Mobile network sharing -

Swedish experiences

Bengt G Mölleryd

20 May 2010

Email: bengt.molleryd@pts.se

04/10/23 2

Network sharing – a no-brainer?

• Reduce Capex with 20-50%

• Cut Opex significantly

• Deploy networks faster with fewer towers

• Positive on the environment

• …but there is also a cost associated with network sharing

04/10/23 3

Positive impact of network sharing

• Extensive deployment of 3G

• 3G population coverage 99.59%

• Geographical coverage ~50%

• 3G operators have more than

fulfilled license requirements

• Competition Authority forced

operators initially to make some

alterations

• PTS support network sharing

~50%

~40%

04/10/23 4

Hot topic – part of the new market

The aim with the presentation is to:

• Give a view on ten years with network sharing in Sweden

• Convey regulators view

• Illustrate the costly deployment in rural Sweden

• Show the limited impact on competition

• Give a view on the future network sharing

04/10/23 5

My background

• Ph.D. Oct 1999 ”Entrepreneurship in Technological Systems - The Development of Mobile Telephony in Sweden”

• Analyst with focus on telecom

• AB Stelacon 1999 – 2001• Evli Bank 2001-05• Nordea 2005-06• Standard & Poor’s 2006-08• Handelsbanken 2007-09• PTS 2009 –

• Guest researcher Royal Institute of Technology, Stockholm (wireless@kth) 2009-

S TELA CONM A R K ET IN G R ES EA R CH & CON S ULT IN G

04/10/23 6

Telia51%

Tele233%

Europolitan/Telenor

16%

Telia dominated the market in 2000

• 6.3m GSM subs

• 70 subs per 100 inhabitants

Population coverage

• Telia 99%

• Europolitan (Vodafone/Telenor) and Tele2 96%

Geographical coverage

• Telia 80-90%

• Europolitan and Tele2 40-60%

04/10/23 7

Four 3G licenses (Dec 2000)

XLicense requirements: cover 8.86m people with up to 70% shared infrastructure and 30% by own infrastructure

04/10/23 8

Two network companies formed

Sunab was able to build the entire network as Telia did not have a 3G license

04/10/23 9

Regulators - positive view

PTS• Part of the license

requirement

• Operators able to fulfill 70% of coverage obligation by network sharing

• 30% by own infrastructure

• Positive towards network sharing

Competition Authority• Sunab more extensive, but

Telia did no have a 3G license

• 3GIS – new players low market shares

• Yes – go ahead with network sharing

04/10/23 10

Different conditions: 43 vs 2 in/km2

Denmark• Area: 43 094 km2

• Population: 5.5 m

• 128 inhabitants/km2

Urban

• 80% of the population lives on 40% of the area

• 255 inhabitants/km2

Rural

• 26 000 km2

• 43 inhabitants/km2

Sweden• 450 295 km2

• 9.1 m

• 20 inhabitants /km2

Urban

• 90% of the population lives on 10% the area

• 182 inhabitants/km2

Rural

• 405 266 km2

• 2.2 inhabitants/km2

Case DK - SE

04/10/23 11

Deploying over 10K sites in SE

Number of sites

0

2 000

4 000

6 000

8 000

10 000

12 000

Sverige Denmark

Urban Rural

Case DK - SE

Coverage in unpopulated areas

04/10/23 12

Capex per subscriber - too highCapex per sub

124 89

5 041

466526152

0

1 000

2 000

3 000

4 000

5 000

6 000

Sverige Denmark

Urban Rural Total

Case DK - SE

Payback 200 months

04/10/23 13

Almost 50% of capex 2003-04 Network sharing of toal capex

0%

10%

20%

30%

40%

50%

60%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Sunab 3GIS Total netw orks sharing capex

Fulfilled 3G license requirement 2007Cover 8.86 m people

04/10/23 14

12% in relation to total marketNetwork share part of value (total end customer revenues)

0%

2%

4%

6%

8%

10%

12%

14%

2002 2003 2004 2005 2006 2007 2008 2009

Indicate that 88% of value made besides network sharing

04/10/23 15

..limited impact on market shares Market shares (subs)

0%

10%

20%

30%

40%

50%

60%

Telia Tele2 Europolian/Telenor 3

2000 2009

04/10/23 16

…but Telia’s revenue share dropped

Market shares (revenues)

0%

10%

20%

30%

40%

50%

60%

70%

Telia Tele2 Europolian 3

2000 2009

Although Telia has lost market shares it has a firm grip of the market

04/10/23 17

Consumers enjoying low prices

OECD mobile medium-usage basket, August 2008, tax included

04/10/23 18

…but what about 4G network sharing

• Heavy volume users • IP-based infrastructure makes it more

dynamic• Voice over 4G from 2015?• Giving GSM a new push• Peak rates play a vital role in strategic

marketing • Differentiation of mobile data services• Operators need to increase capacity and

lower production cost• Making spectrum to a key asset

04/10/23 19

Three infrastructure companies – different partners

04/10/23 20

Net4Mobility – low share of value creation

• Net4Mobility’s cost base in relation to Tele2’s and Telenor’s revenues

• Assuming annual costs of SEK 952m for Net4Mobility

• Capex SEK 3.3 bn • Opex 10% of accumulated

capex, WACC 8.2% • Total mobile market SEK

23.8bn (end customer revenues)

• Market shares: Tele2 and Telenor 22% respectively

Net4Mobility share of value creation

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Tele2 Telenor

Represents 4% of the total market value - implies limited impact on competition

8%

04/10/23 21

…but if its affects competition negatively

• Competition Authority is scrutinizing the agreement

• Determine the level of network sharing (broad range: passive, active, full)

• Sunab as a role model• Enforce Net4Mobility to safe guard continued

end-customer competition• …but if this is not sufficient

04/10/23 22

…could PTS take measures

• …and examine the market for mobile origination

• Revisit the market analysis that PTS carried out in 2005 and explore if any player has SMP status on the market for network capacity (Access and call origination on public mobile telephone networks)

• Another possible avenue could be to examine ways to support the unexploited MVNO market in Sweden

• …or use other possibilities

04/10/23 23

Pro and cons with network sharing

+• Lower Capex

• Lower Opex

• Benefitting from an enhanced network

• Maintained control over mobility

• Maintained position on the market

-• Cumbersome to reach

consensus on all aspects

• Loose independence over network strategy

• Hidden cost

• Impossible to foresee everything that has to be part of the agreement

04/10/23 24

Concluding with a positive view

• Network sharing is here to stay – part of the new market

• Competition has not been affected negatively

• Provided large coverage and price worthy services

• What about the Future: loaded sites gives no incentive to pursue network sharing…

• …but increasing flexibility of 4G infrastructure support network sharing

• It is primarily a financial issue and operators’ drive to generate value safeguard continued end-customer competition

04/10/23 25

Q&A

Vornear passer det bedst med et foredrag fra det svendske PTS?- Hvergang!!

04/10/23 26

Appendix

04/10/23 27

GSM has been revitalized

~90% ~65%~70%

Geographical coverage

04/10/23 28

GSM still dominates …

Traffic split GSM vs 3G

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009

3G GSM

Implies that network sharing is only applicable to 37% of voice minutes, but mobile data…

04/10/23 29

Sweden having low prices

Source: Mobile phone service prices 2009 – International comparision, Ficora May 2009

04/10/23 30

Business case 3G

• 3G penetration 90%

• Market share 25%

• ARPU EUR 25

• Capex EUR 100 000 per site (70K site + 30K radio)

• WACC 12.5%, annualized site 20 years, radio 5 years

• Opex 20% of accumulated capex

• Direct cost EUR 80 per year and sub

• Geographical coverage SE 45%, DK 80%

• Cell range 2.5 km

Case DK - SE

04/10/23 31

Profit margin after annualized capex - Massive losses in Rural SE

Profit margin (after annualized capex)

58%

-567%

7%

62%14%

54%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

Urban Rural Total

Sverige Denmark

Case DK - SE

Decisive argument to pursue network sharing

04/10/23 32

Mobile capex - EUR 4.5 bn

Mobile capex 2001-2009

0

200

400

600

800

1000

1200

1400

1600

TeliaSonera Telenor Tele2 3 Sunab 3GIS

EU

Rm

Share of mobile capex 2001-2009

TeliaSonera23%

Telenor7%

Tele29%

329%

Sunab13%

3GIS19%

Telenor acquired Europolitan/Vodafone Sweden in 2005 for EUR 1bn

04/10/23 33

Network companies share of value 4%-18%

Share of value (revenues)

0%

5%

10%

15%

20%

25%

30%

2004 2005 2006 2007 2008 2009

Tele2 share of Sunab TeliaSonera share of Sunab

Telenor share of 3GIS 3 share of 3GIS

Revenues/cost for network companies in relation to revenues made by the operators

04/10/23 34

Mobile broadband: revenue gap?

No problem with capacity until utilization rates reach peak ratesNetwork upgrade drives capex that reduces cash flow

Business Innovation Strategies to Reduce the Revenue Gap for Wireless Broadband Services by Markendahl, Mölleryd, Mäkitalo, Werdingdownload: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1559116