Assessment of the cost of providing wholesale roaming services and mobile voice termination in the EU/EEA countries - SMART 2017/0091 ...

 
Assessment of the cost of providing wholesale roaming services and mobile voice termination in the EU/EEA countries - SMART 2017/0091 ...
Assessment of the cost of providing
wholesale roaming services and mobile
voice termination in the EU/EEA
countries – SMART 2017/0091

Workshop 1

10 April 2018

This document was prepared by Axon Consulting for the use of the client to whom it is addressed.
No part of it may be copied or made available in any way to third parties without our prior written
consent.
Assessment of the cost of providing wholesale roaming services and mobile voice termination in the EU/EEA countries - SMART 2017/0091 ...
Introduction

   Commission study: Axon Partners Group Consulting (hereinafter, ‘Axon’) has been commissioned the
    study “Assessment of the cost of providing wholesale roaming services in the EU/EEA countries – SMART
    2017/0091” (the ‘Project’) by the European Commission (hereinafter, ‘EC’).

   Objective of the study: Assess the cost of providing wholesale roaming mobile services in the EU/EEA
    countries. In addition, in the event that co-legislators request the Commission to set a single mobile voice
    termination rate across the EEA, the Commission may use the outcome of the cost model to determine the
    costs of providing mobile voice call termination services.

   Purpose of Workshop: Discuss improvements to the previous cost study (SMART 2015/0006) and the
    general methodological approach with stakeholders.

   Written comments: Comments can be provided to the EC in written (through NRAs) by 20th April.

                                                       CONFIDENTIAL                                                2
Agenda

    Time                        Session                                           Description

                                                                Presentation of objectives and timetable (Axon)
09:30 - 10:45   Project’s objectives and timetable
                                                                Q&A session
                                               Coffee Break

                General specifications of the model and         Presentation of the proposed approach (Axon)
11:00 - 12:00
                methodological approach                         Q&A session

                Methodological issues: Volume forecasts,        Presentation of the proposed approach (Axon)
12:00 - 13:15   allocation of joint and common costs and
                economic depreciation                           Q&A session

                                               Lunch Break

                Methodological issues: Seasonality,             Presentation of the proposed approach (Axon)
14:15 - 15:30
                single-RAN modelling and VoLTE                  Q&A session
                                               Coffee Break

                Methodological issues: Spectrum-related         Presentation of the proposed approach (Axon)
15:45 - 17:00
                costs and other issues                          Q&A session

17:00 – 17:30 Next steps & Closure                              Presentation by the EC

                                                     CONFIDENTIAL                                                  3
Contents

   1. About Axon Consulting

   2. Project plan

   3. Model specifications and methodological approach

   4. Methodological issues

                              CONFIDENTIAL               4
Contents

   1. About Axon Consulting

   2. Project plan

   3. Model specifications and methodological approach

   4. Methodological issues

                              CONFIDENTIAL               5
About Axon Consulting

                                    International footprint and reference clients
   Consulting firm providing
    services to an international
    client base in the broad
    technology sector.

   Consulting arm of Axon                                          Madrid           Istanbul
                                                                     (HQ)
                                                           Miami
    Partners Group                                                                                  Delhi
                                           CDMX
    (www.axonpartnersgroup.com).                  Bogotá

   Operates offices in Madrid
    (HQ), Bogota, Mexico, Miami,
    Istanbul and Delhi.                                                   Cost modelling for telecoms

                                                                          Other projects
   Over the last few years, Axon
    Consulting has completed 90     Examples of clients for costing projects:

                                        Telecom operators: Telefonica Group, Vodafone, Telecom Italia, STC Group, Etisalat
    cost modelling assignments in   

                                        Group, Turkcell Group, Maroc Telecoms
    the Telco sector in around 30
                                       Regulatory authorities: European Commission, BEREC, BIPT (Belgium), AGCOM (Italy),
    countries.                          CNMC (Spain), ANACOM (Portugal), EETT (Greece), OCECPR (Cyprus), CITC (KSA), TRC
                                        (Jordan), TRA (Oman), TRA (UAE), CRA (Qatar), IFETEL (Mexico), CRC (Colombia),
                                        SUTEL (Costa Rica), ENACOM (Argentina).

                                                   CONFIDENTIAL                                                              6
Axon Consulting has appointed a highly-qualified team to carry
out this Project

   The team combines extensive
                                     Senior                    Project
    knowledge of (i) telecoms        Advisor                   Director           PROJECT
                                                                                DIRECTION
    costing, regulatory accounting   Dimitri Kallinis          Jorge Martínez
    and economics (ii) cost
    modelling (iii) review of
    regulated tariffs and anti-
                                                               Project            PROJECT
    competitive pricing, and (iv)                              Manager
                                                                                    MGMT
    telecoms regulation.                                       Alfons Oliver

   The team has a good grasp of
    the key characteristics of the                             Senior
                                                               Modeller           PROJECT
    EC’s previous cost study and
                                                               Gonzalo Arranz   EXECUTION
    the processes and discussions
    that were hold.

                                                               Consultants

                                                CONFIDENTIAL                            7
Team members' profiles

        Dimitri Kallinis, Managing Partner at Axon

        Dimitri has +15 years’ experience in telecoms regulation and has directed +25 projects related
        with the regulation of wholesale charges as well as several other projects regarding policy and
        regulation. Dimitri has worked for +10 EU/EEA NRAs in telecom-related projects.

        Jorge Martínez, Principal at Axon

        Jorge has 10 years of experience in telecoms regulation and is Axon’s leader of the cost modelling
        practice. Jorge has participated in +30 Bottom-Up cost modelling projects all over the world,
        including several on behalf of European NRAs.

        Alfons Oliver, Senior Manager at Axon

        Alfons has 8 years of experience in telecoms regulation and cost modelling and is co-leading the
        cost modelling practice together with Jorge. Alfons has participated in +20 Bottom-Up cost
        modelling projects worldwide, including several on behalf of European NRAs.

        Gonzalo Arranz, Senior Associate at Axon

        Gonzalo has 3 years of experience in cost modelling and is one of Axon’s technical experts.
        Gonzalo has participated in +5 Bottom-Up cost modelling projects worldwide.

                                              CONFIDENTIAL                                              8
Contents

   1. About Axon Consulting

   2. Project plan

   3. Model specifications and methodological approach

   4. Methodological issues

                              CONFIDENTIAL               9
The Project aims at achieving 5 key objectives as set by the EC

 Main objectives                                 Key tasks involved

            Objective 1:
                                                    Propose changes to further improve cost model
            Propose changes to further
            improve the cost study                  Workshop 1 to consult changes with stakeholders

            Objective 2:                            Implement changes to cost study
            Implement the agreed changes            Prepare information requests and collect data
            and updates to the cost study
                                                    Populate and calibrate model to deliver outputs

                                                    Consultation of the cost study with NRAs and BEREC
            Objective 3:
            Validate the cost study and its         Workshop 2 on the cost study
            output with NRAs and BEREC              Finalisation of the model & publication of final report

            Objective 4:                            Provide assistance to the EC and BEREC in using the
            Provide technical assistance on
                                                     cost study and its outputs.
            study for EC’s biennial report

            Objective 5:
                                                    (Upon request) Answer questions/requests from the
            Provide technical assistance to
            EC during legislative process            European Parliament and the Council

                                              CONFIDENTIAL                                                     10
The Project will run until September 2020, while the updated cost
model is expected to be finalised by June 2019

                                                    2018                              2019      2020
      Project Activities and Tasks                                                           09/19 -
                                       03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08
                                                                                              09/20
Objective 1. Propose changes to
improve the existing cost study
Objective 2. Implement agreed
changes and update the cost study
Objective 3. Validate the cost study
and its outputs with NRAs and BEREC
Objective 4. Technical assistance on
the cost study - Biennial report
Objective 5. Technical assistance on
the cost study - Legislative process

   The project will run for approximately 22 months (until December 2019), plus another 9 months (until
    September 2020) during which Axon will provide continuous support to the EC in regulatory and legislative
    matters related to the Project.

                                                     CONFIDENTIAL                                          11
IMPORTANT: NRAs will play a major role in coordinating with their
MNOs and communicating with the EC throughout the Project

   EC/Axon will not interact directly with national operators

      NRAs will be responsible for engaging with their respective national operators. Consequently, the NRA
      will need to control/review/clarify all the data/comments provided to them by operators.

   A dedicated Steering Committee (SC) including representatives of NRAs and BEREC

      The SC will be in direct contact with the EC/Axon throughout the project to provide guidance on the
      course of work and ensure that the views of NRAs, BEREC and operators are duly taken into account.

   NRAs should collect any necessary data/comments/information from operators before the
    deadlines, in order to submit it to the EC before the official project deadlines

      NRAs should define their own internal deadlines with operators

      NRAs should coordinate with their MNOs to ensure quality, completeness and timely delivery of data

   All EU/EEA NRAs will be fully involved in the development of the new cost model

                                                     CONFIDENTIAL                                             12
We expect intense collaboration with NRAs (and indirectly, with
operators) throughout the execution of Objectives 1 to 3 (1/2)

                                                                                                  Main dates and intended
     Action                                       Description
                                                                                                    deadlines for NRAs

                ► Workshop 1 (this workshop) presents the main methodological aspects of
Workshop 1                                                                                                10 April
                  the cost model and our suggested approach to deal with them.

Comments on     ► NRAs (and operators through the NRAs) will be able to provide comments
                                                                                                     11 April – 20 April
Workshop 1        to the EC on the contents of the workshop before 20 April.

                ► EC/Axon will share a draft of the Data Request template with NRAs on 2
Comments on
                  May.
Data Request                                                                                           2 May – 9 May
                ► NRAs (and operators through NRAs) will be able to provide comments to
templates
                  the EC on the contents/format of the data request template before 9 May.

                ► Axon/EC will circulate the final data request to NRAs on 16 May.
                ► NRAs will be responsible for data gathering, but will probably require the
                  collaboration of MNOs in order to compile all the required information by
                  the EC.
Delivery and    ► Similarly to other activities within this cost study, there will be no direct
completion of     interaction between the EC and MNOs.                                                16 May – 2 July
Data Requests   ► NRAs should ensure that any information provided by national MNOs is
                  crosschecked and validated before submission to the EC.
                ► The deadline for NRAs to submit the requested information is 2 July. NRAs
                  should set an internal deadline with their national operators before that
                  date.

                                                          CONFIDENTIAL                                                     13
We expect intense collaboration with NRAs (and indirectly, with
operators) throughout the execution of Objectives 1 to 3 (2/2)

                                                                                                  Main dates and intended
        Action                                        Description
                                                                                                    deadlines for NRAs

                     ► Apart from the cost model and associated documentation, stakeholders
                       will receive a set of questions on the main methodological aspects.                4 weeks
1st consultation
                     ► NRAs (and operators through their NRAs) will be able to submit comments     (29 October 2018 – 23
process
                       to the EC during this process but no later than the agreed deadline            November 2018)
                       (expected 23 November 2018).

                     ► EC/Axon will review the comments from NRAs/operators and amend the
Outcomes of the        cost model to address these.                                                23 November 2018 - 15
1st   consultation   ► EC/Axon will submit a new version for public consultation along with the        February 2019
                       corresponding documentation (expected 15 February 2019).
                                                                                                          4 weeks
2nd consultation     ► NRAs (and operators through the NRAs) will be able to submit comments
                                                                                                   (18 February 2019 – 15
process                on the amended cost model during this second consultation process.
                                                                                                        March 2019)

Outcomes of the      ► EC/Axon will review the comments from NRAs/operators during the 2nd
                                                                                                  15 March 2019 – May 2019
2nd consultation       consultation and amend the cost model to address these

                     ► EC/Axon will provide the justifications for including/excluding specific
                       amendments in the cost model during Workshop 2 (expected in May 2019)             May 2019
Workshop 2
                     ► NRAs (and operators through the NRAs) will be able to provide final        10 days after Workshop 2
                       comments on the contents of Workshop 2 (10 days after Workshop)
Delivery of final
                     ► Delivery of the final cost model after the consultation processes.                June 2019
model

                                                             CONFIDENTIAL                                                  14
Contents

   1. About Axon Consulting

   2. Project plan

   3. Model specifications and methodological approach

   4. Methodological issues

                              CONFIDENTIAL               15
To achieve EC’s objectives, a BULRIC model will be developed,
providing insights on present/future economics and sensitivities

           To understand the economics of mobile networks in EU/EEA countries, there is a need to
            implement fit-for-purpose cost models that provide a proper representation of service
            provisioning costs by efficient operators.

           Bottom-Up cost models are the most suitable solution to reach that objective, as they are
            able to calculate cost forecasts, represent theoretical operators, etc. (which is not the case
            in Top-Down models). This is in line with the approach adopted by NRAs for similar studies.

           This approach is also aligned with the previous cost study (SMART 2015/0006).
            Therefore, we will take into account the relevant insights and experience gained through
            that process. The extended time-frame available this time will allow us to increment the
            detail of the assessment.

           The model will be an excel file with the technical and economic algorithms to calculate
            service provision costs in all EU/EEA states.

                                                CONFIDENTIAL                                             16
The model will be based on Axon’s standard prototype,
incorporating usual functionalities of (single) NRAs' cost models

   The model will be built on Axon’s prototype, which has        Axon’s BU-LRIC model Architecture

    been used in >20 assignments with single NRAs,
                                                                                                                     Results: Network costs by service
    allowing us to reach similar functionalities to those used
    by NRAs.
                                                                                                                     Calculation of Joint and Common costs

                                                                        Geographical Data, Coverage and Spectrum
   Axon’s cost model has been subject to public                                                                              LRIC Calculation Module

    consultations and public scrutiny by NRAs/operators.                                                                     Cost Annualization Module

                                                                                                                         Resources Costing (CAPEX & OPEX)          Bottom-Up
                                                                                                                                                                      LRIC
   The overall architecture of the model ensures its:                                                                      DIMENSIONING MODULE                      Model
                                                                                                                                                                  architecture
                                                                                                                   Geotype Dependent        Geotype Independent
    • Versatility: Including dynamic reporting capabilities.
                                                                                                                   Sites and Backhaul
                                                                                                                      Dimensioning
                                                                                                                                                 Core Network
    • Transparency: Easily traceable methodology.                                                                                                      &
                                                                                                                                                  Backbone
                                                                                                                   RAN     RAN   RAN
                                                                                                                   GSM    UMTS   LTE
    • Flexibility: Parameterisation eases modifications.

                                                                                                                           DIMENSIONING DRIVERS
   The final level of detail will depend on the quality and
    granularity of the information provided, which may                                                                                  Demand

    require limited simplifications in some cases.

                                                         CONFIDENTIAL                                                                                                 17
Axon’s BULRIC model already integrates relevant additional
functionalities compared with previous study

   Axon’s standard model already               Main characteristics between Axon’s model and previous study

    includes a number of elements that are                                   Axon’s model     Previous Stud.
    particularly relevant for this study (on
    the right).
                                                BU-LRIC approach                                   
                                                2G, 3G and 4G access
   The flexibility incorporated in Axon’s      networks                                           
    model allows a smooth adaptation of         Implementation of
                                                economic depreciation                              
    our model to the requirements of the
                                                Services results for
    EC and the applicable methodology.
                                                multiple years                                     
    The high level of modularity built in the   Detailed dimensioning of

                                                Single-RAN platforms                               
    model will allow easy development
                                                Detailed treatment of
    of any required add-ons.                    seasonality and BH                                 
                                                Detailed analysis of
   Transparency and traceability of
                                                spectrum parameters                                
    the inputs ensures a smooth and fast
    review of the model, which will become      Voice over LTE                                     
    key in the consultation processes.          Generation of tailored
                                                reports                                            

                                                     CONFIDENTIAL                                         18
The model is well structured in different functional blocks,
designed to ease the understanding of the calculation flow

                                                           Overview of a typical model’s map
                                                                       Model Map
The model will be managed through a Control Panel, which
introduces key options and execution/reporting functionalities

     Control Panel

    FINANCE PANEL

                               WACC                             10.00%
                                                              input.wacc                          RUN
                              Currency                            EUR                             This macro executes the model, following
                                                          selection.currency
    SCENARIOS PANEL
                                                                                                             RUN
                         Demand Scenario                       Base Case
                                                           selection.demand
                         Spectrum Scenario                     Base Case
                                                          selection.spectrum                      PRODUCE REPORT
                         Coverage Scenario                     Base Case                          This macro generates the report
                                                          selection.coverage
                      Year for specific analysis                  2018                                  PRODUCE
                                                   selection.yearforspecificanalysis
                    Consideration of Seasonality                   YES
                                                                                                         REPORT
                                                         selection.seasonality
                       Consideration of VoLTE                      YES
                                                            selection.VoLTE
                         Country selection                         All
                                                           selection.country

    RUNNING STATUS

                      Country under execution                   Cyprus

  Note: The RUN MACRO is just used to control the calculation flow (i.e. to ensure that all worksheets are calculated
  from left to right). No calculations are performed through the model’s MACRO

                                                                                       CONFIDENTIAL                                          20
The model adopts a systematic approach to deal with the inputs,
allowing a better data management and error minimisation

   Each type of input (e.g. demand, coverage, spectrum) is introduced in a specific worksheet. The
    model only includes inputs in a specific block of worksheets and they are never mixed up with calculations.
    This approach allows an easy identification of the inputs considered and prevents potential mistakes that
    could arise if someone forgets to update a partly-hidden input.

   All inputs are thoroughly documented in terms of source, date in which the input has been
    created/updated, detailed description of what it refers to, etc.
                 p
               Source type    Operators
                Input date    10/03/2018
               Update date    22/03/2018
                              The table below includes demand traffic per service for the period 2015-2022. The number of subscribers is
               Description    presented as a yearly average, while traffic for the remaining services is presented as yearly total. Projections are
                              included for the 2018-2022 period.

   Different scenarios are defined in order to accommodate the inputs of the different countries.

                                            Scenario 1                Austria
                                            Scenario 2                Belgium
                                            Scenario 3                Croatia

                                                                    CONFIDENTIAL                                                                      21
The BULRIC model will be accompanied by an extensive technical
manual describing the key network dimensioning algorithms

Illustrative dimensioning worksheet for 4G RAN                                                                                                                                                                                                                                                                                                                                                                                                                                                             Underlying algorithm explained in the manual
              Copper network dimensioning for the Selected Geotype

  1000 connections                                    %                            6%
                                                                                                             blank                                          %                              -

                                                                       Average distance from NTP (Network Termination Point) to FDP (Final Drop P        metres                          90

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         covered / Maximum Area per Cell
                                                                                             Percentage of lead-ins that are aerial                         %                           60%

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Sites Needed=
                                                                                          Percentage of secondary cable that is aerial                      %                           50%
                                                                                           Percentage of primary cable that is aerial                       %                            1%

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      LOW
                                                                                       Assumed separation of poles for uplift calculation                metres                         125
                                                                                  Assumed maximum aerial cable sag given the pole separation             metres                           2

                                                                                         Average number of premises per FDP - Single                        #                           1,00
                                                                                    Average number of premises per FDP - Apartment blocks                   #                           4,00
                                                                                                             blank                                          #                              -

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         (Spectrum availability is checked)
                                                                                                             blank                                          #                              -

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Population Centers
                                                                                                             blank                                          #                              -
                                                                                                             blank                                          #                              -
                                                                                                             blank                                          #                              -
                                                                                                             blank                                          #                              -
                                                                                                             blank                                          #                              -
                                                                                                             blank                                          #                              -

                                                              1                             Percentage of premises that are Single                          %                           64%
                                                              2                        Percentage of premises that are Apartment blocks                     %                           36%
                                                              3                                              blank                                          %                              -
                                                              4                                              blank                                          %                              -

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Sites Needed MEDIUM= Area                                   (specially for rural
                                                              5                                              blank                                          %                              -
                                                              6                                              blank                                          %                              -
                                                              7                                              blank                                          %                              -
                                                              8                                              blank                                          %                              -
                                                              9                                              blank                                          %                              -
                                                              10                                             blank                                          %                              -

                                                                                             Average number of premises per FDP

                                                                                    Aggregation of copper cables enabled? (from FDP to DP)
                                                                                    Aggregation of copper cables enabled? (from DP to MDF)
                                                                                                                                                            #

                                                                                                                                                            #
                                                                                                                                                            #
                                                                                                                                                                                        2,09

                                                                                                                                                                                        Yes
                                                                                                                                                                                        Yes
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           to be covered / Maximum Area                                     areas)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      per Cell
                                                                                                Average number of lines per DP                          # of lines                   329,08

                                                                                      Maximum number of connections handled by an MDF               # of connections                  4.000

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      MEDIUM
                                                                                                     Aerial distance uplift                                 %                         0,07%

                                                                                              Maximum distance of the local loop                           Km                           5,00
                                                                                        Adjustment factor for the copper network quality                    #                       100,00%
                                                                                                    Adjustment road factor                                  #                           1,30

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         (Spectrum availability is checked)
                                                                                                        Geotype's area                                    km2                         385,23
                                                                                                   Total area of the country                              km2                       3.174,69

                                                                                               Number of samples in the geotype                             #                          4,00
                                                                                          Number of population centres in the geotype                       #                         15,00

                                                                                         Can the geotype be covered by municipailty?                        #                            No

              Area covered by a MDF
                                                                                                      Number of premises                                  Units
                                                                                              Maximum distance of the local loop                           km                          3,85

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Sites Needed HIGH = Area to
                                                                                                    Area covered by an MDF                                km2                         46,47

              Distribution of Daisy chain links by size

                                                                                                                                                                                                                                                            SINGLE HOUSE                                                                                    APARTMENT BLOCKS

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          be covered / Maximum Area per
                                                                                                                                                                                                                                                                                                   Resulting                                                                                           Resulting
                                                                                                                                                                           Average                Cable                       Average nº                                          Number of                                       Average nº                                          Number of
                                                                            From FDP (Final Drop Point) to PDP (Primary Distrb. Point):                                                                                                        Cable size        Cable size                         Average                                        Cable size        Cable size                         Average
                                                                                                                                                                         distance per          modularity                      of copper                                            cables                                         of copper                                            cables
                                                                            Aggregation links                                                                                                                                                  employed           required                        distance per                                     employed           required                        distance per
                                                                                                                                                                        FDP (metres)            enabled?                        cables                                             required                                         cables                                             required
                                                                                                                                                                                                                                                                                                      FDP                                                                                                 FDP
                                                              1                                      Aggregation of 1 link                                                             1,69       YES                             1,00             2                   2               1              1,69                            4,00             5                   5               1              1,69

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Cell
                                                              2                                      Aggregation of 2 links                                                            2,12       YES                             2,00             5                   5               1              2,12                            8,00             10                 10               1              2,12
                                                              3                                      Aggregation of 3 links                                                            2,58       YES                             3,00             5                   5               1              2,58                           12,00             20                 20               1              2,58
                                                              4                                      Aggregation of 4 links                                                            2,77       YES                             4,00             5                   5               1              2,77                           16,00             20                 20               1              2,77
                                                              5                                      Aggregation of 5 links                                                            2,24       YES                             5,00             10                 10               1              2,24                           20,00             30                 30               1              2,24
                                                              6                                      Aggregation of 6 links                                                            1,62       YES                             6,00             10                 10               1              1,62                           24,00             30                 30               1              1,62
                                                              7                                      Aggregation of 7 links                                                            0,89       YES                             7,00             10                 10               1              0,89                           28,00             50                 50               1              0,89

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       HIGH
                                                              8                                      Aggregation of 8 links                                                            0,52       YES                             8,00             10                 10               1              0,52                           32,00             50                 50               1              0,52
                                                              9                                      Aggregation of 9 links                                                            0,27       YES                             9,00             10                 10               1              0,27                           36,00             50                 50               1              0,27
                                                              10                                    Aggregation of 10 links                                                            0,13       YES                            10,00             20                 20               1              0,13                           40,00             50                 50               1              0,13
                                                              11                               Aggregation of more than 10 links                                                      17,43       YES                            11,00             20                 20               1             17,43                           44,00             50                 50               1             17,43
                                                                                                                                                                                                                                                                copper.cablesizecopper.cablesrequired.FDPtoDP.singlehouse.geo1                                      copper.cablesizecopper.cablesrequired.FDPtoDP.aparmentblocks.geo1

              Support calculations
                                                                                                     Supporting calculations

                                                                                                      Buildings coverage
                                                                                                                                                          Units

                                                                                                                                                            %                         100%              100%          100%            100%              100%              100%            100%             100%           100%            100%              100%              100%            100%             100%         100%             100%         100%         100%         100%         10
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         (Spectrum availability is checked)                            Inputs
                                                                                                    Area covered in geotype                               km2                           385              385           385               385             385               385             385              385            385               385             385               385             385              385          385               385          385          385          385          3

                                                                                               Number of samples to be covered                              #                             4                4             4                 4                4                 4               4               4              4                4                 4                 4               4               4            4                4            4            4            4
                                                                                            Number of MDFs required for coverage                       # of MDFs                          9                9             9                 9                9                 9               9               9              9                9                 9                 9               9               9            9                9            9            9            9

                                                                                               Percentage of active connections                             %                           28%              28%           27%               27%             27%               27%                -                -              -                -                -                 -               -               -            -                 -            -            -            -

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Outputs
                                                                                          Percentage of FDPs that need to be deployed                       %                           74%              74%           74%               73%             73%               73%                -                -              -                -                -                 -               -               -            -                 -            -            -            -

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Minimum sites for
                                                                                             Number of MDFs required for capacity                      # of MDFs                        367              371           375               379             383               387             391              395            399               403             407               410             414                -            -                 -            -            -            -

                                                                                                       Number of MDFs                                  # of MDFs                        367               371           375             379               383               387             391              395            399             403               407               410             414               9            9                9            9            9            9
                                                                                                        Number of DPs                                   # of DPs                      4.094             4.140         4.186           4.232             4.277             4.321           4.365            4.409          4.451           4.494             4.535             4.577           4.617               -            -                -            -            -            -

              Calculation of copper cable average length between DP and MDF

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Coverage
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Calculations
                                                                                    Ratio between maximum nodes and nodes per coverage                                        0,02

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       LOW/MEDIUM/HIGH
                                                                                                                                                                                                                                                                                                   Resulting
                                                                                                                                                                           Average                Cable                       Average nº                                          Number of
                                                                            From DP (Distribution Point) to MDF (Main Distribution Frame)                                                                                                      Cable size        Cable size                         Average
                                                                                                                                                                         distance per          modularity                      of copper                                            cables
                                                                            Aggregation links                                                                                                                                                  employed           required                        distance per
                                                                                                                                                                         DP (metres)            enabled?                        cables                                             required
                                                                                                                                                                                                                                                                                                      FDP
                                                              1                                      Aggregation of 1 link                                                     4,39             YES                               329             400                400               1              4,39
                                                              2                                      Aggregation of 2 links                                                    5,65             YES                               658             400                400               2             11,30
                                                              3                                      Aggregation of 3 links                                                   12,63             YES                               987             400                400               3             37,90
                                                              4                                      Aggregation of 4 links                                                    5,79             YES                              1.316            400                400               4             23,17
                                                              5                                      Aggregation of 5 links                                                   10,52             YES                              1.645            400                400               5             52,62
                                                              6                                      Aggregation of 6 links                                                    8,55             YES                              1.974            400                400               5             42,76
                                                              7                                      Aggregation of 7 links                                                    7,58             YES                              2.304            400                400               6             45,50
                                                              8                                      Aggregation of 8 links                                                    5,84             YES                              2.633            400                400               7             40,90
                                                              9                                      Aggregation of 9 links                                                    6,30             YES                              2.962            400                400               8             50,41
                                                              10                                    Aggregation of 10 links                                                    9,76             YES                              3.291            400                400               9             87,85
                                                              11                               Aggregation of more than 10 links                                              46,72             YES                              3.620            400                400              10            467,23
                                                                                                                                                                        copper.distanceperDP.geo1                                                               copper.cablesizecopper.cablesrequired.DPtoMDF.geo1
              Calculation of copper cable lenght

                                                                            STEP 1. BURIED COPPER CABLE

                                                                            STEP 1.1. BURIED - FROM NTP TO FDP

                                                                                        Lead-in buried copper cable from NTP to FDP: 1                   metres                14.786.177        14.786.177     14.786.177      14.786.177       14.786.177         14.786.177                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                        Lead-in buried copper cable from NTP to FDP: 2                   metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                        Lead-in buried copper cable from NTP to FDP: 5                   metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                        Lead-in buried copper cable from NTP to FDP: 10                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                        Lead-in buried copper cable from NTP to FDP: 20                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                        Lead-in buried copper cable from NTP to FDP: 30                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                        Lead-in buried copper cable from NTP to FDP: 50                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Lead-in buried copper cable from NTP to FDP: 100                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Lead-in buried copper cable from NTP to FDP: 200                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Lead-in buried copper cable from NTP to FDP: 400                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -

                                                                            STEP 1.2. BURIED - FROM FDP TO DP

                                                                                       Secondary buried copper cable from FDP to DP: 1                   metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Secondary buried copper cable from FDP to DP: 2                   metres                   580.300           585.927        591.517         597.057          602.549            607.993                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Secondary buried copper cable from FDP to DP: 5                   metres                 2.651.282         2.676.989      2.702.526       2.727.839        2.752.930          2.777.804                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Secondary buried copper cable from FDP to DP: 10                  metres                 2.008.492         2.027.967      2.047.313       2.066.489        2.085.497          2.104.340                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Secondary buried copper cable from FDP to DP: 20                  metres                 6.298.653         6.359.725      6.420.395       6.480.531        6.540.139          6.599.232                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Secondary buried copper cable from FDP to DP: 30                  metres                   190.415           192.262        194.096         195.914          197.716            199.502                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                       Secondary buried copper cable from FDP to DP: 50                  metres                   949.133           958.336        967.478         976.540          985.523            994.427                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                      Secondary buried copper cable from FDP to DP: 100                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                      Secondary buried copper cable from FDP to DP: 200                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -
                                                                                      Secondary buried copper cable from FDP to DP: 400                  metres                         -                 -              -               -                -                  -                -                -              -                -                -                 -               -               -            -                 -            -            -            -

                                                                            STEP 1.3. BURIED - FROM DP TO MDF

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       CONFIDENTIAL                                                                                          22
The model is equipped with a reporting functionality that allows a
detailed and graphical reading of the results
Data traffic costs per year and network section                    2020 access sites’ costs per type

         7                                                                      1

                                                                              0,9
         6
                                                                              0,8
         5                                                                    0,7

         4                                                                    0,6
EUR/GB

                                                                    EUR/GB
                                                                              0,5
         3
                                                                              0,4

         2                                                                    0,3

                                                                              0,2
         1
                                                                              0,1
         0                                                                      0
                 2016      2017       2018    2019      2020                                     2020
             Access sites (passive)      Access sites (active)               Twr sites - Urban       Twr sites - Suburban
             Backhaul links              Backbone links                      Twr sites - Rural       Roof sites - Urban
                                                                             Roof sites - Suburban   Roof sites - Rural
             Core platforms              G&A
                                                                             Other

                                                           CONFIDENTIAL                                               23
The model will keep consistency with the methodology defined in
the previous cost study

    Methodological issue                                   Proposed approach

Cost model standard        ► Pure LRIC (termination) and LRIC+ (rest).

                           ► Network CapEx.
Cost categories to be
                           ► Network OpEx.
considered
                           ► General and administration costs (G&A).

                           ► Hypothetical Efficient operator, with a market share equal to 1/N, with N being the
Modelled operator            number of MNOs with at least a 20% market share in the country, subject to the
                             minimum efficient scale not being lower than 25% of the market.

Depreciation methodology   ► Economic depreciation.

                           ► WACC in line with the methodology recommended by the Commission in its
WACC
                             upcoming Guidelines on WACC (expected early 2019).

                           ► The model will be focused on 2015-2025 period. A longer period of time will be
Modelled period
                             included in the model to analyse economic depreciation properly.

Geotypes                   ► Three geotypes: Urban, Suburban and Rural.

                                                  CONFIDENTIAL                                                     24
Contents

   1. About Axon Consulting

   2. Project plan

   3. Model specifications and methodological approach

   4. Methodological issues

                              CONFIDENTIAL               25
This Workshop 1 presents our proposed approach to deal with the
key methodological issues of this new cost study

  Methodological
                                                                Proposed approach
      issue

                      1. Roaming traffic projections should be based on an assessment of the usage by roamers.
Volume forecasts
                      2. Roaming services’ busy hour input should recognise their (potentially) different usage patterns.

Allocation of joint   3. A standard implementation of the pure LRIC and LRIC+ standards should be carried out.
and common costs      4. Improvement of joint and common costs allocation and transparency.

Economic depr.        5. Implement the economic depreciation methodology at asset level, instead of at a service level

Seasonality           6. The (potential) impact of roaming traffic seasonality will need to be assessed.

Single-RAN            7. Single-RAN deployment considerations adopted in the previous cost study shall be reassessed.

VoLTE                 8. Introduction of VoLTE.

                      9. Spectrum license costs should be set on a country basis and should reflect the costs faced by MNOs.

Spectrum              10. The amount of MHz per spectrum band should be accurately defined on a country basis.

                      11. The amount spectrum available and its split per access technology should vary over time.

                      12. Align roaming/termination specific costs with the current realities after the introduction of RLAH.
Other relevant
                      13. Alignment of the cell radius with the spectrum band used
inputs
                      14. The model will be based on IP-only interconnection but may include TDM interconnection.

                                                           CONFIDENTIAL                                                     26
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   27
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   28
Methodological Issue 1: Roaming traffic projections to be based on an
assessment of the usage of mobile services by roamers - Description

    The previous cost study relied on the assumption that with RLAH,           Data demand evolution in Q1
     roaming traffic usage would be equivalent to domestic usage.               2017 – Q3 2017 period

    While that was a reasonable estimate, we should assess user                                                   90

                                                                          Daily consumption per subscriber (MB)
     patterns for roaming traffic after the introduction of RLAH:                                                  80

                                                                                                                   70
        • We expect to face a transition period until RLAH is fully
                                                                                                                   60
          embraced by European citizens (2017-2019), to be assessed

                                                                                                                                                        ?
                                                                                                                   50
          against actual volumes data.
                                                                                                                   40
        • After the transition phase, roaming usage could be similar to
                                                                                                                   30
          that of domestic users.                                                                                  20
                                                                                                                                 x3,5
        • We will assess potential implications of Fair Use Policies                                               10

          (FUP), particularly in countries with greater than average                                                0
                                                                                                                          Q2 2017         Q3 2017
          volume growth.
                                                                                                                           Domestic    Roaming

    Proposed approach (summary): Set roaming traffic projections
                                                                                                                  Source: International Roaming BEREC
    based on an assessment of the demand patterns registered after                                                Benchmark Data Report
    the introduction of RLAH, involving NRAs and operators in the
    provision of expected traffic projections.

                                                         CONFIDENTIAL                                                                                   29
Methodological Issue 1: Roaming traffic projections to be based on an
assessment of the usage of mobile services by roamers - Methodology

   In order to come up with the roaming traffic projections we expect to follow the steps outlined below:

                                  The Data Request template will require detailed information regarding
       Request roaming and
                                  roaming and domestic demand trends (including their detailed historical
1      domestic services’
                                  monthly evolution since the implementation of RLAH). NRAs will be asked
       trends
                                  for the roaming traffic received and generated in other EU countries.

       Compare domestic           Domestic demand forecasts reported, specially the ones related to mobile
2      service trends with        broadband, will be cross-checked against third-party forecasters (e.g. ITU,
       third-party forecasts      Cisco, Ericsson) to assess their reasonability.

       Compare domestic           We will assess the differences between the reported projected daily roaming
3      and roaming                consumption with the domestic consumption. Over the medium to long
       consumption                term, these should be expected to come close one to the other.

                                  For instance, if roaming consumption per user is forecasted to be higher
       Consider potential
4                                 than domestic consumption, operators may be expected to enforce more
       effect of FUP
                                  restrictive FUPs in order to limit this consumption.

                                                      CONFIDENTIAL                                           30
Methodological Issue 2: Roaming services’ busy hour input should
recognise their (potentially) different usage patterns - Description

   The amount of traffic handled in the busy hour is one of the          Illustrative comparison of traffic

    key factors affecting telecom networks’ capacity (and thus            profiles for domestic and roaming

    costs).                                                               data services

   It’s important to assess both the total daily traffic as well as                                  6%
    the hourly traffic patterns of each service type to understand

                                                                        % of daily traffic per hour
                                                                                                      5%
    their impact on network dimensioning (and service costing).
                                                                                                      4%
   Typically, the same traffic pattern is assumed for all the
    services (e.g. domestic and roaming), and hence, the same                                         3%
    percentage of traffic in the busy hour is considered.
                                                                                                      2%
   However, different service users may exhibit diverse
                                                                                                      1%
    busy hour profiles.
                                                                                                      0%

                                                                                                           00h:01h
                                                                                                                     03h:04h
                                                                                                                               06h:07h
                                                                                                                                         09h:10h
                                                                                                                                                   12h:13h
                                                                                                                                                             15h:16h
                                                                                                                                                                       18h:19h
                                                                                                                                                                                 21h:22h
Proposed approach (summary): The model will include
different busy hour percentages for domestic/EEA/non-EEA
roaming services to account for differentiated traffic patterns.
                                                                                                                        Data - Domestic
                                                                                                                        Data - Roaming

                                                         CONFIDENTIAL                                                                                                                      31
Methodological Issue 2: Roaming service users’ busy hour input should
recognise their (potentially) different usage patterns - Methodology

   The data request will include specific questions                Block diagram for the assessment of

    related with hourly distribution of EEA/non-EEA                 differences in the busy hour for domestic

    roaming and domestic traffic.                                   and roaming services

   This information will be very valuable to assess
                                                                         EEA                Non-EEA
                                                                                                              Domestic
    behavioural differences between EEA/non-EEA                       Roaming              Roaming
                                                                                                              busy hour
                                                                      busy hour            busy hour
                                                                                                               profile
    roaming and domestic users.                                        profile               profile

   We will then carry out a quantitative assessment of
    the impact of different services’ traffic patterns on
    the overall busy hour of the network.                                                 Significant
                                                                                          differences
   In the case differences in services’ traffic patterns                                   found?

    are found to be material, these will be addressed in
                                                                                    No                  Yes
    the model.

   In such case, the busy hour profile will be applied                                             Different busy
                                                                           Same busy hour              hour for
    separately to EEA/non-EEA roaming and domestic                         for the different         domestic/EEA
    services, ensuring at all times consistency in the                          services          Roaming/Non-EEA
                                                                                                   roaming services
    dimensioning process.

                                                            CONFIDENTIAL                                                  32
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   33
Methodological Issue 3: A standard implementation of the pure LRIC
and LRIC+ standards should be carried out - Description
                                                                                  Illustrative scheme of LRIC costs
   The previous cost study applied pure LRIC cost standard
    for voice termination services, in line with EC

                                                                                                                              producing the relevant
                                                                                                                              Cost savings from not
    recommendation on termination rates issued in 2009*.                                                   Incremental

                                                                                                                              services (LRIC cost)
                                                                                                               cost

                                                                               Cost level
   For the calculation of LRIC+ values for other services, it
    considered a Fully Distributed Costs (FDC) approach as a                                  Total cost       Total costs
    proxy.                                                                                                        minus
                                                                                                                relevant
   In our view, the calculation of LRIC+ values should be based                                                 service

    on the identification of joint and common costs and its
    allocation to services should be based on a clearly
                                                                                  Overview of pure LRIC vs LRIC+
    defined methodology.

    Proposed approach (summary): The model will follow                                           Joint and
                                                                                                 common
    a standard and functional implementation of the pure                                       network costs

                                                                                 Cost level
    LRIC and LRIC+ cost standards. The former will be
                                                                                              Pure incremental               LRIC+
    applied for termination services while the latter will be                                       costs
                                                                                                                     Pure
    used for the rest of domestic and roaming services.                                        (relevant to a
                                                                                                                     LRIC
                                                                                               specific set of
Note(*): Commission Recommendation of 7.5.2009 on the Regulatory Treatment                        services)
of Fixed and Mobile Termination Rates in the EU

                                                                CONFIDENTIAL                                                              34
Methodological Issue 3: A standard implementation of the pure LRIC
and LRIC+ standards should be carried out - Methodology
                                                                        Illustrative scheme of LRIC costs
   Increments are defined as groups of services that can be
    aggregated together based on a number of different criteria,
    such as type (e.g. origination, termination) or technology.

   Our model will differentiate the following increments:

      • Voice termination

      • Domestic traffic

      • Roaming Traffic

   The model will perform the following steps to calculate the costs
    for each service included under each increment:

    1. Calculation of total cost base.

    2. Calculation of incremental cost for each of increments.

    3. Calculation of joint and common costs (cost base – sum of
       costs of each increment).                                              Full cost base
                                                                              Incremental costs
    4. Allocation of joint and common costs to each service within
                                                                              Joint and common costs
       each increment under the LRIC+ standard.

                                                       CONFIDENTIAL                                    35
Methodological Issue 4: Improvement of joint and common costs
allocation and transparency - Description

                                                   Cost allocation policy in the previous cost study
   The previous cost study considered a Fully
    Distributed Costs (FDC) as a proxy to
    calculate common costs per service.

   It also considered that the costs that would
    not be recovered by MNOs for voice and SMS
    termination should be re-allocated to their
    equivalent origination service.

   In our view, LRIC+ calculation can be
    improved and its implementation can be more
    transparent.

Proposed approach (summary): Maximise
the transparency of the calculation of common
& joint costs. Allocation joint and common
costs based on routing factors in the network
model, and perform the re-allocation in a
separate regulatory policy module.

                                                    CONFIDENTIAL                                       36
Methodological Issue 4: Improvement of joint and common costs
allocation and transparency – Methodology
                                              Allocation of common costs – Network module
   Accordingly, two separated modules will
    be designed:                                                                                                               Full cost
                                                                                                                               base
   Network module (main cost model)
                                                                                                                               Incremental
    • Joint and common costs (based on                                                                                         costs
      issue #3 above) will be allocated to                                                                                     Common
      services under the LRIC+ standard                                                                                        costs

      based on the routing factors matrix.

    • General and administration costs        Allocation of common costs – Regulatory policy module

      (G&A) will be allocated to services
      based on an equi-proportional mark-up

                                               Service costs

                                                                                            Service costs
      on services’ network costs.

   Regulatory Policy module

    • Same approach as adopted in the
      previous cost study.
                                                        Service 1 Service 2 Service 3                       Service 1 Service 2 Service 3

                                                               Incremental costs   Common costs                Cost allocated fom Service 1

                                                               CONFIDENTIAL                                                                37
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   38
Methodological Issue 5: Implement the economic depreciation
methodology at asset level, instead of at a service level - Description

   The implementation of an economic depreciation method to             Illustrative approaches to

    annualise capital expenditures was recommended by the EC             implement economic depreciation

    2009 for the determination of termination rates.                         Current            Typical
   However, while EU/EEA NRAs tend to apply economic
                                                                            Network            Network
    depreciation at asset level, the previous cost study applied it at    dimensioning       dimensioning
                                                                           and costing        and costing
    service level.

   The reason for this was to avoid backloading a significant
    proportion of costs to the end of asset lifetime for services          Calculation of
                                                                          tilted annuities
    whose volumes are expected to increase significantly (e.g. data)        depreciation
                                                                                             Calculation of
   The main concern with this approach is that it creates                                     economic
                                                                                             depreciation
    arbitrariness in the timeframe used for cost recovery (as a
                                                                           Allocation to
    random timeframe is used at user level).                                 services

Proposed approach (summary): Implement a standard
approach of the economic depreciation methodology at asset
                                                                            Economic
level, while ensuring that costs are not unreasonably                                        Allocation to
                                                                           depreciation
                                                                                               services
                                                                           adjustment
backloaded to the end of asset lifetimes.

                                                        CONFIDENTIAL                                         39
Methodological Issue 5: Implement the economic depreciation
methodology at asset level – Methodology (1/2)

   The calculation of economic depreciation relies heavily on       Comparison of service ARPU and

    the determination of the production factors for each             demand as production factors for

    asset.                                                           mobile data services

                                                                                              1,4                              10
   Production factors will need to represent the expected

                                                                                                                                    EUR per subscriber per month
                                                                                                                               9

                                                                      GB per user per month
                                                                                              1,2
    revenue-generating pattern of the assets (in currency                                                                      8
                                                                                              1,0                              7
    terms). Otherwise, defining these production factors based                                                                 6
                                                                                              0,8
    on the demand evolution is likely to lead to an excessive                                                                  5
                                                                                              0,6                              4
    backload of costs in time.                                                                0,4                              3
                                                                                                                               2
                                                                                              0,2
   We suggest defining the production factors of the assets                                                                   1
                                                                                              0,0                              0
    based on the revenues of the services they provide:                                             2012 2013 2014 2015 2016
                                                                                                           Demand      ARPU
    • Assets shared by several services: ARPU and subs
                                                                              If used as production factor, the rapid growth
       evolution.
                                                                              of mobile data would imply a backload of
    • Voice-specific assets: Voice ARPU and subs evolution.                   costs towards the last modelled years.
                                                                              The stability of service ARPU will produce
    • Data specific assets: Data ARPU and subs evolution.                     results aligned with the realities of EU/EEA
                                                                              MNOs.
    • SMS specific assets: SMS ARPU and subs evolution.
                                                                     Source: CNMC data

                                                      CONFIDENTIAL                                                                                                 40
Methodological Issue 5: Implement the economic depreciation
methodology at asset level – Methodology (2/2)

   Production factors of each asset will be defined                   Illustrative comparison of costs and

    based on the revenues they are expected to generate                revenues of an asset under different

    (or a proxy).                                                      production factors (PF)

    • These will be either obtained from NRAs (as part of the                             Revenues as PF

                                                                       EUR mn
       data gathering process) or will be extrapolated by Axon
       based on the trends registered over the last years.                                             Reasonable and
                                                                                                       consistent margin

   Production factors based on revenues ensure that cost
    recovery is aligned with the realities of telecom operators:

                                                                                2018
                                                                                2020
                                                                                2022
                                                                                2024
                                                                                2026
                                                                                2028
                                                                                2030
                                                                                2032
                                                                                2034
                                                                                2036
                                                                                2038
                                                                                2040
                                                                                2042
                                                                                2044
                                                                                2046
    • It ensures that the cost recovery profile is aligned with
       the revenues produced by the asset.                                                  Traffic as PF
                                                                                                               Very negative
                                                                                                               final margin

                                                                      EUR mn
    • Margin profile of the asset is consistent over time.
                                                                                 Large initial margin but
                                                                                 decreasing over time
   On the other hand, production factors based on traffic
    generate a backloaded depreciation profile in the case of
    services with growing demand (e.g. mobile broadband).

                                                                                2018
                                                                                2020
                                                                                2022
                                                                                2024
                                                                                2026
                                                                                2028
                                                                                2030
                                                                                2032
                                                                                2034
                                                                                2036
                                                                                2038
                                                                                2040
                                                                                2042
                                                                                2044
                                                                                2046
    • This entails that margin of the service is inconsistent
                                                                                Revenues               Economic depreciation
       over time.

                                                       CONFIDENTIAL                                                            41
This Workshop 1 presents our proposed approach to deal with the
key methodological issues of this new cost study (ongoing)

  Methodological
                                                                Proposed approach
      issue

                      1. Roaming traffic projections should be based on an assessment of the usage by roamers.
Volume forecasts
                      2. Roaming services’ busy hour input should recognise their (potentially) different usage patterns.

Allocation of joint   3. A standard implementation of the pure LRIC and LRIC+ standards should be carried out.
and common costs      4. Improvement of joint and common costs allocation and transparency.

Economic depr.        5. Implement the economic depreciation methodology at asset level, instead of at a service level

Seasonality           6. The (potential) impact of roaming traffic seasonality will need to be assessed.

Single-RAN            7. Single-RAN deployment considerations adopted in the previous cost study shall be reassessed.

VoLTE                 8. Introduction of VoLTE.

                      9. Spectrum license costs should be set on a country basis and should reflect the costs faced by MNOs.

Spectrum              10. The amount of MHz per spectrum band should be accurately defined on a country basis.

                      11. The amount spectrum available and its split per access technology should vary over time.

                      12. Align roaming/termination specific costs with the current realities after the introduction of RLAH.
Other relevant
                      13. Alignment of the cell radius with the spectrum band used
inputs
                      14. The model will be based on IP-only interconnection but may include TDM interconnection.

                                                           CONFIDENTIAL                                                     42
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   43
Methodological Issue 6: The (potential) impact of roaming traffic
seasonality will need to be assessed - Description

   The previous cost model concluded that seasonality was likely to      Illustrative example of

    have an impact on voice services, but not on data.                    seasonality

   In addition, it simplified cost modelling into 3 generic geotypes,
    which could be averaging municipalities with potentially                            45
                                                                                        40
    different seasonality patterns.
                                                                                        35
    Additional time available for this study could allow to assess                      30

                                                                         Traffic (TB)


    the potential impact of seasonality, IF operators provide                           25
                                                                                        20
    sufficiently granular monthly traffic data per site (split by
                                                                                        15
    domestic, EEA roaming and non-EEA-roaming).                                         10
                                                                                         5
   If found to be significant we will ensure the impact of
                                                                                         -
    seasonality on data services is considered in the cost model.

                                                                                             Jan

                                                                                             Apr

                                                                                             Nov
                                                                                             Jun

                                                                                             Aug

                                                                                             Dec
                                                                                              Jul

                                                                                             Oct
                                                                                             Feb

                                                                                             Sep
                                                                                             Mar

                                                                                             May
Proposed approach (summary): Quantitative analysis of                                         Seasonal
domestic, EEA roaming and non-EEA roaming traffic patterns                                    Not-seasonal
per site and month. If relevant fluctuations are identified that
could signal a significant impact of seasonality, it will be
considered in the model (on a country basis).

                                                         CONFIDENTIAL                                        44
Methodological Issue 6: The (potential) impact of roaming traffic
seasonality will need to be assessed – Methodology (1/2)
                                                                         Illustrative seasonality profiles
   Starting from operators’ monthly data per site, we will
                                                                                         2,0
    perform an analytical procedure to calculate the effect of                                                 Profile A
                                                                                         1,5

                                                                          Traffic (TB)
    seasonality over network dimensioning.
                                                                                         1,0
   Each of the sites reported by the operators will be categorised                      0,5
    under one of the three profiles presented on the right:
                                                                                           -
                                                                                               January   August    October December
    • Profile A: Seasonal roaming traffic during peak months.                            2,5
                                                                                                               Profile B
                                                                                         2,0
    • Profile B: Seasonal roaming traffic during off-peak months.

                                                                          Traffic (TB)
                                                                                         1,5
    • Profile C: Seasonality does not have an impact due to yearly                       1,0

       trends.                                                                           0,5

                                                                                           -
   The impact of seasonality on network dimensioning is expected                              January   August    October December
                                                                                         2,5
    to be particularly relevant in sites with profiles A and B.                                                Profile C
                                                                                         2,0

                                                                          Traffic (TB)
   If the analysis of sites’ profiles shows that data traffic                           1,5

    seasonality may exert a material impact on network                                   1,0

    dimensioning and service costing, it will be considered in the                       0,5

                                                                                           -
    model (see next slide for further details).
                                                                                               January   August   October December
                                                                                                    Domestic       Roaming

                                                          CONFIDENTIAL                                                         45
Methodological Issue 6: The (potential) impact of roaming traffic
seasonality will need to be assessed – Methodology (2/2)

   Whenever a country is identified to have a relevant seasonal profile, we will implement the following lines of
    action:

    • Definition of additional geotypes: In the case that seasonality is deemed relevant, the predefined
       geotypes (Urban, suburban and rural) will be disaggregated according to the seasonality profiles
       identified to be relevant. For instance, one country may have a URBAN-A and URBAN-B geotypes while
       others may only have a single URBAN geotype.

    • Calculation of the seasonality effect over traffic: After the geotypes have been clearly identified, we
       will assess the actual effect of seasonality over traffic. This will be done by calculating:

       - The percentage of traffic in the busy hour of an average day; and

       - The percentage of traffic in the dominant month over the whole year (seasonality adjusted).

    • Both network dimensioning and cost allocation to services would consider the above items to ensure a
       proper dimensioning and a causal cost allocation.

                                                         CONFIDENTIAL                                          46
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   47
Methodological Issue 7: Single-RAN deployment considerations
adopted in the previous cost study shall be reassessed - Description

   There are several factors that can have an impact in the             Illustrative Single-RAN migration

    migration towards a Single-RAN access network:                       pattern

    • Date of deployment of 4G in each country.                                                   100%

    • Different migration paths for urban and rural areas.                                        90%

                                                                       Single-RAN migration (%)
    • Multi-annual (e.g. 2-5 years) migration period.                                             80%
                                                                                                  70%
   However, it can be confidently assumed that an efficient
    new entrant operator would opt for directly deploying                                         60%

    Single-RAN nodes.                                                                             50%
                                                                                                  40%
   In addition, the cost model will be used to assess potential
    changes in wholesale roaming caps from 2020. By that                                          30%

    time, most (if not all) MNOs will be operating an access                                      20%

    network based on Single-RAN nodes.                                                            10%
                                                                                                   0%
Proposed approach (summary): Only full Single-RAN

                                                                                                         2012
                                                                                                                2013
                                                                                                                       2014
                                                                                                                              2015
                                                                                                                                     2016
                                                                                                                                            2017
                                                                                                                                                   2018
                                                                                                                                                          2019
                                                                                                                                                                 2020
deployment will be considered in the model for the entire
period.                                                                                                  Urban                 Suburban                    Rural

                                                        CONFIDENTIAL                                                                                              48
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   49
Methodological Issue 8: Introduction of VoLTE - Description

   While still in its early stages, VoLTE should be expected to gain   Deployment of LTE networks in

    traction in the coming years.                                       Europe

   Its introduction into the market is expected to depend on two
    key factors:

       • Adaptation of MNO’s networks to become VoLTE-ready.

       • Availability and adoption of user terminal equipment that is
        VoLTE-ready.

Proposed approach (summary): VoLTE services will be
treated as data services working at a specific bitrate with a                Countries with at least one
given blocking probability. The model will allow the introduction            operative VoLTE network

of scenarios to define the expected projections in VoLTE usage.
                                                                        Source: GSA 4G market and technology
                                                                        upgrade

                                                        CONFIDENTIAL                                           50
Methodological Issue 8: Introduction of VoLTE – Methodology (1/2)

   The inclusion of the VoLTE in the model will be           VoLTE scenarios in the cost model

    considered under three different scenarios:

    • Scenario 1: Deployment status and expected
      adoption of VoLTE as reported in the data
      collection phase.

    • Scenario 2: Hypothetical efficient operator
      assumed to serve 4G services only. All voice           VoLTE adoption

                                                            Operator Data

      demand will be provided over VoLTE.                   Service Category Technology   2015       2016       2017       2018       2019       2020       2021       2022

                                                            Voice               GSM       99,00%     96,00%     93,00%     80,40%     69,50%     58,40%     40,20%     27,20%

    • Scenario 3: An operator assumed to serve              Voice
                                                            Voice
                                                                                UMTS
                                                                                LTE
                                                                                          1,00%
                                                                                                 -
                                                                                                     4,00%
                                                                                                            -
                                                                                                                7,00%
                                                                                                                       -
                                                                                                                           16,60%
                                                                                                                            3,00%
                                                                                                                                      25,30%
                                                                                                                                       5,20%
                                                                                                                                                 33,00%
                                                                                                                                                  8,60%
                                                                                                                                                            48,70%
                                                                                                                                                            11,10%
                                                                                                                                                                       60,80%
                                                                                                                                                                       12,00%

      all users with VoLTE-ready handsets with               VoLTE adoption

      VoLTE.                                                4G Operator

                                                            Service Category Technology   2015       2016       2017       2018       2019       2020       2021       2022

   These scenarios will be included concurrently in        Voice               GSM              -          -          -          -          -          -          -          -
                                                            Voice               UMTS             -          -          -          -          -          -          -          -

    the model in order to assess their impact on the
                                                            Voice               LTE              -          -          -   100,00%    100,00%    100,00%    100,00%    100,00%

    estimated voice costs.
                                                             VoLTE adoption

                                                            Terminal Adoption

                                                            Service Category Technology   2015       2016       2017       2018       2019       2020       2021       2022

                                                            Voice               GSM       95,70%     93,10%     86,60%     74,90%     64,50%     51,90%     38,80%     25,60%
                                                            Voice               UMTS      4,30%      6,90%      8,70%      16,70%     24,20%     31,20%     37,90%     47,00%
                                                            Voice               LTE              -          -   4,70%       8,40%     11,30%     16,90%     23,30%     27,40%

                                                       CONFIDENTIAL                                                                                                     51
Methodological Issue 8: Introduction of VoLTE – Methodology (2/2)

   Dimensioning of VoLTE requirements will be based           Overview of dimensioning for VoLTE

    on the technical specifications of the standard.

   First, we will calculate the required physical                        VoLTE traffic
                                                                                                 PRB capacity
                                                                            per call
    resources to support a VoLTE call.

   VoLTE standard generates traffic every 20 ms.
    The traffic (bytes) generated will be dependent on                                   PRB
    the voice codec and associated headers.                                          requirements
                                                                                        per call
   This traffic will have to be transmitted over a                 Erlang B
                                                                                       Total PRB
    number of Physical Resource Blocks (PRB).
                                                                                      required for
                                                                                         VoLTE
   Applying Erlang B to the number of calls in a site           VoLTE calls in
                                                                    the BH
    will result in the capacity required for VoLTE.

   This capacity will be added to the requirements                                  VoLTE traffic

    for mobile broadband over LTE.

   The model will allow to analyse different scenarios            Other LTE
                                                                                         LTE
                                                                    traffic
    of VoLTE traffic evolution to understand its                                     Dimensioning
                                                                  (data, sms)
    sensitivity.

                                                          CONFIDENTIAL                                          52
Contents

    4.1 Volume forecasts

    4.2 Allocation of joint and common costs

    4.3 Economic depreciation

    4.4 Seasonality

    4.5 Modelling of Single-RAN costs

    4.6 VoLTE

    4.7 Spectrum-related costs

    4.8 Other relevant inputs

                                        CONFIDENTIAL   53
Methodological Issue 9: Spectrum license costs should be defined on a
country basis and should reflect the costs faced by MNOs - Description

   Spectrum licenses are typically assigned to MNOs through             800 MHz awards in Europe

    auction processes. These auctions involve a relevant                             1,4
                                                                                     1,2
    investment by MNOs which varies from country to country

                                                                     EUR/MHz/pop
                                                                                     1,0
    based on population density, number of MHz, spectrum band                        0,8
    auctioned, PPP, etc.                                                             0,6
                                                                                     0,4
   The current model considers an average annualised price of
                                                                                     0,2
    2.5 €/inhabitant (independent of the number of MHz and the                         -
    band), which entails some limitations:                                                 IT PL DE ES PT UK SE SK
                                                                         2600 MHz (FDD) awards in Europe
    • The real value of spectrum is not considered.
                                                                                     1,4
    • Differences across markets are not reflected.                                  1,2

                                                                       EUR/MHz/pop
                                                                                     1,0
    • Differences in spectrum bands’ value not assessed.
                                                                                     0,8
                                                                                     0,6
                                                                                     0,4
    Proposed approach (summary): Define actual
                                                                                     0,2
    spectrum costs per country in terms of CapEx and OpEx
                                                                                       -
    per MHz and band.                                                                      SE UK IT SK PT ES PL DE

                                                                        Source: Axon Consulting spectrum award database

                                                      CONFIDENTIAL                                                    54
Methodological Issue 10: The amount of MHz per spectrum band
should be accurately defined on a country basis - Description

   We observe that, while spectrum bands for mobile services                     Harmonized spectrum in the EU
                                                                                                                    DE
    are harmonized by the RSPG, the amount of spectrum                                                              PL
                                                                                                                    LV
    available per band and country differs among                                                                    SE

                                                                      % of harmonized spectrum assigned to MNOs
                                                                                                                    LT
    member states.                                                                                                  SK
                                                                                                                    EE
   The consideration of such divergences would entail an                                                            FI
                                                                                                                    RO
    improvement in the methodology, as potential divergences                                                         IE
                                                                                                                    AT
    among countries would be better recognised.                                                                     UK
                                                                                                                    ES
                                                                                                                    PT
   On top of that, the usage of the available spectrum per                                                         BE
                                                                                                                  EU28
    underlying access technology needs to be carefully                                                              EL
                                                                                                                     IT
    assessed too, as there may be limitations in terms of the                                                       HU
                                                                                                                    DK
    usability of the different spectrum bands per technology.                                                       FR
                                                                                                                    NL
                                                                                                                    CZ
                                                                                                                     SI
                                                                                                                    LU
    Proposed approach (summary): The real amount of                                                                 CY
                                                                                                                    HR
    spectrum (in MHz) and its distribution per technology                                                           BG
                                                                                                                    MT
    (2G, 3G, 4G) will be defined per EU/EEA country.
                                                                                                                          -   50%   100%
                                                                      Source: EC Digital Economy and Society Index 2017

                                                       CONFIDENTIAL                                                                   55
Methodological Issue 11: The amount spectrum available and its split
per access technology should vary over time - Description

   In the past few years, NRAs have auctioned relevant                         Sample spectrum awards since 2014
                                                                                        1.200
    amounts of spectrum and operators have refarmed

                                                                       MHz assigned to MNOs
                                                                                        1.000
    technology-based historic bands. This results in a yearly
                                                                                          800
    dependent spectrum allocation.                                                        600
                                                                                          400
                                                                                          200
   The model will consider spectrum (and its allocation to                                 -
                                                                                                       DE     EL     SI    CZ     FR
    technologies) variable over time to better recognise the                                    Before 2014        2014   2015    2016
    realities faced by MNOs in EU/EEA.
                                                                             Source: EC Digital Economy and Society Index 2014-2016

                                                                                Spectrum usage by an EU/EEA MNO
                                                                                              200

                                                                      MHz per technology
                                                                                              150

                                                                                              100

    Proposed approach (summary): Introduce spectrum                                           50

    forecasts based on operators’ expected refarming and                                        -
                                                                                                 2014 2015 2016 2017 2018 2019 2020 2021
    upcoming spectrum auctions in EU/EEA countries.
                                                                                                            GSM     UMTS    LTE

                                                       CONFIDENTIAL                                                                    56
Methodological Issue 9-11: Spectrum costs and allocation trends -
Methodology (1/2)

   The spectrum included in the model        Illustrative example of the model’s spectrum inputs

    will be representative of the                   COUNTRY 1
                                                     Country 1
    holdings by all operators in each               Technology        Spectrum   2015    2016    2017    2018    2019    2020    2021    2022
                                             GSM                 SPEC.900MHz        60      60      60      60      60      52      52        52
    EU/EEA market.                           GSM                 SPEC.1800MHz       30      30      30      30      30      30      30        30
                                             UMTS                SPEC.900MHz         -       -       -       -       -       -       -         -
                                             UMTS                SPEC.2100MHz       30      30      60      60      90      90      90        90
   For each country, we will divide the     LTE                 SPEC.700MHz         -       -       -       -       -       -       -         -
                                             LTE                 SPEC.800MHz         -       -       -       -       -       -       -         -
    spectrum available in each band evenly   LTE
                                             LTE
                                                                 SPEC.900MHz
                                                                 SPEC.1800MHz
                                                                                     -
                                                                                     -
                                                                                             -
                                                                                             -
                                                                                                     -
                                                                                                     -
                                                                                                             -
                                                                                                             -
                                                                                                                     -
                                                                                                                     -
                                                                                                                             -
                                                                                                                            60
                                                                                                                                     -
                                                                                                                                    80
                                                                                                                                               -
                                                                                                                                              80
                                             LTE                 SPEC.2100MHz        -       -       -       -       -       -       -         -
    according to the market share (1/# of    LTE                 SPEC.2600MHz        -       -       -       -       -       -       -         -

    MNOs).

   When dividing this spectrum, we will
                                                    COUNTRY 2

    ensure that the result is consistent,            Country 2
                                                    Technology        Spectrum   2015    2016    2017    2018    2019    2020    2021    2022

    with the standard channel/carrier size   GSM
                                             GSM
                                                                 SPEC.900MHz
                                                                 SPEC.1800MHz
                                                                                    25
                                                                                     -
                                                                                            25
                                                                                             -
                                                                                                    25
                                                                                                     -
                                                                                                            25
                                                                                                             -
                                                                                                                    25
                                                                                                                     -
                                                                                                                            17
                                                                                                                             -
                                                                                                                                    17
                                                                                                                                     -
                                                                                                                                              17
                                                                                                                                               -
                                             UMTS                SPEC.900MHz         -       -       -       -       -      10      10        10
    of access technology (modularity).       UMTS                SPEC.2100MHz       20      20      20      20      20      20      30        30
                                             LTE                 SPEC.700MHz         -       -       -       -       -       -       -         -
                                             LTE                 SPEC.800MHz         -       -       -       -       -       -       -         -
   This spectrum will be used to            LTE                 SPEC.900MHz         -       -       -       -       -       -       -         -
                                             LTE                 SPEC.1800MHz        -       -       -       -       -      20      20        20
    determine the coverage network for       LTE                 SPEC.2100MHz        -       -       -       -       -       -       -         -
                                             LTE                 SPEC.2600MHz        -       -       -       -       -       -       -         -

    each technology as well as the                                                   -
                                                                                     -
                                                                                             -
                                                                                             -
                                                                                                     -
                                                                                                     -
                                                                                                             -
                                                                                                             -
                                                                                                                     -
                                                                                                                     -
                                                                                                                             -
                                                                                                                             -
                                                                                                                                     -
                                                                                                                                     -
                                                                                                                                               -
                                                                                                                                               -
                                                                                     -       -       -       -       -       -       -         -
    available capacity to serve customers.

                                                       CONFIDENTIAL                                                                      57
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