3G Licensing Methodologies and Conditions

1. 3G Licensing Methodologies and Conditions ITU Regulatory Meeting for the Arab Region April 2003 LYNNE DORWARD LADCOMM CORPORATION

2. 3G Licensing Methodologies and Conditions Basic Steps in the Licensing Process LADCOMMCORPORATION

3. 3G Licensing Methodologies and Conditions There are multiple complex steps involved in the licensing process • Band selection (5 stages) • Development of the appropriate licensing methodologies • Determining a fair price for the licences • Implementing the licensing process LADCOMMCORPORATION

4. 3G Licensing Methodologies and Conditions Band Selection LADCOMMCORPORATION

5. 3G Licensing Methodologies and Conditions - Band Selection • Study existing spectrum uses • Make allocation decision • Initiate rulemaking to solicit public comment on frequency allocation • If necessary, relocate incumbents or implement sharing criteria • Develop service/technical rules that will govern licensees Multi-stage process for new spectrum allocations LADCOMMCORPORATION

6. 3G Licensing Methodologies and Conditions: Band Selection– Stage 2 • “Allocations” are blocks, or bands, of frequencies established for a type of service such as land based mobile service • Analyze public need and benefit • market demand for IMT-2000 service • social and economic importance of service • implications for existing services Make allocation decision LADCOMMCORPORATION

7. 3G Licensing Methodologies and Conditions: Band Selection– Stage 3 • Consider • Technical rules necessary to protect other users of the spectrum against harmful interference from a particular use • Service rules to foster competition among service licensees and ensure that systems are built out rapidly Initiate rulemaking to solicit public comment on frequency allocation and technical and service rules LADCOMMCORPORATION

8. 3G Licensing Methodologies and Conditions: Band Selection - Stage 5 • Technical rules • May include maximum transmitter power levels, out-of-band emission limits • Service rules • May include eligibility requirements, size of designated service area, amount of spectrum to be licensed and build-out requirements Develop service/technical rules that will govern licensees LADCOMMCORPORATION

9. 3G Licensing Methodologies and Conditions: Band Selection– Stage 5 • Technical Considerations • Necessity for service to use particular frequency • Amount of spectrum required • Signal strength required for service • Is interference likely to be encountered • Equipment Limitations • Upper practical limits of the useful radio frequency spectrum, including anticipated limits due to technological advances • Operating characteristics of transmitters, including size, cost and technical considerations • Receivers available and being developed LADCOMMCORPORATION

10. 3G Licensing Methodologies and Conditions Licensing Methodologies LADCOMMCORPORATION

11. 3G Licensing Methodologies and Conditions The 3G Licensing Process So Far LADCOMMCORPORATION

12. 3G Licensing Methodologies and Conditions– Methodology Overview • Licensing methodologies for 3G are a new phenomena: barely three years old • Like any new process, there have been missteps and growing pains in the process • In the case of 3G, some of the original licensing approaches have had a major impact on the entire telecommunications market: • The fallout is still being experienced • Some investors have been scared away (mainly in Europe) • Other operators are delaying 3G tenders • Generally, the licensing methodologies and processes have been more successfully implemented in Asia LADCOMMCORPORATION

13. 3G Licensing Methodologies and Conditions - Asian 3G Licences • To date, the market is almost evenly split between beauty contests and auctions: • 3 beauty contests (all with fixed fees) • 3 auctions • 2 direct awards (one with revenue sharing scheme) • Average licence term is 15 years • Most licences transferable with restrictions • Limited coverage and service launch obligations • In South Korea and Malaysia, not all licences were awarded due to bidders’ inability to meet qualification criteria (3rd S. Korean licence was eventually awarded) LADCOMMCORPORATION

14. 3G Licensing Methodologies and Conditions - European 3 G Licences • EU directives have greatly influenced licensing process throughout Europe (even non EU countries) • Results to date: • 9 beauty contests (8 with fixed licence fees) • 11 auctions • 4 direct awards (3 with no licence fees) • Average licence term almost evenly split between 15 & 20 yrs. • Most licences are transferable with some restrictions (e.g. cannot be transferred to dominant incumbent) • In many instances, there are stringent coverage and rollout requirements, many of which cannot presently be fulfilled • Some initial licences subsequently declined and other awarded licences under review by licensee or have already been returned to regulator/government LADCOMMCORPORATION

15. 3G Licensing Methodologies and Conditions– Licence Costs and Impact • After initial European UMTS bidding frenzy in 2000, regulators and governments had to significantly lower expectations; bidders strongly indicated their reluctance to pay early stage prices • Many processes faced long delays or were unsuccessful due to unrealistic expectations - for example: • France compelled to lower fixed licence fee from $4.5B US to $570M; not all licences awarded (only 2 out of 4 initially, with 3rd eventually awarded 4Q 2002) • Belgium valuations low (only 3 bids for 4 licences) • Poland had to reduce licence fees and number of licences (original $650M US reduced to $223M and 5 licences reduced to 3) and reschedule entire licence process • Czech licence fees considerably lower than anticipated with some incumbents declining to bid for licence • Business cases for new market entrants are questionable where high licence prices have been paid LADCOMMCORPORATION

16. 3G Licensing Methodologies and Conditions: AsianCosts per Pop $US *Hong Kong is not included in graph due to revenue sharing formula rather than straight licence fee LADCOMMCORPORATION

17. 3G Licensing Methodologies and Conditions: European Costs per Pop $US LADCOMMCORPORATION

18. 3G Licensing Methodologies and Conditions – Conclusions • Licensing methodologies for 3G are stabilizing as regulators, governments and investors learn from earlier mistakes • It is likely that regulators will be more inclined to allow market and operator flexibility • There is now enough historical data to consult and there is also ready access to groups experienced in 3G licensing • Now that licensing methodologies and market expectations are more mature, for those who have not yet introduced 3G, it will be much easier to define the right licensing balance LADCOMMCORPORATION

19. 3G Licensing Methodologies and Conditions Determining a Fair Price for the Licence LADCOMMCORPORATION

20. 3G Licensing Methodologies and Conditions – Determining a Fair Price The major challenge of a 3G licensing process is to structure it in such a way that it is sufficiently inviting to attract potential bidders/investors while at the same time satisfying the government’s goals and objectives. LADCOMMCORPORATION

21. 3G Licensing Methodologies and Conditions: Possible Approaches in Determining a Fair Price • Auction • Straight auction • Auction with pre-set conditions e.g. service and/or coverage and/or roll-out requirements • Beauty Contest • Beauty contest – no licence fee • Beauty contest – fixed licence fee • Direct Award (First Come, First Served) • Generally to incumbent operators • Lotteries LADCOMMCORPORATION

22. PROS Speed of process Generally costs less to administer than a beauty contest Entity which places highest value on licence wins Spectrum is public resource so revenues benefit citizens Promotes efficient, high value use Ensures transparency of/lack of bias in licensing process Minimizes post bid challenges/interventions CONS May result in increased concentration in industry rather than increased competition Likely to discourage new entrants High licence price may restrict operator’s ability to extensively deploy network May ignore non-financial public interest objectives Revenue potential could create incentive to restrict output and raise prices 3G Licensing Methodologies and Conditions: Possible Approaches - Auctions LADCOMMCORPORATION

23. PROS Awards licence to applicant who would best serve public interest Supports government objectives/initiatives e.g. providing service to remote areas, social obligations etc. Entity which places highest value on licence wins Allows for equity considerations Ensures that bulk of investment is directed at rapid network deployment CONS Time consuming process Greater cost to administer the process Less transparent than other techniques Sets the stage for government to determine what the market wants No process to deal with a tie More susceptible to post bid challenges/interventions 3G Licensing Methodologies and Conditions: Possible Approaches - Beauty Contests LADCOMMCORPORATION

24. PROS Speedy process Provides rules for a tie Less likely to be challenged CONS It is possible for an unqualified party to win The resellers may benefit rather than the public 3G Licensing Methodologies and Conditions: Possible Approaches - Lotteries LADCOMMCORPORATION

25. PROS Speedy process Inexpensive to administer Less likely to be challenged CONS It is possible for an unqualified party to win The resellers may benefit rather than the public May not end up in the hands of an entity who most values the licence The licence value is not taken into account 3G Licensing Methodologies and Conditions: Possible Approaches - First Come, First Served LADCOMMCORPORATION

26. 3G Licensing Methodologies and Conditions Implementing the Licensing Process LADCOMMCORPORATION

27. 3G Licensing Methodologies and Conditions: When Auctions Are Unsuitable • Where no mutual exclusivity exists • Where licensees would need to participate in multiple auctions for a single system (e.g. satellite operators) • Where the free market does not easily value the services (e.g. public safety, national defence) • Where shared use of the spectrum, whether on a licensed or unlicensed basis, proves more efficient LADCOMMCORPORATION LADCOMM CORPORATION September 2002

28. 3G Licensing Methodologies and Conditions– Auction Elements • Decide on the structure of the auction and how the process is to be managed e.g.: • one round or simple (open or closed) • multiple-round auctions (sequential or simultaneous) • Determine the reserve price, if any, and what the approach will be in the event that the reserve price is not met • Establish a clear policy regarding bid deposits and under what circumstances, if any, these deposits will be returned • Take the necessary steps to ensure that the bidding process will be completely secure (no consultation or price fixing between bidders) • Make sure that the payment schedule is unambiguous with control mechanisms in place to deal with non payment LADCOMMCORPORATION

29. 3G Licensing Methodologies and Conditions– Beauty Contest Elements • Define evaluation criteria and scoring mechanism; ensure they are defendable and that evaluators are qualified and objective • Clearly scope out commitments which may form part of the beauty contest submission; define acceptable parameters e.g. • Required commercial launch date • Coverage commitments (population, geographic) • Network deployment schedule • Roaming requirements • Quality of service objectives • Tariff scheme • Job creation requirements or other social obligations • Ensure that there are appropriate review and control mechanisms in place to deal with the winning operators’ potential failure to meet licence commitments LADCOMMCORPORATION

30. 3G Licensing Methodologies and Conditions– Current Considerations • Operator/Investor Fatigue • Increasing caution at corporate Board of Directors level • Globally depressed telecom valuations • Some market consolidation taking place • General scarcity of project and vendor financing • Conflicting views regarding 3G revenue potential • 2G market saturation in many companies/countries These factors are not insurmountable challenges but rather, reminders to ensure a rational process. LADCOMMCORPORATION

31. 3G Licensing Methodologies and Conditions - Foundation for A Successful Process • Study other 3G licensing processes to identify strengths and weaknesses; learn from the successes and mistakes of others • Find out anticipated timetables of other 3G licensing processes; if possible, avoid simultaneous competition • Confirm that there are no regulatory or legal impediments to the 3G licence process • Make sure that the process is well publicized globally and that licensing documentation is easy to obtain • Publish draft licensing conditions (including fixed licence fee or auction reserve price) in advance and solicit bidder input - gain consensus • Clearly define any pre-qualification requirements LADCOMMCORPORATION

32. 3G Licensing Methodologies and Conditions– Factors to Consider in Fee Setting • Availability of 2G and 3G spectrum (easily obtainable or rare commodity?) • Number of 3G licences being awarded (more licences, less value) • Degree of existing competition in mobile market • Mobile penetration level in country (potential for further growth) • Recent international and regional benchmarks These factors apply for both beauty contests with fixed fees or for reserve prices with auctions LADCOMMCORPORATION

33. 3G Licensing Methodologies and Conditions Appendices LADCOMMCORPORATION

34. 3G Licensing Trends - Asia Price per pop calculated using total country population and average licence fee in instances where there is a range of fees LADCOMMCORPORATION

35. 3G Licensing Trends - Europe Price per pop calculated using total country population and average licence fee in instances where there is a range of fees LADCOMMCORPORATION

36. 3G Technology Standards IMT-2000 Terrestrial Radio Interfaces IMT-2000 CDMA Multi-Carrier IMT-2000 CDMA TDD IMT-2000 TDMA Single Carrier IMT-2000 FDMA/ TDMA IMT-2000 CDMA Direct Spread UWC-136/ EDGE DECT WCDMA(UMTS) CDMA2000 UTRA TDD & TD-SCDMA 3G CDMA Although there are five terrestrial standards, most of the attention and energy in the industry has been toward the CDMA standards LADCOMMCORPORATION

37. 3G Technology Bands • The ITU has identified five bands for IMT-2000 • 806-960 MHz • 1710-1885 MHz • 1885-2025 MHz • 2110-2200 MHz • 2500-2690 MHz • IMT-2000 technologies can be deployed in all of these bands as well as in any band allocated for mobile services Ref: World Radio Conference – 2000 (WRC-2000) Istanbul, June 5, 2000: Footnote S5.388 is associated with Resolutions 212 and 223 (the 1.9 and 2.1 bands) Footnote S5.384A is associated with Resolution 223 (the 1.7 and 2.5 bands) Footnote S5.317A is associated with Resolution 224 (the 800/900 bands) LADCOMMCORPORATION