ANALYSIS

Spectrum for new entrants, lessons

learned
February 2015

© GSMA Intelligence gsmaintelligence.com • info@gsmaintelligence.com • @GSMAi

 GSMA Intelligence Spectrum for new entrants, lessons learned

Contents

Executive summary............................................................................................................................. 3

Regulatory models used to encourage new entrants ................................................................ 4

New entrants — 2010 to present day.............................................................................................. 6

Regulators must be wary of the conditions under which new entrants can thrive............. 8

The role of mobile broadband.........................................................................................................10

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 GSMA Intelligence Spectrum for new entrants, lessons learned

Executive summary

Regulators must be wary of the conditions under which new entrants can thrive before
allocating valuable spectrum. Reserving spectrum for new entrants may not result in
effective competition or sustainable market players, while leading to an inefficient use of
the resource. This is particularly important in the context of future 4G-suitable spectrum
assignments since 4G services require wider bandwidth.

Regulators should ensure that operators are assigned sufficient amount of spectrum
and the right bandwidth to achieve the required quality of service. Each new technology
generation uses wider channel bandwidth, as well as improved spectrum efficiency to
drive faster connection speeds. This means that they use increasing amounts of spectrum
making the need for new mobile frequency bands essential. For example, a 2G channel is
0.2 MHz wide, a 3G channel is 5 MHz wide and a 4G-LTE channel can range from 1.4 MHz to
20 MHz wide – the fastest 4G-LTE services are only possible with the wider channel sizes.
The most recent types of 3G and 4G-LTE networks are capable of providing users with
especially fast speeds by combining several channels together, making them even more
reliant on large amounts of spectrum.

In some cases, reserving spectrum for new entrants led to an inefficient use of spectrum. For
instance, in the AWS auction in 2009 in Chile, the three incumbents have been effectively
excluded from participating in the auction, leading to valuable spectrum being awarded to
two new entrants that reached a limited market share of connections.

Spectrum allocation is often seen by regulators as a way to facilitate the entry of new players
in a market with a view to stimulate competition. However, our research demonstrates that
the majority of new entrants that launched services since early 2010 did not impact the
competitive structure of their respective markets, in turn showing that the success and
lifespan of new entrants depends on a number of factors that tend to be excluded from
the regulatory framework.

The analysis notably shows that the number of existing players in the market at the time
a new entrant launches services is a significant indicator of its ability to influence the
competitive structure, with new entrants’ marginal gains (in terms of connections market
share) falling significantly as the number of existing operators in the marketplace increases.

Other factors influencing the lifespan of new entrants include:

• access to sufficient spectrum resources, with the right balance between coverage
bands (<1 GHz) and capacity bands (>1 GHz)
• the ability to invest in network deployments in order to rapidly reach nationwide
network coverage
• the facilitation of access to public building and the removal of other obstacles to support
network deployments
• incentives for infrastructure sharing
• the financial backing to sustain marketing campaigns

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 GSMA Intelligence Spectrum for new entrants, lessons learned

Regulatory models used to encourage new entrants

Once a government or regulator decides to encourage a new entrant into the market,
different models are usually employed to ensure both access to spectrum as well as
facilitation of entry conditions. Examples of these models include:
• the use of spectrum caps
• set-asides of spectrum for the new entrant
• different network deployment and coverage requirements for the new entrant
• obligations imposed on incumbents or established operators to provide facilities sharing
(such as access to infrastructure) and national roaming at regulated prices
• facilitation to access public buildings for site and cell towers allocation

Spectrum caps were first introduced in the 1990s - particularly in Latin America - to foster
competition in mobile markets. The spectrum caps previously imposed in many countries
worldwide have been modified or even removed as the growing demand for mobile data
services triggered the allocation of additional spectrum in new frequency bands. However,
in Latin America, tight spectrum caps are still in place and used extensively as a way to
manage competition - these range from 40 MHz to 80 MHz and many operators have
already reached this ceiling.

In Europe, spectrum caps are not used as an absolute limit on the amount of spectrum an
operator can hold, however, band specific bidding caps have been used as well as caps
specific to a particular spectrum award. For instance, in the Austrian multi-band auction
in October 2013, participants were not allowed to win more than 2x35 MHz of spectrum in
bands below 1 GHz, 2x20 MHz in the 800 MHz band and 2x30 MHz in the 900 MHz band,
while the total spectrum that any one operator could win within the auction was set at
2x70 MHz.

In the United States, the FCC has long considered spectrum concentration in its competitive
review of proposed transactions that involve spectrum holdings. In 2004, the FCC decided
to move away from spectrum caps to a spectrum screen process whereby competitive
objectives are examined on a case-by-case assessment of spectrum aggregation. Under
this new approach, the FCC defines a spectrum threshold that triggers an additional review,
based on the total amount of spectrum available and the number of existing operators in
a market. Unlike a spectrum cap, this spectrum screen is not a bright-line limit since it can
vary slightly market to market, notably when new spectrum bands become available. As a
general rule, the spectrum screen limits the amount of spectrum an operator can hold to a
third of the spectrum available in the market, ensuring at least three operators.

In addition, one of the measures implemented generally to ensure new market players have
access to spectrum during assignment processes is to set-aside spectrum only for entrants
when new frequencies have been made available. For instance, in the 2013 Austrian auction,
the Telekom Control Commission (TKK) set aside 2x10 MHz of spectrum in the 800 MHz
band for a new entrant. Similarly, in the Mexican AWS auction in 2010, a national block of
2x15 MHz was set aside by COFETEL.

In order to ensure the timely deployment of new entrants and stimulate competition,
regulators have also used network deployment and coverage obligations attached to
licences which have usually been more lenient than those imposed on the spectrum blocks

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 GSMA Intelligence Spectrum for new entrants, lessons learned

acquired by established operators. Failure to comply with these obligations tend to be

accompanied by sanctions and penalties, with a tendency for more tolerance for new
entrants missing the targets set. This has been noticed, for instance, with the treatment
of new entrants following spectrum auctions in Chile (AWS in 2009), Peru (900 MHz and
1900MHz in 2012) and Colombia (2500MHz in 2009), which struggled to offer services,
taking more than two years to launch.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

New entrants — 2010 to present day

A number of factors impact the ability of new entrants to successfully challenge established
operators. Recent data shows that most new entrants tend to struggle to gain a foothold in
established markets. As shown in Figure 1, the number of existing players in the marketplace
at the time of launch of a greenfield operator is a significant indicator of its ability to grow
market share.

Number of existing operators: 1 2 3 4 5 6+

25%
Average market share of connections

20%

15%

10%

5%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Figure 1: New entrants’ average connections market share by market structure, quarters after launch
Source: GSMA Intelligence

From Q1 2010 to the present day, a total of 62 new players launched operations across
48 countries worldwide. If we examine the success of new entrants over this timeframe,
it is clear that the number of existing players in a market at the time of launch has a large
bearing on its performance, in terms of its ability to change the competitive landscape.
Of the 62 launches, 24 entered markets with three or less existing players and seven of
these broke hitherto monopolies - the remaining 38 launched in markets with four or more
existing operators.

Those entering markets with only one existing operator performed best, recording
an average market share of connections of 21% some 26 quarters (6.5 years) following
commercial launch. However, our data shows that the marginal gains of new entrants fall
significantly as the number of existing operators increases. Those entering markets with
two existing operators can expect a corresponding average market share of connections of
14% over the same timeframe, while those entering markets with three existing operators
achieved an average market share of 10%. Finally, new entrants entering markets with
four or more existing players did not witness market share in excess of 5% in the 6.5 years
period following their launch.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

Low/high range Average

40%

Average market share of connections 35%

30%

25%

20%

15%

10%

5%

0%
1 2 3 4+
Number of existing operators

Figure 2: New entrants’ Low-Average-High market share by market structure, 13 quarters after launch
Source: GSMA Intelligence

Figure 2 shows the range of connections market shares that new entrants can expect 13
quarters after launch. When looking at the higher end of the scale, this shows that there
is a high potential for new operators to gain market share with players like Free Mobile
in France, Tele2 in Netherlands, Movitel in Mozambique, Claro and Movistar in Costa Rica
managing to reach this potential in their respective markets. These players benefited from
favourable regulation (such as asymmetric termination rates in France at the time of Free
Mobile’s arrival) to access sufficient amounts of spectrum, often at a lower price than
that paid by established players. These operators also had the financial backing to rapidly
reach nationwide network coverage.

Figure 2 also shows that for operators that enter markets with one existing player, the
range can vary from around 5% to 40% market share of connections, however, the average
market share of new entrants that commercially launched in that context stands at 18%.
With the number of existing players in the market increasing to three and above, the
average market share drops significantly to around 2% during the same period.

Essentially, the data demonstrates that new entrants can reach reasonably healthy market
shares of connections 13 quarters after launch, however, the most successful ones tend
to be exceptions which highly depend on the existing market structure, while the vast
majority of newly launched operators in markets where three or more players are already
well-established do not tend to impact the existing competitive structure.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

Regulators must be wary of the conditions under which new entrants

can thrive

The number of existing players in the market at the time of launch of a new operator is not
the only factor that will influence its ability to grow market share. Even in markets with few
existing players, new entrants can struggle to gain a foothold.

New entrants in markets like Chile, Colombia and Peru have struggled from the start, some
missing their target launch dates as well as their connection targets. Even after launching
services, some never managed to gain a foothold and grow their connections market share
above 1%, subsequently having to merge with other operators in the marketplace or even
shut down their networks.

In Chile, tight spectrum caps were used in the 2009 AWS beauty contest that allowed
two new entrants, excluding completely incumbents’ access to new spectrum. One of the
new players became an MVNO and the other was recently sold. Colombia did the same
during the 2.5 GHz band in 2010 allowing for a new entrant to become the unique 4G-LTE
provider in the country. The new entrant enjoyed a ‘first-mover advantage’ of more than
three years as competitors launched 4G services in 2013, following the AWS spectrum
auction. Yet, despite gaining this competitive edge in 2010, the new entrant launched 4G
mobile services in 2012 before merging with an incumbent player in 2014. Similarly, a new
entrant in Peru received spectrum in the 1900 MHz and 900 MHz bands and needed two
years to launch commercial low-cost services.

During the multi-band auction (800 MHz, 900 MHz and 1800 MHz) in Norway in Q4 2013,
third-placed Tele2 did not manage to acquire any spectrum while Access Industries (the
parent company of ice.net, a smaller player in the market with around 130,000 connections
as of Q4 2014) acquired spectrum in all three bands. As a result, the incumbent operator
did not secure a robust spectrum portfolio, while ice.net is expected to fund the rollout
of an entire network from scratch in an already saturated mobile market. A number of
scenarios are now reportedly being envisaged between the two operators, one of which
could lead to consolidation with both companies striking a deal.

In February 2008, South Africa’s fixed line incumbent Telkom applied for a spectrum licence
in the 1800 MHz band to enable it to become the fourth mobile operator in the country.
The new entrant launched its network using its newly acquired spectrum in October 2010.
However, a lack of low frequency spectrum below 1 GHz appears to have hampered its
network rollout, with only six metropolitan areas covered at the beginning of 2014. Telkom
has a roaming agreement with MTN for coverage outside its network footprint. A purported
lack of funds to invest in the expansion of its network and match the marketing budget
of the incumbents - Vodacom and MTN - prompted Telkom to hand over its RAN (radio
access network) to MTN. This deal is currently before the Competition Commission and
the Independent Communications Authority of South Africa (ICASA) for approval.

This evidence can suggest that regulatory initiatives put in place to allow for the launch of
new network operators may not alone stimulate the additional level of competition that
regulators desire. The regulatory framework within a country, access to sufficient spectrum
resources with the right balance between lower and higher spectrum bands, facilitation to
access to local sites (removing local governments red tape), as well as the financial backing

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 GSMA Intelligence Spectrum for new entrants, lessons learned

to invest in network deployment and sustain marketing campaigns are also fundamental
factors.

In November 2010, Movitel (a unit of Viettel Group) was selected to become the third
mobile operator in Mozambique. It received a total of 67.8 MHz of spectrum in 900 MHz,
1800 MHz and 2100 MHz bands to match the spectrum holdings of existing players. At
the time, looking to raise more revenue, incumbent mCell agreed to share its existing cell
towers with the new entrant. Movitel invested heavily in its infrastructure and at launch
its network covered 105 of the 128 districts in the country, accounting for over 40% of the
population. Its market share of connections is estimated to have increased from 5.9% at
launch in Q2 2012 to 26.6% in Q3 2014, when its network was reported to cover around
80% of the population.

Of the 62 operators that entered markets and launched services between 2010 and today,
six have closed their operations or merged with other operators. Furthermore, some
prospective new entrants fail to launch services and handed their licences back before
opening their networks (e.g, Telnet and Voo in Belgium). In 2011, the Belgian regulator
(BIPT) put a new 3G licence up for sale in its hope that the entry of a fourth operator
would stimulate competition in the market. Telnet and Voo - two cable operators - formed
a joint-venture and acquired the 3G spectrum licence for EUR 71.5 million. The licence
terms required the operator to launch services by January 2013, however, the operator
failed to launch and was subsequently fined by the regulator. Telnet&Voo cited changing
market conditions and difficulty securing approval to deploy its towers as the reasons
behind the surrender of its licence. With three well-established operators and connections
penetration way above the 100% mark, the Belgian market poses significant barriers to
entry for any new entrant.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

The role of mobile broadband

As niche players focused on mobile broadband services, new entrants tend to have a
successful run. Our research shows that new entrants tend to perform better in terms of
influencing the competitive landscape and succeed in gaining considerably higher market
share at this service level. Out of the 62 new operators that entered markets over the
period examined, 50 of them launched mobile broadband services in their respective
markets. The average mobile broadband connections market share at the end of the first
quarter following launch stood at 14%, considerably higher than the 1% average market
share of total connections.

Furthermore, as shown in Figure 3, the mobile broadband market share of new entrants
in countries with two or less existing players started just below 30% and stayed above
this rate for the entire period examined. However, the marginal gains of new entrants in
markets that have more than five existing players are significantly lower with an average
mobile broadband connections market share below 10%.

Number of existing operators: 2 or less 3 to 4 5+

50%
Average market share
of mobile broadband connections

40%

30%

20%

10%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Figure 3: New entrants’ average mobile broadband market share by market structure, quarters after launch
Source: GSMA Intelligence

For instance, the state owned monopoly in Costa Rica opened to competition with Claro
and Movistar entering the market in 2011. The two operators launched services in the last
quarter of 2011 and by the end of 2014, their total connection market shares were estimated
at 20% and 23% respectively. Furthermore, their mobile broadband market shares in the
three years period following launch reached 35% and 40% respectively, outpacing that of
the incumbent kolbi (ICE) at 25%, according to our estimates.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

However, it is important to note that the mobile broadband connections of new entrants
tend to stall or decrease two to three years after launch as competition becomes more
intense and they tend to lack the scale and reach of incumbent players, in turn bringing the
lifespan and impact of new entrants into question.

New entrants can implement successful business models that can stimulate innovation
into well-established markets, but when they are brought into the game to change the
competitive structure, the regulatory framework should provide a level playing field for
them to succeed. Allocating spectrum to organisations that do not have the ability to
deploy or heavily invest in infrastructure may not, in fact, increase competition but lead
to spectrum fragmentation and an inefficient use of the resource. New entrants that do
not have the ability to invest to deploy and maintain their networks will hardly manage to
compete against established players.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

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About the author

Dennisa Nichiforov-Chuang Analyst, Spectrum

Dennisa is an analyst at GSMA Intelligence, responsible for mobile spectrum

data research. Prior to joining GSMA Intelligence, Dennisa worked at IPR
Corporation and IHS (Global Insight). She holds an MA in eLogistics and
Supply Chain Management from the University of Greenwich.

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 GSMA Intelligence Spectrum for new entrants, lessons learned

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