Thriving in Harmony
Making the economic case for
frequency harmonisation in Europe
Dr. Klaus-D. Kohrt
Vice-Chairman, UMTS Forum
ITU/FUB-Workshop on Spectrum Management
22. January 2007, Geneva / Switzerland
0
The spectrum debate is considering whether the concerns levelled
at harmonisation can be addressed by a more liberalised approach
Overview of Spectrum Debate
Benefits of Harmonisation
Concerns over Harmonisation
Minimises harmful interference and
promotes spectrum efficiency and so
increases spectrum use and competition
Allows global circulation (mobility of
terminals) and roaming
Creates large equipment markets
Promotes price competition between
suppliers
Ensures radio service penetration and
interoperability between terminals and
other networks – the “network effect”
Promotes independent competition
between market players at every layer
of the architecture (network, end-user
services and application suppliers)
Allows more dynamic growth trajectory
in the introduction of new end-user
services
Focuses R&D investment due to stable
environment
Restrictions on use (or trade) of
underused spectrum for alternative uses
Restrictions on the ability to re-farm
spectrum
Insufficient spectrum allocated to some
end-user services
Delays caused by time to agree
harmonisation measures
Restrictions on the use of equipment
developed elsewhere, which may be
cheaper or have greater functionality
Less innovation and lock-in to a
potentially inferior mandated standard
Delays in the introduction of new
services and equipment due to the time
to agree standards and agree
harmonisation measures
Less flexibility in support of spectrum
access for new market entrants
Goals
Goals of
of Study
Study
Provide
Provide the
the end-to-end
end-to-end
view
view on
on this
this complex
complex
debate
debate
Assist
Assist the
the regulatory
regulatory
process
with
process with aa
differing
differing perspective
perspective
to
that
of
to that of liberalisation
liberalisation
as
a
key
driver
as a key driver for
for
continued
European
continued European
market
market success
success and
and
prosperity
prosperity
Source: Indepen and Aegis study, and Booz Allen Hamilton analysis
1
The analysis compares two alternative spectrum proposition
scenarios
Alternative Spectrum Use Proposition Scenarios – Definitions
Pro-active regulatory approach to manage access
to spectrum bands with defined requirements
Spectrum
Spectrum
Harmonisation
Harmonisation
Dedicated bands linked to defined radio services
nationally, regionally or globally
Designated group of technology standards
required for the use of a particular band
(also nationally, regionally or globally)
Re-active, market-driven approach to spectrum management
Spectrum
Spectrum
Liberalisation
Liberalisation
Basecase for analysis
Spectrum is liberally licensed to users
with little or no pre-conditions
Technology agnostic: total freedom on technology
“generalised technology neutrality” (nationally or regionally)
Spectrum
Liberalisation Case
(including a sensitivity
analysis of penetration
of new end-user
services)
2
The spectrum use proposition analysis contains four components
Scope
While the study does not attempt
to identify bands specifically,
appropriate bands are up to 5 GHz
The study focuses on wide-area
cellular communications scenarios
(e.g. GSM / UMTS)
Time horizon is 15 years
1
Scenarios
Scenarios
Harmonised
Harmonised
Spectrum
Spectrum
Liberalised
Liberalised
Liberalised
Liberalised
Liberalised
Liberalised
Spectrum
Spectrum
Spectrum
Spectrum
Spectrum
Spectrum
3
Analysis
Analysis
Quantitative
Economic
Economic
Model
Model
Assessment
Assessment
2
Qualitative
Industry
Industry
Ecosystem
Ecosystem
Consumer
Consumer
4
Evolution
Evolution
Scenario
Scenario
Regulatory Framework
Conclusions and
Recommendations
Market
Baseline Analysis & Benchmarks
3
The qualitative assessment of the eco-system
provides the input to the scenario analysis
Consumer
Overview of Quantitative Scenarios Analysed
Network
Operators
Industry forecast figures provide the basecase
Licences
Harmonised
Base Case
Interconnect
Terminals
Liberalised Case
Only transport of traffic is considered
in the revenue forecasts (excludes
service / application related revenues)
Liberalised cost impact is phased in over time
No change to market environment
Infrastructure
IPR
4
The analysis considers the key constituents
of the industry value chain
Overview of Industry Value Chain
Determines the overall value of the eco-system through usage, price-paid and penetration
Consumer
Network
Operators
Consumer
Analysis
Value captured by operators to provide services to end-users, either directly, or via
indirect channels (e.g. MVNOs and service providers)
Only the network environment is considered, as the focus of the study is the radio layer
Value of spectrum captured by governments
Licences
Licences are considered to apply in both scenarios
Value associated with transit of traffic and termination of traffic on non-mobile networks
Interconnect
Value of end-user terminals, captured by terminal vendors
Industry
Ecosystem
Analysis
Terminals
Infrastructure
IPR
Value of network infrastructure, captured by network infrastructure vendors
Mechanism to recuperate R&D investments – either captured via IPR royalties
or infrastructure / terminal sales for traditional manufacturers
5
The quantitative scenario analysis employs the
Extended Intelligent Simulation Methodology
1
Harmonised
Scenario
(Baseline)
5
2
Usage
%
increase
in Price
4
Usage
Price
Develop baseline
baseline for
for supply
supply and
and demand
demand
1 Develop
evolution
in
a
harmonised
environment
evolution in a harmonised environment
Demand Curve
Industry Traffic
(MB)
# of Subscribers
Demand
Demand
Implications
Implications
Develop Liberalised Scenario
y%
Traffic
Price
% reduction
in Traffic
6
Usage
% reduction in
Subscribers
7
# of Subscribers
x% Price
Identify impact
impact of
of increased
increased pricing
pricing on
on
5 Identify
industry
industry consumption
consumption using
using demand
demand curve
curve
%
increase
in Cost
Operator
Margin
3
8
10
Operator
Total Usage
Supply
Supply
License
License
Interconnect
Interconnect
Terminals
Terminals
Equipment
Equipment
IPR
IPR
Assumptions
-Eco System
Analysis-
Build increase
increase in
in industry
industry costs
costs due
due to
to
3 Build
lack
of
scale
and
interference
lack of scale and interference
Develop liberalised
liberalised pricing
pricing based
based on
on
4 Develop
increased
increased costs
costs and
and margin
margin
Price / MB
Margin
Establish
Establish usage
usage level
level in
in liberalised
liberalised case
case
2 based
based on
on innovation
innovation delay
delay
# of Subscribers
9
Validate industry
industry usage
usage level
level in
in given
given
6 Validate
year,
based
on
the
percentage
year, based on the percentage change
change
in
in usage
usage on
on today’s
today’s demand
demand curve
curve
Model reduction
reduction in
in subscribers
subscribers due
due to
to
7 Model
reduced
reduced industry
industry usage
usage
8 Reflect
Reflect change
change in
in industry
industry usage
usage back
back
onto
the
cost
structure
onto the cost structure
Reflect change
change in
in subscribers
subscribers back
back onto
onto
9 Reflect
cost
cost structure
structure
Solve for Industry Equilibrium
Iterate for
for industry
industry equilibrium,
equilibrium, where
where
10 Iterate
industry
industry costs
costs support
support industry
industry usage
usage
and
and prices
prices
6
The consumer impact of liberalisation is modelled
using a mobile industry demand curve for Western Europe
Mobile Industry Demand Curve
Overview
Overview
Comments
Comments
A
A range
range of
of countries
countries across
across the
the European-15
European-15
countries
have
been
used
to
establish
countries have been used to establish aa
demand
demand curve
curve that
that is
is used
used to
to model
model the
the
effects
of
changing
price
on
usage
effects of changing price on usage
Demand Curve
-Total EU MB usage per month vs. Revenue per MB-
30
The
The gradient
gradient of
of the
the demand
demand curve
curve is
is assumed
assumed
to
to remain
remain constant
constant throughout
throughout the
the analysis
analysis
period
period
Total EU MB
y = 10.546x -0.8049
R 2 = 0.7259
ItIt is
is anticipated
anticipated that
that the
the demand
demand curve
curve will
will
move
move upward
upward over
over time
time –– i.e.
i.e. as
as the
the market
market
develops
develops and
and new
new end-user
end-user services
services are
are
brought
to
market
the
usage
level
for
any
brought to market the usage level for any
given
given price
price point
point will
will increase
increase over
over time
time
20
Finland
Ireland
10
Belgium
France
Denmark
The
The modelling
modelling approach
approach will
will compensate
compensate for
for
this
effect
by
using
the
percentage
change
this effect by using the percentage change in
in
usage
usage at
at any
any price
price point
point to
to drive
drive the
the model
model
Netherlands
Austria
Italy
UK
Greece
Switzerland
Portugal
Sweden
Germany
0
0
1
2
3
4
Revenue Per MB (€)
(1) Note: IDC, 2006, Booz Allen Hamilton analysis
7
The liberalised case – detailed results
compared to the harmonised base case
Summary
Breakdown
EU-15 – Liberalised Case Network Cost
– Compared to Harmonised Basecase –
120%
117%
EU-15 – Liberalised Case Subscribers
– Compared to Harmonised Basecase –
406 Mio
100%
426 Mio
444 Mio
463 Mio
EU-15 –Liberalised Case Monthly Usage / Sub
– Compared to Harmonised Basecase –
20 MB
100%
182 MB
1,657MB
15,086 MB
95%
97%
110%
100%
2006
90%
2011
2016
2021
EU-15 – Liberalised Case Consumer Revenue1)
– Compared to Harmonised Basecase –
110%
90%
80%
2006
2011
2016
2021
4
100%
3
2011
2016
3.3
2.2 2.3
110%
110%
1.5 1.6
2
2021
EU-15 – Liberalised Case Price / MByte
– Compared to Harmonised Basecase –
120%
EU-15 – Monthly ARPU
– Normalized to 2006 Prices –
3.1
102%
80%
2006
1.0 1.0
1
90%
2006
0
2011
(1) Note: Inflation is included
2016
2021
2006
2011
Harmonised Case
2016
2021
100%
2006
2011
2016
2021
Liberalised Case
8
The economic scenario analysis indicates a tangible upside for the
harmonised case, based on consumers and overall industry benefits
Impact of Liberalised Scenarios Compared to Harmonised Baseline
Industry / Consumer Ecosystem
Indicators
Consumer Indices
Liberalised Case
(Variation in
absolute terms
compared to
Harmonised Case)
Liberalised Case
(Variation in growth
from 2006 compared
to Harmonised Case)
(1)
(2)
(3)
(4)
(5)
Note:
Note:
Note:
Note:
Note:
Usage /
Sub1)
ARPU1)
-3%
7%
Usage /
Sub1)
ARPU1)
-3%
10%
Penetration1)
-5%
Penetration1)
-37%
Consumer
Surplus2)
-€244
bn
(-5%)3)
Consumer
Surplus2)
-€244
bn
(-5%)3)
Consumer
Revenue1)
2%
Consumer
Revenue1)
3%
Industry
Usage4)
Industry
Cost5)
-7%
17%
Industry
Usage4)
Industry
Cost5)
-7%
23%
Percentage change compared to harmonised basecase by 2021
Consumer Surplus shows the cumulative change in consumer surplus compared to basecase over 15 years (2006 -2021)
Consumer Surplus as percentage of scenario consumer revenue over 15 years (2006 -2021)
Industry usage shows the percentage change in mobile industry traffic level, in the EU-15 by 2021, compared to the harmonised basecase
Industry cost shows the percentage change in mobile industry cost level, in the EU-15 by 2021, compared to the harmonised basecase
9
Overall, the quantitative and qualitative assessments favours the
continuation of the harmonised approach to spectrum management
Quantitative
Quantitative Results
Results
Harmonisation
Harmonisation provides
provides aa greater
greater benefit
benefit to
to
consumers
consumers than
than liberalisation
liberalisation
–– 3%
3% greater
greater usage
usage per
per subscriber
subscriber
–– 5%
5% higher
higher in
in end-user
end-user service
service penetration
penetration
–– €244bn
€244bn greater
greater consumer
consumer surplus
surplus over
over
the
15
year
analysis
period
the 15 year analysis period
Harmonisation
Harmonisation has
has aa superior
superior cost
cost position:
position:
the
cost
structure
of
the
industry
eco-system
the cost structure of the industry eco-system
is
is 17%
17% lower
lower than
than the
the liberalised
liberalised case
case
Considering
Considering the
the impact
impact of
of aa delay
delay in
in the
the
introduction
introduction of
of new
new end-user
end-user services
services on
on the
the
liberalised
liberalised case,
case, results
results in
in further
further upside
upside in
in
favour
favour of
of harmonisation,
harmonisation, which
which includes:
includes: 8%
8%
greater
greater usage
usage per
per subscriber
subscriber and
and 4%
4% less
less
mobile
mobile industry
industry revenue
revenue compared
compared to
to the
the
liberalised
liberalised scenario
scenario
Qualitative
Qualitative Results
Results
Consumer
Consumer Benefits
Benefits
More
More rapid
rapid introduction
introduction of
of new
new innovations
innovations
Increased
Increased service
service continuity
continuity and
and cross-boarder
cross-boarder
roaming
roaming
Greater
Greater penetration
penetration of
of new
new end-user
end-user services
services
Industry
Industry Eco-system
Eco-system Benefits
Benefits
Increased
Increased financial
financial stability
stability encouraging
encouraging
investment
investment
Increased
Increased industry
industry scale
scale –– enabling
enabling lower
lower
industry
industry cost
cost structure
structure
Reduced
Reduced interference
interference management
management costs
costs
Layered
Layered architecture
architecture stimulating
stimulating new
new entrants
entrants
and
and competitive
competitive dynamics
dynamics
10
„neither political objectives
nor economic theory
can change the laws of physics“
ITU/FUB-Workshop on Spectrum Management
22. January 2007, Geneva / Switzerland
11
For more information…
(and study download)
www.umts-forum.org
ITU/FUB-Workshop on Spectrum Management
22. January 2007, Geneva / Switzerland
12