Mobile Broadband Working Group

1. Mobile Broadband Working Group Interim progress report

2. Status report • Goal of working group is generation of a white paper, with additional papers on narrower topics possible. • Ongoing phone calls on bi-weekly basis. • Substantial contributions from Bill Lehr and Marie-Jose Montpetit. • Thank you.

3. Incentive to invest • The overall ecosystem depends on the facilities owners continuing to invest in upgrades to capacity and capability. • Investment must be justified by return on investment and overall profitability. • Could broadband access stagnate?

4. Important differences • In U.S. wireline, investment has been stimulated by facilities competition. • But might this stimulus fade? • In EU wireline, facilities unbundling has driven retail costs down, but reduced incentive to invest. • Shared infrastructure may be an answer. • In mobile world, both competition and higher costs. • Hypothesis: the mobile world may be a more challenging case to study.

5. Three related issues: • Growth in demand. • Is raw capacity the only issue? • Cost of usage. • More properly, costs investment in capacity. • Sources of revenues.

6. Growth This is a prediction, not a fact. Exponential growth calls for exponential responses. Growth is due both to new usersand to increasing usage/user. Smart phones will continue todominate. CISCO Virtual Networking Index (VNI): http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html

7. What are people doing? Mobile download U.S. Ericsson forecasts: http://www.ericsson.com/news/1561267?categoryFilter=reports_1270673222_ Sandvine Global Internet Phenomenon Report 1H 2013

8. Sandvine prediction

9. Comparative usage Mean monthly usage Sandvine Global Internet Phenomenon Report 1H 2013

10. My conclusions • Growth is not exogenous. • Important to understand what will shape it. • Netflix, QoE, • Exponential growth requires exponential response. • New spectrum, spectrum efficiency are linear. • Slow the need to take other steps. • Only exponential response I can see is smaller cells. • Could this be a “Clay Christensen” event? • Use of WiFi (offload to wireline network) is important trend. (May be 50% of total device traffic). • In wireline world, subscriptions may be saturating. • Unclear about mobile, but will happen sometime.

11. Costs • Mobile costs are of several kinds. • Upgrades to new technology (e.g., LTE). • Capacity upgrades to existing cells. • New base stations (smaller cells). • Increasing demand has two sorts of effects. • Popular cells get overloaded. • Less loaded cells are more efficiently used. • Wireline can engineer for usage, mobile must also engineer for coverage.

12. Cost models • Regulators and other observers seek cost models to understand implications of usage. • But models are hard to come by, and are highly influenced by accounting decisions. No surprise.

13. Some estimates • It is possible to get down to a fully loaded network cost of less than EUR 1/GB at a level of around 15% average network utilization. Looking at capacity upgrades, it is possible to easily double capacity at a cost per GB of EUR 0.1 to 0.2.” • GregerBlennerud, Mobile broadband – busting the myth of the scissor effect, Ericsson white paper EBR #2 2010 • Operators can (and must, to remain profitable) reduce costs to $1/GB by 2013 • 0.1 cent per MB: ensuring future data profitability in emerging markets, McKinsey,RECALL_No_17, 2011 • ”Monthly network Capital Expenditure (CAPEX) and Operational Expenditure (OPEX) can be kept below 3 EUR per subscriber over an eight-year depreciation period. This is true if the average mobile broadband penetration is at least 500 subscribers per site, and if subscribers use less than 2 GB per month.” “If total data use is high, …, the cost per GB can be below 1 EUR.” • Mobile Broadband with HSPA and LTE—capacity and cost aspects, Nokia Siemens Networks, White Paper

14. Conclusions • There are more dimensions to the cost issues around mobile than around wireline. • But mobile depends on wireline. • Estimates of total cost for wireline are around $0.10/GB—one tenth of mobile. • But incremental might be closer to wireline costs.

15. Revenues • A recurring conversation centers on the sources of revenues for ISPs. • Today the consumer pays essentially all the costs of the access provider. • Is there an alternative frame in which other parts of the ecosystem contribute to the cost of access? • Advertising? • Paid content?

16. Revenues • Other sources? • See previous talk. • Usage-based billing. • Creates positive incentive for ISP, negative incentive for user. • Zero-rating? • Charging for priority? • A way to benefit from ecommerce.

17. Cost vs.revenue • Current pricing for additional usage: • Verizon: $5/GB • AT&T $10/GB • Looks like plenty of incentive for U.S. providers to facilitate usage. • But how much is user discouraged by price point?

18. Europe? • Vodafone UK : usage £5 for 4GB ($2/GB) • Samsung Galaxy Note 3 (4G) • Voda UK: £49+ £52/m, ($79 + $84/month) • VZ US $299 + $110/month • UK price for equal product is cheaper. • UK usage cost is much lower.

19. Possible conclusions • Assume Voda is not actually losing money. • VZ (and ATT) must be making a good profit. • Does this drive investment or bottom line? • Why has competition not driven prices to UK levels? • Raises fundamental questions about user behavior. • Unlimited plans from Sprint do not seem to pressure VZ. • Coverage issues? • If cost of usage is a barrier, why is mobile usage so similar in US and EU? • Are there other barriers? • QoE? Lack of equivalent set of apps?

20. Internet expenditures per BB household Total excluding CDN and advertising: $479.47 ($82,74 per paying customer)