Thursday, 15 September 2011

Some thoughts on White Space spectrum

·         The move for Wi-Fi to leverage White Space frequencies is a logical one as the frequencies currently occupied by Wi-Fi become increasingly congested.

·         Actual development of Wi-Fi that can leverage White Space frequencies appear to be several years away. Also it will be interesting to see whether such a “Super Wi-Fi” could leverage both licensed and unlicensed frequencies through a geolocation database (in the way that Ofcom and the FCC are proposing).

·         We are quite excited by Machine to Machine applications for White Space radio technologies e.g. start-ups like Neul. Such applications require very small amounts of radio frequencies which White Space could easily support.

·         It will be interesting to see if there is enough White Space spectrum available in cities for more spectrum hungry applications such as Wi-Fi or whether it will become confined to the margins for applications like Machine to Machine and rural broadband.

Tuesday, 31 May 2011

THE UPCOMING UK 4G AUCTION


In this blog we look at the upcoming UK 4G auction timing, likely bidders and the important issues of auction structure and spectrum valuation.

The 4G bands and auction timing  
The two 4G bands planned to be auctioned by Ofcom next year are:
·     2.6GHz: This band which spans 2500-2690MHz was identified for 3G “expansion” when the original 3G spectrum was allocated at 1.9GHz and 2.1GHz at the ITU’s World Radio Conference in 1992. Moreover, it was subsequently confirmed as a mobile data band in 2000 at the later ITU World Radio Conference in 2000.
·     800MHz: The band which spans 790-862MHz in Europe[1] is being released as a consequence of the switch from analogue to digital TV, the so called digital dividend spectrum.
4G LTE[2] is widely accepted as the evolutionary next step for 3G based networks (including HSPA and HSPA+) although LTE requires new bands such as the 2.6GHz and the 800MHz. Technology manufacturers are focusing their resources on developing equipment at these bands. Ofcom first started to consider the release of the 2.6GHz bands as a standalone auction as early as 2007. However, this process became mired in legal challenges prior to the recent resolution of the 2G liberalisation matter. Ofcom announced[3] in January 2011 that 3G services will be now be allowed over MNO’s 2G[4] spectrum holdings (and to eventually make these bands fully technology neutral allowing 4G services using LTE) paving the way for a revised timeline for the release of the 2.6GHz and combining it with the 800MHz spectrum freed up by the digital dividend. As we see in Figure 1, the UK 4G spectrum auction has lagged similar auctions in other EU countries.  

Date
Country
Bands
Nov 2007
Norway
2.6GHz
May 2008
Sweden
2.6GHz
Nov 2009
Finland
2.6GHz
Apr 2010
Netherlands
2.6GHz
May 2010
Germany
800MHz/2.1GHz/2.6GHz
May 2010
Denmark
2.6GHz
Sept 2010
Austria
2.6GHz
Mar 2011
Sweden
800MHz
1H 2012
UK[5]
800MHz/2.6GHz
1H 2012
France[6]
800MHz/2.6GHz


Figure 1Timeline of recent and upcoming 4G LTE auctions in Europe
Ofcom has put forward a suggested auction design in its consultation document[7]  (March 2011) which will lead to at least 4 national spectrum owners each with at least the following blocks of spectrum:
·         2x5MHz of sub 1GHz spectrum and 2x20MHz of 2.6GHz Or
·         2x5MHz of sub 1GHz spectrum and 2x15MHz of 1800MHz Or
·         2x10MHz of sub 1GHz spectrum and 2x15MHz of 2.6GHz Or
·         2x10MHz of sub 1GHz spectrum and  2x10MHz of 1800MHz Or
·         2x15MHz of sub 1GHz
Given the current spectrum holdings of the existing MNOs (as detailed in Figure 2), Ofcom is also suggesting that spectrum caps are put in place to deter spectrum hoarding. These spectrum caps are:
·         A maximum holding of 2x27.5MHz of sub 1GHz
·         A total maximum holding of 2x105MHz
However, the sub 1GHz spectrum cap will only likely limit O2 and Vodafone as only they already own qualifying sub 1GHz spectrum. The overall spectrum cap is not material i.e. it is significantly large at 2x105MHz compared to existing and potential holdings and is therefore unlikely to affect the auction bidding process.
In Figure 3 we present a view on the likely bidders in the auction. Some of the key takeaways from an initial assessment of the auctions design and the likely bidders are as follows:
·      MNOs are incentivised to underbid because spectrum fees payable on their existing 900/1800MHz will be based on the prices paid at the 4G auction.
·      Network rollout requires substantial infrastructure hence likely to prevent new entrant apart from BT.
·      H3G may not enter 800MHz but focus on capacity play using existing 3G investments and augment this with 2.6GHz. H3G may also be open to JV or acquisition.
·      Competitive intensity at 800MHz likely to be higher (economics attractive and supply of spectrum is low i.e. 60MHz) compared to 2.6GHz (190MHz).
·      German auction is likely to be a good indicator of pricing (800MHz raised 3.5Bn Euros whilst 2.6GHz raised 344M Euros).
·      MNOs are highly unlikely to bid via a consortium e.g. MBNL[8] (a network sharing JV between T-Mobile and H3G). MNOs see spectrum as core long lived (20 year) strategic asset (unlike sites and equipment).

Figure 2 MNO existing spectrum holdings

Figure 3 Likely bidders in UK 4G auction

To ensure an adequate return on capital, 4G auction bidders will value spectrum assets, like any asset, using two techniques:
·         Relative valuation using benchmarks from similar transactions
·         Intrinsic valuation typically using a discounted cash flow model
In order to use relative valuation techniques, it is vital to have a significant number of data points. Spectrum valuation benchmarks use a metric based on the price paid for the spectrum divided by the unit of spectrum and the population covered. Typically this is expressed as $/MHz/Pop (or €/MHz/Pop).  In Figure 4 we see how recent similar auctions provide a set of benchmarks some of which will be relevant to the UK situation.

Figure 4 Prices paid at spectrum auctions for 700MHz to 3.5GHz since 2008
As for a valuation based on a discounted cash flow (DCF) model, each bidder’s business and use case for the spectrum will be different. The ability of existing MNOs to leverage existing assets (e.g. networks, sites, brands etc.) puts these players in a position such that they are likely to be willing to pay more for the spectrum. To ensure an adequate return on capital, when constructing a DCF model, key issues to consider are:
·    Ensuring that the discount factor reflects the project risk
·    Ensuring that the value from the spectrum is captured within a realistic time horizon (i.e. to avoid over reliance on the terminal value)
Lastly, on the issue of valuation, one point of note for potential bidders in the UK 4G auction is the auction design. Ofcom have chosen a Combinatorial Clock Auction (CCA) design which it previously used in both the 10-40GHz[9] and the L-Band[10] auctions. A CCA is very difficult to game and if a bidder does try to game the outcome, it can lead to unintended consequences e.g. acquiring spectrum blocks that are not the ones that the bidder wanted. Hence, when entering a CCA, it is very important to have a clear valuation in mind for the spectrum blocks that a bidder wishes to acquire.


[1] In North America this spans 698-806MHz whilst in Asia it is consistent with the European bands
[2] LTE stands for Long Term Evolution
[3] http://stakeholders.ofcom.org.uk/consultations/900-1800mhz-wireless-telegraphy/statement
[4] 900MHz and 1800MHz
[5] http://stakeholders.ofcom.org.uk/consultations/combined-award/
[6] http://www.arcep.fr/uploads/tx_gspublication/consult-800-2600-thd-270710.pdf
[7] http://stakeholders.ofcom.org.uk/consultations/combined-award/
[8] http://www.mbnl.co.uk/
[9] http://stakeholders.ofcom.org.uk/spectrum/spectrum-awards/completed-awards/1040award/notices/
[10] http://stakeholders.ofcom.org.uk/spectrum/spectrum-awards/completed-awards/award_1452/

Monday, 7 March 2011

DRIVERS OF VALUE FOR NATIONAL POSTAL OPERATIONS


Private investment in national postal businesses is increasingly used to realise value for state assets and to promote commercial disciplines.  In this article David Stubbs and Faisal Ahmed of Trova Consulting, who recently provided a valuation of UK Royal Mail, consider what drives value in postal businesses.  
In approaching the valuation of a national postal company, we need to consider carefully how a unique set of market and regulatory factors work together.
Typically, you calculate the value of any particular company by comparing the results of three analyses:
·         Consideration of the net assets of the business;
·         Review of the comparative performance of similar businesses, and;
·         Modelling of expected cash flows over a ten year period.  
In respect of a national postal operation, these can be approached as follows.

A review of asset values

Experience of other utility privatisations suggests that net assets written down in the accounts (on a historic costs basis) may underestimate their potential sale proceeds.   
Given the extensive process of modernisation now being undertaken and the significant opportunities for network re-optimisation due to changing volume mix there may well be scope for highly profitable sales of real estate.  However, the timing of any asset sales may well also be important, for example if a “fire sale” of assets was undertaken during a moment of weakness in the real estate market.    
Clearly the terms of any separation between different business segments, for example where retail postal operations may be kept in state control, will also be extremely important. 

A review of comparable performance

There is considerable variance in the commercial performance of national postal companies which makes it difficult to find an exact comparator.  Some national posts have been able to achieve reasonable returns (EBITDA margin of around 10 to 15 per cent) even during the current economic downturn and have a history of higher returns.  Others remain in financial difficulty. 
An explanation can be found in the different national strategies for both the Post and its ownership, with fully or part- private postal operations generally achieving higher margins.  In part this is due to the way in which regulatory policy has developed and cost control has been handled by the company. 

Future business performance

Estimations of the value of postal companies rely primarily on judgements about their potential for future cash flows.
Drivers of profitability at national postal companies reflect their history as public service providers.  Legacy issues connected to decades of public service and civil service employment conditions remain, with industrial relations problems and uneconomic network structures still unresolved in some posts.  Key elements of their financial success still lie outside their control:
·         National posts continue to have important social obligations which can impose costs in serving remote areas at low prices and five or six day weekly delivery; 
·         Their finances are influenced by the actions of national regulators, both in respect of capping prices that they can charge and in limiting their flexibility to flex service and pricing profiles in response to changing demands or competitive pressures;  
·         It is difficult for national postal companies to address the erosion in demand for traditional transactional mail products.  Over time, revenues from such products are likely to substantially decline as mailers seek cheaper or electronic solutions.  
However, it can also be argued that the returns generated by national postal companies are also dependent upon their own commercial behaviour, with key commercial decisions to be made in relation to:    
·         Managing costs down as the volumes profile changes;
·         Retaining or growing market share in the most dynamic market segments.     
Managing down costs involves three key elements.  Firstly taking benefit from the latest sorting and delivery sequencing automation to increase technical efficiency; secondly moving to more efficient and cheaper working practices; and thirdly generating greater cost flexibility.  This can be done through:
·         Increased technical efficiency that can change the shape of the efficient postal network, reducing transport costs, allowing for greater economies of scale in sorting and delivery sequencing and reducing the headcount needed;
·         More efficient and cheaper working practices which can involve changing shift patterns towards part time working, reducing overtime arrangements and greater reliance on self employed staff or on recruiting of staff employed on different (inferior) terms and conditions.  In some national posts this has also involved a firm restraint of pay rises to below the rate of inflation.      
·         Greater cost flexibility may involve increasing the reaction time between volume changes and changing employment levels and network parameters, and greater reliance on temporary or self-employed staff.      
Of course, it is also important to stress that the handling of pensions rights held by the work force remains a key issue in relation to the relative competitiveness of national posts compared to entrants into the market.
Looking forwards, the extent to which national postal companies can seize future commercial opportunities will also affect their value.
Digitalisation of services and increasing use of hybrid mail solutions may provide additional new revenues.  Whilst revenues for traditional products may decline there is likely to be a continued growth in Internet retail distribution.  Over time this will create a very different market profile with packets and parcels replacing traditional mail, and in doing so increasing the intensity of competition in the market as a whole.  Far from declining, the postal market as whole may be growing by the end of this decade.  However, such a change exposes national postal companies to greater intensity of competition and may also impact upon the potential margins available. 
Increased competition should also imply reduced regulation.  Over time, therefore, we may see reduced universal service obligations, with changes towards five-day or three-day delivery, lower next-day service requirements and further removal of bulk mail services from universal service conditions.   We could also see greater pricing flexibility and lower quality of service restrictions on the national postal providers.                            

Conclusions

We have seen that the future profitability of national postal companies is the best indicator of their value and that this will depend on a complex interaction of market and regulatory developments and -more significantly- on how they themselves respond to them.  This can therefore lead to a range of possible values depending upon the severity or otherwise of market and regulatory conditions and the actions taken by the national postal company. 
This can be shown in simplified terms in Figure 1 below.

Figure 1 Drivers of value for Postal Companies (Source: Trova Consulting)

Tuesday, 1 February 2011

MNO backhaul challenges


There’s been a lot of discussion about the impact data-centric devices (smartphones, Apple iPads, netbooks etc.) are having on mobile phone networks. High volumes of data traffic are stressing mobile networks and MNOs have responded by introducing additional capacity in the form of picocells, femtocells and Wi-Fi hotspots to ease some of the data load. MNOs have also taken steps to dampen down demand through the introduction of tiered data pricing models (you pay for what you use) and data usage caps.

Despite these measures, backhaul networks have come under strain and while in the past additional backhaul costs were offset by incremental voice revenues this relationship has broken down as the revenue per bit derived from data services is significantly lower than that derived from voice. So as they look to boost backhaul capacity to handle the explosion of data traffic, MNOs are having to find new cost-effective solutions.

The chart below shows the key MNO requirements from a backhaul network and the compatibility of available technologies. The key driver is the need to handle high levels of data traffic with scalability to meet future growth. And as the typical downlink/uplink ratio for data traffic backhaul is 70/30, MNOs require the flexibility to tailor asymmetric data rates to meet network flows. Fortunately MNOs can now trust IP/Ethernet to cope with the timing and synchronisation issues associated with mobile networks as they will need IP/Ethernet to handle the high air interface data rates associated with 4G/LTE.

Finally MNOs are looking for lower CAPEX and lower OPEX in their backhaul networks as they offer competitive services to satisfy the cravings of their data-hungry customers.

 


Wi-Fi: Why Now? (Answer: A £2Bn saving for UK MNOs)

 

The mobile data capacity crunch is now a reality. A year ago we predicted that in major metropolitan areas mobile data demand would outstrip supply during 2010. The arrival of tablet computing in the form of the Apple iPad (and others) as well as the continuing adoption of smartphones has accelerated the demand for mobile data. With HSPA networks struggling to cope with this surge in demand and UK MNOs waiting on the availability of more spectrum  (and appropriate 4G technology to be able to use the spectrum), we think that the time for Wi-Fi hotzones is here. Wi-Fi hotzones could delay the requirement for UK MNOs to invest £2Bn in network CAPEX in the period 2011-2014.
In Dec 2009, we carried out a mobile data supply and demand study looking in detail at London. We concluded that London would suffer a network capacity issue during 2010 (you can download this research from our website). Since our study, demand has accelerated with the continuing adoption of mobile data enabled devices such as the Apple iPad and smartphones in general (which not only have 3G but also Wi-Fi embedded).
Our assertion is that Wi-Fi based WLANs and in particular next generation 802.11n products from vendors such as Ruckus Wireless, Cisco and Aruba Networks will make wider hotpots i.e. hotzones a commercial reality. With MNO networks struggling to cope with demand for mobile data and the timing for UK spectrum auctions for 4G still not clear (most likely in early 2012 for 2.6GHz), it is time for MNOs to capitalise on tighter integration with larger scale outdoor and indoor Wi-Fi based hotzone networks.
Our further modelling reveals that MNOs could delay a circa £2Bn CAPEX investment in network upgrades in 2011-2014 by leveraging lower cost Wi-Fi based hotzones. We believe that MNOs will nevertheless be compelled to acquire further spectrum in upcoming Ofcom auctions and invest in the region of £3Bn in spectrum acquisition (based on benchmarks from recent similar auctions in Germany and India).

Moreover, we are bullish on white space and cognitive radio. If the regulators get their act together, there is every chance that Wi-Fi based on white space could become the next big thing. We will write more about this topic in the future.