Thursday, December 18, 2014

U.K. Mobile Investment in "Notspots" Also Not Profitable?

U.K. mobile operators have agreed to invest £5 billion to alleviate coverage "notspots" acorss the United Kingdom by 2017, ensuring voice and text messaging access on the part of the biggest four mobile operators across 90 percent of the U.K. land mass by 2017.

Had the voluntary agreement not been reached, the U.K. government was prepared to force mobile operators into mandatory roaming agreements.

The new investments will extend coverage from all four mobile operators to 85 percent of geographic areas by 2017, up from 69 percent at present.

As with most universal service requirements, it is not clear the new coverage actually will have a payback. That is generally why the notspots exist in the first place. Assume a rural tower with a transmitting radius of 1.5 miles, representing nine square miles of surface area, in an area with less than 20 homes per square mile.

At 10 homes per square mile, total addressable locations are 90 locations. Assume two persons per home, or 180 potential accounts.

Assume the four contestants decide to collaborate on tower sites, resulting in a situation where two mobile providers share a single tower, with a subsequent need for two new sets of towers to serve each rural area.

Assume market share winds up roughly split on each of the two new sets of towers. Assume 100 percent take rates, implying 90 accounts per tower, and average line revenue of about GBP21 (USD33).

That suggests per-tower revenue of about $2970 a month, a blended rate including both prepaid and postpaid accounts.

Assume monthly tower rents are $3800 ($1990 per carrier, two carriers per tower). You see the problem: revenues do not cover the cost of tower site leasing.

But perhaps 75 percent of U.K. mobile towers are owned, not leased. In that case the better comparison is the cost of building and operating a tower.

Assume a cost of about $150,000 to create a tower site. If that enables $35,640 in new revenue, the business model works, even at 10 percent interest rates. The problem, of course, is that the new investment will not produce that amount of incremental revenue.

Most customers already buy service, even if that service is affected by limited coverage, as the big problem is partial coverage, not complete lack of coverage. So it would not be unreasonable to assume single digit incremental customer revenues. In that case, the payback might never be obtained.

But that is true of most universal service investments. By definition, there “is no business model.” As always, service providers will rely on profits from urban cells to essentially subsidize rural cells that might actually lose money.

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