PROFITABILITY ANALYSIS

Authors: Alfred Boschulte

Victor Schnee

[The Following is a Excerpt From the Study “WiMAX Deployment”

For further information: Call: Inge Schnee 1-973-813-7106, or Email: inges@bsgadvisory.com

Boschulte Schnee Group LLC

WiMax Business Models – Overview

Introduction: Five Cases Examined

To fully analyze potential profit economics of WiMax, we examined five basic cases.

· First we modeled a medium sized urban/suburban market in an advanced economy, the U.S.

· Then we modeled three different business/marketing cases for a national rollout in the U.S.

– a) the DSL Replacement strategy,

– b) the Mobile Internet strategy, and

– c) the Now Communications (convergence) strategy.

· Finally we examined the case of a less developed country (LDC) model.

These five cases are summarized in Table 0-1.

Table 0-1: Five WiMax Business Model Cases

Category of Country/Market	Market Size
1. Advanced – Single Market	Medium Sized – Urban Suburban 500K–1M POPs
2. Advanced – U.S. National	DSL Replacement
3. Advanced – U.S. National	Mobile Internet
4. Advanced – U.S. National	Now Communications (convergence)
5. Less Developed	Large Region or Countrywide

Source: BSG

While each case is, of necessity, a generalization, they illustrate most of the important considerations in evaluating the potential profitability of WiMax networks and businesses.

For each case, the model develops assumptions as to:

- Network investment

- Operating expenses

- Penetration Rates

- Revenues

- Profitability and Cash flow

In this chapter we review the significant findings of the comparison of the three U.S. national rollout strategy models – Models #2, #3 and # 4. We also discuss the major differences of the LDC model from the U.S. models and the major findings of that model, Model #5. The succeeding five chapters each deal with the findings of an individual model.

Comparison of the Model Structures and Objectives –

Three U.S. National Rollout Strategies

Model #1 (mid-sized U.S. market) was developed first to permit analysis of basic issues regarding building and operating a WiMax network. A limited area and population was used to permit focusing on basic issues such as: engineering of the network, upgrading it over time and packaging, pricing and marketing of services.

This was done to facilitate developing the three national rollout models for the U.S. that deal with the different business cases and marketing approaches BSG was testing. Therefore the three national rollout models are the most comparable in terms of illustrating different likely results from different business/marketing strategies. In this chapter we focus on the results of the three U.S. national rollouts and the LDC model. We deal with the limited mid-sized market model in chapter 6.

A number of assumptions are common to all four of the U.S. models and these are discussed in sections below. They relate to items such as costs of equipment and devices and labor costs. Each U.S. "national rollout" was assumed to cover 50 million added POPs per year, up to a total of 250 million in year 5.

The significant differences between the three national U.S. models revolve around the marketing/business philosophy.

- Model # 2 was designed to test the potential of a business built around emphasizing DSL replacement as the marketing focus. This is most similar to the approach being championed by Clearwire to date.

- Model # 3 was designed to test the potential of a business built around emphasizing mobile Internet as the marketing focus. This is most similar to the approach being championed by Sprint to date.

- Model # 4 was designed to test the potential of a business built around Now Communications – a converged service model. This is based on a marketing strategy developed in BSG's comprehensive study, "The WiMAX Explosion!"

In each case there is an assumed range of service offerings by the carrier, so that some business is derived from services besides the focal service. The difference is that the focal service is the most heavily marketed and assumed to be the most successfully marketed.

A key to the U.S. models was the analysis of bundling opportunities in the consumer market.

LDC Business Model Overview

We assumed a market of 50 million POPs, which would constitute a region (circle) in India, or another large country or a smaller LDC. While this is a generic model for an LDC, the demographic and market assumptions most closely resemble India. We assumed current BB penetration of 1% of households, voice penetration of 19% of households and mobile penetration of 13%.

We assumed a simple service structure that did not include bundling of services – the key market differentiator in the U.S. models. In the LDC model, over the first five years, revenues are dominated by:

- Wireless voice

- SME

There is such a high level of mobile demand, relative to other services, that mobile will overrun the need for HH voice. In effect, a large number of customers will choose to be mobile only – there is no "wireline replacement" to speak of, as in advanced markets, because there is almost no wireline.

Since there is such a low level of phone service in general there are major opportunities in small and medium businesses (SMEs) and to some extent also in enterprises, larger businesses which are not included in the U.S. models.

WiMax needs to offer reasonable rates plus ease of installation and implementation. Because of the lower level of economic development, the full results of this model will probably not be evident until after year five. BSG believes there should be big uptake of home services beyond then, promoted by lower device costs, and advances in the economy. In most LDCs, there is also a need for phone service, since there is almost always someone at home – unlike many advanced economies with typical two earner households. Also over time there will also will be multiple users in the same household.