Architectures and competitive models in fibre networks

Transcription

1 WIK-Consult Report Study for Vodafone Archtectures and compettve models n fbre networks Authors: Prof. Dr. Steffen Hoerng Stephan Jay Dr. Karl-Henz Neumann Prof. Dr. Martn Petz Dr. Thomas Plückebaum Prof. Dr. Ingo Vogelsang WIK-Consult GmbH Rhöndorfer Str Bad Honnef Germany Bad Honnef, December 2010

2

3 Archtectures and compettve models n fbre networks I Contents Content of Fgures Content of Tables IV VI Executve Summary 1 1 Extended Summary 7 2 Compettve models n fbre deployment Introducton The overall NGN/NGA archtecture Technologes/archtectures consdered P2P GPON GPON over a passve P2P plant WDM PON Comparson of technologes consdered Compettve models not consdered Crtcal market shares for compettve models Compettve and regulatory nteracton n an olgopoly envronment Modellng approach The theoretcal model The quanttatve model QoS and wllngness to pay n the basc model Basc model results Results on end-user prces Results on profts Results on market shares and number of frms Results on consumer surplus (CS) and welfare (W) Access mark-up for the GPON btstream core scenaro Endogenous wholesale access charges Lookng at Cluster 4 n solaton Cluster 5 results for the GPON btstream core scenaro Basc model results: Conclusons 82

4 II Archtectures and compettve models n fbre networks Senstvty analyss Greenfeld vs. Brownfeld results QoS and WtP assumptons Conclusons on senstvtes 93 3 Opex and capex of dfferent FTTH technologes The modellng approach General approach Geotypes of Euroland Network structure The ncumbent as nvestor Demand Major assumptons on capex and opex Capex Opex Wholesale cost and prces Dynamc approach Network roll-out Subscrber acquston Replacement nvestments and prce adjustments Interest rate and present values Other parameters Our results Area of proftable coverage and crtcal market shares Investment and cost dfferences of technologes statc approach Investment Cost Wholesale prces Senstvtes: Impact on crtcal market shares Investment reducton for the ncumbent ( Brownfeld deployment ) Lower NGA penetraton 131

5 Archtectures and compettve models n fbre networks III Wholesale prce ncrease CPE prce senstvty Investment and cost of dfferent technologes dynamc approach Investment Cost WDM PON senstvty: Revenues from sale of MDF locatons Summary of cost modellng results Proftable coverage, nvestment, cost and competton n the steady state analyss Impact of the ramp-up on costs and technology rankng 145 Bblography 146 Annex 1: Key parameters of cost modellng 149 Cvl engneerng parameters 149 Port prces 149 ODF 149 Energy consumpton 149 CPE prces 150 Annex 2: NGA technologes not consdered 151 FTTN/VDSL 151 DOCSIS Actve Ethernet 152 Mult-fbre deployment 153 FTTB 154 EPON 154 Annex 3: Results n the lterature related to NGA 156 Annex 4: The competton models: Formal dervatons 159

6 IV Archtectures and compettve models n fbre networks Content of Fgures Fgure 1-1: Overvew of modellng framework 11 Fgure 2-1: NGN/NGA general archtecture 29 Fgure 2-2: Network topology: Terms and defntons 30 Fgure 2-3: Pont-to-Multpont fbre archtecture 31 Fgure 2-4: Access pont optons for wholesale btstream access (WBA) 33 Fgure 2-5: Scenaro P2P wth fbre LLU 37 Fgure 2-6: Scenaro GPON wth btstream access at the core level 41 Fgure 2-7: Scenaro GPON wth btstream access at the MPoP level 42 Fgure 2-8: Scenaro GPON over P2P wth fbre LLU 45 Fgure 2-9: Use of the optcal wavelength grd 46 Fgure 2-10: Outlook: WDM PON n future use 47 Fgure 2-11: Scenaro WDM PON wth unbundlng at the core level 49 Fgure 2-12: Preference space 52 Fgure 2-13: Prces and number of frms Scenaro GPON btstream core, Hnterland 61 Fgure 2-14: Prces and number of frms Scenaro GPON btstream core, No-Hnterland 61 Fgure 2-15: Profts and number of compettors GPON btstream core, Hnterland 64 Fgure 2-16: Profts and number of compettors - GPON btstream core, No-Hnterland 65 Fgure 2-17: Fgure 2-18: Fgure 2-19: Fgure 2-20: Market shares and number of compettors GPON btstream core, Hnterland 66 Market shares and number of compettors - GPON btstream core, No-Hnterland 67 Welfare per month and number of compettors GPON btstream core, Hnterland 69 Welfare per month and number of compettors - GPON btstream core, No-Hnterland 70 Fgure 2-21: Prces and access mark-up - GPON btstream core, Hnterland 71 Fgure 2-22: Prces and access mark-up - GPON btstream core, No-Hnterland 71 Fgure 2-23: Profts per month and access mark-up - GPON btstream core, Hnterland 72 Fgure 2-24: Profts per month and access mark-up - Scenaro Btstream access to GPON at core nodes, No-Hnterland 73 Fgure 2-25: Market shares and access mark-up - GPON btstream core, Hnterland 73

7 Archtectures and compettve models n fbre networks V Fgure 2-26: Fgure 2-27: Fgure 2-28: Market shares and access mark-up - GPON btstream core, No-Hnterland 74 Welfare per month and access mark-up - GPON btstream core, Hnterland 74 Welfare per month and access mark-up - GPON btstream core, No-Hnterland 75 Fgure 3-1: P2P Cost curves of ncumbent and compettors (Cluster 4) 107 Fgure 3-2: P2P Cost curves of ncumbent and compettors (Cluster 5) 107 Fgure 3-3: GPON cost curves of ncumbent and compettors (Cluster 5) 110 Fgure 3-4: GPON Cost curves of ncumbent and compettors (Cluster 6) 110 Fgure 3-5: WDM PON Cost curves of ncumbent and compettors (Cluster 4) 111 Fgure 3-6: WDM PON Cost curves of ncumbent and compettors (Cluster 5) 111 Fgure 3-7: Total nvestment per subscrber and cluster at 70% market share (excl. nvest n IPTV equpment) 113 Fgure 3-8: P2P Cost structure of ncumbent at 70% market share (Cluster 3) 117 Fgure 3-9: GPON over P2P Cost structure of ncumbent at 70% market share (Cluster 3) 118 Fgure 3-10: GPON Cost structure of ncumbent at 70% market share (Cluster 3) 118 Fgure 3-12: Cost structure of fbre unbundler at 20% market share (Cluster 3) 120 Fgure 3-13: Fgure 3-14: Cost structure of a btstream MPoP access seeker at 20% market share (Cluster 3) 120 Cost structure of a btstream core access seeker (GPON) at 20% market share (Cluster 3) 121 Fgure 3-15: Cost structure of a WDM unbundler at 20% market share (Cluster 3) 121 Fgure 3-16: Wholesale prces 123 Fgure 3-17: Annual nvestment Cluster Fgure 3-18: Annual nvestment Cluster Fgure 3-19: Percentage of total nvestment durng ramp-up (example Cluster 1) 138

8 VI Archtectures and compettve models n fbre networks Content of Tables Table 1-1 Overvew of the archtecture scenaros consdered 7 Table 1-2: Comparson of access archtectures consdered 10 Table 1-3: QoS and WtP assumptons for basc model 20 Table 1-4: Margnal costs (MC) and prces (p) n Euro per month 21 Table 1-5: Profts n Mllon Euro (per month) 22 Table 1-6: Market shares s n percent 22 Table 1-7: Basc model results on consumer surplus and welfare (per month) 23 Table 2-1: Costs borne as access charge (ULL, btstream access charge) by entrants by scenaro (shaded) 28 Table 2-2: Overvew of the archtecture scenaros consdered 35 Table 2-3: Comparson of access solutons consdered 50 Table 2-4: QoS and WtP assumptons for basc model 57 Table 2-5: Margnal costs n Euro per month 60 Table 2-6: Margnal costs and prces n Euro per month 60 Table 2-7: Prces n Euro per month n case of 4 entrants for all scenaros 62 Table 2-8: Profts n Mllon Euro (per month) 63 Table 2-9: Market shares s n percent 66 Table 2-10: Basc model results on consumer surplus and welfare per month 68 Table 2-11: Basc model results P2P unbundlng, No-Hnterland 77 Table 2-12: Model results wth endogenous a, No-Hnterland, P2P unbundlng 77 Table 2-13: Basc model results: Cluster 4 - P2P unbundlng, Hnterland Model 78 Table 2-14: Basc model results: Cluster 4 - P2P unbundlng, No-Hnterland Model 79 Table 2-15: Basc model run, Hnterland, GPON btstream core, Clusters Table 2-16: Basc model run, Hnterland, GPON btstream core, Cluster 5 n solaton 81 Table 2-17: Basc model run, No-Hnterland, GPON btstream core, Clusters Table 2-18: Basc model run, No-Hnterland, GPON btstream core, Cluster 5 n solaton 82 Table 2-19: Table 2-20: Basc Greenfeld model results for WDM PON unbundlng, Hnterland model, a = Brownfeld model results for WDM PON unbundlng, Hnterland model, a =

9 Archtectures and compettve models n fbre networks VII Table 2-21: Brownfeld model results for WDM PON unbundlng, Hnterland model, a = Table 2-22: WtP assumptons for senstvty analyss 87 Table 2-23: Senstvty to WtP assumptons - P2P unbundlng, Hnterland Model 87 Table 2-24: Senstvty to WtP assumptons GPON btstream core, Hnterland Model 88 Table 2-25: Senstvty to WtP assumptons - WDM PON unbundlng, Hnterland Model 88 Table 2-26: Senstvty to WtP assumptons - P2P unbundlng, No-Hnterland Model 89 Table 2-27: Table 2-28: Table 2-29: Senstvty to WtP assumptons GPON btstream core, No-Hnterland Model 89 Senstvty to WtP assumptons - WDM PON unbundlng, No-Hnterland Model 90 Senstvty to W and CS to WtP assumptons Hnterland Model, n Mo Euro 91 Table 2-30: Senstvty to W and CS to WtP assumptons Hnterland Model, rankng 91 Table 2-31: Senstvty to W and CS to WtP assumptons No-Hnterland Model, n Mo Euro 92 Table 2-32: Senstvty to W and CS to WtP assumptons No-Hnterland Model, rankng 92 Table 3-1: Structural parameters of Euroland 96 Table 3-2: Aeral deployment share per cluster 97 Table 3-3: Customer mx 99 Table 3-4: Deployment of FTTH n Euroland (passed homes per year) 104 Table 3-5: Evoluton of take-up rate n the dynamc model 104 Table 3-6: P2P Crtcal market shares 106 Table 3-7: GPON over P2P Crtcal market shares 106 Table 3-8: GPON Crtcal market shares 108 Table 3-9: WDM PON Crtcal market shares 109 Table 3-10: Total nvestment per cluster at 70% market share (n Euro, excl. nvest n IPTV equpment) 112 Table 3-11: Investment n network elements (Cluster 1) 115 Table 3-12: Investment n network elements (Cluster 3) 116 Table 3-13: Total cost per customer per month at 70% take-up (n Euro) 119 Table 3-14: Investment reducton for duct nfrastructure per network segment n a Brownfeld approach 125

10 VIII Archtectures and compettve models n fbre networks Table 3-15: Incumbent crtcal market shares (Greenfeld vs. Brownfeld) 126 Table 3-16: Incumbent nvestment at 70% market share 127 Table 3-17: Incumbent total cost per subscrber and month at 70% market share 128 Table 3-18: Compettors crtcal market shares (Greenfeld vs. Brownfeld) 129 Table 3-19: Investment reducton for duct nfrastructure per network segment n a Brownfeld approach when consderng full duct lfetme 129 Table 3-20: Impact of assumng full duct lfetme on ncumbent s Brownfeld vablty 130 Table 3-21: Impact of assumng full duct lfetme on compettor s Brownfeld vablty 130 Table 3-22: Table 3-23: Table 3-24: Table 3-25: Table 3-26: Table 3-27: Compettors crtcal market shares (70% vs. 60% ncumbent maxmum take-up) 131 Impact of settng 60% take-up as target on wholesale prces (ncrease n %) 132 Impact of wholesale prce ncrease on the crtcal market shares of access seekers 132 Impact of WDM CPE prce senstvty on the crtcal market shares of ncumbent 133 Impact of WDM CPE prce senstvty on the crtcal market shares of access seekers 134 Undscounted total nvestments over 20 years (mn Euro) and rankng (1 lowest, 4 hghest) 135 Table 3-28: Dscounted total nvestments over 20 years (mn Euro) 136 Table 3-29: Investment relevance, drver and dfferences between archtectures 137 Table 3-30: Relatve nvestment dfferences to GPON 139 Table 3-31: Rankng of archtectures relatve to lowest total expenses over 20 years at present value (1: lowest expenses, 4: hghest expenses) 139 Table 3-32: Present value of nvest and cost over 20 years Cluster Table 3-33: Cost dfference to GPON: Total expenses (nvest and OPEX, drect and common costs) at undscounted and present value 141 Table 3-34: Sales from MDF dsmantlng 142 Table 3-35: Comparson of dscounted total expenses (mn Euro) 143

11 Archtectures and compettve models n fbre networks 1 Executve Summary Wth the fnalzaton of the EC s NGA Recommendaton there s much debate about how to best delver the next generaton of hgh-speed broadband networks. Actual FTTH rollout, however, remans lmted n Europe, wth most of t based upon GPON technology. The hgh captal costs and the long asset lfe of fbre mean that the technology choces made today wll dctate the forms of competton and regulaton that develop n these markets for years to come. Ths report examnes the cost dfferences and compettve outcomes for dfferent FTTH technologes to determne the mpact dfferent technology choces mght be expected to have on prces, market entry, penetraton and market shares over the long term. Understandng these ssues should help polcymakers decde whether they should be ncentvsng partcular technology choces today n order to maxmze consumer surplus and total welfare n the future. The varous technology scenaros we modelled are: Technologes sutable for unbundlng 1 : Incumbent Ethernet P2P 2 GPON over P2P 3 WDM PON Compettor (Entrant) Fbre LLU at MpoP Fbre LLU at MPoP WDM unbundlng at Core Nodes Btstream-only technologes 4 : Incumbent GPON GPON Compettor (Entrant) Btstream access at Core Nodes Btstream access at the MPoP 1 Whle these technologes have been modelled on the bass of entrant unbundlng, ths does not preclude, of course, addtonal btstream-based entry. 2 P2P Pont-to-Pont; PMP Pont-to-Multpont. 3 Ths conssts of a physcal Pont-to-Pont archtecture but wth the ncumbent usng GPON plant movng the spltters back to the MPoP wth dedcated fbre lnks n both the drop and feeder segments. Further detals are provded n Chapter 2. 4 Due to the underlyng Pont-to-Multpont fbre plant GPON cannot be unbundled at central stes. Accordngly wholesale access s btstream-only.

12 2 Archtectures and compettve models n fbre networks The modellng approach Our basc cost modellng reled upon a bottom-up cost modellng consstent wth a Greenfeld Long Run Incremental Cost approach 5. We consdered both a statc model where the relevant FTTH roll-out s completed and the network has (fully) substtuted the copper access network and a dynamc approach whch consdered the tme path of nvestment accordng to a partcular roll-out over tme. For purpose of ths study we created a hypothetcal country of approxmately 22 mllon households referred to as Euroland. We defned 8 areas or clusters, each havng typcal network parameters derved out of detaled geo-modellng of access networks n several actual European countres. To determne the extent of vable roll-out we then modelled the total cost of provdng NGA servces n each cluster and assessed ts proftablty aganst demand represented by a typcal ARPU of per customer per month whle entrants earned a 5% lower ARPU. 6 These cost modellng results provde an ndcaton of the compettve condtons we mght expect n the NGA market for each technology as the crtcal market shares for vablty ndcated the potental number of compettors whch could be supported. We then developed two competton models whch show the strategc nteracton between the nfrastructure provder and ts compettors allowng end-user prces, consumer and producer surplus for all technologes to be compared. 7 We consdered models both wth and wthout a second vertcally ntegrated broadband nfrastructure (representng cable) to whch no other frms have access. The wth cable model s known as "No-Hnterland", whle that wthout cable s the "Hnterland" model. In both types of models the number of entrants s determned endogenously. Overall results Our overall results reveal a clear dstncton between technologes that can be physcally unbundled and those btstream-only technologes that cannot. 1. Scenaros based on networks sutable for unbundlng generate greater consumer surplus and total welfare than those based on GPON btstream access. Whle our results are less clear on whch technology sutable for unbundlng should be preferred, ths s an mportant concluson for European polcymakers because t sug- 5 As there often s avalable nfrastructure from exstng networks whch may be reused to generate nvestment savngs we also undertook Brownfeld senstvty calculatons. 6 In the dynamc extenson of the model we accounted for growng demand over the 20 year perod of the model up to a maxmum of 70% penetraton. 7 In our compettve models, the ncumbent owns and nvests n an FTTH network to whch entrants must obtan access n order to provde NGA servces. As we found that nfrastructure replcaton s only theoretcally vable n the densest cluster we do not consder t to be of major relevance to FTTH competton so dd not consder t further.

13 Archtectures and compettve models n fbre networks 3 gests that the current trend towards btstream-only GPON s clearly nferor to any opton that s sutable for unbundlng. Such archtectures, whether P2P, GPON over P2P or WDM PON would delver greater consumer surplus and total welfare. P2P archtectures are avalable today, but WDM PON would requre the adopton of new standards n Europe. In addton, we fnd n our modellng that 2. GPON (.e. closed and not sutable for unbundlng) s only about 10% cheaper to roll-out than Ethernet P2P so open technologes can acheve the same coverage as closed GPON. In our basc model, the benefts of Ethernet P2P outwegh the addtonal nvestment costs and delver hgher consumer surplus and total welfare. 3. Proper prcng for wholesale access s essental, wth a partcularly strong mpact on the unbundlng optons. Increasng wholesale prces by 10% can have a sgnfcant mpact on the crtcal market shares for entrants and ther compettve coverage at the gven ARPU. 4. Under other assumptons, WDM PON would be the best choce f that technology becomes commercally avalable for the access network. Networks sutable for unbundlng generate greater consumer surplus and total welfare. The table below summarzes our basc model results for monthly consumer surplus (CS) and total welfare (W) per month. Hnterland ( no cable ) No-Hnterland ( wth cable ) CS W CS W Scenaro Entrants Mo Rank Mo Rank Entrants Mo Rank Mo Rank P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON Btstream Core GPON Btstream MPoP

14 4 Archtectures and compettve models n fbre networks In terms of total welfare, P2P archtectures provde the best results, wth GPON over P2P unbundlng narrowly beatng Ethernet P2P unbundlng, whle WDM PON ranks consstently thrd both for total welfare and consumer surplus, usually wth a sgnfcant margn. 8 The two btstream scenaros compete for last place. We ran a number of senstvtes n addton to the base-case results reported n the table above ncludng the qualty of servce delverable by the varous archtectures, customers wllngness to pay for greater qualty and the ncumbency advantage. Consderng the consstency of rankngs for consumer surplus and total welfare across these senstvtes we found: () () () (v) (v) WDM PON unbundlng always comes up among the best; P2P unbundlng shows a varable rankng, but s usually n the frst ter; GPON over P2P unbundlng s also qute varable but mostly ahead of P2P; GPON wth btstream access at the core s as varable as P2P, but t shows up mostly n the second ter and would rank even worse under weak regulaton; and GPON wth btstream access at the MPoP s always among the lowestranked. In every scenaro we modelled, the technologes sutable for unbundlng ranked well above the btstream-only optons. The addtonal cost nvolved n rollng out P2P s only about 10% hgher than the one assocated wth closed GPON: technologes sutable for unbundlng can acheve nearly the same coverage as closed GPON archtectures. Incumbent coverage of FTTH could reach up to 64% of the populaton wth no notceable dfference between archtectures sutable for unbundlng and GPON. We assume that the fxed network can reach a market share of up to 70% of the total potentally addressable market wth the remander representng DOCSIS 3.0, moble broadband and non-subscrbers. On ths bass and assumng our ARPU projectons, an ncumbent operator can proftably cover a sgnfcant part of Euroland wth FTTH - about 50% of the populaton could be covered wth P2P or WDM PON whle about 64% could be covered wth GPON over P2P (or closed GPON). If WDM PON customer premses equpment (CPE) costs could be reduced to the level of GPON CPE, ths technology could also cover around 64%. If ducts are avalable for re-use, coverage can generally 8 The margn s narrow for CS n the Hnterland model, because here WDM PON has 4 entrants, whle the two P2P scenaros only have 3 entrants.

15 Archtectures and compettve models n fbre networks 5 be extended one addtonal cluster (Less Suburban) wth the greatest mpact on the WDM PON case. The cost comparson of our fve scenaros has shown that overall GPON s the cheapest technology, followed by GPON over P2P, WDM PON and P2P. 9 A P2P fbre archtecture requres only slghtly hgher costs than a closed GPON archtecture n the range of 10%, reducng to around 7% f one takes account of the relatve tmng of nvestment between archtectures. GPON over P2P generates savngs compared to an Ethernet P2P archtecture further reducng ts nvestment gap wth closed GPON. Ths result can be understood because the network elements whch cause the hghest nvestment requrements, n-house cablng and drop cable, account for ~75% of total nvestment and these do not dffer between any of the archtectures. Cost tems lke energy and floor space exhbt sgnfcant dfferences among archtectures. Ethernet P2P causes nearly double as much energy cost at the MPoP as GPON and nearly 6 tmes hgher energy costs than WDM PON (n terms of present value). P2P has more than 2.5 tmes hgher floor space costs than closed GPON and nearly 90 tmes more than WDM PON. These apparently huge dfferences, however, only have a very lmted mpact on the overall cost performance of dfferent archtectures because the cost share of each of these factors s not more than 1%. Proper prcng for access s essental. In our basc models we assume that wholesale access charges are determned accordng to a Greenfeld BU-LRIC cost standard. However, as the polcy approach to wholesale charges as well as natonal specfctes, topology, the speed of deployment and copper swtch-off wll all, of course, nfluence these wholesale prces whch should not be smplstcally nterpreted as the rght prce for fbre access. Because of nformaton asymmetres between the ncumbent and the regulator, dentfyng the proper level of the LRIC n a newly emergng network may be a dffcult task. Furthermore, there s currently a polcy debate on explctly devatng from LRIC to ncentvze FTTH nvestment. Entrants may have to pay a mark-up on the LRIC based wholesale access charge. We have tested the mpact of such polces on competton and welfare on the bass of our modellng approaches. We fnd that, based on a gven ARPU, ncreasng the wholesale prces moderately by 10% has a sgnfcant mpact on the crtcal market shares and the compettve coverage wth the strongest effects occurrng n the P2P unbundlng scenaros at the gven ARPU. The compettve busness model would become unvable except n the two most urban areas (18% populaton coverage). In the btstream access scenaros the vablty of 9 Wth the excepton of the densest urban cluster where WDM PON and GPON over P2P swtch ranks, ths s consstent over the relevant clusters.

16 6 Archtectures and compettve models n fbre networks competton s removed from the Suburban area- some 11% of the total populaton. The general ncrease n crtcal market shares ndcates a lower number of potental compettors and an ncrease n rsk of nsuffcent market entry. Under other assumptons WDM PON could be the best choce, f that technology becomes commercally avalable for the access network. The ablty to consoldate MDF locatons should make WDM PON even more attractve to ncumbents. As WDM PON s expected to enable far longer lne lengths and much hgher splttng ratos, an ncumbent rollng out WDM PON wll be able to close many MDF locatons and greatly aggregate demand n the remanng nodes. The ncumbent mght then be expected to realse profts when sellng former MDF locatons. Such profts have been ntegrated nto our analyss by dmnshng the dscounted total expenses of rollng out WDM PON. Wth these profts ncorporated nto the analyss, WDM PON becomes the most attractve archtecture n Cluster 1, becomes second n Cluster 2 and generally reduces the dfference to GPON sgnfcantly. Ths may, however, strand the assets of entrants who have nvested n actve equpment at the MDF. The relatve performance of WDM PON s strongly nfluenced by the cost of customer premses equpment (CPE). WDM PON vable market shares are actually lower than btstream across the frst 4 clusters but then jump sgnfcantly n Cluster 5 (Suburban). Should WDM PON vendors be able to reduce CPE prces to the level of GPON CPE the crtcal market shares for vablty would be sgnfcantly reduced and coverage could be extended by one cluster to Cluster 6 - equvalent to the coverage achevable by GPON and at a slghtly lower vable market share. Entrants could penetrate to Cluster 5 (Suburban) wth vablty at only 12% market share compared wth 16% or 28% for GPON btstream access at the core or MPoP respectvely. Generally, WDM PON would then rank frst as a technology. Gettng WDM PON CPE costs down wll requre actvty n the standards arena. Notwthstandng these potental developments of WDM PON, the relatve attractveness of t aganst P2P s strongly nfluenced by assumptons made on consumers wllngness to pay for addtonal qualty, the advantages conferred to the ncumbent by ts brand (known as the ncumbency premum) and the techncal performance whch may be acheved by WDM PON. If, by the tme the network s fully rolled-out (after about 10 years) consumers ascrbe a hgh value to ultra hgh speeds and strongly dfferentated retal offerngs, then the addtonal cost of P2P s a prce worth payng. If, on the other hand, consumers ascrbe only a small value to these attrbutes, or entrants cannot reach the market shares requred for vablty, then the savngs achevable under WDM PON, whle stll allowng a form of unbundlng, make WDM PON the best technology to maxmze consumer surplus and total welfare.

17 Archtectures and compettve models n fbre networks 7 1 Extended Summary FTTH archtectures 1. In ths study we consder and evaluate NGA archtectures whch meet the foreseeable future bandwdth demand and allow for hghest bandwdth and qualty for endusers and whch no longer rely on copper cable elements. These are FTTH archtectures only. From all avalable FTTH archtectures we concentrate on the two most relevant archtectures n Europe, Ethernet Pont-to-Pont and GPON. In order to overcome some restrctons and weaknesses beng dscussed for GPON we also nclude nto our consderatons two (G)PON varants, one mplementng GPON on top of a passve Pont-to-Pont fbre plant and a future verson of PON, ncreasng the bandwdth and qualty of the current PON systems by usng WDM technology on a Pont-to-Multpont fbre topology. 2. We assume the ncumbent to be the nvestor n the NGA network nfrastructure. Compettors (new entrants) face the same (effcent) cost f they offer FTTH servces on the bass of wholesale access to the ncumbent s network, but may acheve a lower ARPU. If the NGA archtecture s based on a Pont-to-Pont fbre plant we have modelled the compettors as usng unbundled fbre loops as the wholesale access servce. If the archtecture s based on a Pont-to-Multpont fbre plant, we consder an actve wholesale access at the MPoP or at the core network node locatons. In total we consder the archtectures and wholesale scenaros as presented n Table 1-1. Table 1-1 Overvew of the archtecture scenaros consdered Scenaro name Incumbent archtecture Compettor (Entrant) wholesale base P2P unbundlng Ethernet P2P Fbre LLU at MPoP GPON over P2P unbundlng GPON over P2P Fbre LLU at MPoP WDM PON unbundlng WDM PON WDM unbundlng at Core Nodes GPON btstream core GPON Btstream access at Core Nodes GPON btstream MPoP GPON Btstream access at the MPoP 3. A P2P FTTH fbre archtecture deploys ndvdual fbre access lnes from the MPoP to each customer home. The complete fbre capacty s avalable for each customer n the subscrber access network snce every customer has a dedcated fbre from hs home to the MPoP. Because of the uncertantes of the future bandwdth needs of resdental and busness customers ths Pont-to-Pont fbre plant appears to be the most future proof soluton, snce the use of the full optcal spectrum per fbre s not restrcted by any ntermedate technology. MPoPs can serve more fbre lnks than the largest copper MDFs, whch causes therefore no problem of manageabl-

18 8 Archtectures and compettve models n fbre networks ty. In ths archtecture the capacty of the fbre can easly and flexbly be expanded by dedcated port equpment. The archtecture supports a hgh securty standard. 4. A P2P archtecture provdes easy unbundled access to the ndvdual fbre lne at the MPoP. The compettor just has to nstall hs own Optcal Dstrbuton Frame collocated at the ncumbent s MPoP, where he then operates hs own Ethernet Swtch. 5. The GPON technology s desgned for Pont-to-Multpont fbre plants. It concentrates the traffc of a sgnfcant number of customer access fbres at an ntermedate optcal spltter locaton (DP) onto a sngle backhaul fbre. Optcal spltters may be cascaded n order to optmze the fbre count and to adapt t to the end customer dstrbuton. Thus, the fbre plant strongly depends on the optcal power budget and the maxmum splttng factor. The fbres from the spltters are connected to the customer sde of the ODF n the MPoP and patched there to the approprate OLTs. The OLTs are connected to an Ethernet swtch whch s the nterface to the concentraton network. Especally durng ramp-up when only few potental customers have become subscrbers to the FTTH network ths archtecture stll has consderable spare capacty. GPON systems offer a downstream bandwdth of 2.5 Gbps as shared capacty. In the case of 64 end customers per spltter thus the system supports an average capacty of 40 Mbps for each user. GPON archtectures concentrate the traffc onto fewer electronc nterfaces at the Central Offce than Ethernet P2P. These actve components are more complex and more expensve than P2P components, but fewer components are needed. Also the end-user devces are more expensve. 6. GPON systems are more vulnerable to llegal ntercepton, denal of servce attacks and more dffcult to repar because all users connected to one spltter share the same bandwdth. GPON archtectures are well suted to asymmetrc traffc, nasmuch upstream and downstream bandwdths dffer due to the nherent upstream communcaton collson. A preponderance of downstream traffc over upstream has so far been the typcal resdental behavor. Insofar as customer demand moves more towards symmetrc traffc patterns, the GPON archtecture loses relatve performance. The ablty of GPON to serve end customers wth ndvdual servces and bandwdth guarantees s restrcted. An ncrease n bandwdth can be acheved by reducng the splttng factor (the number of customers per OLT) and/or by allocatng fxed bandwdth through the OLT admnstraton, or even supplyng TDM based servces. But the more bandwdth that s allocated to a partcular customer, the less that s avalable to be shared by the others. 7. GPON, deployed wth spltters n the feld, can at present only be unbundled at the spltter locatons close to the end customers. Fbre sub-loop unbundlng s not consdered n ths study as t does not appear to support a suffcently proftable compettor s busness model.

19 Archtectures and compettve models n fbre networks 9 8. Instead of unbundlng we consder two btstream access scenaros n the GPON case, btstream access at the core network level and at the MPoP level for the compettors wholesale access cases. The man dfference between these scenaros s that the btstream access at the core level ncludes the transport through the ncumbent s concentraton network whle n the scenaro btstream access at the MPoP the compettor has to use hs own concentraton network and may obtan a transparent, non-overbooked bandwdth from the MPoP to hs end customers, resultng n hgher product qualty and the ablty of ndependent product desgn compared to GPON btstream access at core nodes. But snce the compettor stll depends on the ncumbent s actve components, ths qualty mprovement wll not acheve the degree of unbundled fbre local loops. 9. GPON can also be mplemented on top of a Pont-to-Pont fbre archtecture by movng the spltters back nto the central MPoP locaton and havng dedcated fbres n both drop and feeder sectons. We consder ths combned P2P/GPON archtecture because t has the potental to combne advantages of both worlds. All fbres are termnated on the customer sded ports of an ODF and are accessble per patch cables. So every customer stll has a dedcated fbre lne to the MPoP, thus openng all future fbre and optcal spectrum uses one may magne and also allowng ndvdual use of a sngle fbre as descrbed n the P2P scenaro. Besde ths addtonal opton ndvdual customer demand may be served out of the GPON features as descrbed before, whereby the reducton of the splttng rato could be acheved n an easy manner at the central ste just ntroducng new spltters wthout affectng the fbre plant n the feld. Locatng the spltters at a central ste allows a more effcent use of the spltters and the OLTs durng the roll-out of the servces (ramp-up). Ths generates not only postve cash flow effects but also reduces some rsk of nvestment. The flexblty of the Pont-to-Pont fbre plant allows one to exchange the transmsson systems smoothly over tme, customer per customer, f that looks favourable, and thus reduces the suppler dependency of the operator. 10. The assocated wholesale product we have consdered n ths study s an unbundled fbre loop. From a wholesale perspectve GPON over P2P s dentcal wth the Ethernet P2P case because t refers to the same P2P outsde plant. 11. The fourth archtecture we consder and assess s WDM PON. Ths technology would allow dedcated wavelengths for each customer, resultng n hgher bandwdth compared to GPON. Each of these WDM PON wavelengths s announced to support 1 Gbps bandwdth, whch can be admnstered by one or more WDM PON OLTs, operated by dfferent carrers, thus allowng one to unbundle the wavelength. A sngle OLT wll here support up to 1,000 wavelengths wth 1 Gbps capacty each n a symmetrc manner. The fbre plant may brdge a dstance of up to 100 km allowng one to close down all the exstng MDF locatons except those few for the core network. Wth ths type of WDM PON archtecture we have a dramatc ncrease of dedcated bandwdth per end customer (from 40 Mbps to 1 Gbps) but the

20 10 Archtectures and compettve models n fbre networks bandwdth peak per customer s reduced to 1 Gbps compared to 2.5 Gbps n the shared GPON case. 12. WDM PON enables a specfc unbundlng opton at the core locatons. The assocated wholesale access consdered s an actve lne access at the core level, whch we call WDM PON unbundlng. 13. Table 1-2 provdes our assessment of the relatve performance of the four fbre NGA archtectures consdered n ths study on the bass of 10 key performance ndcators. Ths assessment stll s qualtatvely. Insofar as the ndcators relate to nvestment and cost they wll be quantfed n a cost modellng approach developed for ths purpose. Thereby also the relatve mportance of the ndcators can be and wll be taken nto account. Table 1-2: Comparson of access archtectures consdered P2P GPON over P2P GPON WDM PON Fbre count drop / feeder / / / / Bandwdth per customer / capablty for symmetry Max dstance from MPoP to customer / / / / 10-40km 20km 20km 100km Ablty to cater to busness customers Future-proof Securty Degree of vendorndependency Energy consumpton MPoP Fault dentfcaton and repar Floorspace demand at MPoP Relatvely good Relatvely poor 14. We have not consdered and assessed FTTN/VDSL, Actve Ethernet, Mult-fbre deployment, FTTB and EPON technologes n ths study. These technologes ether do not match the long-term capacty requrements of FTTH (FTTN, Actve Ethernet, FTTB), are less flexble n customer ndvdual solutons and not or only rarely used n Europe (EPON) or we have dealt wth them already extensvely elsewhere (Multfbre deployment).

21 Archtectures and compettve models n fbre networks 11 Modellng approach 15. We have developed three partly nterlnked modellng approaches to analyze the mpact of dfferent archtectures and wholesale scenaros on nvestment, cost, proftablty, reach, competton, market shares, prcng and welfare. We have used a steady state cost model that feeds cost functons nto a strategc competton model. In addton, we have analyzed the mpact of a ramp-up over tme as an extenson of the steady state model, the dynamc model. Ths model s not connected wth the competton model. Fgure 1-1 shows the relatons between the three models and ther prmary outputs (grey). Fgure 1-1: Overvew of modellng framework Steady State Cost Model Investment Cost Proftablty Coverage Cost functons Cost functons Dynamc ramp-up analys Present Values Cash Flow Competton Model Number of entrants Prces Market shares Welfare 16. Our basc modellng reles upon an engneerng bottom-up cost modellng approach. We have modelled the total cost of the servces consdered under effcent condtons, takng nto account the cost of all network elements needed to produce these servces n the specfc archtecture deployed. Ths approach s coherent wth a Long Run Incremental Cost approach as appled n regulatory economcs. 17. Our model conssts of a statc and a dynamc approach. In the statc model we compare the cost of a specfc NGA deployment n a steady state. In the steady state the roll-out s completed and the FTTH network has (fully) substtuted the copper access network. By ncreasng the market share n percent and comparng the resultng cost per customer wth the fxed average revenues per customer we determne the pont, where, f at all, the revenues equal the cost. Ths s the crtcal market share necessary to make the NGA busness proftable and hence t deter-

22 12 Archtectures and compettve models n fbre networks mnes the vablty range of a network operator. Therefore we model the complete value chan of the operators. Contrary to the steady state model the dynamc approach consders the tme path of nvestment accordng to a partcular roll-out as well as the re-nvestment pattern. 18. Accordng to the chosen LRIC approach we calculate the cost of each of the four archtectures consdered followng a Greenfeld approach. Ths means that the nvestor wll construct a new, effcent state of the art network from the scratch, assumng that current exstng nfrastructure, f ncluded n the new network, has to be consdered at full current cost. However, n realty there often s avalable nfrastructure from legacy networks whch may be reused to generate nvestment savngs. Ths possblty could have an mpact on the nvestment decson. We analyze ths aspect n a senstvty calculaton. 19. For purpose of ths study we decded not to choose a dedcated European country but chose a settlement structure whch s typcal for European countres and desgned the hypothetcal country for approxmately 22 mllon households or a populaton of around 40 Mo. nhabtants. Ths country s referred to as Euroland. We have defned 8 clusters, each havng typcal structural access network parameters derved out of detaled geo-modellng of access networks n several European countres on a natonwde bass. The geo-type characterstcs rely on exact data from several countres. In that sense, Euroland s a genercally representatve European country. The clusters are composed n a way that they address smlar numbers of potental subscrbers. 20. To assess the relatve performance of fbre technologes we modelled the total cost of provdng NGA servces. The access network s modelled n detal n a bottom-up approach. The cost model follows a Greenfeld approach for all network elements. As a senstty we also developed results of a Brownfeld approach where the ncumbent s able to save nvestment by usng exstng nfrastructure wthout opportunty costs. Concentraton and core network costs are approxmated by a cost functon consstng of fxed and varable costs. Besdes scalng these cost functons they are the same for the ncumbent and the entrant. Demand s represented by an ARPU per customer and month representng a relevant servce customer type mx and amounts to Due to brand and other compettve dsadvantages entrants are assumed to acheve a 5% lower ARPU. Wholesale prces of the varous access models are based on the LRIC of the network elements of the ncumbent. They are calculated at a take-up rate of 70% of the FTTH network, a rate whch s a bt less than the market share of the fxed network for all access lnes today. 21. The dfferent NGA archtectures have a dfferent tme pattern of the nvestment regardng certan network elements. The steady state analyss s not able to cover ths aspect. It may, however, have some mpact on the relatve (fnancal) performance of the archtectures. We have therefore also developed a dynamc approach

23 Archtectures and compettve models n fbre networks 13 whch takes nto consderaton a ramp-up perod to deploy the FTTH network. Besdes a network deployment perod ths approach also takes nto consderaton that demand wll be growng over tme to reach the target level of a 70% take-up. The model takes a 20 year perspectve and therefore also takes replacement nvestment of the electronc equpment nto consderaton. Proftable coverage Greenfeld approach 22. We assume that the fxed network can reach a market share of up to 70% of the total potentally addressable market (access lnes), an ncumbent operator can proftably cover a sgnfcant part of Euroland wth FTTH. The area of proftable coverage s relatvely nvarant of the FTTH archtecture whch s deployed: P2P and WDM PON can be proftably rolled out up to our suburban Cluster 5 or for 50.7% of the populaton. GPON over P2P and GPON can (theoretcally) even be deployed up to our Less Suburban Cluster 6 correspondng to 64.4% of the populaton. 23. Even theoretcally, a FTTH nfrastructure can be replcated by a second nvestor only n the Dense Urban Cluster 1 or for 8.1% of the populaton. In all other vable areas the FTTH nvestor needs a crtcal market share of close to or above 50% to become proftable. Proftable coverage Brownfeld approach 24. An ncumbent usually can use exstng network nfrastructure to deploy a new fbre network. Potental savngs due to exstng nfrastructure relate to trenches, ducts and manholes n all network segments. Potental nvestment or cost savngs depend on the degree of ductng, the avalablty of (suffcent) spare capacty, the age structure of the passve network nfrastructure and the degree of aeral deployment, where no savngs through the use of already exstng ducts can be acheved. 25. We assume that, where exstng ducts are avalable, these ducts on average already have an average age of half of the equpment lfe tme. Thus the use of exstng ducts reduces the nvestment by (up to) 50%. Potental nvestment savngs depend on the network segment and the archtecture. We assume the followng savng factors: up to 50% n the backhaul (up to 100% ducts usable), up to 50% n the feeder (up to 100% ducts usable), up to 25% n the drop segment (up to 50% ducts usable).

24 14 Archtectures and compettve models n fbre networks Potental savngs dffer by archtecture only n the feeder segment, for whch we assume 10% for P2P and GPON over P2P (many fbres n the feeder segment) 50% for GPON and WDM PON (strongly reduced fbre count n the feeder segment) In the drop segment potental savngs ncrease wth customer densty (due to less aeral and more ducts n the dense clusters). 26. Lower nvestment requrements n a Brownfeld approach enable ncumbents to ncrease the proftable coverage wth P2P and WDM PON up to the Less Suburban Cluster For all technologes total costs and crtcal market shares decrease. The strongest effects occur for the WDM PON archtecture. Total network costs here decrease by 5% (Cluster 1) to 11% (Cluster 8). The lowest cost savngs occur wth P2P from 4% (Cluster 1) to 7% (Cluster 3). Cost savngs for GPON are hgher than for P2P but lower than for WDM PON, and range from 5% (Cluster 1) to 9% (Cluster 4). 28. The nvestment savngs become more transparent by segment: The effectve reducton n the drop segment ranges from 7% to 20% dependng on the cluster, and s smlar for all archtectures, snce the archtectures do not dffer n ths segment and the dfferences between the clusters depend on the dfferent degrees of aeral cablng per cluster. In the feeder segment, the savngs for P2P are around 7% and for GPON around 40%, because the probablty of fndng suffcent empty duct space for the hgher fbre count of P2P s lower. The savngs n the backhaul segment amount to around 40% for WDM PON, snce all fbres ft nto exstng ducts. 29. Even f one assumes a more aggressve approach by doublng the nvestment cost savngs, ths would not expand the area of proftable coverage beyond Cluster 6 for any of the archtectures. Potental for competton 30. Competton cannot follow the ncumbent n all areas of the FTTH roll-out. Independent of the network archtecture and the access scenaro consdered, the vablty of any compettve model ends at least one cluster less than the vablty of the ncumbent s roll-out (also the theoretc maxmum for the compettors). 31. The crtcal market shares of the dfferent scenaros ndcate that n all archtectures and competton scenaros potentally several compettors could survve n the mar-

25 Archtectures and compettve models n fbre networks 15 ket. The hghest potental number of compettors may occur n the case of GPON btstream access and WDM PON wavelength unbundlng at the core. 32. As expected, busness models on the bass of unbundlng requre (sgnfcantly) hgher crtcal market shares than busness models based on btstream access. The unbundlng model requres already a crtcal market share of 24% n Cluster 3, whle btstream access s vable at 4% to 8% crtcal market share n the same cluster. 33. Because the cost curve of compettors s relatvely flat n the relevant range, only slght changes n the relevant parameters (e.g. ARPU) have a strong mpact on the proftablty. In case of unbundlng, for nstance, the crtcal market share jumps from 10% n Cluster 2 to 24% n Cluster 3. The structure of the cost curves n the relevant range makes unbundlng a rsker busness model than btstream access. 34. If the wholesale prces also reflect the nvestment savngs of the ncumbent then costs and crtcal market shares of compettors decrease n all competton scenaros. In addton, they can also expand compettve coverage by one cluster wth the excepton of the LLU scenaros. 35. We have calculated the mpact of devatons from LRIC based wholesale prces on the structural condtons of competton. Even a moderate ncrease of the wholesale prces by 10% reduces the vablty of competton and the compettve coverage n most cases. The most sgnfcant mpacts occur n the LLU unbundlng scenaros. Crtcal market shares of compettors n all scenaros ncrease sgnfcantly. 36. Smlar effects occur f the wholesale prces are calculated at a 60% take-up rate of the FTTH network nstead of 70%. Wholesale prces wll then ncrease by 10% to 13%. Investment and cost dfferences 37. GPON requres the lowest nvestment compared to all other archtectures whch we consder. Ths result holds for each cluster (subscrber densty). WDM PON shows the second lowest nvestments. The nvestment deltas between P2P and GPON, however, reman moderate and range from 2% (Cluster 8) to 14% (Cluster 1). 38. GPON over P2P generates relevant savngs compared to a P2P archtecture and requres only moderately more nvestment compared to GPON. 39. The overall nvestment deltas between the archtectures are relatvely small because the network elements whch cause the hghest nvestment requrements, nhouse cablng and drop cable, account for ~75% of total nvestment and do not dffer between archtectures.

26 16 Archtectures and compettve models n fbre networks 40. In order to better understand the relaton between the archtectures, t s worthwhle to look at the nvestment deltas n the dfferent network elements. The man reason for the advantage of GPON compared to P2P and GPON over P2P results from the lower nvestment n port electroncs at the MPoP. Feeder nvestment can become up to double as much for P2P than for GPON. However, feeder nvestment dfferences become relatvely small n less dense clusters as the addtonal fbres for P2P do not necesstate addtonal cvl works but cables only. Ths dfference s overcompensated by the use of spltters n the outsde plant for GPON. WPN PON suffers from the hghest nvestment n CPE. P2P requres more than two tmes hgher floor-space nvestment at the MPoP than GPON and nearly 40 tmes more than WDM PON. These huge dfferences, however, only have a rather lmted mpact on the overall nvestment performance of technologes, because the nvestment share of ths element amounts to less than 1%. 41. The relatve performance of WDM PON s very much affected by the cost of customer premses equpment. Should WDM PON vendors be able to reduce CPE prces to the level of GPON CPE the vablty of WDM PON could be extended by one cluster to Cluster 6. In addton the crtcal market shares for vablty could be reduced. Generally, WDM PON would rank frst as a technology. 42. The cost structure of a compettor n a FTTH network s strongly domnated by the wholesale prce. In the btstream scenaros the cost share of the wholesale prce amounts to ~65% (20% market share, Cluster 3). The cost share of the wholesale provson amounts to 57% n case of unbundlng. Dynamc consderatons of nvestment and cost 43. Movng from a statc to a dynamc approach, the tme path of nvestment accordng to a partcular roll-out and the re-nvestment pattern has some mpact on the relatve nvestment and cost performance of the dfferent archtectures. 44. The overall pcture of the relatve performance only changes moderately: GPON remans the technology wth the lowest nvestment. WDM PON, however, loses some attracton and becomes the most nvestment ntensve technology. Ths follows manly from the hgher cost of CPE equpment n case of WDM PON. 45. The tme path of the nvestment dffers to some extent between the archtectures: Although most of the nvestment s front-loaded for all archtectures, GPON has a lower amount of nvestment whch s drven by the actual number of subscrbers. Whle Ethernet ports n P2P are subscrber drven, GPON s nvestment n OLTs s not. The larger share of varable (subscrber drven) nvestment generates a slghtly better rsk profle for P2P compared to GPON.

27 Archtectures and compettve models n fbre networks Dscountng future nvestment to a present value does not change the rankng between archtectures, but the relatve dfference between P2P and GPON becomes smaller. It decreases from 10% to 7%. The same holds for WDM PON, whch remans ranked as number three but the relatve dfference to GPON decreases to 5%. 47. Completng the pcture by ncludng all other network costs (ncludng OPEX and common cost) besdes nvestment, once agan does not change the overall rankng of archtectures: GPON remans the lowest cost technology, GPON over P2P comes next followed by WDM PON and P2P. The dfferences between technologes decrease f comparng total (dscounted) expenses and nvestment. In relatve terms, the dfference n terms of present value of dscounted expenses (Cluster 1 to 6) between GPON and GPON over P2P become neglgble (~1%); P2P generates ~7% more expenses than GPON and WDM PON ~3% more. 48. Sngle cost tems lke energy and floor space exhbt sgnfcant dfferences among archtectures. P2P causes nearly double as much energy cost at the MPOP as GPON and nearly 6 tmes hgher energy costs than WDM PON (n terms of present value) 10. P2P has more than 2.5 tmes hgher floor space costs than GPON and even nearly 90 tmes more than WDM PON. These huge dfferences, however, have only a very lmted mpact on the overall cost performance of archtectures because the cost share of each of these factors s not more than 1%. 49. The ncumbent mght realze wndfall profts when sellng former MDF locatons. Such wndfall profts are not part of the decson relevant costs of a certan archtecture. They have, however, to be taken nto account n the decson makng process of the nvestor. Ths s of partcular relevance, f such wndfall profts are dfferent among archtectures. Such wndfall profts can conceptually consstently be ntegrated nto our dynamc dscounted cash flow analyss. They smply dmnsh the dscounted total expenses of a partcular archtecture. In ths model ths s only relevant for the WDM PON case. On the bass of some plausble assumptons we assume a total net revenue of dsmantlng MDFs for the ncumbent of 698 Mo., whch are 279 Mo. n present value gven the assumed deployment path. These lump-sum profts have a relevant mpact on the relatve performance of WDM PON. WDM PON becomes the most attractve archtecture n Cluster 1, becomes second n Cluster 2 and generally reduces the dfference to GPON sgnfcantly. 10 CPE power consumpton s not ncluded, snce we consder an operator s vew.

28 18 Archtectures and compettve models n fbre networks The olgopoly modellng approach 50. The cost modellng results only generated a rough pcture on the compettve condtons n the NGA market. It produced clear and defntve results on the replcablty of FTTH fbre nfrastructure. The crtcal market shares for vablty ndcated the potental number of compettors whch could exst n the market on the bass of a certan busness model. Furthermore, and most mportantly, the cost modellng approach generated cost functons for the busness models of the ncumbent as the nfrastructure nvestor and the access seekng compettors. These cost functons are developed for all archtectural and all access scenaros we are consderng n ths study. The cost modellng approach, however, does not deal wth the strategc nteracton between the wholesale provder and the compettors. Only f that s taken nto account, t becomes possble to predct the real market outcome n terms of prces, market shares, profts and the actual number of compettors n the market. 51. We have developed a strategc competton model whch s capable to develop a steady-state model of competton n a FTTH olgopoly. The model s able to show the strategc nteracton between the nfrastructure provder and ts compettors and allows comparng end user prces, consumer and producer surplus for all archtectural and access scenaros. The focus wll be on market outcomes for gven nvestment decsons. The approach, however, wll also allow us to quantfy the gans from certan nvestment decsons. It can thus shed some lght on nvestment ncentves of the dfferent market players. We can evaluate the effect of regulaton on these gans from nvestment. The olgopoly model uses the output of the cost model, the cost functons of the varous market players, as ts basc and central nput. Furthermore, the crtcal market shares are used to calbrate the ntal number of operators n the olgopoly model. 52. Our modellng approach s based on the pyramd model, whch s closely related to the spokes model: For each par of servces, there s a set of consumers who choose between these two products and these consumers are (unformly) dstrbuted n ther wllngness to pay for one servce rather than the other. Graphcally ths leads to a pyramd wth each servce located at one of the tps of the pyramd. Our approach captures essental aspects of competton n FTTH markets, both on the wholesale and retal sde. One frm, the ncumbent, owns and nvests n an FTTH access network, to whch other frms ( entrants ) must obtan access n order to provde NGA-based servces. Entrants are assumed to be symmetrc and need to make own nvestments n order to use NGA access. We consder models both wth and wthout a second vertcally ntegrated broadband nfrastructure ( cable ), to whch no other frms have access. The servces that frms offer are both horzontally and vertcally dfferentated. The former means that consumers do not react strongly to small prce dfferences because ndvdual preferences for frms brands

29 Archtectures and compettve models n fbre networks 19 dffer. In partcular, assumng a unform dstrbuton of ndvdual tastes n ths horzontal dmenson leads to lnear demand functons. As a result of horzontal dfferentaton, the market s mperfectly compettve and frms wll enjoy postve markups. Vertcal dfferentaton expresses dfferences n servce qualty and goodwll or brand recognton as perceved by consumers,.e., at equal prces a frm wth hgher servce qualty would attract more consumers. Servce qualty s assumed to affect all consumers smlarly,.e. we abstract from market segmentaton n the servce qualty dmenson. 53. To model that total FTTH subscrpton demand s varable, we consdered two model varants. In both there s a group of compettve subscrbers. Each compettve subscrber makes a frst choce between two of the frms, and unless ther offers are very unfavorable, he wll choose one of the two. It s assumed that all pars of preferred frms (before qualty dfferences) are equally lkely n the populaton, so that effectvely each frm wll compete wth any other frm for consumers. Formally speakng, cross prce elastctes are dfferent from zero for all product pars. Due to the assumpton of unform dstrbutons of consumer tastes, the resultng demand functon of each frm s lnear n ts own prce and lnear n the prce of all other frms. Ths makes the analyss tractable and allows for explct solutons. In spte of advances n emprcal demand estmaton that allow for more flexble demand specfcatons, the lnear demand system remans popular n emprcal research. Our underlyng mcro foundaton permts us to compare markets wth dfferent numbers of frms n a meanngful way. If the frms on the market nclude the cable frm, our model has the feature that FTTH subscrpton demand s varable. However, total demand for subscrpton s fxed and assumed to be 100% of potental subscrbers n the clusters consdered. We call ths the No-Hnterland model. In the absence of a non-ftth-based compettor, we make subscrpton demand varable wth the ntroducton of captve consumers who make a choce between one frm and not buyng FTTH subscrptons at all (ths s the Hnterland model). In lne wth the crtcal market share analyss we am at FTTH subscrptons close to 70% of all potental subscrbers n the clusters consdered. 54. The access tarff pad by the entrants to the ncumbent conssts of a prce per subscrpton and potentally also of a fxed fee. In ths study we have consdered only lnear wholesale access tarffs based on the ncumbent s LRIC at a defned network load. In one varant of the model, we determned the lnear access tarff such that at the resultng equlbrum quantty, the access payments exactly cover the total cost of provdng FTTH access (nterpreted as LRIC prcng). 55. We treated the ncumbent as f he were under vertcal accountng separaton nto a NetCo that supples FTTH nfrastructure access and an OpCo that sells FTTH enduser servces. The ncumbent s NetCo sells access to other frms ( entrants ) and to the OpCo. Ths does not affect prcng behavor and overall profts but t provdes for an automatc prce-squeeze test.

30 20 Archtectures and compettve models n fbre networks 56. Dependng on the scenaro consdered, frst, frms make certan nvestments n networks and access, whch determne ther servce qualty levels and operatng cost. Second, they compete n subscrpton fees at the retal level. The resultng market outcome s modelled as the Nash equlbrum outcome of the resultng prcng game, from whch subscrber numbers, profts, market shares, consumer surplus and total welfare are derved. In the model wth entry and ext, we frst allow for a non-specfed process of entry and ext wth the feature that all actve entrants make profts and that the entry of an addtonal entrant would lead to losses of all actve entrants. Here we postulate that entrants foresee the effect of entry on the prcng decsons and, thus, on market outcome. Formally, and n lne wth the lterature on ndustral organzaton, ths means that we consder subgame perfect Nash equlbra of the two-stage game n whch entrants frst make ther partcpaton decson and then all actve frms make prcng decsons. 57. Besdes the cost functons for the varous market players and scenaros the qualty of servce and wllngness to pay assumptons of the varous scenaros form another basc nput of the competton model. Our assumptons on qualty of servce (QoS) and the end-users wllngness-to-pay (WtP) are provded n Table 1-3. The values are n Euro-equvalent per month. Table 1-3: QoS and WtP assumptons for basc model QoS Scenaro Incumbent QoS =WtP Cable QoS = WtP Entrant QoS P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core Entrant WtP GPON btstream MPoP The value of chosen QoS dfferences may appear large from today s perspectve. However, t has to be kept n mnd that we are consderng steady state stuatons wth full FTTH penetraton around ten years from now. It can be expected that the share of customers wth hgh-bandwdth demands and the prevalence of correspondng applcatons wll be much hgher than now. Thus, the premum for ultrahgh bandwdth wll also be much hgher than now. In contrast, the ncumbency premum wll lkely become smaller, as tme goes by. Ths justfes the small ncumbency premum of 2 Euros over entrants that we have chosen. Results on end-user prces 58. There are three drvers of prces and prce dfferences: Costs, WtP and competton (number of frms). In addton to the WtP shown above n Table 1-3 we, therefore, have to consder the relevant costs. Prces are drectly drven by varable or, more

31 Archtectures and compettve models n fbre networks 21 precsely, margnal costs (MC), not by fxed costs. Fxed costs only nfluence the level of profts and are, thus, mportant for entry and ext of frms (whch agan ndrectly affect prces). 59. The equlbrum end-user prces for all scenaros are shown n Table 1-4. Whle the frst two scenaros consstently lead to the hghest prces, the order of prces overall dffers between the Hnterland and the No-Hnterland model. Because of product dfferentaton the ncumbent s prce may be below the entrants prce (for nstance, n the GPON over P2P scenaro) f the ncumbent s varable costs are suffcently lower to offset for qualty and goodwll dfferences whch tends to lead to a hgher prce. In the No-Hnterland model the equlbrum number of frms s n two cases one hgher than n the Hnterland model. In both these cases the order of prces between Hnterland and No-Hnterland model s affected by ths dfference. Table 1-4: Margnal costs (MC) and prces (p) n Euro per month Hnterland No-Hnterland Scenaro MC Iperceved MC E n-1 p I p E n-2 p I p E p C P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON btstream MPoP Index I: Incumbent, E: Entrant, C: Cable; n: number of operators 60. Retal prces are qute senstve to the number of frms n the market, f the number of frms s small. Retal prces decrease wth the number of frms n the market for all market players. The absolute prce dfferences between ncumbent and entrants ncrease slghtly and the relatve dfferences ncrease sgnfcantly n the number of frms. Ths suggests that entry ncreases competton among entrants by more than competton between the ncumbent and entrants. Competton by cable brngs prces of entrants and the ncumbent much closer than competton wthout cable. Results on profts 61. Table 1-5 gves profts for the basc model for both the Hnterland and the No- Hnterland case. It should be noted that entrants profts are always reported per entrant.

32 22 Archtectures and compettve models n fbre networks Table 1-5: Profts n Mllon Euro (per month) Hnterland No-Hnterland Scenaro n-1 prof I prof E n-2 prof I prof E prof C P2P unbundlng GPON over P2P unbundlng *) WDM PON unbundlng GPON btstream core GPON btstream MPoP *) *) Wth 4 entrants there s a very small loss for each entrant. Because of ts hgher retal prces and lower costs the ncumbent can persstently earn hgher profts than the entrants. Ths result holds even f one corrects for hs larger market share. Profts of cable follow largely the qualty dfferentals to FTTH. The greater the dfferental the lower s cable s profts. 62. The nfluence of the number of entrants on profts dffers somewhat from the entry effect on prces. The reason les n wholesale profts. In the Hnterland model wholesale profts (because of the assocated ncrease n overall output) ncrease n the number of frms, thereby ncreasng the dfference between entrants profts per frm and the ncumbent s overall profts. In the No-Hnterland case the ncumbent s wholesale profts are, because of the ntervenng effect of cable output, frst ncreasng and then decreasng n the number of frms, resultng n a closng of the gap between entrants profts per frm and the ncumbent s overall profts. All frms experence a declne n profts per frm, as the number of frms ncreases. However, ths happens at a declnng rate, suggestng n partcular that profts per entrant do not change dramatcally around the free-entry equlbrum f the number of frms s farly large. Results on market shares 63. Table 1-6 provdes market shares n the basc model. It should be noted that entrants market shares are always per entrant. Table 1-6: Market shares s n percent Hnterland No-Hnterland Scenaro n-1 s I s E n-2 s I s E s C P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON btstream MPoP

33 Archtectures and compettve models n fbre networks 23 In both models the ncumbent s market share stays n a narrow range through all scenaros, although t vares more n the No-Hnterland model than n the Hnterland model. In the No-Hnterland model the market share of cable vares substantally. It closely follows qualty dfferences between cable and FTTH and s lowest where the qualty dfferental to FTTH s greatest. Results on consumer surplus (CS) and welfare (W) 64. Table 1-7 summarzes our basc model results for CS and W. It also puts the results on prces, profts and market shares n perspectve. In ths context t needs to be noted that CS s largely drven by the prce/valuaton relatonshps between the dfferent technologes and frms rather than by the overall quantty of output, whch s fxed n the No-Hnterland model and vares only for each frm s backyard n the Hnterland model. Table 1-7: Basc model results on consumer surplus and welfare per month Scenaro n-1 Hnterland No-Hnterland CS W CS W n-2 Mo Rank Mo Rank Mo Rank Mo Rank P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON MPoP btstream The rankng of CS n the Hnterland model s very close between the frst three scenaros (wth a 2% dfference between GPON over P2P unbundlng as the frst and WDM PON unbundlng as the thrd). In contrast, the dfference between WDM PON unbundlng as the thrd and the GPON btstream scenaros s much larger (about 10%), whle the latter two are almost equal. As explaned below, the CS rankngs are somewhat dfferent n the No-Hnterland model and, except for the very close GPON over P2P unbundlng and WDM PON unbundlng cases n places 2 and 3, they are rather evenly spread. 66. In terms of W GPON over P2P unbundlng ranks consstently frst and narrowly beats P2P unbundlng, whle WDM PON unbundlng s consstently thrd both for W and CS, usually wth a sgnfcant margn. The margn s narrow for CS n the Hnterland model, because here WDM PON unbundlng has 4 entrants, whle the two P2P topologes only have 3 entrants. The two GPON btstream scenaros are n a dead heat for last place n terms of W.

34 24 Archtectures and compettve models n fbre networks 67. In contrast to CS, W s not much affected by entry, once the number of frms reaches 4 (No-Hnterland model) or 5 (Hnterland model). Thus, as a result of dfferent numbers of entrants, the same rankngs of W are as unsurprsng as are dfferent rankngs of CS. Whle W frst ncreases n the number of frms, ths ebbs off very quckly and possbly starts to decrease. In contrast, CS contnues to ncrease farly strongly n the number of frms. Level of wholesale charge 68. In our basc models we generally assume that wholesale access charges are determned accordng to the LRIC cost standard. Because of nformaton asymmetres between the ncumbent and the regulator dentfyng the proper level of the LRIC n a newly emergng network may be a dffcult task. Furthermore, there s currently a polcy debate on explctly devatng from LRIC to ncentvze FTTH nvestment. Under such concepts entrants have to pay a mark-up on the LRIC based wholesale access charge. We have tested the mpact of such polces on competton and welfare on the bass of our modellng approaches. 69. Increasng the wholesale prces moderately by 10% has a sgnfcant mpact on the crtcal market shares and the compettve coverage at the gven ARPU. Only n the WDM PON scenaro the proftable coverage of the competton model remans unaffected. The strongest effects occur n the P2P unbundlng and GPON over P2P unbundlng scenaros. The compettve busness model here s only vable n Cluster 1 and 2. In the btstream access scenaros the vablty of competton s reduced from Cluster 5 to Cluster 4. The general ncrease n crtcal market shares ndcates potentally a lower number of potental compettors and an ncrease n rsk of market entry. 70. The olgopoly model shows less sgnfcant effects than the cost model. Frst of all, a percentage mark-up on access charges leads to an almost parallel ncrease of all retal prces (ncumbent, entrants and cable). Therefore, the ncumbent s wholesale profts ncrease strongly and lnearly. In contrast, the entrants profts and the ncumbent s downstream profts decrease very slghtly wth the mark-up. Cable s profts are favourably affected. The market share of the ncumbent remans more or less constant and the market share of cable ncreases at the expense of the share of entrants. 71. Welfare shows only a weak declne due to the mark-ups. Consumer surplus, however, shows a strong declne due to an ncrease n the access mark-up. Insofar as the number of compettors remans unaffected, the olgopoly model only shows lmted effects on competton.

35 Archtectures and compettve models n fbre networks 25 The effects of averagng 72. The cost modellng approach generally consders the nvestment decsons of the ncumbent n a cluster-specfc way. The nvestor decdes for each ndvdual cluster whether there s vablty of nvestment on the bass of a gven ARPU per customer. The proft maxmzng frm wll nvest untl the APRU exceeds costs n the margnal cluster. The nfra-margnal clusters wll generate a rent to the nvestor whch may be used to expand coverage up to the cluster where the average cost over all proftable clusters stll exceed ARPUs. We do not consder ths case n ths context. 73. In the competton model we have chosen a dfferent approach. Our analyss here aggregates all varables and all results over the four densest populaton clusters of Euroland. Ths s based on the crtcal market share results of the cost model, whch suggested that entrants and ncumbents would be vable for all scenaros up to Cluster 4. Ths does not mean, however, that the vablty of all frms, whch was the bass of the free-entry equlbra presented so far, also holds for Cluster 4 n solaton. It may be doubtful because access charges, costs and end-user prcng have all been based on an aggregate (or average) of all four clusters. Cluster 4 as the margnal cluster wth the lowest populaton densty has hgher fxed costs per user for all types of frms than the average of Clusters 1 to As a separate market, Cluster 4 would have about 24% the sze of all four clusters. Under the averaged access charge for all four clusters we get the same prces as before, but n the Hnterland model profts of the ncumbent are only about 10% of the aggregate profts and profts of the entrants are only 18%. However, Cluster 4 remans proftable n solaton so that the equlbrum number of frms s reemphaszed. One drawback for the ncumbent s that wholesale access becomes a major loss maker and offerng wholesale access therefore s not ncentve compatble. In contrast, ncumbent s profts are only 6% of aggregate Clusters 1-4 profts and profts of entrants turn slghtly negatve n the No-Hnterland model. Thus, entrants may refran from enterng Cluster 4 n ths case. Under cluster-specfc wholesale access charges nstead of an average access charge end-user prces ncrease but that only helps the ncumbent, whle entrants profts/losses deterorate. 75. Profts n the margnal Cluster 4 are substantally lower than average profts for all Clusters 1-4. Because of large losses from sellng wholesale access profts overall can turn negatve for the ncumbent and slghtly negatve for entrants, suggestng that the ncumbent may refran from enterng Cluster 4 and fewer compettors may enter the margnal cluster than the others. Ths latter effect on compettors becomes stronger f one uses cluster-specfc entry charges or f the ncumbent also enters Cluster 5.

36 26 Archtectures and compettve models n fbre networks Senstvty of Greenfeld approach 76. We have also studed the mpacts of the lower nvestment costs of the Brownfeld assumptons as presented n para. 24 to 29 on competton and welfare. The cost change from a Greenfeld to a Brownfeld model only concerns the captal costs of FTTH for the ncumbent. Snce ths does not affect LRIC and therefore LRIC access charges are unchanged, the effect of the Brownfeld model leaves end-user prces and market shares unchanged. Only the ncumbent s proft s ncreased by the cost savng. Ths s a well-known result from the theoretcal lterature. The only effect of movng from Greenfeld to Brownfeld s that the ncumbent s wholesale profts ncrease precsely by the cost dfference between the Greenfeld and Brownfeld models. 77. If access charges are reduced by the cost savngs of the ncumbent end-user prces are reduced, market shares change lttle, profts of the ncumbent are slghtly reduced but those of entrants ncrease (compared to the Greenfeld approach). If wholesale access charges are adjusted downward by the cost savngs the end-user prces are lowered and profts for entrants ncrease. The ncumbent s profts are substantally lower than under LRIC access charges but stll somewhat hgher than under the Greenfeld costs. Welfare ncreases almost exactly by the cost savngs. Most of ths ncrease benefts consumer surplus but some also goes to profts. Senstvty on QoS and WtP assumptons 78. We have run several senstvtes to dentfy the mpact of our QoS and wllngness to pay assumptons on the results. Changes n the WtP assumptons can have substantal effects on the model results: A smaller spread between the dfferent WtP for ncumbents, entrants and cable shows that end-user prces, profts and market shares of the ncumbent all generally decrease, whle these varables ncrease for the entrants. Increasng the goodwll advantages of the ncumbent ncreases end-user prces, profts and market shares of the ncumbent at the expense of those of entrants. Ths result shows that the ncumbent can have strong ncentves to deterorate the qualty of the wholesale product provded to entrants. An mproved WtP for WDM PON leads to entry of an addtonal frm, mplyng substantally lower prces and profts. An ncrease n the ncumbency advantage leaves the rankngs wth respect to CS and W largely ntact. CS and W generally decrease because of the lower WtP for entrants and cable servces. An mproved WtP for WDM PON changes the rankng of the scenaro by movng t ahead of P2P unbundlng and GPON over P2P unbundlng.

37 Archtectures and compettve models n fbre networks 27 2 Compettve models n fbre deployment 2.1 Introducton The task of the competton model s to develop a steady-state model of competton n an FTTH olgopoly to show and to allow comparng end-user prces, consumer surplus and producer surplus (for both network owner and other frms). The followng fve scenaros of NGA technology and assocated wholesale access seekers are consdered (the costs of these have been derved from the cost model) (Ethernet) P2P unbundlng: The ncumbent bulds a passve P2P plant and operates dedcated Ethernet P2P access lnes. The compettors buy unbundled access at the MPoP level. In addton to the unbundlng charge they have to collocate at the MPoP, nvest n a small ODF of ther own and Ethernet Swtches as well as bear the cost of concentraton and core network. 2. GPON over P2P unbundlng: The ncumbent bulds a passve P2P plant but contrary to the prevous scenaro deploys GPON actve electroncs and spltters at the MPoP for hs own operatons. Compettors buy unbundled access n the same fashon as n the frst scenaro. 3. WDM PON unbundlng: The ncumbent bulds a passve Pont-to-Multpont plant that has cascaded spltters at the dstrbuton pont and MDF level. The majorty of MDF locatons s closed and about lnes are concentrated n MPoPs wth WDM PON technology. Compettors buy unbundled wavelength access to ndvdual customers. Because of the hgh level of concentraton realsed through MDF dsmantlng compettors only add ther own core network; no further concentraton s requred. 4. GPON btstream access a. at the core network level: The ncumbent bulds a passve Pont-to- Multpont plant wth passve spltters at the dstrbuton pont and operates actve GPON electroncs at the MPoP. He provdes btstream access to compettors at the core level so the btstream ncludes a transport servce through the ncumbent s concentraton network. Compettors collocate at the ncumbent s frst level core locaton nodes and add ther own core network. 11 One has to dfferentate between topologes (Pont-to-Pont, Pont-to-Multpont) and the actve layer 2 technologes used to lght the fbres (Ethernet, GPON). Throughout most parts of ths study we use the term P2P to refer to the combnaton of Ethernet technology and P2P topology. In some case we may want to exclusvely refer to the topology. In ths case we would e.g. speak of P2P topologes whch would nclude the frst two scenaros.

38 28 Archtectures and compettve models n fbre networks b. at the MPoP level: The ncumbent bulds a passve Pont-to-Multpont plant wth passve spltters at the dstrbuton pont and operates actve GPON electroncs at the MPoP. He provdes btstream access to compettors at the MPoP level so compettors have to provde ther own concentraton and core network. Accordngly, scenaros dffer by FTTH access technologes and by the mode of access provded to compettors (= entrants). Table 2-1 descrbes the scenaros n terms of the value added suppled by the ncumbent to entrants. The scenaros are descrbed n detal n secton 2.3. Table 2-1: Costs borne as access charge (ULL, btstream access charge) by entrants by scenaro (shaded) Entrant costs scenaro FTTH access network MPoP electroncs Concentraton network Core network Retal P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON btstream MPoP Snce we regard subscrptons as the unts of sales, ULL and btstream access n our approach only dffer by costs, wholesale prces and QoS, but not by unts of measurement. Ths allows us to use the same formal model for all scenaros; we only need to adjust parameter values approprately. 2.2 The overall NGN/NGA archtecture Next Generaton Networks allow one to transport many dfferent applcaton contents over one unversal IP-protocol based electronc communcaton network. Such content may be data, voce-telephony or TV/vdeo etc. The new approach of NGN networks s that all ths content s transported and swtched wthn one sngle network, whle n the past dfferent networks of dfferent technologes have been used at the swtchng level. The unversal transport protocol used s the Internet Protocol (IP). Integratng all electronc communcaton content nto one sngle network and takng nto account the ncreasng demand of electronc communcaton/usage of electronc applcatons requres overcomng bandwdth bottlenecks n the access networks. The new access networks are therefore based on fbre access lnes, whch ether shorten the exstng copper lnes or even replace them totally n the FTTH archtectures.

39 Archtectures and compettve models n fbre networks 29 Fgure 2-1: NGN/NGA general archtecture IP core network Concentraton network Next Generaton Access Network FTTH Ethernet P2P FTTH GPON FTTH GPN over P2P FTTH WDM PON Label Edge Router Metropoltan Pont of Presence (MPoP) The overall NGN/NGA archtecture has three major segments, the IP core network, the nowadays typcally Ethernet based concentraton network and the access network. In the IP core network the IP-traffc s swtched between end users or connected to the applcaton servers located n the core layer locatons or n other networks. The concentraton network collects the traffc from the endponts of the access network and transports and concentrates t to the core network nodes. The access network of today s based on copper lnes between the Man Dstrbuton Frame (MDF) locatons and the end customer locatons. Ther replacement by fbre lnes has already started. Many dfferent technologes are avalable and mplemented. Before we descrbe them we defne some general access network related termnology used n ths study. Regardng access network topology we use the terms of the European Commsson s NGA recommendaton. 12 It defnes the Metropoltan Pont of Presence (MPoP) as equvalent to the Man Dstrbuton Frame (MDF). The MPoP s the last locaton where, dependng on the NGA archtectures and lookng from the end user, an Ethernet Swtch of the concentraton network s located. The Dstrbuton Pont s an ntermedate node n the NGA, from whch fbres from the MPoP can be dvded/accessed before runnng them to the customer buldng (or n the case of FTTC from whch access s realsed through copper sub loops). The segment from MPoP to Dstrbuton Pont s called Feeder (Cable) Segment. The segment from Dstrbuton Pont to the customer locaton we call Drop (Cable) Segment 13. There may be fewer MPoPs than MDFs, snce fbre overcomes the lne length restrctons of copper connectons. Thus MPoPs may be a 12 European Commsson (2010). 13 The EU NGA Recommendaton (2010) calls ths network segment termnatng segment also, but for reasons of consstency wth recent WIK studes we contnue to use the term drop cable segment n ths study. Both termnologes characterse the same network element.

40 30 Archtectures and compettve models n fbre networks subset of the exstng MDFs. In ths case we wll use the term backhaul to refer to the segment between an abandoned MDF locaton and the new MPoP. Fgure 2-2: Network topology: Terms and defntons Feeder Segment Drop Cable Segment Core Network Concentraton network MPoP MDF DP DP Dstrbuton Pont MDF Man Dstrbuton Frame MPoP - Metropoltan Pont of Presence Customer There are three general approaches to reduce the copper lne length n the access network, Fbre to the Curb (FTTC), Fbre to the Buldng (FTTB) and Fbre to the Home (FTTH). Wth FTTC there are fbre lnes between the MPoP and the Dstrbuton 1 Pont (DP - a street cabnet) only. The DP hosts electronc (VDSL) equpment whch transmts the broadband sgnal over the exstng copper pars between the DP and the end user homes. Wth FTTB the fbre lnes cover the dstance between MPoP and end customer buldngs, where electronc equpment n the basement of the buldng transmts the broadband sgnals, usng the exstng nhouse copper cablng, to the end customer home (e.g. apartment). Wth FTTH all the dstance between MPoP and end customer home s brdged by fbre lnes. Here no remanng copper segments reduce the bandwdth. In sngle dwellng buldngs FTTB and FTTH fall together, whle n mult dwellng buldngs FTTH requres a fbre nhouse nfrastructure whch also has to be deployed durng fbre roll out. FTTC requres the lowest number of new fbre lnes. The number of fbres depends on the degree of concentraton a DSLAM n the DP (street cabnet) provdes, e.g. on the amount of user nterfaces a sngle DSLAM offers. Typcal values are below 1000 users per DSLAM. Fbres are then only nstalled n the feeder segment. FTTB requres one fbre per buldng n the feeder and n the drop cable segment. Thus the degree of fbre concentraton s drven by the number of homes per buldng, or by the number of FTTB-termnatng systems (called ONU, Optcal Network Unt) n the case of large mult dwellng unts, dependng on the system s user port capacty. A typcal fgure for the latter may be 8. FTTH Pont-to-Pont (P2P) requres one fbre per home n both, the feeder and the drop cable segment, and n the nhouse cable segment, too. Thus FTTH s the archtecture

41 Archtectures and compettve models n fbre networks 31 wth the hghest fbre count n the feeder cable segment, whch may cause cost dfferences. Pont-to-Multpont Passve Optcal Network (PON) technology concentrates the optcal sgnals of several fbres onto one sngle fbre by a passve component called spltter (Fgure 2-3). Ths archtecture thus reduces the number of fbres n the feeder segment compared to the Pont-to-Pont fbre archtecture descrbed above. The degree of fbre reducton depends on the splttng factor a spltter supports 14. Only one fbre per spltter s needed between MPoP and spltter locaton (e.g. a DP). However, one fbre per home (FTTH) or per buldng (FTTB) s stll requred n the drop segment. Accordngly the drop cable segment n PON archtecture has the same fbre count as a P2P archtecture. Fgure 2-3: Pont-to-Multpont fbre archtecture DP Street Cabnet/ Handhole/ Manhole ONU Opt. Spltter ONT OLT Passve Element at MPoP OLT: ONU: ONT: Optcal Lne Termnator Optcal Network Unt Optcal Network Termnator ONT Due to the fact that multple end customers can send ther upstream nformaton at the same tme some admnstraton s necessary n order to manage conflcts and also n order to manage the downstream traffc. The systems used for ths are the Optcal Lne Termnators (OLT) at the central ste and Optcal Network Unts (ONU) for several end customers (e.g. FTTB) or Optcal Network Termnators (ONT) for one sngle end customer (e.g. FTTH). All customers connected to the same spltter share the same communcaton channel and ts bandwdth. There are many dfferent PON systems. The 14 A spltter spreads the optcal downstream sgnal onto many fbres and n ths way dstrbutes the power of the downstream beam also. Therefore the splttng factor not only s lmted by constructon constrants, but by the total optcal budget of the system, too. Typcally current splttng factors are between 8 and 32.

42 32 Archtectures and compettve models n fbre networks most commonly one used n Europe, GPON, s consdered n ths study and our models. PON systems (MPoP equpment and customer modems) have to nteract and be compatble; n order to fully support all functonaltes PON components often have to be from the same suppler. Another, more advanced Pont-to-Multpont fbre technology s under development, whch allows one to use dfferent colours (optcal wavelengths) of the optcal sgnal to address dfferent customers over a sngle fbre. The technology of usng dfferent colours to separate ndvdual communcaton streams on a sngle fbre s called Wave Dvson Multplex (WDM). Whle the fbre plant does not dffer compared to PON, the WDM-spltters need not necessarly dstrbute all colours to all end customers, but may be confgured to provde ndvdual colours to each of the end customers. 15 Each end customer may then use ts own colour beam ndvdually, not sharng ts bandwdth wth the neghbours at the same spltter. Wholesale access for competng operators may occur for all NGA archtectures n two dfferent manners, by accessng the physcal nfrastructure to the end customers or by obtanng access to a btstream whch s managed by the wholeseller. In FTTH archtectures based on a Pont-to-Pont fbre plant, a physcal access to the fbre access lnes occurs at the MPoP, where all access lnes are concentrated at the Optcal Dstrbuton Frame (ODF) and where the compettors may collocate ther own equpment. Ths s very closely comparable to the well-known copper Local Loop Unbundlng wth all ts proven processes and sklls. In Pont-to-Multpont fbre plants the fbre star pont s at the spltter ste, thus the compettors have to collocate there wth accessble cabnets and Optcal Street Dstrbuton Frames (OSDF), makng these locatons sgnfcantly more expensve. In cases of cascaded spltters t s the spltter locaton closest to the end customer locatons where unbundlng would take place. The closer the spltter locaton to the end customer, the more locatons are needed and the more expensve the own nfrastructure of the compettors wll become. In addton, the less customers are concentrated per spltter and the less customers a compettor can therefore acqure per locaton, the less attractve t s for compettors to collocate there. The dspute of the optmal spltter locaton s well known from the French dscusson about the optmal mutualsaton pont. Studes by WIK-Consult and others have demonstrated the unattractveness of Sub-loop Unbundlng at the DP 16 compared to Local Loop Unbundlng at the MPoP. In our ongong consderatons we wll therefore not consder the physcal unbundlng at the DP. For all NGA archtectures there are many ponts for actve electronc nterfaces to access connectons to the end customers (Fgure 2-4) at all network node locatons of the concentraton and core network. At the concentraton network the nterfaces are typcal- 15 Ths n general mproves the optcal budget and the length over whch the sgnals can be transmtted. 16 See e.g. Elxmann/Ilc/Neumann/Plückebaum (2008), Ilc/Neumann/Plückebaum (2009), Ilc/Neumann/ Plückebaum (2010), Analysys (2007).

43 Archtectures and compettve models n fbre networks 33 ly based on the Ethernet protocol, and the state of the art equpment also conssts of Ethernet swtches 17. In the core network IP routers operate offerng IP nterfaces for wholesale access. 18 Fgure 2-4: Access pont optons for wholesale btstream access (WBA) IP core network Concentraton network Next Generaton Access Network Label Edge Router Ethernet Swtches FTTH Ethernet P2P FTTH GPON FTTH GPN over P2P FTTH WDM PON Central Node (5*) Core Nodes (< 45*) Intermedate Nodes (< 450*) MPoP Nodes (< 5600*) IP-Access Ethernet-Access (ATM Access) * Numbers are approxmatons for Euroland A btstream access at the core network nodes aggregates many customers at one Pont of Interconnecton (PoI), whose traffc may be nfluenced by the traffc of the other customers of the wholesale operator and by the traffc of the other customers on the network. The closer the PoI s relatve to the end customers, the less customers are aggregated and the less the traffc s nfluenced by the wholeseller s own operatons and network management. Besde that a PoI at the MPoP level may also allow for bundled nterfaces for a group of end customers wthout any overbookng/concentratng the end customers access bandwdth, thus formng a so called Vrtual Unbundled Local Access (VULA). 19 Such concepts are well known from the bundled local loop access lnes n the FTTC/OPAL 20 areas of Germany snce Whle the OPAL bundled access uses ITU-T V lke nterfaces, the VULA s based on Ethernet. In these access concepts the compettor stll reles on some last actve access nodes of the wholeseller, whch have to be confg- 17 The older ATM equpment s also mentoned n Fgure Wth FTTC archtectures and DSLAMs at the DP one could also n theory magne a btstream access at the DP ste, requrng the compettors to collocate there, whch we do not consder under the same reasonng as for the physcal unbundlng approaches. 19 See artcle 7 notfcaton responses of the EU Commsson to UK (EU Commsson (2010b)) and Austra (press release IP 10/10/760) as well as the decsons of the Austran Telekom-Control- Kommsson TKK (2010a) und TKK (2010b), all from summer Optcal Access Lne. 21 PSTN E1 nterfaces wth 30 user and 2 control channels wth 64 kbt/s each.

44 34 Archtectures and compettve models n fbre networks ured, operated and repared by hm and stll form a procedural hurdle for a clear and transparent network provsonng and operaton of the compettor. Even wth future WDM PON, where the customer access connectons may be handed over to the compettor as colour beams on a sngle fbre, the compettors network qualty wll depend on the wholeseller s qualty to provde and operate the WDM access nodes. Thus, even the so called Lambda 22 or Wavelength Unbundlng s a low layer but actve wholesale access. 23 Nevertheless, n Pont-to-Multpont fbre plants the VULA may be the hghest qualty wholesale customer access a compettor can buy. Compared to unbundled fbres customer access bandwdth above the wholesale bandwdth or own products based tself on WDM technology could not be offered by a compettor usng WBA, VULA or Wavelength Unbundlng Technologes/archtectures consdered 25 Constructng new broadband access networks should be done n a way whch wll satsfy the end customer demand for almost the estmated lfe tme of the components, e.g. the fbre lnes. Ths s sgnfcantly long and wll exceed 20 years. Thus the archtectures consdered should at least cover future demand rght now or should have a proven mgraton path for sgnfcant bandwdth upgrade. The future bandwdth needs of a resdental customer at the upper end are uncertan (50 or more than 100 Mbps symmetrcal, or even more could be concevable). For busness and even more for wholesale customers we already now see hgh bandwdth demand, whch cannot be satsfed by all NGA archtectures. So already today moble base statons could requre more than 100 Mbps backhaul lne capacty and an ncreasng number of busness and wholesale customers need drect fbre access and explot a major share of the optcal frequency spectrum (e.g. wth CWDM, Coarse WDM or even DWDM (Dense WDM)). The deal future NGA archtecture can cover all customer access demand or at least allows one to do so wth small enhancements. In ths study we therefore consder those NGA archtectures whch allow for hghest bandwdth and qualty for the end customers and whch do no longer rely on copper cable elements. These are FTTH archtectures only. From all FTTH archtectures we concentrate on the two most relevant archtectures n Europe, Ethernet Pont-to-Pont 22 Lambda stands for wavelength of lght and s equvalent to lght of a dedcated colour. 23 We do not enter nto the dscusson f VULA and wavelength unbundlng should be consdered n the market 4 or 5. From the pont of network operaton and related product qualty t s only relevant that there s actve equpment n the customer access lne n the value chan whch s not operated by the compettor and thus nfluences/hnders transparent customer provsonng and network operaton, restrcts product defnton and requres process nterfaces n a degree, whch would not be needed f only physcal wholesale products would be used n the value chan. 24 It s of course questonable f such products are relevant today or n the future, throughout the lfetme of the NGA archtecture. 25 In Annex 2 we descrbe those technologes whch we do not consder n ths study.

45 Archtectures and compettve models n fbre networks 35 and GPON. In order to overcome some restrctons and weaknesses beng dscussed for GPON we also nclude nto our consderatons two GPON varants, one mplementng GPON electroncs on top of a passve Pont-to-Pont fbre plant and a future verson of PON, ncreasng the bandwdth and qualty of the nowadays PON systems by usng WDM technology on a Pont-to-Multpont fbre topology. All archtectures consdered wll be descrbed wth ther relevant characterstcs for product defnton and cost n the next sectons. In the dscusson on the relatve performance of Ethernet P2P and GPON technology arguments about dfferent OPEX, especally concernng space requrement and power consumpton, have been exchanged. Therefore we model the space requrement and the power consumpton of the archtectures consdered explctly n a bottom-up manner. For the sze of an MPoP we assume, that the equpment to serve fbre lnes for 100% of the homes passed has to be hosted. For Pont-to-Multpont topologes all fbres are connected to OLTs, n the case of P2P topologes the floorspace dmensonng for actve equpment s based on 70% take-up 26 (see sectons on the fxed network market reach and on floorspace ssues). In our model we assume that the ncumbent s the nvestor of the NGA network nfrastructure. Compettors (new entrants) face the same (effcent) cost f they provde access on the bass of wholesale access to the ncumbent s network, but may acheve a lower ARPU. If the NGA archtecture s based on a Pont-to-Pont fbre plant we consder the compettors to use unbundled fbre loops as wholesale access servce n ths study. If the archtecture s based on a Pont-to-Multpont fbre plant, we consder an actve wholesale access at the MPoP or at the core network node locatons. In total we consder the followng archtectures (Table 2-2). Detals of the archtectures are explaned n the next subsectons n the order Ethernet P2P, GPON, GPON over P2P as a specal mplementaton and WDM PON. Table 2-2: Overvew of the archtecture scenaros consdered Scenaro Incumbent archtecture Compettor (Entrant) wholesale base P2P unbundlng Ethernet P2P Fbre LLU at MPoP GPON over P2P unbundlng GPON over P2P Fbre LLU at MPoP WDM PON unbundlng WDM PON WDM unbundlng at Core Nodes GPON btstream core GPON Btstream access at Core Nodes GPON btstream MPoP GPON Btstream access at the MPoP 26 We expect a long-term market of the FTTH network of all potental access lnes n the competton aganst cable, moble and non-users.

46 36 Archtectures and compettve models n fbre networks P2P FTTH Pont-to-Pont (P2P) deploys fbre access lnes from the MPoP to each of the customers homes (apartments, dwellngs). The complete fbre capacty s avalable for each customer n the subscrber access network snce every customer has a dedcated fbre from hs home to the MPoP, thus one fbre per home n both the feeder and the drop cable segment s requred. Because of the uncertantes of the future bandwdth need of resdental and busness customers ths Pont-to-Pont fbre plant appears to be the most future proof soluton, because the use of the full optcal spectrum per fbre s not restrcted by any ntermedate technology. The maxmum length a fbre local loop may have s determned by the optcal budget of the fbre connecton and the power of the nterface cards at the MPoP and end customer locaton (respectvely ther lasers and recevers). Wthout ntermedate repeaters today s nterface cards may reach up to km. But the longer the dstance brdged, the more expensve the nterfaces wll become. In NGA networks we talk about mass market deployments, thus expensve nterface cards could have a sgnfcant mpact on total cost. In our model assumptons for Ethernet P2P we therefore take the same lne length assumptons as for the copper access network. Another dscusson covers the manageablty of larger fbre network starponts, so that an upper lmt regardng the fbre count at the MPoP mght exst. Today large copper MDFs serve more than 35,000 copper pars. Wth fbre an end customer connecton n Pont-to-Pont fbre plants needs only a sngle fbre nstead of a copper par and each fbre requres less space (has a much smaller dameter) than a copper wre. The Optcal Dstrbuton Frame may be larger than the copper equvalent, so the ODF may stll be a lttle bt larger per fbre, but due to techncal nnovatons ths may change over tme. Overall, a fbre MPoP wll be able to serve more fbre lnks than the largest copper MDFs today. Therefore, we are convnced that wth our model approach of assumng the exstng copper MDF locatons to be the proper scorched nodes of the new NGA network, where all exstng spare ducts may be used, we are conservatve and do not rase fbre management problems. In the P2P archtecture the ncumbent termnates the access fbres on an Optcal Dstrbuton Frame located n each of the MPoPs. Thus an ODF has as many customer sded ports as potental customers are n the feld and as many homes have been passed by the fbre plant. The ODF s used to connect the sngle fbres to the ports of the traffc concentratng Ethernet equpment by patchng only the access fbres of the subscrbers to the network sded ports of the ODF, whch then are connected to the ports of the Ethernet swtches. Ths arrangement also allows one to connect each end customer ndvdually to ports of dfferent speed (0.1 to 10 Gbps) or to separate dedcated equpment.

47 Archtectures and compettve models n fbre networks 37 If more than one Ethernet swtch s needed to connect the actve customers addtonal swtches are consdered n a cascaded and herarchcal manner. The last network sded swtch then s the border to the upper concentraton network. The network sded nterface cards are already part of the concentraton network. They are consdered separately n the respectve cost calculatons n order to adapt to the wholesale cost calculatons (see below). For compettors usng wholesale access we have consdered a fbre unbundlng scenaro for the P2P archtecture n whch a compettor rents the unbundled fbre loop, places an addtonal Optcal Dstrbuton Frame of hs own at rented collocaton space n the MPoP where he operates hs own Ethernet Swtch. The compettor s ODF s connected va a dedcated connecton cable to dedcated customer sded ports of the ncumbent s man ODF. The costs of all these elements are part of the compettor s total cost. In addton, the compettor has to bear the cost of the concentraton and core network hmself. Fgure 2-5 not only descrbes the P2P topology n general and whch cost elements are consdered n the ncumbent s total cost, but also detals whch cost tems become part of the fbre LLU prce (underscored cost postons) and whch elements and costs of the access network the compettor has to bear drectly (red). We treat the ncumbent deployng a P2P network and offerng fbre unbundlng to compettors as our frst scenaro. Fgure 2-5: Scenaro P2P wth Scenaro fbre LLU 1: Unbundlng of FTTH/P2P Fber 1:1 Handhole/Sleeve ODF * MPoP Ethernet Swtch Ethernet modem /router ODF Ethernet Swtch Access Seeker Incumbent cost (relevant for LLU prce) CPE Access Network ncl. Inhouse cablng ODF + Patch cablng + floorspace Ethernet Swtch + floorspace + energy Network sded Ethernet port (1 per MPoP) * Only actve customers patched through to Ethernet Swtch Compettor cost** CPE LLU charge Compettor s ODF & Patch cablng + floorspace Ethernet Swtch + floorspace + energy Network sded Ethernet port (1 per MPoP) Concentraton Network Core Network Concentraton Network Core Network ** Assumpton: Unbundler operates Ethernet P2P network 3

48 38 Archtectures and compettve models n fbre networks GPON The GPON technology s desgned to deal deally wth Pont-to-Multpont fbre plants. It concentrates the traffc of a sgnfcant number of customer access fbres at an ntermedate optcal spltter locaton (DP) onto a sngle backhaul fbre. Optcal spltters may be cascaded n order to optmze the fber count and to adapt t to the end customer dstrbuton. But each spltter adds some addtonal attenuaton by gettng splced nto the cable and because t has to dstrbute the power of the downstream sgnal to all fbres connected. Thus the fbre plant strongly depends on the optcal power budget and the maxmum splttng factor. ITU-T G.984 standardses GPON n ts lmtaton of 20 km reach at a 1:32 maxmum splttng factor. New standards and better nterfaces allow a splttng factor of up to 64 or even 128. For our models we assume a splttng factor of 1:64 under any crcumstances n a sngle step, wthout any cascades. Already n order to enable the use of exstng spare ducts we assume DP locatons and szes comparable to an effcent copper plant. These may host several spltters, accordng to fbre count. In our ncumbent model the fbre plant s deployed to all homes (100% homes passed). Ths assumpton corresponds to an effcent fbre deployment strategy. The fbres are connected to spltters fllng them up to 90% of ther capacty, keepng spares for future use and addtonal capacty. The fbres from the spltters are connected to the clent sde of the ODF n the MPoP, patched over there to the approprate OLTs. The OLTs are connected to an Ethernet swtch whch s the nterface to the concentraton network. Especally durng ramp-up when only few potental customers have already become subscrbers to the FTTH network ths archtecture stll has consderable spare capacty, whch wll be reduced as the take-up ncreases. Keepng the copper MDF locatons as scorched nodes where the exstng duct plant concentrates we are confdent that fbre management problems at the MPoP stes due to the number of fbres wll never occur, snce the fbre count n the feeder cable segment s reduced by the splttng factor compared to a P2P approach. The fbre count n the drop cable segment between (the last) spltter and the end customer premse wll be the same as n the P2P case. In order to coordnate communcaton of users wth the actve electroncs at the MPoP, admsson rghts are admnstered by a central component (the Optcal Lne Termnator OLT) whch has to nteract wth decentralsed components at the end customer stes, called ONU (Optcal Network Unt, n case of several customers) or ONT (Optcal Network Termnal, n case of one customer). Accordngly, OLT and ONU/ONT must be able to communcate wth each other. Internatonal standards generally only offer a basc, mnmal level of nteroperablty, thus n practce there s a suppler dependency between OLTs and ONUs/ONTs. By contrast, the degree of suppler dependency for P2P solu-

49 Archtectures and compettve models n fbre networks 39 tons s not sgnfcant, because current solutons for actve equpment are all based on standard Ethernet nterfaces that nteroperate n a worldwde mass market. GPON systems offer a downstream bandwdth of 2.5 Gbps and an upstream bandwdth of 1.25 Gbps, shared between all customers connected to the same spltter (respectvely spltter chan) or OLT port. In the case of 64 end customers per spltter t would result n approxmately 40 Mbps down- and 20 Mbps upstream per customer as a fxed capacty, whch can be used n a shared manner f the system s confgured approprately, so that the users may acheve the total sum of bandwdth as a peak capacty. Also f the spltters are not completely flled wth actve subscrbers the spare capacty may be shared between the subscrbers. GPON wth ts central admnstraton of sendng rghts n the OLT n prncple allows one to allocate a fxed bandwdth or more dynamc bandwdth for an end customer and thus enables to serve end customers n an ndvdual manner. But ths s lmted to the degree the other customers are not harmed or restrcted n ther prncple capacty demand. Reducng the amount of customers connected to a spltter s another method to ncrease bandwdth per customer, and of course both methods may be combned. But reducng the amount of customers for a spltter requres a change n the fbre plant. Snce customer demand cannot be planned n advance, some spare spltters could be foreseen durng fbre roll out for future use. All fbres wll be drven by the same nterface cards, so ndvdual solutons to sngle, dedcated (busness or wholesale) customers gong beyond Ethernet nterfaces above 1 Gbps or requrng access to the optcal spectrum (WDM band) cannot be supported by GPON, but may requre addtonal fbres n the feeder and drop cable segment. 27 Addtonal spare spltters or fbres are not consdered n our model assumptons, because we dd only model pure archtectures and no hybrd solutons. Each ONU/ONT has to lsten to the downstream messages of all connected customers and flter them for ts own end-user. The downstream messages are encrypted, but may be lstened to by all neghbours at the same spltter. Ths nherently makes the system more vulnerable to llegal ntercepton and/or generates hgher costs for encrypton to secure communcatons. The upstream messages between end customer and OLT are not encrypted and may be reflected by mperfect splces n the feeder cable, thus enablng clear text ntercepton wth very senstve (specal) recevers. Denal of servce attacks may be started wth a strong optcal beam gnorng the OLT s admnstraton, or by affectng the OLT s admnstraton messages, and there s also a certan rsk that faults n one ONU/ONT may affect all the other endponts of the same spltter/olt. Determnaton of fault locatons n such a spread envronment s harder to acheve than n a P2P system where only sngle lnes fal under these crcumstances. Thus we assume GPON systems to be more vulnerable to llegal ntercepton, denal of servce attacks and un- 27 Wth sub-loop access at the DP and an OSDF addtonal feeder fbres could be flexbly connected to the drop segment wthout any addtonal fbre count.

50 40 Archtectures and compettve models n fbre networks der certan fault condtons more tme consumng to repar. We wll consder ths aspect n our assumptons about qualty dfferences n our competton model (secton ). GPON archtectures concentrate the traffc onto fewer electronc nterfaces at the Central Offce. These actve components are more complex and more expensve than P2P components. The same holds true for end user devces. As long as a GPON archtecture cannot make use of the concentraton of the spltters, because users have not yet subscrbed or nfll homes 28 are not yet constructed, many spltter locatons n an OLT are lkely to stand empty for a sgnfcant perod of tme. Ths stuaton could be mproved wth ntermedate dstrbuton frames at spltter locatons. Nevertheless, ths complexty does not occur wth P2P archtectures, where ports are only nstalled and operated to connect actve customers. GPON archtectures are well suted to asymmetrc traffc, nasmuch upstream and downstream bandwdth dffers due to the nherent upstream communcaton collson. A preponderance of downstream traffc over upstream has so far been a typcal resdental communcaton behavour, and GPON s well suted to resdental customers who have substantal downstream and lmted upstream communcaton demand. However, already today busness customer demand s symmetrcal. And even for resdental customers, there s a strong progressve trend towards more symmetrc broadband communcaton (e.g. vdeo conferences/telephony, gamng, Peer-to-Peer 29 communcaton). Therefore, one mght queston whether the GPON archtectures are really future proof n the long-term concernng traffc patterns, gven that fbre-based nfrastructures could have economc lfetmes of as much as 40 years. If GPON had to deal wth a bandwdth demand ncrease by a factor of 10, then the planned GPON evoluton to 10G-PON would not suffce; however, one can be confdent that new GPON technologes wll appear, or that the nstalled Pont-to-Multpont fbre plant may be used to mgrate to WDM PON. 30 Mgraton to systems where the optcal frequences used overlap each other (e.g. GPON and DWDM) requre the complete exchange of the components n the fbre strngs (tree) of a spltter/olt n one step wth all ONU connected (e.g. 64) or a redesgn of the fbre plant. Mgraton to technologes requrng a Pont-to-Pont fbre plant would requre addtonal ducts and fbres n the feeder cable segment, thus should be avoded f possble. GPON, deployed wth spltters n the feld, can at present only be unbundled at the spltter locatons closest to the end customers. Fbre sub-loop unbundlng s not consdered n ths study as t does not appear to be a suffcently proftable wholesale product. In- 28 Homes whch may be constructed later. 29 Peer-to-Peer s n many cases also referred to P2P. In ths study we only use the term P2P for the fbre archtecture, not for the logcal communcaton relaton n the layers above. 30 For mgraton from GPON to 10GPON the optcal wndows of the frequency plan are synchronzed and allow for overlay nstallatons and smooth mgraton. Wth XG-PON2 of FSAN (Full Servce Access Network, the member companes drve standards nto products and contrbute to the standardzaton process va ITU-T) 10GPON wll offer 10 Gbps symmetrcal shared bandwdth. From 10GPON to WDM PON overlay and frequency plans are not coordnated and wll cause conflcts (Fgure 2-9).

51 Archtectures and compettve models n fbre networks 41 stead we consder two btstream access scenaros n the GPON case, btstream access at the core network level and at the MPoP level for the compettors wholesale access cases. The man dfference between the two scenaros s that btstream access at the core level ncludes the transport through the ncumbent s concentraton network whle n the other btstream scenaro the compettor has to use hs own concentraton network and may obtan a transparent, non-overbooked bandwdth from the MPoP to hs end customers, resultng n hgher product qualty and the ablty of ndependent product desgn compared to the GPON btstream core scenaro. But snce the compettor stll depends on the ncumbent s actve components ths qualty mprovement wll not acheve the degree of unbundled fbre local loops. Snce the ncumbent benefts more from economes of scale hs unt cost of the concentraton network transport wll be lower than that of the compettor, thus the compettor n the GPON btstream core scenaro may beneft from the lower cost n the wholesale prce. Fgure 2-6 and Fgure 2-7 show the GPON archtecture and detal cost components for the two scenaros. The underlned cost components once agan are the nput for the wholesale prce calculaton, whle the components n black buld the total cost of the ncumbent and those n red the total cost of the compettor. Fgure 2-6: Scenaro Scenaro GPON 3a: wth GPON btstream btstream access at access the core at level core level MPoP Fbre 1:64 ODF OLT Ethernet Swtch Concentraton Network ONT Spltter Incumbent cost (relevant for btstream prce) CPE Access Network ncl. nhouse cablng ODF + Patch cablng + floorspace OLT + floorspace + energy Ethernet Swtch + floorspace + energy Concentraton Network Compettor cost CPE Btstream wholesale charge Network sded Ethernet port (1 per MPoP) Core network Core Network 49

52 42 Archtectures and compettve models n fbre networks Fgure 2-7: Scenaro GPON 3b: wth GPON btstream btstream access access at the MPoP at MPoP level level MPoP Fbre 1:64 ODF OLT Ethernet Swtch Spltter ONT Incumbent cost (relevant for btstream prce) CPE Access Network ncl. nhouse cablng ODF + Patch cablng + floorspace OLT + floorspace + energy Ethernet Swtch* + floorspace + energy Network sded Ethernet port (1 per MPoP)* Concentraton Network Core Network Compettor Cost CPE Btstream wholesale charge Network sded Ethernet port (1 per MPoP)* Concentraton Network Core Network *Network sded port of Ethernet Swtch s not part of btstream access monthly charge per subscrber. 48 Most GPON systems allow one to dstrbute a separate cable-tv sgnal (RF sgnal) 31 as a separate wavelength n a broadcast manner from OLT to ONU/ONT. Ths sgnal s termnated on a coax plug and can be fed nto the exstng cable-tv cablng at the end customer homes. If enough bandwdth s set asde for the RF sgnal (e.g. 2.5 GHz bandwdth of ths addtonal RF sgnal) the RF channel may be shared between several cable-tv sgnals (e.g. 3 x 800 MHz) and thus s open for unbundlng and wholesale offers also. Ths feature adds new optons of market approaches whch would ncrease the complexty of modellng and result nterpretaton. We exclude a detaled analyss of the addtonal TV capabltes of GPON, only takng nto account that IPTV s consdered. Because there also exsts Ethernet P2P equpment offerng a RF colour on the same fbre used for the Ethernet sgnal wth no sgnfcant addtonal cost, these RF-TV features wll not cause any dfferences between the archtectures we compare, hence ths feature may be neglected wthout dstortng results. Provdng 40 Mbps per customer on average could cause bottlenecks f many of these customers use hgh qualty IPTV and Vdeo on Demand (VoD) n parallel, e.g. durng evenng hours, f they use several recevers per home. Thus IPTV n a GPON envronment often s mplemented as dynamc multcast where only those TV-programs are broadcasted n an OLT strng whch are requested by the end users of that strng. Ths may cause swtch-over delays. Ths may happen n GPON archtectures more often than n archtectures wth hgher bandwdth per end customer, where more programs 31 RF Rado Frequency.

53 Archtectures and compettve models n fbre networks 43 may be broadcasted at the same tme. Thus, we qualfy the IPTV capablty of GPON to be poorer than n the other archtectures consdered n ths study GPON over a passve P2P plant GPON can also be mplemented on top of a Pont-to-Pont fbre archtecture by movng the spltters back nto the central MPoP locaton and havng dedcated fbres n both drop and feeder secton. Lke n the frst scenaro the fbre count n the feeder and drop cable segment s the same, thus ths GPON archtecture does not have the fbre savngs n the feeder segment as descrbed before. The reason why we consder ths hybrd P2P/GPON archtecture s the potental to combne advantages of both worlds. All fbres are termnated on the ODF and are accessble per patch cables. So every customer stll has a dedcated fbre lne to the MPoP, thus openng all future fbre and optcal spectrum uses one may magne and also allowng ndvdual use of a sngle fbre as descrbed n the prevous P2P scenaro. If not connected to the spltters and OLTs at the MPoP, but to other transmsson systems, ndvdual customers could be served wth specal products beyond the broadband mass market GPON products (e.g. 1 Gbps symmetrcal traffc, 10 G or even optcal frequency space based transmsson). Besde ths addtonal opton ndvdual customer demand may be served out of the GPON features as descrbed before, whereby the reducton of the splttng rato could be acheved n an easy manner at the central ste just ntroducng new spltters wthout affectng the fbre plant n the feld. Locatng the spltters at a central ste allows a more effcent use of the spltters and the OLTs durng the roll out of the servces (ramp-up). Ths not only generates postve cash flow effects but also reduces some rsk of nvestment. Only actve subscrbers would be patched from the man ODF va a network sded ODF port onto a spltter and from there to the OLT. Ths assures a very hgh degree of spltter and OLT effcency (contrary to the standard GPON case wth spltters n the feld, OLTs wll have a very hgh utlsaton rate because only actve subscrbers are patched through). 32 The use of longer access lnes between spltters and end customers has no mpact on the total optcal budget of the GPON system snce the feeder cable s shortened by the same length. Compared to cascaded spltters a larger spltter at a central ste also means less fbre splts and therefore lower attenuaton and potentally an mproved optcal budget due to less spltter attenuatons. There s also no change concernng the exchangeablty and nteroperablty of GPON OLTs and ONU/ONT. But the flexblty of the Pont-to-Pont fbre plant allows one to exchange the transmsson systems smoothly over tme, one customer at a tme, f that 32 At least n the begnnng of a roll-out, GPON OLTs would suffer from low take-up whle GPON over P2P OLTs could always be operated at ther capacty lmt.

54 44 Archtectures and compettve models n fbre networks looks favourable, and thus reduces the suppler dependency of the operator. Ths economc value per se 33 s nether quantfed nor consdered n our model assumptons. Snce the actve equpment connectng to the customers stll s GPON, the securty and avalablty consderatons for GPON descrbed n the secton above reman the same. But the underlyng Pont-to-Pont fbre archtecture allows ndvdual servces wth mproved features for dedcated customers n parallel wthout any addtonal fbre count. It would also allow a smooth mgraton to other archtectures lke Ethernet P2P, f that looks favourable at one pont n the future or for a subset of customers. The space and the assocated cost requred at the MPoP stes wll be hgher than wth GPON wth dstrbuted spltters (descrbed n the prevous secton 2.3.2), because the ODF network and customer sded port counts are sgnfcantly hgher (by the splttng factor) and the spltters themselves must be located at the MPoP stes, too. Ths wll be consdered n our bottom-up space demand model for the MPoPs. On the other hand, the dstrbuted spltters and ther assocated cost n the feld wll be saved. The demand of electrcal power consumpton durng ramp-up wll be lower n GPON wth centralzed spltters, snce the OLTs wll only be nstalled accordng to demand and subscrber ncrease. We wll consder ths also n our bottom-up MPoP OPEX modellng. The ramp-up effect however only wll become vsble n our dynamc modellng (secton 3.1.8). The assocated wholesale product we have consdered n ths study s an unbundled fbre loop. From a wholesale perspectve the scenaro GPON over P2P unbundlng s dentcal wth the scenaro P2P unbundlng because t refers to the same P2P outsde plant. 33 The ablty to exchange supplers wthout loss of servce qualty for the end user mproves suppler competton and reduces equpment cost when new generatons of systems have to be ntroduced. It also reduces mgraton cost and the rsk of suppler nsolvency etc.

55 Archtectures and compettve models n fbre networks 45 Fgure 2-8: Scenaro Scenaro GPON 2: over Unbundlng P2P wth fbre of GPON LLU over passve P2P Fber 1:1 MPoP Handhole/Sleeve ODF * OLT Ethernet Swtch Ethernet modem /router ODF Ethernet Swtch Access Seeker Incumbent cost (relevant for LLU prce) CPE Access Network ncl. nhouse cablng ODF + Patch cablng + floorspace Spltter + OLT + floorspace + Energy Ethernet Swtch + floorspace + Energy Network sded Ethernet port (1 per MPoP) Concentraton Network Core Network * Only actve customers patched through Compettor Cost CPE LLU charge Compettor s ODF & Patch cablng + floorspace Ethernet Swtch + floorspace + energy Network sded Ethernet port (1 per MPoP) Concentraton Network Core Network ** Assumpton: Unbundler operates Ethernet P2P network 4 Concernng outband RF-TV sgnal transmsson there s no dfference between the two GPON approaches. RF, however, s not consdered n the modellng WDM PON Usng one optcal fbre for several customers can be done n technologcally dfferent ways. GPON technologes use the same sngle optcal beams and assgn transmsson rghts to end users by a central admnstraton (the OLT at the central ste), so that each user can send hs upstream nformaton exclusvely and wthout nterference to other users n the same system n dfferent tme slots (TDM, Tme Dvson Multplex). WDM (Wave Dvson Multplex) systems, however, use dfferent optcal beams of dfferent wavelengths (dfferent colours) to separate the transmtted nformaton from each other. Hence, WDM s essentally a means of capacty expanson through reusng the physcal medum optcal fbre wth more than just one wavelength. GPON already multplexes two (three when addtonally consderng analogue (RF) TV) wavelengths on the fbre. The Coarse WDM standard enables 18 separately dstngushable wavelengths and the Dense WDM standard enables 162 wavelengths wth a much smaller channel wdth. GPON and C/DWDM as such cannot coexst on the same fbre (at least not wthout sacrfcng some of the defned WDM wavelengths, see Fgure 2-9). The more wavelengths are enabled, the smaller the spacng between two wavelengths becomes. Smaller channel wdth and spacng mean that lasers must be ncreas-

56 vdeo 46 Archtectures and compettve models n fbre networks ngly accurate. Ths s what has made the use of DWDM n the access network up to now so expensve. System development proceeds and DWDM cost have sgnfcantly decreased over the last decade and wll contnue to decrease further on. Already today there are DWDM PON systems n the market that allow usng up to 80 dfferent colours of the DWDM grd n order to address customers ndvdually 34 or as customers grouped to an GPON overlay network. The WDM spltters allocate the ndvdual colours to the approprate fbre access lnes connected to the spltters. Each colour s capable of transportng a 10 Gbps Ethernet sgnal. Tuneable transponders allow one to use grey lght standard end customer equpment. In mult-dwellng buldngs ths large capacty may be shared n a FTTB manner by an Ethernet aggregaton swtch n the basement. At the central ste the OLT routes the optcal beams to dfferent drectons and thus allow one to unbundled sngle optcal beams. Overall ths DWDM based approach s not well suted to address the mass market already now, because t s overszed and stll s rather expensve, so better suts for busness customers and large mult-dwellngs n a FTTB manner. Fgure 2-9: Use of the optcal wavelength grd O-Band E-Band S-Band C-B. L-Band up upstream down Nanometer (nm) GPON 10G-PON CWDM (centre Frequency) DWDM NGOA 1000 of s up & down Source: WIK/Schuster 35 Recent research by Noka Semens Quelle: Noka Networks Semens Networks, and Natonal other Strateges companes for nfrabroadband organzed Aprl n 2010 the Open Lambda Intatve ams at enablng an enormous ncrease of wavelengths on the same fbre by facltatng technologcal progress n sgnal processng, tuneable lasers and photonc ntegraton. Ths would allow hgh wavelength densty and requres hgh recever senstvty, thereby enablng approxmately one thousand ndvdual wavelengths n the C-Band of the spectrum alone (Next Generaton Optcal Access NGOA), just affectng the GPON downstream channel bandwdth, beng above and below the RF vdeo wavelength of the GPON standard and above and below the 10G E.g. ADVA Systems, Munch, Germany. 35 Schuster (2010), modfed by WIK.

57 Archtectures and compettve models n fbre networks 47 PON downstream channel wavelength). In ths way, only coexstence between GPON and 10G GPON would be enabled. At the moment we see no opton for coexstence between GPON and NGOA. Such a WDM PON technology (Fgure 2-10) would allow dedcated wavelengths for each customer, resultng n hgher bandwdth compared to GPON. Each of these WDM PON wavelengths s announced to support 1 Gbps bandwdth, whch can be admnstered by one or more WDM PON OLTs, operated by dfferent carrers, thus allowng one to unbundle the wavelength. To be precse, the am of usng WDM n ths context s not to multplex multple GPON overlays on the same fbre but rather to enhance the capacty of the system by provdng every customer wth a separate wavelength of hgher capacty whch e.g. may be unbundled, too. So far, ths s ongong research and development, and t remans to be seen whether ths technology can be commercalzed. Supplers forecast the market avalablty wthn approxmately three years from now. Fgure 2-10: Outlook: WDM PON n future use Curt Badsteber Source: Badsteber (2010)