Business Development Strategies for Wireless Broadband Operators: the Need for Mobility Integration towards Profit Returns

Transcription

1 INTERNATIONAL TELECOMMUNICATIONS SOCIETY ITS 17 TH EUROPEAN REGIONAL CONFERENCE AUGUST AMSTERDAM, THE NETHERLANDS Business Development Strategies for Wireless Broadband Operators: the Need for Mobility Integration towards Profit Returns Madrid, 27 h July, 2006 AUTHORS: Mr. Manuel Espías RF Systems Engineer ISDEFE Dr. Sergio Ramos Associate Professor Universidad Politécnica de Madrid Dr. Jorge Pérez Professor Universidad Politécnica de Madrid CONTACT: ADDRESS: sramos@gtic.ssr.upm.es www site: Phone and Fax: Mobile: Escuela Técnica Superior de Ingenieros de Telecomunicación Office C Madrid Spain Topics: fixed - mobile convergence, WiMAX-MVNO business model

2 ABSTRACT The fixed broadband market is converging with the world of fixed wireless solutions under the umbrella of broadband wireless. Companies are offering a variety of different service technology options to the market that may compete or work in conjunction with each other to meet user requirements for higher bandwidth lower latency solutions, differing in terms of their degree of mobility, level of performance and their market penetration. In this context, broadband wireless is currently considered as a part of alternative access technologies with DSL, cable and mobile. However, true mobility integration in order to offer competitive bundled services as fixed DSL or cable operators, the so called triple play, multiple play and the like are far for being real. From the existing wireless technologies WiMAX appears as the one that will help make broadband wireless the third access technology (the other two being fixed and mobile). Optimistic new entrant operators believe WiMAX has a high potential for success as in emerging markets operators are interested in using WiMAX for low-cost voice transport and delivery, while in developed markets WiMAX is shown as a broadband Internet access solution. In a competitive landscape of triple play from fixed, and mobile 3G services from mobile, broadband wireless operators have different strategic options to compete in broadband, mobility and ideally in both arenas. In this document we present a practical case of a potential wireless broadband operator based on WiMAX. In order to particularize the business model presented we have considered Spain, as current situation of Spanish markets in fixed and mobile is very fast moving (three worldwide mobile leaders competing -Telefonica Móviles, Vodafone and Orange- plus a fourth 3G license holder without operation; cable operator consolidation; Telefonica merging with Telefonica Moviles towards business reintegration), the regulatory environment is changing dramatically for existing operators (as an example, last January the European Commission allowed Spanish regulator to introduce MVNO to foster competition) and wireless broadband technology is continuously evolving (first commercial pilots based on WiMAX have been recently launched). The business case presented describes and characterizes market size, target segments and market shares, expected sales and prices, network design, investments and expenses needs, and finally presents a financial analysis to evaluate its viability. From our results we conclude that a broadband wireless access operator deploying its own network with the objective of competing in the broadband needs for mobility integration into its business to guarantee profits. Even more, sensitivity analysis shows that profitability is highly dependant on the number of potential mobile users the wireless broadband operator can attract.

3 INDEX ABSTRACT PREVIOUS CONSIDERATIONS BUSINESS MODEL DESCRIPTION MARKET NETWORK DESIGN INVESTMENTS AND EXPENSES SALES FINANCIAL ANALYSIS HYPOTHESIS MOBILITY FACTOR AGREEMENT WITH THE MVNO CONCLUSIONS REFERENCES...15 ABOUT THE AUTHORS...16

4 1. PREVIOUS CONSIDERATIONS The broadband revolution is fundamentally changing the landscape in European telecommunications. According to (Papacharissi, 2006) citing (Kirstein 2001) - broadband can be defined as: all flavours of high-speed digital voice, data and video services, as well as the underlying infrastructure, clients and technologies that enable these services. In a sense, this definition implicitly describes the current converging scenario in which bundled offers of VoIP, TV (broadcasting, on demand, pay per view) and Internet access are becoming a synonym of broadband, being mobility integration the forthcoming issue to complete the ideal of convergence. This broadband revolution is as well facilitating a remarkable acceleration of the ICT diffusion, approaching the multiple advantages of the Information Society to all citizens (Telefónica, 2005). Among the reasons that motivate this growth is possible to emphasize the incessant appearance of new convergent technological solutions that look for surpassing the previous technologies limitations and offering new functionalities in a scene of convergence among Telecommunications, Multimedia and Internet. This convergent scene has forced telco operators to face new challenges to include in its traditional services offer of connectivity and telephony new multimedia services, what is commonly known as Triple Play. The inclusion of contents in its offer to customers has two different aims: on the one hand it is a way to make services more appealing to customers and, on the other hand, it allows creating new sources of income additionally to voice (that has decreased 1 dramatically) and broadband connectivity. Figure 1. An example of triple play network architecture. Source: ALCATEL 1 The reduction of incomes from fixed telephony can be explained by two main phenomena: the process of fix-mobile substitution (in many European countries the mobile telephony incomes have surpassed those from fixed) and the increasing popularity of IP telephony, that allows making calls through the data networks, bypassing telecom operator.

5 The present sector evolution suggests that the following step consists of incorporating to these supplies the advantages of mobility, traditionally associated to the mobile networks that, with the evolution of the mobile systems and the new wireless standards, have become data networks of high capacity and business potential (Ramos, 2006). The demand of new services in which contents play a predominant role and the tendency towards full mobility are motivated, to a great extent, by the unstoppable evolution of end user devices and terminals. Then terminals have gone progressively reducing their size simultaneously that they integrate greater functionalities, narrowing the separation between terminals coming from the world of computer science (portable, PDA, TabletPC, ) and those from the mobile business (mobile phones, smart phones, ). Figure 2. User devices evolution. Source: ING Group Within the European market of electronic communications there are two great groups of operators with certain common characteristics, fixed and mobile operators, although the market structure evolves towards integrated fixed-mobile operators that can get the maximum benefit from the opportunities that present convergence offers to offer an all IP world in which everything is multimedia, multi-access and ubiquitous. Fixed operators have characterized themselves to supply services of fixed telephony and broadband connectivity more recently, whereas mobile operators, on the other hand, began offering solely voice and, with the evolution of the mobile systems, extended their supply to the world of data in mobility. The appearance of new standards of wireless broadband and new 3G services has diminished the different among players, although the present document will still maintain such separation since the nature of each operator and technologies to a great extent condition the strategy and the own characteristics of the different agents.

6 The technological aspect is a key element to offer Triple Play, because the technical and functional characteristics of each technology condition service provision and business strategy (fixed- copper line, fibre-, mobile, wireless WiFi, WiMAX, satellite). In the case of Spanish market (Red.es 2006), broadband scenario is dominated by ADSL solutions over the copper line, provided by Telefonica or other alternative operators that access to incumbent network or provided their own last mile access. Cable operators also have a significant presence in the market that is continuously growing. In this sense the recent process of consolidation between Ono and Auna shows a clear move to become an alternative to Telefonica and xdsl solutions. However the limitations of ADSL or cable coverage in certain areas favour the existence of market niches that can be of potential interest for other players using alternative access technologies as satellite, PLC or wireless. These solutions have a reduced presence in the Spanish broadband market due to their high cost of implementation, technological limitations, regulatory uncertainty or strategic decisions. Telefónica Alternative ADSL operators Cable Figure 3. Market shares of broadband Spanish market. Source: CMT 2 As the previous figure shows for the Spanish market (CMT, 2006), ADSL has a market share of approximately 75% of users (both combining Telefónica and alternative ADSL operators subscribers) while cable represents the other 25%. In this context and given the current trend of triple play offers that integrate voice, video and data in addition to new services that demand an increasing bandwidth, the combination of transport network of high capacity and wireless broadband access networks to cover the last mile can be a clear alternative to compete in those niches where current players do not operate. In this article we will consider WiMAX access 2 Spanish Nacional Regulatory Authority, Comisión del Mercado de las Telecomunicaciones

7 networks as a particular example of an alternative business strategy that takes advantages from wireless broadband. 2. BUSINESS MODEL DESCRIPTION Due to the business potential of the combination of WiMAX and backhaul technologies, and the current regulatory conditions in Spain that allow MVNO, the business model under study is that of a Spanish operator holder of a license in the 3,5 GHz band for deploying a broadband wireless access network and MVNO services. Figure 4. WiMAX network configuration. Source: Intel The objective is to offer users a bundled offer that combines wireless broadband connectivity and mobile voice, in an attempt to get benefit from the two most profitable businesses in fixed and mobile market segments. Potential users could then communicate through WiMAX base stations where coverage is available, and through mobile network operator in the rest. MVNO operation is characterized by an agreement with the mobile operator to buy minutes of usage with discount that depends on the amount agreed. For this purpose the study is focused on the Spanish case, where both technology and regulatory measures allow this convergent business strategy. In this context the model presented is a simplification of the operator s operation with the aim to explore its economical viability and the possible implications that bundled offers that integrate mobility could have on current and future market situation Market Considering that business operation and network deployment will start in those areas with the highest business potential, market characterization has been conducted by dividing Spanish cities in three categories (A, B and C) according to the percentage of population that each hold. Clients are divided into two main types, basic and

8 preferential, depending on the broadband access speed offered, 512 kbps and 2Mbps respectively. Client distribution among cities (population concentration) is presented in the following table. Note that percentages are used to compensate possible variations so as to make the model more independent from changes in absolute values. CITY A CITY B CITY C Client distribution among cities (%) Basic clients per city (%) Preferential per city (%) clients Table 1. Client distribution With these data, potential market share is calculated as a global percentage of clients that the convergent operator attracts from its competitors in mobile segment. For that purpose mobile market size has been taken from the Spanish NRA Network design The operator holds a license for operating in the 3,5 GHz band. Given the potentiality of WiMAX, this technology is used for network design and deployment. WiMAX network is designed to offer services to those potential clients that will be attracted by the bundled offer. For each city, network coverage will be restricted to areas of high business potential, like financial centres, university campus, etc. Coverage is represented in the model by a percentage of total city area. The number of base stations is calculated from coverage and traffic assumptions. Network design includes access points, backhaul equipment, routers and management system. In addition, user concurrency and guaranteed connectivity for each type of client are considered based on different industry and operators reports (see references). MVNO requirements include a Home Local Register and a billing system as the main network elements, further functionalities (SMS, MMS, ) being included in the agreement with mobile network operator. Finally, client devices can be bought independently or subsided by the operator. For the present study, we will consider that handsets are dual (GSM-WiMAX) although they are not commercially available at this moment. The reason is that we want to explore the effects of mobility and broadband access combination previously to commercial launches in order to evaluate model viability.

9 2.3. Investments and expenses Prices of equipment acquisition have been considered from recent WiMAX industry reports and articles 3. It is important to highlight that discounts based on the amount of equipment bought are considered. Apart from network equipment, investment includes site acquisitions, base stations, deployment costs and software design tools among others. Sites for base stations are not available at the beginning of the year so a coefficient is used to limit the number of months that the site rental fee is payable. Operating costs are calculated as a percentage of the prices of equipment (between 3-7%). The number of employees is function of the deployed network, affecting to operational, administrative, engineering and sales staff volume. The model fixes a maximum number of employees achievable, not exceeding 90 at the fifth year of operation. Average gross salary is , plus an increase of 25% as social benefits expenses. Another expense considered is the spectrum usage fee, using 2005 official rates from the Ministry of Industry, Tourism and Commerce. The model considers as well the subsidization of a large percentage of user handset cost to foster service adoption (as many European operators usually did at the beginning of their operations). Concerning MVNO operation, expenses are calculated based on the agreement achieved with the mobile network operator from buying a high volume of minutes. From the existing data of minutes per year and the average income per minute published by CMT, the model calculates incomes that the mobile network operator would potentially received from clients attracted by the new MVNO and then applying a light discount. Finally, indirect costs (offices, sales, etc) are evaluated as a percentage of total incomes 2.4. Sales Revenue comes from sales of services, which have two components, wireless broadband connectivity and mobile voice. Connectivity incomes include new user and monthly fee, which are different depending on the type of client. Voice incomes are calculated from direct sale of minutes to users. 3. FINANCIAL ANALYSIS From the input variables described (investment, incomes, expenses) the model analyses the financial viability for a period of five years considering the following parameters: EBITDA, cash flow, NPV and IRR 3.1. Hypothesis The present study considers a network deployment in different phases. The business operation starts in type A cities (which include main Spanish capitals) from the first year, while type B and C are covered from the second and third year respectively. 3 See (WiMAX Forum, 2005), (Eurescom, 2005) and (Smura, 2005)

10 Guaranteed connectivity is established as a 20% of maximum speed for basic clients and 70% for preferential. These values exceed normal 10% of existing operators but they have been selected as an element of differentiation from competitors. Clients concurrency is fixed at 30% for basic clients and 70% for preferential. Finally, regarding handsets, the operator subsidizes a 30% of their costs, supplying a 75% of total amount of available mobiles. The agreement with the mobile operator establishes that the MVNO will pay it a 75% of expected incomes from mobile voice services. Finally market share has been estimated by considering the low penetration of LMDS networks in Spain and other reports about wireless networks evolution (WiMAX Forum, ). In addition, MVNO evolution in other European markets is considered (Enter, 2006). With this starting hypothesis, three scenarios have been defined: Pessimistic: first year market share is 0,1% and it reaches 1% at the fifth year, which means clients after five years of operation. Optimistic: market share starts at 1% and grows to 5% (approximately 1 million clients) Moderated: first year share is 0,4%, getting a 2,1% at the end of the fifth year ( clients approximately). The results achieved are summarised in the following table, where calculations for NPV and IRR are shown, considering WiMAX deployment with and without providing mobile voice services: NPV (in thousands ) IRR Pessimistic without mobility ,7% Pessimistic with mobility ,3% Moderated without mobility ,0% Moderated with mobility ,6% Optimistic without mobility ,1% Optimistic with mobility ,1% Table 2. NPV and IRR calculations

11 NPV comparison x Pessimistic Moderated Optimistic Scenario Without mobility With mobility Figure 5. Effect of mobility provision on NPV results These results are achieved considering that the market share is not affected by the commercialization of mobile services, although this approach is not realistic as mobile services offer would potentially attract more clients Mobility factor In order to consider the potential growth of clients due to mobility, the model includes a so called mobility factor, that directly modifies market share. Its effect is clearly positive according to the following figures Mobility improvement NPV (x 1000 ) ,5 2 2,5 3 3, mobility factor Figure 6. Mobility improves NPV in pessimistic case

12 Mobility improvement NPV (x 1000 ) ,2 1,3 1,5 2 2,5 mobility factor Figure 7. Mobility improves NPV in moderated case Mobility improvement NPV (x 1000 ) ,2 1,3 1,5 2 2,5 mobility factor Figure 8. Mobility improves NPV in optimistic case Considering the pessimistic scenario, a high increase of clients is required (half million at the fifth year) in order to guarantee business model viability, while moderated scenario would need an extra 20% to achieve profitability. Finally, the optimistic scenario is even more profitable when the mobility factor is considered Agreement with the MVNO There is another important element that affects business models: mobile operator agreement. In this model, the simulation is based on the percentage of incomes that the MVNO pays to the mobile operator based on the minutes of network usage (MVNO factor). As

13 it is shown below, the analysis suggests the importance of this factor as it can significantly modify previous results. The following figures show business model sensitivity to the mentioned percentage. In this case, the mobility factor is fixed at 1,5 for all scenarios (then market share increases a 50% from the expected one without MVNO operation). MO agreement effect NPV (x 1000 ) % 73% 70% 68% 65% MVNO factor (%) Figure 9. Mobile operator agreement effect; pessimistic scenario MO agreement effect NPV (x 1000 ) % 77% 80% 82% 85% MVNO factor (%) Moderated Optimistic Figure 10. Mobile operator agreement effect; moderated and optimistic scenarios For the negative scenario, in which mobility factor of 1,5 does not achieve positive results (an increase of 250% in market share is needed) a 5 points reduction of MVNO factor would ease profitability. By contrast, a margin reduction from MVNO operation would lead profitability to negative figures, even for the more optimistic scenarios.

14 4. CONCLUSIONS As it is shown in this paper, technological evolution and regulatory measures can directly affect business development at both fixed and mobile markets. While bundled offers are predominant in fixed, trying to add mobility as that last milestone towards full multiple play, from the point of view of mobile, voice is still the cash cow and it will be for the following years. For this reason, MVNO in Spain is a great opportunity to try to steal a piece of the appealing benefits that mobile network get from voice services. The model presented and the results shown suggest that any network deployment requires high investments and a significant number of clients to achieve positive results in the long term. Broadband wireless access deployment is cheaper than cable based technologies but the service quality to be offered affects investments directly. In addition and given the fact that ADSL coverage is present in almost all significant market areas in Spain, competition in this segment is really intense and it could discourage new entrants to invest. In this context, the paper presented is focused on the study of the combination of WiMAX and MVNO business operations in order to show the effects of mobility on business development. Then the three scenarios presented include the potential business evolution according to market trends in fixed broadband and mobile markets. In all of them it is clear that mobility provision guarantees business viability. Another important factor affecting profitability is the agreement that can be achieved with the mobile operator. Although the simulations presented and the model used can be seen as too simplified, any agreement in real market conditions can be summarised as a payment of the MVNO to the mobile operator for network usage. In this sense, sensitivity analysis suggests that a bad agreement can be an extremely important barrier for business viability. This particular situation is connected as well to the degree of intervention of the NRA, easing better or worse conditions for the MVNO. Regarding the Spanish case, although the results presented suggest that a convergent operator based on WiMAX access and MVNO services can be quite profitable, the current market conditions do not ease new entrants to take risks in innovative adventures where investments are needed, the profit is not guaranteed and regulatory decisions can affect dramatically. For this reason we believe that converging scenarios will be developed by existing operators, particularly those in the fixed market that want to extend their portfolio of services by including mobility both in voice and broadband access. By contrast, innovative alternatives will probably wait until see if the environment is even brighter for new entrants.

15 5. REFERENCES Comisión del Mercado de las Telecomunicaciones (2006). Primer Informe Trimestral (enero-marzo 2006). ENTER (2006): Mobile Market & Trends Facts & Figures. ENTER-IDATE Report. February, Eurescom (2005): Study P1446. WiMAX in Backhaul and Access Networks. February Intel Information Technology (2003): Deploying Wireless LANs. April Kirstein, M., Burney, K., Paxton, M. and Bergstrom, E (2001): Moving towards broadband ubiquity in US business markets. Cahners In-Stat Group White Paper, Papacharissi, Z. and Zaks, A (2006): Is broadband the future? An analysis of broadband technology potential and diffusion. Telecommunications Policy, 2006, 30, pp Ramos, S., Pérez, J. & Jordán, A. (2006): Fixed Broadband Strategies for Mobility Integration. The Journal of the Communications Network. April-June Red.es (2006): Triple Play, análisis de la oferta de los operadores de cable. Entidad Pública Empresarial Red.es. Smura, T (2005): Competitive Potential of WiMAX in the Broadband Access Market: A Techno-economic Analysis. 16th ITS European Regional Conference September Porto, Portugal. Telefónica (2005): La Sociedad de la Información en España Informe elaborado por Telefónica de España. WiMAX Forum (2005): WiMAX: The Business Case for Fixed Wireless Access in Emerging Markets. June 2005.

16 ABOUT THE AUTHORS Mr. Manuel Espías gained his Telecommunications Engineering Master degree (6 years) from the Universidad Politécnica de Madrid. He worked for ten years in RETEVISION (Spanish network carrier) as planning engineer, developing TV broadcasting and last mile radio access networks. He was wireless network planning team leader in ALUA, a free space optics network operator. He is currently systems engineer in ISDEFE, a consulting company in defense and civil sectors, and he is preparing his Ph.D. dissertation thesis on economic viability of radio network access and its implication in the process of fixed-mobile convergence from the point of view of technology, market development and public policies and regulation. Dr. Sergio Ramos gained his Ph. D. in Telecommunications Engineering from the Universidad Politécnica de Madrid, and he is MBA from the Stockholm School of Economics. He worked for the European Commission as Resident Twinning Adviser of a PHARE Twinning Project for the Public Utilities Commission of Latvia, to design and monitor the transposition process of EU regulatory framework into Latvian legislation. Dr. Ramos is an expert on mobile and wireless communications, being his research interests the technological, economic, regulatory and social aspects of 3G and beyond mobile communications systems and mobile Internet. He is currently associate professor at Universidad Politécnica de Madrid. Dr. Jorge Pérez gained his Ph. D. in Telecommunication Engineering from the Universidad Politécnica de Madrid, and his Master in Social and Political Science from the Universidad Complutense de Madrid. He is a professor in the Signals, Systems and Radiocommunications Department of the E.T.S.I. de Telecomunicación. Dr. Jorge Pérez leads the Research Group in Communications and Information Technologies (GTIC- SSR-UPM). His research interests are focused on new advanced telecommunications services and telecommunications policy and regulation. From 1990 to 1999, Dr. Pérez was President of the Spanish Professional Association of Telecommunications Engineers and Dean of Spanish Telecommunications Engineers. He currently holds the Chair on Information Society Development of Red.es, where he coordinates the Spanish Experts Group on Analysis and Prospective on Telecommunications. In addition, he is adviser on Industrial Policy on Telecommunications and Sector Regulation for the State Secretary of Telecommunications at the Spanish Ministry of Industry, Tourism and Commerce.