Broadband Everywhere Assessment of Broadband Access Strategy based on Market and Cost Modeling

Transcription

1 Opinion Paper Broadband Everywhere Assessment of Broadband Access Strategy based on Market and Cost Modeling 2013 / 02 We make ICT strategies work

2 Table of Contents 1 Executive Summary Motivation and Challenges within a Joint Venture Portfolio Detecon Approach and Methodology Project Introduction Phase I Access Strategy for 6 integrated operators Model Design Process Data and Definitions How to deal with Black Box Perception and achieve buy in? Results Phase II SARA for 5 integrated operators The re run which was more than just re fresh-run Improvements Model design Process Input data guidance and reconciliation Results Lessons learned Process set up Alignment steps Data filling Guidelines Outlook Authors The Company Opinion Paper 2 Detecon International GmbH

3 1 Executive Summary Detecon was chosen by a big European integrated network operator to execute two projects to support resource allocation in its Joint Ventures (JV). The main focuses were to develop a consistent generalized methodology and assess the NPV (Net Present Value) of broadband access technologies for six integrated Joint Ventures in Europe. The existing and future local marketing data and network infrastructure were taken into account, while supporting strategic decision and the optimization of CAPEX allocation. The project was planned in two main phases from 2010 to 2012 and successfully performed with a number of comprehensive deliverables. Detecon took advantage of a professional planning tool NetWorks and developed the technical cost models for HSPA+, LTE, xdsl and GPON to calculate CAPEX and OPEX for broadband access network rollout over five years. In addition, an Excel-based commercial model was implemented to transfer the marketing input and evaluate the NPV for different rollout areas, both for the short/middle term planning (year 1-5) and the long term planning (year 6-20). Although centrally (headquarters) driven, the project required international data collection and alignment. The results had to be discussed not just with the customer but also to be explained in front of the participating Joint Ventures at expert level as well as at management level. In our opinion the project delivered value for investment transparency and efficiency within Joint Ventures: Due to the centralized approach the shareholder benefits from a transparent investment within a joint venture portfolio, based on the optimized CAPEX allocation and a subsidiary independent generalized cost model. The deliverables from the project give a clear feedback to support network design, cost comparisons for network elements and the centralized technology strategy. The positive business case can be introduced to all subsidiaries. The Joint Ventures are able to review or establish their own broadband access strategy from marketing, technical and financial point of view. The network modeling is based on real network dimensioning rules provided by the JV operator. The recommendations from the project can support the local technical and marketing development. The technical and marketing input from all Joint Ventures provides an explicit overview of different devices/links/locations and ARPA/ARPU/Market share, etc., which support both, shareholder and subsidiaries to reach the similar price level, i.e. saving costs or increase revenues. We believe that the proposed methodologies can be applied to other network operators as well and support the financial investment and strategic decision of broadband access strategy. Opinion Paper 3 Detecon International GmbH

4 2 Motivation and Challenges within a Joint Venture Portfolio It is not a surprise that a parent company having a number of Joint Ventures in different countries operating fix and mobile networks has some difficulties in assessing the justified needs for investments. Revenues and EBITDA-margins under competitive pressure are strong arguments to meet CAPEX-Sales ratios according to international bench marks for fixed and mobile technologies. Recent examples have demonstrated that especially Chief Financial Officers and Invest Committees lag of detailed information about investment programs and their earning potentials of subsidiaries often apply a hair cut while trying to optimize Cash Flow of the group. Beside this, subsidiaries tend to highlight their specific setup, if it comes to a comparison. Such local constraints must be taken into account, to save investments. The global view of the parent company has to be standardized to support comparability and needs to be customized to handle local constraints. Since significant investments are channeled into broadband network rollout both fixed line and mobile efforts for transparency are needed. Transparency is especially required in market ambitions and correlating to this for the value of technology rollout. Furthermore the shareholder is highly interested in the optimized mix of broadband technologies and the profitability ranking of the different technological options. In those cases of missing relevant information about the invest programs our method Strategic Access Technology Resource Allocation based on a standardized modeling approach helps the parent company to perform educated discussions about invest direction and volume with the subsidiaries when it comes to broadband rollout strategies. Those discussions in general lead to significant investment savings in the right areas - geographical- and technology-wise. To be as realistic as possible in an executable project time a reasonable standardized spatial distribution within a country has to be established in order to distinguish different demand and competitive situations as well as different architecture and cost levels for technologies. As a welcomed side effect, by applying equal spatial distribution the shareholder was able to do a comparison of technology values along different countries. Opinion Paper 4 Detecon International GmbH

5 3 Detecon Approach and Methodology Detecon developed the technical cost models for HSPA+, LTE, xdsl and GPON to calculate CAPEX and OPEX for network rollout over five years, based on a professional planning tool NetWorks. An Excel-based commercial model is developed to transfer the marketing input and evaluate the NPV for different rollout areas, both the short/middle term planning (year 1-5) and the long term planning (year 6-20). Country Municipality Clusters Cluster 1 Metropolitan Cities >750k inhabitants Area Types per Cluster Dense Urban (DU) [%] Cluster 2 Major cities k inhabitants Urban (UR) [%] Cluster 3 Big cities k inhabitants Municipalities Cluster 4 medium cities 20-50k inhabitants Urban (UR) [%] Municipality 1 1 mio Municipality k Municipality 3 90 k Municipality 6 Municipality 7 Municipality 8 68 k 59 k 56 k Cluster 5 small cities 5-20k inhabitants Rural (RU) [%] Municipality 4 85 k Municipality 5 80 k Municipality 9 55 k Cluster 6 villages <5k inhabitants Detecon proposes a methodology consisting of three steps: Figure 1: Classification of Municipality Clusters and Area Types 1. Classification of rollout areas (6 municipality clusters and 4 area types) and data collection of marketing and technical input; 2. Detailed modeling (short/middle term) for year 1-5 including CAPEX and OPEX calculation and NPV analysis for HSPA+, LTE, xdsl, GPON; 3. Explanation to the long term planning (Year 6-20) and advanced financial evaluation with the Terminal Value (TV). Figure 2: Modelling and evaluation process for short/middle-term and long term planning Opinion Paper 2 Detecon International GmbH

6 4 Project Introduction 4.1 Phase I Access Strategy for 6 integrated operators We endorse the customer s opinion that the modeling exercise truly unfolds its value by making it a recurring project building upon earlier inputs, ambitions and results and improving the model and the process by applying lessons learned Model Design The model is designed as an incremental broadband demand driven approach, calculating the CAPEX and OPEX needs on the basis of new broadband demand according to an equal average spatial distribution within one country. The method can be qualified as a leveraged model since existing infrastructure of earlier investments justified or not contribute to the value. Leveraged model Source of net adds Brownfield capacities New capacities Network utilization Home passed vs. sold Mobile network Compare to budget plan Include wind fall from earlier invest Figure 3: Leveraged Method, building on all existing capacities In a rough overview the design for the detailed modeling period can be described in 3 major steps. Step 1: Broadband Demand Demand is derived from market penetration and market share forecasts resulting in Net Adds forecast per broadband cluster (Product Group, PG). The traffic demand is derived from the Net Adds and the corresponding ARPU/ARPA per PG. The bandwidth demand is derived from the Net-Adds and the related busy hour demand per PG. Step 2: Geodata-based network incremental planning via NetWorks Development of new network elements is based on the forecast of the net add development per PG. Result is CAPEX and OPEX development Step 3: Calculation of Discounted Cash Contribution (DCC) and Net Present Value (NPV) As a final step the network planning namely CAPEX and OPEX development within the detailed modelling period was translated into Discounted Cash Contribution (DCC) and NPV per technology and country. Opinion Paper 3 Detecon International GmbH

7 In detail this steps unfold within a spatial distribution which divides a country into 6 Municipality Clusters (MC) ranging from Metropolitan Cities to Villages, each Municipality Cluster is divided into 4 Area Types (AT), ranging from Dense Urban to Rural. The broadband demand was forecasted by the Joint Ventures according to fix line and mobile broadband demand categories (Product Groups, PG) per MC and AT by taking into account fix mobile convergence especially in rural areas through technology mapping, as follows: Basic Fixed BB: Moderate Fixed BB: Heavy Fixed BB: Power Fixed BB: Media Fixed BB: < 6 Mbit/s > 6 Mbit/s < 16 Mbit/s >16 Mbit/s < 50Mbit/s >50 Mbit/s IPTV, requires >16 Mbit/s Basic Mobile BB: Moderate Mobile BB: Heavy Mobile BB: Confined Connectivity: < 7,2 Mbit/s > 7,2 Mbit/s >21,6 Mbit/s All speeds MC and AT specific demand is mapped to the appropriate technology. In the first project HSPA+, DSL (ADSL2+ or VDSL) and FTTH technologies were applied. Input Data Level Technology Mapping: Step 1 Technology Mapping: Step 2 ARPA/ARPU Development per PG SAC/SRC per PG Market Share per MC & PG Total Net Adds Development Net Adds Development per Technology ARPA/ARPU Development per Technology Revenue Development per Technology CAPEX Development per Technology PG=BB Demand Cluster Revenue generating Adds Partially blended KPI Country Technology Mapping Technology Mapping plus blended calculations Figure 4: Product-Technology Mapping Opinion Paper 4 Detecon International GmbH

8 The dimensioning of the networks within a country is modeled by Detecon s proprietary software solution NetWorks. It is a topology based modeling tool and uses as an input Net Add forecasts per Product Group, existing brownfield infrastructure and cost data of network elements (Price book), in case of mobile technology also peak traffic forecast. In general this tool is able to perform network planning and dimensioning at any grade of detail. In this project it calculates network capacities at an aggregated strategic level using brownfield data including types, capacities and geographical coordinates of network elements, like access and control devices. If the Joint Ventures provided addresses instead of geographical coordinates for such devices, geocoding services were used by Detecon to translate into geographical coordinates.. As a blue print for the technology modeling for each technology a so called Reference Architecture was established. Based on this the network planning software calculates the sites which are required on top of the existing infrastructure per technology. This calculation comprises coverage and capacity driven rollout. The financial output of NetWorks is CAPEX and OPEX development as per MC and AT within the detailed modeling period. Bottom-up calculation logic for Mobile and Fixed Networks Traffic, Subs (BH Voice, BH data) Area (DU, UR, SU, RU) Subs (SDU, MDU, SME, LE) Area (DU, UR, SU, RU) Capacity Sites Coverage Sites Capacity Sites Coverage Sites Rollout Area # Sites (Access devices) Traffic+subs for Ctrl devices (BSC/RNC) Core network distributed over pre-defined locations # Sites (Access devices) Traffic+subs for Ctrl devices (CO, ONT) Rollout Area 3G 3G 3G 3G 3G 3G 3G Figure 5: Rollout Calculation in NetWorks Invest and OPEX needs are processed into Discounted Cash contribution (DCC) and NPV. For the NPV calculation the detailed modeling period of 5 years is extended with a 15 years extrapolation period, aiming to establish a fair lifetime comparison for fixed line and mobile technologies, supplemented by the Terminal Value (TV). Opinion Paper 5 Detecon International GmbH

9 Demographic Data & Municip. Cluster Housing Characteristics Product Groups (PG) Market Penetration per MC & PG Input Data Market Share per MC & PG ARPU/ARPA per PG Non-recurring Charges SAC/SRC per PG Commercial Results per Technology and MC Net Adds per technology Cash Contribution (CC) CAPEX NPV Avg. CC/Avg. Sub Cum. CC/Cum CAPEX JV Level Align Input Data & Result Quality stronger to increase Buy-in Additional optional Analyses & Way Forward Data Consistency & Benchmarks Support Budget discussions Return Calculations Return on Capital Employed Widen Scope at JV & Drill downs Benchmarking across JVs: Market, Cost Return on Market Investment Figure 6: Commercial Input Data and financial Results Process Detecon believes that such a headquarters driven exercise collecting data from affiliates can only be successful if the method and process are very transparent. That is why Detecon performed a first road show per country for kick off and explanation of the method and the potential use of the results followed by the data collection and the modeling. A second road show was done to introduce the results. According to feed back we earned a lot of credit with the affiliates by treating the input data of the Joint Ventures by applying the principle challenge but not over rule, work with Detecon assumptions transparently in case of missing input data and Introducing the results prior and with comments from the Joint Ventures to the presentation in the Steering Committee at Headquarters Data and Definitions We believe it is essential to operate with input data demand structured in a way were the Group is familiar with through other projects or reports. This project in particular used input data which are valid for other specific processes and projects or reports such as planning and budgeting. Examples are the clustering of the Product Groups into speed categories and Confined Connectivity or Media Broadband as well as Population, Households, Net Adds, Subscriber Acquisition Cost (SAC), Subscriber Retention Cost (SRC) etc. During the follow up project Detecon was even more sensitive with this and applied data filling guidelines, reference is made to chapter Opinion Paper 6 Detecon International GmbH

10 4.1.4 How to deal with Black Box Perception and achieve buy in? We should not be silent about the fact that despite a lot of efforts made to open up the method and process the perception of a Black Box could not be eliminated totally. Especially the mechanics within the planning software NetWorks by nature cannot be made available to a broad audience. First as a result of a two decade development it is simply too complex, second it belongs to the intellectual property of Detecon. To meet remaining concerns we believe there is one promising route. Be honest with the method, the data and with the communication towards Headquarters and Joint Ventures especially when it comes to strength and weaknesses of the model and the potential utilization of the results. Address what can and should be done with the results and what not. Be aware that any model only can serve as a proxy of the reality. In our case it means that calculated investment cannot substitute detailed rollout planning but rather establish a detailed country technology and investment pattern. Perform NetWorks workshops with the client with detailed demonstrations of model mechanics. Take up improvement proposals and try to implement them in the coming release. In a subsequent phase of the project we established another effective method to increase buy in by performing sensitivity analysis, reference is made to chapter Results The results prepared numeric as well as graphical reflect the necessary network rollout by showing existing and new network elements and NPV per technology and MC and AT on a country level. This provides sufficient granularity for detailed decisions. On cross country level an NPV ranking per technology and MC and AT was established, showing were the highest NPV can be realized with which technology Network Dimensioning/Elements Based on the brownfield data and the demand driven planning NetWorks plots a picture of technology rollout per country by showing existing and newly to establish nodes for all technologies considered. Opinion Paper 7 Detecon International GmbH

11 FTTB/H xdsl HSPA+ Optical network is mainly present in the major cities Other cities have installed limited optical network infrastructure The DSL network is based on ADSL and ADSL2+ technologies Three technologies are present in the wireless network GSM 900/1800 UMTS F-OFDM The complete nation-wide network is based on defined number of sites providing coverage and capacity Figure 7: Existing and new Network Nodes per Technology (Example) Financial KPI Building upon the output of topology based cost modeling the financial results can be edited and processed into a short or mid- term view, supported by the detailed modeling period. Those short term results comprise of the Net Adds Revenues, ARPA/ARPU and DCC or related KPI such as Average CC/Average Net Adds or Cum. CC/CAPEX This short term view in general is equal to the budgeting and planning process of the client and thus helps to understand and argue the planning numbers. A second major result is the Net Present Value (NPV) calculation per technology, MC and AT. The NPV calculation includes the short term period, the extrapolation period and the Terminal Value (TV). Opinion Paper 8 Detecon International GmbH

12 Long-Term Mid-Term Broadband Everywhere Development of financial KP Segments KPI Technology Country Net Adds ARPU/ARPA HSPA+ Municipality Cluster Revenue CAPEX VDSL Area Type OPEX Disc. Cash Contrib. FTTH Country Revenue CAPEX HSPA+ Municipality Cluster Area Type OPEX Disc. Cash Contribution NPV VDSL FTTH Relevant KPIs Figure 8: Development of financial KPI The NPV view allows to determine a so called Demand Case which shows the CAPEX needs if all market demand would be served and the NPV Case displays where only the demand in positive clusters would be served. The combination of both values shows the range, where the actual invest can be expected, since they refer to worst and best case, respectively. TV = meur 3,7; NPV = meur 30,5 Total CAPEX = meur 31,4 Total CAPEX = meur 45, Cash Contribution Revenues CAPEX OPEX Figure 9: Example of a VDSL NPV Case (Cash in/out development over time is shown) Opinion Paper 9 Detecon International GmbH

13 NPV [meur] Cum. NPV [meur] Broadband Everywhere NPV Ranking and cross Country Comparisons The following figures are demonstrating how the rollout of certain technologies is building value up along MC and AT and how value destroying roll out reduces the contribution within a country II UR II SU I UR I DU I SU III UR III SU II RU IV UR IV SU II DU I RU III DU IV RU III RU VI RU VI SU V SU V RU V UR HSPA+ VDSL FTTB/H II UR II SU I UR I DU I SU III UR III SU II RU IV UR IV SU II DU I RU III DU IV RU III RU VI RU VI SU V SU V RU V UR Figure 10: NPV-Ranking within a country In order to pick value items for the customer we would like to highlight a few derived findings and recommendations: Invest recommendations per country in general reflected the perception of the Joint Ventures and the parent company. Price erosion occurs across all countries. Most of the demand falls into product categories where DSL and 3G capabilities are sufficient, please also see results of re fresh run. Limited price premiums for high end products achievable, i.e. FTTH and Mobile broadband In general a FTTH sell ratio of 30 % (from homes passed) is not sufficient to achieve pay back. For FTTH cost levels need to improve to those of disruptive players and/or network utilization need to increase significantly. As a general pattern in some countries more true than in others an investment shift from fibre towards mobile was recommended. One invested in mobile broadband brings back up to 4 within 5 years while fibre usually earns below 1. Pure (extensive) coverage driven 4G rollout is questioned. Opinion Paper 10 Detecon International GmbH

14 NPV [meur] Broadband Everywhere In addition to a NPV ranking within a country a cross country ranking can be established easily NPV cluster results are subject to: Size of cluster (covered pop./households) Market assumptions Readiness of existing network infrastructure Value Contribution per Technology ADSL2+ 12,1% VDSL 17,3% 48,6% HSPA ,0% FTTB/H I DU I DU I UR I UR I UR V SU I SU II SU I DU II UR II UR II RU I RU V RU III SU IV SU II UR II UR II SU III UR Source: Incremental investment view including Terminal Value Figure 11: Cross Country NPV Ranking (Country names are eliminated) Cross country technology/npv-ranking was endorsing specific competitive situations between countries, e.g. kind of already lost markets i.e. for fiber. All in all the results were used by the client for checking and correcting general investment patterns. Due to the character of the model at this stage a one to one comparison with broadband access related CAPEX was done but not utilized for a straight reduction of the CAPEX envelope. 4.2 Phase II SARA for 5 integrated operators The re run which was more than just re fresh-run The opinion that the modeling project unfolds its true value in a recurring exercise could be proved. Comparing new data with earlier inputs and ambitions and comparing findings and recommendations with new results led to interesting findings and even better guidance for the planning and budgeting process. However, lessons learned from the first project were not just to perform input data comparison but also include improvements of the model partially driven by feedback from Joint Ventures, partially requested by parent company. The nature of the model as an incremental broad band demand driven approach, leveraging brownfield infrastructure however, was not changed. Opinion Paper 11 Detecon International GmbH

15 4.2.2 Improvements The detailed modeling period remained to be 5 years - now two years ahead. Also the extrapolation period and the structure of Product Groups were not changed. However, some improvements reflecting feedback and requests were implemented. The most important ones are listed below. Considering fix mobile substitution in the technology mapping according to judgement of the Joint Ventures. Inclusion of wholesale as it contributes to the efficient utilization of investments as time-variant portion of retail-subscriber and revenue at MC-level. Support time-variant utilization ratios homes-passed to homes-connected for the detailed modelling period. Time-variant Wifi off-load at MC-level of mobile traffic Taking into account fix-network Next Generation Access Regulation by additional capacity/investment requirements. Inclusion of mobile spectrum one time and annual fee in addition. TV channel license fee for IPTV services. CATV ED3 proxy modelling ED3 Output and reports were improved also. In order to meet the increased demand for output additional reports were created and all results were handed over as Excel files as well. Examples Coverage numbers New and co-location site number 3G and LTE respectively Existing and new Street cabinets Homes passed, homes connected FTTH respectively (FTTC is applicable for VDSL) Traffic volume (TB per year or busy hour network traffic GB/s or busy hour traffic per customer 3G and LTE respectively), The major portion of further development however, lies in the adjusted design of the model, i.e. NetWorks Model design Taken into account technology evolution and the new requirements the model was developed further. Opinion Paper 12 Detecon International GmbH

16 Major steps were taken with respect to technologies considered and reference architecture developed. GPON/FTTH 3 DSL options ADSL2+, DSLAM in Central Office (CO) VDSL, SDLAM in Central Office VDSL, DSLAM in Street Cabinet (SC), FTTC-solution HSPA+ LTE For each applied technology a Reference Architecture was developed harmonized with Group functions and distributed to Joint Ventures along with definitions and Principles for Input Data as well as Guidelines for Mobile KPI to achieve a comparable underlying network design and cost structures. Figure 12: Example for Reference Architecture: GPON/FTTH As mentioned above especially for a recurring exercise it is important to open up the model further for reasons of acceptance and establishing a next step of country customization, however, by keeping the frame in order not to lose comparability. As an important step towards improved transparency and more precise modeling results a greater parameterization was established within the input data structure for NetWorks. Below we show some important examples parameters which could be determined by the Joint Ventures (Excerpt from Guidelines for mobile KPI ). Opinion Paper 13 Detecon International GmbH

17 Site Area and Scaling Factor The site area and the site area scaling factors can be used to calculate a maximum area per site so that the minimum number of sites needed to cover a certain area can be determined. By applying specific factors for HSPA+ and LTE frequencies in most of the case the combined value of the site area and site area scaling factor is representative of the network being modelled. Since the scaling factors for area are defined per municipality cluster and area type, a detailed modelling is possible. The combination of site area and scaling factor is used to model frequency plans like shown in the following table. Frequency plans strongly depend on available frequencies and obligations. Dense urban Urban Suburban Rural Cluster 1: Metropolitan Cities 2600 MHz 2600 MHz 2600 MHz 1800 MHz Cluster 2: Major Cities 2600 MHz 2600 MHz 2600 MHz 1800 MHz Cluster 3: Big Cities 2600 MHz 2600 MHz 1800 MHz 1800 MHz Cluster 4: Medium Cities 1800 MHz 1800 MHz 800 MHz 800 MHz Cluster 5: Small Cities 1800 MHz 800 MHz 800 MHz 5 Mhz 800 MHz 5 Mhz Cluster 6: Villages 800 MHz 800 MHz 800 MHz 5 Mhz 800 MHz 5 Mhz Table 1: Frequencies and bands used for different municipality clusters and environments Site Capacity and Scaling Factor The site capacity parameters are used for calculation the minimum number of sites needed to support a certain traffic level in a particular area. It changes similar to the site area over municipality cluster and area type and is mainly reflected by the bandwidth value (5 or 10 MHz) given in the previous table. Maximum Utilization Factor The NetWorks tool calculates the number of sites needed to support a certain traffic level in a given area by dividing the total area traffic by the product of the utilization and carrier capacity, considering also the number of carriers and number of sectors per site. As an example a 100% utilized cell capacity cannot be filled in all sites for a number of reasons. At 100% utilization the user experience in a given sector is very poor. Usually, it is recommended an individual carrier should not typically be utilized at more than 70% during the busy hour. The traffic distribution over the sectors of a given site is uneven. Typically in a three sectored site there might be one sector that carries 50% of the site traffic, so that when that sector is fully loaded, that average site capacity utilization is 67%. Opinion Paper 14 Detecon International GmbH

18 The traffic distribution over the sites in a given area is uneven. Some site maybe approaching their capacity limit, while other sites might have reached their capacity limit recently, and cell splits or carrier expansions might have been deployed. To account for this variability from site to site, a further utilization factor of 75% can be considered. Individual sectors have different busy hours to the overall network busy hour so that the summed cell BH traffic exceeds the core network BH traffic. The Maximum Utilization Factor should consider the combination of the above effects. As a result an utilization value exceeding 50% was not recommended by experts. However, it is advisable to give these numbers only as a guidance and leave it to the Joint Ventures to fill it with their own planning assumptions. During the modeling we found utilization assumptions ranging from 25 % to 50%. On the NPV judgment side we believe it was important to take into account that the results of a model always will be a proxy of the reality. Therefore we calculated the results for an Optimized Scenario instead of a sharp separation of NPV=0 per area type, by developing a sound ratio of a negative NPV to the investment volume. A NPV to CAPEX ratio (NPV divided by total cumulative CAPEX) of above -10 percentage was applied as hurdle for the NPV case Process In such a recurring project it is important to always aim for improvement of the data collection and harmonization process as well. This time Detecon conducted one ramp up and alignment visit per Joint Venture prior to commercial and technical input data fill. Fitting to the central model but allowing more customization the tasks listed below were performed: Communication of central modelling parameter to all participants, Find out country specific specifications and Develop and discuss and data filling guidelines Input data guidance and reconciliation Next to the definitions in the input sheets Principles for Input Data and Guidelines for mobile KPI were designed to give guidance for the input data. Typical examples from the input principles are Source of commercial input data, i.e. Forecast 2012 Comparison with Planning data 2011 and 2012 Handling of CPE expenses Utilization definitions for fixed network architecture More choice usually opens up for more interpretations and even misunderstandings which only partially could be offset by definitions and guidelines provided. Therefore the input data reconciliation, including reconciliation with relevant group functions resulted in numerous teleconferences and required significant more time than expected. Opinion Paper 15 Detecon International GmbH

19 4.2.6 Results Due to the fact that the technology portfolio was more up to date, 3 DSL options were offered, LTE technology was in scope and more modeling parameters were offered the results improved compared to the first project significantly. The results were accepted by the Steering Committee and the next phase was envisaged. In a subsequent work Detecon prepared the comparison of technical and marketing input parameters. Price information for network elements and value drivers such as ARPU/ARPA puts the shareholder into the position to compare the effectiveness and the value of the operations. The JVs are able to compare themselves with other operations. In particular the following results were acknowledged by the Steering Committee: NPV improvement throughout Re-visited cost levels and revenue forecasts in some JVs Re-modelling with updated inputs based on the results created transparent way of iteration Risk and opportunity review The model showed exposure due to volatility, regulatory environment (including license fee, unbundling) and operational risks The model showed opportunities like Fixed Mobile Substitution (FMS), cost benchmark, project profitability ranking including mobile spectrum costs and wholesale, NPV improvement and advantages of vectoring in a strong copper environment CAPEX driven by business demand Better aligned projects to maximize broadband customer reach and profitability Improved cost levels and incremental revenue enabled more NPV positive CAPEX Financials Similar to the first project the financial results can be edited and processed into a short or mid- term view by technology applied, supported by the detailed modeling period. Those short term results comprise of the Net Adds Revenues, ARPA/ARPU and DCC or related KPI such as Average Cash Contribution (CC)/Average Net Adds or Cum. CC/CAPEX This view in general is equal to the budgeting and planning process of the client and thus helps to understand and argue the planning numbers. The long term view - the NPV calculation was done per technology, MC and AT. As mentioned above the deciding NPVtrigger is not zero anymore but following a ratio of a negative NPV to related revenue. As examples we refer to results of mobile technology. Opinion Paper 16 Detecon International GmbH

20 TV Broadband Everywhere By applying investment for spectrum were able to show both characteristics, HSPA+ or LTE CAPEX and NPV development with and without spectrum cost. LTE meur All Municipality Clusters NPV Case Optimized 2,000 1,800 Cumulated Cash Contribution Revenues CAPEX OPEX ,600 1,400 1,200 1, Including ~77m license CAPEX Positive cum. cash contribution NPV CAPEX ( 12-31) Findings Low CAPEX per net-add driven by : Reuse of existing sites Reasonable backhaul cost due to microwave connections Mixed tower and rooftop solution for rural areas Target Penetration for confined connectivity is ~85% Low SAC-/SRC for confined connectivity ~5% Figure 14: LTE Development including License CAPEX LTE meur All Municipality Clusters NPV Case Optimized (excl. License costs) 2,400 2,200 2,000 Cumulated Cash Contribution Revenues CAPEX OPEX TV ,800 1,600 1,400 1,200 NPV 1, Positive cum. cash contribution CAPEX ( 12-31) Figure 15: LTE Development excluding License CAPEX Opinion Paper 17 Detecon International GmbH

21 The old truth applies here as well. CAPEX not spent for spectrum can be allocated for the coverage of areas Sensitivity Analysis In addition to country results Detecon conducted various sensitivity analysis. In the mobile technology for example the forecast of the split of HSPA+ vs. LTE-handsets was sensitive for the NPV-results of both technologies ,634 41, % LTE ,219 4,019 25% LTE 63,336 2,884 50% LTE Sum of positive NPV LTE Sum of porsitve NPV HSPA Figure 16: Sum of positive NPVs in TSD for HSPA+ and LTE for different LTE handset portion. Findings An aggressive shifting of confined connectivity subscribers from HSPA to LTE causes a positive effect on LTE NPV. The 50% case shows the highest value creation, however it ignores cannibalization of own existing (HSPA) network infrastructure investments Supported by 2 studies ( Strategic Analytics and Infotechnics ) Detecon applied a handset technology split for confined connectivity based on the expected speed for the migration speed of mobile handsets 80% HSPA+ and 20% LTE in Another sensitivity analysis demonstrates how dependent expected CAPEX spend and NPV values are in the mobile business from the applied cell utilization. Scenario 1 30% and 25 % Conservative utilization Capex Opex Cluster 1: Cluster 2: Cluster 3: Cluster 4: Cluster 5: Cluster 6: Total: Scenario 2 Aggressive 50% max. utilization Capex Opex Cluster 1: Cluster 2: Cluster 3: Cluster 4: Cluster 5: Cluster 6: Total: Table 2: CAPEX Sensitivity for HSPA+ Cell Utilization Conservative mobile KPI s (max. utilization and low capacity scaling for UMTS900) are main cost drivers. Applying a more aggressive KPI (50% max. utilization) reduces significantly the cost. Therefore respective guidance from Group technology was applied in the Guidelines for Mobile KPI. Opinion Paper 18 Detecon International GmbH

22 5 Lessons learned 5.1 Process set up This project was initiated by financial department, but requires input from marketing and technology. A clear definition of process and responsibilities will improve the project performance. An earlier alignment with central marketing and technology functions will speed up preparation of the data filling guidelines. 5.2 Alignment steps It was proven that the opening of the modeling parameter was beneficial, however, at the same time it became clear that this phase is essential for the success of the project. Therefore more time must be considered for data collection and alignment. An effective cooperation and alignment with marketing and technology departments supports to save the data collection time and increase the input quality, while avoiding additional discussions or reruns after the result presentation. 5.3 Data filling Guidelines To avoid the misunderstanding with the input data template, it is proven that a guideline for data filling is very helpful. It is even better if the head-quarter (shareholder) prepares a centralized guideline especially for technical parameters by giving space for parameters reflecting the local situation. Opinion Paper 19 Detecon International GmbH

23 6 Outlook Since SARA is established as a recurring tool for investments pattern, CAPEX allocation and efficiency in JVs operations related to broadband roll out it is important to further develop the model and improve the data mining and modeling process mainly along the lessons learned so far without increasing complexity too much. In our opinion the already discussed stronger involvement of central and technology functions of the HQ will further increase the benefits through better guidelines for critical parameters. With respect to the clustering of the countries into 6 MCs an addition of additional 3 Clusters for Metropolitan, Major and Big Cities with intense CATV competition need to be checked in order to respond to specific competitive challenges on the fixed line side. At the marketing side in particular an improvement of the market modeling and a stronger coupling with SARA would decrease the effort at the JV side. At the technology side we consider it as an ideal solution if central technology group would take ownership for the technical data filling guidelines. Model design Based on project feed backs some further model adjustments seem to be justified. Next to some minor adjustments and prior to the next run a few options need to be evaluated such as. For polygon instead of radial planning, especially for fixed line a switch to geo based clutter seems to be necessary to reflect density specifics of cities. If input data can be made available for the respective countries, Detecon considers the use of the ArcGIS tool to improve the regionalization. Enter into a multi technology modeling per area; consider a second technology for non profitable first technology choices. Improve CATV modeling while shifting it from a proxy calculation towards a NetWorks modeling. Integrated aggregation network planning, if the benefit is tangible. Check the possibility of devise driven input on the mobile side such as new add numbers for Confined Connectivity/Smart phone penetration. Opinion Paper 20 Detecon International GmbH

24 7 Authors Horst Hermann, now independent telecommunications expert, used to work as Principal with Detecon in Cologne. His background ranges from Telecommunications Strategies, Regulatory, Finance, M&A, Post Merger Integration and Corporate Governance. Within Detecon his main focus was acquisition and broadband access modeling. Horst Hermann continues to stay in close contact with Detecon. He can be reached or Dr. Rong Zhao joined in Detecon International GmbH in Germany in 2008, with focus on fixed access, transport networks and cost modeling. His expertise covers FTTx strategic planning and optimization, migration to FTTH, fixed and mobile cost modeling, and network rollout. He is involved in a number of projects in Europe, MENA and Asia. Since 2012, he has been the Vice Chair of Deployment & Operations Committee by FTTH Council Europe. He is also the member of VDE/ITG Expert Group Access and Home Networks in Germany. He can be reached or Rong.Zhao@detecon.com Dr. Mathias Schweigel works as a managing consultant in the group Network Optimization and Tools and joined Detecon after finishing his PhD in telecommunications in In addition to the specification of functions and the training of users in Detecon s network planning and optimization software NetWorks, he supported many Detecon projects that required the application of planning software for operational as well as strategic questions. He can be reached at: or Mathias.Schweigel@detecon.com. Opinion Paper 21 Detecon International GmbH

25 8 The Company We make ICT strategies work Detecon is a consulting company which unites classic management consulting with a high level of technology expertise. Our company's history is proof of this: Detecon International is the product of the merger of the management and IT consulting company Diebold, founded in 1954, and the telecommunications consultancy Detecon, founded in Our services focus on consulting and implementation solutions which are derived from the use of information and communications technology (ICT). All around the globe, clients from virtually all industries profit from our holistic know-how in questions of strategy and organizational design and in the use of state-of-the-art technologies. Detecon s know-how bundles the knowledge from the successful conclusion of management and ICT projects in more than 160 countries. We are represented globally by subsidiaries, affiliates, and project offices. Detecon is a subsidiary of T-Systems International, the business customer brand of Deutsche Telekom. In our capacity as consultants, we are able to benefit from the infrastructure of a global player spanning our planet. Know-how and hands-on expertise The rapid development of information and telecommunications technologies has an increasingly significant influence on the strategies of companies as well as on the processes within an organization. The subsequent complex adaptations affect business models and corporate structures, not only technological applications. Our services for ICT management encompass classic strategy and organization consulting as well as the planning and implementation of highly complex, technological ICT architectures and applications. We are independent of manufacturers and obligated solely to our client's success. Detecon International GmbH Sternengasse Cologne Phone: info@detecon.com Internet: Opinion Paper 22 Detecon International GmbH