Transcript Wireless Telephone Data Networks - Yesterday, Today and Tomorrow and How to Value It Kevin Snow AT&T December 4, 2012 History • Wireless Networks were voice centric, extremely.

Wireless Telephone Data Networks
- Yesterday, Today and Tomorrow
and How to Value It
Kevin Snow
AT&T
December 4, 2012
1
History
• Wireless Networks were voice centric,
extremely limited data
• 1G – Analog - voice
• 2G – Digital – voice
• CDPD for data, “1 Adam 12” – police running license plate
#’s
– CDMA, GSM, TDMA
• 2.5G –Digital – circuit switch voice + data (3x dial up)
– 1XRTT-CDMA; GSM-GPRS/EDGE; TDMA – DEAD*
• 3G – Broadband Data (DSL speed but voice via circuit switch)
– CDMA-EVDO & RevA, UMTS-HSPA
•
* Acronym for DEAD – none – literally means dead
2
Current
• Data centric but still with circuit switched voice
• 3.5G – Broadband Data (cable modem speed, voice via circuit;
– UMTS-HSPA+, CDMA EVDO-Rev B, not deployed )
AT&T is double trouble, has 2 circuit switch networks –GSM & UMTS
– That will both transition to LTE VOLTe
– And now three data networks – EDGE/HSPA+ transitioning to LTE
• 4G – Broadband Data (cable modem+ speed, voice as packet VOLTe LTE (some carriers have not yet deployed VOLTe)
– GSM-UMTS path To LTE
– CDMA path to EVDO Rev C – DBA* so LTE
• * DBA Acronym (Dead Before Arrival) – never will be deployed
3
Characteristics of the Wireless Industry
 Highly competitive
 Not regulated as to prices or rates of return
 Rapidly changing technology due to competition
& customer demand for more service capability
 Declining voice demand
 Messaging at risk from various data apps
 Exploding demand for high volume data due to
smart phones and computer applications
4
Where We Are
• Voice Network
• Data Network
– A circuit switched TDM network –
based on a mature technology
– A packet switched network – based on
emerging technology
– A reliable infrastructure optimized to
support circuit voice
– Optimized for non-delay sensitive (best
effort) applications
– Difficult to support non circuit voice
applications
– Support data/audio/video as data
application
– Circuit switch/TSI based infrastructure
is harder to scale
– Packet based infrastructure offers
greater scalability
• Two separate networks, each designed/optimized to support different
applications (AT&T actually 5 different networks including LTE)
•
Even without “4G”, technology has advanced where the “circuit switch Voice
Network” is being replaced
• TRFO (transcoder free operation)
• MPLS (multi-protocol layered system)
•
We are already packetizing all switches and any new switch builds are 100% packet
• DACS are sunsetted and “5E” class switches are planned for removal
5
Network Overview


The current AT&T network is comprised of different generations of equipment
installed over more than a decade.
A high level view of the current AT&T Mobility network is represented below:
6
State of the Industry
• Approaching Maturity, Growth is Slowing Except for Data
– Over-penetration
• Mid Year 2012 321,716,905 Total Connections (CTIA Estimate)
– Customers with two or more mobile devices
• M2M
– Increased usage
• Data Usage Up Double Digits During last 12 month period
• Innovation
– Robust data networks
– New product
• Streaming Video
• Wireless house/security/more wireless car apps coming
• Industry Convergence
• Highly Competitive
– Consolidation
7
Mobile Wireless Internet Access Subscribers and Devices
in Use
140
[1]
120
Millions
100
80
Mobile Wireless Devices in Use
Capable of +200 kbps
115.7
Mobile Wireless Internet Access
Subscribers
86
Mobile Wireless Connections
60
55.8
51
40
26.5
22
20
3
0
2005
2006
2007
2008
2009
AT&T 3rd Q 2012 –
18.3 percent growth in wireless data revenues, up more than $1 billion versus the year-earlier
quarter
Strong smartphone sales of 6.1 million postpaid
Smartphones represented 81 percent of postpaid device sales.
63.8 percent of AT&T’s postpaid subscribers had smartphones, up from 52.6 percent, a
year earlier and up 1.4 million from the second quarter.
AT&T’s ARPU for smartphones is twice that of non-smartphone subscribers
[1]
Commission estimates based on Form 477 data. Mobile wireless Internet access subscribers include subscribers whose device and subscription
plan allow them to access to the lawful Internet content of their choice at over 200 kbps in at least one direction.
8
Mobile Data Service Adoption Rates Among Cell Phone Users[1]
Millions
0
50
100
150
200
250
300
2 6 1.3
2 7 4 .3
Mobile Telephone Subscribers (Form 477)
2 6 .5
Mobile Internet Access Subscribers (Form 477)
5 5 .8
2 2 8 .4
257
Data-Capable Handsets/Devices (CTIA)
2 2 7 .2
2 3 8 .4
SMS-Capable Devices (CTIA)
2 0 2 .7
Web-Capable Handsets (CTIA)
2 3 8 .4
86
Mobile Devices Capable of +200 kbps (Form 477)
115 .7
2008
Sm artphones (CTIA)
4 9 .8
2009
7 .2
11.9
Wireless Laptops, Aircards, Modem s (CTIA)
[1]
Mobile Access 2010, at 7; Wireless Internet Use, at 16.
30%
Instant Messaging
20%
17%
May-10
38%
Internet (Web)
Access
25%
19%
April-09
December-07
34%
E-mail
25%
19%
72%
Texting
65%
58%
0%
20%
40%
60%
80%
100%
9
Total Wireless Data Traffic (CTIA)
10
Data Evolution
• 2G systems, some limited circuit switch data was possible
• Cell sites had CDPD cabinets, maximum speed 19.6 kb/s, ran in
reality no more than 14.4 kb/s, very little revenue with it
• Depending on the chosen technology– 2002/2003/2004 – CDMA carriers 1X RTT(2.5G)
– GPRS them EDGE – GSM carriers
• that incorporated packet data at a maximum speed of 144 kb/s, ran
at approximately 90kb/s
• Use of 2.5G packet data grew significantly into 4th Q 2006 and has
declined since to almost zero
• Broadband data (3G-EVDO) is currently experiencing tremendous
growth but has started its rapid decline
• 2010 – 4G LTE launched Verizon
• Late 2011 launched AT&T
11
Switching Equipment (Note rows of equipment replaced by 1 cabinet)
DEPRECIATION & TRENDING TABLES THAT ARE APPLIED TO WIRELESS
EQUIPMENT DO NOT TAKE INTO ACCOUNT TECHNOLOGY DIFFERENCES OR
PRICING DECLINES OF ELECTRONICS. APPLICATION OF TYPICAL DEPRECIATION
& TRENDING TABLES TO THE HISTORICAL ACQUISITION COSTS WOULD RESULT
IN THE ABOVE 2G EQUIPMENT HAVING A HIGHER VALUE PER UNIT OF
CAPACITY THAN 3G EQUIPMENT THAT WOULD OPERATE FAR MORE EFFICIENTLY
AND HAVE GREATER FUNCTIONALITY.
12
Base Station/Cell Site RF Changing
Technology/Smaller, less
expensive/more
NOT ONLY GENERATION TO GENERATION, BUT WITHEN A GENERATION
GSM BASE STATION
UMTS BASE STATION
UMTS NODE B
LTE - ENODE B
13
GSM BASE STATION
• 6 foot “refrigerator” size cabinet
14
UMTS BASE STATION
• First Type of UMTS deployed – also a 6 foot
sized “refrigerator” cabinet
– Had more than double the capacity of the GSM
and also did broadband data
15
New UMTS – NODE B
• A one-one ½ foot plug in that takes the place
of an entire 6 foot cabinet
16
LTE E-NODE B
• LTE – a two foot cabinet (outside cabinet) that
is 50% vacant
• (the equipment only is 1 foot high)
• Has more than double the capacity of even
the UMTS Node B and is capable of doing
voice as a data packet
17
LTE and New UMTS (inside
configuration)
• LTE and UMTS mounted together in a “rack”
– UMTS about 1.5feet high
– LTE about 1 foot high
18
New UMTS
• Close up of the 1.5 foot high equipment
19
LTE
• Close up of the 1 foot high LTE
20
Current – Future
4G LTE Buildouts
•LTE – Long Term Evolution
–4G radio technology of choice for ALL
–Standardized under 3GPP
–All-IP IMS core network supports LTE
•What is 4G:
–Fourth Generation System
–Comprehensive IP Solution – Voice, Data, Streamed Multimedia can be given to users “Anytime &
Anywhere”, ALL IP SYSTEM
–Based on OFDMA
•Capabilities
–Minimum 100 Mbits/sec indoors & outdoors, premium quality & high security
•Technologies
–WiMax (IEEE 802.16e) “going, going ………….gone”
–LTE (Long Term Evolution (3GPP)
–UMB (Ultra Mobile Broadband, formerly EV-DO Rev C, 3GPP2 )
•Officially DOA (“dead on arrival” – actually DBA – “dead before arrival”
21
Verizon's 4G LTE Rollout Will Be Complete By
Mid-2013 -On an investor call earlier this morning, Verizon Wireless CFO Fran
Shammo said that the carrier's buildout of its 4G LTE network will be completed by mid-2013.
This is after an earlier estimate of the end of 2013, putting the company a full six months
ahead of schedule.
Right now, Verizon's LTE network already covers 250 million people; And as we know,
Verizon will also begin its VoLTE (voice over LTE) rollout some time before the end of
2013, which will almost certainly make it America's first VoLTE network of any
substantial size. This puts Verizon on the fast track to begin phasing out its CDMA
equipment
Verizon Wireless CTO Nicola Palmer announced that 35 percent of the carrier's overall data traffic traveled over its LTE network at the end
of September 2012. She said that in "a few months" a majority of the carrier's traffic would be transmitted over its LTE network.
Palmer said it took Verizon eight years to reach this milestone with its 3G CDMA network, but it only took the carrier two years to reach the
goal with its LTE network
22
SPRINT: Customers in Atlanta, Baltimore, Dallas/Fort Worth, Houston, Kansas City, San
Antonio and Waco are already experiencing 4G LTE service. Stay tuned - over 100 new
markets are expected to launch in the coming months.
T-Mobile, MetroPCS Deal Is About LTE
The merger of T-Mobile and MetroPCS is foremost about an LTE network and all it enables,
Deutsche Telekom (DT) and MetroPCS, in the opening paragraph of an Oct. 3 statement
announcing a "definitive agreement" to merge the small but notable carrier with DT's American
brand, T-Mobile, First, they said, the transaction will create a "clear-cut technology path to one
common LTE network."
Long Term Evolution technology is critical to T-Mobile's ability to compete against the nation's
top three carriers; is necessary for it to offer an Apple iPhone; and is the only network
technology that it has in common with MetroPCS, as the latter's legacy network is based on
Code Division Multiple Access (CDMA) technology.
While T-Mobile has said it will begin offering LTE in early 2013, MetroPCS, which in Sept. 2010
jumped ahead of Verizon to offer the first commercial LTE deployment, completed its LTE
rollout in March 2011. In August 2012, MetroPCS was the world's first carrier to offer voiceover LTE.
23
NOT ONLY THE BIG BOYS (and GIRLS)
US Cellular announced on Wednesday that it will increase its LTE network coverage by 30 new markets on
November 5th.
Tier 2 carrier U.S. Cellular is accelerating its plans to deploy LTE. The company, which had originally planned to
deploy the next-generation technology in 2012, announced it will deploy LTE in 24 markets by November, covering
approximately 25 percent to 30 percent of its total subscriber base. The company will outfit around 1,250 cell sites
with LTE using its 700 MHz spectrum.
Leap's LTE rollout to start next week
October 10, 2012
SAN DIEGO--Cricket provider Leap Wireless (NASDAQ:LEAP) plans to begin turning on its LTE network starting
next week. The carrier said it will flip the switch on one LTE market next week and will then announce additional
markets in November.
Leap spokesman Greg Lund said the carrier plans to have 21 million POPs covered by year-end and two-thirds of its
current network footprint covered with LTE by 2015.
Cellular South details network enhancements ahead of LTE launch
August 19, 2011 |
Cellular South said its plan to deploy an LTE network late this year is on schedule..
Cellular South plans to launch an LTE network in 700 MHz spectrum in the fourth quarter of 2011. Cellular South
intends to use Voice over LTE technology and will continue its LTE deployment into 2012.
24
Radio Interface Progression
WiMAX
Cellular
2005
2006
2007
2008
2009
2010
EV-DO Rev 0
EV-DO Rev A
EV-DO Rev B
EV-DO Rev C
(UMB) (“DBA”)
 2x 1.25 MHz FDD
 2.4/0.15 Mbps (DL/UL)
 850/1900 MHz
 2x 1.25 MHz FDD
 3.1/1.8 Mbps
 850/1900 MHz
 1.25-20 MHz FDD
 4.9/1.8 Mbps
 850/1900 MHz
 1.25-20 MHz FDD
 70+/30+ Mbps
 850/1900 MHz
WCDMA
HSDPA
HSUPA
HSPA+
LTE
 2x 5 MHz FDD
 0.384/0.384 Mbps
 850/1900 MHz
 2x 5 MHz FDD
 14.4/2.0 Mbps
 850/1900 MHz
 2x 5 MHz FDD
 14.4/5.8 Mbps
 850/1900 MHz
 2x 5 MHz FDD
 40/10 Mbps
 850/1900 MHz
 1.25-20 MHz
 100/50 Mbps
Fixed WiMAX
Mobile WiMAX
Mobile WiMAX
 1x 10 MHz TDD
 15/5.3 Mbps
 2.5/5.8 GHz
 1x 10 MHz TDD
 14/5.3 Mbps
 2.5 GHz
 1x 10 MHz TDD
 32/7 Mbps
 2.5 GHz
Note: All speeds are theoretical
maximums. Device and deployment
configurations will constrain attainable
throughput capabilities.
Radio Interface
25
LTE Transforms Wireless Access and Core Networks
to All-IP
e
26 |
26
3G to 4G Migration: Efficient Spectrum Migration
For a 3G to 4G OFDMA migration, a ~2-3 year “phased transition” period can be planned, where both
technologies are deployed (to ease subscriber migration).
–
This requires separate spectrum to be assigned to 3G and 4G technologies
–
3G traffic will initially grow, peak, and ultimately decline as 4G traffic grows
–
4G traffic will then take off and continue after migration
–
Efficient spectrum utilization is very important during this migration period
To leverage OFDM benefits,
a minimum starting
bandwidth of 5 MHz is
recommended. Smaller
allocations are possible.
4G spectrum (carriers)
+4G
5MHz 4G
3G spectrum
(carriers)
4G traffic
+1 4G
1.4MHz
5MHz
3G traffic
10MHz spectrum
utilization
Total Traffic
•
Re-scale to
3MHz
4G
Re-scale to
10MHz
4G
-
Time
3G provides a smooth, efficient spectrum migration to
4G
27
What Does LTE Mean to End Users & Service
Providers?
Performance
Improvement
Impact to End User
INCREASED SPECTRAL
EFFICIENCY
 Lower costs – flat fee
Uplink: 2.00-2.25x vs. 3G
Downlink: 1.25x vs. 3G
FASTER SPEEDS
pricing
 Faster downloads of
Impact to Service Provider
 Can buy the same amount of spectrum and pump
more data to users, or less spectrum to maintain
the same level of data usage
 Reduced cost per bit
 More ways to splice bandwidth:
Uplink: 2.00-2.25x vs. 3G
Downlink: 3x vs. 3G
Peak rate = 100 Mbps
multi-media
 Better experience with
blended services
INCREASED VOICE
CAPACITY
 Better voice quality
 Support more voice users
 Faster reactions when
 Can reuse applications across wireless and
gaming
 Better voice, video
telephony
wireline
 More capacity for VoIP and TCP-based
applications
Same # of users with more bandwidth/user or more users
with same bandwidth per user
10 MHz: 2x vs. 3G
REDUCED LATENCY
< 50 ms
Comparisons based on average aggregate performance
Technology innovation significantly improves performance, which translates to better
quality of experience for the end user
28
Spectral Efficiencies
Signalling
Data Rate (Mbps),
Channel Width (MHz), B
Link Efficiency (bit/s/Hz), R/B
Reuse factor, K
System Efficiency (bit/s/Hz/sector), R/B/K
R
AMPS
0.0096
–
0.03
0.32
7x3
0.015
GSM
0.013 x 8 = 0.104
Pk
0.2
0.52
4x3
0.043
EDGE
0.384†
Pk
0.2
1.92
4x3
0.16
cdmaOne
0.0096
Av
1.2288*
0.0078
1
0.0078 x 13 = 0.1
1xRTT
0.0096
Av
1.2288*
0.0078
1
0.0078 x 26 = 0.2
1xEV-DO
1.100
Av
1.2288
0.9
1
0.9
1xEV-DO
2.457
Pk
1.2288
2.0
1
2.0
W-CDMA (UMTS)
0.384
Pk
5*
0.0768
1
0.0768 x 33 = 2.53
LTE
16.2
Av
10
1.62
1
1.62
LTE
172.8
Pk
20
8.6
1
8.6
IEEE 802.16e
75
Pk
20
3.75
1
3.75
The promise of 4G isn’t average spectral LINK efficiency…it’s in
frequency-domain aggregation and scheduling (and therefore total
throughput), and to a lesser extent, peak spectral link efficiency.
29
LTE-Speed
Dependent on how much spectrum
Average Throughput
Mbps
8
7
6
5
4
3
2
1
0
5x5
30
10 x 10
FUTURE
• Actually, right down the road*
• LTE Advanced
– 100% Data Centric with voice as just a data packet
• Technical Specifications:
•
•
•
•
•
•
In LTE-Advanced focus is on higher capacity:
Increased peak data rate, DL 3 Gbps, UL 1.5 Gbps (“actual” goal 1Gps Down, 500m up)
Higher spectral efficiency, from a maximum of 16bps/Hz in R8 to 30 bps/Hz in R10
Increased number of simultaneously active subscribers
Improved performance at cell edges, e.g. for DL 2x2 MIMO at least 2.40 bps/Hz/cell.
The main new functionalities introduced in LTE-Advanced are Carrier Aggregation (CA),
enhanced use of multi-antenna techniques and support for Relay Nodes (RN).
•
•
*The technology received its first commercial implementation in October 2012 by Russian network Yota
Yota Networks launched the technology LTE Advanced, which will provide data rates up to 300 Mbit / s on the user's
device. LTE Advanced technology currently implemented by 11 base stations. LTE Advanced, п. The first consumer
devices that support LTE Advanced, will have virtual network operator Yota Networks in the first half of 2013.
31
Growth Drives Changes in Network Capacities
Latency/Year of Rollout
WCDMA = 150 ms (2003/4)
HSPA = 100 ms (2005/6 HSDPA, 2007/8 HSUPA)
HSPA+ = 50 ms (2008/9)
LTE = ~10 ms (2009/10
LTE Advanced = less than 5ms
According to Cisco, Mobile video will grow at a CAGR of 90 percent between 2011 and 2016
Mobile video traffic exceeded 50 percent for the first time in 2011
Last year’s mobile data traffic was eight times the size of the entire global Internet in 2000
In 2011, a fourth-generation (4G) connection generated 28 times more traffic on average than a non-4G
Global mobile data traffic will increase 18-fold between 2011 and 2016
Two-thirds of the world’s mobile data traffic will be video by 2016
Cisco estimates that traffic in 2012 will grow 2.1-fold
32
AT&T Mobile Data Volumes Estimated to Grow 10X Over Five Year
Period
Petrabytes/Month
2012
2013
2014
2015
2016
Mobile Data Volumes Estimated to Grow
10X Over Five Year Period
2012
2013
2014
2015
2016
33
Total Florida*
AT&T Total
Traffic By
Technology
Total FL
Jan-07
Jan-08
Jan-10
Jan-12
TDMA MB's Equiv
0.59%
0.03%
0.00%
0.00%
GSM MB's Equiv
96.83%
79.87%
26.03%
3.65%
UMTS MB'sEquiv
2.58%
20.09%
73.97%
96.18%
LTE MB's Equiv
0.00%
0.00%
0.00%
0.17%
100.00%
100.00%
100.00%
100.00%
Jan-07
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Dec-17
Voice %
97.53%
91.16%
61.98%
29.31%
16.26%
13.45%
12.87%
Data %
2.47%
8.84%
38.02%
70.69%
83.74%
86.55%
87.13%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Total
Industry Data
Traffic Voice vs Data
Total
*Voice also includes non circuit switched voice starting in 2013 - the LTE voice is a data packet - Voice Over Long Term evolution
the data shown does not include VOLTe as data so actually the true data % from 2014 forward is even greater
34
© 2012 SNL Kagan, a division of SNL Financial LC, estimates. All rights reserved.
Network Coverage & Subscriber Unit Projections For 3G, 4G And Smartphone
Proliferations, 2011-2021
2013
2015
2017
2019
2021
2G Subs % Total Subscriptions
(%)
20%
7%
2%
0%
0%
3G Subs % Total Subs
(%)
66%
60%
44%
25%
15%
4G Primary Subs % Total Subscriptions
(%)
14%
33%
54%
75%
85%
(mil.)
190.9
231.6
259.2
280.0
294.9
(%)
66%
77%
85%
90%
94%
Smartphone Owners
Smartphone Owners % Total Retail Subs
35
AT&T Recent Announcement
4G LTE Extending Our Buildout
Expand build plan to 300M POPs U.S. coverage by
Year‐End 2014
Densification of wireless grid
Enhances AT&T’s ability to offer voice and data services
Supports launching Voice over LTE
Multiple technology deployments*:
10,000+ new macro sites
1,000+ distributed antenna systems
40,000+ small cells
*Over plan period
36
37
PARADIGM CHANGING TECHNOLOGY:
THE ELIMINIATION OF THE CELL TOWER
The “lightRadio Cube” …
A small antenna and radio that has
shrunk the regular workings of a
conventional cell phone base
station and antenna and could, as
soon as mid-2012, replace those
unsightly cell phone towers.
Photo courtesy of Bell Labs / AlcatelLucent
38
PARADIGM CHANGING TECHNOLOGY:
THE ELIMINIATION OF THE CELL TOWER


The “lightRadio Cube”
o Three 2-inch, stacked circuit boards for the antenna, radio, and network
connection, replacing the conventional antenna system that connects every cell
phone call.
o Could radically transform the model for wireless networks and could actually
change the way the wireless industry operates," per Dan Hays, Telecommunications
Consultant with PRTM of Washington, D.C.
o Developed by Bell Labs.
o Could replace wireless towers blanketing urban areas and the countryside.
o Can be positioned nearly anywhere:
• Sides of buildings.
• Light poles.
• Arranged in grids for more strength.
Implication: Lowers the barriers for competitors to inexpensively gain entry into markets by
[1] eliminating the need to obtain permission to place towers or [2] placing additional
antennas on existing towers. These scenarios could be exploited as competitive threats
which, in turn, translates into greater risk.
39
WIRELESS SUBSCRIBERS BY TECHNOLOGY
Source: Technology Futures, Inc.
400
300
Total
4G
250
3G
200
2.5G
150
Analog
100
Digital
50
0
1990
1995
Historical Data Source:CTIA & ITU
2000
Wireless Forecast 2011
Millions of Subscribers
350
2005
2010
2015
2020
Year Source: Technology Futures, Inc.
40
Summary Wireless Changing Technology




Analog – No longer in Service
TDMA – No longer in Service
GSM – In service but going, going…. Not capable of high volume data
UMTS – Now widely used for data and voice
o HSPA – Software upgrades to improve data
o HSPA+ - Additional software upgrades to further increase speed
o It too is starting to be phased out
 LTE (Long Term Evolution)4-G – Currently being deployed to enhance and replace 3G
because of data demand. Based on IP technology. Relies on typical servers and
routers for much of its infrastructure.
 LTE Advanced – coming right on down the road
Analog
GSM/CDMA
TDMA
HSPA/EVDO
UMTS
LTE
HSPA+
LTE
Advanced
41
VALUATION
VALUATION
VALUATION
42
Valuation / Depreciation Issues
1. The introduction of a next generation of technology / equipment does not
mean that the old equipment or technology is immediately removed from
service.
2. Generations of equipment and technology are “layered,” meaning that
customers are “migrated” from older generations and technologies to newer
ones over a period or time.
3. During that process of migration, layers of overlapping equipment and old
technologies are captured in the historical costs that are carried on the General
Ledger and in the Fixed Asset Register.
4. The historical costs do not reflect the cost efficiencies and capacity
improvements of newer technologies (i.e., functional obsolescence).
5. Wireless equipment depreciation factors that are applied to historical costs
need to take into account the embedded inefficiencies and the layers of
overlapping equipment / older technologies in order to derive an appropriate
value.
6. Wireless equipment depreciation factors should also take into account:
 Price declines of wireless electronics impacted by technology
 Cost efficiencies and capacity improvements of newer technologies
43
Principle of Substitution
• States that a buyer will not pay more for a
particular property if it costs less to buy a
similar property of equal utility and
desirability. People prefer the less expensive
price if all other things are considered equal.
• The maximum value of a property tends to be
set by the cost of acquiring an equally
desirable substitute property.
• A prudent investor would pay no more for a
property than the cost of acquiring an equally
acceptable alternative property on a timely basis
REPLACEMENT COST– ASA “is the current cost of a
similar new item having the nearest equivalent
utility as the item being appraised” – constructing
a property with the same function/utility as the
subject using current prices for labor and materials
44
Replacement Cost
• Principle of Substitution
• Even if Replacement Cost used – it only
eliminates excess capital costs
– Subject property still has obsolescence
• Excess operating costs (reduces margins)
• Lacks ability to do streaming video (reduces potential
revenue/income)
45
46
Next Generation Technologies Result in Improved
Network Performance & Lower Unit Costs
47
48
RCN Impacts: Pricing Decline
Technology Price Trends
Electronic Price Trends
49
Summary of Replacement Cost Translators
as of December 31, 2011 by Asset Group
and Vintage in Service Year
Translators 1998=100
Description
(b)
1995
1996
1997
1998
(m)
(n)
(o)
(p)
1999
2000
(q)
(r)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(s)
(t)
(u)
(v)
(v)
(v)
(v)
(z)
(aa)
(ab)
(ac)
Depreciable Plant
Switching Equipment
0.149 0.150 0.152 0.182 0.184 0.238 0.345 0.346 0.359 0.396 0.479 0.504 0.562 0.634 0.695 0.752 0.774
Radio Frequency & Control Equip
0.075 0.087 0.089 0.145 0.148 0.237 0.336 0.360 0.363 0.377 0.404 0.469 0.589 0.636 0.704 0.755 0.759
Used with permission of
AUS/VZW
50
REPLACEMENT COST ONLY ELIMINATES THE EXCESS CAPITAL COSTS
THE SUBJECT PROPERTY 2.5G/3G/3.5 G LACKS THE UTILITY OF NEW
PLANT
CUSTOMERS ARE DEMANDING MORE AND MORE DATA
APPLICATIONS, ESPECIALLY VIDEO
Current technologies lack the ability to give customers what they
want
Loss of potential revenue/income
Current technologies, have significant additional costs to operate
Operating expenses to operate dual networks (voice &
data)
Spectral inefficiencies of current technology require more
plant/carriers (spectrum) to be deployed than LTE
Lower margins/income
Transport Costs (Backhaul – significantly less expensive
for fiber/ethernet connection than multiple T1 (copper) connection
Need To Quantify for Proper Valuation
51
Depreciation
The American Society of Appraisers states, in part, that:
“The most economical new substitute property may have many
advantages over an old property, such as longer life
expectancy, lower annual disbursements for operation and
maintenance, increased receipts from sale of product or
service. The depreciation deduction of the hypothetical new
substitute property should be a measure in money terms of
all of these disadvantages of the existing old property.” [The
American Society of Appraisers, Valuing Machinery and
Equipment: The Fundamentals of Appraising Machinery and
Technical Assets, 2005, pg. 66]
52
Technology
Throughput
Mbps
8
7
6
5
4
3
2
1
0
Today
Latency
msec
80
70
60
50
40
30
20
10
0
LTE
Cost Efficiency
Cost per MB
0
53
Today
LTE
Today
LTE
LTE Economics
EV-DO
1.25 Mhz
1.1 Mbps
5 Mhz
UMTS
15 Mbps
10 Mhz
Network Cost
Network Cost
1 GB = 100%
Base Station
• Common platforms used
for GSM and WCDMA
• Common elements
across product lines
(amplifiers, filters)
54
1 GB ~ 10 –
16%
Packet Core
• Mobility Manager evolved
from existing GSM Nodes
• Gateways use widely
deployed router platforms
ASA
• Functional Obsolescence is the loss in value
within the property as a result of the
development of new technology – this
includes such things as changes in design,
materials, or process resulting in
overcapacity, inadequacy, excess
construction, lack of utility, or excess
variable operating costs.
Starting Point For Value
• IF YOU ARE STARTING FROM ORIGINAL
COST OR REPRODUCTION COST,
ACCORDING TO THE ASA, “the difference
between reproduction and replacement cost
represents the amount of excess capital cost
which is a form of FUNCTIONAL
OBSOLESCENCE”
55
Not Only Speed
• Spectral Efficiencies
– Can have more users in the same amount of spectrum
• Data/Voice on same session
– Big plus for carriers especially if spectrum constrained
• Real-time delivery
– Super low latency, 30-millisecond latency is better than the
50-millisecond “real time” threshold, new revenue
streams/real time applications
• Cost
– Both infrastructure costs, transport costs and other variable
costs are significantly lower (increased margins)
Quantification of Obsolescence
• Identification of excess operating costs in subject property
• Subject property, lacks potential revenues
•
In my opinion, what works best is an economic approach
• Companies are is business to make money – in a highly competitive industry
such as wireless, projections of revenue/income of different technologies over a
period of time works best
Remember, lack of utility
Analog – no data
Digital – limited data
2.5G – data but only 3X dial up
3G/3.5G – BB data but not real time, voice still circuit switched
4G – ability for new revenue streams/real time apps/VOLTe
57
HYPOTHETICAL
REVENUE OPPORTUNITY
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
23.77
21.47
19.22
17.07
14.97
12.97
11.07
9.32
7.72
6.22
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
DATA
22.56
24.37
26.37
28.52
30.82
33.27
35.87
38.37
40.62
42.62
TOTAL
49.33
48.84
48.59
48.59
48.79
49.24
49.94
50.69
51.34
51.84
VOICE
FEATURES
USING 10 YR PERIOD 2013-22
POTENTIAL REVENUE
YEAR 1
YEAR 2
VOICE
YEAR 3
YEAR 4
YEAR 5
YEAR 6
YEAR 7
YEAR 8
YEAR 9
YEAR 10
23.77
21.47
19.22
17.07
14.97
12.97
11.07
9.32
7.72
6.22
FEATURES
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
Non BB Data
4.35
3.70
3.14
2.67
2.27
1.93
1.64
1.39
1.19
1.01
3G BB Data
13.15
11.83
10.65
9.59
8.63
7.76
6.99
6.29
5.66
5.09
4G BB Data
1.25
5.46
9.29
12.66
15.49
17.95
20.01
21.89
23.59
25.15
45.52
45.46
45.30
44.99
44.36
43.61
42.71
41.89
41.16
40.47
Total
Revenue Opportunity
1G
1G
1G
23.77
2G
2G
2.5G
2.5G
3G
44.27
4G
22.22
28.17
4G
2G
2.5G
3G
2G
2.5G
3G
2G
2.5G
3G
2G
2.5G
3G
2G
2.5G
3G
3G
4G
143.80
33.02%
9.22
173.80
39.91%
10.23
197.09
45.26%
15.32
282.73
64.93%
435.47
100.00%
2.5G
11.91
20.00
6.22
2G
2.5G
3G
Totals
10.72
13.71
22.70
4G
1G
7.72
12.32
15.71
25.66
4G
1G
9.32
14.07
17.90
28.87
4G
1G
11.07
15.97
20.24
32.33
4G
1G
12.97
17.97
22.74
36.01
4G
1G
14.97
20.07
25.36
40.00
1G
17.07
2G
24.47
31.12
3G
19.22
2G
26.77
2.5G
1G
21.47
3G
17.57
4G
4G
45.52
45.46
45.30
44.99
44.36
43.61
42.71
41.89
41.16
40.47
0.9091
0.8264
0.7513
0.683
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
Present Value 1G
21.61
17.74
14.44
11.66
9.29
7.32
5.68
4.35
3.27
2.40
97.77
36.16%
Present Value 2G
24.34
20.22
16.69
13.71
11.16
9.02
7.22
5.75
4.55
3.55
116.20
42.98%
Present Value 2.5G
28.29
23.28
19.05
15.53
12.57
10.10
8.06
6.40
5.05
3.94
132.28
48.92%
Present Value 3G
40.25
33.06
27.05
22.08
17.93
14.49
11.65
9.33
7.45
5.91
189.18
69.97%
Present Value 4G
41.38
37.57
34.03
30.73
27.54
24.62
21.92
19.54
17.46
15.60
270.39
100.00%
DCF using 10% discount rate
58
INCOME OPPORTUNITY
KNOWLEDGEABLE
WILLING BUYER/WILLING SELLER
REVENUE IS NOT EVERYTHING - REMEMBER OPERATING COSTS
IT IS NOT ONLY REVENUE - IT IS INCOME, MARGINS
EACH GENERATION OF EQUIPMENT IS MUCH MORE SPECTRAL EFFICIENT
EACH GENERATION OF EQUIPMENT COSTS LESS BUT DOES MORE
ERACH GENERATION OF EQUIPMENT COSTS LESS TO OPERATE
SO:
MARGINS
1G
5%
2G
10%
= voice + features
2.5G
15%
= voice+features+data @ 3x dial up
3G
20%
= voice+features+brodbad data (dsl speed)
4G
40%
= voice*+features+super fast broadband data (cable modem speed)
coming down the road Advanced LTE = 4.5G
= voice only
voice*+features+super fast broadband data (fiber optic speed)
*Voice in 4G and 4G Advanced = VOLTe (Voice Over Long Term Evolution) - voice is just another data packet, no dedicated equipment such as circuit switches
59
HYPOTHETICAL
INCOME OPPORTUNITY
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
23.77
21.47
19.22
17.07
14.97
12.97
11.07
9.32
7.72
6.22
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
DATA
22.56
24.37
26.37
28.52
30.82
33.27
35.87
38.37
40.62
42.62
TOTAL
49.33
48.84
48.59
48.59
48.79
49.24
49.94
50.69
51.34
51.84
VOICE
FEATURES
USING 10 YR PERIOD 2013-22
Revenue Per User
YEAR 1
YEAR 2
VOICE
YEAR 3
YEAR 4
YEAR 5
YEAR 6
YEAR 7
YEAR 8
YEAR 9
YEAR 10
23.77
21.47
19.22
17.07
14.97
12.97
11.07
9.32
7.72
6.22
FEATURES
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
Non BB Data
4.35
3.70
3.14
2.67
2.27
1.93
1.64
1.39
1.19
1.01
3G BB Data
13.15
11.83
10.65
9.59
8.63
7.76
6.99
6.29
5.66
5.09
4G BB Data
1.25
5.46
9.29
12.66
15.49
17.95
20.01
21.89
23.59
25.15
45.52
45.46
45.30
44.99
44.36
43.61
42.71
41.89
41.16
40.47
Total
NOI PER USER
1G
1G
1G
1.19
2G
2G
2.5G
2.5G
3G
8.85
4G
2.22
4.23
4G
2G
2.5G
3G
4G
2G
2.5G
3G
4G
2G
2.5G
3G
4G
2G
2.5G
3G
2G
2.5G
3G
3G
4G
7.19
4.13%
0.92
17.38
9.98%
1.53
29.56
16.97%
3.06
56.55
32.46%
174.19
100.00%
2.5G
1.79
4.00
0.31
2G
2.5G
3G
Totals
1.07
2.06
4.54
4G
1G
0.39
1.23
2.36
5.13
4G
1G
0.47
1.41
2.69
5.77
1G
0.55
1.60
3.04
6.47
1G
0.65
1.80
3.41
7.20
1G
0.75
2.01
3.80
8.00
1G
0.85
2G
2.45
4.67
3G
0.96
2G
2.68
2.5G
1G
1.07
3G
3.51
4G
4G
18.21
18.18
18.12
18.00
17.74
17.44
17.08
16.76
16.46
16.19
0.9091
0.8264
0.7513
0.683
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
Present Value 1G
1.08
0.89
0.72
0.58
0.46
0.37
0.28
0.22
0.16
0.12
4.89
4.52%
Present Value 2G
2.43
2.02
1.67
1.37
1.12
0.90
0.72
0.57
0.45
0.36
11.62
10.74%
Present Value 2.5G
4.24
3.49
2.86
2.33
1.89
1.52
1.21
0.96
0.76
0.59
19.84
18.35%
Present Value 3G
8.05
6.61
5.41
4.42
3.59
2.90
2.33
1.87
1.49
1.18
37.84
34.98%
Present Value 4G
16.55
15.03
13.61
12.29
11.02
9.85
8.77
7.82
6.98
6.24
108.16
100.00%
DCF using 10% discount rate
60
VALUATION
• Start with RCN
– Fee simple, actual costs new for same capacity/function
– Mass Appraisal – trend original cost (will be higher than
“fee simple” if sight added to over time)
Depreciation
- Physical
- Obsolescence
- Functional
- External (test for)
61
Summary
• LTE is not only a complete replacement for
2.5G/3G/3.5G, it is also a growth technology; can handle
all traffic today and new services that can’t be run on
even 3G
– EnodeB (base station) launched actually has almost DOUBLE the
capacity of our average deployed cell sites
– Core network has significantly less cabinets and in fact are not
tied to just the cell sites “homed” to them. They have
significantly more capacity and are now in a “community of
interest” where other sites can also be run thru them
• All at a fraction of the cost of today’s 2.5G and 3G/3.5G
networks
• As history shows, technology keeps moving along,
plans/standards are being drawn up for the next
iteration:
• LTE ADVANCED
KEY TAKEAWAY “Remember”
State of the Art Today
Obsolete Tomorrow
• As evidenced by Moore's law, technology is continually
changing at a rapid pace
– Thus, today’s innovation although “state of the art,” will
become functionally obsolete property in the near future
• The good news is that in a highly competitive marketplace
such as wireless, companies will try to differentiate themselves
and will continually reinvest and bring the latest & greatest to
the marketplace
63