the digital dividend in europe: in the eye of “the perfect storm”

8/6/2019 The Digital Dividend in Europe: in the eye of “The Perfect Storm”

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April 2011

The Delta Perspective

The Digital Dividend in Europe:in the eye of “The Perfect Storm”

Authors Alberto Pamias - Managing Partner Daniel Torras - Associate Partner

OVERVIEW

The 800 MHz frequencies, commonly referred to as the Digital Dividend, have

the potential to unleash a perfect storm in the telecommunications industry.

Compounding the need for operators and vendors to capitalise on the growing

demand for mobile broadband, the scarcity of available spectrum and the

governments’ opportunity to cash in billions of dollars in spectrum auction

proceeds, the Digital Dividend may disrupt the global competitive landscape

in an unprecedented manner and force operators to make a wide range of

strategic decisions of significant impact, including revisiting their strategic

positioning and commercial strategies, partnering with competitors, re-

evaluating technology choices and rolling out new technologies and networks,

refarming spectrum if necessary.

This white paper explores the significance and implications of the Digital

Dividend and concludes with a strong call to action for operators to evaluate

all options and develop an action plan now. The complexity and breadth of

decisions that CEO’s of European operators need to make, and the imminent

award of new licences across the continent, require that this be tackled as a

matter of urgency.

A USD 50 Bln rule-changing

play triggered by the new800 MHz spectrum. In this

high-stakes game old rules

will no longer apply and

operators will need to re-

invent themselves to survive.



2

The Digital Dividend in Europe:

in the eye of “The Perfect Storm”

The global telecommunications industry, and especially the mobile sector in most of the developed

and an increasing number of the developing markets, is sailing into a perfect storm. Following

the meteorological analogy, three different weather-related phenomena are coalescing in the

formation of this telecommunications storm:

Warm air from a low-pressure system coming from one direction:• the rise of wireless

broadband

The surge in mobile data as a result of the advent of data-centric handsets, spurred

by Apple’s iPhone and iPad and later followed by the whole Industry, has dramaticallychanged the way people use the Internet on their mobile devices. Global mobile data

traffic is expected to increase 26-fold in the next 5 years to reach over 6 Exabytes by 2015

(from 0.24 Exabytes in 2010)2

A flow of cool and dry air generated by a high pressure front from another direction:•

the operators’ need for new sources of growth as markets stagnate

Mobile operators are looking for new growth avenues to counter the stagnation of

traditional voice services. The data opportunity is the new “El Dorado”. Pressed to deliver

returns to their shareholders, operators are making significant Capex investments to

upgrade networks from UMTS to HSPA+, and more recently to LTE, on the promise of a

new and long life for the wireless industry.

Tropical moisture:• the need for additional spectrum and new technological standards to copewith the exponential increase in data traffic

Network utilisation is on the rise as a result of the exponential growth in data traffic,

leading to severe network congestion for many operators. Operators desperately need

additional spectrum and new spectrum-efficient technology bearers in order to sustain

data growth. From a policy and regulatory point of view, increasing broadband availability

is, on paper, a key priority for governments (in reality, governments’ motivations can be

quite different, as we well see later). In its Digital Agenda published in May 2010, the

European Commission stated its goal that member states should provide basic broadband

connectivity to 100% of Europeans by 2013, fast broadband (above 30 Mbps) to 100%

of Europeans by 2020, and ultra-fast broadband (above 100 Mbps) to at least 50% of

European households by 2020.

In meteorological terms, a storm is a disturbance of the

atmosphere marked by wind and usually by rain, snow, hail, sleet,

or thunder and lightning1. A severe storm can have a negative

impact on people’s lives and property. A perfect storm is a rare

combination of circumstances that aggravates the situation

drastically.

1 Merriam Webster dictionary2 Cisco



3

Similarly to a perfect storm, aggravating circumstances are coming together, which are drastically

contributing to make this telecommunications storm a perfect one:

Device manufacturers are focusing on data hungry devices such as smartphones and tablets•

to foster (and capitalise on) growth opportunities, pushing infrastructure vendors to engage

in an arms race to deliver the best, fastest and cheapest next generation equipment

Content providers and consumer advocates have in recent years escalated the debate in•

favour of net neutrality and closing the digital divide, adding further pressure on operators to

improve network coverage and data speeds

Many GSM licences that were originally awarded in the 90’s are approaching their expiration•

dates

Governments, still trying to recover from the global recession of the 2008-2009 period, need•

to generate new sources of income to finance their budgets, and the auctioning of scarce

public assets such as spectrum has the potential to rake in large sums of money

In the eye of “The Perfect Storm” is the Digital Dividend, a set of radio frequencies that are

very well suited for the provision of mobile broadband, and that have the potential to trigger an

unprecedented shake-up in the global telecommunications market.

This white paper discusses the business opportunities that the Digital Dividend will unveil (as well

as the devastating effects it can have if not implemented well) and how the different market

constituents – particularly operators - need to prepare themselves, including the trade-offs they

must be willing to make, to sail through this perfect storm.

EXHIBIT 1: THE DIGITAL DIVIDEND IN THE EYE OF THE PERFECT STORM

Source: Delta Partners



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What is the Digital Dividend and

why does it matter?

In order to facilitate cross-border provision of services, avoid interference and allow equipment

manufacturers and operators to benefit from economies of scale and faster time to market,

Digital Dividend frequencies have been harmonised globally and divided into 2 parts: one in the

lower part of the UHF spectrum band (also known as lower Digital Dividend) and another one

immediately above it (upper Digital Dividend)3. The first has been reserved for TV broadcasting,

and the second has been reserved for mobile broadband. In Europe and the CIS, as well as

Africa, the Middle East and parts of Asia, the band comprised between 790 and 862 MHz will be

allocated to mobile broadband.

As the terrestrial television switchover from analogue to digital

takes place across the world, some of the radio spectrum that

is currently used for TV broadcasting will be freed up and

allocated to other uses, such as mobile broadband. This range

of frequencies is commonly referred to as the “Digital Dividend”.

A few countries in Europe and the Americas have alreadycompleted the switchover, and many others will follow in the

next 12-24 months.

EXHIBIT 2: ANALOGUE TO DIGITAL TV SWITCOVER TIMEFRAME

Source: GSA

3 Ultra High Frequency Band: 300 MHz to 3000 MHz



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From a technical perspective, the Digital Dividend spectrum is very attractive. It is in the lower UHF

range, and thus has very good propagation characteristics. Radio signals in this band can travel

further distances than higher frequency signals, and are less attenuated by buildings and other

geographic or climatologic obstacles. Because a single site operating in the 800 MHz band can

cover as much area as up to 5 sites operating in the 2100 MHz band, it is significantly cheaper to

provide mobile broadband coverage over a given geographic area using 800 MHz spectrum than

with the 2100 MHz spectrum. This advantage is even more pronounced when one compares the

Digital Dividend spectrum with the 2600 and 3500 MHz bands, which are also used for wireless

broadband. This makes the Digital Dividend spectrum particularly well suited to provide mobile

broadband coverage in rural and suburban areas.

Another benefit of the Digital Dividend frequencies is that they are very close to the GSM 900

band. Thus, a Digital Dividend base station can in most cases be co-located on existing GSM

towers to reuse existing passive infrastructure.

Because of these reasons, the Digital Dividend spectrum is highly coveted. As a point of reference,

in the May 2010 German auction - which included Digital Dividend spectrum alongside other

frequencies in the 1800 MHz, 2100 MHz and 3500 MHz bands - the Digital Dividend frequencies

were valued 7 and 32 times more than the 2100 MHz and 2600 MHz spectrum (see Exhibit 4),

respectively, attaining a valuation of USD 1.00/POP/MHz.

EXHIBIT 3: UPPER DIGITAL DIVIDEND ALLOCATION BY REGION

Source: GSA



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Taking the German valuation as a reference, the Digital Dividend spectrum could be sold for as

much as USD 50 Bln once all the countries in Europe (including transcontinental countries Russia

and Turkey) have auctioned it off.

Beyond the intrinsic benefits of allocating badly needed spectrum, the Digital Dividend also has

the potential to dramatically shake up the competitive landscape by giving challengers powerful

weapons with which to fight incumbent operators, and it can also be a catalyst for fixed-to-

mobile broadband substitution. As such, the Digital Dividend may not be a win-win for all market

constituents, and operators need to carefully analyse the implications of the Digital Dividend

in their markets in order to design an appropriate defence or attack plan, depending on their

competitive position.

Given the above considerations, it is easy to see how the Digital Dividend can unleash the previously

mentioned perfect storm. It reunites all the characteristics required to boost mobile data growth

(the basic requirements for a conventional storm), but it comes a time when all the aggravating

factors that can turn it into a perfect storm are flowing together. Of particular importance is the

role that regulators will play. Notwithstanding the rhetoric of most governments around social

development and the need to provide affordable broadband access to the general population,

the truth is that when it comes to spectrum allocation, most governments are moved primarily

by greed. In trying to maximise their cash-in at all costs, governments may, perhaps unwillingly,

unleash “The Perfect Storm” whose negative consequences can last for a very long time.

EXHIBIT 4: PRICES PAID IN GERMANY’S MAY 2010 BIG BANG AUCTION (USD CENTS/POP/MHZ)

Source: KB Spectrum, Delta Partners



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Telecom regulators need to reconcile two seemingly opposed objectives when awarding telecom

licences, especially when access to scarce resources such as spectrum is concerned:

The social aspect:• increasing competition and availability of services for the general

population, to benefit society at large, is at the core of this objective. This can be achieved,

for example, by establishing licence obligations that require significant investment and job

creation

The financial aspect:• simply put, this entails maximising the revenue windfall for the

government from the auctioning of spectrum

To achieve the first objective (the social one), regulators typically resort to coverage and service

level requirements with any new licence, and define auction rules to eliminate the possibility of a

single operator monopolising the entire spectrum available, via spectrum caps, spectrum trading

restrictions, or a minimum number of licences. In the case of the Digital Dividend, coverage

requirements in rural areas often constitute a key component of licence obligations.

To achieve the second objective (the financial one), regulators are predominantly opting for auctions

as the vehicle to award spectrum, in a clear attempt to maximise financial proceeds. Although

advocates of auctions will argue that an auction tends to command the fairest value for the

spectrum and that it is the most transparent method to award a licence, history shows that auction

The regulators’ perspective

As directors of the whole process, regulators exert enormous

influence in how the Digital Dividend implementation will take

place. Is greed good?4

EXHIBIT 5: EVOLUTION OF PRICES PAID FOR 3G SPECTRUM IN EUROPE (USD CENTS/POP/MHZ)

Source: Global Spectrum Database, country regulators, Delta Partners (does not include beauty contests)

4 “Wall Street”. Oliver Stone. 1987. Gordon Gekko full quote: “Greed is good. Greed is right. Greed works. Greed clarifies, cuts through, andcaptures, the essence of the evolutionary spirit”



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processes in the past decade have led to vastly different (and increasingly low as a function of the

auction timing) valuations on a comparable basis (USD/POP/MHz). These differences in valuation

cannot be explained by the macroeconomic differences among countries alone, and disprove thehypothesis that an auction is the guardian of “fair value”. On the contrary, they suggest that the

timing of an auction is a far more important factor when it comes to spectrum valuation than the

award process itself. The early European 3G auctions commanded much higher prices than latter

3G auctions, as is shown in Exhibit 5. Unsurprisingly, regulators in many countries are rushing to

auction the Digital Diligence spectrum ahead of other countries in order to take advantage of this

“early euphoria” effect.

Another aspect to consider for regulators looking to maximise the revenue windfall, and of great

implications for operators, is the expiration dates of the existing GSM licences. Many of the

licences that were awarded 15-20 years ago are coming or will soon come to their expiration, and

regulators may see this as an opportunity to auction multiple frequency bands at once, similarto what the German regulator did last May, or what the Spanish regulator is planning to do in

the coming months. This represents an attractive opportunity for operators that do not have

(or have very little) spectrum in the sub-1 GHz band, and conversely, it is a threat for incumbent

operators hoarding large blocks of GSM 900 frequencies. Multiple-band auctions further illustrate

the regulators’ ambitions to maximise their cash-in, by using the Digital Dividend as a trigger of

a major rule-changing event. Last, but not least, specific auction design parameters, including

minimum bidder activity requirements to remain eligible for subsequent auction rounds, and

minimum bid increments, can turn a standard auction into an inflationary one.

In the past, not all the regulators had placed equal emphasis on the social and financial objectives.

Nordic countries, for instance, have traditionally focused more on the social benefits of the

licences than on increasing government’s revenues, and as such they have historically favoured

beauty contests over auctions. In Central Europe, the reverse is true. However, in the midst of

economic turmoil or for other reasons, countries are changing their historical stance on this issue.

Sweden provides a good example. It awarded 3G licences via a beauty contest back in 2000,

but switched to an auction in early 2011 to award the Digital Dividend spectrum, without any

coverage requirements whatsoever for six of the five spectrum blocks that were auctioned.

EXHIBIT 6: EXPIRATION DATES OF EUROPE’S GSM LICENSES

Source: Global Spectrum Database, country regulators, Delta Partners



9

The two Digital Dividend auctions completed in Europe to date provide a good illustration of the

auction mechanics used by two countries that had historically pursued almost polar opposite

objectives (i.e. social-driven Sweden and financially-driven Germany). The spectrum valuationsattained in both countries should give a good indication of the upper and lower brackets we

should come to expect in the upcoming European auctions: in Germany, the Digital Dividend

spectrum was sold for USD 1.00/POP/MHz, whereas in Sweden the valuation was USD 0.57/POP/

MHz. In both cases, six blocks of 2x5 MHz were allocated, with a spectrum cap of two blocks

per bidder (which led in both Germany and Sweden to three operators acquiring 2x10 MHz

of spectrum each). While on paper the main difference between the licences auctioned in the

two countries had to do with coverage requirements (in the case of Germany, all licensees were

subject to coverage requirements, whereas in Sweden, coverage obligations were attached only

to one of the six 2x5 MHz blocks), in the end, other factors, mainly related to the “rules of the

game” including the mechanics and the timing of the auction itself, and the characteristics of the

domestic markets and operators, made one process more inflationary than the other.

One of the next countries in the line to award the Digital Dividend spectrum is Spain. It is a

remarkable case in that Spain has traditionally favoured beauty contests to award spectrum, buthas already announced it will use an auction format to award the Digital Dividend spectrum, and

there has been no mention of any coverage requirements.

The Spanish Government recently published the mechanics it intends to use in its upcoming

spectrum allocation process, tentatively scheduled for the second quarter of 2011. Being under a

big budget pressure, it is not surprising that several aspects of the Spanish process are blatantly

designed to maximise the financial proceeds for the government, even if the Spanish administration

purports to disguise this auction as a process aimed to advance social goals. Some of the Spanish

auction design elements are quite different from previous auctions in the continent and might set

a benchmark going forward:

EXHIBIT 7: SUMMARY OF THE GERMAN AND SWEDISH DIGITAL DIVIDEND AUCTIONS

Source: PTS, BNetzA, Delta Partners



10

Spectrum to be awarded:• 310 MHz in total, comprising 4 different bands (800 MHz, 900

MHz, 1800 MHz and 2600 MHz); this represents a 70% increase in the total amount of

spectrum currently used for the provision of mobile services in SpainGeographic scope:• all licences will be national, with the exception of several blocks in the

2600 MHz band, which will be awarded on an regional basis

Eligible bidders:• Telefonica and Vodafone will not be allowed to bid for the new 900

MHz and 1800 MHz spectrum, and Orange will not allowed to bid for the new 1800 MHz

spectrum; other than that, any party can bid for any of the licences

Technology neutrality:• all licences will be technology neutral, meaning licence holders will

be free to use any bearer technology they choose, be it GSM, UMTS, HSPA+, LTE or other

future technologies

Award format:• frequencies will be awarded using both auctions and beauty contests. For

the 800 MHz and 2600 MHz bands, auctions will be used. For the 1800 MHz band, there will

be a beauty contest. Finally, for the 900 MHz band, a hybrid model combining an auction andbeauty contest depending on the spectrum block will be used

Fungible spectrum caps:• a combined spectrum cap of 2x20 MHz per operator will apply to

the 800 MHz and 900 MHz bands, and a combined cap of 115 MHz (unpaired) will apply to

the 1800 MHz, 2100 MHz and 2600 MHz bands

Flexible spectrum trading:• operators will be allowed to trade spectrum starting 2 years

after the concession period begins, provided that licence obligations and spectrum cap

restrictions remain in force

The reserve price for each of the six 2x5 MHz blocks of Digital Dividend spectrum to be auctioned

in Spain has been set to Euro 170 Mln, representing a total minimum valuation for the 60 MHzavailable of over Euro 1 Bln (around USD 1.4 Bln). This is equivalent to a valuation of just over

USD 0.50/POP/MHz. While this appears to be broadly in line with the German and Swedish cases,

it is just the reserve price and there is a possibility that the final valuation might be materially

higher once the auction is completed. As a point of comparison, the final price paid in Sweden

for the Digital Dividend spectrum was more than two times higher than the initial reserve price.

The whole telecommunications sector is expectant about the outcome of the Spanish process to

understand whether it may become a reference point (and trigger) for a widespread explosion of

inflationary auctions throughout Europe.

In summary, notwithstanding the importance of spectrum auction proceeds in terms of balancing

government budgets, telecom regulators must carefully assess the impact that these auctioningprocesses can have on their markets. An unwelcome side effect of inflationary auctions might

be that some of the existing operators, typically the smaller ones that are often the ones with

the greatest need for spectrum, leave auctions empty-handed (as was the case with E-Plus in

Germany), while the auction “winners” are forced to take on massive amounts of debt to pay for

the licence fees and network rollout, potentially at the expense of limiting geographic coverage,

increasing broadband prices, or downsizing their workforces. In this context, regulators must

understand the motivations of operators and be prepared to deal with their lobbying efforts,

and design and implement an auction process that best meets the social and financial objectives

defined earlier.



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The complexity of decisions involving the Digital Dividend1.

The decision of whether to acquire Digital Dividend frequencies or not is a very complex one,

and goes far beyond a mere spectrum purchase consideration. As described earlier, the Digital

Dividend implementation will be heavily influenced by how regulators in each country choose to

award the spectrum, and will force operators to evaluate a wide range of interlinked strategic

decisions:

Strategic positioning:• operators will need to think about which customer segments they

want to target, what the best operational model is to do so, and the positioning that will best

support this strategy (e.g. no-frills price-oriented player vs. premium-based best network

positioning, or somewhere in between). It is not self-evident that an operator’s current

strategy will remain valid in the context of the new paradigm brought about by the Digital

Dividend

Commercial proposition:• related to the above, operators will need to carefully assess

the degree and scope of convergent value propositions, and the extent to which regional

differences or a multi-brand strategy might be advisable. This is particularly relevant for

integrated operators, which may see their fixed customer bases cannibalised by the new

services enabled by the Digital Dividend

Technology strategy and choices:• while many may assume that the Digital Dividend and

LTE need one another, it is not necessarily the case. In the face of potentially inflationary

auctions and unclear vendor technology roadmaps, some operators may choose to deploy

LTE (or even stick to HSPA+) on alternative bands to the 800 MHz and forego the Digital

Dividend altogether, even if that results in a slight time to market disadvantage versus the

competition. The issue of spectrum refarming is critical in this context

Partnerships:• we expect to see an increase in M&A activity, network sharing, domestic

roaming agreements and other types of strategic partnerships between operators as a result

of the Digital Dividend, as operators look for creative ways to ensure a positive return on

investment for their shareholders. In some cases, these partnerships will be formalised prior to

the spectrum auctions (e.g. one of Sweden’s Digital Dividend auction winners, Net4Mobility,

is a 50/50 joint venture of Telenor and Tele2 created specifically with the goal of providing

mobile broadband services in Sweden), and in others, they will come about depending on the

auction outcomes in each country

Once again, the Digital Dividend appears as a trigger of a perfect storm implying a potentially

big paradigm shift for telecom operators. The aforementioned strategic decisions and their

relevance as “moments of truth” will force operators to evaluate, and eventually implement a

Digital Dividend strategy in a cross-functional way. When it comes to the Digital Dividend, all

departments within an operator (corporate strategy and development, marketing and sales, legal

and regulatory, finance, and of course network and IT) will be affected by and contribute towards

the implementation of a new broadband strategy.

The operators’ perspective



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Given the vast financial, operational and strategic implications that decisions related to the Digital

Dividend will bring along, operators would be well advised to tackle this issue early, well in advance

of the spectrum auctions planned across Europe in the next 12-24 months (see exhibit below),

to make sure their bidding strategy and network rollout plan are well informed and aligned with

the business opportunity. As we will see next, there isn’t a one-size-fits-all approach with regardsto the Digital Dividend for all types of operators. The financial valuation of the opportunity is

technically complex, which heightens the need for European operators to define their strategy as

a matter of urgency.

EXHIBIT 8: TYPES OF DECISIONS AND DEPARTMENTS INVOLVED IN THE DIGITAL DIVIDEND


EXHIBIT 9: LIKELY DIGITAL DIVIDEND EUROPEAN AUCTION ROADMAP

Source: Regulators, Delta Partners estimates



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How much is the Digital Dividend spectrum worth?2.

Depending on the market position of an operator, the perceived value of the Digital Dividendmay be very different, and thus the Digital Dividend can be seen as a threat or an opportunity.

Factors such as the effect that the Digital Dividend will have on ARPU and churn given the new

competitive landscape, the potential danger (or opportunity, depending on the operator’s point

of view) of fixed line cannibalisation, and the mid to long term changes in market share position

that the Digital Dividend may unleash, will heavily influence the value that an operator assigns to

the spectrum.

In order to illustrate the above, let us consider three generic operator types:

Large integrated incumbents:• these are operators with the largest market share and

network in their countries, with ARPU’s typically above average, and a full suite of servicesincluding fixed, mobile, broadband and often Pay TV. These operators typically have a large

amount of GSM 900 spectrum

Early entrant challengers:• these are often large mobile operators occupying the number

2 or 3 spot in their markets, with a fair share of GSM 900 spectrum, and providing primarily

mobile services (sometimes also fixed and Pay TV). These operators are sometimes squeezed

between the incumbent and the late entrants and struggle to maintain market share

Late entrant challengers:• these are number 3-5 operators in their countries, with growing

customer bases and market share, but a less favourable spectrum position than their

competitors. In many cases, the GSM spectrum portfolio of these operators consists only

of 1800 MHz, although they may also have 2100/2600/3500 MHz frequencies. In some

extreme cases, these operators do not have any GSM spectrum at all and rely on domesticroaming agreements to provide GSM services to their customers. These operators are the

most likely to compete on price

EXHIBIT 10: EUROPEAN MOBILE OPERATOR CATEGORISATION




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Each of these operator types have to weigh different considerations when valuing the Digital

Dividend spectrum. It is reasonable to assume that late entrants will find more upside in the

Digital Dividend opportunity than a well-established incumbent, which might see its comfortablecompetitive position threatened. As a matter of fact, the value of the Digital Dividend spectrum for

an incumbent operator may be purely strategic, and some incumbent operators may be content

with acquiring this spectrum only to prevent their competitors from getting their hands on it.

Technology and strategy: a prisoner’s dilemma3.Aside from the strategic implications that gaining access to new spectrum can have for operators

as they define and implement their broadband strategies (today’s telecom “Nirvana”), there

are key network related decisions – such as refarming of frequencies and the rollout of new

technology bearers including LTE and/or HSPA+ - that, as a collateral effect, have the potential

to drive strategic partnerships among operators, in their simplest form through network sharing,

and in certain cases through full mergers. This effect may be amplified or accelerated depending

on how regulators manage the Digital Dividend process, as we saw in the previous chapter. Delta

Partners predicts that in most countries, three equally sized 2x10 MHz Digital Dividend licences

will be awarded. There is little that operators can do with a smaller frequency block, and we

generally expect regulators to impose a 2x10 MHz spectrum cap to ensure a minimum level ofcompetition. In both Germany and Sweden, the Digital Dividend spectrum was split into six blocks

of 2x5 MHz, and the end result of both auctions was that three bidders acquired blocks of 2x10

MHz each. This outcome is likely to repeat itself across Europe.

Having the most to lose from letting competitors acquire digital Dividend spectrum, we expect

that in almost every case, the national incumbents will acquire one of the licences, and the other

two licences in a given country will be acquired by early or late entrant challengers. This means

that in countries with more than three operators, at least one of them will be left out without any

800 MHz frequencies, unless they partner in advance and participate in the auction as a single

entity. In the case of Germany, E-Plus failed to acquire Digital Dividend spectrum, and in the case

of Sweden, Tele2 and Telenor participated jointly through their 50/50 joint venture Net4Mobility.

EXHIBIT 11: IMPACT OF DIGITAL DIVIDEND ON KEY BUSINESS DRIVERS




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Under these circumstances, the three operators with Digital Dividend licences may need to come

to terms with the notion of partnering with one of its peers to compete more effectively, although

it is not self-evident that partnering for network sharing will always be value accretive. Buildinga shared network could provide two challengers a strong platform from which to erode an

incumbent’s market share, compounding the benefit of Capex savings for the two partners.

For incumbent operators, however, the Capex savings from building a shared network may in

some instances be offset by a loss of market share, especially in favour of the weaker partner,

and potentially also by a reduction in ARPU resulting from an eventual price war triggered by the

remaining challenger or challengers, being forced to compete on price as the only way to fight

bigger incumbents. Thus, it is crucial, especially for incumbent operators, to evaluate the pros and

cons of network sharing from a strategic and financial perspective before starting partnerships

discussions with other operators. In any event, in cases where the provision of mobile broadband

services is clearly economically unviable, as might be the case in certain rural areas, operators mayseek to share their networks on an ad-hoc basis in these regions.

The second or third operator in a given market, typically the early entrant challenger in our earlier

categorisation, may often hold the upper hand when it comes to partnerships, as it may benefit

from partnering with either the incumbent (in order to marginalise smaller players), or one of the

smaller players (to eat into the incumbent’s lead). This is a rare instance when being a “middlechild” may actually be advantageous, and may prompt a prisoner’s dilemma situation for the

incumbent, which may be better off in a market environment with no partnerships, but for

whom the risk of two smaller operators partnering is larger than the economic downside of the

incumbent partnering with another operator to pre-empt a coalition of the weak. In the example

illustrated in exhibit 13, the highest combined pay-off for the incumbent and a challenger operator

happens when neither partners with a third operator, but an alternative equilibrium point exists

when both partner to avoid a potentially worse individual pay-off. Of course, the two operators

can only partner with someone else if there are at least four operators in the market. In a market

with three operators, the middle operator may end up being a much sought-out partner for

both the incumbent and the smallest operator as each tries to prevent the other from striking a

partnership.

EXHIBIT 12: ILLUSTRATIVE EFFECT OF NETWORK SHARING FOR INCUMBENT OPERATOR

Source: Delta Partners, based on actual project but sanitised to protect client’s confidentiality



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Alternatives to the Digital Dividend4.

The Digital Dividend spectrum is not the only avenue for operators to provide mobile broadband

services to their customers. While lacking in terms of relative performance compared to LTE, HSPA+

is a proven technology, still evolving, and data throughput will continue to increase in the coming

years (actual tests have been performed demonstrating HSPA+ data rates above 100 Mbps).

A more intriguing possibility is the rollout of HSPA+ or LTE in the 900 MHz band. This would of

course entail refarming the 900 MHz spectrum and reconfiguring the GSM infrastructure to cope

with a hybrid GSM/HSPA+/LTE radio network. Among other things, this would include optimising

and sectorising (if needed) the surviving GSM base stations to avoid interference with LTE, and

adding new GSM base stations to make up for the capacity loss. In addition, in a refarming

scenario, more LTE sites would be required than in a pure Digital Dividend scenario because of

the limited 900 spectrum available for LTE and the need to reuse frequencies. However, an LTE

900 site would be on average 5%-10% cheaper than an LTE 800 site because of the possibility

of reusing some of the passive infrastructure elements of the existing GSM 900 sites. All in all,

spectrum refarming is likely to result in higher cumulative Capex for operators than rolling out anLTE network in the Digital Dividend band. It is therefore important for operators to consider two

aspects when evaluating the spectrum refarming option:

Is the incremental Capex lower than the likely licence fees for the Digital Dividend•

spectrum?

Considering the time required to refarm the spectrum and procure LTE 900 compatible•

equipment, will competitors that focus on an LTE 800 network enjoy a material time-to-

market advantage?

EXHIBIT 13: IMPACT OF NETWORK SHARING PARTNERSHIP FOR INCUMBENT AND CHALLENGER

OPERATOR




17

EXHIBIT 14: CUMULATIVE 10-YEAR CAPEX FOR LTE 800 AND LTE 900 (REFARMING) SCENARIOS

Source: Delta Partners, based on actual example but sanitised to protect client’s confidentiality

How operators should approach the Digital Dividend5.

process

As we have seen, the Digital Dividend not only urges operators to make very relevant Capex and

network related decisions, but also has the potential to disrupt the competitive dynamics in themarket and ignite a new wave of consolidation and partnerships. As such, operators need to act

cautiously by designing a strategic roadmap that optimises their own business case.

From a large integrated incumbent’s point of view, the best possible scenario is the current

status quo, favouring a “divide and conquer” strategy where the Digital Dividend auction is

delayed as much as possible, the current GSM 900 licences are extended, and eventual Digital

Dividend licence coverage requirements are either non-existent or technology neutral (since most

likely the incumbents are already meeting these coverage requirements with their 3G networks).

If push comes to shove, and assuming this is possible without infringing licence obligations,

incumbent operators may opt to buy Digital Dividend spectrum but do nothing with it or just

meet the minimum coverage requirements, in order to prevent the competition from acquiringthis spectrum.

Early entrant challengers, on the other hand, might pursue a “regroup and jump” strategy

that allows them to leap forward and eventually (co)lead the market. To do that, they might need

to partner with another operator to share the network and realise Capex savings, operational

synergies and a faster time to market in order to more effectively compete with the incumbent

(Orange’s and T-Mobile’s joint venture in the UK, Everything Everywhere, is a good example of

such type of partnership).



18

Finally, late entrant challengers, especially those that do not own GSM 900 spectrum, might

push for a “big bang” strategy that allows them to acquire 800 MHz spectrum at all costs and

partner with other challengers. In addition, they also need to lobby the regulator to re-auction theGSM 900 frequencies sooner rather than later, in order to improve their spectrum position at the

expense of the incumbent and early entrant challengers. This may be a late entrant challenger’s

last chance to become a relevant market player.

All in all, European operators need to understand the competitive scenarios that may develop in

their markets as a result of the Digital Dividend, some of which they can influence, while others

they may be forced upon. Next, operators should value each scenario and then define and execute

a lobbying campaign to promote the scenario that best meets their strategic objectives. Finally,

and ideally when all the auction design elements are known, operators should perform a battery

of war game and auction simulations to inform their bidding and competitive strategy.

We expect the European Digital Dividend process to heat up after the first two auctions in

Germany and Sweden have been completed. As we saw earlier, most of the Western and a few

of the Central European countries will auction the Digital Dividend spectrum in the next 12-18

months. The remaining European countries (and the rest of the developing world) will follow

from 2013 onwards, as the analogue to digital TV switchover is slated to take place later in those

countries.

Given the complexity of the decisions involving the Digital Dividend, the disparate interests of

the constituents involved, the financial impact for all players and the Digital Dividend’s role as

a catalyst of a new competitive landscape, operators in the countries where spectrum auctions

are scheduled in the next 18 months need to define their strategic game plan now in order

to capitalise on the opportunity, assess the key technological options in response to or as a

driver of a new competitive landscape, and strike appropriate partnerships early, anticipating their

competitors’ moves. Billions of dollars in licensing fees and Capex as well as in additional revenues

are at stake. Winners in the Digital Dividend process will come out stronger than they are today,

while losers may be forced out of the market or be severely handicapped.

The operators’ moment of truthto unleash or avoid “The PerfectStorm”



19

Just like captains of boats and airplanes study their navigation charts and weather forecasts ahead

of their journey to avoid or protect themselves against inclement weather, so do telecom CEO’s

must prepare to deal with different kind of storms. This is especially the case in Europe today given

the magnitude of the storm that the Digital Dividend has the potential to unleash.

A call to action for operators

The complexity and breadth of decisions that CEO’s of telecom

operators will need to make in the wake of the Digital Dividend

require a well coordinated, modular and phased approach to

ensure success.



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the digital dividend in europe: in the eye of “the perfect storm”

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