Redefinition of 28GHz BFWA Licence Areas - Key Findings of Impact Analysis

1. Redefinition of 28GHz BFWA Licence Areas - Key Findings of Impact Analysis Presentation to BFWA Consultative Group Mason Communications 11 November 2003

2. Format • Introduction • Modelling Process • Key Findings • Recommendations

3. 1. Introduction

4. Scope of Work – AY4467 • A number of 28GHz BFWA licences remain unallocated following the initial licensing award exercises in 2000 and 2001 • The RA is considering offering Licence 3 (of 3) in small coverage areas. Possible options are as follows: • Defining smaller regional licences by political areas (e.g. Local Authority or county boundaries) or by postcodes • Operators defining the licence areas • Licensing individual base stations • Mason has completed a financial and market impact assessment in order to provide a detailed evaluation of the options • Recommendations have been formed regarding the definition of licence areas as the basis for a further licence award process.

5. 2. Modelling Process

6. Modelling – Forecast the Business Case for each Licence Area within each Licensing Scenario Define assumptions: • Discrete licence areas within each licensing scenario • BFWA service portfolio • BFWA target market • Competing platforms • BFWA service tariffs • BFWA technical solutions Perform scenario analysis: • Predict BFWA roll-out in each licence area (MapInfo) • Forecast revenues • Forecast costs • Perform sensitivity analysis • Value licence & form opinion on pricing mechanism. Licence Areas Definition Market Data Revenue Model Financial Model Technical Data Cost Model Pricing Mechanism

7. Modelling - Definition of Five Licensing Scenarios and Component Licence Areas -7-

8. Modelling - Summary of Key Assumptions – Classical Urban Deployment

9. 3. Key Findings

10. Regional Areas

11. Small, Pre-Defined Licence Areas

12. Operator Licence Areas

13. Base Station Licence Areas

14. 28GHz Business Case Issues • Cost of Interconnection • A key sensitivity in the model is the cost of interconnection to Internet (transmission connection + Internet port) • BFWA operator must secure significant discounts on typical Internet interconnection charges to create a viable business • Implies that significant regional traffic concentration must occur, and/or that BFWA operator must have partnership with major telco • Technology • With PMP, the number of target businesses that can be ‘seen’ from each base station is limited, which hinders penetration and effectively inflates the cost of service provision per subscriber • Mesh can alleviate this to a degree (higher connection rate) • Tariffs • Tariffs charge cannot be raised due to elastic nature of cross-price elasticity of demand with leased line platforms

15. 28GHz Optimal Business Case • The optimal business case occurs under the following conditions: • An operator is able to target high broadband demand locations across BFWA Regions where there is the optimum mix of businesses • The licence charges for each location is minimised i.e. pay just for the businesses covered • The operator runs all the locations as a single business to benefit from operational economies of scale, particularly cost of interconnection to Internet. • The market assumptions underpinning the business model have a strong impact on the business case viability

16. 4. Recommendations

17. Some considerations in designing licence areas (Consultation doc bfwacg-03-05) • Business viability • Ubiquitous coverage • Spectrum efficiency • Transparent non-discriminatory award process • Minimal planning required • Spectrum packaging.

18. Considering business viability in isolation: • To enable realisation of the conditions associated with the optimal business case: • Licence Areas need to be as small as possible so that an operator pays licence charges only for the businesses/area covered • Licence Area boundaries should ideally not be pre-defined, so that the optimum location of base station sites can be achieved by the operator • Operators must purchase multiple Licences across Regions to generate economies of scale.

19. Fit between scenarios and the optimal business case: • Our modelling suggests that Option 1a (existing BFWA regions) represents the least favourable business conditions of those considered, because of the variation in business density across relatively large geographical regions • Adoption of Scenario 3 – Licence Individual Base Stations – would best enable realisation of the ideal business conditions for operators, however: • This will be the most difficult scenario to administer, due to co-ordination, administering the licence process etc. • Spectrum efficiency lower due to frequency co-ordination overhead • Operators would have to purchase a number of Licences to generate the necessary economies of scale • Adoption of Scenario 1b – Licence by Local Authority / Unitary Authority would also enable realisation of the ideal conditions to a degree • Although frequency co-ordination issues still remain.

20. Fit between scenarios and optimal business case (continued) • Adoption of Scenario 1c would be difficult to implement, as it is difficult to predict and define Hotspot Areas • The process of defining hotspots is not transparent due to the assumptions that underpin the hotspot definition – the RA may be open to challenge from operators if RA defined hotspots do not match requirements of individual business cases • Different operator strategies will impact the preferred hotspot locations, meaning that pre-defined hotspots may be unattractive to some operators • Also changes in technology over the next 15 years may affect the definition of hotspots • Adoption of Scenario 2 would also be complex to implement and manage • As with scenario 1c, different business drivers will mean that operator areas may vary and overlap, which will worsen the licensing and spectrum co-ordination problem.

21. Conclusion regarding Licence Areas • Licensing scenario • 1a. Regional Licence Areas • 1b. Authority Licence Areas • 1c. ‘RA Hotspot’ Licence Areas • 2. Operator Licence Areas • 3. Base Station Licence Areas • Administration & Technical Feasibility • Business Viability

22. Conclusion regarding Licence Pricing • Based on market assumptions as defined in this presentation, we did not find that any of the remaining BFWA Regions had an NPV above £0.5million over 15 years, even with the Licence Fee set to zero • Similarly, none of the smaller areas has an NPV above £400k • In the present market climate, the value of the Licences for BFWA operation is difficult to quantify, even with the most optimistic business case assumptions • Therefore, in Mason’s view, it is not presently possible to set a reserve price based on the potential value of BFWA business • Mason’s view was that an ‘administrative’ price could be determined based on standard spectrum tariffs e.g. bandwidth used/area covered, in an equivalent way as for point-to-point links (e.g. using 27 - 29 GHz fixed link costs as the basis) • This would also be consistent with the possibility that an operator might buy the spectrum purely for backhaul, in which case the cost should be equivalent to standard point-to-point fees.