upgrading the cost model for mobile termination in denmark · upgrading the cost model for mobile...

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Upgrading the cost model for mobile termination in DenmarkIan Streule, Matthew Starling, Alex Slinger

21 June 2011

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Contents

Background to the original LRAIC model

Introduction

Upgrades proposed to the cost model

Next steps

Glossary

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Introduction

Analysys Mason Limited (‘Analysys Mason’) has been commissioned to assist the National IT and Telecom Agency (‘NITA’) in upgrading the existing long-run average incremental cost (LRAIC) model for mobile networks in Denmark

The upgraded cost model will help inform future NITA decisions on the pricing of regulated mobile services: the upgraded cost model will feature additional functionality on top of

the original mobile LRAIC model addition of high-speed packet access (HSPA) technology possible addition of Long-Term Evolution (LTE) technology development of a new ‘generic operator’ derivation of costs of wholesale mobile voice/SMS termination,

consistent with the European Commission’s Recommendation for the ‘pure long-run incremental cost’ (pure LRIC), released in May 2009

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Ian Streule(Senior Manager)

Project Director (and Project Manager for the development of the original cost model)

Matthew Starling(Lead Consultant)

Project Manager, leading the development of the upgraded cost model

Alex Slinger(Associate Consultant)

Assisting in the development of the upgraded cost model

The Analysys Mason project team

Name and title Role in the project

Introduction • Project team

James Allen(Partner) Project Adviser

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Our process will allow significant input from industry parties Our experience of these projects, in both Denmark and other countries,

allow us to present an approach covering the:

management of various conceptual issues

interaction of industry parties/stakeholders

request and collection of relevant data

construction and upgrade of models that will be clear and robust

support for NITA in understanding the results and implications of

– charge controls based on LRAIC and other approaches

• including the specific case of the pure LRIC approach for wholesale mobile termination

Introduction • Approach

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The process involves four phases …

Phase 1:Model specification

Phase 2:Model preparation

Phase 3:Model consultation

and revision

Phase 4:Model finalisation

Industry workshop regarding the specification of the model Data request issued Reference paper on model specification for industry Consultation response and finalisation of specification

Interim bilateral meetings regarding the data request Data collection and review Construction of model upgrades and verification

Consultation on the draft model Consultation on the revised model/draft pricing decision

Finalisation of the upgraded cost model Publication of the final model and final pricing decision


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… with industry involvement requested in each phase

Phase 1:Model specification

Phase 2:Model preparation

Phase 3:Model consultation

and revision

Phase 4:Model finalisation

Industry workshop regarding the specification of the model Consultation responses on the model specification

Data collection and data review meetings

Industry workshop on the draft model Industry workshop on the revised model and NITA’s draft

pricing decision Consultation responses following both workshops

Industry workshop on the final model and NITA’s final pricing decision


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Jun2011

Industry meetings

4: Model finalisation

Consultation of revised materials

Review comments and revise model

Review comments and finalise materials

Consultation of draft model

Project completion

3: Model consultation and revision

2: Model preparation

Issue data request

Industry consultation

Industry workshop

Construction of upgrades

Data collection

Jul Aug

1: Model specification

MarJan2012

DecNovOctSep

Finalise specification

Apr May JunFeb

The project is due to last 12 monthsIntroduction • Timetable

KEYModel development

Operator consultation

Industry meetings/workshops

Holiday periods

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Phase 1: Draft specificationIntroduction • Timetable

Jun2011

Industry meetings






Project completion



Issue data request


Industry workshop


Data collection

Jul Aug


MarJan2012

DecNovOctSep


Apr May JunFeb

Industry consultationDraft reference paper issued to industry prior to workshop

Workshop meetingToday

Data requestIssued to industry




Holiday periods

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Phase 1: Final specification




Holiday periods

Jun2011

Industry meetings






Project completion



Issue data request


Industry workshop


Data collection

Jul Aug


MarJan2012

DecNovOctSep


Apr May JunFeb

Industry responsesResponses to the

reference paper due by 11 August 2011

Finalised approachCompleted by

the end of August 2011

Introduction • Timetable

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Phase 2: Model preparationIntroduction • Timetable

Jun2011

Industry meetings

4: Model finalisationConsultation of revised materials




Project completion



Issue data request


Industry workshop


Data collection

Jul Aug


MarJan2012

DecNovOctSep


Apr May JunFeb

Data requests11 weeks for parties to provide demand/network data

16 weeks for parties to provide cost data

Industry meetingsDiscussions of data received and any issues related

to data collection encountered during the process




Holiday periods

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Phase 3: Model refinementIntroduction • Timetable

Jun2011

Industry meetings






Project completion



Issue data request


Industry workshop


Data collection

Jul Aug


MarJan2012

DecNovOctSep


Apr May JunFeb

Draft modelReleased in the middle

of December 2011

Revised modelRevised model (as well as NITA’s

draft pricing decision) released in early April 2012

Consultations4–5 week periods

for operators to respond


Operator consultation Holiday periods


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Phase 4: Model finalisationIntroduction • Timetable




Holiday periods

Jun2011

Industry meetings

4: Model finalisationConsultation of revised materials




Project completion



Issue data request


Industry workshop


Data collection

Jul Aug


MarJan2012

DecNovOctSep


Apr May JunFeb

Final modelsFinal models (as well as

NITA’s final pricing decision) released in June 2012

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Introduction

Proposed upgraded cost model

Next steps

Glossary

Model specification

Reference design

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The original model was developed according to four key dimensions

Background to the original LRAIC model • Model specification

2. Technology

3. Service

1. Operator

4. Implementation

TypeSize

Network designRadio technology

SpectrumVoice vs. data

Network vs. retailWACC*

DepreciationSize of incrementYear(s) of resultMark-up method

Structure

Conceptual issues

*WACC = Weighted average cost of capital

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Conceptual issue Recommendation for original model

1. Structural implementation

Bottom-up, reconciled against top-down information

2. Type of operator Actual operators

3. Size of operator Actual size

Original concepts: operator

2.Technology

3.Service

1. Operator

4.Implementation

The original mobile LRAIC model captured the four actual mobile network operators (MNOs) in Denmark:

TDC, Telia, Telenor (Sonofon) and Hi3G

Only NITA had visibility of the model data from all MNOs:

MNOs only had visibility of their own model data


Source: NITA

KEY To be reconsidered

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Original concepts: technologyConceptual issue Recommendation for original model4. Radio technology

standards2G and/or 3G, as needed to reflect actual operators

5. Technology generations Included within the model explicitly

6. Extension and quality of coverage

Reflect historical and expected future coverage

7. Transmission network

Actual transmission networks as far as possible

8. Network nodes Scorched-node calibration, optimised for efficiency and modern standards

9. Input costs Mixed approach based on actual/average costs

10. Spectrum situation Capability to capture hypothetical or actual allocations, plus licence fees

2.Technology

3.Service

1. Operator

4.Implementation


Source: NITA


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Original concepts: serviceConceptual issue Recommendation for original model

11. Service set Both voice services and non-voice services

12. Wholesale or retail Wholesale network costs only

The original mobile LRAIC model captured both voice and non-voice services:

including SMS, GPRS, EDGE, R99 data and video

However, HSPA was not considered explicitly, rather converted into R99-equivalent traffic

2.Technology

3.Service

1. Operator

4.Implementation


Source: NITA


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19176-225Source: NITA

Original concepts: implementationConceptual issue Recommendation for original model

13. WACC Calculate using the capital asset pricing model (CAPM)

14. Depreciation method Economic depreciation

15. Increments One traffic increment; multiple subscriber increments

16. Years of results All relevant past and future years (1992–2041)

17. Mark-up mechanism Equi-proportionate mark-up (EPMU)

18. Network externality surcharge Not applied

2.Technology

3.Service

1. Operator

4.Implementation



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Introduction


Next steps

Glossary

Model specification

Reference design

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Structure of the reference design for the original mobile LRAIC model

Background to the original LRAIC model • Reference design

BTSTRXTRX

TRXTRX

BTSTRXTRXTRXTRX

TRXTRXTRXTRX

BTS

TRXTRXTRXTRX

TRXTRXTRXTRX

CKCK

CKCK

BTSNodeB

E1MUX

MUX

MUX

PCUSGSN

HLRINNMSCS POIPS

Internet

E1

SMSC Billing

STM1STM1

STM1STM1

E1E1

TRXTRXTRXTRX

TRXTRXTRXTRX

BTSBTS

BTSTRX

TRXTRXTRX

TRXTRXTRX

GGSN

MSCBSC

RNC

GMSC or

TSC

Overall design logic of network1. Coverage drivers

2. Network roll-out

3. Radio network

4. Backhaul network

5. MSC, TSC

6. Backbone network

7. HLR, SMSC, GSNs

8. Expenditure rules

9. Incremental costs

Source: Analysys Mason

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NITA’s Mast database was used to specify details of coverage …

All operators recognised c. 95% of Denmark as ‘rural’:

though key differences occurred in the number and size of urban geotypes

We averaged across operator data and used NITA’s Mast database to identify operator sites by geotype

Background to the original LRAIC model • Reference design • 1. Coverage drivers

Source: Analysys Mason, NITA

Dense urban

Urban

Suburban

Rural

Dense urban

Urban

Suburban

Rural

Geotype Area Size (sq. km)Dense urban 0.09% 40Urban 0.82% 350Suburban 3.34% 1 430Rural 95.75% 40 944

Map of geotypes in the original model

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MapInfo model of hexagonal outdoor coverage at each BTS

Calibrated cell radii, by geotype, for outdoor coverage

0

1

2

3

4

5

6

7

8

9

10

Denseurban

Urban Suburban Rural

Theo

retic

al ra

dius

(km

)

900MHz 1800MHz 2100MHz


Source: Analysys Mason, NITA

… and operator data was used to calibrate the cell radii

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Optimal versus scorched-node coverage was captured in the model In an optimal network, coverage would

be achieved with the theoretical cell radius

In reality, operators are constrained in the potential locations for their base transmitter stations (BTS), and must take a strategic decision about how well they fill the resulting gaps (by frequency)

The ratio of effective-to-theoretical coverage per site (the ‘scorched-node coverage coefficient’) was used to calibrate cell radii by operator

Optimal locations of BTS

Sub-optimal locations of BTS

occurring in reality

BTS coverage assumptions



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Both 900/1800MHz 2G networks and 2100MHz 3G networks were modelled The model input was defined by

geotype, frequency and time (history + forecast)

Historical coverage by operator was calculated from NITA’s Mast database and operator data, using MapInfo:

special sites (indoor, tunnel) were separately specified

The primary spectrum used for coverage was defined for each operator (900MHz for TDC and Sonofon; 1800MHz for Telia; 2100MHz for Hi3G)

Secondary spectrum coverage BTSs were deployed mainly on existing primary spectrum sites

3G coverage was deployed mainly on existing 2G sites

Both aspects varied by operator and geotype

Deployment is predominantly tri-sectored to maximise coverage:

some one-sector/two-sector deployments were assumed in rural areas with 900MHz

Background to the original LRAIC model • Reference design • 2. Network roll-out

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The BHE* to be conveyed were applied to the coverage network … Capacity of 2G coverage sectors was

calculated, taking into account: the amount of spectrum maximum reuse factor: 12 cell-blocking probability: 1–2% BTS capacity: four transceivers

(TRX) TRX capacity: 8×n, less CCH and

GPRS allocations

Capacity of the 3G coverage sectors was calculated, taking into account:

number of carriers (1–3) cell-blocking probability (1%) soft-handover margin (40%) NodeB capacity (15 kits) channel-kit (CK) capacity

(16 channel elements, or CE)

*Busy-hour Erlangs

Background to the original LRAIC model • Reference design • 3. Radio network

BTS, TRX, NodeB and CK capacities were further weighted by a utilisation factor, some of which varied by operator:

e.g. for BTS/TRX this varied depending on the (strategic) trade-off between more TRXs or more sites

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… with unsupported BHEs requiring additional sites The additional BTSs deployed were

always tri-sectored, and utilise primary and/or secondary spectrum in a certain (average) proportion by geotype

Other radio network elements were dimensioned more simply:

approximately 1% of traffic was carried on special sites (indoor and tunnel sites)

these were deployed with a fixed number of TRXs/CK per site, i.e. capacity elements not driven explicitly by traffic

Site types were deployed according to a percentage input

Own tower site Own monopole site

Third-party rooftop site*Third-party tower site*

*Blue shading denotes own equipment; light grey denotes third-party assets

Site types modelled

Background to the original LRAIC model • Reference design • 3. Radio network

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The model assumed separate 2G and 3G LMA* backhaul networks

3G backhaul network elements

BSC

8Mbit/s microwave (n E1 part-filled)

Access hub

n E1 leased lines per site on average

E1

E1 E1

2G fibre backbone links

1E1Special

sites

BTS

Rural sites

2G backhaul network elements

KEY 2G BTS 3G NodeB

8Mbit/s microwave (n E1 part-filled)

E11E1

Special sites

Access hub

NodeB

3G fibre backbone links

E1E1

Rural sites

RNC

Background to the original LRAIC model • Reference design • 4. Backhaul network

Source: Analysys Mason *LMA = Last-mile access

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The 2G MSC/TSC topology was driven by a simple reference table The 2G mobile switching centre (MSC) had a processing capacity, in busy-

hour call attempts (BHCA), subject to maximum utilisation

The number of MSCs calculated by this method was used to drive the topology of the switching network

Background to the original LRAIC model • Reference design • 5. MSC, TSC


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The 3G MSC layer assumed separate servers and gateways

Mobile switching server (MSS) Media gateway (MGW)

3G BHCAsMSS processor maximum utilisation

MSS processor capacity Number of MSSs

Switching topologySwitching topology look-up table

Traffic per route

E1 ports

BHE on inter-switch, interconnect, VMS

MGW port maximum utilisation

MGW port capacity

Number of MGWs

Background to the original LRAIC model • Reference design • 5. MSC, TSC


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The inter-MSC network was formed of one or more mesh layers

1

23

1

2

1

23

4 56

6 logical routes

10 logical routes

15 logical routes

0 logical routes

2 logical routes

3 logical routes

KEY Switching location Route

Background to the original LRAIC model • Reference design • 6. Backbone network


Mature GSM networks are typically beyond three sites; however, evolving 3G networks have yet to reach the same extent

For 12 MSCs and 7 locations, a two-mesh transit layer was deployed

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Jutland fibre ring

Fyn fibre ring

Sealand fibre ring

The logical backbone links were deployed on a national fibre network A proportion of incoming, outgoing

and on-net voice traffic travelled between switching sites:

depending on caller locations and the locations of the points of interconnection (PoIs)

The average traffic per logical route was used to dimension the total E1 links between switching sites

National fibre backbone

Background to the original LRAIC model • Reference design • 6. Backbone network


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Data servers were deployed using standardised rulesHLR Home location register (HLR) units

were driven by registered SIMs (both personal and non-personal):

the capacity per HLR unit, plus maximum utilisation, was used to calculate HLR units over time

2G and 3G subscribers were aggregated in the HLR

SGSN and GGSN Subscriber GPRS serving nodes

(SGSN) were dimensioned in terms of simultaneously connected (2G+3G) subscribers

Gateway GPRS serving nodes (GGSN) were dimensioned in terms of (2G+3G) active packet data control (PDP) contexts

SGSNs/GGSNs had defined capacities, subject to a utilisation factor

SMSC The peak SMS throughput was

calculated SMS centres (SMSC) had a peak

throughput capacity, subject to a utilisation factor

Background to the original LRAIC model • Reference design • 7. HLR, SMSC, GSNs

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The model purchased assets using both lead and replacement periods The model calculated active network

assets at mid-year

Capital expenditure (capex) on assets occurred 1–18 months in advance of activation:

depending on lead times and the size of network assets

Operating expenditure (opex) was incurred once the asset is active

A replacement lifetime (5–25 years) determined when an asset was replaced (at its current cost)

Time

Demand requirement (t)subject to max.

utilisationLook-aheadperiod

Ord

erin

gP

urch

asin

gD

eplo

ymen

tTe

stin

gA

ctiv

atio

n

Dep

loym

ent

Purchase requirement subject to

look-ahead

Lead time expenditure profile

Background to the original LRAIC model • Reference design • 8. Expenditure rules


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Network elements were removed when no longer required Due to migration off the networks,

traffic-driven assets sometimes became unnecessary, although coverage rules still applied

The rate at which assets were removed from the network was an input to the model

Removal saved: asset replacement costs opex

Investment costs were still fully recovered; but removal was considered to be at zero cost with zero scrap value Time

Dep

loym

ent

Actual requirement according to

demand

t=1 t=2 t=100

Retirement options

Background to the original LRAIC model • Reference design • 8. Expenditure rules


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The LRAIC approach used a four-part mark-up

Dedicated 2G assets

Incremental

Applicable to 2G-only services

Dedicated 2G assets –

common

Dedicated 3G assets

Incremental

Applicable to 3G-only services

Dedicated 3G assets –

common

Shared assets

Incremental

Applicable to 2G+3G services

Shared assets – common

Retail incremental and common costs

Business overhead common costs

Mark-up sequenceIncremental and common cost components

Shared

Overheads

3G2G

Background to the original LRAIC model • Reference design • 9. Incremental costs


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Introduction


Next steps

Glossary

Model specification

Reference design

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Several conceptual issues are being revisited in this upgrade …

Technology

Service

Operator

Implementation

TypeSize



Network vs. retailWACC


Structure

Conceptual issues

To be revisited in more detailKEY To effectively remain as in original

Proposed upgraded cost model • Model specification

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Conceptual issue

New recommendations for upgraded cost model

A. Supplementary interconnect services

Separately calculate the cost of establishment of interconnect

B. Pure LRIC increment

Implement a pure LRIC calculation of voice/SMS termination consistent with the EC Recommendation

… and a small number of new ones are being introduced


Technology

Service

Operator

Implementation

TypeSize



Network vs. retailWACC


Structure


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A particularly important upgrade is the inclusion of a ‘generic operator’ A generic operator will be added

into the cost model:

industry parties, other than NITA, will only see their own inputs (if applicable) and the generic outputs

This structure will increase transparency, whilst preserving confidentiality and ensuring the model still reflects Danish mobile operations


As visible to NITA

As visible to operators (e.g. TDC)

Generic bottom-up calculation

engine

Common inputs

Generic operator inputs

TDC-specific inputs

Telia-specific inputs

Telenor-specific inputs

Hi3G-specific inputs

Generic operator outputs

TDC outputs

Telia outputs

Hi3G outputs

Telenor outputs

TDC-specific inputs

Common inputs



TDC outputsGeneric bottom-up calculation

engine

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The structure of the model will remain the same

1. Structure:

The overall structure of the original mobile LRAIC model will be retained:

the model will continue to be a bottom-up calculation with top-down validation

Industry data will be used for hybridisation:

calibration to ensure the number of modelled assets (sites/equipment) reflects those actually deployed

reconciliation to ensure that modelled expenditures reflect expenditures actually incurred

KEY To effectively remain as in original

Proposed upgraded cost model • Model specification • Operator

Service

Operator

Implementation

TypeSize


SpectrumVoice vs data

Network vs retailWACC


Structure

Technology

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Technology

Service

Operator

Implementation

TypeSize





Structure

The model will still consider both 2G and 3G technologies

5. Technology generations:

The upgraded cost model shall continue to capture the effects of technology generations between 2G and 3G (and LTE if modelled)

We expect the 2G network to be shut down in the longer term, consistent with the principles of the original model:

this assumes that 3G is the long-term replacement for 2G and it would be inefficient for both technologies to coexist


Proposed upgraded cost model • Model specification • Technology

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The generic operator will assume an efficient network

8. Network nodes:

The generic operator will adopt the modified scorched-node principle, as was used in the original model

The model will reflect the number of nodes in real operators’ networks, but the function of the node may be ‘scorched’ if not efficiently deployed

Examples of scorching would include: moving remote base station

controllers (BSCs) to the main switching sites, and replacing with a transmission hub or radio site

interchanging radio sites between macro, micro and pico sites

Technology

Service

Operator

Implementation

TypeSize





Structure

KEY New recommendations


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Technology

Service

Operator

Implementation

TypeSize





Structure

MNOs cost data and benchmarks will be used to derive cost inputs

9. Input costs: The cost base for the generic operator

will be based on the actual costs incurred by operators, validated against international benchmarks

Where operators have materially different cost inputs, an average could be taken, but other processing will be used where appropriate:

confidential data will not be used directly in any model released to industry

In the absence of operators’ input cost information, a suitable benchmark, adjusted for efficient purchasing scale, will be utilised



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Technology

Service

Operator

Implementation

TypeSize





Structure

The generic operator will have access to average spectrum holdings

10. Spectrum situation: The model will remain capable of

capturing the network/cost differences arising from different spectrum allocations and fee structures

For the generic operator, we propose to assume spectrum of:

2×8.8MHz of 900MHz spectrum 2×18.8MHz of 1800MHz spectrum 2×15MHz of 2100MHz spectrum 2×20MHz of 2600MHz spectrum

The model will include 3G licence fees (but not 2G), and spectrum usage fees based on the current NITA charges

New recommendations KEY To effectively remain as in original


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Technology

Service

Operator

Implementation

TypeSize





Structure

The key service change in the upgrade is the inclusion of HSPA

11. Service set:

The generic operator will provide all the commonly available (current and planned) Danish non-voice services alongside voice services:

this will include mobile data services such as HSPA

Economies of scope will be shared across all services:

forecast sensitivities will be explored to ensure that uncertain growth forecasts do no over-influence the economic cost of voice/SMS



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Technology

Service

Operator

Implementation

TypeSize





Structure

Only wholesale network costs will be considered

12. Wholesale or retail:

Following NITA’s market definition, only wholesale network costs will be calculated

Business overheads common to both retail and network operations will be:

included in the LRAIC costing approach (through a mark-up on all services)

excluded from the pure LRIC approach


Proposed upgraded cost model • Model specification • Services

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Technology

Service

Operator

Implementation

TypeSize





Structure

The WACC will be updated with the most recent data available

13. WACC:

The original LRAIC model used a nominal, pre-tax WACC derived using the CAPM:

sector-specific parameters include beta and the optimal gearing ratio

It will be investigated whether the value of WACC requires revision:

to ensure that the most up-to-date parameters are implemented, this will only be undertaken in the final costing stage


Proposed upgraded cost model • Model specification • Implementation

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Technology

Service

Operator

Implementation

TypeSize





Structure

The model will continue to use economic depreciation

14. Depreciation method:

It is appropriate to continue using economic depreciation to recover network expenditures in line with modern equivalent asset (MEA) price trends, network output over the long run, and the discount rate

Economic depreciation

Year1 2 3 4 5

Plus change in utilisationover the asset lifetime

Change in asset priceover the asset lifetime



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Technology

Service

Operator

Implementation

TypeSize





Structure

The years modelled and the mark-up mechanism remain the same

16. Years of results:

The model will still consider the years 1992 to 2041 (as in the original model):

we will ensure consistency between expenditure, network activity and cost-recovery timeframes

17. Mark-up mechanism:

The model will continue to use EPMU for calculating network common costs and shared business overheads:

however, the pure LRIC calculation will not require mark-ups



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A new ‘generic operator’ will be developed …

2. Type of operator: This is one of the most significant

changes to the upgraded cost model: the most recent termination pricing

decision used the highest cost operator from the original model

NITA has also decided to consider a generic operator:

this operator will be based on an efficient mobile network deployment

this allows the calculation to be fully shared with industry stakeholders, thereby increasing transparency

Technology

Service

Operator

Implementation

TypeSize





Structure


Proposed upgraded cost model • Reconsidered principles • Operator

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… but actual operator data will still be required for hybridisation

This approach has been recently used successfully in the Netherlands and Sweden

The model can be shared, as model inputs and other parameters will use market averages and benchmarks

However, it is still necessary to collect real operator inputs to allow comparison:

this data is not included in any public release of the model

these inputs will allow the model to still be hybridised (both calibration and reconciliation)

Technology

Service

Operator

Implementation

TypeSize





Structure



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Both transparency and accuracy will be ensured in the upgrade

Technology

Service

Operator

Implementation

TypeSize





Structure


Industry bottom-up data

Bottom-up model

Bottom-up calculations

Industry top-down data

Top-down verifications

Top-down calculations

Hybridised model

Final results

Upgraded model calculationA generic operator calculation ensures transparency and

shareability

Calibration/reconciliation ensures that real-world accuracy is preserved


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Given the historical development of Danish operators …

3.1. Steady state size of the operator:

Prior to 2010, the number of active MNOs in Denmark has been made of two periods:

two active operators between 1992 and 1998

four (almost) constantly since 1998

Technology

Service

Operator

Implementation

TypeSize





Structure

Historical number of operators in Denmark

Source: NITA

012345

Num

mbe

r of a

ctive

M

NOs



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… the generic operator will be assumed to have 25% market share

In NITA’s 2011 mobile termination pricing decision, the market share of each of the Danish MNOs was assumed to be 25% from 2010 onwards:

this principle will be retained for the generic operator in 2010

We note that recent market developments indicate a degree of network sharing between Danish MNOs in the future

The evolution of the MNOs’ future market share will depend on the nature of the integration involved (radio-network only, or integration of the retail brands as well)

For the moment, a steady-state market share of 25% will be assumed for the generic operator

Technology

Service

Operator

Implementation

TypeSize





Structure



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How the generic operator reaches this market share is also important

3.2. Assumed evolution to the steady-state size: The past evolution of an operator will

influence the economic costs calculated, thus affecting the unit cost of traffic

Therefore, it is a key costing issue for wholesale mobile termination (though it affects LRAIC+ more than pure LRIC)

Higher output (higher utilisation) over the network lifetime generally gives rise (through economies of scale) to a lower unit of traffic

We have suggested four options that could be modelled for the generic operator (see next slide)

Technology

Service

Operator

Implementation

TypeSize





Structure



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The four profile options depend on increasing amounts of historical data

0%

25%

50%

75%

100%

0%

25%

50%

75%

100%

0%

25%

50%

75%

100%

0%

25%

50%

75%

100%

1. Hypothetical new entrant 2. Reach immediate scale

3. Hypothetical existing entrant 4. Historical-based profile

Area coverage Market share of subscribers



Source: Analysys MasonNote: Values are for illustration purposes only

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We currently consider option 1 and option 4 to be less suitable …


0%

25%

50%

75%

100%


0%

25%

50%

75%

100%


1. Hypothetical new entrant

4. Historical-based profileOption 4:

Relies heavily on long-past historical information from periods when the mobile market was configured differently from the current four-player situation

Option 1:

Does not reflect likely future market developments


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… therefore, we recommend options 2 or 3, but invite industry feedback

0%

25%

50%

75%

100%


3. Hypothetical existing entrant

Option 2:

Equivalent to an operator undertaking a full renewal of its network deployment disregarding all previous expenditures

Option 3:

A period to achieve coverage roll-out would be specified along with a period to achieve steady-state size

This means that real technology transitions can be reflected

0%

25%

50%

75%

100%


2. Reach immediate scale



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There are range of choices to a hypothetical profile for both 2G …

Using 900MHz, with 1800MHz available

from 1997:

As was the case for the two early 2G Danish entrants

Using 1800MHz, with 900MHz available

from 2001:

As was the case for the two later 2G entrants

Using both 900MHz and 1800MHz:

First year where both 2G frequency bands were

allocated to all 2G operators


First year where 2G and 3G frequencies were

available to all 2G operators


Assuming instantaneous scale


First year in which all current MNOs had access to

900MHz, 1800MHz and 2100MHz spectrum

1992 1997 2001 2005 2010 2011


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… and 3G network developments

Using 2100MHz spectrum:

First year in which 3G networks were

commercially active in Denmark


First year in which 2100MHz frequencies

were available


First year in which the four current 3G networks were commercially active


First year in which the four current 3G network operators

had 2100MHz


Assuming instantaneous

scale?

Using 900/1800/2100MHz

spectrum:

Assuming a hypothetical new entrant

2002 2003 2007 2010 201120051992 1997


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The generic operator will be assumed to use both 2G and 3G

4. Radio technology standards: The model design will continue to

consider both 2G and 3G networks, and include HSPA technology explicitly

We note that LTE assets could share some costs of termination traffic (i.e. site sharing and core transmission network): however, the impact on the

LRAIC+ or pure LRIC is likely to be only small and downward

in the medium term, LTE is unlikely to convey large volumes of wholesale mobile termination

We therefore propose that LTE is not modelled

Technology

Service

Operator

Implementation

TypeSize





Structure


Model specification • Reconsidered principles • Technology

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The coverage profile of the generic operator depends on other factors

6. Extension and quality of coverage:

The four geotypes as defined in the original model will be retained in the upgraded cost model

However, the final 2G/3G coverage profiles for the generic operator depends on:

the market share evolution profile adopted

the assumed spectrum holdings

Technology

Service

Operator

Implementation

TypeSize





Structure



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The generic operator’s LMA will be based on those of actual operators

7. Transmission network: We propose a mixture of microwave

and leased-line LMA backhaul for the generic operator, based on the actual 2G/3G networks

HSPA will require modelling of additional backhaul options (e.g. Ethernet backhaul), due to higher traffic throughput:

HSPA transmission upgrades shall be modelled as an upgrade of the 3G LMA network

Greater levels of efficient integration at the backbone transmission layer may be modelled if reasonable for Danish deployments

Technology

Service

Operator

Implementation

TypeSize





Structure



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Technology

Service

Operator

Implementation

TypeSize





Structure


Costs for the establishment of interconnect will be separated out

A. Supplementary interconnect services:

NITA wants the upgraded cost model to be capable of separately specifying the costs of interconnection establishment: originally these were captured in the

overall cost base, so we will ensure double-counting is avoided

Set-up and maintenance-related costs shall be considered separately

The model will use data from both stakeholders and the Co-location model from NITA’s fixed network cost model

Section 5 of the data request outlines questions related to these services

Model specification • Reconsidered principles • Service

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The EC recommends a ‘smaller’ increment for wholesale termination

15. Increments:

The EC Recommendation of May 2009 outlines a derivation of the pure LRIC of wholesale mobile termination:

the current model uses LRAIC+

This ‘smaller increment’ approach of pure LRIC is only relevant to wholesale mobile termination services

This approach will be implemented as an add-on to the existing model:

the LRAIC calculations will also be retained

Technology

Service

Operator

Implementation

TypeSize





Structure


Model specification • Reconsidered principles • Implementation

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NITA is now looking to quantify this pure LRIC of termination in Denmark

Cost-volume of pure LRIC

Pure LRIC increment

pure LRIC

Volume

Cos

t

Incremental cost of termination

Network share of business overheads

Large parts of mobile coverage network, plus traffic related costs

for other services

Network common costs (some coverage, spectrum)

SIM

Volume

Cos

t

LRAICCommon costs

Cost-volume of LRAIC+

LRAIC+ increment

Incremental cost of all traffic(radio sites, base station

controllers, mobile switching centres etc.)



SIM



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Pure LRIC is derived as the difference of two modelling states

KEY Input OutputCalculation

Run model with all traffic

Run model with all traffic except

termination increment

volume

Expenditures with termination

Output profile with termination

Expenditures without

termination

Output profile without

termination

Difference in expenditures

Difference in output

Capex and opex trends

Economic cost of difference in expenditures

Total economic cost of the difference

Unit ‘pure LRIC’Termination traffic volume



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The upgraded model will also calculate the cost of MT-SMS

B. Treatment of the costs of voice/SMS: The upgraded cost model will contain

a new costing approach capable of calculating the pure LRIC of mobile termination for mobile-terminated (MT) wholesale voice and wholesale SMS

We propose to assume a single increment definition for terminated traffic in this calculation, i.e. it is either:

MT-voice only both MT-voice and MT-SMS

The avoided costs will be allocated between these services using routeing factors

Technology

Service

Operator

Implementation

TypeSize





Structure



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We have rejected the use of a separate increment for MT-SMS

Out of the three approaches to derive the pure LRIC of voice and SMS, we believe it appropriate to disregard both:

separate independent increments, as it can lead to double-counting of avoided costs

and separate dependent increments, as it is complex and may lead to different results depending on the order of traffic removal

Incremental cost ofvoice and/or SMS termination


Majority of coverage network, plus other traffic-related costs


SIM

Incremental cost ofvoice termination


Majority of coverage network, plus other traffic related costs


SIM

Incremental cost ofSMS termination

Single increment to be used*

Separate increment rejected*

*Costs associated with the shaded boxes are included in the approach

Possible double-counting of avoided costs


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Introduction


Next steps

Glossary

Model specification

Reference design

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Small revisions are required to the original reference design The reference design has been

revised in several places

Industry comment is welcome

1. Demand inputs:

The original mobile LRAIC model considered 3G packet data as one category

The upgraded cost model will distinguish between R99 and HSPA data megabytes on the 3G networks:

LTE data-only subscriptions would also need to be considered separately for a holistic forecast

1. Demand inputs

2. Network design parameters

3. Network design algorithms

4. Unit costs

5. Network costing

6. Top-down data and reconciliation

7. WACC

8. Economic depreciation

9. Routeing factors

10. Service costing and mark-ups

11. Model documentation

KEY Different to original reference design

Upgraded cost model • Reference design • 1. Demand inputs

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Network parameters will be added to capture HSPA …


Upgraded cost model • Reference design • 2. Design parameters

2. Network design parameters

A large number of the existing network design aspects will still be used:

some parameters require enhancements due to the implementation of HSPA (and, were it to be modelled, LTE)

Network loading parameters

Changes

Call attempts and ringing time

No change anticipated

Busy-hour profile The packet data busy-hour profile will be re-examined given recent growth in data volumes. If possible, GPRS, EDGE, R99, HSPA (and LTE) volumes will be analysed separately

Treatment of SMS and GPRS

No change anticipated

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… though many factors are subject to the outcome of the data request



Network loading parameters

Changes

Treatment of high-speed packet data

• R99 packet data remains unchanged• High-speed data will be modelled separately according to

the load on 3G cells• A range of throughput options for these data services are

proposed, but these may change based on the responsesto the data request

Location updates and handovers

• No changes to the 2G layer, or R99 voice/data• No uplift needed for HSDPA traffic

Cell load • No changes for voice traffic• An average throughput of 40% of peak will be assumed,

unless the data provided implies otherwise

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We propose that 800MHz spectrum be modelled for use in 3G/LTE



Coverage parameters

Changes

Geotypes • The four geotypes used will be retainedCell radii • (Were they to be needed, LTE cell radii would be

estimated using the same process as for 2G/3G in the original mobile LRAIC model)

Spectrum differences • 800MHz will be assumed to be available from 2013 onwards for use in 3G networks (and LTE were it to be modelled) as per the currently expected auction date

Special areas • No change anticipatedTraffic by geotype • No change anticipated

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Equipment capacity parameters

Changes

Radio element capacities

• HSDPA (respectively HSUPA): it is assumed that each 2×5MHz carrier conveys up to 21.1Mbit/s (respectively 11.5Mbit/s) in the data busy-hour

• LTE: were it to be modelled, each 2×5MHz carrier would be assumed to convey 86.4Mbit/s)

Backhaul links • Higher-capacity backhaul links required compared to the original model (which used E1s). HSPA backhaul would be an upgrade of the 3G LMA backhaul

• The modelled fibre network will also be enabled to convey a proportion of this traffic

Both radio element capacities and backhaul elements will be updated



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Changes

BSC and RNC switches

• Were it to be modelled, the LTE network could require a radio network controller (RNC) equivalent, depending on operator feedback and the final network design

Remote BSC vs. co-located BSC

• No changes anticipated, subject to operator information submitted

BSC-MSC links • No changes anticipated, subject to operator information submitted

MSC-MSC links • Separate 2G MSC–2G MSC and 3G MSS–3G MSS links are modelled. Operator asset upgrades (e.g. further integration) will be accounted for in the model

Network software • No changes anticipated

If LTE is not modelled, most switch and link designs remain the same



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Equipment capacity parameters • 2G MSC and 3G MSS/MGW switches

(including VLR functionality)Changes• 2G/3G layer to remain unchanged

• An LTE core architecture would be needed to carry the data traffic as shown. Switches deployed according to the minimum number of locations and the busy-hour load on the processor (Mbit/s). Ports on these switches will be calculated according to their different functions

If LTE were to be modelled, a new core architecture would be needed

Proposed LTE architecture

Control plane

Control platforms

IP multimedia subsystem

Management entity

Service platforms

Voice Interconnect

Data Interconnect

eNode B eNode B

Packet-domain services only

Access gateway



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Few changes are needed to capacity inputs, but GSNs may be refined




Changes

Data servers The original model considered separate 2G and 3G units. Unless indicated otherwise, it is expected that the GSN will now be dual-technology rather than separate-technology units

The fibre network No changes anticipatedSMS centre (SMSC) No changes anticipated. MT-SMS does not use the SMSC,

therefore the pure LRIC of MT-SMS will not include its contribution

HLR and other network elements

No changes anticipated, subject to operator information submitted

Capacity utilisation factors

No changes anticipated, subject to operator information submitted

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The modelled generic backbone design will be retainedNetwork topology

The original generic network design will be used as the starting point for upgrade

Geographically, a physical network topology was assumed that consisted of:

a 1000km fibre backbone

PoIs, core switching sites, remote hubs (BSC/RNC) in a specific number of locations

backhaul link topology consistent with the real operator’s network design

Jutland fibre ring

Fyn fibre ring

Sealand fibre ring

National fibre backbone



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4. Unit costs:

No changes currently required, but future developments may mean that unit asset cost trends require adjusting to reflect network sharing

5. Network costing:

Subject to operator information, new assets will be assigned lifetimes and planning periods based on equivalent existing assets:

if equivalents do not exist, then international benchmarks and/or stakeholder data will be used to inform the inputs

3. Network design algorithms:

The modelled HSPA deployment based on both stakeholder information and our network design experience from other jurisdictions

For pure LRIC, the network design algorithm may need to be refined in order to model the mobile network when termination traffic is not included:

Section 4 of the data request allows operators to provide feedback that may help guide any appropriate modifications

The HSPA implementation will be based on stakeholder feedback


Upgraded cost model • Reference design • 3,4,5. Network factors

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Hybridising the generic operator model will still be an important step


Upgraded cost model • Reference design • 6,7,8. Cost factors

6. Top-down data and reconciliation:

As mentioned earlier, model hybridisation will still be undertaken (i.e. calibration and reconciliation exercises):

real world data will help increase model robustness

The generic operator cannot be expected to exactly match real operators’ asset or cost data:

but, for example, there should not be significantly fewer/more sites deployed for a comparable level of coverage

7. WACC:

No changes to value at present:

NITA is expected to update the WACC value at a later stage

8. Economic depreciation:

No changes; economic depreciation will be used as before

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The documentation will be updated to include all model developments9. Routeing factors:

No changes anticipated, subject to operator information submitted:

though changes may arise from the adaptation of the network design (e.g. the explicit addition of HSDPA)

10. Service costing and mark-ups:

As mentioned earlier, pure LRIC does not require mark-ups, but mark-ups will be retained for the LRAIC+ calculation


11. Model documentation

Documentation will be updated to reflect the upgraded model, including enhancements made

The aim is to position users to understand both the main features of the model and its technicalities

The documentation will explain, where possible, the reasons for choices adopted in the model

Upgraded cost model • Reference design • 9,10,11. Other factors

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Introduction


Next steps

Glossary

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The data-collection process will begin following this workshop

replies by 12 September 2011 on demand and network data– coverage data– subscriptions and volumes– network loading data– asset information and lifetimes– network dimensioning rules– upcoming deployments

replies by 17 October 2011 on remaining data– pure LRIC specific relationships– interconnection data– bottom-up equipment unit costs– top-down expenditure data

Data requests were issued to industry stakeholders prior to the industry workshop

Data submissions will be split into two parts:

Next steps

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Next steps and upcoming milestones following this industry meeting Electronic versions of these slides will be uploaded onto NITA’s website

Industry stakeholders are invited to provide feedback, by 11 August 2011 to NITA, on the draft reference paper

We will be available to clarify any aspects of the data collection in the coming weeks:

in the week commencing 29 August 2011, we have provisionally scheduled time in Copenhagen to discuss the data request with stakeholders

Next steps

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Main contacts

For NITA

Morten Møller Johnsen or

Frederik Rygaard

+45 3545 0000

[email protected]

For Analysys Mason

Matthew Starling

+44 845 600 5244

[email protected]

Next steps

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Relevant documents [1 of 3]

Reference paper for the original mobile LRAIC model:

http://www.itst.dk/tele-og-internetregulering/smp-regulering/engrospriser/filarkiv-engrospriser/lraic/lraic-processer/lraic-mobil/horing-over-lraic-mobil-principdokument/LRAIC%20principdokument_final.pdf

Original mobile LRAIC model documentation:

http://en.itst.dk/telecom-internet-regulation/smp-regulation/lraic/filarkiv-lraic/lraic-pa-mobil/udsendelse-d-19-6-08/Final%20v4%20NITA%20model%20documentation_090608.pdf

Documentation related to the upgraded mobile cost mobile project will be made available on NITA’s website:

http://www.itst.dk/tele-og-internetregulering/smp-regulering/engrospriser/lraic-1/lraic-processer/lraic-mobil/opbygning-af-lraic-mobil-2011-2012/

Next steps

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Act on ‘Competitive Conditions and Consumer Interests in the Telecommunications Market’:

http://en.itst.dk/law-material/filarkiv/acts/Act%20on%20Competitive%20Conditions%20and%20Consumer%20Interest%20in%20the%20Telecommunications%20Market.pdf

NITA’s decision on wholesale mobile SMS termination regulation:

http://www.itst.dk/tele-og-internetregulering/smp-regulering/markedsundersogelser/2-runde-af-markedsundersogelser/horing-over-markedsanalyser/marked-7-sms-terminering

EC Recommendation on wholesale termination costing:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:124:0067:0074:EN:PDF

Next steps

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Denmark’s most recent Executive Order, February 2011:

https://www.borger.dk/Lovgivning/Hoeringsportalen/Sider/Fakta.aspx?hpid=2146002408

Redacted shell of the original mobile LRAIC model:

http://www.itst.dk/tele-og-internetregulering/smp-regulering/engrospriser/filarkiv-engrospriser/lraic/lraic-processer/lraic-mobil/horing-over-udkast-til-eftersporgsels-og-netmodel/Modeludkast.zip

NITA’s pricing decision on wholesale mobile termination, 2011:

http://www.itst.dk/tele-og-internetregulering/smp-regulering/engrospriser/filarkiv-engrospriser/lraic/lraic-priser/2010/prisafgorelse-for-mobilterminering

Next steps

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Introduction


Next steps

Glossary

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Glossary

2G: Second generation of mobile telephony

3G: Third generation of mobile telephony BHCA: Busy hours call attempts BSC: Base station controller BTS: Base transmitter station or base

station CAPM: Capital asset pricing model CCH: Control channel CE: Channel element CK: Channel kit E1: 2Mbit/s unit of capacity EC: European Commission EDGE: Enhanced data for global evolution eNodeB: LTE equivalent of a NodeB EPMU: Equi-proportionate mark-up

GGSN: Gateway GPRS serving node GMSC: Gateway mobile switching centre GPRS: General packet radio system GSM: Global system for mobile

communications GSN: GPRS serving node HLR: Home location register HSDPA: High speed downlink packet

access HSPA: High speed packet access HSUPA: High speed uplink packet access IP: Internet Protocol IN: Intelligent network LMA: Last-mile access LRAIC: Long-run average incremental cost LRIC: Long-run incremental cost

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Glossary

LTE: Long-term evolution Mbit/s: Megabits per second MEA: Modern equivalent asset MGW: Media gateway MHz: Megahertz MNO: Mobile network operator MSC: Mobile switching centre MSS: MSC server MT: Mobile terminated NITA: National IT and Telecom Agency NMS: Network management system NodeB: Denotes the 3G equivalent of a

BTS PCU: Packet control unit PDP: Packet data protocol

PoI: Point of interconnect PS: Packet switch R99: Release-99 RNC: Radio network controller SGSN: Subscriber GPRS serving node SIM: Subscriber identity module SMS: Short message service SMSC: SMS centre STM: Synchronous transport module TDC: Tele-Denmark Communications TRX: Transceiver unit TSC: Transit switching centre VLR: Visitor location register WACC: Weighted average cost of capital

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Copyright © 2011. Analysys Mason Limited has produced the information contained herein for the National IT and Telecom Agency

(NITA). The ownership, use and disclosure of this information are subject to the Commercial Terms contained in the contract between

Analysys Mason and NITA

Analysys Mason Limited

St Giles Court, 24 Castle Street

Cambridge CB3 0AJ, UK

Tel: +44 (0)845 600 5244

Fax: +44 (0)1223 460866

www.analysysmason.com

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