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ROI Analysis Essential for Medium and Long Term 5G Planning

Release Date:2020-11-20  Author:By Qi Xiaohong  Click:

How its rationality is evaluated when the medium and long term 5G planning for an operator is accomplished. The analysis of financial return on investment (ROI) is an important means to test its rationality, and it can also further modify the mid- and long-term 5G planning. The following is a brief introduction to ROI analysis of medium and long term 5G planning designed by ZTE, including basic modeling ideas, data prediction and acquisition, and the application value of ROI analysis results. Finally, this article shares a ROI analysis case of medium and long term 5G planning for an operator.

Building a ROI Analysis Model for Medium and Long Term 5G Planning
In a ROI analysis model for medium and long term 5G planning built by ZTE (Fig. 1), the revenue of operators in the 5G era comes from 2C and 2B, while the proportion of 2B revenue in the 2G/3G/4G era is negligible. CAPEX includes investment in network construction (including equipment and engineering) as well as license cost. OPEX involves network-related operation and maintenance (O&M) costs, and non-network-related marketing costs, general and administrative (G&A) expenses and other expenses such as international gateway fees and financial expenses, which are often listed in the operators' annual report.


Key Data Acquisition and Prediction
In ROI analysis, data acquisition and prediction are fundamental. Some data comes from the direct output of network planning, some from basic database, and some needs to be obtained through reasonable forecast tools.
The network size is output through E2E network planning. Through network planning tools, new 5G link budget, and service KPI settings, the number of wireless sites deployed at each stage can be generated. For core network planning, the capacity configuration of each network element is generally based on user and service forecasts, combined with the average rates of users and services. The transport network is planned according to the scale of wireless sites, which involves existing site expansion and new site construction.
It is quite important to estimate the cost for a single site, so a typical site model is established in network planning. Through the site model, the number of devices configured at each site and the engineering work can be clearly known, so both equipment and engineering expense of a single site can be calculated.
Some key data such as the number of users, ARPU value, and vertical industry income, are recommended to be forecasted by an intelligent big data platform.

Application Value of ROI Analysis
The main purpose of ROI analysis is not only to understand the medium and long term return on investment, but also to guide us to carry out targeted strategies for future 5G network and business planning.
First of all, it is necessary to make a CAPEX analysis. According to the ROI analysis of the medium and long term 5G planning of some operators, the investment in RAN accounts for 70–80% of total network CAPEX, in bearer network (BN) about 15%, and in core network (CN) about 5%. Therefore, in terms of cost control, it is critical to reduce TCO of wireless network. The first major strategy to reduce investment in wireless network is to control the number of sites. The main schemes include reasonable spectrum planning, reasonable coverage planning, and reasonable setting of performance indicators, especially the uplink edge rate. Reducing the cost of a single site is also quite important. The extreme simplified site solution is the trend of 5G planning.
The second is OPEX analysis. By the OPEX analysis, we find that network O&M cost, marketing cost and administrative expense account for the same proportion, which constitute the vast majority of OPEX. From the perspective of equipment suppliers, we usually give strategic suggestions on network O&M cost. By further analysis, it is illustrated that electricity cost, site rental cost and network maintenance cost are three major ones, so the solution is reducing energy consumption, simplifying the site, and intelligent O&M.
The last part is the analysis of key financial indices, especially focusing on cash flow trends. Due to the large investment in 5G, few individual users in the early stage and the difficulty of industry applications to produce economies of scale, the pressure on cash flow is very high. Operators need to reserve enough funds to deal with it, including using 4G business revenue to feed 5G. If the operators' own financial strength is weak, they need to broaden financing channels or adopt innovative business models in cooperation with suppliers. In the analysis of ROI financial indicators, there are several key indicators to evaluate the rationality of 5G investment.
Earnings before interest, taxes, depreciation and amortization (EBITDA) above 40% is relatively healthy margin for the telecom industry.
Net present value (NPV) is the difference between the present value of future capital inflows (income) and the present value of future capital outflows. An investment with a positive NPV will be?profitable,?while an investment with a negative NPV will result in a net loss.
Internal rate of return (IRR) refers to a metric used in financial analysis to estimate the profitability of potential investments. IRR is generally higher than the loan interest rate of a local bank.

Case Study
The following is a case study of ROI analysis of the medium and long term (2020-2025) 5G planning for an operator in Southeast Asia, which is analyzed from three aspects.
—Revenue: The operator's 5G revenue comes from individual mobile business, FWA and vertical industries. According to the six-year forecast, the revenue from individual mobile business still accounts for more than 80% of total revenue, while 2B income is relatively low in the first three years and will gradually grow to over 20% after the fifth year. It can be predicted that 2B income will account for over one third of the total revenue in the long run. However, the revenue forecast of 2B industries is more uncertain than that of 2C business, which largely depends on the country's macroeconomic development and the operator's strategy.
—CAPEX: The operator's existing transmission devices are obsolete and have been put into use for a long time, most of which need to be replaced, so the investment in transmission is relatively high. As for the wireless network, reasonable KPIs are recommended to control the site size and a large number of co-site construction and infrastructure are shared, so the investment in wireless network can be well controlled, accounting for slightly over 70% of the total.
—Financial indicators: From the perspective of 5G ROI alone, the pressure of cash flow is relatively high within six years. Cash flow does not turn positive until the fourth year, nor cumulative cash flow positive until the fifth year. However, the revenue from 4G business remains stable and can supplement 5G cash flow. The IRR of this project reaches 16%, and the static return cycle of 5G investment is 5.1 years, with a good overall evaluation.

ROI analysis is indispensable for medium and long term 5G planning. A good ROI analysis must come from professional model building, comprehensive data collection, and scientific prediction and evaluation, and can help operators adjust their business development strategies and optimize their medium- and long-term network planning.