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Part IIIReducing the Cost of UMTS
Fraser CurleyBonnNovember 2001
Arthur D. Little Int., Inc.Martin-Luther-Platz 26D-40212 DüsseldorfTel. +49-211-8609-0Fax +49-211-8609-599
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Table of contents
1
2 Typical approach and methodology
Infrastructure sharing
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General market development - Overview1
The rapid development of the new economy boom and bust cycle has hit themobile industry in the UMTS roll-out
The "New Economy Hype Curve"
Mar
ket c
ap
Time2000 2001
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Dot.coms
ISPs
Telcos
Telecom equipment suppliers
Management Consultants
Financiers?
Tro
ub
led in
du
stries
illustrative
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Infrastructure sharing - Refocusing roll-out strategies1
Making the situation more difficult, this happens in a time of sharplyincreasing competition on the European mobile markets
• A late market entry isdifficult to accomplish inmobile telephony -providers usually takea long time (if ever) toreach their "fair"market share
• The already very highmobile penetrationleaves few room forgrowth in new marketsegments
• Lack of (spectrum)capacity in this specificmarket could force afaster market entry ofnew players in UMTS
• The development of in-house applicationsolutions with exclusivepartners will beincreasingly difficultfor mobile operators
Number of UMTS license holders by country Issues
Number of UMTS licenses
Source: UMTS forum, 2001
0 1 2 3 4 5 6
Co
un
try
AustriaUK
SwitzerlandPortugalNorway
NetherlandsItaly FranceFinland
DenmarkSpainBelgium
Germany
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Infrastructure sharing - Refocusing roll-out strategies1
The rapid roll-out schedule for UMTS has put additional pressure onoperators as well as on vendors
3 31
74
2 3 31
14
85 5
3 2
96
2 10
10
20
30
40
50
60
70
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001E
2002E
Num
ber
of m
ajor
net
wor
k la
unch
es
Network launches in 16 European countries
• Equipment and handsets• Cell sites and planning application• IT and support systems (implementation
time frame)• Roll-out teams and radio planners• Integrity testing teams• Application development and
implementation teams
> 60networks
Source: Mobile Communications, Arthur D. Little research 2001
Constraining Factors
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4Reducing network and infrastructure cost
4Optimize spectrum utilization (partnering)
4Optimize equipment utilization (synergies through partnering)
4Expedite the roll-out of services
4Avoiding repetition of WAP and GPRS roll-out mistakes
4Bringing services to the (increasingly skeptical) market
Main targets
Infrastructure sharing - Refocusing roll-out strategies1
In view of this changing market environment, operators are redesigning theirroll-out strategies
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Late availability of handsets
Limited coverage
High pricing
Shortage in infrastructure supply*
Scarcity of antenna sites
No killer applications
No difference to GPRS
No need for fast data services
Saturation of the mobile market
Electrosmog concerns
3,8
3,5
3,4
3,3
3,2
3,1
3,0
2,5
2,3
2,1
0 1 2 3 4 5
Source: Arthur D. Little survey, 11/2000
Purely network roll-out related
weak strong
Network roll-out related problems are regarded as among the mostthreatening showstoppers for UMTS introduction
Infrastructure sharing - Refocusing roll-out strategies1
Importance of UMTS barriers
*) within the intended roll-out timeframe
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TMNVodafoneOptimus
ONI WAY
DoCoMoJ-Phone
Manx Telecom
Monaco Telecom
TelefónicaAirtel
RetevisiónXfera
CellnetVodafoneOrange
One2OneHutchison 3G
Indications are, that stable UMTS technology development will be available bylate 2002/early 2003, forcing many operators to delay the launch of services.
Portugal
Japan
Country / Key Operator
Isle of Man
Monaco
Spain
UK
Source: ADL Analysis; Total Telecom; 3Gportal; Financial Times Initial date Estimated launch delay Rumours
1 Infrastructure sharing - UMTS Status
2001 2002 20033rd3rd 4th4th 1st1st 2nd2nd 3rd3rd 4th4th 1st1st 2nd2nd2nd2nd
• Launch schedule for 1 October
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Source: ADL Analysis; Total Telecom; 3Gportal; Financial Times Initial date Estimated launch delay
Germany
T-MobilD2
E-Plus HutchisonViag Interkom
MobilcomGroup 3G
BelgiumKPN -Orange
MobistarProximus
to be awarded
Switzerland
SwisscomOrange
Team 3GdSpeed
Sunrise (Diax)
SwedenEuropolitanTele2 - Telia
HI3GOrange
FinlandSonera
RadiolinjaTelia Finland
Suonen
3rd3rdCountry / Key Operator
4th4th 1st1st 2nd2nd 3rd3rd 4th4th 1st1st 2nd2nd2001 2002 2003
1
Indications are, that stable UMTS technology development will be available bylate 2002/early 2003, forcing many operators to delay the launch of services.
Infrastructure sharing - UMTS Status
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In addition, some issues still remain regarding full operator interoperability.
• Mobility - Problems with the handover from one base station to another and from onecontroller to another
• Stability of trial 3G services
• Interoperability - European markets will require an “interoperability period" to allowmore testing to ensure that handsets and infrastructure, both old and new, are able tointeroperate with each other.
• Software problems and delays in agreeing standards, which means that production isdelayed.
• Obtaining sites and equipment availability (high number of simultaneous installations)
NetworkInfrastructure
UMTS Technology Issues
• Integration of Applications with Service Platforms and Interoperability Tests
• Software problems and browser integration problems
• Battery miniaturisation and power control
• Dual mode availability
Handsets
App.
Source: ADL Analysis; Vendor reports and Interviews; Total Telecom; 3Gportal; Financial Times
1 Infrastructure sharing - UMTS Status
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Mass market UMTS handsets are expected to be available in the second half of2003, the development being driven by strong competition amongst vendors.
Source: ADL Database; Merril Lynch; Vendors reports Demo Mass Production Temporary WithdrawalLegend:
Country / Key Operator2000
1st1st 2nd2nd 3rd3rd 4th4th
20011st1st 2nd2nd 3rd3rd 4th4th
20021st1st 2nd2nd 3rd3rd 4th4th
20031st1st 2nd2nd 3rd3rd
19993nd3nd 4nd4nd
MassProd.R520
Mass Production
DemoTimeport 260
DemoR520
EstimatedLauchT68
TemporaryWithdrawalR520
Mass Production
Demo Timeport 260
1st Test of 3G handsetMassProductionVoice Phones
MassProductionData Phones
UMTS
WAP
GPRS
Demo710
Mass Production 7110/Nokia 6210 was 2 months delayed
Other Vendors
Other Vendors
Other Vendors
NEC
DemoR320 Mass Production R320/ Other models were 6 months delayed
Mass ProductionNokia Imaging
MassProd.8310
FOMA
Sagem 959 & 979
Trial Visual Upgrade Starts Delivery inEurope
TrialPhone
UpgradedTrial VisualPhone
TrialVisualPhone
GPRSMassiveLaunch
1 Infrastructure sharing - UMTS Status
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Infrastructure sharing - Recent developments1
Facing the rapidly changing environment, operators start to look for newways to reduce the risk of the 3G roll-out while meeting their objectives
Network sharing agreement in GermanyThe Telefonica and Sonera JV, Group 3G, has confirmed that it has signed a memorandum ofunderstanding for a network sharing co-operation with KPN's E-Plus.
3G Newsroom, September 11, 2001
BT and DT to share 3G network costsBT and Deutsche Telekom have struck a landmark agreement to co-operate in the rollout of 3Gnetworks in the U.K. and Germany, the companies said on Tuesday.The agreement between mobile arms BT Wireless and T-Mobile could save them each up to 30%of the capital cost of building the networks.Reuters, June 12 2001
BT's 3G network sharing plan could come trueUK government said today that it would support 3G network sharing if it brings benefit toconsumers and the environment.3G News, May 04, 2001
Green party encouraging network sharingEnvironmentalists are lobbying the European Union to allowing 3G operators to shareinfrastructure.3G News, May 13, 2001
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Source: DKB 2000
Coverage phase - covering major cities - first year of roll-outExpansion phase - reaching national coverage - 2002-2005Capacity - further increasing capacity - from 2005
The main reason for sharing the burden is to lower the level of investmentper user
Infrastructure sharing - Main reason cost pressure1
Investments per roll-out phase
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Two or more networks, covering different parts ofthe intended coverage area are owned andoperated by different operators - mutual roamingagreements are put into place
Roaming cooperation
Operator A
Operator B
Roamingagreement
Various elements of the required networkinfrastructure are owned and operated togetherby two or more operators
Shared infrastructure
Core networkUTRAN
Core networkUTRAN
Op
erat
or
AO
per
ato
r B
Shared network elements
Infrastructure sharing - Network sharing approaches1
There are two basic options for operators to share the costs of networkinfrastructure
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Roaming cooperationShared infrastructureOwn infrastructure
MNO
MVNO
Service provider
Combinedapproaches
MNO
MVNO
Service provider
Combined approaches
MNO
MVNO
Service provider
Combined approaches
MNO
MVNO
Service provider
Combined approaches
Typical
GSM
roll-out
options
3G roll-out option
3G roll-out options
3G roll-out options
3G roll-out options
Network strategy
Sp
ectr
um
str
ateg
y
Infrastructure sharing - Network cost reduction framework1
A holistic approach shows multiple possible network roll-out options forUMTS license holders
illustrative
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Business focus 3G only 3G and 2G 3G, 2.5G, 2G
Network operation mode MNO only
Spectrum strategy
Roll-out plan Large cities (densepopulated areas) Geographic focus National
UTRAN Own Shared Mixed
Backbone
Core network
Applications
Network performance 144k outdoor
Net
wo
rk s
har
ing
MVNO only(one)
MVNO only(multiple)
MNO andMVNO (one)
MNO + MVNO(multiple)
No MVNO Give MVNO Take MVNO
Own Shared Mixed
Own Shared Mixed
Own Shared Mixed
348k indoor
License holder's strategy for 3G roll-out
a potential 3G roll-out strategy
Focus on businessenvironment Roll-out speed Migration speed Regulatory
requirements Debt basis Target segmentsand offerings
1
A successful network sharing strategy has to be integrated thoroughly into asound roll-out strategy covering all the key aspects
Infrastructure sharing - Integrated roll-out strategy
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1
Network sharing decisions and rollout strategy are interdependent with thebusiness strategy and environment of a UMTS license holder
Business strategy and environment
Migration speed (2G-3G) Slow Average Fast
Rollout speed Slow Average Fast
Rollout cost Minimize
Regulatory environment Coveragerequirements
Networkperformancerequirements
MVNO legal
Target segment
Offering Multimedia products Business products Standard products
Secondary
Network sharinglegal
Wholesale Corporate SME SoHo HEC LEC
Infrastructure sharing - Integrated roll-out strategy - Further elements
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NetworkManagement
Center
UMTS radioaccess network
Node B /site
Link / LL
RNC
Core network
iuU-MSC
(incl. GSM, GPRS)
• OMC• Customer Care• Billing• Provisioning• Call Center• Applications
Shared UTRAN
Shared network
Shared operation
Shared applications and support functions
Infrastructure sharing - Network infrastructure approach1
The "shared infrastructure" approach allows for multiple levels of co-operation with different risks and benefits
1
2
3
4
Networkmanagement
Applicationsand support
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• no independent physicalcontrol over RANresources
• dependence on partnerroll-out performance
• complex legal situation -network ownership
• need for detailedcoordination in operationsand maintenance
• need for detailed siteplanning (coordination ofantennas, …)
• substantial cost reduction(UTRAN equals around2/3 of total CAPEX)
• only limited effect oncompetitive positioning
• more cash for marketing,application development,...
• opportunity of resellingspectrum
• a dominant operator is thebest partner in this option
• ideal for greenfield playersto avoid problematic siteacquisition
• in some countries explicitlyfavored by the regulator
Option 1 - shared UTRAN
Potential elements to be shared:• Site• Mast• Antenna• Node B (RBS)• Transmission links between Node Bs and RNC• RNC• Transmission links between RNCs
ConsPros
Infrastructure sharing - Network infrastructure approach - Shared UTRAN1
Sharing elements of the UTRAN is a common approach to reduce networkcost and environmental impact
1
UMTS radio accessnetwork
Node B /site
Link / LL
RNC
iu
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UMTS radio accessnetwork
Node B /site
RNC
iu
Option 2 - shared network
Potential elements to be shared:• UTRAN (option)• Transmission links between RNCs and U-
MSCs• U-MSCs• Transmission links between U-MSCs
• complicated strategiccoordination with partner
• no independent controlover network resources
• complicated to implement
• heavy dependence onpartner roll-outperformance
• complex legal situation -network ownership
• strong regulation risk
• need for detailedcoordination in operationsand maintenance
Cons
• viable option for similarpositioned partners toreduce roll-out cost
• cost reduction (corenetwork can equal up to1/5 of total CAPEX)
• opportunity of resellingspectrum
• better utilization oftransmission links
• economies in networkoperations andmaintenance
Pros
Corenetwork
U-MSC
(incl. GSM, GPRS)
Infrastructure sharing - Network infrastructure approach - Shared network1
Sharing elements of the core network is a more radical approach to reduceroll-out cost
2
Link / LL
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Option 3 - shared operation
Potential elements to be shared:• UTRAN (option)• Core network• NMC
• spectrum control is notcredible
• heavy dependence onpartner in all operationalaspects
• complex legal situation -spectrum "ownership"
• only little overall costreduction compared toshared UTRAN/CoreNetwork option
Cons
• opportunity for greenfieldlicense holders tocapitalize license withoutrisking additionalinvestment - or focussingexclusively on serviceprovision
• similar to one network withbroader frequencyspectrum
• viable approach incountries with limitedspectrum size (fordominant operators)
Pros
UMTS radioaccess network
Node B /site
Link / LL
RNC
Core network
iuU-MSC
(incl. GSM, GPRS)
Networkmanagement
Infrastructure sharing - Network infrastructure approach - Shared operation1
Reducing 3G operation to a "spectrum lease" or "merge" business could bea viable option for a greenfield operators that owns a cost effective license
3
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Option 4 - shared applications and support functions
Potential elements to be shared:• Other network elements (optional)• Specific applications or support systems (in
combination with other options) OMC CRM Billing Call center (CTI) Provisioning
• market positioning
• complicatedimplementation and/ormigration
• limited cost impact inmany cases
• detailed interfacedefinition required
• critical service levels
Cons
• viable approach to co-operate on standardapplications
• viable approach foroperators with licenses inmultiple countries - investin applications only once
• combination with UTRANor network sharing optionpossible
• potential co-operation /sharing with non-operatorexternal partner
• reduced overall scale ofoperations
Pros
UMTS radioaccess network
Node B /site
Link / LL
RNC
Core network
iu U-MSC
(incl. GSM, GPRS)
NetworkManagement
Center
Infrastructure sharing - Network infrastructure approach - Applications & support1
Sharing applications and support functions can be an approach to furtherreduce the scale of operations
4
Applicationsand support
• OMC• Customer
Care• Billing• Provisioning• Call Center• Applications
Networkmanagement
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Roaming cooperation
Operator A
Operator B
Areas with high population /traffic density
• regional separation isextremely difficult
• redundant structures willbe required in some areas(and can lead to extracosts)
• regional structures can notbe adjusted to economicand socio-demographicdevelopments
• inefficient spectrumutilization
Cons
• reasonable reduction ofnetwork cost
• little coordination effort
• no complexity increasedue to equipment sharing
• more flexible partnershipenvironment than sharingapproaches
Pros
2G roaming
• Gives a clear advantage (and strong negotiation position)to incumbent operators
• Many regulative frameworks force some form of 2Groaming, but usually do not define conditions
• Adds another element to network/spectrum strategyframework
Infrastructure sharing - Roaming approach1
A roaming cooperation does not increase complexity but requires a higherdegree of partnership coordination
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Sharedapplication &
support
Relevant costreductions insome areas
Roamingcooperation
Fully functionalnetwork atsmaller scale
Shared network Shared operationShared UTRAN
Reasonablesavings
Very limitedadditionalsavings
Most substantialcost reduction(up to 40%)
Cost reduction
least favorable most favorable
Not affected byregulation
Limited bycoveragerequirements
Will need to benegotiated
Currently notpossible in mostcountries*
Activelypromoted insome regulations
Regulation*
Clear interfaces Smaller scaleLowerredundancies
SynergiesMost critical tomanage
Operationalcomplexity
*) tends to become less important in the future as regulators become more flexible
Infrastructure sharing - Approach evaluation1
From the current point of view both sharing of UTRAN as well as selectiveapplications and support functions seem most promising
Key
cri
teri
a
illustrative
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2004
Performance
-200,0
0,0
200,0
2001 2002 2003 2005 2006 2007 2008 2009 2010
MEuro
EBITDA
-200,0
0,0
200,0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
MEuro
EBITDA
Savings achieved
Cumulated total CAPEX
Cumulated total networkOPEX
NPV of FCF incl. TV
Peak funding
37-40% reduction
35-40% reduction
two years earlier
>200% increase
55-60% reduction
Own Network Shared Network
MVNO only(no ownbrand)
Own network Shared network Roaming cooperation
MNO only(own brand)
MNO and
MVNO
Scenario 2
Scenario 3
Scenario 1Base scenario
Scenario 4Scenario 5
Network strategy
Sp
ectr
um
str
ateg
y
Combined approach
Performance
In real-world scenarios, CAPEX as well as OPEX have been reduced by ~37%by sharing parts of the UTRAN, transmission links and applications
Infrastructure sharing - Greefield rollout strategy1
illustrative
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1
Despite substantial savings that can be achieved by infrastructure sharingagreements in the short run, negative implications can affect the long termbusiness case
Top cost reduction results fromnetwork sharing business cases
Source: Arthur D. Little network sharing business case
CAPEX OPEX Peak funding
100%(=full independentroll-out accordingto regulatoryrequirements)
50%
-40% -40%
-60%
Negative long runeffect due to- co-ordination cost- legal risks- operational risks- ...
Infrastructure sharing - Long run cost view
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BUSINESS
ENVIRONMENT
Country C
BUSINESS
ENVIRONMENT
Country B
1
To avoid all these problems a license holder has to define an overall strategyfor network roll-out, including potential internal synergies as well as allelements of the business environment
Infrastructure sharing - Overall approach
BUSINESS
ENVIRONMENT
Country A
Network 'infrastructure'sharing strategy
Technological businessfocus (2G-3G)
Spectrum strategy Network operationstrategy
Regulatory requirements
Competition
Debt situation
Technical considerations
License holder's strategy
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Table of contents
1 Infrastructure sharing
Typical approach and methodology2
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How can you successfully reduce your UMTS network costs through infrastructure sharing?
What are thecommercial
options?
What are thefinancial
projections?
What are thedetails for
implementation andlogistics?
Equipment inter-workingand compatibility
Channel planning
Design optimisationBSS planing
Capacitymanagementand performancereporting
Fault management
Common vendorstrategy
What are the technicaland operational
options?
Businessmodelsevaluation
Products andservices
Equity or othercommitments
Financial model
Base case
Enhanced cases(e.g. revenuesharing)
Cost savings
Migration plans
Staffing &resourcing
SLAs
Organisationplanning
Maintenanceoperation
Network resourcesdesigns &operation
Revenue models
Which solution canbe "sold" to the
regulator?
Equipmentsharing
Ownership
CapexCommitment
Licenserequirements
What is the best strategy to adopt?
Networkmanagement
The full range of difficulties in reaching a successful network sharingagreement need to be addressed
Approach and methodology - Overview2
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Network Design Strategy
Negotiation Preparation
Examine CAPEX andOPEX implications
2
Responsibilities,ownership & costs
4
Detailed Technical &Operational Planning
5
Co-operation contract
3
Evaluate Options
1
Negotiation Support
Financial Evaluation
Implementation
The approach needs to cover the design-through-implementation of thenetwork sharing agreement
Approach and methodology - Overview2
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StepsIdentify NetworkDesign Options
1Evaluate NetworkDesign Options
2Select preferredoptions
3
Tasks
• Explore competitors willingnessto cooperate
• Determine current competitorsituation
– GSM status
– UMTS vendor selection
• Determine interworking andinterconnections possibilities
• Determine internationalresources (within the company)available for sharing
Network Design Strategy
Results
• Is a harmonisation of vendorstrategies possible?
• GSM/UMTS roaming possibilities
• Viability of network infrastructuresharing options I-IV
• Ownership options and costestimates
• Check fit with Group technicalplans for other Europeanholdings
• Select preferred option to pursuein negotiations (Operators) andlobbying activities (Reg.Authority)
• Identify fallback positions
• Identify no-go limit
Understanding of the regulatory,competitive and technical UMTSenvironment
Clear negotiation position withfallback position identified
Clear lobbying position towardsReg Auth.
Technical and commercialevaluation of the main optionsavailable
Approach and methodology - Network design strategy2
The approach needs to cover the design-through-implementation of thenetwork sharing agreement
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Steps Evaluate CAPEX
1
Evaluate OPEX
2
Ongoing support
3
Tasks
• Determine capex requirementsfor the selected options
– UTRAN– Core network– Transmission– Application platforms
(if applicable)– etc
• Based upon Group's UMTSrollout/coverage plans (forEurope)
Results
• Ongoing business planningsupport during the negotiationphase
View of CAPEX requirements, withsensitivity analysis for negotiation
Clear identification of currentnegotiation position with financialimplications
Financial Evaluation
• Determine opex requirementsfor the selected options
– Geo split– Common infrastructure– UTRAN only– etc
• Modelling of national roamingcosts based upon current marketforecasts
View of OPEX requirements, withsensitivity analysis for negotiation
Approach and methodology - Financial evaluation2
The approach needs to cover the design-through-implementation of thenetwork sharing agreement
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StepsCo-operationIssues
1
Tasks• Identify the key elements of the
co-operation contract
– Level of co-operation
– Vendor relationships
– Service Level Agreements
• Draft responsibility matrix– Design– Implementation– Operations
• Draft line for negotiation withother Group units in Europe
Results Draft contract elements and terms
Negotiation Preparation
Draft Contract
2
• Draft contract terms review
• Local legal support required
Draft contract elements and terms
Approach and methodology - Negotiation preparation2
The approach needs to cover the design-through-implementation of thenetwork sharing agreement
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Steps Technical
1
Commercial
2
Contract Drafting
3
Tasks
• Network interfaces between theco-operation parties and thirdparties
• Network capacity
• Interworking levels
• Network operationresponsibilities
• Service level agreements
• Network evolution
• Prepare information documentfor regulator
Results
• CAPEX and OPEX calculationfor the common part of co-operation
• Cost splitting structure
• Ownership options and costestimates
• Cost for network evolution
• Contract drafting for:- Technical Approach- Commercial conditions- SLAs- Network evolution
• Frame contract review includingthe general term of conditions
Definition of the technical frame ofwork
Support in the contract drafting andobligations for each party
Definition of the cost factors andcost splitting for each party
Negotiation Support
Approach and methodology - Negotiation support2
The approach needs to cover the design-through-implementation of thenetwork sharing agreement
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StepsContract andproject mgt.
1Networkacceptance
2UMTS operationset-up
3
Tasks
• Review the contract andpayment Milestones
• Implementation Schedule
• Project team support
• Project reporting
• Contract review meetings
• Network redesign issues
• Contract adaptation
Results
• Definition of network acceptancetest (and split) for:- UTRAN- Core- Transmission- Service application- Interworking with IP and PSTN
• Acceptance reporting
• Marketing support
• Definition of operation set-upstrategy
• Service definition andparameterisation
• Operation and maintenanceprocess for:- UTRAN- Core,- Transmission,- Service and application
• Operation structure and Staffing
Controlling of the project status andmilestones for:- Implementation- Contract conditions
Operation and maintenanceprocess shall be defined andimplemented
Technical acceptance and reportingwill be performed
Implementation
Approach and methodology - Implementation2
The approach needs to cover the design-through-implementation of thenetwork sharing agreement