Broadband Business Models to meet deployment targets Dr. Raul L. Katz, Columbia Institute for Tele-Information

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1 Broadband Business Models to meet deployment targets Dr. Raul L. Katz, Columbia Institute for Tele-Information 1

2 Broadband business models Ø Business model: the architecture of the value creation, delivery, and capture mechanisms employed to deliver a service, including offerings, strategies, infrastructure, organization, trading practices, and operational processes and policies Ø Supply side: business models to accelerate broadband deployment Ø Policies to stimulate private sector investment Ø Government intervention as a last resort Ø Demand side: business models to accelerate adoption Ø Practices to address demand-side challenges Ø Models to address the affordability gap 2

3 Supply-side business models: Accelerate deployment 3

4 Supply side business models Ø Objective: to make sure that universal service targets are met MARKET STRUCTURE SEVERAL OPERATORS 2-3 OPERATORS ONE OPERATOR NO OPERATOR DENSITY AND SIZE OF DEMAND HIGH MEDIUM LOW VERY LOW Dense urban areas with high business and residendal density Urban areas/towns with primarily residendal density Rural areas with sparse residendal density Rural areas with very low density 4

5 Supply side business models Stimulate private investment Ø Business model development to address isolated areas begins by understanding deployment economics BROADBAND MARKET DEPLOYMENT PLANS MARKET SHARE ACCESS LINKS HOMES PASSED CONSTRUCTION CPE MIX ARPU REVENUES ARPU REVENUES EQUIPMENT OPERATING EXPENSES EBITDA AMORTIZATION AND TAXES EBIT FREE CASH FLOWS 5

6 Supply side business models Stimulate private investment Ø Deployment economics highlight the business case choke points DEPLOYMENT PLANS HOMES PASSED CONSTRUCTION EQUIPMENT Primary demand is too small, so even if 100% share, revenues do not allow for positive NPV CPE MARKET SHARE Inefficient operations affect margins OPERATING EXPENSES BROADBAND MARKET ARPU REVENUES ACCESS LINKS MIX ARPU REVENUES EBITDA Low share impacts revenue streams Capex too high relative to operating profits leads to lengthy horizons for a positive NPV AMORTIZATION AND TAXES EBIT FREE CASH FLOWS 6

7 Supply side business models Stimulate private investment Ø Highlighted choke points enable the determination of policy initiatives to stimulate deployment Reduce property taxes Reduce VAT on equipment purchase DEPLOYMENT PLANS HOMES PASSED Reduce ROW or spectrum access costs CONSTRUCTION EQUIPMENT Provide low cost real estate for central facilities Provide grants to fund capital investment CPE MARKET SHARE OPERATING EXPENSES MIX ARPU AMORTIZATION AND TAXES BROADBAND MARKET REVENUES ACCESS LINKS ARPU REVENUES EBITDA EBIT FREE CASH FLOWS 7

8 Supply side business models Stimulate private investment Ø Reduce property taxes and VAT on initial equipment purchase to decrease CAPEX burden Ø Reduce infrastructure costs linked to ROW, pole attachment or spectrum access costs (release spectrum for mobile broadband, lower and standardize pole attachment rates, Dig-once /joint trenching rules) Ø Provide grants to fund capital investment Ø Provide low cost real estate for central facilities Ø Enforce infrastructure sharing and wholesale access 8

9 Supply side business models Government intervention Ø If despite incentives, private sector investment does not materialize, government intervention can be justified if expenditures are outweighed by the broader socio-economic benefits Ø The first question is where should the State intervene? Ø Which communities can be, or are, served by market forces? Ø Which communities will need assistance with initial investment to become self-sustaining? Ø Which communities cannot become self-sustaining and will require ongoing funding? Ø The second question is how should the State intervene? 9

10 Supply side business models Government intervention Facilities or servicebased competition National government deploys backbone to reach isolated area (leveraging government utilities infrastructure) Private service provider operating under protected conditions (e.g. regulated monopoly) Community-owned service provider Scope of government intervention

11 Supply side business models Government intervention Ø Community-based service provisioning can follow four models Ø Closed network, whereby local government provides retail services Ø Local government wholesales access to a single retail service provider Ø Local government is wholesaler of transport to multiple retail service providers (open access) Ø Local government is provider of dark fiber 11

12 Supply side business models Government intervention ALTERNATIVE MODELS OF GOVERNMENT INTERVENTION Ø Subsidize incumbent telco/bb to upgrade to utility Ø In greenfields, government could build (contracts) for the construction of universal access network Ø Promote competition for government contracts to lower initial costs Ø Government can then auction the broadband infrastructure to highest (qualified) operator Ø Monopoly for wholesale-only/open access utility operator? Ø Any loss is a one-time infrastructure subsidy (like building a highway and road system) 12

13 Supply side business models Government intervention Ø Government intervention should consider opportunities and risks IS GOVERNMENT INTERVENING? YES NO IS PROJECT SUSTAINABLE AND PROFITABLE? YES PreempDon of private investment ( crowding- out ) Market addresses the need of public good NO Alleviate the constraints of the business case to sdmulate private investment Re- creadon of access bovlenecks Erosion of the public udlity model Supplier of last resort 13

14 Demand-side business models: Accelerate adoption 14

15 Demand-side business model models should address the demand gap Country BROADBAND DEMAND GAP Households passed (*) Households connected Demand Gap Australia 89 % 69 % 20 % Denmark 96 % 76 % 20 % France 100 % 77 % 23 % Germany 98 % 58 % 40 % Israel 100 % 83 % 17 % Italy 95 % 55 % 40 % Republic of Korea 100 % 93 % 7 % Spain 93 % 61 % 32 % Sweden 100 % 89 % 11 % United Kingdom 100 % 68 % 32 % United States 92 % 62 % 31 % Sources: Analysis by the author, based on data from EU; FCC; BMWi; OECD; PTS - Sweden; and Israel Minister of Communication. REASONS FOR NOT ACCESSING TO THE INTERNET AT ALL Reasons Relevant ( lack of interest, busy doing other tasks) Percentage of answers United States United Kingdom 45 % 60 % Price 15 % 28 % Service availability 16 % 14 % Easy to use (difficulty, senior ciuzen, physical handicap) 22 % 16 % Sources: Horrigan, J. (2009); Ofcom (2008)

16 Demand side business models Accelerate adoption Ø Three business model initiatives to initially stimulate adoption DEPLOYMENT PLANS Reduce taxes MARKET SHARE BROADBAND MARKET ACCESS LINKS Aggregate state demand for critical mass HOMES PASSED MIX CONSTRUCTION CPE ARPU REVENUES ARPU REVENUES EQUIPMENT Provide subsidies to subscribers OPERATING EXPENSES AMORTIZATION AND TAXES EBITDA EBIT FREE CASH FLOWS 16

17 Demand side business models Accelerate adoption Ø Aggregate demand: the local government can become an anchor user to guarantee revenues at ramp-up phase of broadband Ø Coordinate demand for broadband access from government administration, public safety, local schools and health care facilities Ø Negotiate a wholesale rate and long-term contract and define Service Level Agreements Ø Create a flow of revenues that eases the economic pressure on the business case Ø Organize groups of people (schools, communities, SMEs) at the grass-root level Ø Establishment of a Broadband Expertise Centres to spread knowledge on broadband for institutions that do not have ICT as their core task Ø Deploy broadband demonstration areas for consumers and conduct training 17

18 Demand side business models Address the affordability gap Ø High consumer taxes as a percentage of total cost of broadband ownership are an obstacle to adoption Tax as a proportion of TCMO Source: Telecom Advisory Services LLC Ø For every dollar that taxes are reduced over a 5 year period, US $ 1.4 to 12.6 will be created in additional GDP

19 Demand side business models: Address the affordability gap Ø Fiscal incentive Ø A reduction in local taxes to small and medium enterprises linked to ICT adoption has been found to stimulate adoption in areas that can have an impact on economic output Ø A subsidy targeted to economically-disadvantaged subscribers addresses the social inclusion problem (Universal Service) Ø However, subscriber subsidies need to be used sparingly 19

20 Broadband business models: Conclusion Ø The primary business models to guarantee broadband deployment pertain to the private sector Ø Should governments intervene in broadband and wireless deployment? Yes, but initially facilitating market forces not preempting them Ø Should Government be the risk-taker of last resort? Maybe Ø Governments, communities, businesses, and operators should coordinate to identify supply and demand conditions and tailor services to tackle unmet needs Ø The establishment of a business case to deploy broadband is a joint effort 20