1. PERSPECTIVE MARCH 2013WHAT CAPACITY CRUNCH? AN EXAMINATION OF THE TRUTH BEHIND THE IMPENDING MOBILE SPECTRUM APOCALYPSE Enrico Lanzavecchia, Faizal Patel, Adele Sinclair

2. What capacity crunch? An examination of the truth behind the impending mobile spectrum apocalypse Published by Value Partners Management Consulting Limited, 16 Smith Square, 7th floor, Kings Building, London SW1P 3JJ, UK March 2013 Written and edited by: Enrico Lanzavecchia, Faizal Patel, Adele Sinclair If you would like an electronic copy please write to: enrico.lanzavecchia@valuepartners.com For more information on the issues raised in the report please contact: enrico.lanzavecchia@valuepartners.com faizal.patel@ valuepartners.com adele.sinclair@valuepartners.com If you would like to subscribe or to be removed from our mailing list please write to: subscription@valuepartners.com valuepartners.com Copyright Value Partners Management Consulting Limited All rights reserved 3. 3OVERVIEWTHE CAPACITY CRUNCH IS A POPULAR TOPIC OF DISCUSSION IN THE TELECOMMUNICATIONS INDUSTRY, AND NUMEROUS OBSERVERS ARE PREDICTING A SHORTAGE OF SPECTRUM CAPACITY IN THE MEDIUM TO LONG TERM. INDEED, DATA TRAFFIC IS GROWING EXTREMELY RAPIDLY, WITH SOME OPERATORS ATTRIBUTING DROPS IN THEIR QUALITY OF SERVICE TO CONGESTION ON BOTH FIXED AND WIRELESS NETWORKS. REGULATORS ARE RESPONDING BY OPENING ACCESS TO MORE FREQUENCY BANDS, HOWEVER AN INCREASING BODY OF RESEARCH SUGGESTS THAT THE IMPACT AND URGENCY OF THE CAPACITY CRUNCH MAY BE SOMEWHAT OVERSTATED. SOME OPERATORS SEEM TO AGREE, OR AT LEAST ARE OF THE OPINION THAT ACQUIRING MORE SPECTRUM ISNT THE ANSWER, AS EVIDENCED BY THE DISAPPOINTING RESULTS IN A NUMBER OF RECENT AUCTIONS. INSTEAD THEY ARE TURNING TO ALTERNATIVE COMMERCIAL AND TECHNICAL OPTIONS WHICH THEY HOPE CAN BE LESS EXPENSIVE AND MORE EFFICIENT THAN SPECTRUM ACQUISITION.PERSPECTIVE WHAT CAPACITY CRUNCH? 4. 4Global mobile data traffic growth is expected to be explosiveMOBILE DATA100.00090.000Next 3-5 years: operators will become increasingly capcity constrained as mobile data usage expands80.00070.00060.00050.00040.000Current situation: MNOs reaching capacity in high usage towers and turning on 2nd and 3rd carriers throughout rest of networks30.00020.00010.0000 89101112131415161718192021222324252627282930MONTHSSource: Value Partners Market ResearchPERSPECTIVE WHAT CAPACITY CRUNCH? 5. 5MOBILE DATA TRAFFIC IS EXPLODINGPromoting the shared use of radio spectrum resources in the internal market, European Commission, September 2012. 12Vodafone annual report 2012.Sky Broadband struggles with demand after adding subscribers, BBC, January 2013. 3Mobile data traffic is experiencing significant growth, placing pressure on the capacity of networks. It is well documented that data traffic is exploding; users are now consuming more data, in more places and on more devices. The European Commission recently published a report stating that it expects mobile data traffic to increase at an annual rate of 26% over the next 3 years1, whilst Ofcom predicted that by 2030 Britain will consume up to 300 times more mobile data than today.Network traffic is experiencing a systematic shift away from voice towards the transfer of data Network traffic is experiencing a systematic shift away from voice towards the transfer of data (for example, approximately 70% of traffic on Vodafones network is now data2) and this is only expected to continue over the coming years as an increasing number of users adopt the data-hungry services (such as video streaming) on offer.PERSPECTIVE WHAT CAPACITY CRUNCH?This increased data consumption is taking place both in and outside of the home, with implications for fixed and mobile operators, and on an increasing number of devices. Tablets and smartphones are now well on their way to becoming ubiquitous, but this is not the end of the matter; the advent of machine-to-machine (M2M) communications promises further proliferation of network-connected devices. It is within this context that operators are trying to maintain their quality of service and plan for the future, with some high usage areas already reaching full capacity on some networks3. 6. 64CNet.5TechWeek Europe.Many observers are warning of an impending spectrum capacity crunch As data usage has really taken off, operators and regulators have begun to fear that the supply of spectrum may be inadequate to meet future demand. The perceived threat has been sufficient to lead operators and vendors to take action, with both Verizon and AT&T in the USA stating the capacity crunch as the key driver for their respective attempted acquisitions of competitors4. Similarly, Ciscos acquisition of network management specialist Intucell reflects its belief that network efficiency and optimisation will be of critical importance to operators in the near future5.Operators need spectrum for multiple reasons Operators have clear drivers for needing new spectrum, each of which has different implications. In addition to changes in usage patterns, operators spectrum strategies are heavily influenced by their existing network and infrastructure, as well as commercial considerations. They must acquire spectrum to satisfy their desire to cover broad geographical areas in order to reach the greatest number of potential customers, whilst these bands can also offer good indoor coverage, penetrating buildings to improve reception inside buildings. Shorter wavelength bands are required in densely populated urban areas to satisfy peak hour capacity demands. There are also commercial drivers for the acquisition of new spectrum; operators are keen to use new spectrum to launch superfast LTE services ahead of or at the same time as competitors, which they hope will drive ARPU and reduce churn. Some mobile operators also hope that their ability to launch advanced wireless broadband services using LTE will enable them to compete with fixed broadband players, a factor which is particularly relevant in developing markets with limited fixed infrastructure.PERSPECTIVE WHAT CAPACITY CRUNCH? 7. 7REGULATORS ARE PLAYING THEIR PARTRegulators are taking action to avoid spectrum congestion, leading to a range of opportunities and challenges for operators. Their natural response to the threat of congestion has been to open access to more spectra, particularly with a view to enabling the deployment of LTE services. Regulators have broadly taken the following approaches to address mobile traffic growth: 800 MHz Digital Dividend: bands previously reserved for analogue television are being allocated to mobile data use, with the European Union deadline for the digital switchover elapsing in 2012 and set for 2015 for the 119 member states of the GE06 agreement2600 MHz auctions: many regulators have chosen to auction the 2600 MHz band simultaneously with the 800 MHz band, enabling a paired band approach to deploying LTERegulators are taking action to avoid spectrum congestion, leading to a range of opportunities and challenges for operators. PERSPECTIVE WHAT CAPACITY CRUNCH?Refarming of 900 / 1800 MHz: regulators are allowing operators to repurpose spectrum in the 900 MHz and 1800 MHz band for use in deploying LTEUse of 700 MHz: use of 700 MHz for LTE deployments, currently mainly restricted to North America, will become more commonplace thanks to a resolution signalling the intention to use the band for LTE deployments passed at the 2012 World Radio Conference. 8. 8Not everyone is in agreement There is a body of evidence, however, that suggests that the threat of insufficient spectrum capacity may be being overstated. A number of papers examining future demand for spectrum have been published disputing the capacity crunch narrative, and there is little consensus between third-party observers (such as analysts and vendors) as to whether additional spectrum will be needed in the future. For example two recent reports (from Ofcom in the UK and NITA in Denmark) did not identify any requirement for additional spectrum over and above what governments could be reasonably expected to release. This view is shared by many who cite both a slowdown in data traffic growth and the use of mechanisms other than spectrum acquisition as the two major factors influencing their predictions.Recent auction results have thrown up some surprises Some operators seem to agree, and results from a number of recent auctions have been disappointing, reflecting a decrease in appetite for new spectrum. Regulator expectations regarding the outcomes of auctions have naturally been high given the pressures on operators and the scarcity of spectrum, but this has not always translated into the expected outcome. A number of recent auctions have failed to spark interest amongst operators: In the UK, the 2013 4G auction raised just 67% (2.34bn) of the previously anticipated target of 3.5bnIn the recent Romanian auction, 15% of the 757 MHz on offer went unallocatedIndias recent 2G auction raised less than one quarter of the expected revenue for the government, selling just 42% of the spectrum on saleIn Thailand, the recent 3G auction raised revenues of just 3% over the reserve pricesPERSPECTIVE WHAT CAPACITY CRUNCH?Vodafone Australia has withdrawn from the forthcoming 4G auction, and Optus are considering a boycott, due to the high reserve prices set by the regulator. 9. 96CiscoThere are other options Operators are beginning to consider other technical and commercial avenues in order to manage demand instead of spectrum acquisition. Alternatives to large investments in spectrum are increasingly being considered by operators deterred by high reserve prices and uncertain returns. Commercial strategies to curb data consumption are now common, with operators replacing unlimited usage plans with data caps and metered data, introducing severe overage charges, and charging premium prices for smartphone and tablet plans.Operators are beginning to consider other technical and commercial avenues in order to manage demand instead of spectrum acquisition. Wireless offloading through use of Wi-Fi and femtocells has also emerged as a key strategy for operators, who have introduced free Wi-Fi in crowded hotspots in order to encourage consumers to move off cellular networks, with some estimates suggesting that 31% of handset and tablet data traffic will be through Wi-Fi networks by 20166.PERSPECTIVE WHAT CAPACITY CRUNCH?Recent announcements by Telefonica O2 UK, Orange UK and Bouygues Telecom unveiling femtocell rollout plans mean that all operators in the UK and France now offer femtocell services. Improved technology is also enabling operators to increase the efficiency of their existing networks without the prohibitive costs associated with complicated technologies (such as cell splitting). For example, Alcatel-Lucent have developed hardware containing the components of an antenna and base station inside a 2.3 inch block; MIT have developed technology enabling seamless transition of data streams between Wi-Fi and LTE without dropping packets of data, boosting bandwidth from 1 to 16 Mbps. Other technologies, such as transcoding video into smaller and more efficient formats or limiting the amount of video downloaded in advance of viewing, are already available from vendors. 10. 10A NEW MODEL MAY BE ROUND THE CORNER Spectrum sharing is another possibility, although the business case for operators is uncertain. It involves the authorised use of a given frequency band by multiple users (either sharing the band in time or in geographical area).Their concerns include lack of clarity regarding business models for sharing, lack of regulation, concerns regarding the readiness of spectrum sharing technologies and potential security issues to name but a few.Steps have been taken by major regulators worldwide (including the Federal Communications Commission in the US and the European Commission) to encourage the adoption of shared spectrum access models, who expect the introduction of shared spectrum access to deliver significant benefits to society.Operator positioning is likely to have a significant impact on receptiveness to spectrum sharing, with Tier 1 operators hesitant to share spectrum, fearing loss of competitive advantage, whilst Tier 2 operators are likely to be keener to exploit the benefits of shared access to spectrum. Indeed, T-Mobile in the USA has already entered into an agreement with the government to test spectrum sharing.These include increased occupancy of bands (currently estimated to be only 10% in Europe), the creation of additional network capacity (both in terms of traffic levels and geographical coverage) and lower access costs for consumers. Operators, however, whilst not entirely dismissive, remain somewhat less enthusiastic about prospects for spectrum sharing in the short to medium term.PERSPECTIVE WHAT CAPACITY CRUNCH? 11. 11Operators will have to navigate a complex environment Whilst the reality of the capacity crunch may not be as threatening as some are saying, it still poses some difficult questions to operators. That mobile traffic is growing rapidly, and that operators networks are likely to come under strain as a result, are very real issues for operators to address. Network performance is of utmost importance to consumers as they consume more and more content over mobile networks. Spectrum strategies designed to meet these requirements must be cognisant of the options which are available both in the short and the longer term, and of course the implication for actions taken now in terms of acquisitions, lobbying positions and network investment. Operators with a thorough understanding of the impact of technological and regulatory changes on their existing network, and ultimately customers, will be best placed to take decisions which ensure long term competitiveness.PERSPECTIVE WHAT CAPACITY CRUNCH? 12. 12AUTHORSEnrico LanzavecchiaFaizal PatelAdele SinclairDirectorManagerAssociateManaging Partner of Value Partners London officeBased in Value Partners London officeBased in Value Partners London officeenrico.lanzavecchia@valuepartners.comfaizal.patel@valuepartners.comadele.sinclair@valuepartners.comPERSPECTIVE WHAT CAPACITY CRUNCH? 13. 13ABOUT VALUE PARTNERSValue Partners is a leading international strategy consultancy focused on the converging industries of telecommunication, media and information technology. We work with the worlds leading operators, policy makers, regulators, vendors and financiers to provide strategic, commercial, financial and technical advice. Specifically, we work across corporate and commercial strategy, policy formation, economic analysis, financial advisory support, licensing, operational improvement and change management, policy and regulation, rights management, strategic technology decisions and strategy implementation. Our clients span the digital marketplace including broadcasting, fixed telecoms, mobile telecoms, music, new media and internet, the public sector, publishing and sport. Value Partners is a global management consulting firm that works with multinational corporations and high potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness.Founded in Milan in 1993, today it draws on 18 partners and over 275 professionals from 23 nations, working out of 9 offices in Milan, London, Istanbul, So Paulo, Buenos Aires, Beijing, Shanghai, Hong Kong and Singapore. Value Partners has built a portfolio of more than 350 international clients from the original 10 in 1993 with a worldwide revenue mix, as over 60 percent of the management consulting revenues are generated outside Europe.For more information on the issues raised in this note please contact the authors. Find all the contact details on valuepartners.com Milan London Istanbul So Paulo Buenos Aires Beijing Shanghai Hong Kong SingaporeValue Partners combines methodological approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunications, new media, financial services, energy, manufacturing and hi-tech. In 2007 Value Partners acquired Spectrum Strategy Consultants a leading UK company specialized in publishing, broadcasting, entertainment, IPTV and mobile thus further strengthening its international presence. Today Value Partners is a leading advisor in the telecom, media and technology sectors worldwide.Copyright Value Partners Management Consulting Limited All rights reservedPERSPECTIVE WHAT CAPACITY CRUNCH?