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Int. J. Management and Network Economics, Vol. 2, No.

2, 2011

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Mobile broadband expansion calls for more spectrum or more base stations: analysis of the value of spectrum and the role of spectrum aggregation Jan Markendahl
Wireless@KTH, Royal Institute of Technology, Electrum 229, S-164 40, Kista, Sweden E-mail: jan.markendahl@radio.kth.se

Bengt G. Mlleryd*
Swedish Post and Telecom Agency (PTS), P.O. Box 5398, SE-102 49, Stockholm, Sweden E-mail: bengt.molleryd@pts.se *Corresponding author
Abstract: This paper analyses the marginal value of spectrum which includes engineering and strategic value. The analysis of the engineering value shows that operators that are able to obtain more spectrum than their competitors, and pursue network sharing and spectrum aggregation have a competitive advantage as they have the lowest production cost, highest margin and highest capacity when usage takes off. The analysis of the strategic value shows that the level of offered data rates is pivotal for operators marketing of mobile broadband services and that network sharing in combination with spectrum aggregation has a positive impact on the strategic value. Altogether, the willingness to pay for spectrum in recent auctions has been lower than the estimated marginal value in this analysis. However, it is likely to increase when a broad range of smart mobile devices and mobile broadband are ubiquitously used as this will put unprecedented pressure on mobile networks increasing the demand for spectrum. Keywords: mobile communications; spectrum valuation; network deployment; network capacity and cost; carrier and band aggregation; market position. Reference to this paper should be made as follows: Markendahl, J. and Mlleryd, B.G. (2011) Mobile broadband expansion calls for more spectrum or more base stations: analysis of the value of spectrum and the role of spectrum aggregation, Int. J. Management and Network Economics, Vol. 2, No. 2, pp.115134. Biographical notes: Jan Markendahl received his MSc in Engineering Physics from Uppsala University in 1980 and his PhD in Communication Systems from the Royal Institute of Technology (KTH) in Stockholm in 2011. He is currently a Lecturer and Researcher at Wireless@KTH. Bengt G. Mlleryd received his PhD in 1999 from the Stockholm School of Economics. He is a Senior Analyst at the Swedish Post and Telecom Agency (PTS) at the competition department and a guest researcher at Wireless@KTH since 2009.

Copyright 2011 Inderscience Enterprises Ltd.

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Introduction

The breakthrough for smartphones, tablet computers and mobile broadband is taking the mobile communications industry into a new phase (Markendahl et al., 2009). Traffic volumes in the mobile networks are growing immensely, underscored by the fact that global mobile data traffic surpassed mobile voice traffic by the end of 2009.1 A continued growth of mobile data will inevitably force operators to upgrade capacity pushing up capital expenditure (CapEx) budgets. However, the deployment of new base station sites could be postponed if operators get access to additional spectrum since network capacity is a function of the amount of spectrum and the number of base station sites. In other words, mobile operators are facing a spectrum availability problem. The expansion of the mobile broadband market will propel the demand for more bandwidth, i.e., more and wider spectrum bands (Mlleryd et al., 2010). The more bandwidth is allocated to an operator the more capacity can be offered by each base station site. Costs related to sites, e.g., expenditures for towers, power, site leases etc., are the dominating component (Johansson, 2007) of the overall cost structure. Hence, the more spectrum is available the less sites are required in order to offer a specific amount of capacity (Zander, 1997). In addition to this value of spectrum, which is derived from the possibility to reduce costs due to lower number of sites, more spectrum may have another type of value enhanced by recent advances in radio technology. It is called carrier or spectrum aggregation which enables operators to combine spectrum from different frequency bands into one large block of spectrum. The aggregation features that are part of the 3GPP standard result in larger total bandwidth which will enable higher data rates for end users. This comprises a significant marketing and strategic value for mobile operators since they can provide services with high data rate requirements. The effects of limitations of use of spectrum aggregation has been studied by Leighton (2009). The evolution of LTE (4G) will allow carrier aggregation, and with IMT-advanced bandwidths up to 100 MHz can be supported (Parkvall and Astely, 2009; Yuan et al., 2010). The mobile equipment industry has launched flexible radio equipment capable of handling all relevant frequencies and access technologies. The fierce competition among equipment manufactures has pushed down prices enabling operators to replace existing radio equipment with new equipment for only ten thousand Euro per base station.2 By combining the deployment of new radio equipment and additional spectrum, operators are able to increase capacity substantially. This implies that operators that are unable to obtain additional spectrum, are forced to deploy more base stations compared to competitors which will increase CapEx substantially (see Figure 1).
Figure 1 Illustration of base station density satisfying the same user (capacity) demand in the area, high level of allocated spectrum (left side) and lower level of allocated spectrum (right side)

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Assessing the value of spectrum is complex and involves different evaluation approaches. One cornerstone is the opportunity cost of spectrum that is related to potential cost savings in infrastructure that an operator with access to a certain band of spectrum can achieve. In this type of analysis the network capacity needed to serve the user demand is a key aspect. Another key characteristic of the network is the data rates that can be offered to the end users. The more bandwidth can be used the higher the data rates. This means that differences in bandwidth allocation between operators will lead to differences in offered services. Operators with more bandwidth will have a competitive advantage compared with competitors that do not have access to similar amounts of spectrum. This difference will have an impact on the market position of mobile operators can therefore be expressed in terms of a strategic value. The amount of available bandwidth can be increased by use of technical solutions, such as carrier and spectrum aggregation. In combination with network and spectrum sharing between operators, spectrum aggregation can result in very high system bandwidths and data rates. This paper set out to analyse the marginal value of spectrum and the impact of spectrum aggregation. The value of spectrum includes the engineering and strategic value. The engineering value is derived from the impact of CapEx on network infrastructure when additional spectrum is available. The strategic value reflects the expected position in the market an operator will hold as a result of the assigned amount of spectrum. We address two research questions: How is the production cost affected by different levels of spectrum? How does the use of spectrum aggregation influence the evaluation of spectrum?

The analysis is based on different combinations of the 1800 and 2600 MHz band resulting in system bandwidths of 10, 20, 40 and 80 MHz.3 The 80 MHz case also includes network and spectrum sharing of two operators. The paper is organised as follows. Section 2 reviews related work and the following chapter describes the model assumptions and framework for the analysis. Section 4 analyses the engineering value in terms of network costs for different amounts of spectrum. Section 5 analyses the strategic value of spectrum with focus on data rates, and the main conclusions are found in following chapter.

Related works

2.1 Valuation of spectrum


The focus on this paper is not to analyse the economic value of spectrum, which could be measured as the sum of consumer and producer surplus, it is rather aiming at capturing the marginal value of spectrum, which, according to Nera and Smith (1996), is defined as the value of output forgone when frequencies are used for a particular use rather than the next best alternative. Nera and Smith (1996) developed a method to calculate the marginal value of spectrum, which is derived from the additional cost or cost saving depending upon whether operators are allocated spectrum or not, and how much spectrum they are allocated.

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Sweet et al. (2002) underscores that the spectrum value for cellular telephony operators includes an engineering value and a strategic value. The engineering value is determined by cost savings in the infrastructure of an operators network obtained by having access to additional spectrum. The strategic value, according to Sweet et al. (2002), reflects the expected position in the market an operator will hold as a consequence of the allocated spectrum and to what extent this has had any consequences on competition. This resembles the option value which, according to Plum (2009), is the value of having the flexibility to invest at the optimal time. This in combination with a project value (i.e., the net present value) adds up to an estimated value of spectrum. Operators may attach some strategic value to having additional spectrum, not least because it would give them greater flexibility should demand expand faster than has been assumed. The strategic value reflects the expected position and competitive advantage an operator achieve in the market as a result of assigned spectrum compared to operators that does not have the equivalent amount of spectrum. Compared with Nera and Smith (1996) and Sweet et al. (2002), this paper investigates both the engineering and strategic value. Moreover, we take into account existing infrastructure and consider both upgrading of existing sites and deployment of new sites. We extend the analysis of capacity limited scenarios (Sweet et al., 2002) to include both capacity and coverage limited scenarios.

2.2 Techno-economic modelling and analysis of telecom networks


A major area of techno-economic evaluation is modelling and analysis of networks, demand, costs and revenues. It has been the framework for several European projects like TERA, TONIC, and ECOSYS (Olsen et al., 2006; Harno, 2010; Loizillon et al., 2002).4 Mobile broadband network costs in relation to bandwidth and capacity was examined early by Zander (1997). The profitability of flat rate mobile broadband per se was insistently by e.g., Blennerud (2009a). Regarding the allocation of costs for voice versus mobile broadband Blennerud (2009b) argues that there is a difference in capacity of roughly 1012 times comparing voice and HSPA on 5 MHz. The analysis shows that the cost is 1 EUR per GB when the network runs at low utilisation, while it is reduced to 0.1 EUR GB when the network reaches a utilisation rate of 50%.
Table 1 CapEx comparison of nation-wide scenario with different traffic share and bands Traffic share 0% 700 MHz 900 MHz 2100 MHz 2600 MHz 1,00 1,00 1,00 1,00 15% 1,32 1,19 1,09 1,05 50% 2,08 1,64 1,26 1,15 100% 3,22 2,29 1,56 1,32

Notes: CapEx for each band is normalised to fixed cost of coverage deployment. Source: Azcoitia et al. (2010)

Mobile broadband expansion calls for more spectrum or more base stations
Table 2 CapEx comparison of nation-wide scenario with different traffic share and bands Traffic share 0% 700 MHz 900 MHz 2100 MHz 2600 MHz 1,00 1,69 4.05 7.13 15% 1,00 1,52 3,33 5,66 50% 1,00 1,34 2,45 3,96 100% 1,00 1,20 1,96 2,92

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Notes: CapEx for each band is normalised to cost of deployment in 700 MHz Source: Azcoitia et al. (2010)

Azcoitia et al. (2010) examine the value of spectrum by analysing the impact on CapEx depending on the spectrum band by applying a long run incremental cost (LRIC) model. Azcoitia et al. (2010) show that the variable costs increase most at the lower frequency bands as the cell areas need to shrink when the traffic volumes increase. For 900 MHz, the difference in CapEx is 2.2 times when market share of traffic increases from 0% to 100% (see Table 1). Moreover, Azcoitia et al. (2010) show that an operator with a 50% market share has to spend four times more CapEx when he is using 2,600 MHz compared with using 700 MHz (see Table 2).

Methodology, models and assumptions

This paper combines the issue of demand for mobile broadband, cost of network deployment and significance of spectrum. The role and value of spectrum aggregation is analysed by modelling four different operators. The paper set out to analyse the value of spectrum from a marginal cost approach (Sweet et al., 2002) by including both, engineering and a strategic value. The engineering value is derived from the impact on network infrastructure CapEx when more bandwidth is available. This could also be referred to as avoidable cost. The strategic value reflects the expected position in the market an operator will hold as a result of available bandwidth and the service offers that can be marketed in terms of data rates.

3.1 Market and demand


We focus on a limited part of the total market by modelling an urban area where four operators each have a 25% market share, all having existing mobile networks which have been deployed to provide voice services. Subsequently, networks are upgraded to LTE in order to offer high capacity mobile broadband services. Four network deployment alternatives illustrating different spectrum allocation and network sharing strategies will be analysed. In our comparison, we consider operators using one or two frequency bands and full LTE system bandwidth (20 MHz) or half of the full LTE bandwidth (10 MHz).5 For high capacity demand levels deployment alternatives with large amounts of spectrum (resulting from either spectrum allocation or sharing) will result in a higher degree of re-use of base station sites, i.e., lower total number of sites and less costs. The different deployment alternatives are:

120 A B

J. Markendahl and B.G. Mlleryd one operator deploying its own network using one frequency band with relatively less bandwidth, 10 MHz in the 2.6 GHz band, i.e., in total 10 MHz one operator deploying its own network using two frequency bands with relatively less bandwidth 10 MHz in both the 1.8 GHz and the 2.6 GHz bands, in total 20 MHz one operator deploying its own network using two frequency bands with the full LTE bandwidth, 20 MHz in both the 1.8 GHz and the 2.6 GHz bands, in total 40 MHz two cooperating operators deploying a common network where spectrum resources are jointly utilised, each operator has 20 MHz in both the 1.8 GHz and the 2.6 GHz bands, i.e., in total 80 MHz.

This set of deployment scenarios quite resembles the situation in Sweden when it comes to spectrum allocation and network sharing agreements (Markendahl, 2011). We assume that the penetration rate for mobile broadband is 50%, with average revenue per user (ARPU) of 20 EUR per month and subscriber. We calculate with three levels of data usage: 5, 20 and 80 GB per user and month. This could be compared with an average usage in this market of 12 GB for mobile broadband and 0.5 GB for smartphone users.6 The usage is spread out over eight hours per day, implying a busy hour rate of 12.5%, in line with industry standard.

3.2 Network modelling, coverage and capacity and data rates


In the following, the key parameters will be examined, starting with coverage. The sites are equipped with base stations (radio equipment) and set up into three sectors. We model cell ranges of 0.70 km, which implies a cell area of 1.54 km2. The next parameter is capacity, which is a function of the total number of sites, the amount of spectrum and spectral efficiency of the radio access technology. The spectral efficiency varies with the distance from the base station, typical target values are >10 bits per Hz close to the base station, <0.01 bits per Hz at the cell border and 12 bits per Hz on average over the whole cell (Parkvall and Astely, 2009). We assume an average spectrum efficiency of 2.0 bits per Hz. This translates into an average throughput of 40 Mbps for 20 MHz. Peak data rates and marketed offers will be discussed in Section 5. The site capacity is calculated according to the following formula: Capacity = Bandwidth (MHz) * number of sites * sectors * spectrum efficiency The capacity is subsequently compared with the demand in order to estimate the utilisation rate, and in case upgrading of the network is required. We assume that a utilisation rate of 70% is a critical level in order to maintain an appropriate service level.

3.3 Cost assumptions


The assumptions related to operational expenditures (OpEx), i.e., site rent, licence cost for equipment, support cost, operations and maintenance, transmission, and power. OpEx

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is set to 20% of accumulated CapEx, in line with estimates made by Plum (2009). Moreover, there is a direct customer cost of 80 Euro per year, based on an industry benchmark, covering marketing, sales, subsidies, support and administration. We calculate the initial CapEx for building a site, including electronics, civil engineering and construction work, to be 100,000 Euro, which are depreciated over 20 years.7 We assume that all sites are upgraded to LTE requiring a CapEx of 30,000 Euro per site, including backhaul, depreciated over five years. The cost of capital (WACC) is set to 12.9%. This gives the basis for calculating the cost for upgrading network capacity, which will be the focus in the next section.

Analysis of engineering value

4.1 Four operators with different spectrum competing in one market


In this section, we analyse the engineering value of spectrum which implies that focus is on examining the different thresholds for the four operators as they have varying amounts of spectrum. This will give the basis for calculating the marginal cost for operators with fewer spectrums in order to provide a similar capacity level as the operators with more spectrums. The analysis is conducted by comparing how the utilisation level is impacted by different levels of spectrum, and when networks are forced to be upgraded. The aim is to exhibit how different levels of spectrum affect network costs. This addresses the first research question: How is the production cost affected by different levels of spectrum?

The analysis enables us to capture the engineering value of spectrum as a function of lower network cost through different levels of spectrum.

4.2 Network analysis


The parameters in the model could be divided into five categories. The first relates to the demand for mobile broadband, expressed as demand per km2, derived from the estimated usage per subscriber and population density. Secondly, we estimate the average revenue per user to be 20 Euro per month, which is line with market average. Thirdly, the network load factor determines the demand during peak hours, and constitutes the capacity that the network has to manage. Fourthly, OpEx required to run a mobile network, and fifth, investments of infrastructure equipment. The four operators start with equivalent networks, the same number of sites, and each having a 25% market share. The analysis does not take historical CapEx for building the initial network into consideration, neither is any cost for spectrum included in the calculation. The only differentiator is the amount of spectrum allocated, which ranges from 10 MHz, 20 MHz, 40 MHz to 80 MHz applicable for LTE services. This implies that the capacity, expressed as Mbps per km2 is eight times higher for Operator D compared with Operator A.

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Spectrum, peak rate and capacity per km2 for the four operators (see online version for colours)
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350 300 250 200 150 100 50 0 A B Spectrum MHz C Capacity Mbps per km2 39 10 20 78 40 80 156

The four networks have sufficient capacity to manage data volumes generated from an average usage of 5 GB per month and user. But with usage increasing to 20 GB, Operator A is required to upgrade its network, while the three other operators have sufficient capacity. However, a usage of 80 GB, approximately 40 times higher than the current average usage in Sweden, creates capacity problems for three out of the four operators, as illustrated by Figure 3.
Figure 3
500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% A B 5 GB 20 GB C 80 GB D 31% 16% 125% 62% 8% 31% 4% 16% 125% 62% 249%

Utilisation rate of the four networks (see online version for colours)
498%

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Consequently, Operators A, B and C are forced to upgrade their networks with more sites. Operator A, that only controls 10 MHz, needs to deploy about 1,000 additional sites to manage the increased traffic generated by a usage of 20 GB. With a usage of 80 GB, Operator A has to deploy an additional 7,000 sites in order to cope with the demand, reaching a total of over 9,400 sites. Operator B has to deploy an additional 3,300 sites, reaching 4,650 sites, and Operator C has to roll out an additional 1,055 sites, reaching a total of 2,355 sites. However, Operator D is able to manage the increased demand without any upgrades. Altogether, the increased number of sites means that Operator A with an average usage of 20 GB has to spend 175 mill. Euro in CapEx. With a usage of 80 GB Operator A, is forced to spend almost 1,000 mill. Euro in CapEx, while Operator B and Operator C have to invest 475 mill. Euro and 175 mill. Euro, respectively. Operator D does not have to make any additional investments besides the initial 40 mill. Euro.
Figure 4 Number of sites required to manage increased traffic (see online version for colours)
9 419

10 000 8 000 6 000 4 000 2 000 0 A

4 651 2 355 2 355

B 5 GB 20 GB

C 80 GB

Figure 5

CapEx to upgrade (see online version for colours)

1 200 1 000 800 MEUR 600 400 200 0 A B 5 GB 20 GB C 80 GB D 176 176 39 475 989

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The required network upgrades translate into higher production cost per GB. The production cost is defined as annualised CapEx divided with delivered traffic. Given that no additional CapEx was required for the usage of 5GB the production cost for the four operators are all 0.12 Euro per GB. But with increased usage the production costs start to deviate. Operator A is worst off, as its production cost is flat when the usage increases from 5 to 80 GB, while the other three operators are lowering their production cost at a varying degree. Unsurprisingly, Operator D is capitalising on economies of scale as it is avoiding any network upgrade. Its production cost declines by 94% when usage increases from 5 to 80 GB, and the equivalent number for Operator B and C is a decline of 51% and 80% respectively, as illustrated by Figure 6.
Figure 6 Annualised CapEx per GB (see online version for colours)
0,14 0,12 0,10 EUR per GB 0,08 0,06 0,04 0,02 0,00 A B 5 GB 20 GB C 80 GB D 0,06 0,12 0,12 0,12 0,12 0,12

0,09

0,03

0,03

0,02

0,03 0,01

Figure 7

Profit margin after annualised CapEx (see online version for colours)

Mobile broadband expansion calls for more spectrum or more base stations
Figure 8

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Euro per MHz and head for the Operators A, B and C (see online version for colours)
4,00 Value per MHz-Pop in EUR 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 A B C

Figure 9

Euro per MHz per head for auctions in the USA, Germany Sweden and Denmark (see online version for colours)

Source: Bulow et al. (2009), NRAs in Germany, Denmark and Sweden

Altogether, this translates into a deviating profit margin (after annualised CapEx). However, given the modest pressure on the networks with a usage of 5 GB the profit margin is 51% for all of the four operators. Unsurprisingly, the profit margin for Operator A declines radically from 51% to 9% and reaches a negative 246% margin with an 80 GB usage. The profit margin for Operator B is positive until usage reach 80 GB, reaching a negative margin of 84%, while Operator C is forced to make minor network upgrades, resulting in a 9% profit margin. Finally, Operator D maintains its profit margin of 51% in the three usage levels demonstrating the significance of spectrum. Summing up, the analysis has demonstrated how capacity is affected by the amount of spectrum, and how CapEx can compensate for a shortage of spectrum. Based on the estimated CapEx levels, we analyse the engineering value of spectrum. The CapEx needed is divided to meet the demand of 80 GB with the difference in spectrum holding

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between Operator A and Operator D. It shows that the engineering value is 13.50 mill. Euro per MHz. The equivalent calculation is made for Operators B and C which r esults in an engineering value of 7.20 mill. Euro per MHz for Operator B and 3.40 mill. Euro per MHz for Operator C. Subsequently, these estimates are divided by the population, in this case 4.00 mill. giving an estimated range from 0.85 to 3.40 Euro per MHz per head. Furthermore, it is interesting to examine how these estimates relate to prices obtained at recent spectrum auctions. The German spectrum auction, completed in June 2010, reached 1.54 Euro per MHz per head for 800 MHz, while a mere 0.05 Euro was paid for the 2.6 GHz band. Both, Sweden and Denmark reached considerably higher levels in their 2.6 GHz auctions with 0.30 and 0.42 Euro respectively; and the 800 MHz auction in Sweden reached an average of 0.69 Euro per MHz per head. The results from four spectrum auctions in the USA show prices from 0.14 Euro up to 0.89 Euro per MHz per head. The analysis has shown that the engineering value of spectrum, measured in Euro per MHz per head, is in the range between 0.85 and 3.40 Euro. This should be compared with recent spectrum auctions in Europe and the USA which have resulted in prices from 0.05 to 1.58 Euro per MHz per head, as illustrated in Figure 9. The deviation of the estimated engineering value from auction prices indicates that willingness to pay is lower than the marginal value of spectrum. This is in line with Bulow et al. (2009) who state that budget constraints and auction processes set the price which could be considerably lower than the value that the operators ascribe to the spectrum. The analysis of the engineering value of spectrum has demonstrated three aspects. Firstly, operators with 10 MHz have sufficient capacity to manage demand up to 5 GB, assuming 250 subscribers per km2 that share 40 Mbps per km2. This implies that operators with 10 MHz of spectrum have limitations on how to provide mobile broadband services in a cost efficient way. Secondly, by making a radical assumption of increased usage levels the analysis shows that operators with relatively more spectrum are able to lower their production cost when usage takes off. Thirdly, the analysis demonstrates that operators that are able to obtain more spectrum than their competitors and pursue network sharing and spectrum aggregation have a competitive advantage as they operate at the lowest production cost, the highest margin and the highest capacity when usage takes off. Moreover, they are also able to capitalise on strategic value of spectrum which is examined in the next section.

Analysis of strategic value the impact of offered data rates

So far we have considered the value of spectrum as a function of bandwidth, capacity and cost savings reasoning in terms of avoided network costs. The value of spectrum is also influenced by the user perception of service quality in terms of offered and provided data rates. The data rates that operators can provide play a significant role in the marketing of mobile broadband services (see Section 5.1). Even quite small differences in data rates offered by different operators are taken into account in marketing. The current WCDMA/HSPA systems, which use 5 MHz carriers, give limited opportunities for operators to differentiate the provided data rates. Even if

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more than one 5 MHz carriers are used, the system bandwidth is restricted to 5 MHz. Additional carriers are only used for capacity upgrades as it is currently not feasible to use additional carriers to increase data rates. However, this will change when multi-carrier HSPA solutions and LTE Advanced with bandwidth up to 100 MHz will be launched, but until this technology is implemented, the system bandwidth in LTE is up to 20 MHz. This implies that an operator using LTE with 20 MHz will be able to offer twice the peak rate compared with an operator using 10 MHz of spectrum (see illustration on the left side of Figure 10).
Figure 10 Data rate as function of the range from the base station (see online version for colours)
Achievable bit rates
2X M Hz of bandwidth

Higher bandwidth by use of aggregation

X M Hz of bandwidth

Base station site

Distance from base station

1800 MHz

2100M Hz

2600 M Hz

Notes: With larger bandwidth higher data rates can be supported (left). Illustration of band aggregation combining 1,800, 2,100 and 2,600 bands (right)

The introduction of new technology including LTE and the possibility to aggregate carriers and bands will have an impact on the competitive landscape. Differences among operators in spectrum allocation within frequency bands can be exploited in order to offer higher data rates. In the same way, operators with multiple frequency bands can combine these using band aggregation. Furthermore, band aggregation can be used by cooperating operators to combine separate bands into one larger block in order to offer higher data rates.

5.1 How mobile operators use data rate figures in marketing


Operators with higher system bandwidth than competitors can claim that they are able to offer higher data rates. Technically, higher bandwidth influences user experience in two ways: higher peak data rates can be provided more users can be served at a given data rate when the network is loaded.

Network performance in terms of data rates and coverage are considered to be very important by the operators. This can be observed from the information found at the operators websites. All operators claim to offer the best broadband access services [see examples below from the operator websites in December 2010 as described in Markendahl (2011)].
The fastest Mobile Broadband in Sweden according to information retrieved from Bredbandskollen.se, November 25, 2010. (Telenor)8

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Today the best Mobile Broadband in Sweden was nominated and the winner is Tele2. This means that you can do web surfing at higher speeds with Tele2 compared to any other operator.9 We have the fastest 4G network in Stockholm.(Tele2)10 For the fourth year in a row the magazine Mobil did nominate our Mobile Broadband to be the best in Sweden (3 Sweden)11 4G. The fastest Mobile Broadband in the world for just 15 per month until the Easter holiday, ordinary price 60 per month. (Telia) Today 8 million of Swedens population have coverage with Turbo3G+ (Telia)

These statements about data rates for 3G networks are used in marketing although the measured differences in various tests are quite small. The operators use the same type of radio access technology, the same system bandwidth and in many cases share networks. As mentioned before, this situation will change when carrier and band aggregation is introduced. This case will be discussed in the following section.

5.2 Impact of carrier aggregation and network sharing


In order to examine the differences in service offering, we compare data rate performance for four operators with different amounts of spectrum according to the assumption in Section 3.1. Without any carrier aggregation the system bandwidths are 10 or 20 MHz, the cases with more than 20 MHz of bandwidth will result in multiple 20 MHz systems working in parallel. The average data rates will be 2040 Mbps and peak data rates of 100200 Mbps, assuming a spectral efficiency of 2 and 10 bits per Hz respectively (see Figure 11).
Figure 11 Examples of data rates without any carrier aggregation assuming spectral efficiency 2 bps per Hz for average and 10 bps per Hz for peak data rate (see online version for colours)
Data rates without aggregation
800 700 600 Mbps 500 400 300 200 100 0 1* 10 MHz 2* 10 MHz 2* 20 MHz 2 ( 2*20) MHz Average data rate Peak data rate

The performance will change if carrier aggregation is introduced (see Figure 12). The system bandwidth will increase substantially, up to 80 MHz for two cooperating operators with 2*20 MHz each. Applying the same assumption on spectrum efficiency as above the average data rates can reach 80 or 160 Mbps, and the peak data rates can be up to 400 or 800 Mbps.

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Figure 12 Examples of data rates using carrier aggregation assuming spectral efficiency 2 bps per Hz for average and 10 bps per Hz for peak data rate (see online version for colours)
Data rates with aggregation
800 700 600 Mbps 500 400 300 200 100 0 1* 10 MHz 2* 10 MHz 2* 20 MHz 2 ( 2*20) MHz Average data rate Peak data rate

5.3 How users perceive expected and experienced levels of service quality
How can we assess the differences in system bandwidth and data rates and link them to the strategic value of spectrum? For the end-user perception of service quality, we base our analysis on work by Pohjola and Kilkki (2006) and by Tversky and Kahneman (1992). Pohjola and Kilkki (2006) have proposed a model to analyse value creation of services based on how users behave and attribute value to the experience. The assumptions on user perception and rating of service quality are based on the findings by Tversky and Kahneman (1992). They use expected experience and expected value functions to represent user happiness. Pohjola and Kilkki (2006) have proposed a model to analyse value creation of services based on how users behave and attribute value to the experience. The assumptions on user perception and rating of service quality are based on the findings by Tversky and Kahneman (1992). They use expected experience and expected value functions to represent user happiness. Following Pohjola and Kilkki (2006) the users evaluate their benefits relative to a reference level (usually their status quo or expectation due to marketing) so that the gains are by a factor of about 22.5 lower than losses. This implies that below the reference the perceived value decreases rapidly and above the reference level the user experience is good enough and further improvements do not significantly increase the benefits. This leads to different shapes of utility curves, showing how utility for a user depends on different parameters of a service. This means that a user that expects a 4 Mbps data rate would be more disappointed with a delivered data rate of 2 Mbps (i.e., half of the offered value) than being delighted by the positive experience of getting twice the offered data rate, namely 8 Mbps. This leads to different shapes of utility curves, showing how utility for a user depends on different parameters of a service. This means that a user that expects a 4 Mbps data rate would be more disappointed with a delivered data rate of 2 Mbps (i.e., half of the offered value) than being delighted by the positive experience of getting twice the offered data rate, namely 8 Mbps.

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Examples of utility functions as a function of bit rates are presented in Sachs et al. (2007). This kind of behavioural economics proposed by Tversky and Kahneman has also been used for analyses of consumer preferences for flat rates (Mitomo et al., 2007), (Nassar and Mitomo, 2010) and for analyses of service availability and data rates (Pyhnen et al., 2009). User satisfaction decreases substantially if the delivered bit rate is lower than what is promised as illustrated by the analysis in Markendahl et al. (2008). Figures 13 and 14 illustrate user satisfaction (from 10 to +10) as a function of the delivered data rate for two values of marketed (expected) data rate. Note that the very same delivered data rate (200300 kbps) results in different values of user satisfaction as it depends on user expectation. The expected value is 200300 and 12 Mbps in Figures 13 and 14 respectively.
Figure 13 User satisfaction as a function of delivered data rates (expected value: 200300 Kbps) (see online version for colours)

Figure 14 User satisfaction as a function of delivered data rates (expected value: 12 Mbps) (see online version for colours)

The results presented and the arguments presented by Tversky and Kahneman indicate that it is decisive for operators to keep the promised bit rates whatever the absolute

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value may be. Operators with higher system bandwidth than competitors can use this fact in their marketing and (correctly) claim that higher peak data rates can be offered and that more users can be served at a given data rate when the network is loaded. For the analysis of the strategic value, it is more difficult to express the value of more bandwidth in a quantitative way similar to the avoided network costs used for the engineering value. This is an area for further work, but two main conclusions can be drawn: 1 Since even small differences in data rates today are highlighted and taken into account in marketing, future big differences in available bandwidth and data rates most likely will be used in marketing to convince the end-users that the offered service is better than the service offered by a competitor with less spectrum. The use of carrier and band aggregation will enhance the importance of network and spectrum sharing. The higher total bandwidth due to aggregated bands of cooperating operators will undoubtedly be of importance in the future. Aggregation may be a driver for future sharing agreements in order to improve or protect market positions.

Conclusions

Altogether, this paper analyses the marginal value of spectrum which comprises engineering and strategic value. The engineering value has been examined by analysing the impact of different traffic volumes on four operators with different amounts of spectrum. The analysis has shown that when usage takes off the availability of spectrum becomes of significance as it enables operators with relatively more spectrum to avoid additional CapEx. Engineering value has been estimated it to be in the range of EUR 0.85 to EUR 3.40 per MHz pop compared to recent auctions in Europe and the USA which have resulted in prices from EUR 0.05 up to EUR 1.58 per MHz pop. This indicates that the marginal value of spectrum and the willingness to pay could deviate. It is in line with Bulow et al. (2009) which state that budget constraints and auction process set the price which could be considerable lower than the value that the operators ascribe to spectrum. The analysis of the engineering value of spectrum has demonstrated three aspects. Firstly, operators with relatively less spectrum have limitations on how to provide mobile broadband services and their long-term ability to compete with fixed broadband. Secondly, operators are relatively well prepared to meet the expected user demand for the next couple of years, but when usage levels increase radically it calls for network upgrades. Thirdly, the analysis demonstrate that operators that are able to obtain more spectrum than its competitors, and pursue network sharing and spectrum aggregation have a competitive advantage as it has the lowest production cost, highest margin and highest capacity when the usage takes off. The examination of the strategic value of spectrum has showed three aspects. Firstly, the level of offered data rates is pivotal for operators marketing of mobile broadband services. Even minor differences between operators offerings are used in the marketing to convince that our offer is the best. Proven differences in terms of bandwidth, use of aggregation and/or network sharing will certainly be used in the marketing. Secondly, in a market where operators have equal amounts of spectrum network sharing can be used

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to exploit spectrum aggregation in order to provide a more attractive offer compared competitors that do not share networks. Finally, a comparative approach needs to be employed when analysing the strategic value of spectrum. Unlike the engineering value, that quantitatively can be estimated by analysis of deployment and spectrum allocation options leading to measures of avoided costs, the strategic value is more difficult to quantify. The analysis implies that the key issue for operators is to have a have the same basic setting for network deployment, cooperation and spectrum allocation as the competitors, as it enable operators to compete on equal terms. Hence, there are two sides of the spectrum allocation through auctions. On the one hand, operators do not want to have less bandwidth than competitors and on the other hand acquiring of spectrum bands is a way to prevent competitors to get more. In conclusion, the analysis has strived to capture the marginal value of spectrum which includes the engineering and strategic value. Although, the willingness to pay for spectrum has been lower than the estimated engineering value the analysis of the strategic value is added to the marginal value. Although it is difficult to quantify the strategic value the analysis underscores that spectrum aggregation has the ability to fundamentally change the perception of different offers for mobile data. Altogether, the marginal value is set to increase when smartphones, tablet computers (like different pads) and mobile broadband are ubiquitously used as it will put unprecedented capacity pressure on mobile networks.

References
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Notes
1 http://www.ericsson.com/thecompany/press/releases/2010/03/1396928. An example of increased usage is that a 2-hour per day usage of an i-pad with a 2 Mbit/s connection adds up to a usage of 53 GB per month [(2*60/8)*120*30/1024]. This is an approximation of the market price. Telenor signed an agreement with Huawei in 2009 for the replacement of ~6000 base stations for 63 million Euro which is equivalent to ~10 thousand Euro per site. Source: http://www.telenor.com/en/news-and-media/pressreleases/2009/telenor-to-replace-its-infrastructure-for-mobile-services-in-norway. For all the bandwidths numbers we consider both downlink and uplink, i.e., 2*10, 2*20 etc. An excellent overview of the background, drivers and results of these projects can be found in Olsen, 2009.

3 4

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For simplicity we just mention the bandwidth used for one way communication, i.e., up link or downlink, to or from the base station. The total bandwidth is hence 2 times larger. 6 The average data traffic in mobile networks in Sweden was 2.6 GB per user and month during H1 2010, Source: PTS, Statistics Portal, http://www.statistik.pts.se/pts1h2010e/index.html. 7 Given that the majority of the investment for building a new site is passive infrastructure the annuity calculation uses a 20-year period which is in line with industry standard. The CapEx estimate for a site is in line with the LRIC model developed by Analysys commissioned by PTS, see link: http://www.pts.se/sv/Dokument/Remisser/2011/Samrad-om-kalkylmodell-ochprismetod-for-mobilnat/. 8 The Bredbandskollen service measures the connection speed at which a users web browser can send and receive data, as an indication of real connection speed, see also www.netnod.se/other/valueadd/bbk. 9 http://www.tele2.se/mobilt-bredband/bast-i-test.html 10 http://www.tele2.se/mobilt-bredband/4g.html 11 http://www.tre.se/Privat/Mobilt-bredband/DataSubscriptionListPage/