Digital Dividend Making the broadband business successful Achieving the highly desired ubiquitous broadband coverage is firmly on the agendas of governments and their subordinate agencies, telecommunication organizations and unions, and of course operators. For some EU countries, one of the most eagerly anticipated broadband measures is the allocation of the digital dividend spectrum and its subsequent usage in broadband wireless networks. But the undoubtedly valuable frequency resource alone cannot mitigate all risks related to business viability when building infrastructure to close broadband coverage gaps. Further key aspects to be considered are network costs (CAPEX & EX), revenue potential and uncertain license fees. Network operators must critically assess the digital dividend business case on the basis of a set of technoeconomic parameters including coverage type, band width, license fee, subscriber forecast, and subsidy schemes. A recent Detecon study has shown that positive business results are only attainable with the right combination of parameters. We make ICT strategies work
Initial Situation The digital dividend (previously analog TV spectrum) is deemed as a highly valuable resource that could bring benefits measured in billions of Euro within the EU zone alone. Its relatively low frequency band (790 862 MHz in Europe) possesses very good radio propagation characteristics which in technical terms means that fewer sites will be required to cover a certain area with wireless services. Not surprisingly, this is the main argument as to why this particular spectrum has to be allocated for the provision of broadband wireless services in areas lacking broadband access in general. In Germany the government plans to use the spectrum as a lever to stimulate the reach and usage of broadband services throughout the country, with a focus on underserved or noncovered areas also known as white spots. In 2010 the national telecommunication regulator is going to distribute nationwide licenses to interested parties (operators or service providers). The successful bidders have to roll out broadband wireless networks in compliance with the requirements stipulated by the regulator (coverage, rollout plan, and minimum offered connection speed being the most important ones). Inherently network rollout is linked to costs and especially in the current economic turmoil a valid question arises will a digital dividend network be able to offer broadband services profitably? Challenge A recent study 1 has revealed that the deployment of wireless networks and the provision of broadband services using the digital dividend spectrum will clearly involve a number of challenges that must be addressed. The primary goal being ubiquitous broadband coverage implies that telecom operators or service providers must cover the existing white spots. In Germany, this would mean mostly deploying the necessary new network infrastructure in rural areas with very low population density and/or in areas with terrain which is difficult to cover (like hills, mountains, forests, large plains, etc.) The main reasons why these areas have remained disconnected from broadband access to date are: prohibitive capital investment very low revenue potential (few potential subscribers) or both The difficult terrain and the low population density will have a huge impact on the required network infrastructure and consequently on the necessary investments and expenditure. New sites must be built and sufficient backhaul capacity links supplied and this will reflect on the total deployment costs. 1 Detecon Study on Digital Dividend, October 2009 Detecon International GmbH 02/2010 2 www.detecon.com
The number of households without broadband coverage (DSL) in Germany is under 4% 2 (as of end of 2008) thus leaving a relatively small addressable market for the digital dividend networks. With the ongoing expansion of VDSL, DOCSIS and FTTH networks in urban areas it will be very hard for wireless networks to compete for broadband market share in these areas (at least not before true 4G networks). Furthermore it can be presumed that in some areas digital dividend license holders may already operate a fixed line broadband network making a strategy of avoidance of market share cannibalization very likely. The spectrum license fee is another risk to be considered: a very high fee might hinder the deployment of wireless networks as happened in the case of 3G a couple of years ago. Key Considerations To counter these challenges operators or service providers have to carefully consider a combined set of technical and economic parameters: Coverage type (indoor or outdoor) influences the required network infrastructure (radio base stations, backhaul links, civil infrastructure). The coverage itself depends on other parameters such as frequency, antenna height and type, radio equipment technical specifications, and regulations. CAPEX and EX will be affected. Cell bandwidth (in MHz) influences the total cell/site throughput and thus the number of subscribers supported simultaneously. CAPEX and EX will be affected. Subscriber base (forecasted) influences both the revenue stream and the required network infrastructure and both CAPEX and EX. Services (offered) affect the average revenue per subscriber. Subsidies on end user equipment or logistics affect the CAPEX. License fees affect CAPEX. 2 DTAG 2008 Annual Report Detecon International GmbH 02/2010 3 www.detecon.com
All these items will have direct impact on the business results. The above mentioned options were taken and transformed into a set of scenarios in a study carried out by Detecon. Figure 1 shows the net present value (NPV) of a network using digital dividend spectrum covering the state of Mecklenburg-Vorpommern for a period of six years. It can be seen that only five scenarios exhibit a positive NPV 3 in these cases coverage type is outdoor, cell bandwidth is 10 or 20MHz, the access technology is OFDMA 4, the subscriber forecast is based on 30% to 50% market share, and in most cases end-user equipment (CPE) is not subsidized. The offered service is fixed wireless internet and the license fees are assumed to be the minimum (starting) fees in the upcoming auction in 2010. NPV NPV, MEUR 10 Indoor Coverage Outdoor Coverage 8.9 5 0-5 -3.0 0.8-0.9 2.9-1.8 5.1 2.0-10 -15-20 -25-19.8-20.6-19.4-20.2-13.7-15.0-12.3-13.7 NPV, CPE subsidy NPV, no CPE subsidy -30 Fig.1: Net Present Value 3 In the study NPV is defined as the discounted difference between revenues on the one hand, and CAPEX and EX on the other. CAPEX is capital expenditure and EX is operating expenditure. 4 Orthogonal frequency division multiple access, as implemented in LTE and mobile WiMAX Detecon International GmbH 02/2010 4 www.detecon.com
Conclusion & Recommendation The main conclusions from the study show that profitable business using the digital dividend is possible, but only under certain framework conditions and after a careful consideration of techno-economic parameters. The number of required sites (and thus investment) only stays at a reasonable level when the network is planned for providing outdoor coverage. Furthermore significant market share (30% to 50%) is necessary to achieve positive net present value within the rollout period. Enough bandwidth (at least 10MHz) is another mandatory condition emerging from the results. Certain cost elements e.g. end-user equipment (CPE), if covered by the operator, impose significant financial burden on the business results and can even lead to negative NPV. Another parameter that may have a similar effect is the license fee. In the study the assumed license fees are the minimum ones announced by the national regulator but in reality higher fees can be expected. The main findings are independent of the underlying broadband wireless technology. Based on the above conclusions we recommend that operators or service providers focus on areas where they can expect high subscriber uptake (currently areas not covered with broadband access) consider teaming up with a partner to share the costs for network deployment, operation and/or frequency spectrum sharing (especially for those with less than 10MHz spectrum) and achieve the necessary critical market share coordinate the rollout of the broadband network with other operators and consider national or regional roaming agreements carefully plan which cost elements to cover alone (e.g. CPE) consider different public funding schemes to complement own investments as broadband coverage, especially in rural areas, is a matter of broad public and governmental interest, and funding options are available 5 are realistic regarding the maximum license fee payable per frequency block - it should stay within a reasonable range in order not to overburden the deployment of the wireless broadband networks. Under no conditions should these fees reach the level of the 3G licenses distributed in 2001. The authors Nikolay Zhelev Nikolay Zhelev@detecon.com Dr. Wolfgang Knospe Wolfgang.Knospe@detecon.com 5 The European Commission approved several state aid schemes in 2008, more information available at http://ec.europa.eu/competition/state_aid/register (e.g. N115/2008, N150/2008, N266/2008) Detecon International GmbH 02/2010 5 www.detecon.com