Technology Cost Optimization Strategies

T-Mobile International AG & Co. KG Confidential and ProprietaryAll rights reserved. No part of this report may be reproduced in any material form

without the written permission of the copyright owner.

Technology cost optimization strategies

Middle East Telco Summit, Dubai, December 7th, 2009

Dr. Kim Kyllesbech LarsenNetwork Economics, T-Mobile International

2

T-Mobile– Orange UK JV … 2009.

One single network by 2014 with ~25% fewer radio nodes and ~40% fewer site locations than standalone scenario.

Leveraging on higher spectral efficiency by consolidating traffic on one single radio infrastructure.

Large and readily achievable synergies in both Network & IT

Significant synergy potential: NPV of net Opex and Capex savings in excess of £3.5 bn.

Opex run-rate synergies of £445m per annum (from 2014).

Capex run-rate synergies of £100m per annum (from 2014).

Integration cost in the order of £700m until 2014.

The joint venture between T-Mobile and Orange comprises full technology consolidation in the UK market, thus RAN, Core, VAS, IT and Operations..

T-Mobile International AG & Co. KG Confidential and ProprietaryAll rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.

Source: Investor presentation September 2009.

3

Vodafone– Telefonica sharing … 2008.

The VF-TF deal comprises passive RAN network sharing with shared 2G and 3G site locations including masts and possible backhaul.

Traffic managed independently of each other.

Customers expected to benefit from improved coverage, especially for mobile broadband (i.e., HSPA and later LTE).

The benefits announced to be in the order of hundreds of million British Pounds for both operators over the next 10 years.

Since announcement in 2008 no much more has been heard about the progress.

The venture between Vodafone (VF) and Telefonica (TF) addresses network sharing in Germany, Spain, Ireland and the UK with detailed discussions ongoing in the Czech Republic. The agreement is supposedly a 10 year deal.


(i.e., VF-Europe Opex in 2008 was £16.4 bn and TF-Europe 2008 Opex was in the order of £13 bn).

4

European telecom challenges


Market saturation.

Revenue growth slow-down.

Opex cost keeps increasing (if left un-managed).

Profitability growth will be challenging to keepProfitability growth will be challenging to keep withoutcontinuous tough cost optimization measures.

5

Profitability in mature European markets.


Opex CAGR

Ebitda CAGR : Revenue growth

:Revenue decline

Opex reduction compensate

revenue decline

Opex reduction don’t compensate revenue decline

Source: ML mobile matrix

Revenue don’t compensate Opex

increase

2010 - 2014

6

Technology cost optimization measures?

OutsourcingRAN sharing

Personnel efficiency

Network re

duction

Opex tasking

Joint-venture - NetCo

Near- & off-s

horing

Full network sharing

Managed servicesModernization

Access reduction


Reduce Capex / Activity

7

The radio access is one of the most important technology cost and investment drivers.

55% - 60% RAN & BSS

Core Network

10% - 15%

IT & Platforms

25% - 30%

Other Costs incl. Energy

15%

Rental & Leasing

40%

Leased Lines

20%

Personnel Costs

15%

Services,

10%

Maintenance & Repair

Conceptualview


8

Technology cost and synergy potential.

IT FTE (5%)

Leased Lines (5% - 10%)

IT Services (25%)

Other incl. Energy (10% - 15%)NT FTE (10%)

NT Services (15%)

Rental/Lease (25%)

Conceptualview


Sourcingtrade-off

Sourcingtrade-off

General tasking: -10% paTypically lots of small items adding up.Substantial energy savings by modernization

Opex – Capex trade-offWith 4G move away from conventional leased lines to fiber.

Network sharing resulting in overall infrastructure reduction.

Network sharing resulting in overall site location reduction / rental sharing.

9

Technology cost and synergy potential.

Conceptualview


Synergy potential TechnologyOpex

Managed services Network sharing

NT FTE 10% typical 20%HC reduction

Typically Capex commitment

Min. 20% - 35%

NT Services 15%>35% but depends

on network reduction.

Rental & Leasing 25% - 30% some potential – risk for sharing

>35% but depends on network reduction.

Transmission 5% - 10% Opex – Capextrade-off

More Opex – Capex trade-off

IT FTE 5% 10% - 20%HC reduction

Opex – Capextrade-offs

Minor opportunities <10% due to scale.

IT Services 25% Minor opportunities <10% due to scale.

Other 10% - 15% minimum 10% pa at least 35%

€€€ (€)€€ (€)

10

Stages of sharing benefits.The best sharing strategy depends on the business cycle and technology age.

Rollout Phase Steady State Renewal / Obsolescence

Significant Capex prevention.

Opex prevention Cash optimized startup Best network.

Little Capex benefits. Opex savings. Significant write-off. High re-structuring cost. Efficiency financing

extended coverage.

Significant Capex prevention.

Opex savings. Opex prevention. Minor write-off. High re-structuring cost.

< 5 years 4 – 8 years

UMTS LTE

> 7 years

GSM / UMTS UMTS

Examples of sharing: Site lease & build sharing (passive sharing), Mast sharing (passive sharing)Ancillary & Rack sharing (passive sharing). Backhaul sharing (active sharing)

Active sharing: e.g., Frequency, TRX, PA, baseband, ports, ….


11

T-Mobile – Orange UK joint venture consolidated network concept.

dismantling of surplus sites

locations

2G site locations upgraded to 3G

7k Node-B(new)

shared build-out

14k – 16k Node-B

Orange

14k-16kBTS

2G network 3G network (co-located with 2G)

T-Mobile

JV

13k BTS

99% pop. coverage

10k BTS98% pop. coverage

7k Node-B

94% pop. coverage 80% pop. coverage

7k Node-B

7k Node-B(re-used)

1. One network with ~25% less radio nodes and ~40% fewer site locs.

2. Wider and faster deployed coverage

3. Best sites retained for improved coverage and quality of service (i.e., 1 + 1 > 2)

4. Progressive sharing of backhaul, backbone and core

Fewer stations

Shared backbone

Shared backhaul

Fewer sites

nodeB

BTS

shared core

RNC

BSC

optimized target14-16k sites

Conceptualview

Modernization

Modernization Harmonization

Today

2014


12

Maximum addressable cost, upon which a saving can be expected, isbetween 30% (passive1) to 60%(active2) of technology cost

Maximum Opex annual saving on relevant costbetween 20% to 40%.

Maximum resulting Opex savingbetween 5% to 25% of technology cost

Technology Opex is typicallybetween 15% to 25% of total corporate Opex

Resulting Opex savingbetween 1% to 6% of total corporate Opex

Termination cost (in network consolidation): I would as rule of thumb addbetween 1.5 to 3.0 times that of the annual steady state savings.

Integration and migration cost (i.e., Capex) depends on (1) size, (2) scope of sharing and (3) supplier match, (4) age of infrastructure, etc.. …

Capex budgets can (easily) be re-prioritized and thus net cash effect of implementing RAN share is not necessarily big.

What to expect from RAN sharing?

1 Passive sharing: site lease & build sharing, mast sharing, ancillary & Rack sharing, 2 Active sharing options: frequency, TRX, PA, baseband, ports, backhaul sharing , ….


13

Summary.

Network consolidation can significantly reduce Opex costs and capital requirements.

However, organizational complexity, high restructuring costs and write-offs should not be ignored.

Network consolidation can enable a far better network for same or better financials.

Network and IT Managed services are other strategies that will provide a Telco with Opex savings.

The ultimate optimization strategy is for Telco’s to create NetCo ventures sharing the total network.


14

Thank you for your attention.

Contact details:[email protected] +31 6 2409 5202L http://www.linkedin.com/in/kimklarsen

15

Backup … profitability structure.


1 Pyramid Research & ML mobile matrix

Total Revenue

Technology cost (ca. 15% – 20% of Opex)

Usage cost−

Market invest

−

= EBITDA

Personnel cost (ca. 25% – 40%Technology related)

Other cost

−

−

−

Network depreciation (ca. 10% to 20%)−

= Contribution Margin (after depreciation)

Spectrum amortization−

= EBIT

Total Opex

Margin in WEU 1

between

22% and 44%

with an average of

35%

Service revenue is

expected to decline

in most of

European markets 1.

Conceptualview

16

Restructure cost can be significant. Although contract termination can be less costly due to longer operational period.

Termination• Site lease.• Site restoration.• Service Contracts.• Personnel cost.• etc.Other• JV overhead• Legal, etc..

Restructuring cost can be low if little legacy infrastructure is present.

If decision for network sharing is taken in the renewal / obsolescence phase write-off exposure can be relative light both for equipment and site-build.

As most of the network has been deployed at this stage the write-off exposure can be significant even if equipment can be re-used.

Relative low exposure if little legacy infrastructure is present.

Backup … structure of RAN sharing benefits.


Rollout PhaseBulk (>80%) of site and node deployment.

Steady StateCapacity & special sites deployed, node & transmission expansion

Renewal /ObsolescenceActive element / node replacement, technology migration. Site consolidation.

Passive sharing• Site build• Mast• Rack / AncillaryActive sharing• MW/Fiber • Electronics• Spectrum• Resources

Passive sharing

Low capex levelActive sharing

Passive sharing

Medium capex levelActive sharing

Substantial Capex

CAPEX Synergy

= Low = HighSynergy potential

Opex prevention• Site lease• Non-telco services• Telco services• Energy• Resources

Opex saving if absolute number of site locations are reduced, i.e., consolidation.Primarily Opex prevention in case of site number expansion.

Opex saving if absolute number of site locations are reduced, i.e., consolidation.Primarily Opex prevention in case of site number expansion.

OPEX SynergySharing stages Restructure Cost

= Low = HighCost exposure

Write-off

17

More than 50% of all Network Related TCO comes from site-related operational and capital expenses.

Backup … TCO & synergy opportunities.

Site Rental

Energy

Operate & Maintain

Leased Transmission

Resources

Site-related Opex

Radio Node

Ancillary

Transmission

Build /Civil Works

Resources

Site-related CapexOpex

+Annualized

Capex=

TCO

= Low = HighSynergy Potential

Antenna


-

18

Backup … Why to share your network?

OPEX Saving (ca. 30% pa )Capex prevention (>30%)

Personnel efficiency

Network effic

iencyEnvironmental Improvements

Better network & customer benefits

OPEX prevention

Operational efficiency

Less spectrum demand

Extended coverage

“cheap” M&A alternative


Rollout speed

19

Backup … Why NOT to share your network?

Strategic lock-inDeal complexity

Asymmetric benefits High restructuring cost

Coordination overhead

Competitive disadvantages

Integration complexity

Growth limitationsAsset write-off

Regulatory scrutiny

Loss of independence


Staff resistance

Dis-entanglementvery complex

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Technology Cost Optimization Strategies