Technology Cost Optimization Strategies

Technology cost optimization strategies Middle East Telco Summit, Dubai, December 7th, 2009 Dr. Kim Kyllesbech Larsen Network Economics, T-Mobile International

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 Proprietary All 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.

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. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. (i.e., VF-Europe Opex in 2008 was £16.4 bn and TF-Europe 2008 Opex was in the order of £13 bn).

European telecom challenges T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Market saturation. Revenue growth slow-down. Opex cost keeps increasing (if left un-managed). Profitability growth will be challenging to keep Profitability growth will be challenging to keep without continuous tough cost optimization measures.

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

Technology cost optimization measures? Outsourcing RAN sharing Personnel efficiency Network reduction Opex tasking Joint-venture - NetCo Near- & off-shoring Full network sharing Managed services Modernization Access reduction T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Reduce Capex / Activity

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% Rental & Leasing 40% Conceptual view T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Other Costs incl. Energy 15% Leased Lines 20% Personnel Costs 15% Services, 10% Maintenance & Repair

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%) Conceptual view T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Sourcing trade-off Sourcing trade-off General tasking: -10% pa Typically lots of small items adding up. Substantial energy savings by modernization Opex – Capex trade-off With 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.

Technology cost and synergy potential. Conceptual view T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. €€€ (€) €€ (€) at least 35% minimum 10% pa 10% - 15% Other Minor opportunities <10% due to scale. 25% IT Services Minor opportunities <10% due to scale. 10% - 20% HC reduction Opex – Capex trade-offs 5% IT FTE More Opex – Capex trade-off Opex – Capex trade-off 5% - 10% Transmission >35% but depends on network reduction. some potential – risk for sharing 25% - 30% Rental & Leasing >35% but depends on network reduction. 15% NT Services Min. 20% - 35% typical 20% HC reduction Typically Capex commitment 10% NT FTE Network sharing Managed services Technology Opex Synergy potential

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. UMTS LTE 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, …. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. < 5 years 4 – 8 years > 7 years

T-Mobile – Orange UK joint venture consolidated network concept. dismantling of surplus sites locations 2G site locations upgraded to 3G shared build-out Orange 2G network 3G network (co-located with 2G) T-Mobile JV One network with ~25% less radio nodes and ~40% fewer site locs. Wider and faster deployed coverage Best sites retained for improved coverage and quality of service (i.e., 1 + 1 > 2) Progressive sharing of backhaul, backbone and core Conceptual view Modernization Modernization Harmonization Today 2014 T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. 7k Node-B (new) 14k – 16k Node-B 14k-16k BTS 13k BTS 99% pop. coverage 10k BTS 98% pop. coverage 7k Node-B 94% pop. coverage 80% pop. coverage 7k Node-B 7k Node-B (re-used) Fewer stations Shared backbone Shared backhaul Fewer sites nodeB BTS shared core RNC BSC optimized target 14-16k sites

What to expect from RAN sharing? Maximum addressable cost, upon which a saving can be expected, is between 30% (passive 1 ) to 60%(active 2 ) of technology cost Maximum Opex annual saving on relevant cost between 20% to 40%. Maximum resulting Opex saving between 5% to 25% of technology cost Technology Opex is typically between 15% to 25% of total corporate Opex Resulting Opex saving between 1% to 6% of total corporate Opex Termination cost (in network consolidation): I would as rule of thumb add between 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. 1 Passive sharing : site lease & build sharing, mast sharing, ancillary & Rack sharing, 2 Active sharing options: frequency, TRX, PA, baseband, ports, backhaul sharing , …. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner.

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

Thank you for your attention. Contact details : [email_address] M +31 6 2409 5202 L http://www.linkedin.com/in/kimklarsen

Backup … profitability structure. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. 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 . Conceptual view

Backup … structure of RAN sharing benefits. 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. T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Rollout Phase Bulk (>80%) of site and node deployment. Steady State Capacity & special sites deployed, node & transmission expansion Renewal / Obsolescence Active element / node replacement, technology migration. Site consolidation. Passive sharing Site build Mast Rack / Ancillary Active sharing MW/Fiber Electronics Spectrum Resources Passive sharing Low capex level Active sharing Passive sharing Medium capex level Active sharing Substantial Capex CAPEX Synergy Synergy 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 Synergy Sharing stages Restructure Cost Cost exposure Write-off = Low = High = Low = High

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 Capex Opex + Annualized Capex = TCO = Low = High Synergy Potential Antenna T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. -

Backup … Why to share your network? OPEX Saving (ca. 30% pa ) Capex prevention (>30%) Personnel efficiency Network efficiency Environmental Improvements Better network & customer benefits OPEX prevention Operational efficiency Less spectrum demand Extended coverage “ cheap” M&A alternative T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Rollout speed

Backup … Why NOT to share your network? Strategic lock-in Deal complexity Asymmetric benefits High restructuring cost Coordination overhead Competitive disadvantages Integration complexity Growth limitations Asset write-off Regulatory scrutiny Loss of independence T-Mobile International AG & Co. KG Confidential and Proprietary All rights reserved. No part of this report may be reproduced in any material form without the written permission of the copyright owner. Staff resistance Dis-entanglement very complex

Technology Cost Optimization Strategies

More Related Content

What's hot (20)

Viewers also liked (10)

Similar to Technology Cost Optimization Strategies (20)

More from Dr. Kim (Kyllesbech Larsen) (20)

Technology Cost Optimization Strategies