RURAL BROADBAND FINANCIAL MODELING RAPID BUSINESS CASE ASSESSMENT FOR LOCAL GOVERNMENTS SEEKING ALTERNATIVE APPROACHES

Transcription

1 RURAL BROADBAND FINANCIAL MODELING RAPID BUSINESS CASE ASSESSMENT FOR LOCAL GOVERNMENTS SEEKING ALTERNATIVE APPROACHES MARKET ANALYSIS Rural communities struggling to find an optimal solution to their broadband needs are turning to alternative approaches that are attractive to investors and network operators. Alcatel-Lucent Bell Labs has developed a financial model for rural broadband that includes access topology, demographics, broadband speed and take rate in the business case assessment. The model can be used for rapid business case assessment to facilitate local government planning.

2 TABLE OF CONTENTS INTRODUCTION / 1 DEFINING THE RURAL BROADBAND BUSINESS CASE / 1 DEPLOYMENT COST OPTIMIZATION / 2 KEY TAKEAWAYS / 4 ABOUT BELL LABS ADVISORY SERVICES / 4 REFERENCES / 4

3 INTRODUCTION This Market Analysis document provides insights gained from evaluating the business opportunity in rural communities where commercial companies investment appetite is low. The long return on investment for deploying high-speed broadband in rural areas generally discourages commercial companies from making such investments. Local authorities are aware of the benefits that high-speed broadband can bring to their residents and businesses and are keen to see such investments made, but the options are generally limited to either subsidizing commercial companies or through more direct intervention such as creating an open access network. Evaluating the business opportunity for the latter is challenging because prerequisites generally include, as a minimum, site surveys to assess the scope of the civil works and planning to target the maximum number of subscribers. Bell Labs has developed algorithms that allow local authorities to assess the initial viability of these approaches quickly and efficiently by simultaneously minimizing civil works and maximizing revenue. DEFINING THE RURAL BROADBAND BUSINESS CASE A more efficient mechanism was required to assess the viability of these capital investments. Several European countries incumbents are rolling out the next generation of broadband access through fiber-to-the-curb (FTTC) or fiber-to-the-building (FTTB). However, the large investments required mean that only urban and suburban areas are likely to benefit in the short to medium term. A digital divide is emerging, with rural communities and enterprises struggling to get digital subscriber line (DSL) speeds of 2 Mb/s and also unlikely to see high-speed fiber or cable access for several years because commercial companies are unlikely to realize a reasonable return on their investments. Local authorities with a geographically dispersed population have typically been forced to award incentives to the private sector to subsidize both accessibility and affordability. However, to provide value for money from local taxation, authorities are examining creative methods of meeting a universal service commitment as alternatives to simple subsidies. One method extends the connectivity that local authorities have provided to offices and buildings under their control, such as schools, fire stations and health centers, to residents and businesses. Such locations can provide a backdrop for local authorities to invest directly in high-speed networks, introducing the potential for an open access wholesale network by unbundling rural street cabinets and connecting them to the nearest connected premise within their network to provide the necessary backhaul. This backhaul connectivity is typically where the majority of the costs are incurred due to the civil works required because the connectivity generally requires a fiber to be laid underneath the street or walkway. Evaluating the economic viability of investing in such a network requires detailed knowledge of the distances between street cabinets and the closest point of access, such as a central office, school or fire station. Furthermore, targeting areas that have poor DSL coverage also maximizes revenue because it addresses latent demand. Full site surveys are expensive and take time, so a faster, more economical way is required to assess the viability of these capital investments in the regions infrastructure. Understanding the areas that have the most influence over the payback period is critical to the success of the business case and enables us to examine the key assumptions in greater depth. Rural Broadband Financial Modeling ALCATEL-LUCENT MARKET ANALYSIS 1

4 DEPLOYMENT COST OPTIMIZATION Bell Labs devised an algorithm that automatically calculated the line of sight distances between the two end points to provide an initial estimate of the distance if each street cabinet were to be connected to the nearest local authority building in a star configuration. This provided an initial estimate of the civil works required, which was then refined with a minimum spanning tree algorithm. This algorithm created street cabinet sub-nodes, where street cabinets were clustered and connected together with the nearest local authority building (see Figure 1). The minimum spanning tree model optimized the rollout plan and reduced dig distance by as much as 36 percent. As the civil works costs were the largest capital expenditure, these savings were critical to the feasibility of the business case. Figure 1. Different methods for calculating distance between node and connection points Tradtitional method of calculated distance from node to nearest connection point, forming a star Optimized method of measured distance from node to nearest node or connection point, forming a cluster The list of clusters was prioritized in order of number of working lines, so that the clusters serving the highest potential subscriber populations (function of total people and willingness to pay for broadband) would be addressed first. This method increased the revenues seen in the first years (see Figure 2), which can be used to offset future investment and reduce the payback period. Such targeting also has the side effect of optimizing some operational costs, such as costs paid to the incumbent, because the cost of unbundling an exchange will match the likely demand. Figure 2. Revenue improvement for an optimized network Original revenue Optimized revenue Revenues (in thousands of British pounds) 30,000 25,000 20,000 15,000 10,000 5, Rural Broadband Financial Modeling ALCATEL-LUCENT MARKET ANALYSIS 2

5 To assess the take-up of rural broadband in a specific area, the residents and enterprises were segmented according to whether they already received high-speed broadband (more than 2 Mb/s) and, if they did not, whether they would purchase a faster service. Total take-up within the residential segment was approximated based on residents propensity to purchase high-speed broadband given their socio-economic groupings and then extrapolated using the Bass diffusion model. Although the take-up was assumed to be greater among residents who currently receive a poor broadband service, primary research indicated that residents would pay for premium service even if they already received a 2-Mb/s service. Take-up for enterprise customers was based on site type and fixed broadband penetration rates, taking into account the type of enterprise building (warehouse, office, and so on) and the relative likelihood of upgrading to a higher-speed broadband service. A combination of optimized rollout and business modeling analysis focused on the key sensitivities of the business case and produced a payback of about eight years. As shown in Figure 3, earlier payback was achieved through optimized rollout. Figure 3. Optimized cumulative discounted cash flow of an optimized rollout 20,000 Original rollout Optimized rollout Cash flow (in thousands of British pounds) 10, ,000-20,000-30,000-40,000 Payback in eight years -50, Analysis also highlighted that the case was greatly influenced by the inclusion of subscribers who already received 2-Mb/s service but would be likely to want a faster service. At about 70 percent of the addressable market, subscribers who already received 2-Mb/s service accounted for 60 percent of the total revenue. When analyzed in greater depth, this is attributable to the higher take-up of premium service among that group. Given the sensitivity of the case to pricing, these price points were further verified with market data. With an optimized rollout, in both distance and scheduling, the payback was reduced from more than 10 years to about 8 years. Rural Broadband Financial Modeling ALCATEL-LUCENT MARKET ANALYSIS 3

6 Additional research is being conducted within Bell Labs to further demonstrate the benefit of ubiquitous broadband in areas such as remote medicine and other consumer services. When these benefits are extended to the macro-economic environment, Bell Labs Business Modeling continues to study the correlation between broadband deployment and employment, productivity, economy sector outputs and overall GDP. KEY TAKEAWAYS The Bell Labs modeling practice has led to development of a quick and inexpensive mechanism to evaluate the business opportunity, paving the way for a more detailed analysis and trials to determine the validity of the assumptions. We have demonstrated the capability to assess high-level economic viability in a few weeks rather than months a unique metric within the business modeling community. The Bell Labs result for this particular example shows a significant monetary advantage for the network operator in adopting an optimized approach to network rollout: payback of the network investment several years earlier. ABOUT BELL LABS ADVISORY SERVICES Bell Labs is the innovation engine of Alcatel-Lucent. Bell Labs Advisory Services applies innovative and advanced analysis-driven problem solving expertise to address your complex business, network, strategic and operations challenges. Tailored to your unique needs, a multi-disciplinary team of Bell Labs scientists, technologists, modelers and Alcatel-Lucent services and solutions experts will perform an objective analysis and provide you with actionable insights and confidential recommendations. Contact us to: Request a first-of-its-kind analysis or get a second opinion on focused topics Learn how emerging technologies will perform in specific scenarios Find out about other product offerings For more information on this study or on how Alcatel-Lucent is working with service providers and stakeholders globally to better understand consumer needs, please contact Bell Labs Advisory Services. REFERENCES 1. Alcatel-Lucent. Internal communications. 2. DECE Kavi Workspace, 3. Mampaey, Marcel. DECE and UltraViolet for Media Entertainment, CTO Brief, October Netflix forecast: 23.7 million subscribers by end of 1Q2011, Alcatel, Lucent, Alcatel-Lucent and the Alcatel-Lucent logo are trademarks of Alcatel-Lucent. All other trademarks are the property of their respective owners. The information presented is subject to change without notice. Alcatel-Lucent assumes no responsibility for inaccuracies contained herein. Copyright 2011 Alcatel-Lucent. All rights reserved. M (November)