Detecon Executive Briefing

Digital Dividend
Making the broadband
business successful
Achieving the highly desired ubiquitous broadband
coverage is firmly on the agendas of governments and their
subordinate agencies, telecommunication organizations and
unions, and of course operators. For some EU countries,
one of the most eagerly anticipated broadband measures is
the allocation of the digital dividend spectrum and its
subsequent usage in broadband wireless networks.

But the undoubtedly valuable frequency resource alone

cannot mitigate all risks related to business viability when
building infrastructure to close broadband coverage gaps.
Further key aspects to be considered are network costs
(CAPEX & OPEX), revenue potential and uncertain license
fees.

Network operators must critically assess the digital

dividend business case on the basis of a set of techno-
economic parameters including coverage type, band width,
license fee, subscriber forecast, and subsidy schemes.

A recent Detecon study has shown that positive business

results are only attainable with the right combination of
parameters.

We make ICT strategies work

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Initial Situation

The digital dividend (previously analog TV spectrum) is deemed as a highly valuable

resource that could bring benefits measured in billions of Euro within the EU zone alone. Its
relatively low frequency band (790 – 862 MHz in Europe) possesses very good radio
propagation characteristics which in technical terms means that fewer sites will be required
to cover a certain area with wireless services. Not surprisingly, this is the main argument as
to why this particular spectrum has to be allocated for the provision of broadband wireless
services in areas lacking broadband access in general.

In Germany the government plans to use the spectrum as a lever to stimulate the reach and
usage of broadband services throughout the country, with a focus on underserved or non-
covered areas also known as “white spots”. In 2010 the national telecommunication regulator
is going to distribute nationwide licenses to interested parties (operators or service
providers). The successful bidders have to roll out broadband wireless networks in
compliance with the requirements stipulated by the regulator (coverage, rollout plan, and
minimum offered connection speed being the most important ones). Inherently network
rollout is linked to costs and especially in the current economic turmoil a valid question arises
– will a “digital dividend” network be able to offer broadband services profitably?

Challenge

A recent study1 has revealed that the deployment of wireless networks and the provision of
broadband services using the digital dividend spectrum will clearly involve a number of
challenges that must be addressed. The primary goal being ubiquitous broadband coverage
implies that telecom operators or service providers must cover the existing “white spots”. In
Germany, this would mean mostly deploying the necessary new network infrastructure in
rural areas with very low population density and/or in areas with terrain which is difficult to
cover (like hills, mountains, forests, large plains, etc.) The main reasons why these areas
have remained “disconnected” from broadband access to date are:
Q prohibitive capital investment

Q very low revenue potential (few potential subscribers)

Q or both

The difficult terrain and the low population density will have a huge impact on the required
network infrastructure and consequently on the necessary investments and expenditure.
New sites must be built and sufficient backhaul capacity links supplied and this will reflect on
the total deployment costs.

1
Detecon Study on Digital Dividend, October 2009

Detecon International GmbH z 02/2010 2 www.detecon.com

 Detecon Executive Briefing

The number of households without broadband coverage (DSL) in Germany is under 4%2 (as
of end of 2008) thus leaving a relatively small addressable market for the digital dividend
networks. With the ongoing expansion of VDSL, DOCSIS and FTTH networks in urban areas
it will be very hard for wireless networks to compete for broadband market share in these
areas (at least not before true 4G networks). Furthermore it can be presumed that in some
areas digital dividend license holders may already operate a fixed line broadband network
making a strategy of avoidance of “market share cannibalization” very likely.

The spectrum license fee is another risk to be considered: a very high fee might hinder the
deployment of wireless networks as happened in the case of 3G a couple of years ago.

Key Considerations

To counter these challenges operators or service providers have to carefully consider a

combined set of technical and economic parameters:

Coverage type (indoor or outdoor) influences the required network infrastructure (radio base
stations, backhaul links, civil infrastructure). The coverage itself depends on other
parameters such as frequency, antenna height and type, radio equipment technical
specifications, and regulations. CAPEX and OPEX will be affected.

Cell bandwidth (in MHz) influences the total cell/site throughput and thus the number of
subscribers supported simultaneously. CAPEX and OPEX will be affected.

Subscriber base (forecasted) influences both the revenue stream and the required network
infrastructure and both CAPEX and OPEX.

Services (offered) affect the average revenue per subscriber.

Subsidies on end user equipment or logistics affect the CAPEX.

License fees affect CAPEX.

2
DTAG 2008 Annual Report

Detecon International GmbH z 02/2010 3 www.detecon.com

 Detecon Executive Briefing

All these items will have direct impact on the business results. The above mentioned options
were taken and transformed into a set of scenarios in a study carried out by Detecon. Figure
1 shows the net present value (NPV) of a network using digital dividend spectrum covering
the state of Mecklenburg-Vorpommern for a period of six years. It can be seen that only five
scenarios exhibit a positive NPV3 – in these cases coverage type is outdoor, cell bandwidth
is 10 or 20MHz, the access technology is OFDMA4, the subscriber forecast is based on 30%
to 50% market share, and in most cases end-user equipment (CPE) is not subsidized. The
offered service is fixed wireless internet and the license fees are assumed to be the
minimum (starting) fees in the upcoming auction in 2010.

NPV
NPV,
MEUR Indoor Coverage Outdoor Coverage
10 8.9
5.1
5 2.9 2.0
0.8
0
-0.9 -1.8
-5 -3.0

-10
NPV, CPE subsidy
-12.3 NPV, no CPE subsidy
-15 -13.7
-15.0 -13.7
-20 -19.4
-19.8
-20.6 -20.2
-25

-30
10MHZ 20MHZ 10MHZ 20MHZ 10MHZ 20MHZ 10MHZ 20MHZ
BS BS OP OP BS BS OP OP

Fig.1: Net Present Value

3
In the study NPV is defined as the discounted difference between revenues on the one hand, and CAPEX and
OPEX on the other. CAPEX is capital expenditure and OPEX is operating expenditure.

4
Orthogonal frequency division multiple access, as implemented in LTE and mobile WiMAX

Detecon International GmbH z 02/2010 4 www.detecon.com

 Detecon Executive Briefing

Conclusion & Recommendation

The main conclusions from the study show that profitable business using the digital dividend
is possible, but only under certain framework conditions and after a careful consideration of
techno-economic parameters. The number of required sites (and thus investment) only stays
at a reasonable level when the network is planned for providing outdoor coverage.
Furthermore significant market share (30% to 50%) is necessary to achieve positive net
present value within the rollout period. Enough bandwidth (at least 10MHz) is another
mandatory condition emerging from the results. Certain cost elements e.g. end-user
equipment (CPE), if covered by the operator, impose significant financial burden on the
business results and can even lead to negative NPV. Another parameter that may have a
similar effect is the license fee. In the study the assumed license fees are the minimum ones
announced by the national regulator but in reality higher fees can be expected. The main
findings are independent of the underlying broadband wireless technology.

Based on the above conclusions we recommend that operators or service providers

Q focus on areas where they can expect high subscriber uptake (currently areas not
covered with broadband access)
Q consider teaming up with a partner to
O share the costs for network deployment, operation and/or frequency spectrum
sharing (especially for those with less than 10MHz spectrum) and
O achieve the necessary critical market share
Q coordinate the rollout of the broadband network with other operators and consider
national or regional roaming agreements
Q carefully plan which cost elements to cover alone (e.g. CPE)
Q consider different public funding schemes to complement own investments as
broadband coverage, especially in rural areas, is a matter of broad public and
governmental interest, and funding options are available5
Q are realistic regarding the maximum license fee payable per frequency block - it should
stay within a reasonable range in order not to overburden the deployment of the
wireless broadband networks. Under no conditions should these fees reach the level of
the 3G licenses distributed in 2001.

The authors
Nikolay Zhelev
Nikolay Zhelev@detecon.com

Dr. Wolfgang Knospe

Wolfgang.Knospe@detecon.com

5
The European Commission approved several state aid schemes in 2008, more information available at
http://ec.europa.eu/competition/state_aid/register (e.g. N115/2008, N150/2008, N266/2008)

Detecon International GmbH z 02/2010 5 www.detecon.com