600 MHz spectrum. These two countries have also carried out auctions of spectrum at or close to 3500 MHz that has also been awarded on a technology and service neutral basis. The auctions were carried out over the four years from 2004, during which the degree of interest in telecoms investments increased significantly after the low following the dotcom bubble to the peak of the asset bubble in Table 9 shows details of the spectrum assets auctioned in these countries, all of which were licences of 15 years duration. Frequency Year Quantity MHz Value m Value per MHz per year 21