You are on page 1of 26

ATIS

LTE Business Case

Confidential - Do Not Reproduce January 26, 2009 2


1/29/2009
David Waite, Altman Vilandrie & Company (AV&Co.)

Consulting Profile Client Universe

Background Service Providers (CellCos,


ILECs, CLECs, RLECs, IXCs,
45+ Consulting -1- ASPs/ISPs/MSPs, etc.)
Professionals
Operating Equipment Vendors
Headquartered in Boston Companies
Content Creators and
Core Capabilities Aggregators

Specialists in the
Communications, Media,
and Technology Sectors Private Equity Investors
-2-
Analytical Approach to Financial Hedge Funds
Problem Solving
Investors Investment Banks
Deep Economics and
Financial Focus

Confidential - Do Not Reproduce 1/29/2009 3


Topic Overview
Todays focus is on the LTE business case

What are the revenue incentives and investment implications for operators
who adopt LTE?

What is the LTE market opportunity and implications for the broader
ecosystem, including equipment providers, operators, and device
manufacturers?

How could the current economic climate impact the overall LTE business
case?
LTE Evolution
Carriers are beginning the transition to 4G

The Approaching Transition from 3G to 4G


100+

UMB (EVDO-Rev C) LTE


LTE
Fixed WiMAX
Mobile WiMAX 4G
Mobile Bandwidth Capability (Mbps)
10.0

EVDO-Rev B HSPA+
fo r
ly Path an
UMTS / HSDPA Lik e
Am e
ric
rs
North Operato
A
CDM
EVDO-Rev A
1.0

3G
EVDO
0.1

EDGE
0.01

2003 2006 2009 2012


Estimated Time of Commercialization

Confidential - Do Not Reproduce 1/29/2009 5


LTE Ecosystem
Each segment of the ecosystem has a role to play in LTEs success

Network Content & Content &


Component Device
Infrastructure Applications Application
Vendors Providers
Providers Developers Distributors

Dual-mode chips Demonstrated Innovative Focused efforts to New, innovative


to enable seamless potential through 4G applications that understand & GUI designs to take
3G/4G coexistence lab tests and trials take advantage of address end-user advantage of rich
Greater Possibly, multi- LTEs bandwidth and requirements multimedia content
computational standard base latency among consumers and applications
power on-board stations to facilitate characteristics and businesses Development of new
Improved battery migration from and Rich multimedia Willingness to take device categories
life for media- transitional content to drive measured risks to (MIDs) to leverage
intensive coexistence of 3G to eyeballs to the monetize 4G LTE beyond the
applications 4G handset screen handset

Confidential - Do Not Reproduce 1/29/2009 6


LTE Business Case
Success also rests on business case, and underlying economic drivers, for LTE

$50

ARPU
ARPU
$20 (~40%)
D ir
_ Recurring ect
Margin ion
$30
$1,200 al
CCPU
CCPU x Customer
60 Lifetime Value
$850
months

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value
$350 ~$300 B
Total
Total Value
Value
CPGA
CPGA x (pre-tax,
(pre-tax,
unlevered)
unlevered) ???
~270 MM, U.S.

ROI
ROI
## Subscribers
Subscribers ???

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 7


Economic Drivers: ARPU
ARPU stands to benefit from higher-bandwidth, lower-latency platform

Value-added applications

ARPU
ARPU
Advertising revenues
Broadband device proliferation

_ Recurring
Margin

CCPU
CCPU x Customer
Lifetime Value

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value

CPGA
CPGA x Total
Total Value
Value

ROI
ROI
## Subscribers
Subscribers

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 8


ARPU: Selected LTE Capabilities
Content and applications will benefit from LTEs capabilities relative to 3G

- 4G Application Enablers -

Rich
Rich Multimedia
Multimedia Content
Content

Real-time
Real-time Interactivity
Interactivity

Greater
Greater User
User Concurrency
Concurrency

LTE
More
More Simultaneous
Simultaneous Sessions
Sessions

New
New Computational
Computational Alternatives
Alternatives

Greater
Greater Mobility,
Mobility, Availability
Availability
Network-based
Network-based Location
Location // Presence
Presence
Better
Better Physical
Physical World
World Awareness
Awareness
Confidential - Do Not Reproduce 1/29/2009 9
ARPU: Average ARPU Components
Value-added applications offset ARPU declines in other price components
Consider the opportunity cost of inaction

Illustrative,
Illustrative,
Directional
Directional
$55
$52 Consumer
$50 Interactive gaming
Apps
Mobile TV
($10)
Social multi-user video
Mobile commerce
Business
VoIP Collaboration
Voice
Voice LTE? ($20) Tele-presence
($37)
($47) Telemedicine
M2M
Fleet management
Asset tracking
Interactive sales
Data
Cross-Segment
Data ($25)
Customized bandwidth
($13) Remote monitoring
Data ($5)
GPS/Navigation
2005 2008 2011

Confidential - Do Not Reproduce 1/29/2009 10


ARPU: Emerging Mobile Applications
A wide range of vertical and horizontal applications already are emerging

Example
Category
Companies

Collaboration
Application
Horizontal

Computing and Storage


Security and Monitoring
Location-based Applications

Emergency Response
Pattern Recognition
Vertical Applications

Navigation and Tracking


Surveillance
Telemetry and Telecommand
Interactive Sales
Machine to Machine

Confidential - Do Not Reproduce 1/29/2009 11


Economic Drivers: CCPU
LTE is likely to reduce operating costs over time, but with caveats

All-IP networks

ARPU
ARPU



Backhaul
Network virtualization
Migration, multiple networks, OSSs, etc.

_ Recurring
Margin

CCPU
CCPU x Customer
Lifetime Value

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value

CPGA
CPGA x Total
Total Value
Value

ROI
ROI
## Subscribers
Subscribers

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 12


CCPU: Carrier Operating Costs
Switching to an end-to-end IP network with greater spectral efficiency can
significantly reduce network expenses

Wireless Network Operator


OPEX Breakdown LTE OPEX Impacts
Other Operating
Expenses Fewer sites and radios
19% Cell Site Reduced maintenance and
part replacement costs
Cell Site
Maintence & Rent
35% Reduced switching and
Network transport costs
Provisioning Network Better able to handle bursts of
5% Expenses data
Reduced backhaul costs (50%
by some estimates)
More remote (i.e., online)
Network maintenance
Network Staff Staffing Fewer network elements
19% (when fully converted)

Network Network Fully IP networks may simplify


Expenses Provisioning provisioning
12%

Source: AV&Co. Experience


CCPU: LTE Cost Cushion
Cisco estimates up to 50% savings on backhaul for wireless carriers switching to
LTE networks
Example of Potential EBITDA Impact

LTE cost savings have the


same EBITDA impact as a Assumptions
$50 Revenue ~15% growth in revenue
$46
EBITDA
$45 General Assumptions
$40 $40 Revenue of $40Bn
$40 COGS = 40% of Revenue
Backhaul = 25% of COGS
$35 SG&A = 20% of Revenue
$30
Cost Savings Assumptions
Switching to a 4G network will result in a
$B

$25
50% reduction to backhaul costs
$20
$16 $16 Predicated Cost Savings
$14.0
$15 Gross margin increases to 65% from
60%
$10 EBITDA margin improvement of 5%
(~40% to ~45%)
$5
Cost savings create EBITDA contribution
$0 equivalent to ~15% growth in revenue
Current With Cost Equivalent
Savings EBITDA without
Cost Savings

Sources: Cisco

1/29/2009 14
Economic Drivers: Churn
Customer lifetime may improve, but the outlook remains ambiguous

Sticky 4G applications


More devices per user
Slippery open-access environments
ARPU
ARPU New non-contract pricing models

_ Recurring
Margin

CCPU
CCPU x Customer
Lifetime Value

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value

CPGA
CPGA x Total
Total Value
Value

ROI
ROI
## Subscribers
Subscribers

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 15


Churn: SMBs, Enterprises
Dont forget SMBs and Enterprises

SMB Mobility Barriers to Adoption


Wireless coverage concerns 4.2
1
In-building coverage 4.0 Limited Network Coverage and Performance
Coverage is critical for businesses to maintain real-time
Technological

Bandwidth 4.0 communication with employees, customers and suppliers


Latency 3.9 2
Security Concerns
Security concerns 3.8
Concerns about security of information shared across
wireless networks -beyond the company firewall
Integration concerns 3.8

Affordability: High cost to roll-out for all


3 Lack of Device Compatibility & Integration
3.8 Workforce has different devices, with different OS
employees

Duration of contract with provider 3.7

Unclear about benefits (costs, ROI) 3.5 4 Cost and Return on Investment
Creating a wireless organization could mean a substantial
Hard to develop a mobility strategy for
our size business
3.3 investment in technology upgrades of the business
Flexibility 3.4
5 Business flexibility
Business

No financing to buy IT/ mobility


3.3
Concerns about difficulties in adjust mobile solution to
solutions
changes in business needs
Scalability 3.3

Lack of IT expertise to manage


Limited experience in managing mobility
3.2 5
mobility solutions IT department has limited experience/knowledge of
Difficult to manage professional versus mobile solutions
3.2
personal usage

- 1 2 3 4 5

Source: AV&CO primary research survey, n=500


Economic Drivers: CPGA
LTEs impact on CPGA remains uncertain

Economies of scale

ARPU
ARPU
Customer acquisition
Higher subsidies open may offset

_ Recurring
Margin

CCPU
CCPU x Customer
Lifetime Value

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value

CPGA
CPGA x Total
Total Value
Value

ROI
ROI
## Subscribers
Subscribers

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 17


CPGA: Economies of Scale
Scale economies from promise to drive down equipment subsidies

1,600

1,400

1,200

1,000
GSM/WCDMA
800 Handsets

600

400

200
CDMA
Handsets
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
CPGA: Smartphones
Yet, greater adoption of smartphones and other advanced devices may offset
benefits from scale economies, at least in the near-term

1,406 Smartphones Basic Phones

1,206
Consumer Wireless Devices (M)

1,006

806

606

406

206

6
2008 2009 2010 2011 2012

Smartphones use more data than basic phones


iPhone users consume 30 times the data of other smart phones users (e.g., Youtube)
Even if smartphone penetration growth slows, existing smartphones are becoming much more
data intensive to match the iPhone
Economic Drivers: Subscribers
LTE seems likely to attract new subscribers and more devices per subscriber

New applications tap new segments

ARPU
ARPU



Greater bandwidth targets performance hold-outs
Machines
MIDs

_ Recurring
Margin

CCPU
CCPU x Customer
Lifetime Value

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value

CPGA
CPGA x Total
Total Value
Value

ROI
ROI
## Subscribers
Subscribers

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 20


Economic Drivers: CapEx
Capital efficiency is set to improve with LTE deployments

Economies of scale



All-IP network & spectral efficiency
Network virtualization
ARPU
ARPU Multiple networks in transition

_ Recurring
Margin

CCPU
CCPU x Customer
Lifetime Value

Customer
Customer
_ Net Customer
Lifetime
Lifetime Lifetime Value

CPGA
CPGA x Total
Total Value
Value

ROI
ROI
## Subscribers
Subscribers

Capital
Capital
Investment
Investment

Confidential - Do Not Reproduce 1/29/2009 21


CapEx: All-IP
Standardized, IP-based network equipment for LTE will reduce capital costs

Wireless Network Operator LTE CAPEX Impacts


CAPEX Breakdown
Improved spectrum efficiency
Propagation benefits of 700
Cell Site MHz spectrum
Spectrum flexibility (channel
width, FDD/TDD)
Network
40%
Simpler network architecture
Network
Lower equipment costs resulting
Maintenance from standardization

Maintenance
60%

Network Lower equipment costs resulting


from standardization
Expansion Simpler network architecture

Source: AV&Co. Experience

1/29/2009 22
CapEx: Impact of Spectral Efficiency
Improved spectral efficiency of LTE promises to further enhance the capital
efficiency of LTE investments
LTE 3G Comparison

- LTE - - EVDO Rev-A - - HSDPA -

Theoretical DL- >100 Mbps DL- 3.1 Mbps DL- 14 Mbps


Speed UL- >50 Mbps UL- 1.8 Mbps UL- 5.8 Mbps

Expected Speed DL- 5 Mbps DL- 400 kbps DL- 900 kbps

Spectrum
Efficiency
~3-5 bps/Hz ~1-2 bps/Hz ~1-3 bps

Channel 5 MHz
Bandwidth
1.25-20 MHz 1.25 MHz
(Future plans for 10 MHz)

1-30 Miles
Range 1-5 Miles 1-5 Miles
(theoretical)

Source: Ericsson, Alcatel, Qualcomm, Wireless World, AV&Co. interviews with RF engineers

1/29/2009 23
Macroeconomic Considerations
Investments may be impacted by the current economic climate

Barriers

Tight credit markets; depressed equity markets; cash is king


Declining consumer demand

Drivers

Operators subscription cash flows


Competitive intensity
Market saturation

Wildcards

Economic stimulus
Cost of capital
Macroeconomic Considerations
Despite economic headwinds, participants across the ecosystem are gearing up
for LTE

December 08: Qualcomm laid out an aggressive LTE roadmap (expect to have samples ready
by Q209)

December 08: Alcatel-Lucent announced an increase in LTE investment

November 08: Motorola completed its first field test for LTE expect limited LTE deployments
in 2009

December 08: Nokia demonstrated LTE technology

November 08: HTC introduced MAX 4G, the worlds first GSM & WiMAX enabled handset in
Russia

October 08: ZTE increases LTE R&D investment as they believe the global recession will not
dampen equipment demand for LTE

November 08: T-Mobile announced plans to forego additional investment into HSPA+ and
focus exclusively on LTE

December 08: Verizon states that LTE service will be launched in 2009 in select U.S. markets

January, 09: TeliaSonera awards first LTE contract


Conclusions
Potential Impact Rationale


Value-added applications
ARPU Advertising revenues
Broadband device proliferation

All-IP networks


Backhaul
CCPU Network virtualization
Migration, multiple networks, OSSs, etc.

Sticky 4G applications


Customer More devices per user
Slippery open-access environments
Lifetime New non-contract pricing models


Economies of scale
CPGA Customer acquisition
Higher subsidies open may offset

New applications tap new segments


Sub- Greater bandwidth targets performance hold-outs
scribers Machines
MIDs

Economies of scale

CapEx


All-IP network & spectral efficiency
Network virtualization
Multiple networks in transition