[BWA Licensing Issues] [Saturday, May 31, 2008]

BWA Licensing Issues: Auction or Beauty Contest?

Hello everyone,

1. Country “A” plans to provide end to end Internet connectivity to its residents at
affordable cost. Though, it is as small as New York State, but the estimated population is almost
150 million. Country “A” is concerned that the Internet penetration rate is as low as 0.4 percent
till date. The country is connected to only one submarine Internet backbone, installed at a cost
about 94 million U.S. dollars back in 2006, but almost 90% of its capacity has remained un-
utilized, due mostly to its initial high tariff rates, lack of proper nationwide telecommunications
backbone infrastructure and its pricing model which failed to promise the ability to reach it’s
prospective subscribers in under-privileged areas. As usual, the state owned incumbent
phone/Internet company could not reach those unconnected as expected and they long ago
amortized the cost of their fewer copper network, as they hardly added new connections over
the years, and spent barely anything on expanding it. The e-commerce could not start, as you
have guessed it right - where is the connectivity?

2. Let’s get to some of the basic facts which will determine the Internet business cases
viable for this country. The country is very flat, I would say, it is the radio propagation heaven.
The population is heavily dense, which means you get to meet more than 2700 people in a
square mile. This will bring the thought in your mind that investment on infrastructure will have
its return over night. That’s why the local subsidiary of foreign cell phone companies is earning
their fortune here. The single radio BTS don’t even need to reach out to cover cell planning
area, because it gets filled up way before half of its expected coverage.

3. The per capita GDP is close to US$ 470 (as estimated in 2007) which will depict the
baseline of affordability of the common people. I would say, the lowest Internet connectivity
tariff may start at 4 USD, because that *really* can be termed as affordable for this country. I
understand Maintaining QoS of Internet at this price can be challenging, but the existing
broadband policy sets 128 kpbs as a minimum for time being. Here most of the existing (mostly
unlicensed) ISP’s don’t care about the contention ratio for the home users, because with the
existing higher bandwidth pricing, it is nearly impossible to provide good contention ration like
1:20 or 1:30 with 8-9 USD. The taxation on CPE (modems) is also arbitrarily high to get the cost
down.

4. Say, right now, the policy makers of this country really want to connect all the
unconnected like providing universal access services obligation. Let’s set the initial connection
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speed to 64 kpbs for some time to get the initial cost down. While there is very less
infrastructure on copper or fiber (FTTH and ADSL relies heavily on infrastructure) in this
country, Broadband Wireless Access (BWA) technologies can be life saver for reaching
everyone. The population density, the vibrant private sector with state support for ICT should
be able to deliver when it comes to connecting those unconnected. Here technologies like
WiMAX/Wi-Fi and HSPA can be good contenders for connecting everyone wirelessly. For most
countries, these BWA services are complementary to those offered by ADSL/cable and FTTH,
but here the scenario is different now. For reaching everyone, it (BWA) has to be the primary
stop gap solution before the real infrastructure comes up. We have to give it a time. With
regard to spectrum costs and charges, telecommunication experts sometimes opine that
charges paid for radio spectrum exceeding the costs for administrative spectrum management -
either caused by auctions or set in beauty contest’s spectrum fees - should be avoided as far as
possible and in any case should flow back into the telecommunications sector for the benefit of
the information society of a country. The attribution processes should be judged on merits how
the country is benefited, and not to consider this as an opportunity for governments to
withdraw additional money from this sector in order to reduce their budget deficit. For future
expansions, experts generally support the principle of “technology neutrality” as proposed by
other regulatory authorities for the optimum delivery of BWA services.

5. Now, let’s say, we have devised BWA services to be the best methodology to bridge the
digital divide quickly. Before opening up these BWA operations to private sector, the country
needs to figure out what is best way to reach its goal. That is why the authorization of
Telecommunications Services to the companies and right to use radio spectrum and licensing
rural and universal access services should be dealt differently. Other countries which has ADSL
and FTTH up and running might have the luxury to earn extra cash by auctioning, but we have
be little careful about that. Let me put something from ICT regulatory toolkit document ….

“There are significant differences in the authorization practices in force in different

countries. At one end of the spectrum are wide-open authorization regimes, where no
form of governmental approval is required to start a telecommunications service
business or to operate network facilities. At the other end are individual licensing
regimes with lengthy licence documents customized to the circumstances of a specific
service provider. In between are many forms of general authorization or “class licences”
that authorize and provide generally applicable regulatory conditions for classes of
telecommunications service providers.”

6. We hear loads of good thing about spectrum auctioning but it does not work when it
comes to using it for universal access services. But, it is true that as per the Telecommunication

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Regulatory Handbook, in least-cost subsidy auctions, a selection is made based on which

qualified applicant requires the lowest subsidy to provide a non-economic service. The services
authorized using a least-cost subsidy auction is generally subsidized as part of a country’s
universal access program. This country “A” is yet to work on that kind of program right at this
moment. Others would say, prices for mobile communications services in the United States
continue to drop despite the billions of dollars paid for licenses in FCC auctions. Those who
claim that bid prices will be passed through to consumers have yet to provide a sound
economic argument or to show any empirical evidence that this has occurred anywhere in the
world. It’s confusing, it is!

7. On the contrary, beauty contest seems to the most adequate method to allocate the
spectrum licenses because the regulatory authority is in a position to design the comparable
criteria around the country’s need. It (merit based comparative evaluation approach) has its
downside for not being that transparent like auction. Most of the comparative evaluations
require the applicants to make the best use of the limited resources associated with the license
to serve the public. That saves the hidden cost passed on to the subscribers. It also relies in part
on quantitative measures, such as the time it might take to cover the whole area (coverage
obligation), the number of years of operational experience. Others rely on more qualitative
(and thus subjective) criteria, such as the management skill. But, it brings out the applicants
technical competence, experience, and cost efficiency. Some regulators might even put specific
criteria like the lowest tariff for Internet connectivity to the home users. This requires the
applicants to review their business case to offer the lowest tariff based on its ROI. This exercise
makes the prospective service provider to open up its business case to the evaluator. The
evaluation committee might have to get down calculating the cost per Hz per population, which
seems a great idea to minimize the cost as this will be passed on to the subscribers. But, its
success largely depends on building a smart merit based comparative evaluation metrics
(criteria) with some pre-set list of selection criteria with the distribution of weight-age. Those
can be listed under some broad head like, Business Plan, Telecommunications Sector
Experience and Financial Strength and Stability and Network roll-out obligation.

8. Here’s how I thought of building one from some of the regulatory consultation papers …

Merit Based Evaluation on Defined Performance Metrics

1. Past Performance (should the country consider licensing from existing

operators).

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a) Service Roll-out and Coverage

aa) Coverage Provided (a. Number of transmitters, b. Number of base station

sites and their demographic distribution, c. Percentage of Land mass and
Population receiving coverage from Applicant’s network, d. throughput)

bb) Spectrum Efficiency (a. Earlngs per MHz of spectrum allocated, b. Quality
of Service based of allocated spectrum, spectrum reuse schemes)

b) Delivered Telephony Penetration

aa) Number of subscribers served, Subscriber Growth, Subscribers per MHz

of spectrum.

bb) Urban Penetration (Contribution to penetration over 5 Year period,

Spectral efficiency in terms of cell planning in dense area)

cc) Rural Penetration (Contribution to penetration over 5 year period,

aggressive pricing scheme to reach the under privileged area)

c) Investment

aa) Financial Standing (Audited financial statements for the past 3 years to
assess operational track record)

bb) Investment Record (Annual investments on network and non network

capital assets over the last 5 years)

d) Regulatory Compliance

aa) Compliance Confirmation (Minor and major violations if any, show causes
also to be considered)

e) Technology Development

aa) New Services (Number of new services introduced over last 5 years)

bb) New Technologies (Pioneering technologies introduced over the last 5

years)

cc) Local R&D (Locally developed products and the contents)

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dd) Technology (development contribution to ICT sector partnerships

established to promote/assist local ICT sector)

f) Quality of Service

aa) Network Performance, Fault Incidence and Repair, Customer service

complain handling, throughput as promised

bb) Ability to provide broadband service with the expected contention ratio

9. Now, when inviting new players it to this BWA regime, we need to evaluate their
business case to evaluate their capability to roll-out throughout the country.

a. The Business Plan

1) Pricing of services, the introduction of services and distribution plans.

2) Local employment, skills transfer and training.

3) The involvement of local businesses either as shareholders, partners or as

suppliers of goods and services leading to reinvestment in the Country “A”s
economy, and minimizing the exportation of economic benefits.

4) Geographical coverage and coverage in terms of population, of network

and services, and rate of roll out. (Number of transmitters and roll out plan,
number of base station sites and their demographic distribution along with
implementation time-line, i.e. service launch time-line of pilot service, full
commercial service, network deployment plan etc.)

5) Promotion of applications and content services development,

6) Promotion of Human Resource Development such as job creation,

knowledge development etc.

7) Range and quality in the BWA services provided by the Applicant.

8) Evidence of primary and secondary market research supporting forecasts

and financial plans.

9) Financial aspects related to the planned BWA network, particularly

evidence of the necessary funding and commitment to funding the business.

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10) Experience and track record under comparable conditions, and proven
ability and capability to deliver commitments made in competitive markets.

11) The overall soundness and quality of the business plan.

b. Miscellaneous Obligations

a) Country “A” would love to have proposals from the applicant to provide
free basic 256 kbps wireless broadband services to all the public schools for the
first year. This enables all the schools to be connected to Internet. It makes a CSR
(corporate social responsibility) case for them.

b) Valued users to be provided the enhanced mobility services including

voice-over-IP, video conferencing, online gaming, location-based services etc.

c) Right to share its own infrastructure and should not invest on newer
infrastructure when competitors have that already.

9. Some experts says that new operator should not be barred from providing some
services like voice when home broadband phone can never take away Cell Phone’s position, at
least for next 10 years here in this country “A”. Voice is still a prime service here in this country.
This can be done in order to allow new operators to join the market simply without constraints
until a SMP state is reached. In this later case, some constrains might be imposed to guarantee
that the free competition is in conformity with the free competition regulatory framework.
Also, required modification in regulations to make spectrum available and harmonize use of
spectrum across international boundaries can only pave its way to connect the unconnected.

10. Please provide me some feedback on making a great Merit Based Evaluation form on
defined performance metrics. What more should I include to make it somehow full proof to get
the widest coverage of Internet with the lowest tariff?

[Consultation papers from NTRA, OFCOM, TRCSL, Maravedis, TRA (Bahrain), CSK, OECD, OFTA,
Industry Canada, MCA, ECC, GSA, HTLL, IDA, ETNO, IEEE 802 LMSC, MPT and NTA were really
helpful to make these metrics]

Sincerely Yours,

Raqueeb Hassan ©

Saturday, May 31, 2008

6 No organizational viewpoints are reflected: Academic discussion