Comparison of fixed

and mobile cost structures

Contents

Comparison of fixed and mobile cost structures 1

1 Introduction and Executive Summary 3

1.1 Introduction 3
1.2 Executive summary 3

2 Background 5
2.1 Purpose of the study 5
2.2 Approach 5
2.3 Regulatory context 5
2.4 Comparison of networks 5

3 Factors affecting differences between fixed and mobile cost structures 7

3.1 Treatment of access network costs 7
3.2 Market structure 8
3.3 Scarcity of spectrum 9
3.4 Useful lives of assets 9
3.5 Age of networks and depreciation methodology 10
3.6 Scale and scope economies 11
3.7 Network sharing versus cost sharing 13
3.8 Next Generation Networks 13

4 UK case study 14

5 Conclusion 17
5.1 Several factors suggest differing cost structures 17
5.2 Markets are still evolving 17

6 List of sources 18
4

1 Introduction and
Executive Summary
1.1 Introduction 1.2 Executive summary
This report was commissioned by the GSM In recent times a number of commentators have
Association (GSMA) and undertaken by questioned whether the scale of differences
PricewaterhouseCoopers (PwC) to examine the observed between fixed and mobile termination
differences in fixed and mobile cost structures. rates and the level of differences are cost reflective.
Some commentators have gone so far as to suggest
Our report focuses on the areas which we believe that the costs of fixed and mobile termination
contribute to long-run differences between the should be approximately the same. Given the
cost structures of fixed and mobile networks and fundamental differences between fixed and mobile
the impact these differences have on the average networks we see no a priori reason to suppose that
unit cost1 of voice traffic. We have considered both costs should be similar. In the light of the public
qualitative and quantitative analysis on the key debate and regulatory scrutiny, this paper examines
differences between the two types of network as the reasons why the cost of a minute of mobile
well as the intuitive and theoretical reasons why telephony differs from, and is higher than, the cost
differences in cost structure might be expected, of a minute of fixed telephony.
including:
• Treatment of access network costs Having analysed the factors set out above, we
conclude that there are significant differences
• Scarcity of spectrum
between the cost structures of mobile and fixed
• Useful lives of assets operators. The biggest single difference is the
• Age of networks access network and how its costs are driven and
• Scope and scale economies hence should be recovered. The access network
in a fixed network (predominantly the copper
• Ability to reduce costs through cost sharing
loops) is almost entirely driven by the number of
subscribers, and increases in traffic, independent
The paper looks at both the differences in the nature of the number of subscribers, require no further
and structure of costs and the implications the investment in the access network. As such, the costs
differences have on regulated cost-based charges for of the access network are appropriately recovered
fixed and mobile call termination. from a subscription service. This is not the case for
mobile networks where the access network (base
We hope this paper will contribute to a constructive stations and associated equipment) is not dedicated
debate around the factors that should be considered to individual subscribers. An increase in traffic on
when NRAs and operators are comparing cost mobile networks does require further investment in
structures for different types of network operator. the access network. As such, the costs of the access
network are appropriately recovered from traffic
services.

In addition to the difference in the economics of the

access network, there are also a number of other
factors that result in the costs of a mobile network
being different to those of a fixed network. It is our
opinion that these differences support the view that
the cost of a unit of traffic is more expensive on a
mobile network than on a fixed network and that
such a cost difference is unlikely to disappear in the
foreseeable future.

1 When referring to cost

In this report, we mean
operating costs, depreciation
and a return on capital.
 5

2 Background

2.1 Purpose of the Study 2.4 Comparison of networks

PwC has been commissioned by the GSMA to When considering the different cost structures of
write a report on the differences between fixed fixed and mobile operators, it is helpful to consider
and mobile cost structures. We have considered how the network architectures differ. Shown below
a number of factors which we believe contribute are simplified diagrammatic representations of
to the significant differences between the cost typical fixed and mobile networks.
structures of fixed and mobile network operators.
In the following section we set out the impact of
these differences. Mobile Fixed

2.2 Approach Other

networks
Other Data
We have used the following sources of information Data VAS
networks platforms
platforms HLR/
in compiling this report: platforms
VLR/
Signalling
Backbone transmission
1. Publicly available cost models; Backbone transmission
f (BH calls,
BH traffic)
Circuit Switching Circuit Switching
2. Publicly available information on the websites f (BH calls,
BH traffic)
Core Switching
of national regulatory authorities (NRAs) and Local exchange/Subscriber f (coverage,
concentrator units
network operators;
BH calls,
BH traffic)
Line cards DSLAMs
BSC/RNC
3. Information from research reports and data MDF

services.
Dedicated copper/fibre

f (coverage, Connection points (PCPs, SCPs) f (subscribers)

We have considered the factors we feel contribute to BH traffic)

Dedicated copper
a different cost structure between fixed and mobile
f (subscribers)
networks. We start by considering the impact of
each of the factors individually and then analyse
the impact of a combination of factors using worked
examples. (Note – elements recovered from subscribers are shown in pink
and elements recovered from traffic are shaded in grey).
2.3 Regulatory context
There has been an initial consultation by the The diagram above compares mobile and fixed
European Regulators Group (ERG) on creating a networks at a high level. Both MNOs and FNOs
common position on Mobile Termination Rates incur costs to meet the demand for subscription,
(MTRs). A survey of NRAs is currently being busy hour calls, busy hour traffic and the need to
conducted. One of the questions within this survey provide the required level of network coverage.
is whether NRAs consider that fixed and mobile Whilst all the complexities of the two networks
termination rates should ultimately converge. cannot be captured in a diagram, there are some
As demonstrated in this paper there are a number notable differences which stand out, including;
of reasons why the cost structures of fixed and • The absence of material subscriber-driven
mobile operators are likely to be different. This network elements (excluding mobile devices) in
suggests that the convergence of fixed and mobile mobile networks,
termination rates in any particular country should • An increase in traffic in the fixed network will
not be assumed and in fact is only likely to be only result in an increase in core-switching and
appropriate from a costing perspective2 through transmission costs, not in the access network,
coincidence or the convergence of modelling inputs
• An increase in traffic in mobile networks will
that are currently substantially different.
result in an increase in all network elements
including the radio access network,
• Coverage-related costs in fixed networks are
typically recovered from traffic services, as is the
case with mobile networks, and
• Signalling and location activities (HLR/VLR) are
more material in mobile networks

2 We are not considering

symmetrical fixed and
The remainder of this paper sets out the differences
mobile termination rates between fixed and mobile cost structures in more
from a competition or market
stimulation perspective.
detail.
6

3 Factors affecting differences between

fixed and mobile cost structures
This section sets out the most important factors that It could be argued that some of the mobile base
contribute to the differences in the cost structures of stations that are in their original deployment are not
fixed and mobile network operators. variable with respect to traffic. In fixed networks,
coverage related network elements, e.g. local
3.1 Treatment of access network costs exchange equipment and subscriber concentrator
The biggest single difference between the cost units, have been recovered from traffic services.
structures of fixed and mobile operators is the Therefore, as a matter of consistency, the costs of
treatment of the access network. The access network coverage base stations should also be recovered
(and its cost) in a fixed network (predominantly from traffic services. This is the current stance of
the copper loops) is entirely driven by the number many NRAs who have typically concluded that
of subscribers and increases in traffic per se require these costs are only a small proportion of the total
no further investment in the access network. This network costs and have opted to allow operators
is because each subscriber has a dedicated (copper) recover all network costs from traffic services3.
line which is capable of handling 24 erlangs of
traffic per day. Thus the dimensioning and costs of In our opinion, the treatment of the access network
this line, and the whole customer access network, is the biggest single difference between the cost
are effectively invariant to the amount of traffic structures of fixed and mobile operators. The
throughput. (As discussed above and further majority of fixed network costs are not recovered
below, this is not the case for the core switching from traffic services, whereas mobile network costs
and transmission functions of a PSTN.) As such, are only recovered from traffic services. In section 4
the costs of the access network are causally related we look at the cost structure of BT vis-à-vis the UK
to the number of subscribers and independent of mobile operators and demonstrate the impact this
the volume of traffic. Such costs are appropriately difference has in terms of cost structures and cost
recovered from subscription revenues. recovery.

This is not the case for mobile networks where 3.2 Market Structure
the access network (base stations and associated The mobile telephony market structure is different
equipment) is not dedicated to individual to the fixed telephony market due to the historical
subscribers. Rather, these network elements are evolution of the market as well as the economics of
dimensioned so that they are capable of serving the network build.
traffic arising from outgoing and incoming calls.
Therefore, an increase in traffic does require further In most European countries, there will typically be
investment in the access network. As such, the costs a single dominant fixed line incumbent operator
of the access network are causally related to the which was formerly state owned. In some countries
volume of traffic and are appropriately recovered the government still has a stake in the company4.
from traffic services. There is also frequently a cable operator or collection
of cable operators who provide fixed telephony
Regulators have typically decided (based on services5. Typically there will also be alternative
detailed costing studies) that all the costs of a operators with limited infrastructure who might
mobile network are incremental to traffic services. only offer services to businesses or within specific
The nature of the mobile radio access network is not parts of the country. The alternative operators will
3 If NRAs did not allow directly analogous to the copper network of a fixed often rely on the wholesale services of the incumbent
operators to recover all the operator. The access network in a mobile network operator e.g. Local Loop Unbundling (LLU), the
network costs from voice
services, operators might not is competed between different users – when one provision of which is underpinned by a regulatory
be able to continue to offer user is using radio capacity, it cannot be used by obligation. At the date of the last Communications
pre-pay services, which would
not be desirable from a public any other user. As such, the efficient mechanism for Market Review6, 25% of BT’s 5,600 local exchanges
policy perspective. recovering the cost of radio capacity is in relation were unbundled, covering 72% of UK households.
4 Such as France or Greece. to the traffic services that it supports. However, In general, it could be said that the fixed market
5 Often there will be more than the access network in a fixed network comprises typically has two network providers of nationwide
one cable operator in a country, dedicated copper. The copper pair of one user services – one incumbent telecoms operator and
but their geographical footprint
will have no or limited overlap. cannot be used by any other user. Therefore, the one cable operator (or collection of operators) and
efficient mechanism for recovering the cost of the numerous service providers either relying on the
6 Ofcom, Communications
Market Review, August 2007. copper access network is in the form of a rental fee incumbent operator’s network entirely or with some
from subscribers. limited infrastructure of their own.
 7

The typical mobile market is structured differently. Going forward, it is possible that mobile network
In nearly every mobile market in the world there operators will seek to generate further cost savings
is more than one mobile network operator with in the form of network sharing, effectively reducing
national coverage. In Europe there are at least two the number of mobile network operators. The effect
mobile network operators in every country with of scale economies more generally is considered
most countries having three to five mobile network further in section 3.6.
operators. The actual number of network operators
is largely determined by the regulatory authority 3.3 Scarcity of spectrum
that is responsible for licensing and spectrum. Spectrum is a scarce resource, the use of which
However, whereas the fixed market is characterised is regulated through the allocation of specific
by many service providers competing at a retail frequency bands to individual operators.
level, the mobile network operators continue to Spectrum suited to the provision of GSM services,
dominate the retail market as well. There have the 900MHz and 1800MHz bands, was allocated to
been some successful mobile virtual network operators in the 1980s8 and 1990s and the licence
operators (MVNOs) e.g. Virgin Mobile, who use payments were frequently a mix of up-front fees
the MNOs’ infrastructure with some limited core and ongoing annual payments. GSM licence fees,
infrastructure of their own. However, the mobile either through operating costs or amortisation
market is generally characterised by a few vertically costs, were typically a small but not immaterial
integrated network operators competing with proportion of an operator’s annual cost base. For
each other for the end-to-end provision of mobile some later entrants, the GSM licence fees were more
services. material as the value of mobile services was more
established.
These characterisations of the fixed and mobile
markets are supported by a recent study that found In recent years a number of countries have allocated
that the average number of MNOs per country is 3G spectrum through an auction process. Due
3.69, compared to 2.30 FNOs per country7. These to the scarcity of spectrum, it was imperative for
figures do not assess the coverage offered by the the existing mobile operators to acquire some
operators and some operators included may not spectrum in these auctions in order to be able to
have full national coverage. offer 3G (UMTS) services and to maintain their
existing 2G subscriber base. In the early years of
Having established that the mobile market is the millennium, the prices paid at some of these
typically served by more operators than the fixed auctions were high and in some cases exceeded the
market, the implication this has for the relative costs total cost (in present value terms) that was expected
of mobile and fixed services is clear. to be invested in the 3G network itself during the
life of the licence, thus more than doubling the total
In any industry where there are fixed costs of cost base of the network operators.
service provision, the more operators there are, the
higher the total cost base of the industry. It is widely Additionally, the terms of the UMTS licences
held that there are significant fixed costs associated frequently contained an obligation to cover a certain
with both fixed and mobile networks, and therefore, percentage of the population within a specified
the presence of more mobile networks in the market time period. The cost and duration of the licences
means, ceterus paribus, that the cost of providing in countries for which auctions were held is shown
mobile service in that market will be higher. in the table overleaf along with the implied cost per
year (assuming HCA depreciation) and the coverage
It should be noted that the presence of more mobile obligations in each country.
network operators than fixed network operators
leads to increased network competition among
MNOs. This provides strong efficiency incentives. It
is likely that the extent of such efficiency incentives
will be less in the fixed sector. When comparing
7 Source: Primetrica. Sample
size for MNOs is 169 countries; MNOs with FNOs, this will counter-balance some
sample size for FNOs is 158 of the economies of scale from which FNOs benefit.
countries. Data from 2006 and
2007. However, this point is less relevant where there is
8 In the UK, Vodafone and O2
effective regulation on FNOs.
(trading as Cellnet) received
their licences in 1982 and
Orange and T-Mobile (then
One2One) in 1989.
8

Country Auctions v Price of UMTS Duration Annual HCA Coverage

comparative bids licences (years) depreciation requirement
(€ billions) (€ billions)
Austria Auctions 0.8 20 0.04 25% pop in 3yrs
50% pop in 5yrs
Belgium Auctions 0.6 20 0.03 30% pop in 3yrs
40% pop in 4yrs
50% pop in 5yrs
85% pop in 6yrs
Denmark Auctions 0.5 20 0.03 30% pop in 3yrs
80% pop in 7yrs
Germany Auctions 50.1 20 2.51 25% pop in 3yrs
50% pop in 5yrs
Greece Auctions 0.5 20 0.03 25% pop in 1.5yrs
50% pop in 4.5yrs
Italy Auctions 12.2 15 0.81 Regional capitals 2.5yrs
Provincial capitals 5yrs
Netherlands Auctions 2.7 15 0.18 Main cities, roads and
airport in 6.5yrs
UK Auctions 36.1 20 613 80% pop in 7yrs

FNOs do not face similar spectral constraints These show that the key differences in useful lives
and associated costs. Apart from the direct costs are in the access network, with the Trench/Duct and
of purchasing spectrum, there is a further cost Cable categories having significantly longer lives
associated with spectrum. The migration from than base stations.
one type of spectrum to another necessitates an
upgrading and reinvestment in the network. This is From the publicly available cost models, we have
demonstrated by the relatively short life associated also calculated the average useful life of assets for
with the various mobile technology generations. In fixed and mobile operators weighted by Gross
contrast, copper networks have been in deployment Replacement Cost. This indicates that the average
for many years (as discussed further in section 3.5). UEL is likely to be higher for fixed than for mobile,
although we note there is limited data for FNOs.
3.4 Useful lives of assets
Mobile Network Operator
Fixed network assets have longer useful lives
on average than mobile network assets. For Max UEL Min UEL Average UEL weighted by GRC
example, the copper wire in the access network Australia 15 5 7.85
is frequently assigned a 20 year useful economic UK 20 6 12.22
life for depreciation and accounting separation Sweden 25 5 11.66
purposes; however, in reality, the useful life may
be considerably longer. Duct and trenches have Fixed Network Operator
even longer useful lives – in the region of 40 years.
These assets are buried underground so have less Max UEL Min UEL Average UEL weighted by GRC
exposure to weather and vandalism. In contrast, Ireland 40 4 Not available
mobile base station equipment is unlikely to have UK 40 3 Not available
a useful life of more then ten years, although the Sweden 40 10 30.75
site infrastructure and buildings will have a longer Denmark 40 5 21.73
New Zealand 34 4 Not available
useful life.

To illustrate this point further, we present below the For a given initial investment, the network with the
average useful life of each of the major network cost longer average useful economic life, i.e. the fixed
categories taken from publicly available Regulatory network, will have a lower annual cost.
Accounts and Cost Models9.
9 Sources: Fixed – BT Annual
report, Eircom regulatory Fixed network Mobile network
financial statements, Sweden
cost model, Denmark Hybrid Asset Class UEL Asset Class UEL
LRAIC model, New Zealand
Commerce Commission Buildings 40 Buildings 40
Principles Paper. Mobile – Trench/Duct 40 Base stations 10
Sweden cost model, UK cost Cable 20 Transmission 10
model, Australia mobile model
Exchange equipment 10 Switching 10
Others (cars, computers etc) 5 Others (cars, computers etc) 5
 9

3.5 Age of networks and depreciation methodology In the mobile cost model produced by Analysys
Commercial fixed line telephony services have Consulting for Ofcom, economic depreciation is
been offered in developed countries since the early used. This recovers investment costs over the total
1900s. The predecessor of BT, the Electric Telegraph demand for the assets, hence a large amount of
Company, started business in 184610. Whilst a large the cost recovery will have been deferred from
portion of the network will have been upgraded the early years of mobile services until later years
over time, some long lived assets such as trenches when demand is significantly higher. Thus using
and ducts would have existed prior to the launch of economic deprecation creates a difference between
mobile services in the 1980s. the cost recovery of fixed and mobile networks in
relation to traffic services.
Since the inception of analogue mobile services,
there have been several new generations of 3.6 Scale and Scope economies
technology (see Figure 1 below) e.g. the first GSM As noted in section 3.2, the presence of fewer
service launching in Finland in 1991. Each of these nationwide fixed network operators will result in
has required substantial capital investment. greater economies of scale for those fixed operators.
Network industries typically have a mix of fixed
Figure 1 – average age of mobile networks by and variable costs. The greater the number of
technology generation11 network operators, the greater the fixed costs
that have to be recovered13. The presence of fewer
Generation Average age nationwide fixed operators means less fixed costs
1G 16.81
that have to be recovered from the users of fixed
2G 8.29
2.5G 4.14 telephony services.
3G 2.37
3.5G 1.24 FNOs will also benefit from economies of scope
Overall average 5.63 as they are able to offer multiple services over the
same infrastructure. A typical fixed operator will
The average age of the mobile networks currently in provide all or most of the following services:
use is therefore low relative to fixed networks. There
• Wholesale and retail voice telephony services
are two implications of assets being newer in terms
of cost recovery: • Wholesale and retail broadband services
1. When accounting based depreciation is used • Leased lines
for cost recovery (e.g. Current Cost Accounting • VPN/Data services
of Historic Cost Accounting), newer assets will • IPTV
require more cost recovery than older assets. This
is because part of the annual cost recovery of an
The following breakdown of revenue from
asset is the return on capital. This is calculated
Eircom’s regulated accounts for the 15 months
as WACC x Net Book Value or Net Replacement
ended June 2007 show that only 40% of retail
Cost. The return on capital therefore declines as
revenue relates to calls:
the assets age resulting in newer assets requiring
greater cost recovery than older ones12.
Breakdown of Eircom Retail Turnover £m %
2. It is likely that fixed networks will have a Access (line rental, VPN, DSL) 614 40%
significant proportion of assets that are fully Call revenue 618 40%
depreciated, and where allowable cost is derived Leased lines 121 8%
from the unadjusted accounting records, there Other 176 12%
will be no annual cost recovery associated with TOTAL 1,529
these assets.

Another issue associated with the age of networks is

the depreciation methodology used to depreciate the
10 Source: BT Website – http://
www.btplc.com/Thegroup/
network assets. The simplest form of depreciation is
BTsHistory/index.htm straight-line historic cost depreciation. This is most
11 Source: Primetrica, calculated relevant in a world with stable demand where only
based on launch date of mobile maintenance capex is being undertaken, as has been
services. Sample size is 169
countries. the case for many fixed operators in recent years. For
12 This paper does not discuss
mobile operators demand is growing and has grown
the relative merits of different rapidly over the past few years.
depreciation methodologies.
10

Breakdown of Eircom Retail Turnover £m % The level of network sharing will be impacted by
Access (line rental, VPN, DSL) 614 40% regulatory restrictions and general competition
Call revenue 618 40% law preventing collusion. This is an area where an
Leased lines 121 8% equilibrium has not yet been reached and which
Other 176 12% may affect the number of mobile networks in
TOTAL 1,529
operation and hence the number of mobile network
operators.
In contrast, mobile operators typically only provide
voice and mobile data services. Vodafone Group’s It is not possible currently to assess whether there is
accounts for the year ended March 2007 shows greater potential for cost sharing in mobile or fixed
that 80% of the revenue from Vodafone’s European networks. However, the presence of cost sharing
operations related to voice revenue. opportunities is another reason why mobile and
fixed cost structures are different. Detailed costing
exercises should take into account the most up-to-
Breakdown of Vodafone European Turnover £m %
Voice revenue 17,357 80%
date information on cost-sharing in order to assess
Messaging revenue 2,925 14% the per unit cost of traffic, rather than assuming
Data revenue 1,300 6% equality between fixed and mobile networks.
TOTAL 21,582
3.8 Next Generation Networks
(Excludes revenue from Vodafone’s fixed operations)
Some fixed network operators are currently
investing in Next Generation Networks based
Fixed operators are therefore likely to benefit from on internet protocol (IP). Operators will require
greater economies of scope as a result of: large up front investment but this will result in a
• Multiple services utilising the same assets, e.g. wider range of services available and lower per
voice and broadband both utilising the copper subscriber cost for the services provided. Part
access network, and of the investment will be to provide more data
• Fixed and common costs being distributed services (e.g. high speed broadband) and part to
among more services so the contribution to reduce the unit cost of providing telephone calls.
overheads from each service is reduced. The investments in NGN would not be made if
there was not an expectation that they would be
3.7 Network sharing versus cost sharing profitable.
Fixed network operators can share some of the cost
of extending or repairing their access networks A major benefit expected from NGN core networks
with other companies such as utilities. These is the removal of the many overlay networks that
companies can share the cost of digging up roads have supported the range of services provided by
and preparing trenches/ducts with electricity or gas fixed operators. This is another area that NRAs will
companies14. This is explicitly recognised in many need to be mindful of going forward in assessing
cost models, for example that produced by the the relative costs of fixed and mobile networks.
World Bank15. As trenching and ducting are a large
part of the access network cost, cost savings in this
area can be considerable when considering a new-
build network. The opportunities for cost sharing in
13 The issue of fixed cost recovery established fixed networks are more limited.
is outside the scope of this
paper. It is our view that
regulated prices should include Cost sharing for mobile operators is also possible.
a mark-up for the recovery of
fixed and common costs. This is Typically cost sharing for mobile operators is
discussed further in the paper focused on the radio access network (RAN).
titled “The setting of mobile
termination rates: Best practice The realisation of these cost savings is dependent
in cost modelling”, which is on how the process is approached and the
available at www.gsmworld.
com/costmodelling compatibility of the geographic coverage of the
14 An example of trench sharing
operators concerned.
is described here – http://
www.patentstorm.us/
patents/5839242-description.
html

15 A Model for Calculating

Interconnection Costs, World
Bank, 2004, pg 40
 11

4 UK Case study

In this section we look at a comparison between the This is a fixed income stream which is independent
costs of BT, the biggest UK fixed network operator of customer usage. There is no equivalent income
and the estimated combined costs of the UK stream for mobile operators. Although customers
mobile network operators. We have used the UK on post-pay contracts do pay a monthly charge, this
as an example because of the detailed information is effectively covering the cost of the ‘free’ minutes
provided in BT’s regulatory accounts although we and handset subsidies which are associated with
would expect similar results from any country in post-pay packages.
the developed world.
In the table below we compare the number of
Looking at BT’s Current Cost Financial Statements, subscribers, minutes of use and annual costs for BT
2007, it can be seen that only four of the Wholesale and the UK MNOs. Looking at the data below it can
Markets are providing similar services to that be seen that the combined total number of minutes
provided by mobile network operators16, the total for the MNOs is very similar to that of BT. These
HCA operating cost of which is £486m. This is only figures are likely to be an underestimate because
32% of the core network HCA operating cost and the MNO figures do not include H3G and the BT
10% of total network operating cost. The remainder figures will not include transit minutes. The annual
of the cost relates to services not provided by mobile cost figures will include the effect of differing asset
network operators, such as leased lines, broadband lives, age of networks and economies of scale.
conveyance and technical areas such as interconnect
circuits. We can also see that the total annual cost (cost of
sales plus other expenses plus depreciation) is
In comparison, Vodafone’s total UK network similar for BT and the combined total of all MNOs.
running cost was £1,353m in 200717. Based on this This total annual cost will include outpayments to
we have estimated the total network running cost other operators and retail costs such as marketing.
for MNOs in the UK as £5,413m, more than ten We have then excluded these outpayment and retail
times the cost of BT providing the analogous fixed costs by making some high level assumptions on
services. the MNO data and using BT current cost financial
statements in order to reach an annual network cost.
In addition, MNOs use the incumbent’s network Despite the total annual cost being higher for BT
for transit purposes, which is another source of than for the total MNOs, the annual network related
income for the fixed line incumbent. This means cost is lower for BT.
that comparing the number of retail fixed minutes
to retail mobile minutes is not strictly a like-for-like BT provides a wide range of services over its
comparison, given that a proportion of retail mobile network, many of which are not offered by MNOs.
minutes also use elements of the fixed network, and Examples include exchange lines, wholesale leased
hence contribute to the cost recovery of the fixed lines, technical interconnect circuits and broadband
network. conveyance. Comparing BT’s cost of providing
equivalent services to MNOs against the total MNO
The range of services offered by BT gives it greater network cost, one can see that the total network
opportunities to recover fixed operating and cost of providing MNO equivalent services is only
investment costs. For example, one should consider slightly higher than an average MNO. Bearing in
the revenue profile of FNOs and MNOs. Fixed mind that the average MNO has only three-fifths of
network operators receive a substantial proportion the subscribers and one quarter of the minutes of
of their income from monthly charges such as BT, this implies that the per unit cost of providing
line rental. Taking BT as an example, total access mobile equivalent services is higher for MNOs than
revenue for the year ended March 2007 was £4.7bn. for BT.

16 Call origination on fixed public

narrowband networks, Local-
tandem conveyance and transit BT Total MNO Vodafone
on fixed public narrowband Number of minutes (m) 87,852 87,677 24,520
networks, Single transit on
fixed public narrowband
Number of subscribers (m) 25.7 72.9 18.4
networks and Fixed call Total annual UK cost (£m) 17,915 18,452 4,613
termination. BT Current Cost Annual network related cost 7,740 5,413 1,353
Financial Statements, page 14
Annual network related cost for voice traffic services (£m) 486 5,413 1,353
17 Vodafone Annual Report 2007,
page 36
12

A breakdown of the total annual cost is given in

the table below. We have estimated the total annual
MNO cost by multiplying Vodafone’s cost by four.
We feel this is a conservative estimate as there are
five MNOs in the UK market, although the last
entrant, H3G, has a lower market share.

£bn BT Total MNO estimate Vodafone

Total annual UK cost 17.92 18.45 4.61
of which
Retail 8.94 9.04 2.26
Outpayments from retail 1.23 4.00 1.00
Network 7.74 5.41 1.35
of which
Outpayments from core 2.72
Access network 3.50
Broadband convenyance 0.85
Leased lines 0.18
Voice traffic services 0.49 5.41 1.35

The cost breakdown is illustrated in the diagram

below, which highlights the fact that overall BT
and all of the MNOs have a similar annual cost and
a similar number of minutes. However when the
cost is broken down into the services this relates
to, it can be seen that only a small proportion of
BT’s total annual cost relates to MNO equivalent
services.

Total BT minutes Total BT annual Total MNO annual costs Total MNO minutes
cost – £17.9bn – £18.5bn

Outpayments – £4.0bn Outpayments – £4.0bn

87.9bn Retail – £8.9bn Retail – £9.0bn 87.7bn

Leased lines – £0.2bn

Broadband conveyance – £0.9bn

Voice traffic network costs – £0.5bn Network – £5.4bn

Access network – £3.5bn

Sources: BT annual report and regulatory accounts. Total MNO cost estimated from Vodafone annual report
 13

5 Conclusion

5.1 Several factors suggest differing cost structures Ultimately a call on a mobile network is very
There is significant evidence that mobile network different from a call on a fixed network. The
operator cost structures are different from those of mobility that a mobile network provides has
fixed network operators due to a number of factors. implications both for the level of costs and how
This is consistent with our a priori view that, from those costs are efficiently recovered. The additional
a costing perspective, the cost of a minute of voice costs associated with mobile telephony are
traffic on a mobile network is not comparable to the unlikely to unwind in the coming years. However
cost of a minute on a fixed network. the phenomenal success of mobile telephony
demonstrates that customers are willing to pay extra
5.2 Markets are still evolving for the costs associated with mobility. These are
real cost differences which no amount of spuriouss
In addition to the currently observed differences,
comparisons with the costs of fixed telephony can
there are likely to be significant changes to both the
eliminate.
mobile and fixed industries in the coming years.
There are a number of unknowns e.g. in relation to
migrations to new technologies, consolidation of
operators and the opportunities to implement cost
reduction initiatives.

Just as symmetry between mobile and fixed traffic

costs cannot be assumed now, it also cannot
be assumed to occur at any point in the future.
Therefore, for as long as customers are charged for
telephony on a unit basis, and for as long as NRAs
believe that regulatory intervention is necessary,
there will be a need for robust cost analysis to
inform the efficient level of regulated prices.
14

6 List of sources

Regulatory and Statutory Accounts

Fixed
Eircom – Current Cost and Long Run Incremental
Cost Statements for period ended 30 June 2007

BT – BT Annual Report 2007, BT Current Cost

Financial Statements 2007

Mobile
Vodafone Annual Report 2007

Cost Models
Fixed
Sweden – PTS Consolidation Model v1.3 PUBLIC.
xls, available from
http://www.pts.se/Sidor/sida.asp?SectionId=1980

Mobile
Sweden – Model_ver_ 2_with_basic_swedish_
inputs.zip, available from
http://www.pts.se/Sidor/sida.asp?SectionId=1848

UK – Analysys 2002 model – available from

http://www.analysys.com/ukmobilelric

Australia – Mobile Termination Cost Model for

Australia, WIK-Consult, January 2007

Public document
New Zealand Commerce Commission TSLRIC
Principles Paper, 20 Feb 04
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