Roberto Ercole
CEng, Spectrum & Telecom Consulting Ltd. – Cambridge UK
www.linkedin.com/in/roberto-ercole-1158771
Overview
Ideally, when a regulator introduces a measure such as a spectrum cap or reserving a band for a new entrant or mandating coverage requirements etc, a cost benefit analysis should be done. The CBA should look at the benefits from extra competition compared to any extra fixed costs (i.e. increasing incumbents current or near future costs).
This paper looks at what the cost impacts might be of having extra operators in a market or mandating coverage. This is not intended to argue that there should be a single operator, but that there will be a law of diminishing returns from extra competition that must be balanced against the introduction of productive inefficiency.
Background
It seems almost a given that regulators should try to encourage competition in mobile markets, by increasing the number of networks. This leads to a fairer share of the economic benefits between mobile operators and consumers. However, the counter argument is that mobile networks require thousands of base stations to offer wide area coverage, and large fibre networks to move data around (as well as billing platforms etc). Each new network needs to duplicate these fixed costs, and that is a large extra burden for an economy to carry.
If a regulator, simply tries to ensure a level playing field and feeds in enough spectrum – allowing market entry and exit – then this is not an issue. The discipline of the market decides on how many operators there are (and who they are). The problem comes if a regulator implements spectrum policies to encourage more opcos, and these polices have a cost impact on the sector. It is the “twisting[1]” of the market by regulatory measures to have more firms than the market would support that is the issue. It is this “twisting” that gives rise to economic inefficiencies that may reduce overall welfare.
This is briefly examined for Saudi Arabia, using a population distribution curve provided by Policy Tracker, and publicly available data for the operators.
Number of Operators and economic Welfare
It is tempting to think that a regulator should always seek to encourage more companies into the mobile market. However, there is be a tension between the number of firms and economic efficiency – in a market with high fixed costs and economies of scale – which is what we have in the mobile market. Increasing the number of firms does not necessarily increase economic welfare as was pointed out by Motta in his book[2]. Obviously moving from one to two opcos will have a major impact but moving from five to six will obviously have much less of an impact on competition.
This is easy to see if each mobile network needs 10,000 sites say. Each macro site might cost around $150k to build (civils and 4G radio equipment + microwave backhaul). One might also assume that 10% per annum was needed for running cost (opex). Over 10 years this effectively doubles this cost to $300k. That would put the total for 10k base stations (over 10 years) at $3 billion dollars per operator.
This ultimately needs to be paid for by mobile subscribers (if we assume MNOs are not loss making). This represents an upper bound, as you can argue that in high population areas of a country (where network capacity is the issue) the total number of cells between all opcos ultimately remains similar. This is because each MNO needs fewer capacity cells as traffic moves to the new MNO – assuming subscribers/traffic is equally shared. This would mean incumbent MNOs may be left with extra urban/sub-urban capacity for a time, until the historic trend of data demand growth “catches up” to use this spare capacity.
However, even in capacity constrained areas, there may be “trunking” inefficiencies because spectrum is split between opcos. There may also be problems with shortage of mast sites or having to build the sites away from the centre of the area they wish to cover. In a large cell of several kilometres, placing the mast a couple of hundred metres off centre is not much of an issue. But in an urban area where cells tend to be smaller, two hundred metres on a 500 m cell is a bigger problem. The exact value will vary from opco to opco in various countries, but a realistic number might (at a guess) be around 20% (depending on the situation).
This increase in fixed costs needs to be weighed against the extra benefits of competition. As the number of MNOs increase (all other things being equal) you would expect a more competitive market; So there would be a flow from producer to consumer surplus (MNO profits being competed away to give consumers a better deal). Increasing competition may also lead to more efficient MNO’s through a Darwinian (natural selection) mechanism. This would ultimately lead to the most efficient mobile firms offering the best service to consumers.
It is clear however that there must be some law of diminishing returns, beyond which the extra benefits are outweighed by the extra costs. In a well-functioning market, a regulator does not need to set the number of firms and allows market forces to play out. Players will enter and leave the market and the regulator will try to ensure that there is fair competition, and that enough harmonised spectrum is available to allow for cost effective MNOs.
As Motta notes in his book, a policy of maximising the number of firms can contrast with the objective of economic efficiency. Essentially this fixed cost duplication would need to be balanced by the competition benefit of going from say three to four or five competitors which might be small (few percent)[3].
The Example of Saudi Arabia
A practical example of this could be a country like Saudi Arabia. A recent consultation by the regulator CITC[4] provides a good overview the importance of spectrum to an economy, and the questions that need to be considered in making new spectrum available for commercial use. The release of spectrum by CITC between 2017 and 2019 more than doubled the spectrum available in KSA for mobile services, which had a major impact on the quality of service available to mobile subscribers (as noted in the consultation document).
The pragmatic and speedy approach taken by CITC in awarding much needed harmonised spectrum to the mobile operators has led to the desired outcome of substantially improving mobile internet speeds for consumers. According to an Opensignal report of last month[5], KSA has the fastest average 5G download speed at 144.5 Mbps of any country in the world (with Canada second at 90.4 Mbps).
Data available from Zain for KSA financial information states they have just under around 10,000 sites. This compares with STC at 7,000 sites (of which 3,000 are currently 5G enabled). As noted above, the cost of 10k sites might be around $3 billion. If 50% of sites are capacity limited (and 50% are rural) then the “dead wight” extra cost might be the 50% rural sites and say 20% of the capacity limited (due to trunking and site acquisition problems). That is, then 5k sites (rural) and 1000 sites (capacity limited areas) are unnecessarily duplicated, making 6,000 sites the “dead weight loss”, that needs to be compensated for by increased competition. Put another way, each new entrant means the consumers/economy in KSA needs to pay for another 6,000 sites. As the number of opcos increased the trunking inefficiency and site acquisition problem would grow.
A recent IEEE paper by Frias and others (looking at 4G in Greater London) found that MNOs with double the bandwidth use 42% fewer eNBs on average in dense urban areas (for similar market shares), dropping to around 25% fewer in lower density areas[6]. The paper uses data from Opensignal, so is based on actual handset measurements from consumers. This suggests that 15% maybe on the low side for extra costs in non-rural areas.
The upshot is that the decision to encourage a new entrant via reserving spectrum in an award or placing spectrum caps on incumbents may have a significant impact on fixed costs. This can be exacerbated when one considers MNOs need to have two or three or four different technologies operating at the same time in the valuable sub-1 GHz bands – that is GSM, UMTs, 4G, and now 5G.
The Problem of Mandating Coverage
Regulators will have legitimate concerns about how frequency bands are used across an MNO’s network, and the level of rural coverage. Many spectrum licences contain coverage obligations to help address such concerns. However, as with above this can have the effect on the market as it can impose a significant cost burden on an MNO. The exact setting of the coverage target could have a major impact on business cases or costs payed by consumers.
The way an MNO would use various frequency bands across its sites will be complex and will ultimately be designed to provide the required quality of service and capacity for the lowest price. It does not make sense to use all bands at all sites as this may increase the costs without adding any benefits. For example, in a lightly loaded rural cell, perhaps one frequency band is sufficient. As discussed, the Frias paper, this is a complex issue relating to legacy assets as well as consumer traffic profiles etc. Ideally an MNO might use one coverage band and then one capacity band (as needed) in as many places as possible (as the data for London shows) – if they have the spectrum resources to do that. If not, then various additional bands will be used, and this will increase costs because it requires additional radio kit (eNodeBs for 4G).
An important cost driver will be the population distribution across a country.
Below is a population vs landmass distribution for KSA. It can be seen that 10% of the landmass is where just over 70% of the population live. In terms of a simple business case one can imagine that the sites in this densely populated 10% of the country generate most of the revenue. However, we know consumers value being able to make a call almost anywhere with mobile, so MNOs cover more than this 10%.
The level of geographic coverage will depend on the extra costs versus how much consumers value it. As we have seen above the costs can depend on the amount and type of spectrum, and CITC has made much more spectrum available in the last few years to help boost mobile broadband coverage and data rates.
Landmass of KSA 2.1 million Km2 (source : https://www.policytracker.com )
According to the World Bank[7] 4G coverage in KSA is now 91% of the population (compared to 99% for voice). If we assume that consumers are only willing to pay for coverage up to say 95% of population coverage for 4G (for the sake for argument), that is still only around 60% of the landmass of KSA. If coverage is mandated to say 99% of population, then this is around 87% of landmass.
If this 99% coverage is mandated it requires each MNO to potentially add around 50% more sites (5,000 in the case of Zain), which is a significant cost if all three opcos need to do this independently.
An alternative solution would perhaps be to have a common network for the last 4/5% of the population in KSA – perhaps for a period of time. The running of the rural network might be done jointly between the MNOs, with the regulator ensuring that things run smoothly and to time. A variation may be to assign parts of this last 4/5% to each opco and allow national roaming in these areas – or some combination of these.
Whilst in theory such sharing of infrastructure may be allowed in many countries, the competitive dynamic may make it hard for MNOs to agree such long-term arrangements without the encouragement of the regulator.
Conclusion
The way regulatory objectives are set such as coverage or mobile data rates can have a significant impact on the cost of providing mobile services. Similarly, regulatory measures such as spectrum caps or reserving bands for new entrants can also have an impact on MNO costs due to the high fixed costs associated with networks and inefficiencies from reducing the spectrum available to each MNO.
It is suggested that a cost benefit analysis be undertaken for such measures to assess if the potential benefits from extra competition or improved coverage outweigh the costs of such regulatory measures.
[1] As referred to by Motta – se below.
[2] “Competition Policy”: by Massimo Motta Cambridge University Press 2004 – Section 2.2.3.
[3] For example see: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1234.pdf
[4] https://www.citc.gov.sa/en/new/publicConsultation/Pages/14111205.aspx
[5] https://www.opensignal.com/2020/08/26/benchmarking-the-global-5g-user-experience
[6] https://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=9229062
[7] https://blogs.worldbank.org/digital-development/saudi-arabia-investments-digital-infrastructure-are-paying
Mr Roberto Ercole
BSC, MSc, CEng
Spectrum Telecoms and Consulting Ltd.
Cambridge, UK
www.linkedin.com/in/roberto-ercole-1158771/
Roberto is a Chartered Engineer in Europe, specialising in mobile radio systems and radio spectrum regulation. He graduated with a degree in Applied Physics in 1988, and a Masters in Electronic Engineering in 1990. He also has a post graduate certificate in EU and UK Competition Policy and Law.
Roberto spent 10 years at GSMA as a senior global policy director for spectrum from 2006 to 2016. He was responsible for the GSMA’s WRC campaigns in 2007 and 2012, as well as several regulatory market interventions around the world.
He also worked as a radio spectrum regulator in the UK for 7 years, following that he worked with a UK GSM1800 operator as a spectrum engineer, specialising in regulatory issues (related to the UK spectrum auction for) 3G for 2 years.
Roberto has extensive experience in mobile competition and economic regulation issues. He worked for the UK telecoms competition regulator (Oftel) for 5 years looking at mobile and spectrum competition issues such as spectrum auctions and infrastructure sharing. He has also prepared competition cases for clients.
Prior to joining the GSMA in 2006, He worked as an independent consultant advising on radio spectrum engineering issues, as well as in spectrum valuations. Roberto has also assisted governments developing spectrum liberalisation policies and in helping to promote competition in mobile markets by encouraging new entrants.
Roberto left GSMA in 2016 and now works as a consultant for several clients (including mobile operators and regulators) and has worked extensively in the MENA region.