Network Sharing Study

30/09/2001

Northstream strongly believes in the benefits of network sharing. This study has tried to show that the benefits are large and measurable and much more significant than the 20-50% network cost savings would suggest. The downside risk of a reduction in competition on the other hand is much less certain. The evolution to 3G changes the competitive landscape in a way that makes it much harder for operators to collude. If it wasn’t for the high barriers to entry for the 3G market, there would be little reason to fear for a lack of competition. Network sharing precisely takes care of this problem by lowering the upfront investment costs.

Today the mobile industry is facing a big problem. Large investments in 3G networks and licenses have been made or are about to be made soon while revenues from 3G are still some time away. Network sharing may provide the cure the industry needs. The goal of network sharing is to reduce costs associated with setting up a 3G mobile network by sharing facilities between multiple mobile operators. There are many ways of network sharing ranging from sharing of sites and facilities to the creation of a single network. Operators and regulators face a difficult trade-off between cost reduction and network limitation. Far reaching network-sharing agreements will allow operators to save a lot of costs but too much sharing will reduce their ability to differentiate from their competitors.

Although network sharing is not new, there has been an increased awareness lately. Mounting concern of the viability of the business cases for 3G has driven this new interest. The situation is especially difficult for new entrants. Delays in 3G deployments, which have recently been indicated by the industry, will mean that revenues will appear later than expected and that the series of negative cash flows for the new 3G-network operator will be prolonged.

Network sharing can reduce both operating expenditure and capital investments. Savings of 20 to 50% are mentioned by industry analysts. These savings will be especially significant in the short term and might help to restore confidence in the industry. More importantly the savings are on fixed costs and will therefore dramatically reduce the operating leverage of the business. Lower costs will also reduce the operator’s need for external financing which in turn could reduce the financial leverage. The result will be a considerable reduction in the risk of the 3G business. This is especially important for new entrants with little or no revenues.

In the longer term the effect of network sharing will be less significant. Expenses related to subscriber acquisition and subscriber retention are expected to be the main cost items and operators will put more emphasis on differentiation and flexibility. Besides savings, other potential benefits are a faster roll-out, a better geographical coverage as well as reduced number of base station antennas which would help to reduce both health and environmental concerns.

This report will show that regulators face a difficult trade-off in regulating network sharing. Network sharing does not exclude competition and this paper will show how different ways of network sharing affect the ways that operators will compete. On the other hand too much network sharing might still reduce competition and lead to higher prices and/or reduced quality for consumers. If on the other hand the regulation of network sharing is too restricted, mobile operators will incur unnecessary expenses and operate below optimal efficiency. This will also lead to higher prices and/or reduced quality.

The trade-off between efficiency and competition is different for each country and even within a single country the optimum is different for different regions. The main driver for these differences is the expected traffic density and the barriers to entry. In countries with a low population density like Sweden it makes sense for operators to aim for a far-reaching network sharing agreement. In effect they would build a single network operator in sparsely populated areas where the traffic density is low. In a densely populated country like the UK site sharing is more appropriate. In a country with high entry barriers network sharing makes it easier for new entrants to be successful.

Allowing network sharing does not mean that the license rules have to be changed. On the contrary, all the benefits can be achieved within the rules and the risk of collusion will be reduced if the rules are strictly enforced. So it remains important for the regulator to watch over competition and license regulations.