Spectrum pricing, make or break the 5 g momentum, June 2019

5G spectrum pricing, make or
break the 5G momentum?
Stefan Zehle
CEO, Coleago Consulting Ltd
+44 7974 356 258
stefan.zehle@coleago.com
www.coleago.com
4th 5G Spectrum & Policy Forum
Shanghai, 27th of June 2019

Policy makers in all countries are keen to develop mobile broadband and 5G
There is an international race to become a leader in 5G;
policy makers have launched initiatives towards that goal.
 “5G will enable industrial transformation through wireless
broadband services provided at Gigabit speeds”
European Commission
In emerging markets a link is made between 5G and
national development goals:
 “We have missed three industrial revolutions,
Bangladesh should be established as a leading country
in the fourth industrial revolution. The whole world will
enter into the era of 5G in 2020. The country will not be
allowed to stay behind from this.” (Bangladeshi Telecoms
and IT minister Mustafa Jabbar, Speech at Junior Chamber
International, 19 May 2018)
© copyright Coleago 2019
5G spectrum pricing, make or break the 5G momentum
1

The introduction of 5G is inseparable from making large amounts of new spectrum
available for mobile
 A typical Region 3 country has 480MHz
assigned to mobile.
 Over the next 5 years the amount used
by mobile operators will more than
double.
 The most important band in the context
of deploying 5G is the C-Band (3.3-
4.2GHz) and there are already 3GPP
standardised radios and terminals
available.
 Depending on the country 400MHz may
be assigned to mobile operators.
 This excludes mm wave spectrum
2
220
340
480 480
620
970
1070
0
200
400
600
800
1000
1200
1400
1600
2005 2010 2015 2019 2020 2021 2024
MHz
850/900 1800 2100 2600 2600 TDD 700 2300 3.4-3.7
Spectrum used by mobile in a typical Asian country

In order to deliver 5G, mobile operators must have access more spectrum of all types
of spectrum
 5G will be introduced in low (sub-1 GHz), mid
(1 to 6GHz) and high frequency (24GHz and
above) bands.
 Other bands are already in use for mobile but
in time will be refarmed to 5G.
3
Type of spectrum
Coverage
width
User
throughput
Latency Mobility
System
capacity
Sub-1 GHz *** * * *** *
Mid band: 1.5 – 6.0 GHz ** ** ** ** **
High band: 24 – 40 GHz * *** *** * ***
Source: Ericsson

Per smartphone traffic is forecast to grow 3 to 6 fold between 2018 and 2024
 Part of this traffic increase is due to the
adoption of 5G but usage for 4G
smartphones is also increasing.
 Per smartphone traffic will grow 3 to 6
fold between 2018 and 2024.
4
Monthly data traffic per smartphone
7.0
3.1
6.7
4.5
3.0
7.1
3.6
9.8
39.0
18.0
32.0
19.0
16.0
21.0
17.0 18.0
0
10
20
30
40
50
North
America
Latin
America
Western
Europe
Central &
Eastern
Europe
Middle
East and
Africa
North
East Asia
South
East Asia
&
Oceania
India,
Nepal,
Bhutan
Gbytes/smartphone/month
2018 2024

To cater for mobile broadband traffic, mobile operators are continuing to invest large
sums in 4G and 5G radio access networks and backhaul infrastructure
 Mobile broadband traffic grew close to
88% between Q4 2017 and Q4 2018.
 This is made possible because
between 2018 and 2020 mobile
network operators world-wide are
investing US$ 480 billion in their 4G
and 5G networks, i.e. around US$ 160
billion per year.
 During the next 6 years traffic the
CAGR estimated 23% to 42%.
5
Total mobile data traffic compound annual growth rate
2018-2024
33%
36%
31%
35%
42%
23%
38%
23%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
North
America
Latin
America
Western
Europe
Central &
Eastern
Europe
Middle
East and
Africa
North
East Asia
South
East Asia
&
Oceania
India,
Nepal,
Bhutan
Gbytes/smartphone/month

Mobile operator revenues are declining in many markets and in markets where there
is some growth, this tends to be below inflation
Globally, average mobile service revenue
contracted 1.0% from a year ago as Emerging
Markets and Developed Markets service
revenue both declined. Revenue in developed
markets declined -1.3% overall, with Asia-
Pacific down 1.9%, Developed EMEA down
1.9% and North America down 0.7%.
Emerging markets service revenue declined
0.7% in 4Q18 vs. last year’s growth of 3.1%
with Emerging Asia declining 2.5%, Emerging
EMEA growing +3.0%, and Latin America
expanding +1.6%. Bank of America Merrill Lynch,
Global Wireless Matrix, 30 April 2019
 Looking back over 10 years, in most markets
there have been only small increases in
mobile revenue and in some markets,
revenues declined driven by competition.
– India is an extreme example of this where
revenues declined by 14% in 2017.
 History shows us that the introduction of 4G
(LTE) did not increase mobile operator
revenue materially and in some cases
revenues declined.
6

Mobile data traffic increase by 23 to 42% CAGR and revenue may be flat or increase
only by 1-2%
7
Traffic
Increase
Revenue
Increase
23% to 42%
0% to 2%
The consumer is the winner!
CAGR = Compound Annual Growth Rate

Prices for 5G packages are not higher than for 4G and also offer larger data volumes
and faster download speeds
 In April 2019, mobile operators in Korea
announced tariffs for 5G mobile. Depending
on the tariff plan, in some instances 5G plans
are cheaper than 4G plans.
5G 4G
Tariff KRW Data pack
Limit after
out of pack
Tariff KRW Data pack
Limit after
out of pack
Entrance 55,000 9GB 1Mbps 55,900 6.6GB 3Mbps
Middle 75,000 150GB 5Mbps 74,800 16GB 3Mbps
High 85,000 Unlimited Unlimited 88,000 30GB 3Mbps
Premium 95,000 Unlimited Unlimited 110,000 40GB 3Mbps
8
 5G data prices are lower. In early 2019 AT&T
in the USA announced a 5G plan at rate of
US$ 4.67 per GB compared to US$ 5 per GB
for 4G.

IoT may add some revenue but additional investment is required for IoT optimised
networks such as LTE-M and NB-IoT
The IoT market is projected to grow
significantly, but less than 20% will accrue to
mobile operators
 Historically % of IoT SIMs increase rapidly but
IoT revenue increased minimally.
 More than 80% of the IoT market is applications,
platforms and services, and professional
services.
 Connectivity, i.e. mobile data, accounts for only
a small part of the IoT revenue stack. This small
connectivity revenue slice will increase mobile
operator service revenue only very slightly.
9
4.9%
19.5%
0.4%
1.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2011 2018
%ofSIMsandRevenue
SIMs Revenue
IoT SIMs and Revenue % of total SIMs and
Revenue in France

Mobile operator revenue per MHz of spectrum has declined and will decline more
rapidly when additional spectrum for 5G is added
Incremental spectrum does not generate
incremental revenue
 Revenue per MHz has declined between
2007 and 2019:
– Canada - 60% decline
– France - 59% decline
– Germany - 60% decline
– Singapore - 52% decline
 With additional spectrum for 5G, the
decline will accelerate.
 While additional spectrum may produce
some cost savings, the effect is relatively
small because mobile data traffic
increases rapidly.
10
0
10
20
30
40
50
60
70
80
90
100
110
120
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
RevenueperMHzIndex2007-=100
Canada France Germany Singapore
Mobile industry revenue per MHz of spectrum deployed

The return on investment in mobile operating companies has declined
11
Return on
Investment
=
Profit
Capital Employed
Mobile operator profit
margins have declined in
virtually all markets
Network investment and
spectrum investment is
increasing

Per MHz spectrum licence fees must decline or 5G deployment will be reduced or
delayed
12
Traffic Demand and
Spectrum Need
Up-Front Prices Paid for
Spectrum Licences
4G/5G Deployment and
Backhaul Capex
Network and Spectrum
Capital Expenditure
Revenue
EBITDA
Free Cash Flow
Impact on Operators
Balance Sheet
Cash Flow Return on
Investment - CFROI
Annual Spectrum Fees
The consequence: The only
way to maintain returns is to
reduce investment
Other Opex
minus
minus minus
equals
Corporation Tax
minus
User’s willingness and
ability to pay

How to set spectrum licence fees which foster the development of 4G and 5G?
When new spectrum is assigned in a country or
existing spectrum licences are renewed, the
question arises of how to price the spectrum
 If there is a spectrum auction, regulators need to
set the reserve price, i.e. the minimum price or
opening bids.
 If spectrum is assigned administratively or
licences are indefinite, then regulators have to
set the price without the benefit of a market
based mechanism such as an auction.
13

Using benchmarking to set reserve prices or set licence fees is not appropriate
because it is backward looking rather than forward looking
 Mobile operator revenue per MHz of
spectrum has declined by over 50% in the
past.
 Adding the C-Band to an operator’s
network will enable operators to compete
with higher data bundles. ARPU does not
change.
 Revenue per MHz of spectrum deployed
will continue to decline.
 If each new MHz of spectrum for 5G yields
little or no additional revenue, then
comparisons with the past are not helpful.
 Therefore it is fundamentally flawed to use
prices paid for spectrum in the past to
estimate the value of additional spectrum
for 5G mobile broadband.
 Examples of failed auctions due to setting
reserve prices based on benchmarks
include India, Bangladesh, and Thailand
14

Regulators can easily calculate the annualised cost of spectrum to ensure that
spectrum pricing is sustainable and does not slow down the 5G momentum
The “annualised cost of spectrum as % of revenue” metric makes it easy to identify excessive spectrum
fees and communicate this to a non-expert audience, such as the ministry of finance or politicians.
15
Up-front fees paid for
spectrum in the past and
years of licence duration
Convert up-front fees paid in
the past into an annualised
cost of spectrum
Add existing annual
spectrum fees, if any
Proposed spectrum fee for
new spectrum
Industry revenue
Industry annual cost of
spectrum as a percentage
of industry annual revenue
Is it sustainable or is likely
to slow the 5G momentum?

Example of annualised cost of spectrum as % revenue for Singapore
16
Date Band Name Type Band # MHz Sold
Price Paid
SG$ Million
Licence
Duration Years
Annualised
Cost SG$ mn
Apr-01 2100 FDD&TDD 1 104 300 20 28
Oct-10 2100 FDD 1 30 60 20 6
Jun-13 1800 FDD 3 150 240 13 28
Jun-13 2600 FDD 7 120 120 15 13
Dec-16 900&2300 FDD/TDD 8&40 60 105 20 10
Apr-17 700 FDD 28 90 846 15 91
Apr-17 900 FDD 8 40 192 16 20
Apr-17 2600 TDD 38 45 107 16 11
Total 639 1,970 206
Cost of Capital (WACC) % 6.7%
Annual industry service revenue 2018 SG$ mn 3,047
Annualised cost of spectrum % of revenue 6.8%
Annualised cost = cost of capital / (1 - (1 / (1+cost of capital)) ^ licence duration)

An annualised cost of spectrum above 10% of revenue is likely to slow the 5G
momentum
Annualised cost spectrum as a % of
revenue
 Up to 5% likely to be sustainable
 5-10% may be sustainable
 Over 10% may not be sustainable
Are there other regulatory fees?
 Where there are substantial additional
regulatory fees these may need to be
deducted from revenues before
making the calculation.
17
Annualised cost of spectrum in selected countries
18.5%
8.4%
6.8%
6.2%
1.4%
0.0% 5.0% 10.0% 15.0% 20.0%
India
UK
Singapore
Germany
Finland
Annualised Cost of Spectrum % of Revenue

Auction
date
Band
Name Type Band #
MHz
Sold
Price Paid
$ Million
$ million
per MMz
Licence
Duration
Years
Annualised
Cost $
million
2006 850/900 FDD 5/8 70 260 3.7 15 30
2007 1800 FDD 3 150 180 1.2 15 21
2010 2100 FDD 1 120 280 2.3 20 29
2016 2600 FDD 7 140 90 0.6 15 11
Total 480 810 1.7 90
Spectrum cost % of revenue % 9.0%
Auction or
renewal
date
Band
Name Type Band # MHz
Price $
Million
$ million
per MMz
Licence
Duration
Years
Annualised
Cost $
million
2016 2600 FDD 7 140 90 0.6 15 11
2020 2600 TDD 38 50 9 0.2 15 1
2020 700 FDD 28 90 170 1.9 15 20
2020 2100 FDD 1 120 113 0.9 15 13
2021 850/900 FDD 5/8 70 132 1.9 15 15
2021 3.4-3.7 TDD n77 300 85 0.3 15 10
2023 1800 FDD 3 150 142 0.9 15 17
2024 2300 TDD n40 100 28 0.3 15 3
Total 1,020 770 0.8 90
Spectrum cost % of revenue % 9.0%
Cost of Capital (WACC) % 8.0%
Annual industry service revenue $ mn 1,000
A worked example: Calibrating spectrum licence fees for renewal and new 5G related
spectrum licences
18
Current cost of spectrum
Future cost of spectrum
Spectrum licences will expire and must
be renewed
 In 2020: 2100MHz
 In 2021: 850/900MHz
 In 2023: 1800MHz
The country’s spectrum roadmap plans
to assign new 5G related spectrum
 In 2020: 700MHz and 2600MHz TDD
 In 2021: 3400-3700MHz 2300MHz,
 In 2024: 2300MHz TDD
The regulator does not want to slow
down the 5G momentum
 The price per MHz of spectrum must
decline to ensure that the annualised cost
does not increase above 9% of revenue.

The Spectrum Price Index provides a further check on the sustainability of spectrum
licence fees
 For spectrum related to the introduction of
3G, the SPI was up to 6 in some countries
which led to an industry crisis and slowed
down 3G deployment.
 The SPI for 4G related spectrum tended to be
below 4.
 Early indications for 5G related spectrum
show that the SPI is less than 2.
 Spectrum related to the introduction of 5G
includes the C-Band, potentially 700MHz,
2300MHz and 2600MHz and also mm wave
spectrum. The combined cost of spectrum
needs to be included in the SPI for 5G.
 An SPI above 2 may be an indication that the
proposed spectrum pricing is not sustainable.
19
Spectrum Price Index (SPI) =
Spectrum Licence Fees
ARPU Subscribers

Spectrum Price Index 3G, 4G and 5G in selected countries
20
10.1
27.6
0.4 0.3
3.3
0.5
5.1
0.5
4.4
14.3
0
5
10
15
20
25
France
Germany
Spain
Australia
Thailand
Mexico
Ukraine
Norway
Italy
UK
SpectrumPriceIndex
2.6
3.8
1.5 1.6
13.5
4.4
2.5
1.0
5.6
1.1
26.2
0
5
10
15
20
25
France
Germany
Spain
Australia
Thailand
Mexico
Ukraine
Norway
Italy
UK
India
SpectrumPriceIndex
0.3
5.9
0.4 0.8
1.8
0.3 0.6 1.0
0
5
10
15
20
25
Spain
Italy
Finland
Ireland
S.Korea
CzechR.
Australia
UK
SpectrumPriceIndex
3G Spectrum Price Index < 6 5G Spectrum Price Index < 24G Spectrum Price Index < 4
6
4
2

Summary and conclusions
21
Mobile industry revenue is not
increasing and 5G will not
materially increase revenue
5G requires much more
spectrum compared to the
amount in use today
Revenue per MHz of spectrum
used has declined and will
decline further by over 50%
Per MHz spectrum licence fees
must decline to prevent fees
from becoming unsustainable

Recommendations to ensure that spectrum licences fees are sustainable
22
Quantify annual mobile
operator service revenue
for the whole industry
Ascertain revenue
evolution of the next 5 to
10 years
Calculate today’s
annualised cost of
spectrum as a % of
revenue
Look at your spectrum
roadmap for the next
5 to 10 years
Make assumption for
spectrum licence fees
Check that the cost of all
spectrum used in future
does not increase as %
of revenue
Ascertain licence
renewals during the next
5 to 10 years
SPI: Check that licence fees for 5G
related spectrum are less than 50%
of 4G related spectrum fees

About Coleago Consulting
23
Stefan Zehle
CEO, Coleago Consulting Ltd
+44 7974 356 258
stefan.zehle@coleago.com
www.coleago.com

Since 2001, Coleago has offered a wide range of advisory services to the telecom
industry
24© copyright Coleago 2019
Strategy & Business Planning
 Strategy development, marketing strategy
 MVNO and multi-brand wholesale strategy
 Business planning and business modelling
Telecoms regulation & interconnect
 Accounting separation & price control
 Interconnect cost modelling, RIO
 Competition (merger) assessment
 Moving to a unified licencing
Spectrum policy and licencing
 Prepare and executing spectrum auction for
regulator, end to end
 Spectrum roadmap
 Spectrum pricing
Transaction Services
 Commercial due diligence
 Tower due Diligence
 Preparation of Information Memorandum
Spectrum Valuations and Auctions
 Spectrum strategy
 Spectrum valuation for auctions
 Spectrum auction bid strategy and execution
 Beauty contest bid books
Mobile Network Sharing
 Mobile network sharing
 Managed services and outsourcing
 Tower due diligence
 Network audit

Coleago has carried out over 90 spectrum consultation, valuation, auction and beauty
contest licence projects
Completed in 2017-18
 Denmark – 700 and 3500MHz
 Canada – 600MHz
 Ukraine – 1800, 2600MHz
 Paraguay – 700MHz
 Malaysia – 700MHz
 Nepal – 700, 2600MHz
 Myanmar – 1800MHz
 Bangladesh – 700, 1800, 2100,
2300, 2600MHz
 Indonesia – 2100, 2300MHz
 Cambodia – 2600MHz
 South Africa – 800, 2600MHz
Ongoing in 2019
 Slovenia - 700 and 3500MHz
 Slovakia - 700 and 3500MHz
 Belgium - 900, 1800, 2100MHz
renewal and 700, 1500, 3500MHz
25© copyright Coleago 2019

Spectrum pricing, make or break the 5 g momentum, June 2019

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