Network Sharing: a path to an ultra-efficient network factory?

(Revisited thoughts on the benefits of network sharing)

Dr. Kim Kyllesbech Larsen, Technology, Deutsche Telekom AG.

Transform or Perish

Dr. Kim Kyllesbech Larsen, Technology Leadership Forum, June 14 th 2012, Bonn.

So why should you share your network?

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Deutsche Telekom sharing examples (1 of 4).

Going Dutch converging to The rule of Three.
2001 - 2004: 3G sharing Capex avoidance strategy.

T-Mobile US Cingular The GSM Factory.

2001 2004: Regional GSM Sharing JV.
Geographical GSM RAN sharing agreement. T-Mobile US (via JV) responsible for NYC Metro areas.
ca. 22+M

Initial discussion with Orange NL started in mid-2001. JV operational from mid 2002 to 2004.
-

Site & ancillary sharing.

2008 Acquisition. Common plan & build organization.

No common procurement.

T-Mobile Orange NL merger 2008 2009.

JV closed down in YE 2004. 2007: Joint 1.3B or ca. 600 per customer. #Base Stations ca. 2,300 (at time of breakup). Price of Orange NL was ca.venture design, plan & build-co MBNL Ltd.
-

Population TMUK H3G 3G RAN sharing more for less.

Staff resistance (them vs us)

One single Different strategic objectives. network by 2010 with

Cingular (via JV) responsible for California/Nevada areas.

TMUK Population ca. 40+M (TMUS TMNL decides no need for ancillary sharing. nodes and - Ca. 5,000 fewer radio adds 3,000 5,000 3G Node-Bs that would otherwise not have been had 1.7M subs @ breakup in CA/NV)

financially/economical feasible. More economical to share own infrastructure than common.

-

T-Mobile Orange UK Network JV.

Common 3G plan & build organization (MBNL Ltd). Oct 2007 T-Mobile acquire Orange; network consolidation started. Venture discontinued in 2004 with Cingular AT&T Wireless merger. Securing future competitive growth. Positive TMUK T-Mobiles radio network run-rate avoidance). with 30%-40% denser + add spectrum optionality. EBITDA net of 50m 14% network by (net) $2.3B for California/Nevada grid than standalone. (ca. single TMUS pays 2014ish Nov 2008 all Orange customers were migrated to leveraging on higher spectral efficiency by consolidating. - Starting point a network of 14,000 sites,NYC Metroend-game is 18,500. TMUS forced to spin-off 10MHz in today the markets (very painful!).

Ca.3,300 (ca. 50%) fewer site locations.

#Base Stations ca. 5,000 (at The breakup). 2009: EE Network (ad)Venture time ofBIGGEST Network in UK!

H3G benefits from faster and much more efficient deployment .

On track to deliverPositive annual Capexof 1+B by79m Total 9,000money). roaming agreement. synergies in excess benefit of 2013 by 2012 (18% run-rate avoidance). (in time & site locations will be terminated (33% reduction) Nationwide

Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom 13 H3G capital benefits far in excess of 0.5B (estimated savingspectral efficiency by consolidation. Leveraging higher & avoidance).

Substantial

site lease cost savings andLargeprevention expected. synergies in both Network & IT. cash and readily achievable

Kim Kyllesbech Larsen, Technology - T-Mobile.

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From 2011 and onwards.

Significant synergies with NPV in excess of 3.5 bn.

-

Opex run-rate synergies ca. 35% (on relevant cost!) Capex run-rate synergies up-to 25%.
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Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Integration & termination cost of up-to 1.2 bn. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom 16 EE has the BIGGEST mobile network(s) in UK which will remain so even after consolidation and integration has been finalized.
Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Deutsche Telekom sharing examples (2 of 4).

Going Dutch converging to The rule of Three.
2001 - 2004: 3G sharing Capex avoidance strategy.

Initial discussion with Orange NL started in mid-2001. JV operational from mid 2002 to 2004.
-

Site & ancillary sharing. Common plan & build organization. No common procurement.

JV closed down in YE 2004.

-

Staff resistance (them vs us) Different strategic objectives. TMNL decides no need for ancillary sharing. More economical to share own infrastructure than common.

Oct 2007 T-Mobile acquire Orange; network consolidation started. Nov 2008 all Orange customers were migrated to T-Mobiles radio network

T-Mobile Orange NL merger 2008 2009.

2008 Acquisition.
Price of Orange NL was ca. 1.3B or ca. 600 per customer. One single network by 2010 with
-

Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom 13

Ca. 5,000 fewer radio nodes and Ca.3,300 (ca. 50%) fewer site locations.

Securing future competitive growth. leveraging on higher spectral efficiency by consolidating. On track to deliver synergies in excess of 1+B by 2013 (in time & money).

Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Deutsche Telekom sharing examples (3 of 4).

T-Mobile US Cingular The GSM Factory.
2001 2004: Regional GSM Sharing JV.

Geographical GSM RAN sharing agreement. T-Mobile US (via JV) responsible for NYC Metro areas.

Population ca. 22+M #Base Stations ca. 2,300 (at time of breakup).

Cingular (via JV) responsible for California/Nevada areas.

Population ca. 40+M (TMUS had 1.7M subs @ breakup in CA/NV) #Base Stations ca. 5,000 (at time of breakup).

Venture discontinued in 2004 with Cingular AT&T Wireless merger.

TMUS pays (net) $2.3B for California/Nevada + add spectrum optionality. TMUS forced to spin-off 10MHz in NYC Metro markets (very painful!). Nationwide roaming agreement.

Kim Kyllesbech Larsen, Technology - T-Mobile.

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Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Deutsche Telekom sharing examples (4 of 4).

TMUK H3G 3G RAN sharing more for less.
2007: Joint venture design, plan & build-co MBNL Ltd.
TMUK adds

3,000 5,000 3G Node-Bs that would otherwise not have been financially/economical feasible. & build organization (MBNL Ltd).

Common 3G plan Positive

TMUK EBITDA net of 50m (ca. 4% run-rate avoidance). annual Capex benefit of 79m by 2012 (18% run-rate avoidance). site lease cost savings and cash prevention expected.

H3G benefits from faster and much more efficient deployment .

Positive

H3G capital benefits far in excess of 0.5B (estimated saving & avoidance).

Substantial

T-Mobile Orange UK Network JV.

2009: EE Network (ad)Venture The BIGGEST Network in UK!

From 2011 and onwards.

1 single network by 2014ish with 30%-40% denser grid than standalone.

-

Starting point a network of 14,000 sites, today the end-game is 18,500.

Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Total 9,000 site locations will be terminated (33% reduction) Leveraging higher spectral efficiency by consolidation. Large and readily achievable synergies in both Network & IT.

Significant synergies with NPV in excess of 3.5 bn.

-

Opex run-rate synergies ca. 35% (on relevant cost!) Capex run-rate synergies up-to 25%.

Integration & termination cost of up-to 1.2 bn. EE has the BIGGEST mobile network(s) in UK which will remain so even after consolidation and integration has been finalized.
Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Vodafone sharing examples.

Vodafone Orange sharing 2007.
Network sharing agreement in Spain and Romania.

Vodafone Telefonica sharing 2008.

Network sharing agreements for Germany, Ireland and the UK with detailed discussions ongoing in the Czech Republic.

Rural Area / Geographical sharing. National roaming like sharing concept with joint field services. Rural areas with population of less than 25,000 pops. Ca. 1,500 Node-Bs where shared by YE2007 with max 5,000 by YE2009. Venture frozen in 2009 as VF announced sharing deal with Telefonica.

Passive RAN network site sharing. Traffic managed independently of each other. Customers expected to benefit from improved coverage. Benefits in the order of hundreds of million for both over next 10 years. Today (May 2012) they share 4,000 site locations.

Vodafone Telefonica sharing 2012.

Getting a lot more for less . Capex & Opex avoidance.
(i.e., VF-Europe Opex in 2008 was 16.4 bn and TF-Europe 2008 Opex was in the order of 13 bn).

Passive sharing including backhaul.

Kim Kyllesbech Larsen, Technology - T-Mobile. 18

(i.e., VF-Europe Opex in 2008 was 16.4 bn and TF-Europe 2008 Opex was in the order of 13 bn).
Kim Kyllesbech Larsen, Technology - T-Mobile. 19

Common Build JV, planning & design separately. 1 single network by 2015 with doubling the site count to standalone.
-

Each has ca. 10,300 sites today with shared end-game of 18,500.

Total of ca. 2,000+ site locations will be terminated (10% reduction). Geographical (50%-50%) sharing (i.e., London halved). No Frequency sharing. Individual supplier relationships (missing out on procurement scale?). Massive Opex and Capex avoidance. This is NOT an Opex reduction game but rather matching EE super-grid.

Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

The Good and The Ugly.

Recipe for successful merger (or network sharing) and is matching technology landscape and strategic outlook. Matching spectrum position and network grid are much more valuable (short-term) for synergies than complementary spectrum.
AT&T Cingular merger Sprint - Nextel

Dominated by Nextel

Matching technology landscape and strategic outlook. Good complementary spectrum (high grid match). Fairly symmetric & matching business structures and models.

Mismatch in technology landscape & strategic outlook. Complementary spectrum but relative low grid match. Very different business structures and models.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Expectation management the full sharing potential.

Total Opex 100%

Expect up-to 35% saving on Tech Opex

Up-to 5% on Total Corporate Opex

Cluster Opex 40%

Termination cost 1.5 3+ of Opex savings Integration Capex synergetic with BaU Capex Instant Cell split potential Enhanced Capacity Spectral efficiency gains (>10%+)

Technology Opex NT 14% RAN 7%

RAN saving

Illustration

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Stages of sharing benefits.

The best sharing strategy depends on the business cycle and technology age.
< 5 years 5+ years > 5+ years

LTE

UMTS

UMTS - GSM

GSM UMTS (LTE piggybacking)

Rollout Phase
UK: 3G T-Mobile 3 UK

Steady State
UK. T-Mobile UK Orange JV (EE Ltd).

Modernization
Poland: PTC Orange incl. LTE

Illustration Passive sharing: Site Lease & Civil Works, Mast/Tower sharing, Ancillary & Rack sharing, and Backhaul Sharing. Active sharing: e.g., Frequencies, TRXs, PAs, Baseband, CPU, ports, .

High Capex prevention. Opex prevention. Cash optimized startup. Best network.

Little Capex benefits. Opex savings. Significant write-off. High re-structuring cost. Extended coverage.

High Capex prevention. Opex savings. Minor write-off. Re-structuring cost. Instant cell split. Better network.
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Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

Economics of RAN sharing benefits.

Sharing stages Capex Synergy
Passive sharing Site build Mast Rack / Ancillary Active sharing MW/Fiber Electronics Spectrum Resources

OPEX Synergy

Restructure Cost
Restructuring cost can be low if little legacy infrastructure is present.

Write-off
Relative low exposure if little legacy infrastructure is present.

Rollout Phase
Bulk (>80%) of sites and nodes to be deployed.

Opex prevention Site lease Non-telco services Telco services Energy Resources

Steady State
80% of coverage and sites deployed. Mainly capacity additions and coverage maintenance.

Passive sharing

Low Capex level Active sharing

Opex saving if absolute number of site locations are reduced. Primarily Opex prevention in case of site number expansion. Opex saving if absolute number of site locations are reduced. Primarily Opex prevention in case of site number expansion.
= Low = Low

Termination Site lease. Site restoration. Service Contracts. Personnel cost Other JV overhead Legal, etc.. Restructure cost can be significant. Although contract termination can be less costly due to longer operational period.
= High = High

As most of the network has been deployed at this stage the write-off exposure can be significant even if equipment can be re-used. If decision for network sharing is taken in the renewal / obsolescence phase write-off exposure can be relative light both for equipment and site-build.

Modernization/ Obsolescence
Active element / node replacement, technology migration. Site consolidation.

Passive sharing

Medium Capex level Active sharing

Substantial Capex

Illustration

Synergy potential Cost exposure

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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The ugly tail the low profitability areas.

Should drive sharing in low-traffic areas
Illustration

Urban

Sub-urban

Rural-like areas Low profitability sites

Cumulated Revenue (Traffic)

0%

20%

50% revenue 10% sites

40%
60%

50% sites takes less than 10% revenue

Top 30% sites 80% revenue.

80%

100%
0% 50% 100%

Sites
Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom 13

Network Sharing can provide better economics and market timing

Frequency
(MHz)

Site
(acq. + build)

Radio
(electronics)

Backhaul
(transport)

Backbone
(transport)

Core
(switch & control)

BSS
(bill & care)

plmn 1 plmn 2

MNO 1 Core
plmn 1 + plmn 2 (optional)
BTS & NODE-B eNodeB

BSS

MNO 2 Core

BSS

Capex prevention

Efficiency enabler

40%-60%

< 35%

up-to 50%

up-to 50%

Partly possible

Less likely

Opex prevention
Regulatory complexity

Efficiency enabler
HIGH

< 35% LOW

ca. 35% LOWER

scale discount
LOWER

scale discount
LOWER

Partly possible
HIGH

Less likely HIGH

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Anatomy of network sharing.

RAN sharing guaranties competitive differentiation, operator independency and vast consumer quality improvements.

Sharing: Costly Radio Access Network infrastructure will be shared, Not shared: All core network and service infrastructures that provides respective customers with differentiated services, applications, handsets, rate plans, etc. Result: A network with greater capacity (i.e., instant cell split) and improved coverage.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Network sharing.
A mean to close the mobile broadband coverage gap (in CEE).
Network Sharing Strategies
Rural areas1
BILL PRICE BRAND SALES Operator A SHARED Operator B

Safe for Service by Sharing.

Substantial improved coverage,

BILL

PRICE

BRAND

SALES

with a capacity boost and

SERVICES CORE SERVICES CORE RAN JV2 Co

higher quality of services

2G, 3G & LTE RAN incl. BACKHAUL SHARE

GSM UMTS LTE

to the Consumer at a Quality Level

NOT Economical viable in Standalone.

Urban areas1
BILL PRICE BRAND SALES

Idealized Illustration
BILL PRICE BRAND SALES

SERVICES CORE

SERVICES CORE RAN JV2 Co

Benefits.
Opex avoidance & savings. Substantial Capex avoidance. Shared Modernization. Shared LTE deployment. A Much better network.

2G, 3G & LTE RAN incl. BACKHAUL SHARE

GSM 900 & 1800 UMTS 900 & 2100 LTE SHARING 800, 2100 & 2600 MHz GSM 900 & 1800

Note: frequency bands not to scale!

Note sharing spectrum between two (or more) MNOs might not be regulatory allowed, 2 RAN JV Co can (often will) have different role & responsibilities.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Network sharing flavors

Site sharing (*) Capacity limited
HSS HLR HSS

RAN Sharing (*) Coverage limited

HSS HLR HSS

National Roaming (*) Rural

HSS HLR HSS

Core

Core

Core

Core

Core

Core

BSC RNC

BSC RNC

BSC RNC

BSC RNC

BSC RNC

Shared site and passives Independent BTS, NB, eNB. Passive sharing. shared transport (possible). Independent frequencies.
1 Multi-Operator

Shared Radio, aggregation & frequencies (optional). Active sharing (MOCN1) Shared transport. Frequencies sharing.

Wholesale arrangement, geographical partnership. Geographic sharing. One frequency sufficient. Wholesale/cost-sharing.,

Core Network supporting RAN Sharing, (*) For LTE there is no BSC/RNC, core networks connected directly to the eNode-B.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Common Frequency Sharing

Solution for low-demand, rural areas and symmetric demand scenarios.
Frequency pooling (*)
...

3GPP Release 8, 2009 (earliest) onwards with the following sharing concepts:
Gateway Core Network (GWCN) shared core network (CN) (multiple CNs connected to a common core, connected to the shared RAN).

HLR

HLR

MOCN: Multi-Operator Core Network where only the RAN is shared (i.e., NO common CN). Introduction of Iu Flex allowing multiple CNs connecting to shared RAN.

Core

...

Core

Multiple core networks connected to a common radio access network (RAN) sharing a single frequency or a pool of frequencies. Service requirements & capabilities not limited by the sharing requirements (i.e., resides in core network or service creation platforms above the core network). Requires user equipment support (i.e., R8 or later). Non-supporting user equipment will ignore the broadcast system information related to sharing functionality. Fairly complex coordination issues on resource allocation among sharing parties, making this concept more interesting for low-traffic rural areas (where demand is no issue) or highly asymmetric traffic situations.
1

Shared IP backhaul LTE eNode-B

Shared Freq., Radio & aggregation.

1 operator share its spectrum with others. Multiple operators pool their spectrum assets together and share total spectrum.

MORAN = Multi-Operator Radio Access Network sharing of all active electronics with exception of frequencies. 2 MOCN = Multi-Operator Core Network = two core networks connected to 1 frequency. (*) For 3G network core networks connect to the RNC that then connects to the Node-B.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Network components mapped to network layers.

The deeper into the network infrastructure is shared the more the sharing concept will appear as a merger or NetCo concept.
Network Sharing
Radio Access Network CS & PS Network Signaling Network

Network Merger Netco concept

VAS Network

IT & CS Network

Spectrum / Frequencies GSM BTS GSM BSC GSM TRX 3G Node-B 3G RNC 3G Carrier & Channel elements e-Node-B (LTE RAN) Backhaul (MW & LL) Routers, switches and multiplexing SW Licenses & features. NMS & operations. Etc.

Classical MSC/VLR R4 MSC Server & Gateway Multiplexing GGSN & SGSN (packet core). Evolved Packet Core. IP networks (routers, FW, etc..) Backbone transport Interconnect NMS & operations. Etc.

Classical HLR NG HLR IN platform Interconnect NMS & operations Etc.

SMSC MMSC VMS WAP Portals 3rd party content NMS & operations Etc

Billing system Rating Mediation CRM SAP/Finance systems. Business Intelligence. Call center systems (call routing, ..) OSS IT Operations. Etc.

Note: above categorization is guiding but not fully un-ambiguous.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom 19

Why one should NOT commence Network Sharing.

2 out of 3 NS deals considered are put on ice again!

Complex Governance

Technology mismatch

Divest / Spin-off / merger very complex

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom 20

Other business models LTE as a Service.

Emerging business models LTE network factory
Cash optimized startup via virtualization & OTT based services.

Option: Small cell centric startup and Capacity as a Service.

Provides.
Attractive (startup) cost economics.

Enablers.
Profitability & cash crunch.
Incumbent spectrum crunch. MVNO / tier-2&3 MNO appetite.

Relative low Capex cash optimized.

Increased spectral efficiency & utilization.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Other business models ultra-efficient transformation.

Emerging business models piggybacking on Virtualization & Cloud
3rd party, media companies, MNO/MVNO CDN & SDNs.

3rd parties delivers BSS / OSS cloud services to SmartCo (offthe-shelf)

3rd parties (supplier) delivers core network functionality (i.e., HSS, PCRF, etc..)

Provides.
Data-only QoS transparent network.

Enablers.
Regulatory support.
Spare Spectrum (i.e., typical Startup). MNO & MVNO appetite.

Network services to MNO & MVNO.

Dedicated OTT network services.

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Technology cost and synergy potential.

Synergy potential Mobile ONLY NT FTE NT Services Share of Technology Opex Ca. 10% Ca. 15% Managed services Network sharing

()
Typical 20% HC reduction Typically Capex commitment Good savings potential, though risk for future sharing optionality Opex Capex trade-off 10% - 20% HC reduction Opex Capex trade-offs Minimum 10% pa

()
Min. 20% - 35% >35% but depends on network reduction. >35% but depends on network reduction. More Opex Capex trade-off Minor opportunities <10% due to scale. Minor opportunities <10% due to scale. At least 35%

Rental & Leasing

Ca. 25% - 30%

Transmission IT FTE IT Services Other

Ca. 5% - 10%
(can be a lot higher if majority leased transport)

5% 25% 10% - 15%

Illustration
Note: Above numbers serve as illustrations only. Different operations may have different Technology Opex distributions..

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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Key messages.
What we need to be passionate about!
First things first

Utilize technology to achieve the best operational performance RRH, SDR RAN, Single-RAN, FTTS, Virtualization, Cloud, dont over-focus on financial savings!
Network sharing provides cost reduction & increased quality. & increased complexity & upfront cash needs & dont forget!

Sharing models for mobile applies to fixed broadband as well. Maybe Even more so!

Dr. Kim Kyllesbech Larsen, Technology Economics Deutsche Telecom

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The key value proposition of a mobile network is ....

Freedom
& Mobility