techno-ECOnomics of integrated communication SYStems and · Investments Figure 1 The flow chart of cash flow calculation (from Optimum project [1]) The figure describes a traditional

techno-ECOnomics of integrated communication SYStems and services

Deliverable 6:

“OPEX models”

March 2005

OPEX models Page 2 of 38

Document Information Contractual Date of Delivery: 31 March 2005

Actual Date of Delivery: 1 April 2005

Editor(s): Markku Lähteenoja, Borgar T. Olsen (Telenor)

Author(s): Renjish Kumar Kaleelazhicathu, Timo Smura, Heikki Hämmäinen (Helsinki University of Technology), Beatriz Craignou (France Telecom R&D), Dimitris Katsianis (University of Athens), Jarmo Harno (Nokia), Rima Venturin, Irena Gjerde, Jørgen Lydersen, Nils Elnegaard, Kjell Stordahl (Telenor)

Participant(s): Telenor, Helsinki University of Technology, France Telecom R&D, University of Athens, Nokia

Workpackage: 2

Workpackage title: Techno-Economic methodology development

Workpackage leader: Borgar T. Olsen

Deliverable number: 6

Deliverable title: OPEX models

Est. Person-months: 5

Security: Public

Nature: Report

Version/Revision: 1.0

Total number of pages: (including cover)

38

File name: ECOSYS_Del06_v1.0.doc

Abstract: This deliverable describes the OPEX elements that are rele-vant for cash flow analyses of various telecommunication business cases. In order to be practical the different OPEX elements are modelled as functions of different drivers. Typical drivers include e.g. number of customers, number of network elements, number of services etc. A separation has been made between OPEX as an ac-counting concept and OPEX as part of cash flow analysis. The main focus in this work has been on OPEX as part of cash flow analysis. The structuring of OPEX elements can be used as a guide-line and a memo when performing business case analyses.

Keywords: OPEX, operating expenditures in telecommunications, cash flow analysis, OPEX drivers


Table of Contents

DOCUMENT INFORMATION......................................................................................................................... 2 TABLE OF CONTENTS .................................................................................................................................... 3 EXECUTIVE SUMMARY ................................................................................................................................. 4 1 INTRODUCTION ...................................................................................................................................... 5

1.1 MOTIVATION......................................................................................................................................... 5 1.2 FOCUS................................................................................................................................................... 5 1.3 CASH FLOW ANALYSIS FOR BUSINESS CASES......................................................................................... 5 1.4 DEFINITIONS ......................................................................................................................................... 6

2 OPEX ELEMENTS .................................................................................................................................... 8 2.1 INTRODUCTION ..................................................................................................................................... 8 2.2 OPEX ELEMENTS.................................................................................................................................. 8

3 OPEX DRIVERS AND MODELS........................................................................................................... 12 4 OPEX IN ECOSYS BUSINESS CASES................................................................................................. 19

4.1 OPEX IN MOBILE CASES .................................................................................................................... 20 4.1.1 OPEX in Mobile Case Study “2G incumbent without UMTS”...................................................... 22 4.1.2 OPEX in Mobile Case Study “Mobile Virtual Network Operators” ............................................. 25 4.1.3 OPEX in Mobile Case Study “Greenfield Operator with 3G license” .......................................... 26

4.2 OPEX IN FIXED CASES ....................................................................................................................... 28 5 CONCLUDING REMARKS ................................................................................................................... 30 APPENDIX A. COMPANY OPEX.............................................................................................................. 31

5.1 APPENDIX A1...................................................................................................................................... 31 5.1.1 OPEX in company accounting................................................................................................ 31

5.2 APPENDIX A2...................................................................................................................................... 33 5.2.1 Appendix A2.1: Company specific OPEX elements ....................................................................... 33 5.2.2 Appendix A2.2: Company specific OPEX drivers and models....................................................... 34

REFERENCES .................................................................................................................................................. 36 ACRONYMS...................................................................................................................................................... 37


Executive Summary

Modelling of OPEX (Operational Expenditures) in telecommunication cash flow analysis has got increased focus in the last few years.

The deliverable describes the OPEX elements that are relevant for cash flow analyses of various telecommunication business cases. In order to be practical the different OPEX elements are modelled as functions of different drivers. Typical drivers include number of customers, number of network elements, number of services etc.

The granularity of the OPEX elements is a compromise between completeness and usefulness. Therefore the number of elements is limited to 15. Further structuring and subdivisions must be handled on specific business case analyses.

A separation has been made between OPEX as an accounting concept and OPEX as part of cash flow analysis. The main focus in this work has been on OPEX as part of cash flow analysis.

This work represents the first step to improve handling of OPEX in ECOSYS business cases. The structuring of OPEX elements can be used as a guideline and a memo when performing business case analyses. The business cases must adapt and refine these elements based on available information.

Telecommunication operators, service providers and managers interested in techno-economic analysis and financial evaluation of telecom market can exploit this information.


1 INTRODUCTION

1.1 Motivation

Modelling of OPEX in telecommunication cash flow analysis has got increased focus in the last few years. This is mainly due to the increased competition, reduced revenue from traditional services, increased requirement on short-term profitability and the fact that the business models of new and old actors in the telecommunication market have become more sophisticated. There are many actors, who do not invest heavily in the networks and platforms, but take roles as service providers etc. In the business cases for such actors, the OPEX make up the dominating part of the total life cycle costs.

This deliverable describes the OPEX elements that are relevant for cash flow analyses in various telecommunication business cases. The different OPEX elements are modelled as functions of different drivers. Typical drivers include number of customers, number of network elements, number of services etc.

The results of this deliverable will hopefully improve the implementation of OPEX in the business cases within the ECOSYS project and in other telecommunication business cases.

1.2 Focus OPEX including OA&M (Operation, Administration and Maintenance) constitutes a part of the costs in cash flow calculations of business cases. OPEX is also a main part in the general company accounting.

In this deliverable the main focus is on OPEX elements and drivers for strategic telecommunications projects evaluated by traditional cash flow analysis. OPEX related to company accounting is described in Appendix A.

More detailed and refined application of this OPEX approach will be worked out in each separate business cases performed in the ECOSYS project.

1.3 Cash flow analysis for business cases Cash flow analysis is a method for studying the profitability of investments projects (business cases), e.g. comparisons between different tecnhnological alternatives. In cash flow analysis, an incremental approach is often used, i.e. only the costs directly related to the evaluated project are taken into account. Overhead costs (i.e. how the project will contribute to cover the general costs of the company) are not normally part of cash flow analysis.

The main elements of cash flow analysis are shown in Figure 1.


NPVNPV IRRIRR PaybackPeriodPaybackPeriod

Economic Inputs

Economic Inputs

Economic Inputs

Cash flows, Profit & loss accounts



Geometric Model(s)Geometric Model(s)Geometric Model(s)ServicesServicesServices ArchitecturesArchitecturesArchitectures

Year 0 Year 1 Year n Year m. . .

Demand for the Telecommunications Services

DB

RevenuesRevenuesRevenues OA&MCosts

OA&MCosts

OA&MCosts

Life Cycle Cost

Life Cycle Cost

First Installed Cost

First Installed CostInvestmentsInvestmentsInvestments

Figure 1 The flow chart of cash flow calculation (from Optimum project [1])

The figure describes a traditional network operator business case. For pure service providers the architecture and investments are less important and OA&M (OPEX) includes mostly payments on network resources, interconnection and roaming etc.

The technical and economic analysis has to consider the objectives to be reached (in terms of service demand, sales or target customers), the activities associated to the project, the network architecture and requested resources, the planned expenses (CAPEX and OPEX), and other costs that are not directly assigned to the activity.

Input elements related to the cash flow analysis are: • Revenues (derived from the number of customers and tariffs) • OA&M / OPEX • Investments / CAPEX (Capital Expenditures)

The outputs include the cash flow (CF), the pay back period, the accumulated cash flow, the net present value (NPV), and the internal rate of return (IRR). It can also be necessary to consider the installed first costs (IFC), which is the sum of all discounted investments, or the life cycle costs (LCC), which is the sum of all discounted CAPEX and OPEX.

There are many important parameters in cash flow analysis, which are not easy to reach consensus on, and are a bit different from company to company and from project to project. These include e.g. the choice of discount rate and study period, estimation and use of the residual values etc.

1.4 Definitions For the purposes of ECOSYS cash flow analyses, CAPEX is defined as expenditures associated with the implementation or extension of fixed assets (like network


infrastructure), subject to depreciation over the economic life of a project. Then, there is a residual value associated to these expenses. CAPEX are indispensable for new service provisioning or improvement of existing services, or for enhancement of the company business. CAPEX analysis is generally based on the physical and logical resource requirements. The construction of a network, the implementation of new network elements, and the acquisition of software (or hardware) systems enabling particular service offerings, for instance, involves important amounts of money for purchasing the required elements or the basic information system.

OPEX is defined as expenditures necessary for running the business or the equipment, indispensable to keep the services active and running. These expenses are not intended to extend the fixed asset and are not subject to depreciation. Once made, these expenses have no residual value.

On the overall level, OPEX is defined in this work as all cost elements in cash flow analysis that are not CAPEX. In reality, the border between CAPEX and OPEX is not always clearly defined. Some expenses, like those related to software, are at the border between CAPEX and OPEX, because they are related to each other.

All purchase of hardware and software systems is defined as CAPEX, but operation and maintenance of these systems, related manpower costs and periodic license costs are OPEX.

The total OPEX is built up of OPEX elements shown in chapter 2. The selection of elements is made to match the cost information usually available within telecommunications business.


2 OPEX ELEMENTS

2.1 Introduction The list of OPEX elements below should cover all relevant roles, such as service operator, network operator, service integrator, content provider etc [2]. The elements should be applicable for all kinds of telecommunication business: mobile, fixed and convergent for both incumbents and newcomers. The elements should also cover different kinds of projects dealing with either implementing new services/products or introducing new technologies/platforms.

The list below contains the main OPEX elements identified. For each element, some examples of characteristics and application areas are listed. The IT (Information Technology) costs are implicitly distributed on the different elements. There is no single element only allocated to IT. Many of the elements can also be outsourced, meaning that OPEX for these must be modelled as a payment to other actors.

The OPEX elements listed here are related to cash flow analysis. The use of OPEX in company accounting is described in Appendix A.

2.2 OPEX elements

1. Maintenance of equipment and components • Includes all the recurrent costs that are periodically necessary for undisturbed

network and service operation. • Includes both preventive maintenance and reparation • Reinvestment due to outdated equipment is treated as CAPEX. Reinvestment

means a change to a newer version of equipment, usually with higher functionality.

• Decommissioning cost (removing of old equipment) might be counted as OPEX or be included to CAPEX.

2. Equipment and software licenses, maintenance outsourcing

• This includes e.g. yearly expenses from the operator to the equipment provider after buying the equipment (maintenance agreement and periodic licence costs)

3. Sales and marketing, Customer acquisition

This element is intended to cover both retail and wholesale businesses. • Marketing • Advertising • Campaigns


• SLA (Service level agreement) negotiation • Subsidisation (provisions to e.g. handset vendors)

4. Customer provisioning • Customer registration • Installation and reinstallation (by churn) of customer • Activation of customers devices

5. Customer care

• Customer service, handling of complaints etc • Help desk operation • CRM (customer relationship management) operation • May often be outsourced, can be based on personal and/or IT-systems.

6. Charging and billing

• Metering, data collection, etc. • Charging • Billing • Accounting and controlling (regular reporting to the higher level

management) 7. Service management

• Product management (responsible person) • Supervision and monitoring of services and quality • SLA management

8. Network management

• Faults, Configuration, Accounting, Performance, and Security management (FCAPS)

• Supervision and control of network elements • Operation Support Systems (OSS) operation

9. Product/platform development • Network planning • Service design and development • SLA design

10. Rental of physical network resources


These elements are very relevant to to service providers or virtual operators that do not own network platforms, or infrastructure, but rent it from others. Also traditional operators often have to pay for some of these, albeit in a lesser degree.

• LLUB (local loop unbundling) • Wholesale (e.g. DSL access) • Leased lines • Dark fiber • Co-location, hosting • Mast for base stations • Mobile access • SAN (Storage area network)

11. Roaming

• Roaming agreement and settlement cost: The cost incurred in negotiating and managing the roaming agreements and financial settlements.

• Global roaming test: The cost incurred in conducting interoperability tests for roaming across multiple networks and technologies.

• VHE (Virtual home environment) maintenance: The cost incurred for the maintenance of the VHE, essential for providing the same personalized profile across multiple networks and terminals for an inbound subscriber.

12. Interconnection The interconnection costs include mainly termination charges levied by a network operator responsible for completing a call or session originated in another network. 13. Yearly cost of radio spectrum licenses

• Yearly cost for frequency licenses for UMTS, WiMAX etc • Not including one-time payment • Some regulatory regimes allow the possibility of leasing the spectrum owned

by an operator to a third party. For instance, the leasing of spectrum by an MVNO from a network operator could be possible. Here, the spectrum leasing cost incurred by an MVNO is considered as an OPEX whereas the cost incurred by the network operator in purchasing that license is considered as CAPEX

14. Regulation

• Cost for collecting information and reporting to the regulator • Additional cost due to the impact of changes in regulatory decisions • Fines based on regulator decisions

15. Content


• This is the cost in purchasing licenses from a third party (content owner) for content distribution.

• Includes also other payments to a third party


3 OPEX DRIVERS AND MODELS

For the 15 elements defined in chapter 2 we have tried to identify the main drivers and to create simple formulas for calculating the OPEX costs. These formulas are on the general level. They are overall guidelines, not going into the details of specific business cases. The business cases must adapt and refine these formulas based on available information.

Most of the unit costs applied in the formulas are time and/or volume dependent, e.g. because of learning effects.

OPEX drivers and models for company accounting are shown in appendix A.

1. Maintenance of equipment and components

The maintenance costs have been defined as all the costs related to the resolution of physical problems in the network, such as fibre cuts or equipment failure. It can be calculated as the sum of replacement part costs and the maintenance staff costs. The first part encompasses the costs of failed network elements, while the second includes labour costs and obviously depends on the required amount of personnel. These costs can be evaluated as manpower costs. Therefore, for each analysed project, it would be useful to evaluate the time between failures and the working time required in average to repair a given type of equipment. Manufactures and equipment suppliers can help to provide these figures. For these elements one alternative is to use model developed in EU project AC226-OPTIMUM [1]. The Maintenance costs are divided into two separate M1 and M2 components, which are parts of the traditionally OA&M costs (Figure 2).

M1 - Represents the cost of repair parts. This component is driven by the investments. M2 - Represents the cost of repair work.


Figure 2. OPTIMUM Maintenance model [1]

The total maintenance costs caused by any single cost component in year i are:

where :

• Vi is the equipment volume in year i • Pi is the price of cost item in year i • Rclass is the maintenance cost percentage • Pl is the cost of one working hour • MTTR is the mean time to repair for the cost item in question • MTBR is the mean time between failures for the cost item in question

2. Equipment and software licenses, maintenance outsourcing This element covers the yearly expenses from the operator to the equipment provider after buying the equipment (maintenance agreement and licence costs). There is a maintenance contract, carried out with the suppliers, to ensure maintenance. Annual fees and/or Upgrades based on:


• Working time for upgrade (upgrade time) • Frequency of upgrades (FOU) • Number of network elements to visit

Software maintenance cost = annual cost (driver: customers, nodes, traffic etc) and/or Software maintenance cost = upgrade time * working time costs * FOU * number of network elements to visit

3. Sales and marketing, Customer acquisition Marketing, advertising, campaigns: OPEX for marketing, advertising etc. is very case dependent (wholesale for a few customer vs. retail for mass market). This OPEX consists of the manpower costs (work time of the marketing staff working for the relevant case times the average manpower cost) and costs of buying media time for advertising. SLA (Service level agreement) negotiation: The costs depend on the length of preparation and negotiation (very dependent on service, customer, case) and manpower cost. Subsidisation (provision to vendor): OPEX for subsidisation is the number of subsidized units (e.g. handsets) times the average subsidisation per unit. Subsidy could be e.g. lowered price of handset, or give-away such as DVD player etc. The operator that uses subsidisation of handsets will try to get this OPEX covered by higher tariffs or longer contract lengths. Marketing cost = cost per potential customer * size of potential customer base Customer acquisition cost = (customers_year_end – customers_year_begin + churned customers) * customer_acquisition_cost_per_customer Churn rate = lost customers / [(customers_year_end + customers year_begin)/2] (might be used differently by different operators) Subsidisation cost = number of new (subsidized) customers * subsidy cost per customer

4. Customer provisioning


OPEX for installation of the customers can be calculated as the number of new customers each year times the average installation cost per new customer. OPEX for reinstallation of the customers can be calculated as the number of churned customers (customers, that terminate the service) each year times the average reinstallation cost per churned customer. The average installation/reinstallation cost can have some learning effects i.e. reduce over time because of economies of scale. Provisioning includes also initial service configuration, disconnecting a customer, deleting data from customer base etc. Provisioning cost = (customers_year_end – customers_year_begin + churned customers) * provisioning cost of one customer or Provisioning cost of one customer = installation cost + database work cost ++…

5. Customer care Customer care is a typical element where there are learning effects in place, i.e. unit costs decrease with time and increased volume. Customer care cost = average number of customers per year * unit cost(t) or Customer care cost = average number of customers per year * customer care personnel per customer * yearly manpower cost

6. Charging and billing

Charging and billing costs can be modelled with unit costs (price per customer). Charging and billing cost = average number of customers per year * unit cost(t)

7. Service management This element is very case dependent and is mostly driven by the number and complexity of the services. Cost = management cost for service1 + management cost for service2 + …

8. Network management


Here, the number of network elements is the main driver. Network management cost = F(number of personnel, number of network management systems, number of network elements)

9. Product/platform development Mostly the number and complexity of in-house developed services drive this element. Product/platform development cost = F(number of engineers, number of services, complexity of existing and new services)

10. Rental of physical network resources Here, the drivers are very dependent on the business case:

• Number of customer (LLUB, ADSL Wholesale) • Traffic (leased lines) • Number of sites (mast for base stations)

Accordingly, formulas will be case dependent. Unit cost comes often from the price lists.

11. Roaming Roaming agreement and settlement cost: The agreement and settlement cost incurred per roaming network mainly depends on the number of inbound and outbound subscribers. The overall cost increases with the increase in the number of roaming partner networks. Additional costs are also incurred due to the personnel involved in negotiation and management of the agreements and settlements. Global roaming test: Major drivers for OPEX here are the number of different technologies and roaming networks involved. Costs are mainly due to the personnel involved in testing. VHE (Virtual home environment) maintenance: Main driver here is the number of inbound subscribers.

For majority of the roaming OPEX, the main drivers are inbound and outbound roaming subscribers. Different types of network technologies and terminals can also be used as drivers. For the sake of simplification, we propose to have the OPEX model for roaming as the sum of the cost per inbound subscriber times the total


number of inbound subscribers and the cost per outbound subscriber times the total number of outbound subscribers of an operator. Roaming costs = cost per inbound subscriber * total number of inbound subscriber + cost per outbound subscriber * total number of outbound subscribers

12. Interconnection For interconnection costs, the main driver is interconnecting traffic volumes. From an operator’s perspective, the interconnect traffic can be either inbound or outbound. The amount of traffic depends mainly on the size of operator’s subscriber base and/or their usage profile. For instance, an operator with a smaller subscriber base may end up having higher outbound traffic than the inbound traffic. This would mean higher OPEX for the operator. The net interconnection costs by an operator can be modelled as the cost per traffic unit (in minutes, Mbytes, events etc) times the net amount of inbound and outbound traffic. Interconnection costs = (cost per traffic unit) * (total inbound traffic – total outbound traffic) Prices are often different in different directions (e.g. in incumbent/non-incumbent case). Interconnection costs can also vary based on geographical location such as national and international connections. In such cases, the amount of national and international traffic and their respective costs have to be considered separately for calculating the total interconnection costs incurred.

13. Yearly cost of radio spectrum licenses

For cost of radio spectrum, the main driver is the subscriber base and traffic volume generated by the subscribers based on which the required spectrum is calculated. Cost calculation depends on the leasing agreements that may be offered for 15-20 years or even less, with a yearly fixed fee or fee for the entire duration of license.

14. Regulation The major driver for regulation related OPEX is the personnel costs involved in regulatory reporting and information collection as well as the costs involved in complying with the regulatory decisions.


15. Content

For content distribution rights, the main driver is the number of licenses and number of users of the content. Additional costs can also be incurred due to the maintenance of content distribution and rights management systems.


4 OPEX IN ECOSYS BUSINESS CASES

This chapter illustrates the first application of the derived OPEX approach to selected business cases from the ECOSYS project. The further work on how in detail to handle OPEX in specific business cases will be carried out in the ECOSYS case studies. The following table is used as a template in this evaluation.

Business case:

Opex element Relevance Comments

1 Maintenance of equipment and components

2 Equipment and software licenses, maintenance outsourcing

3 Sales and marketing, Customer acquisition

4 Customer provisioning

5 Customer care

6 Charging and billing

7 Service management

8 Network management

9 Product/platform development

10 Rental of physical network resources

11 Roaming

12 Interconnection

13 Yearly cost of radio spectrum licenses

14 Regulation

15 Content

OPEX elements relevance for the business cases: 4: Dominant 3: Very relevant 2: Relevant 1: Not very relevant 0: Not existing


4.1 OPEX in Mobile Cases

In some of the mobile cases the following more general structure is used to be able to distribute the relative OPEX costs according to available information: Group A: Network related elements 1 - Maintenance of equipment and components 2 - Equipment and software licenses, maintenance outsourcing 8 - Network management 10 - Rental of physical network resources 13 - Yearly cost of radio spectrum licenses Group B: Marketing and sales related elements 3 - Sales and marketing, Customer acquisition Group C: Customer service related elements 4 - Customer provisioning 5 - Customer care 6 - Charging and billing Group D: IT and other product support and development related elements 7 - Service management 9 - Product/platform development 14 - Regulation 15 - Content Group E: Interconnection and roaming costs 11 - Roaming 12 - Interconnection Related to the mobile cases of new service provisioning in 3G and beyond, the average total OPEX is considered to be higher than for the current (2G) operator, since the new network technologies and services require increased resources in all of the OPEX groups mentioned above, excluding maybe the “Interconnection and roaming costs”: • Network related elements • Marketing and sales related elements • Customer service related elements • IT and other product support and development related elements


During the last 10 years the average European GSM operator OPEX (per subscriber) has decreased to less than half. This is due to maturing technology and networks, growing subscriber amounts, and in general advance on the learning curve and competition.

When estimating the 3G and beyond services’ business cases, we should consider same kind OPEX trends as with the earlier generation. We have to take into account the product development, provisioning and customer support of the new data related services, which form a much more complicated structure than the basic GSM services, mainly voice and SMS. Also the new end-to-end networking technologies require increasing resources especially in the early period before maturing. And we should not forget that marketing and terminal subsidies per subscriber are at the highest, when the services and technologies are first introduced.

Based on the OPEX data collected from the economic figures published by the operators, the above highlighted 3G and beyond case related trends, and other more operator specific factors, we end up to suggest for the general average OPEX to be at the monthly level of 13€ - 39€ per subscriber. In the ECOSYS WP5 the operator business is divided into Service Operator and Network Operator businesses. We should note that this OPEX figure includes both players’ total OPEX.

Probably in the beginning of the study period the OPEX is nearer to the higher end per 3G subscriber, but later as the 3G customer penetration rises and technologies mature, it would approach the lower limit. This development is of course dependent on the specific approach the operator selects, e.g. developing high end services as a forerunner, or selecting to be a low cost follower.

This OPEX estimation of monthly costs of 13€ - 39€ per subscriber, can be further divided into the OPEX grouping presented above, based on the knowledge and history data we have on the GSM operators. Here again we perceive much variance between different kinds of operators. Established operators having big customer base may have an advantage over small entrants, but the total size if scattered in many markets does not self evidently give an advantage in OPEX per subscriber. Low GDP per capita clearly lowers both the average personnel hour cost and the ARPU, but the labour efficiency is another thing, which is normally increasing with subscriber growth and the company maturing in the market. Diverse competition strategies are available that affect immediately one or more of the OPEX groups: high or low network quality, big or small marketing investments, good or moderate customer service, etc. The suggestion for the average division is: • Network related elements 20% • Marketing and sales related elements 26% • Customer service related elements 15% • IT and other product support and development 13% • Interconnection and roaming costs 26%


4.1.1 OPEX in Mobile Case Study “2G incumbent without UMTS”

In this case study we concentrate on an incumbent operator, whose business is divided into Network Operator and Service Operator roles. These are handled as economically independent players although they have tight co-operation relationship. They are both sticking to other technologies than UMTS.

The Network Operator has 100% population coverage of GSM-based network, and the 3G services are going to be provided by utilizing combinations from technologies like: EDGE, IEEE 802.11/16/20 and DVB-H. The Service Operator owns a remarkable share of the 2G customers and has thus a good position in migrating them to the 3G services, if the network and 3G service support is competitive.

The value proposition of the Network Operator is to support a competitive set of services compared to the UMTS operator, but with lower infrastructure deployments costs. As the capacity is of lower price, the traffic price level provided to the Service Operator can be kept cheaper. A threat, related especially to the IEEE based technologies, is the Internet business model, where the price level of transport and services get eroded due to the competition of unrestricted amount of players. This threat is common to both partnering players. The idea is to build a combination of coverage, availability and mobility with a service set and unique content that other scattered Internet players cannot compete with.

As the Service Operator is an incumbent, it has a large customer focus. Basically all segments are covered. Anyhow there are certain high-value segments, which are specially suited for this player. These are: 1) Business users on the move, with the laptop access to the corporate intranet as a number one need, followed by biz applications, VoIP, etc.; here the wide IP based access gives a strong position 2) Consumer segment heavy users, technology forerunners, youth or youth minded, interested on content downloads (music, video, etc.), gaming and TV programming while on the move As an incumbent with high market share, the selected operator profile is twofold: 1) A high quality, reliable provider of most developed services 2) A low price – low cost provider for the lower segments, with a reduced service set and customer care Consistently also the marketing strategy is partly to give the perception of a very reliable partner competing with functionality and service excellence, and partly to show as a low price shop. This leads to division of the brand: the high end products are provided under different brand that the low end service. Also the customer care and customer relationship management are separated. This will raise the costs due to redundancy in e.g. marketing, but to cover segments from both ends is seen to require differentiation inside company.


Marketing costs are high especially in the consumer side because of needed high coverage, while corporate segment can utilize more direct channels. Clearly the product development costs are higher in the high end segments, so reasonable market share is needed also there to maintain profitability. Also the price level should be sustained high enough to recover the development costs. Segmentation is again needed to avoid the price erosion of the basic mobile services to affect the advanced services.

Business case: 2G incumbent without UMTS, Service operator

Opex groups and elements Relevance Comments

A Networks related elements 2 Service Operator’s gateways and servers also counted to network related elements

1 Maintenance of equipment and components 2


1

8 Network management 2

10 Rental of physical network resources 2 In this scenario, the IP traffic, excluding the mobile access, is taken care by the Service Operator, utilizing e.g. leased lines

13 Yearly cost of radio spectrum licenses 0

B Marketing and sales related elements

4

3a Sales 3

3b Marketing 4

C Customer service related elements 3 The SO aims to lock the high-end customers and provide self activations through Internet for the low-end customers -> not dominant, but important

4 Customer provisioning 3

5 Customer care 3

6 Charging and billing 3

D IT and other product support and development

4

7 Service management 4 For competitive advantage


9 Product/platform development 4 For competitive advantage

14 Regulation 2

15 Content 4 For competitive advantage

E Interconnection and roaming costs

2 These costs are shared with the NO; not so crucial as there being kind of balance btw costs and incomes

11 Roaming 2

12 Interconnection 2

Business case: 2G incumbent without UMTS, Network operator

Opex groups and elements Relevance Comments

A Networks related elements 4 The main competitive area of NO, aim for high network quality

1 Maintenance of equipment and components 4


4


10 Rental of physical network resources 3

13 Yearly cost of radio spectrum licenses 2 As UMTS not utilized, this is low compared to competitors


1 No retail business

3a Sales 1

3b Marketing 1

C Customer service related elements 1 No retail business


5 Customer care 1

6 Charging and billing 2 Support for SO charging, interconnect accounting


2


7 Service management 1

9 Product/platform development 2

14 Regulation 0

15 Content 2


3

11 Roaming 3


4.1.2 OPEX in Mobile Case Study “Mobile Virtual Network Operators” Mobile Service Operators (MSOs) and Mobile Virtual Network Operators (MVNOs) are operators that offer mobile services without owning any spectrum license. MSOs and MVNOs can be differentiated based on the parts of the value network controlled by them. MSOs are mostly just re-selling and re-branding the services produced by the Mobile Network Operators (MNOs), whereas MVNOs have also their own switching centers and service platforms.

In the MVNO case study, the feasibility of different MSO and MVNO strategies are evaluated. Furthermore, evolution paths from MSO to MVNO business are analysed.

Business case: Mobile Virtual Network Operators

Opex groups and elements

Relevance for MSO

Relevancefor MVNO

Comments

A Networks related elements

3 3


0 2


0 3

8 Network management 0 3


4 4 Very significant part of OPEX in both MSO and MVNO cases


0 0 Radio Access Network outsourced


3 3


3a Sales 2 2 Depends on strategy, e.g. sales might happen mostly in the Internet

3b Marketing 4 4 Active marketing required to gain market shares

C Customer service related elements

3 3

4 Customer provisioning 3 3 SIM card delivery and customer management systems required also for MSOs

5 Customer care 2 2

6 Charging and billing 4 4 Billing is in the core of MSO business


2 2

7 Service management 3 3

9 Product/platform development

1 2

14 Regulation 1 1 Light regulatory burden on MSOs and MVNOs

15 Content 3 3 Depends on strategy


0 2

11 Roaming 0 2 For MSOs, roaming handled by the NO

12 Interconnection 0 3 For MSOs, interconnection handled by the NO

4.1.3 OPEX in Mobile Case Study “Greenfield Operator with 3G license” This business case describes the business of a 3G Greenfield or a new entrant operator starting a network and service operation in the market under investigation. The major characteristics of this operator include lack of legacy system (such as GSM network) operations/ownership, lack of an installed customer base, network sharing, national roaming for a limited period for GSM-based network services and a major emphasis on value-added service provisioning. Minimizing cost is a priority for this operator. Hutchison with its network (Hi3G in Scandinavia and H3G in other markets) and service (three) operations is one such major Greenfield operator having a global presence.

Tables below present the OPEX elements and their respective relevance for the service and networks operations of a Greenfield operator.


Business case: Greenfield Operator with 3G license, Service Operator



2 For application, call/session control and customer related service elements


2 For application and call/session control and customer related service elements


4


5 Customer care 4

6 Charging and billing 4 Billing takes up majority of the cost. Charging functionality is taken care of by the network operator and passed on to the service operator.





1

11 Roaming 0 Taken care of by the network operator

12 Interconnection 0 Taken care of by the network operator


0 Taken care of by the network operator

14 Regulation 1 To a certain extent

15 Content 4 As the service operator has a greater emphasis on providing value-added services.

Business case: Greenfield Operator with 3G license, Network Operator



4



4


0


5 Customer care 0

6 Charging and billing 3 Charging takes up majority of the cost. No billing.





2

11 Roaming 4



0 The license cost is considered as CAPEX in this case.

14 Regulation 2

15 Content 1

4.2 OPEX In Fixed Cases One example of fixed broadband business case is the rollout of DSL by the incumbent operator in an exchange area. This case is done from network operator point of view with DSL wholesale as the product.

Business case: DSL rollout


1 Maintenance of equipment and components 3 Dependent on the ownership of CPE (DSL-modem/router)


2 Case dependent


3 Sales and marketing, Customer acquisition 1 Few (wholesale) customers

4 Customer provisioning 2 Dependent on the ownership of CPE (DSL-modem/router)

5 Customer care 2 Few (wholesale) customers

6 Charging and billing 1 Mainly charging


8 Network management 3 Dependent on what is included in the wholesale product


10 Rental of physical network resources 0

11 Roaming 0


13 Yearly cost of radio spectrum licenses 0

14 Regulation 1 Dependent on the competition and regulation

15 Content 0


5 CONCLUDING REMARKS

This work has been an attempt to make a comprehensive structuring of the OPEX. The OPEX elements are related to different drivers and should cover most items that are needed in handling of OPEX in diverse telecommunication business cases.

The separation of OPEX as an accounting concept and OPEX as part of cash flow analysis has been made. The main focus in this work has been on OPEX (including OA&M) as a part of cash flow analysis.

This work represents the first step to improve handling of OPEX in ECOSYS business cases. The structure of OPEX-elements can be used as a memo when performing business case analyses. The business cases must adapt and refine these elements based on available information.


Appendix A. Company OPEX

5.1 Appendix A1

5.1.1 OPEX in company accounting In this appendix the role of the OPEX at the company level is described. Figure 3 shows a simplified view of a telecommunications company and its environment.

COMPANY

CustomersCliens

Personnel• Administrators• Staff• Techniciens

State

BanksLenders

Providers• Equipment• Services• Material

Associated enterprise owners

Social organismsSocial security, pensions, …)

Sales

DividendsCapital

Purchases

Loans

Interests

Rembursments

TaxesContribution

Salaries

Subventions ?

Figure 3 Company model with environment In order to understand the results of a company, it is important to know, at least roughly, the main account lines and rules. For instance, which are the most (or the least) profit-earning activities of the enterprise, which are the operational costs for the different services, which are the cost prices for the different products.

The incoming cash flows are due to customers (operating income), shareholders (capital increase) and banks or lenders (credit, money loans).


The outgoing cash flows are due to CAPEX and OPEX, that is to say, network and equipment expenses (paid to suppliers), technical and administrative expenses (service providers), labour costs (staff) etc.

For the company, the concepts of CAPEX and OPEX are a financial categorization of costs for accounting and taxation purposes. Consequently, the rules to determine if a kind of investment is CAPEX or OPEX are strongly dependent on the accounting methods of the company. The accounting input elements for a company are mainly:

• Revenues • Costs (CAPEX and OPEX) • Depreciation and amortization of implemented equipment • Interest and Taxes

Taxes

CAPEX

Net income

OPEX

+-

-

-

Interest

-

DepreciationAmortization

Revenue

EBITDA

EBIT

+ Revenue- OPEX= EBITDA- Depreciation and amortization= EBIT- Interest= Pre-tax profit- Income taxes= Net income

Figure 4 Derivation of EBITDA, EBIT, and Net income

In the company accounting the EBITDA (Earning Before Interests, Taxes, Depreciation and Amortization) results from Revenues minus OPEX. The EBIT (Earnings Before Interests and Taxes), results from the EBITDA minus the depreciation and amortization (derived from CAPEX). The net income is EBIT minus interests and taxes. It appears that CAPEX and OPEX are for the company a financial categorization of costs for accounting and taxation purposes. Consequently, the rules to determine if a kind of investment is CAPEX or OPEX are strongly dependent on the accounting methods of the company. In addition, some expenses, like those related to software, are at the border between CAPEX and OPEX, because they are related to each other. In these cases, fixing an investment threshold could help to determine their classification.


Interest and taxes are generally not part of the OPEX. However, some companies consider as OPEX some financial charges related to immobilisations (fixed or capital assets), professional taxes and equipment amortization.

5.2 Appendix A2

5.2.1 Appendix A2.1: Company specific OPEX elements I addition to the OPEX elements for cash flow analysis (chapter 2), some company specific OPEX elements are listed here. These should be used in cases where the analysis includes the economics of the whole company, not only of the individual projects.

1. Taxes In principle, taxes are not part of OPEX (see Figure 4). Some special taxes are however in some countries and companies included in OPEX.

2. General management of the company

3. Research &Development

R&D activity costs can be considered as support or administrative costs. In some cases, part of these costs is considered as CAPEX.

4. Law department

5. Economy department

6. Human resources (HR)

7. General IT support This includes IT-costs that relate more to the company itself, not to one specific case. These include:

• Personal computers, internal data network • Software licenses, maintenance/support agreements, outsourcing • Ongoing deployment of upgrades/patches etc


5.2.2 Appendix A2.2: Company specific OPEX drivers and models

1. Taxes Not generally part of OPEX.

2. General management of the company The main assumptions needed for the definition of the Operational cost related to such activities is the size (in personnel) of the examined department. Usual large companies (like incumbent operators) have specific departments for all these activities. In contrary new companies usually combine the cost related to some departments in one and assign multiple activities to the management department.

Number of Man. employees= Total numbers of employees * percentage of management department Or Number of Man. employees= Total number of Employees / Number of Employees in the Management departement per Total number of employees Or Number of Man. employees= Total number of customers / Number of Customers per Man. employees Finally Cost=Total number of employees*employee yearly salary Salary includes insurance and other overhead.

3. R&D department A big R&D department is cross-related to incumbent operators statistically speaking. The main cost driver is the number of the employees as well as the cost of the equipment, which is usually high because of the test bed. This Operational cost cannot be predicted since it is a strategic decision for each company. We can estimate the operational cost with similar rules like for element 2.

4. Law department The law department is mainly involved with the negotiations with the Regulatory authority and the suits from the consumers. Additionally the case of illegal Base station transceiver installation (Mobile operators) may increase the main cost as a consequence from the municipalities (city planer) suits. We can estimate the operational cost with similar rules like element 2.

5. Economy department We can estimate the operational cost with similar rules like element 2.


6. Human resources (HR) We can estimate the operational cost with similar rules like element 2.

7. General IT support We can estimate the operational cost with similar rules like element 2. The main difference here is the case where the company has a leasing contract and everything has been included there. In all the other cases we can assume a percentage of man month work per installed Personal Computer in the company or we can define a rule related to the size of the intranet network. The cost related to the software licenses is mainly related to the number of Personal Computer as well as the network size.

Cost_IT_PC=Total number Personal Computer*Mmrate*%person of Support Per PC


References [1] The OPTIMUM project (http://www.telenor.no/fou/prosjekter/optimum/) [2] ECOSYS Deliverable 3 “Business models in telecommunications”, October 2004


Acronyms Acronym Term Description

2G Second Generation Mobile Systems

3G Third Generation Mobile Systems

ADSL Asymmetric Digital Subscriber Loop

ARPU Average Revenue per User

CAPEX Capital Expenditures

CPE Customer Premises Equipment

CRM Customer Relationship Management

DSL Digital Subscriber Loop

EBIT Earning Before Interests and Taxes

EBITDA Earning Before Interests, Taxes, Depreciation and Amortization

EU European Union

FCAPS Faults, Configuration, Accounting, Performance, Security

FOU Frequency of upgrades

GDP Gross Domestic Product

GSM Global System for Mobile communications

HR Human resources

IP Internet Protocol

IRR Internal Rate of Return

IST Information Society Technologies

IT Information Technology

LLUB Local loop unbundling

MSO Mobile Service Operator

MTBR Mean Time Between Repairs

MTTR Mean Time To Repair

MVNO Mobile Virtual Network Operator

NPV Net Present Value

NO Network Operator

OA&M Operation, Administration and Maintenance

OPEX Operational Expenditures

OSS Operation Support Systems

PC Personal Computer

R&D Research and Development

SAN Storage Area Network


Acronym Term Description

SLA Service Level Agreement

SMS Short Messages Service

SO Service Operator

UMTS Universal Mobile Telecommunication System

VHE Virtual home environment

WiMAX Worldwide Interoperability for Microwave Access

Documents

techno-ECOnomics of integrated communication SYStems and · Investments Figure 1 The flow chart of cash flow calculation (from Optimum project [1]) The figure describes a traditional