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Oct 24, 2014
Paper for National Post and Telecom Agency (PTS)
Mobile LRIC model conceptual design and model specification for 2G and 3G mobile networks in Sweden
AnalysysConsultingLimited StGilesCourt,24CastleStreet Cambridge,CB30AJ,UK Tel:+44(0)1223460600 Fax:+44(0)1223460866 [email protected] www.analysys.com
Contents1 2 2.1 2.2 3 4 4.1 4.2 4.3 5 6 6.1 6.2 6.3 6.4 6.5 7 7.1 7.2 7.3 7.4 7.5 Introduction Conceptual approach Overview of conceptual issues regarding a mobile LRIC model Selection of conceptual issues that require additional consideration Conceptual issues relating to operator Conceptual issues relating to technology Spectrum allocations Radio technology standards Infrastructure sharing Conceptual issues relating to services Conceptual issues relating to implementation WACC Depreciation method Mark-up mechanism and network externalities Increments Years to consider Model specification Network loading Coverage parameters Equipment capacities Demand inputs and projections Network topology 1 2 2 3 5 6 6 7 12 15 17 17 17 18 18 20 22 23 24 26 27 30
Annex A: Glossary of technical abbreviations Annex B: Revisions to approach following industry consultation Copyright 2008 Analysys Consulting Ltd has produced the information contained herein for the National Post and Telecom Agency (PTS). The ownership, use and disclosure of this information are subject to the Commercial Terms contained in the contract between Analysys Consulting Ltd and PTS.
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1 IntroductionAnalysys Consulting Ltd. (Analysys) has been commissioned by the National Post and Telecom Agency (PTS) to perform an upgrade of the LRIC calculation model originally developed in 2003 by Analysys and HiQ (the original model) in order to take into account recent market developments. In particular, the upgrade will incorporate the emergence of 3G networks and services. Since the development of the original model, the volume of mobile network traffic in Sweden has increased and 3G networks have emerged. In order to assess the potential requirement for further regulation of mobile termination, PTS needs a detailed understanding of the costs associated with the current market situation and the status of the networks in Sweden. This is to be accomplished by carrying out a set of upgrades to the existing 2G LRIC calculation model to incorporate the evolution in the mobile market, and 3G deployments and services. This paper sets out two aspects of the upgrade process that need to be considered: its conceptual approach, and its proposed model specification. Certain elements of these two aspects are determined by the original model, and PTS does not intend to reopen the discussion on these matters. However, other elements will require fresh consideration either as modifications to the existing 2G LRIC model approach, or as completely new issues. Following submissions from the Swedish industry parties on a consultation version of this paper (dated 26 October 2007), a number of modifications to the proposed approach have been made. These modifications have been included at the relevant points throughout the present document, and are collated in Annex B. The conceptual design (Conceptual Design Final Version.pdf) and model specification (Model Specification Final Version.pdf) applicable to the original model can be found on PTSs website.1 The remainder of this document is structured as follows:
Section 2 describes the conceptual issues associated with the mobile LRIC model and distinguishes between those that are determined by the original model and those that require additional consideration Section 3 describes the conceptual issues relating to the operator modelled Section 4 describes the conceptual issues relating to the technologies used Section 5 describes the conceptual issues relating to the services provided Section 6 describes the conceptual issues relating to the implementation of the upgraded model Section 7 describes the proposed specification of the upgraded model Annex A contains a glossary of the technical abbreviations used in this paper Annex B lists the revisions made to the approach following industry consultation.
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2 Conceptual approachThis section first provides a brief overview of the conceptual issues associated with the design of a mobile LRIC model. These issues were considered carefully during the conceptual design of the original model in 2003, and the decisions that were taken at that time are summarised briefly. The section then distinguishes between those issues which, in the view of Analysys, do not need to be considered again, and those which do require fresh examination.
Overview of conceptual issues regarding a mobile LRIC modelOn 5 June 2003, PTS issued the final version of the Mobile LRIC Model Conceptual Design, which specified the basis on which the original model was implemented and applied. That document classified the conceptual issues in terms of four dimensions: operator, technology, service and implementation, as summarised in Figure 2.1 and described in more detail below.
Modelling conceptual issues
Framework for classifying conceptual issues [Source: Analysys]
The characteristics of the operator that is used as the basis for the model represent a significant conceptual decision, with clear costing implications. The following choices are significant:
What structural implementation of the model should be applied (topdown, bottom-up, hybrid)? What type of operator should be modelled the actual operators, an average operator, or a hypothetical new entrant to the market? How efficient an operator should be modelled individual operators, the most efficient in Sweden, the most efficient in the world, a hypothetical most efficient operator? What size of operator(s) should be modelled actual size, average size, or some other size of hypothetical operator?
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The nature of the network to be modelled depends on the following conceptual choices:
What radio technology standards should be deployed? What are the effects and existence of migration and other proxies for technology evolution? What is the nature of the spectrum allocated to the modelled operator (amount, band and fees paid)?
Within the service dimension, there are questions regarding the scope of the services being examined:
What service set does the modelled operator support? Are costs calculated at the wholesale or retail level (i.e. is the network standalone or vertically integrated)?
A number of implementation issues must also be resolved to produce a final cost result. They are:
What is the weighted average cost of capital (WACC) for the modelled operator? What depreciation method should be applied to annual expenditures (HCA, CCA, tilted annuities, economic)? What increments should be costed, and should they be marginal, incremental or average? What year(s) should results be calculated for? What mark-up mechanism should be applied to costs that are common to the increments? Should Ramsey pricing be employed? Is a network externality surcharge appropriate?
Selection of conceptual issues that require additional considerationIn Table 2.1 below, the issues outlined in Section 2.1 are listed, together with the decisions made for the original model. There are a number of issues that Analysys does not consider require revisiting for the purposes of the model upgrade: the decisions regarding these issues that were taken by PTS in the original conceptual design are considered independent of the refinements being proposed for the model upgrade. The remaining issues in Table 2.1 have been marked with yes, indicating that Analysys believes that they that require further consideration in the context of upgrading the mobile LRIC model. Note that the derivation of the WACC for the upgraded model is an issue that may be studied by PTS in a separate analysis and therefore does not fall within the scope of the present paper. The following sections of this Paper discuss these issues under the headings of operator, technology, service and implementation, and specify the proposed approach.
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Conceptual issue Structural implementation of model Type of operator Efficiency of operator Size of operator Radio technology standards Spectrum allocations Service set Standalone network or vertically integrated WACC Depreciation method Increments Type of increments Years to calculate results for Mark-up mechanism Inclusion of network externality Table 2.1:
Determination for original model Hybrid (bottom-up reconciled against top-down) Actual operators All operators are efficient by Swedish standards Actual size GSM only Actual Voice and data Full business costs Use Capital Asset Pricing Model (CAPM) Economic depreciation Two; traffic and subscribers Average All past and future years Equi-proportionate mark-up (EPMU) No
No No No No Yes No No No No No Yes No Yes No No