Network and retail cost modelling

The problem

Our client was the third mobile operator in a large African market – it was competing strongly on price but wanted to demonstrate to policy makers that the market structure needed to evolve: large operators were too large, and small operators needed support from regulatory and competition measures to improve their long-term sustainability. Fundamental to this was the demonstration of economies of scale in the network and retail costs of our client and its larger competitors.

The solution

We built a cost model of our client’s network. This model relied upon international standard principles for network costing (LRAIC+, forward-looking costs, economic depreciation, etc.). We collected a variety of information from our client to ensure that the model reflected the national, technical and cost characteristics of the country, and also adapted the model to show the costs of the larger competitors.

We added a retail service cost module and a revenue module to this calculation so that full service costs and profitability could be estimated.

We demonstrated the underlying asymmetry in network costs applying to the large and small players in the country (this was used by our client to support its submissions on wholesale mobile termination rates).

We also demonstrated the economies of scale applying to the nationwide retail division, driven by different retail characteristics such as churn, prepay/postpay split, usage and required wholesale inputs.

Figure 1: Our model covered the full mobile business of our client [Source: Analysys Mason, 2014]

The result

Our client gained a robust basis on which to understand its own network service costs (voice, SMS, data) and how the costs differed from those of its larger competitors. This was used for submissions to the regulator on mobile termination rates and for broader business intelligence.

We developed a number of supporting calculations that could be used in different circumstances, including an understanding of the costs of our client’s competitors, reasonable national roaming costs, data service costs, and incremental service costs.