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

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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)

58 48 Archtectures and compettve models n fbre networks Nevertheless we have consdered a WDM PON technology such as the one proposed by the Open Lambda Intatve as a very forward lookng technology opton n ths study. 36 We assume that a sngle OLT supports up to 1000 wavelengths wth 1 Gbps capacty each n a symmetrc manner. The fbre plant may brdge a dstance of up to 100 km. Ths allows one to close all of the exstng MDF locatons except those used for the core network, whch conssts of 45 locatons n our model country Euroland (see secton 3.1.2). The MDF wll be replaced by larger manholes whch host addtonal spltters (1:16) n order to further concentrate the fbres. Up to 1000 drop cable access lnes would then be concentrated per backhaul fbre between the old MDF and the remanng MPoP at the core layer nodes. Up to the old MDF locatons we assume the fbre plant to be the same compared to GPON (wth spltters n the feld), from there to the MPoP the exstng concentraton network wll be replaced by backhaul fbres, hence by a passve optcal network. 37 Furthermore, we make advanced assumptons for the cost of the WDM PON equpment by assumng t wll be produced n large numbers of components, thus costng more than GPON components. The OLT we assume to be 5 tmes more expensve than a GPON OLT, the ONT 1.5 tmes more expensve than a GPON ONT. The dfference s caused by the hgher complexty and bandwdth of the systems. 38 The central systems functonalty of WDM PON at the MPoP s comparable to the GPON technology. The backhaul cables are termnated to an ODF, whch allows one to patch the spltter chan to any OLT port. The OLTs are connected to hgh power Ethernet swtches aggregatng the traffc to the core routers. The space requred n the MPoP and the electrcal power consumpton wll be calculated bottom up lke n all other calculatons. 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 bandwdth peak per customer s reduced to 1 Gbps compared to 2.5 Gbps n the shared GPON case. Ths soluton only allows one to serve the end customers ndvdually n the bandwdth frame the optcal beam offers (1 Gbps). Hgher bandwdth can only be offered by bundlng colours. Dark fbre optcal frequency bands for dedcated customers cannot be served and requre addtonal fbres n the backhaul, feeder and drop segment. Suppler dependency and nflexblty for future system upgrade may reman the same snce the system bases also on a Pont-to-Multpont fbre plant. 36 Therefore our results may have some uncertanty. 37 Wth 45 MPoPs the 22 mllon potental subscrbers gve on average 490,000 potental subscrbers per MPoP. Wth a splttng rato of 1:1000 only 490 fbres have to be concentrated at the MPoP, thus there s no queston of fbre manageablty. 45 crcles wth a radus of 50 km (100 km dvded by 2 for fbre routng devatons) may certanly cover the whole Euroland. Therefore, we beleve our assumptons to be reasonable. 38 The WDM PON OLT has 400 tmes more capacty (1000/2.5) than a GPON OLT and a much hgher complexty of the optcal systems, the WDM PON ONT has to deal wth the much more complex wavelength grd at comparable speeds. For the WDM PON ONT prce we also conducted senstvtes.

59 Archtectures and compettve models n fbre networks 49 We assume that the dsadvantages of the GPON securty and avalablty constrants wll not exst n the WDM PON archtecture, whch does not use broadcast for ndvdual communcaton and only transmts the end user nformaton over the end users access lne. Accordngly, the assocated wholesale access consdered s an actve lne access at the core level, whch we call WDM PON unbundlng. The underlned cost components n Fgure 2-11 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 2-11: Scenaro WDM 4: WDM PON PON wth wth unbundlng btstream at the access core level at core level Former MDF MPoP Fbre 1:64 Backhaul Cable ODF OLT Ethernet Swtch ONT Spltter Spltter Incumbent cost (relevant for wholesale prce) CPE Access Network ncl. nhouse cablng and backhaul from MDF to MPOP ODF + Patch cablng + floorspace OLT + floorspace + energy Ethernet Swtch + floorspace + energy Network sded Ethernet port (1 per MPoP)* Compettor Cost CPE WDM PON wholesale charge Network sded Ethernet port (1 per MPoP)* Small collocaton space Core Network Core Network *Network sded port of Ethernet Swtch s not part of wholesale charge per subscrber. 37 To our knowledge the WDM PON solutons do not mplement the RF-TV approaches of GPON and Ethernet P2P, but n prncple we see no techncal hurdles to add an addtonal optcal beam for ths purpose, f there s demand for t. Thus we see no compettve dfferences between the archtectures consdered concernng RF-TV and beleve the excluson of ths opton to be justfed Comparson of technologes consdered The followng table provdes a comparson of all solutons consdered. Generally Pontto-Pont outsde plants (deployed n the case of P2P and GPON over P2P) are better suted for hgher and symmetrcal bandwdth and therefore also better able to cater to busness users. P2P outsde plants are more future proof because they can be flexbly upgraded accordng to the demand of future customers. In addton, P2P allows the op-

60 50 Archtectures and compettve models n fbre networks erator to source from multple equpment vendors much more easly than all PON varants. PON varants (GPON over P2P, GPON and WDM PON) on the other hand requre fewer fbres n the feeder segment and save on MPoP footprnt and potentally on energy consumpton. Our cost modellng analyss wll specfcally address the latter aspects to analyze the cost advantages n ths respect. Most of the other qualtatve dfferentatng factors (performance, ablty for unbundlng, scalablty, fault dentfcaton, securty, etc.) are not part of the quanttatve analyss. Table 2-3: Comparson of access solutons 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 Source: WIK-Consult 2.4 Compettve models not consdered There are two models or scenaro varants whch are close to the scenaros consdered, for whch we have decded not to analyse n the competton model. The frst varant would be n the wholesale entrant sphere, an entrant usng btstream nstead of unbundlng fbre loops of the exstng Pont-to-Pont fbre plant of the P2P and GPON over P2P archtectures. Ths varant would not add sgnfcant fndngs, and would not contrbute to the dscusson of archtectural dfferences, snce the btstream has most of the qualty dsadvantages a btstream access product produced by GPON also has. Both strongly depend on the wholesale provders performance and servce qualty.

61 Archtectures and compettve models n fbre networks 51 The second varant wll show an entrant who replcates the ncumbent s NGA nfrastructure to the end customers homes. As we wll show n chapter 3 nfrastructure replcablty s only (theoretcally) vable n Cluster 1 of Euroland, we do not beleve ths approach to have major relevance, but ncludng t would brng major complexty nto the compettve model. The coverage of the other scenaros at least reaches Cluster 4 and the cost curve would dffer compared to the other entrants. Therefore we have excluded ths varant. In addton to these 2 varants there s another case we have nether modelled n the steady state model and ts dynamc extenson nor n the competton model: Ths s the case of sub-loop unbundlng at the DP n order to obtan access to unbundled fbre lnes n the Pont-to-Pont drop fbre plants. These archtectures requre a compettor s nfrastructure not only to the MPoP, but n addton to the DPs n the feld. So the feeder fbre lnes have to be replcated by the compettors. Ths reduces proftablty compared to all scenaros consdered (ULL and btstream) and s the reason why we dd not nclude ths case nto our consderatons. 2.5 Crtcal market shares for compettve models The cost model determnes whch take-up rate an operator needs to realse n order to brng hs total cost below revenues per user. These crtcal market shares (see secton 3.2.1) also formed the bass of determnng the number of frms n the ntal compettve model desgn. Snce crtcal market shares of compettors have shown to be relatvely hgh except n the frst two clusters t became apparent that the number of frms n the compettve model would very lkely be n the sngle-dgt range. Later calbraton of the model then confrmed ths expectaton. As a result, we are lookng at about 4-6 frms competng n the free entry equlbrum. In the cost model the ARPU s fxed and market shares are only referenced to n order to compare ARPU wth cost. In the compettve model however, prce s a functon of competton and so s the effectve market share n the equlbrum. 2.6 Compettve and regulatory nteracton n an olgopoly envronment Modellng approach The theoretcal model Our modellng approach s based on the pyramd model, whch s closely related to the spokes model: 39 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 39 The pyramd model was frst developed by von Ungern-Sternberg (1991), whle the spokes model orgnates from Chen and Rordan (2007).

62 52 Archtectures and compettve models n fbre networks wllngness to pay for one servce rather than the other. Graphcally ths leads to a pyramd, as llustrated n Fgure 2-12, wth each servce located at one of the tps of the pyramd. In addton, there may be Hnterland consumers who consder only one of the servces, represented as the thn lnes emanatng from the tps. Fgure 2-12: Preference space An alternatve would be the Salop model, whch s wdely used n the ndustral organzaton lterature. 40 A major dsadvantage of the Salop model s that t mposes a very partcular substtuton pattern across products: A servce s a substtute only to ts two neghborng servces mplyng that cross prce elastctes to other servces are equal to zero. Our modellng approach allows for postve cross prce elastctes between any par of servces. Another frequently used model s the logt model. 41 Our approach and the logt model have n common that all cross prce elastctes are strctly postve. Whle our approach s n general very flexble, our chosen mplementaton and the logt model have n common that a gven number of avalable servces are affected symmetrcally by the ntroducton of an addtonal servce. In terms of mplementaton, an advantage of the present framework leads to lnear demand functons and, thus, explct solutons. Ths s not the case for the logt model. Infrastructure. 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 or- 40 See Salop (1979). 41 For an extensve treatment, see Anderson, de Palma and Thsse (1992).

63 Archtectures and compettve models n fbre networks 53 der 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. Demand. 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 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 mark-ups. 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. To model that total FTTH subscrpton demand s varable, we consder 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. For reasons that become clear n a moment, 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). Here we am at FTTH subscrptons close to 70% of all potental subscrbers n the clusters consdered. All subscrbers then ether buy one subscrpton or none, where compettve subscrbers wll always buy one subscrpton. Not buyng leads to a surplus normalzed to zero, whle the choce between the two preferred optons s based on the comparson between prces, qualty of servce and the relatve preference for the two brands.

64 54 Archtectures and compettve models n fbre networks Cost structure. We consder market outcomes on a monthly bass, so nvestment cost for provdng or usng NGA have been translated nto a monthly value over the lfe tme of the nfrastructure. Each frm also bears downstream costs whch consst of a fxed part and a varable part as a functon of number of subscrbers. For the latter, the model allows for ether ncreasng or decreasng margnal cost. In the actual model runs we have only used constant margnal costs, though. 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 are consderng only lnear wholesale access tarffs based on the ncumbent s LRIC at a defned network load. In one varant of the model, we determne 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). We treat the ncumbent as f he were under vertcal accountng separaton nto a NetCo that supples FTTH nfrastructure access and an OpCo that sells FTTH end-user 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. 42 All cost components consst of fxed costs and constant varable costs, but we could also nclude a quadratc term to model non-constant varable cost. Incumbent: Costs of wholesale products for the whole FTTH output Opportunty costs of wholesale products for own end-user sales Downstream network (concentraton and core network) and retal costs for own end-user sales. Compettors/entrants: Prce of wholesale products purchased Downstream network (concentraton and core network) and retal costs for enduser sales. o o Entrants/compettors are modelled on a scorched node bass, where nodes are determned by the ncumbent s network archtecture. Entrants fully penetrate each modelled cluster. 42 In our model runs prce squeeze has never been an ssue.

65 Archtectures and compettve models n fbre networks 55 Cable TV/DOCSIS3 Total costs of own end-user sales The prce of wholesale products s assumed to be based on the long-run ncremental costs (LRIC) of the access servce, whch n turn contan the fxed and varable costs ncurred by the ncumbent for the FTTH access product. Here the varable costs nclude wholesale sale costs. These wholesale sale costs are saved when the ncumbent provdes the access product nternally to hmself. A lnear wholesale charge s then the total LRIC dvded by the FTTH access quantty (ncludng access used nternally by the ncumbent). On top of ths, there may be a multplcatve mark-up on the pure LRIC to arrve at the wholesale charge. Equlbrum. 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. 43 In the model wth entry and ext, we frst allow for a nonspecfed 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 correctly foresee the effect of entry (and the assocated nvestment decsons) on the prcng decsons and, thus, on market outcome. Formally, and n lne wth the lterature on ndustral organzaton, the stronger noton of subgame perfect Nash equlbrum s used. 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 The quanttatve model More detaled and formal descrptons of the compettve model are provded n Annex 4. In the market for broadband, n frms (the ncumbent, entrants and potentally a cable company) compete for N c compettve consumers and possbly N e Hnterland consumers. Each frm provdes a qualty level S. The ntensty of preferences of consumers between servces suppled by frms and j are measured by σ j, and λ s the ntensty of preferences n the Hnterland of frm. After nvestments have been made, frms compete n subscrpton prces. Market outcomes are gven by the Nash equlbrum of ths prcng game between frms. Provdng FTTH access nvolves a margnal cost of c 0 and a fxed cost of K 0. Frm s downstream costs of provdng retal servces consst of a margnal cost c and a fxed 43 The Nash equlbrum s the standard soluton concept used n the lterature. It assures that frm decsons are mutually consstent.

66 56 Archtectures and compettve models n fbre networks cost K. Downstream frms pay an access tarff consstng of a per-subscrber prce a and (potentally) a fxed fee A. Only the ncumbent receves wholesale payments (γ 1 = 1 and γ = 0 for the other frms), but all frms apart from the cable company use the ncumbent s FTTH access (δ = 0 for cable, and δ = 1 for all other frms) Model output varables. The followng varables are determned at the equlbrum outcome: p = fnal output subscrpton prce n = the equlbrum number of frms. Whle the number of frms s actually an nput nto the quanttatve model, we determne the free-entry equlbrum number by runnng the model wth an ncreasng number of entrants, untl under n frms entrants are proftable whle under (n+1) frms entrants expect to make losses. prof = profts per month per frm WhProf = wholesale profts of ncumbent. These nclude profts from the sale of the ncumbent s Netco to the ncumbent s Opco. s = market share per frm sum(q) = market output CS = consumer surplus per month. It has to be noted that total output (ncludng cable) does not vary n the No-Hnterland model, whereas n the Hnterland model t does not vary for compettve subscrbers but does vary for Hnterland subscrbers. W = welfare per month = CS + sum(prof). Asde from market expanson effects n the Hnterland markets the man welfare effects stem from cost and WtP dfferences of the varous technologes and supplers. Among others, welfare s affected by changes n the market shares of the dfferent technologes and by changes n the market shares of the dfferent provders usng the same technology. Wth endogenous entry, also the duplcaton of fxed costs affects the welfare analyss QoS and wllngness to pay n the basc model Our assumptons on qualty of servce (QoS) and the end-users wllngness-to-pay (WtP) are provded n Table 2-4. The values are n Euro-equvalent per month.

67 Archtectures and compettve models n fbre networks 57 Table 2-4: 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 Entrant WtP GPON btstream core GPON MPoP btstream 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 ultra-hgh 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 over entrants that we have chosen. Qualty dfferences between archtectures refer to ncumbents, entrants and cable and are explaned as follows. Incumbent: 1) P2P Ethernet: Ths s the base case wth best qualty (QoS = 100). Each customer can be served wth ndvdual bandwdth up to 10 Gbps accordng to demand. 2) GPON over P2P: In ths case users share down- and upstream capacty and nfluence each other. However, the operator can scale the degree of sharng very flexbly by controllng splt factors. Compared to P2P Ethernet ths s poorer for IPTV and more senstve to securty and avalablty for end-users. Due to P2P fbres ndvdual servces for dedcated customers up to 10 Gbps or n the optcal spectrum n separate technology are possble (-> QoS = 99). 3) WDM PON: In ths case users share down- and upstream lnes on a per color base, resultng n about 1 Gbps per customer. Compared to P2P Ethernet ths s poorer for IPTV and s senstve to securty. The shared fbre s nflexble for dramatc bandwdth upgrades so that there can be no 10 Gbps lnes or WDM use (-> QoS = 95).

68 58 Archtectures and compettve models n fbre networks 4) GPON: In ths case users share down- and upstream capacty and nfluence each other. Any bandwdth guarantee per customer s lmted (< 40 Mbt/s) or dependent on statstcal behavor. Compared to P2P Ethernet ths s poorer for IPTV and s senstve to securty. The shared fbre s nflexble for dramatc bandwdth upgrades (-> QoS = 90). Entrant: Cable: 1) Unbundlng of P2P Ethernet: Ths s the base case wth best qualty for entrants enablng ULL for entrants, but because the value chan s partally predetermned by the ncumbent and because entrants depend on the ncumbent for servce and repars, slghtly poorer qualty may result. Each customer can be served wth ndvdual bandwdth up to 10 Gbps accordng to demand (-> QoS = 99). 44 2) Unbundlng of GPON over P2P: Ths case allows ULL for entrants wth advantages as above (-> QoS = 99). 3) Unbundlng of WDM PON: In ths case the value chan s strongly dependent on the ncumbent, but the bandwdth guarantee s rather hgh (~1 Gbt/s per customer). The servce s senstve to securty. The shared fbre s nflexble for dramatc bandwdth upgrades. So, there can be no 10 Gbps lnes, dark fbre or WDM use (-> QoS = 91). 4) Btstream access of GPON: Value chan n ths case s strongly dependant on the ncumbent. Any bandwdth guarantee per customer s lmted (< 40 Mbps) or dependent on statstcal behavor. The handover at core locatons s poorer than at MPoPs (btstream core -> QoS = 85, btstream MPoP -> QoS = 87.5). Cable s a shared technology that s nferor to FTTH n all the above versons and compared to ncumbents and entrants. Scope of results We have done model runs based on the fnal cost model outputs. Ths resulted n runs for all scenaros for the aggregate of Clusters 1 through 4. We have done ths for both the Hnterland model and the No-Hnterland model. Ths way we can generate comparable results for all scenaros and for both models. In addton we have done selectve model runs for GPON btstream core 44 Nevertheless, we assume that wholesale servces are provded under non-dscrmnatory condtons. Ths means under a perfect regulatory regme. Imperfect regulaton would mply larger qualty dfferences between ncumbent and entrants, See Footnote 52 below for ncentves of the ncumbent to deterorate qualty of wholesale access.

69 Archtectures and compettve models n fbre networks 59 for Clusters 1 through 5, because the crtcal market share analyss 45 ndcated that compettve entry n Cluster 5 was feasble for the GPON btstream core scenaro. The remanng dscretonary data nputs (horzontal dfferentaton and sze of Hnterland) were calbrated to be compatble wth the assumed ARPUs, wth plausble qualty dfferences and wth plausble market shares. We have kept these parameters constant across scenaros and only adapted them to dfferent market szes. Reduced product dfferentaton would have led to fercer competton, resultng n a smaller equlbrum number of frms Basc model results In ths secton we provde results on prces, profts, market shares, consumer surplus and welfare for all scenaros over the frst four clusters. These basc model runs have all been performed under strong regulaton and do not dfferentate between weak and strong regulaton. Weak regulaton wth mark-ups on wholesale access prces s taken up n secton Secton endogenzes the access charges based on actual equlbrum access quanttes. Secton consders the margnal Cluster 4 n solaton, n order to fnd out f nvestment n that cluster s proftable for the ncumbent and/or entrants under the basc model assumptons. Last, we nclude Cluster 5 for the GPON btstream core scenaro n secton The cost data and wholesale charges for the dfferent scenaros are generally taken from the results of the cost model. Except when noted dfferently the costs and wholesale charges are generally the aggregate numbers for the frst four clusters. The cost data for cable were assumed by us to reflect reasonable estmates Results on end-user prces 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 2-4 we, therefore, have to consder the relevant costs. Prces are drectly drven by varable or, more 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). 46 In Table 2-5 below MC C and MC E are the actual margnal costs ncurred by cable and entrants and are drectly relevant for ther retal prcng; the values for MC C have been assgned by us and the values of MC E have been determned from cost model results. For the ncumbent, MC I_actual are the sum of MC of access and downstream servces, 45 The concept of crtcal market shares s developed n secton The aggregate fxed costs of cable for the frst four clusters are assumed to be 20 Mo per month.

70 60 Archtectures and compettve models n fbre networks whle MC I_perceved are the sum of wholesale access charges and downstream costs. In contrast to MC I_actual the MC I_perceved are drectly relevant for the ncumbent s end-user prcng because sellng wholesale rather than retal s the next best use of the ncumbent s FTTH nfrastructure. Prces above MC I perceved also fulfll the condton of beng margn squeeze free. The margnal cost of the entrants MC E are the sum of the wholesale access charges and the (varable) downstream costs. Table 2-5: Margnal costs n Euro per month Scenaro MC C MC I actual MC I perceved MC E P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON btstream MPoP Source: WIK estmates The equlbrum end-user prces for all scenaros are shown n Table 2-6. 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 case of GPON over P2P unbundlng) 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 (P2P unbundlng and GPON btstream MPoP) 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. Fgure 2-13 and Fgure 2-14 below llustrate the effect of the number of frms, n, on prces. Table 2-6: Margnal costs and prces 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

71 Archtectures and compettve models n fbre networks 61 Fgure 2-13: Prces and number of frms Scenaro GPON btstream core, Hnterland Fgure 2-14: Prces and number of frms Scenaro GPON btstream core, No- Hnterland

72 62 Archtectures and compettve models n fbre networks The above llustratons n Fgure 2-13 and Fgure 2-14 for GPON btstream core are derved by runnng the model wth varyng numbers of frms whle keepng all other nput varables of the model constant (and thus treat entry and ext as exogenous). The results are representatve for all scenaros. The curves are always downward-slopng and convex. Retal prces are thus qute senstve to the number of frms n the market, f the number of frms s small. Note that under the basc parameterzaton n all scenaros only 3 or 4 entrants survve n equlbrum. 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 together than competton wthout cable. Snce the Hnterland model has one less frm than the No-Hnterland model, a drect comparson between both models would be for 3-7 frms n the Hnterland model and for 4-8 frms n the No-Hnterland model. In these ranges the two models yeld qute smlar results. Table 2-7 shows the case of 5 frms n the Hnterland model and 6 frms n the No- Hnterland model, leadng to 4 entrants n each case. Both models gve the same rankngs of the scenaros for prces of ncumbents and entrants. However, on average prces are a lttle hgher n the Hnterland model than n the No-Hnterland model. Prces of ncumbents are always hgher whle prces of entrants are always lower n the Hnterland model than n the No-Hnterland model. Table 2-7: Prces n Euro per month n case of 4 entrants for all scenaros Hnterland No-Hnterland Scenaro p I Rank p E Rank p I Rank p E Rank p C Rank P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON btstream MPoP Table 2-7 clearly shows that the rankng of scenaros by the end-user prce of cable dffers substantally from the rankngs of scenaros by the end-user prces of the ncumbent and entrants. Ths holds because cable has n all scenaros dstnctly lower margnal costs than the ncumbent and entrants, whle the dfference n customer valuatons between cable and the ncumbent s and entrants servces vares substantally by scenaros. End-user prces for cable therefore vary nversely to the relatve dfference n WtP between cable and FTTH servces.

73 Archtectures and compettve models n fbre networks 63 The rankngs of the scenaros n terms of the ncumbent s and entrants end-user prces are not all the same except for P2P unbundlng whch has always the hghest and GPON btstream MPoP whch has always the lowest prces. GPON over P2P unbundlng and WDM PON unbundlng are very close to each other below P2P unbundlng, and GPON btstream core s somewhat above GPON btstream MPoP. If one therefore keeps the number of frms constant the equlbrum results would show P2P unbundlng to have the hghest prces followed by GPON over P2P unbundlng and WDM PON unbundlng. GPON btstream core would be next and GPON btstream MPoP last. The prce rankngs follow qute closely those of margnal costs, and any devatons are explaned by hgher or lower customer valuatons of the servces Results on profts Table 2-8 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. Table 2-8: 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 the addtonal competton of cable n the Hnterland model, profts are not drectly comparable between the Hnterland model and the No-Hnterland model. In the Hnterland model entrants profts are substantally hgher n the three-entrant markets (P2P unbundlng, GPON over P2P unbundlng and GPON btstream MPoP) than n the four-entrant markets (GPON btstream core and WDM PON unbundlng). Only n the WDM PON unbundlng scenaro seem the profts of the ncumbent to be mpacted by the number of compettors n the Hnterland model. As Fgure 2-15 and Fgure 2-16 show, ths s mostly drven by addtonal competton. In the No-Hnterland markets entrants profts are much lower n those markets, whereas the Hnterland model has one less entrant n equlbrum. The reason s that there s a knfe-edge entry of one more frm n the No-Hnterland model n those scenaros (P2P unbundlng and GPON btstream MPoP). Had fxed costs been just a lttle hgher there would not have occurred ths extra entry.

74 64 Archtectures and compettve models n fbre networks As has been the case wth end-user prces, profts of cable servces follow largely the qualty dfferentals to FTTH n the varous scenaros. The greater the dfferental the lower s cable s profts. As Fgure 2-15 and Fgure 2-13 show, 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. Fgure 2-15: Profts and number of compettors GPON btstream core, Hnterland

75 Archtectures and compettve models n fbre networks 65 Fgure 2-16: Profts and number of compettors - GPON btstream core, No-Hnterland Because of the ncrease n FTTH market output 47 that s assocated wth entry the wholesale profts ncrease wth entry, although at a decreasng rate. Otherwse, 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. However, n the range of our equlbra (4-5 frms n the Hnterland model and 5-6 frms n the No-Hnterland model) profts do change substantally wth entry Results on market shares and number of frms Table 2-9 provdes market shares n the basc model. It should be noted that entrants market shares are always per entrant. 47 We are referrng here to a relatve shft of market shares between cable and the FTTH network.

76 66 Archtectures and compettve models n fbre networks Table 2-9: 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 Even f one fully corrects for the presence of cable the ncumbent s market share n the No-Hnterland model s consstently smaller than n the Hnterland model. 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. As Fgure 2-17 and Fgure 2-18 show, the market shares sometmes react n a nonmonotonc fashon to market entry. It s, n partcular, noteworthy that, n the Hnterland case, the market share of the ncumbent ncreases at some pont as entry ncreases further. Ths appears to be restrcted to the GPON btstream core scenaro, whle n other scenaros the ncumbent s market share only tapers off as more frms enter. Fgure 2-17: Market shares and number of compettors GPON btstream core, Hnterland

77 Archtectures and compettve models n fbre networks 67 Fgure 2-18: Market shares and number of compettors - GPON btstream core, No- Hnterland In the No-Hnterland case cable experences at some pont a market share ncrease as the number of entrants ncreases further. Under the basc parameterzaton n all scenaros only 3 or 4 entrants survve n equlbrum. Whle we had expected ths for all the other scenaros, t has come as a surprse for GPON btstream core, where our expectaton based on the crtcal market shares was for a hgher number of entrants. The man reason s that, already wth a small number of entrants, the low WtP for GPON leads to prces below the general ARPU assumed for the crtcal market share analyss. Further entry then leads to even lower prces and lower quanttes per entrant, resultng n overall losses for all entrants Results on consumer surplus (CS) and welfare (W) Table 2-10 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.

78 68 Archtectures and compettve models n fbre networks Table 2-10: Basc model results on consumer surplus and welfare per month Hnterland No-Hnterland CS W CS W n-1 n-2 Scenaro Mo Rank Mo Rank Mo Rank Mo Rank P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng GPON btstream core GPON btstream MPoP 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 two GPON btstream scenaros s much larger (about 10%), whle GPON btstream core and GPON btstream MPoP 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 scenaros n places 2 and 3, they are rather evenly spread. In contrast to the case of CS, the rankngs of W are smlar between the Hnterland and the No-Hnterland model and so are the dfferences between Scenaros. There s a roughly 4% dfference between the frst (GPON over P2P unbundlng) and the thrd (WDM PON unbundlng) and a 7%-8% dfference between thrd and 4 th /5 th place. The dfference n CS and W between Hnterland and No-Hnterland s greater than the smple addton of the cable market. A drect comparson of absolute values between the two models s therefore not approprate. 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 P2P unbundlng and GPON over P2P unbundlng only have 3 entrants. The two GPON btstream scenaros are n a dead heat for last place n terms of W. In terms of CS the rankng between the P2P topologes and between the GPON btstream scenaros s reversed for the Hnterland and No-Hnterland model. In the No- Hnterland model there are only three entrants under GPON over P2P unbundlng and four entrants under P2P unbundlng. Vce versa, n the Hnterland model there are only 3 entrants under GPON btstream MPoP and 4 entrants under GPON btstream core. Ths leads to hgher prces and lower CS for GPON over P2P unbundlng than P2P unbundlng and for GPON btstream MPoP than GPON btstream core.

79 Archtectures and compettve models n fbre networks 69 Fgure 2-19 and Fgure 2-20 show that, n 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 scenaros n terms of W are as unsurprsng as are dfferent rankngs of scenaros n terms of CS. The small effect of entry beyond 4 or 5 frms on W seems to be the result of the stable market share of the ncumbent. In the No-Hnterland case, the resultng cable s gan n market share relatve to the entrants appears to be welfare neutral takng all other effects nto account. Fgure 2-19: Welfare per month and number of compettors GPON btstream core, Hnterland

80 70 Archtectures and compettve models n fbre networks Fgure 2-20: Welfare per month and number of compettors - GPON btstream core, No-Hnterland 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. Snce the number of frms n equlbrum n some cases appears to be qute senstve to small changes n model parameters (and therefore dfferent between the Hnterland and the No-Hnterland model), the results on welfare should be consdered more stable than the results on consumer surplus Access mark-up for the GPON btstream core scenaro The GPON btstream core scenaro ncluded weak regulaton n ts orgnal defnton. Ths has not been part of the basc model runs presented so far and wll be done n the current secton. In ths context weak regulaton shall mean that entrants have to pay a mark-up on the LRIC-based wholesale access charge. In the followng we show the effects of such a mark-up of 0%-20% on prces, profts, market shares, CS and W. Whle the presentaton of results s restrcted to GPON btstream core, the results would be smlar across all scenaros.

81 Archtectures and compettve models n fbre networks 71 As expected and as shown n Fgure 2-21 and Fgure 2-22 a percentage mark-up on access charges leads to an almost parallel ncrease of all retal prces (ncumbent, entrants and cable). Fgure 2-21: Prces and access mark-up - GPON btstream core, Hnterland Fgure 2-22: Prces and access mark-up - GPON btstream core, No-Hnterland

82 72 Archtectures and compettve models n fbre networks As becomes clear from Fgure 2-23 and Fgure 2-24 the ncumbent s wholesale profts ncrease strongly and lnearly wth an access mark-up. In contrast, the entrants profts and the ncumbent s downstream profts decrease very slghtly wth the mark-up. Cable s profts are agan favorably affected by the mark-up, although not qute as much as the ncumbent s overall profts. Fgure 2-23: Profts per month and access mark-up - GPON btstream core, Hnterland

83 Archtectures and compettve models n fbre networks 73 Fgure 2-24: Profts per month and access mark-up - Scenaro Btstream access to GPON at core nodes, No-Hnterland Fgure 2-25 shows the ncumbent s market share n the Hnterland model to ncrease slghtly aganst entrants as a result of ncreased access charge mark-ups. In contrast, n the No-Hnterland model hgher access charge mark-ups reduce the market share of entrants, hold the ncumbent s market share constant and ncrease the market share of cable. Fgure 2-25: Market shares and access mark-up - GPON btstream core, Hnterland

84 74 Archtectures and compettve models n fbre networks Fgure 2-26: Market shares and access mark-up - GPON btstream core, No- Hnterland Fgure 2-27 and Fgure 2-28 show the relatonshp between access charge mark-ups and consumer surplus and welfare. Fgure 2-27: Welfare per month and access mark-up - GPON btstream core, Hnterland

85 Archtectures and compettve models n fbre networks 75 Fgure 2-28: Welfare per month and access mark-up - GPON btstream core, No- Hnterland Both models show a weak declne n W and a strong declne n CS n an ncrease n access charge mark-up. Snce ncumbents profts strongly ncrease and entrants profts weakly decrease n the mark-up, such a mark-up may encourage ncumbents nfrastructure nvestments. However, n our analyss so far ncumbents aggregate profts appear to be suffcent wthout mark-ups. If we take weak regulaton for the GPON btstream core scenaro to mean a 10% markup on LRIC wholesale access charges then weak regulaton changes the rankngs of the scenaros as follows. End-user prces are ncreased compared to the basc model run from to for the ncumbent and from to for the entrants n the Hnterland model and from to for the ncumbent and from to for the entrants n the No-Hnterland model. In both cases the ncumbent s prce rankng would move from lowest prce (place 5) to hghest prce (place 1) for the ncumbent and from place 5 to place 3 for the entrants. The ncumbent s profts would ncrease by about 50% n both models, whle the entrants profts would decrease by about 15%. CS would decrease from Mo to Mo n the Hnterland model and from Mo to Mo n the No-Hnterland model. It would move the GPON btstream core scenaro from place 4 to place 5 n the Hnterland model and would reemphasze place 5 n the No-Hnterland model. In contrast, W would change very lttle, from Mo to Mo n the Hnterland model and from Mo to Mo n the No-Hnterland model. Ths would have no effect on the W- rankngs. The results on wholesale access charge mark-ups n the competton models

86 76 Archtectures and compettve models n fbre networks may appear to contrast wth those of the crtcal market share analyss n the cost model (secton 0).Ths s, because crtcal market shares of compettors ncrease n the cost model but equlbrum market shares reman relatvely stable n the competton model. The current competton model assumes that demands for FTTH servces are downward-slopng. Thus, an ncreased mark-up can be translated nto a hgher end-user prce wthout too much loss n sales. In the cost model analyss the ARPU s taken as gven and therefore mplctly assumes a horzontal demand curve at a prce equal to the assumed ARPU. However, as long as the crtcal market shares determned n the cost model (whch consttute mnmum market shares for vablty) reman below or at the level of the actual market shares n the competton model, there s no contradcton Endogenous wholesale access charges The wholesale access charges n our analyss are based on LRIC, whch n turn s based on projected FTTH output quanttes. In equlbrum the FTTH output quanttes may dffer from those projected quanttes, requrng an adaptaton of a to the resultng new LRIC. Annex 3 descrbes the formal method for calculatng such adaptatons for both the Hnterland model and the No-Hnterland model. Ths s done by solvng for the LRIC correspondng to the actual equlbrum quanttes of each case. We have done the calculatons of endogenous access charges for all scenaros. As can be seen n Table 2-11 and Table 2-12 for the No-Hnterland case of the P2P unbundlng scenaro, the effect of endogenzng a can be substantal. It s, however, strongest for P2P unbundlng and GPON over P2P unbundlng, where t leads to a substantal decrease n retal prces. 49 In the P2P unbundlng scenaro, snce the market share of cable wth 22% s substantally below the 30% that we assumed for the LRIC calculaton, the endogenzed LRIC for access charges, based on 78% market share for FTTH, gves a reducton n the wholesale ULL charge from a = to a = 19.82, correspondng to the exact equlbrum market share. As a result, all end-user prces are reduced, wholesale profts vansh (by constructon) wth a strong negatve effect on the ncumbent s overall profts. Cable s profts also decrease, whle entrants profts rse moderately (not enough to spur further entry). Consumer surplus rses moderately and welfare only by a mnmal amount. 48 In addton, we have to keep n mnd that market share's n the cost model are cluster-specfc whle market shares of the competton model are mostly based on an aggregated analyss of clusters In the frst two scenaros n the No-Hnterland model the dfference between exogenous and endogenous a s above 1.30, whereas for all other scenaros t s below 0.70 and, n the cases of the btstream access scenaros goes n the other drecton.

87 Archtectures and compettve models n fbre networks 77 Table 2-11: Basc model results P2P unbundlng, No-Hnterland a = gven = General Incumbent Cable Each Entrant N 6 P Prof Mo 2.81 Mo 0.45 Mo WhProf 9.23 Mo S sum(q) 8.64 Mo W 490 Mo CS 467 Mo Table 2-12: Model results wth endogenous a, No-Hnterland, P2P unbundlng a = endogenous = General Incumbent Cable Each Entrant A N 6 P Prof Mo 0.11 Mo Mo WhProf 0 S sum(q) W CS 8.64 Mo 491 Mo 478 Mo Lookng at Cluster 4 n solaton Our analyss so far 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 4.

88 78 Archtectures and compettve models n fbre networks We have therefore, for P2P unbundlng, separately calculated the relevant outcomes for Cluster 4 alone wth a wholesale access charge based on the average of all four clusters: a = LRIC(Clusters 1-4) = the margnal Cluster 4: a = LRIC(Cluster 4) = the average of fve clusters: a = LRIC(Clusters 1-5) = The last case reflects the fact that, accordng to the cost model results, the ncumbent would be vable n Cluster 5 as well as n Clusters 1-4. If the ncumbent, n addton to Clusters 1-4, also penetrates Cluster 5 the LRIC relevant for wholesale access charges would therefore be based on the average LRIC of Clusters 1-5. Ths would follow currently used regulatory practce. Table 2-13: Basc model results: Cluster 4 - P2P unbundlng, Hnterland Model Average access charge over 4 clusters: a = Incumbent Each Entrant n 4 p Prof 2.52 Mo 0.69 Mo WhProf Mo Cluster-specfc access charge: a = n 4 p Prof 5.13 Mo 0.57 Mo WhProf Mo Average charge Cluster 1-5: a = n 4 p Prof 4.50 Mo 0.60 Mo WhProf Mo

89 Archtectures and compettve models n fbre networks 79 Table 2-14: Basc model results: Cluster 4 - P2P unbundlng, No-Hnterland Model Average access charge over 4 clusters: a = Incumbent Cable Each Entrant N 6 P Prof 1.08 Mo 0.67 Mo Mo WhProf Mo Cluster-specfc access charge: a = N 6 P Prof 3.88 Mo 1.65 Mo Mo WhProf 1.90 Mo Average charge Cluster 1-5: a = N 6 P Prof 3.20 Mo 1.40 Mo Mo WhProf 1.18 Mo When nterpretng the results on Cluster 4 presented n Table 2-13 and Table 2-14, one has to keep n mnd that Cluster 4 has 2,062,480 potental end-users compared to 8,636,068 potental users for all four clusters. Thus, 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 (a = 23.41) end-user prces ncrease but that only helps the ncumbent, whle entrants profts/losses deterorate. Ths pattern also holds for the not llustrated case of GPON over P2P unbundlng. Furthermore (not llustrated here), n the GPON btstream scenaros and WDM PON unbundlng the ncumbent makes a loss on account of the larger wholesale loss assocated wth the smaller market share of FTTH relatve to cable. Snce only n the GPON btstream core scenaro the market share of FTTH s below the 30% assumed for the LRIC calculaton relevant for determnng the access charge, ncumbent losses may turn up for all scenaros under endogenous access charges. Ths does not hold for the Hn-

90 80 Archtectures and compettve models n fbre networks terland model of P2P unbundlng, where endogenous access charges of a = lead to a slght reducton n the Cluster 4 ncumbent s proft to 2.29 Mo and an ncrease n each entrant s profts to 0.70 Mo. However, n the No-Hnterland model wth an endogenous access charge of a = the ncumbent generates an overall loss of 0.63 Mo (resultng from a wholesale loss of 2.89 Mo ) and the entrants make a small loss of 0.02 Mo each. If the ncumbent also serves Cluster 5 the resultng averaged wholesale access charge (a = LRIC(Clusters 1-5) = 22.85) leads to a result that les between the result under a = and under a = Cluster 5 results for the GPON btstream core scenaro One of the results of the crtcal market share analyss has been that n the GPON btstream core case both the ncumbent and entrants could proftably operate n Cluster 5 as well as n Clusters 1-4. We have therefore done basc model runs of the GPON btstream core scenaro for the aggregate of Clusters 1-5 and of Cluster 5 n solaton. The access charge n ths case s a = Table 2-15: Basc model run, Hnterland, GPON btstream core, Clusters 1-5 General Incumbent Each Entrant n 5 p prof Mo 1.84 Mo WhProf 0.35 Mo s sum(q) 7.79 Mo W 303 Mo CS 267 Mo Table 2-15 shows that both for ncumbent and for the same number of entrants profts are hgher for Clusters 1-5 than they were for the Clusters 1-4 case. 50 Ths results n spte of the hgher Cluster 5 costs, because the hgher access charge of a = over the Cluster 1-4 access charge of a = drove up end-user prces. Table 2-16 provdes the results for Cluster 5 n solaton, and t s qute surprsng. Although addng Cluster 5 to Clusters 1-4 ncreases profts for both the ncumbent and the entrants, Cluster 5 n solaton s a bg loss maker for the ncumbent, but provdes decent profts for the entrants (consderng that Cluster 5 has only about 22% the nhabt- 50 Profts are not hgher n proporton to ncreased market sze, though. However, snce these profts are above the calculated rate of return on equty, ther absolute sze would be relevant for nfrastructure nvestment.

91 Archtectures and compettve models n fbre networks 81 ants of Clusters 1-5 together). The reason s that the ncumbent s FTTH nfrastructure access costs n Cluster 5 are compared to the wholesale access charge of a = As a result, the ncumbent generates a wholesale loss of over 10 Mo. Thus, the ncumbent could have ncentves not to nvest n Cluster 5 f wholesale access seekers also enter. But nevertheless the ncumbent would be better off than f he had only nvested n Clusters 1-4. Table 2-16: Basc model run, Hnterland, GPON btstream core, Cluster 5 n solaton General Incumbent Each Entrant N 5 P Prof Mo 0.50 Mo WhProf Mo S sum(q) 1.73 Mo W 57 Mo CS 59 Mo In Table 2-17 and Table 2-18 we show the same exercses for the No-Hnterland model. Compared to the Cluster 1-4 case the ncumbent s profts are now about even for the aggregate of Clusters 1-5, whle those of cable and entrants jump ahead. The reason s that the ncreased market prce gves cable a boost, both n prce-cost mark-up and n market share aganst FTTH. As a result, the ncumbent suffers a substantal wholesale loss that negatvely affects ts overall profts. Table 2-17: Basc model run, No-Hnterland, GPON btstream core, Clusters 1-5 General Incumbent Cable Each Entrant N 6 P Prof Mo Mo 2.56 Mo WhProf Mo S sum(q) Mo W 555 Mo CS 498 Mo Table 2-18 shows that, agan, Cluster 5 n solaton generates a huge wholesale loss for the ncumbent, and that translates nto a large overall loss as well.

92 82 Archtectures and compettve models n fbre networks Table 2-18: Basc model run, No-Hnterland, GPON btstream core, Cluster 5 n solaton General Incumbent Cable Each Entrant n 6 p prof Mo 4.80 Mo Mo WhProf Mo s sum(q) 2.46 Mo W Mo CS Mo Basc model results: Conclusons Although the two P2P topologes consstently show the hghest prces, they also have hghest levels of CS and W n the basc model runs. They are followed farly closely by WDM PON and more dstantly by the GPON btstream scenaros. GPON btstream core falls back even further f, for ths scenaro, strong regulaton s replaced by weak regulaton. Sometmes the rankng of CS and W between scenaros do not concde, manly because of dfferences n the equlbrum number of frms. Snce consumer surplus can be very senstve to small parameter changes, the results on W are lkely more robust than those on CS. Whle CS always ncreases n the equlbrum number of frms, W s almost constant at the equlbrum levels reached n our model runs. Under the basc parameterzaton n all scenaros only 3 or 4 entrants survve n equlbrum. Ths s the result of a combnaton of hgh cost and hgh WtP for some scenaros (notably P2P unbundlng and GPON over P2P unbundlng) and low cost and low WtP for others (notably GPON btstream core and GPON btstream MPoP). Independent of entry, the ncumbent s market share does not dffer much across scenaros. Because of lower costs ncumbents are consstently proftable n the basc model runs, where entrants are proftable. A percentage mark-up on the LRIC-based access charge leads to a correspondng ncrease n end-user prces of almost the same magntude as the mark-up; entrants market share decreases and entrants profts decrease slghtly, whle the ncumbent s profts ncrease substantally.

93 Archtectures and compettve models n fbre networks 83 Endogenzng the wholesale access charge strengthens the results of the basc model runs. 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 ncumbents also enters Cluster 5. A competton analyss of Clusters 1-5 for GPON btstream core showed that enterng Cluster 5 would be proftable for entrants both on an aggregate bass and for Cluster 5 n solaton. However, such entry has ambguous effects on the ncumbent. The ncumbent would have hgher profts than f both he and the entrants would only enter Clusters 1-4. Yet, Cluster 5 n solaton would be a large loss maker. The reason s that overall prces ncrease through ths expanded penetraton, but t generates a large wholesale loss n Cluster 5. The lkely effect of wholesale access regulaton on the ncumbent s FTTH nvestment s therefore ambguous, f appled a wholesale cost average. There seems to be no nvestment problem for an aggregate number of clusters. The ncumbent s profts are suffcent for aggregate nvestments. However, there can be problems n the margnal clusters, where the ncumbent s overall profts may turn negatve on account of large wholesale losses. Ths would not happen f wholesale access charges were cluster-specfc. But such dfferentated charges could severely cut compettor entry n less densely populated clusters. The man explanaton for the welfare rankng for the Scenaros s the followng: The rankngs n terms of costs are almost exactly the reverse of the rankngs of the scenaros n terms of consumer valuatons. However, the cost dfferences are smaller than the valuaton dfferences. As a result P2P unbundlng and GPON over P2P unbundlng rank ahead of WDM PON unbundlng, whch n turn beats the GPON btstream scenaros Senstvty analyss In the followng we show a few senstvty analyses on cost assumptons, by contrastng a Brownfeld approach wth the Greenfeld approach of the basc model on WtP for ncumbent, entrant and cable servces for all scenaros.

94 84 Archtectures and compettve models n fbre networks Greenfeld vs. Brownfeld results Table 2-19, Table 2-20 and Table 2-21 contrast three cases. Table 2-19 shows the basc Greenfeld results for WDM PON unbundlng, whle Table 2-20 gves Brownfeld results based on LRIC cost calculatons. Table 2-21 moves to stronger access charge regulaton based on Brownfeld costs. The cost change from Greenfeld to Brownfeld model only concerns the captal costs of FTTH access. 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. However, f access charges are reduced by the cost savngs end-user prces are reduced, market shares change lttle, profts of ncumbent are slghtly reduced but those of entrants ncrease (compared to the Greenfeld approach). Table 2-19: Basc Greenfeld model results for WDM PON unbundlng, Hnterland model, a = General Incumbent Each Entrant n 5 p prof Mo 1.83 Mo WhProf 1.33 Mo s sum(q) 6.24 Mo W 271 Mo CS 240 Mo Table 2-20: Brownfeld model results for WDM PON unbundlng, Hnterland model, a = Brownfeld, a = General Incumbent Each Entrant n 5 p prof Mo 1.80 Mo WhProf Mo s Comparng Table 2-19 and Table 2-20 shows that the only effect of movng from Greenfeld to Brownfeld s that the ncumbent s wholesale profts ncrease precsely by the

95 Archtectures and compettve models n fbre networks 85 cost dfference between the Greenfeld and Brownfeld models. However, f wholesale access charges are adjusted downward by the cost savngs from a = to a = the end-user prces are lowered and profts for entrants ncrease (s. Table 2-21). 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 CS but some also goes to profts. Table 2-21: Brownfeld model results for WDM PON unbundlng, Hnterland model, a = Brownfeld a = N 5 P Prof Mo 2.12 Mo WhProf 3.86 Mo S sum(q) 6.37 Mo W 290 Mo CS 255 Mo As wll be shown n secton below, a swtch from PSTN to WDM PON can generate substantal lqudty for an ncumbent from sellng MDF locatons n real estate transactons. Ths money would not have been avalable under contnued use as MDF and therefore provdes an addtonal proft potental generated by the swtch to WDM PON. Snce the net revenues from such real estate sales (exhbted n Table 3-34 below) only save captal costs, they can be treated almost exactly n the same way as the savngs of the Brownfeld over the Greenfeld approach. For the clusters 1-4 modelled for our compettve analyss they would represent about 1.6% savngs 51 over the Greenfeld FTTH captal requrements or an ncrease of about 13% relatve to the Brownfeld cost savngs for those four clusters. Wthout an adjustment of wholesale access charges the ncumbent s proft under the WDM PON unbundlng scenaro would therefore ncrease by about an addtonal 2.2 Mo per month. Alternatvely, there could be an addtonal 0.40 downward adjustment n the wholesale access charge to about a = Ths n turn would lead to a downward adjustment of end-user prces by about 0.30 for both ncumbent and entrants and to slght ncreases n profts for both types of frms compared to the Brownfeld approach wthout sale of MDF locatons. Dfferent from the Brownfeld approach, however, s the welfare treatment of the savngs from sellng MDF locatons. To the extent that the ncumbent only exchanges one asset 51 We are usng approxmate fgures here because of the nexact possbltes for dscountng. The compettve model operates n a steady state about 10+ years from now. The savngs may have to be brought up to that value, usng the WACC, but that s not the way other costs are treated for steady state purposes. So, we have treated the savngs lke the other costs.

96 86 Archtectures and compettve models n fbre networks (real estate) aganst another (money) such a sale would be welfare neutral. The ncumbent should have valued the opportunty cost of the real estate already under the PSTN regme. One can argue that dsmantlng the MDF has freed up the real estate and therefore created addtonal value, but that has also been assocated wth dsmantlng costs. So t s hard to squeeze extra welfare out of ths transacton QoS and WtP assumptons The followng senstvty analyss of our WtP assumptons s contrastng the basc Model (I) wth three alternatves: Model II. An ncrease n the goodwll advantage of ncumbents vs-à-vs entrants and cable by 3 for all scenaros (from 2 to 5 ). For our basc model we had assumed a small goodwll advantage of 2 because we are modellng steady state competton ten years from now, when both ncumbents and entrants are establshed FTTH supplers. The reason for ths senstvty then s that today s goodwll advantage of ncumbents appears to be larger than assumed n the basc model. Model III. A reducton n the spread between the dfferent WtP for ncumbents, entrants and cable for all scenaros by 50%. In our basc model we had assumed a farly large spread between technologes based on expected ultra-hgh bandwdth requrements by a large fracton of users. Agan, such large dfferentaton n WtP s not generally observable today. Model IV. Frst a reducton n the spread by 50% and then an ncrease n the goodwll advantage by 3. Ths model combnes the propertes of Models II and III. Model V. In addton, for WDM PON unbundlng alone, we adapted the WtP closely to that of the GPON over P2P scenaro. Ths model reflects uncertantes about the qualty propertes of WDM PON.

97 Archtectures and compettve models n fbre networks 87 Table 2-22: WtP assumptons for senstvty analyss I. Basc model II. Increased ncumbency advantage III. Smaller spread IV. Increased ncumbency advantage and smaller spread Scenaro SI SE SC SI SE SC SI SE SC SI SE SC P2P unbundlng GPON over P2P unbundlng WDM PON unbundlng WDM PON unbundlng alternatve GPON btstream core GPON btstream MPoP We frst present senstvtes for three scenaros, P2P unbundlng, GPON btstream core and WDM PON unbundlng. The reason for ths selecton s that P2P unbundlng benefts most from the hgh spread of the basc Model I. GPON btstream core suffers most under the hgh spread. In contrast, n the basc Model I, WDM PON unbundlng les n between those scenaros and s closest n rankng to the two P2P topology scenaros. Also, only WDM PON unbundlng s affected by the Model V changes. Table 2-23 to Table 2-25, for the Hnterland case of each of the selected scenaros, compares the outcomes of the dfferent models n terms of the equlbrum number of frms, prces, profts and market shares. Table 2-23: Senstvty to WtP assumptons - P2P unbundlng, Hnterland Model I. Basc model SI = 100 SE = 97 II. Increased ncumbency advantage WtP n p I p E prof I Mo SI = 100 SE = 94 III. Smaller spread SI = 100 SE = 98.5 IV. Increased ncumbency advantage and smaller spread SI = 100 SE = 95.5 prof E Mo s I s E

98 88 Archtectures and compettve models n fbre networks Table 2-24: Senstvty to WtP assumptons GPON btstream core, Hnterland Model I. Basc model SI = 90 SE = 83 II. Increased SI = 100 ncumbency advantage SE = 80 III. Smaller spread SI = 95 SE = 91.5 IV. Increased SI = 95 ncumbency advantage SE = 88.5 and smaller spread WtP n p I p E prof I Mo prof E Mo s I s E Table 2-25: Senstvty to WtP assumptons - WDM PON unbundlng, Hnterland Model I. Basc model WtP n p I p E SI = 95, SE = 89 II. Increased SI = 95, ncumbency advantage SE = 86 III. Smaller spread IV. ncumbency and smaller spread V. Increased WtP for WDM PON SI = 97.5, SE = 94.5 Increased SI = 97.5, advantage SE = 91.5 SI = 99, SE = 95 prof I Mo prof E Mo s I s E In comparson to the basc Model I we fnd the followng for the Hnterland model: In Model II (ncreased ncumbency advantage) end-user prces, profts and market shares of the ncumbent all ncrease at the expense of those of entrants. 52 In cases where the number of frms stays the same, Model III (smaller spread) end-user prces, profts and market shares of the ncumbent all generally decrease, whle these varables ncrease for the entrants. However, n the GPON btstream core and WDM PON unbundlng scenaros the number of frms ncreases by one, leadng to lower prces and profts for both types of frms. Such entry further erodes the ncumbent s market share. Model IV (ncreased ncumbency advantage and smaller spread), as the ntermedate case, shows almost the same prces, profts and market shares as Model I. 52 Ths result shows that the ncumbent can have strong ncentves to deterorate the qualty of the wholesale product provded to entrants.

99 Archtectures and compettve models n fbre networks 89 Model V (mproved WtP for WDM PON) for WDM PON unbundlng leads to entry of an addtonal frm, mplyng substantally lower prces and profts. Market shares are qute smlar to Model III. Table 2-26 to Table 2-28, for the Hnterland case of each of the selected scenaros, compares the outcomes of the dfferent models n terms of the equlbrum number of frms, prces, profts and market shares. Table 2-26: Senstvty to WtP assumptons - P2P unbundlng, No-Hnterland Model WtP n p I p E p C prof I Mo prof E Mo prof C Mo s I s E s C I. Basc model SI = 100 SE = 97 SC = III. spread Smaller SI = 100 SE = 98.5 SC = II. Increased SI = 100 ncumbency advantage SC = SE = IV. Increased SI = 100 ncumbency advantage and SE = 95.5 SC = 88 smaller spread Table 2-27: Senstvty to WtP assumptons GPON btstream core, No-Hnterland Model I. Basc model WtP n p I p E p C SI = 90, SE = 83, SC = 82 II. Increased SI = 100, ncumbency SE = 80, advantage SC = 79 III. Spread Smaller SI = 95, SE = 91.5, SC = 91 IV. Increased SI = 95, ncumbency SE = 88.5, advantage and SC = 88 smaller spread prof I Mo prof E Mo prof C Mo s I s E s C *) *) Large market share of cable leads to large wholesale loss. Endogenous a would fx that.

100 90 Archtectures and compettve models n fbre networks Table 2-28: Senstvty to WtP assumptons - WDM PON unbundlng, No-Hnterland Model I. Basc model WtP n p I p E p C SI = 95 SE = 89 SC = 82 III. Spread Smaller SI = 97.5 SE = 94.5 SC = 91 II. Increased SI = 95 ncumbency advantage SC = SE = IV. Increased SI = 97.5 ncumbency advantage and SE = 91.5 SC = 88 smaller spread V. Increased WtP for WDM PON SI = 99 SE = 95 SC = 82 prof I Mo prof E Mo prof C Mo s I s E s C In comparson to the basc Model I we fnd the followng for the No-Hnterland model: In cases where the equlbrum number of frms stays the same, Model II end-user prces, profts and market shares of the ncumbent all ncrease at the expense of entrants, whle the results for cable are generally unchanged. In the frst scenaro the number of frms s decreased by one, leadng to hgher prces and profts for all frms. In ths case the market share of the ncumbent and cable ncrease at the expense of entrants. Model III (smaller spread) shows very dfferentated results, dependng on whether the number of entrants decreases, (P2P unbundlng) or ncreases (GPON btstream core and WDM PON unbundlng). In the P2P unbundlng scenaro the number of frms decreases by one, leadng to hgher prces for all frms. Profts of cable and entrants ncrease, whle those of the ncumbent drop. In ths case the market share of the ncumbent remans the same, whle cable ncreases at the expense of entrants. In GPON btstream core and WDM PON unbundlng the number of frms ncreases by one, leadng to lower prces and profts for ncumbents and entrants, whle those of cable ncrease substantally. Such entry erodes the ncumbent s market share n favor of cable. Wth the excepton of P2P unbundlng Model IV (ncreased ncumbency advantage and smaller spread), as the ntermedate case between Models II and III, shows almost the same prces, profts and market shares as Model I. In the P2P unbundlng scenaro

101 Archtectures and compettve models n fbre networks 91 Model IV has one less frm than Model I, leadng to hgher prces and profts for all frms. The ncumbent and cable gan market shares at the expense of entrants. Model V (mproved WtP for WDM PON) leads to entry of an addtonal frm, mplyng substantally lower prces and profts. The ncumbent and cable lose market shares. Table 2-29 to Table 2-32 relate the WtP assumptons of Models I-V to the CS and W outcomes across all scenaros. Table 2-29: Senstvty to W and CS to WtP assumptons Hnterland Model, n Mo Euro P2P unbundlng GPON over P2P unbundlng GPON btstream core GPON btstream MPoP WDM PON unbundlng CS W CS W CS W CS W CS W Basc model WDM alternatve PON Increased ncumbency advantage Smaller spread Increased ncumbency advantage and smaller spread Table 2-30: Senstvty to W and CS to WtP assumptons Hnterland Model, rankng P2P unbundlng GPON over P2P unbundlng GPON btstream core GPON btstream MPoP WDM PON unbundlng CS W CS W CS W CS W CS W Basc model WDM alternatve Increased advantage PON ncumbency Smaller spread Increased ncumbency advantage and smaller spread

102 92 Archtectures and compettve models n fbre networks Table 2-31: Senstvty to W and CS to WtP assumptons No-Hnterland Model, n Mo Euro P2P unbundlng GPON over P2P unbundlng GPON btstream core GPON btstream MPoP CS W CS W CS W CS W CS W Basc model WDM alternatve PON WDM PON unbundlng Increased ncumbency advantage Smaller spread Increased ncumbency advantage and smaller spread Table 2-32: Senstvty to W and CS to WtP assumptons No-Hnterland Model, rankng P2P unbundlng GPON over P2P unbundlng GPON btstream core GPON btstream MPoP WDM PON unbundlng CS W CS W CS W CS W CS W Basc model WDM alternatve Increased advantage PON ncumbency Smaller spread Increased ncumbency advantage and smaller spread Compared to the basc model (Model I): An ncrease n the ncumbency advantage (Model II) 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. A decrease n the spread of WtP (Model III) changes the CS rankng aganst the two P2P topology scenaros. WDM PON emerges as the frst-ranked and GPON btstream core as second. 53 The change n rankngs s less pronounced for W, but WDM PON unbundlng s agan frst. CS and W ncrease n all cases, due to the mpled hgher WtP for all scenaros. 53 The rankng of Scenaro 3a could be negatvely affected by replacng strong wth weak regulaton.

103 Archtectures and compettve models n fbre networks 93 Model IV leads to the most even levels of CS and W under all scenaros. WDM PON unbundlng agan comes out ahead. Model V only changes the rankng of WDM PON unbundlng by movng t ahead of the P2P topologes scenaros Conclusons on senstvtes The senstvty analyses have added the followng to the basc conclusons: Movng from a Greenfeld approach to a Brownfeld approach for the ncumbent s FTTH nvestments affects (and ncreases) competton only f the regulator devates from LRIC prcng of wholesale access. Profts of the ncumbent are ncreased even f the wholesale access charge s adjusted downward. Changes n the WtP assumptons can have substantal effects on the model results. However, results of the basc model are reemphaszed for the most lkely alternatve to the basc model, whch s to ncrease the ncumbency advantage (Model II). The next realstc alternatve (Model IV) provdes very smlar market outcomes to the basc model, but leads to dfferent rankngs n the valuatons of CS and W. The least realstc alternatve (Model III) changes many outcomes. An adaptaton of WtP for the WDM PON unbundlng scenaro to those of GPON over P2P unbundlng (Model V) leads to a reversal n the CS and W rankng between the P2P topology scenaros and WDM PON unbundlng. Rather than comng up wth an unambguous wnner the compettve analyss has revealed some consstency along wth major tradeoffs. Consderng the consstency of CS and W rankngs of ndvdual scenaros across models WDM PON unbundlng always comes up among the best, whle GPON btstream MPoP always s among the lowestranked. P2P unbundlng shows a hghly varable rankng, but s usually n the frst ter. GPON over P2P unbundlng s also qute varable but mostly ahead of P2P unbundlng. GPON btstream core s as varable as P2P unbundlng, but shows up mostly n the second ter and would rank even worse under weak regulaton. The man explanaton for the lack of consstency n rankng for P2P unbundlng, GPON over P2P unbundlng and GPON btstream core scenaros les n the fact that the rankngs n terms of costs are almost exactly the reverse of the rankngs of the scenaros n terms of consumer valuatons. For gven cost dfferences any changes n the valuatons therefore can have large effects on the net results of valuatons mnus costs.

104 94 Archtectures and compettve models n fbre networks 3 Opex and capex of dfferent FTTH technologes 3.1 The modellng approach General approach Our basc modellng reles upon an engneerng bottom-up cost modellng approach. Ths means we model 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 an (LRIC) approach as appled n regulatory economcs. 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 n the future. 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 and comparng the resultng cost per customer wth the fx revenue per customer we determne the pont, where, f at all, the revenue equals the cost. Ths s the crtcal market share necessary to make the NGA busness proftable and hence t determnes 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. Ths methodology s explaned n more detal n secton and only covers the expenses/cost sde of the busness. The crtcal market share may not exceed a dedcated percentage of the potental subscrber base. In the telecommuncatons market all fxed network operators together wll never acheve 100% market share snce there are always potental subscrbers who are not wllng to use a fxed NGA network, but nstead favor the use of a moble network only, the use of a cable-tv network or even do not use telecommuncaton access at all. Thus, we beleve the maxmum achevable market share of an FTTH network of all potental subscrbers s n the range of 70% for Euroland, whch s the lower level of the fxed network market share n most European countres today. 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 scratch, assumng that currently exstng nfrastructure, f ncluded n the new network, has to be consdered at (full) cost. However, n realty there often s avalable nfrastructure from legacy networks whch may be reused for NGA to generate nvestment savngs. Ths possbly could have an mpact on the nvestment decson. We analyze ths aspect n a senstvty calculaton carred out later on n secton 0 as "Brownfeld deployment".

105 Archtectures and compettve models n fbre networks 95 Wth WDM PON many of the MDF locatons are no longer used but replaced by larger manholes to host the addtonal spltters. These MDF locatons may be sold. For ths purpose they have to be dsmantled and the techncal nstallatons have to be removed, thereby reducng the net proceeds of sellng MDF locatons. For an ncumbent nvestor s decson the net dsmantlng lump sum revenues may be a relevant element of hs decson process. Snce these revenues are not part of the relevant cost, nor do they n fact reduce cost, we consder these revenues and ther nfluence on the total rankng of the dfferent solutons n the dynamc model wthn the net present value calculaton (secton 3.2.3) and also n the competton model nfluencng the ncumbent s proft (see secton ) Geotypes of Euroland The vablty of access networks strongly depends on the subscrber densty (subscrbers per km²) and on settlement structures. The denser the subscrbers, the sooner the access network wll become vable. Thus the modellng has to rely upon a concrete settlement structure, a gven country, and the results derved depend on that country. 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 to desgn the hypothetcal country for approxmately 22 mllon households or a populaton of around 40mn nhabtants. Ths country s referred to as Euroland. We have defned 8 clusters, each havng typcal structural access network parameters derved from detaled geomodellng of access networks n several European countres on a natonwde bass. The geotypes characterstcs rely on exact data from several countres. In that sense, Euroland s a genercally representatve country. Each of the 8 clusters s characterzed by specfc subscrber denstes. The vablty of a specfc busness model s calculated for each cluster separately, lke for a separate proft center,.e. the vablty of a busness model n Cluster 1 s ndependent from the vablty n Cluster 2. In each of the clusters we assume the access network to be rolled out to 100% homes connected. For each of the clusters, the pont where the NGA busness may become vable s calculated ndvdually and ndependently from the results of other clusters. The operators (ncumbent and entrants) nvest n all clusters whch are vable. The clusters are composed n a way that they address smlar numbers of potental subscrbers. Table 3-1 provdes an overvew of the resultng cluster classfcaton.

106 96 Archtectures and compettve models n fbre networks Table 3-1: Structural parameters of Euroland Geotype Cluster ID Potental customers per km² Total potental customers per cluster Share of total customers Potental customers (cumulated) Number of MDF Potental customers per MDF Average trench length per potental customer (m) Dense urban 1 4,000 1,763,916 8% 1,763, , Urban 2 1,600 2,163,672 10% 3,927, , Less Urban ,646,000 12% 6,573, , Dense Suburban ,062,480 9% 8,636, , Suburban ,460,360 11% 11,096, , Less Suburban ,989,056 14% 14,085, , Dense Rural ,331,208 20% 18,416,692 1,421 3, Rural 8 < 60 3,448,368 16% 21,865,060 2,488 1, ,865, % 5,398

107 Archtectures and compettve models n fbre networks 97 The steady state model wll run for all 8 clusters descrbed n Table 3-1. Typcally n the dense clusters there are larger MDF locatons concentratng sgnfcantly hgher numbers of potental subscrbers than n the rural areas, thus wth 28% of the MDF one can already cover 64% of the potental subscrbers (Cluster 1 6). The clusters are manly used to consder the cost dfferences due to the dfferent geographc and settlement nformaton. We use cluster-specfc ndvdual nput data for access lne length and DP szes, for constructon cost and for deployment methods (e.g. underground ducted, bured or aeral cablng). Man cluster specfc values are the constructon cost of ducts/cables, manholes, sleeves and aeral cables and the nhouse cablng. Constructon costs are hghest n the densely populated areas, whle aeral cablng s used to a larger degree n the rural areas. Table 3-2: Aeral deployment share per cluster Cluster ID Aeral share 1 0% 2 0% 3 10% 4 20% 5 30% 6 40% 7 60% 8 60% Identcal for all clusters are the values for MPoP components lke Ethernet swtches/ ports, OLTs, ODF ports and patch cables and fbre splces and also the values for fbre cables and CPE. Result of ths approach s the vablty of each of the clusters, whch allows one to determne the proftable reach of a market approach on a per cluster level (ndependent from other clusters) Network structure The network modelled conssts of a core network, a concentraton network and one of the next generaton access network archtectures as descrbed n secton 2.3. For sake of modellng smplcty we have chosen exstng core and concentraton network bottom-up LRIC models for several countres whch we adapted to the Euroland crcumstances concernng busness and resdental end customers and ther data volumes transmtted.

108 98 Archtectures and compettve models n fbre networks Accordng to the defned sze of Euroland the core network conssts of 45 core layer nodes where core routers are located. These are Label Edge Routers (LER) for managng the access and Label Swtch Routers (LSR) for managng a fast swtchng of the IP data packets. At fve locatons we also assume IP core backbone layer functons of addtonal LSR, buldng the upper network layer and reducng meshng complexty of a 45 locaton core network. We do not model the core network explctly but descrbe t as a cost functon wth a fxed fee element and varable cost per customer (usagebased).the cost curve s derved from exstng bottom-up models as descrbed above. The core network s the same for all access archtectures consdered. Snce the cost share of the core network s small compared to the total cost and the absolute cost s the same for all archtectures, we regard ths approach as a reasonable approxmaton for our comparatve results. The concentraton network brdges the gap between the MDF locatons (MPoPs) and the core layer nodes. We assume t to consst of state of the art Ethernet swtches. Also these cost have been derved as a cost functon of fxed cost plus usage (customer) dependant varable cost from an exstng model whch has been scaled for Euroland. The cost share of the concentraton network s small compared to the access network cost. Thus, we are convnced that proceedng n ths way s reasonable. For WDM PON the concentraton network s replaced by a passve backhaul network. The fxed cost of the natonal core and concentraton network s dstrbuted to the clusters by defnng a fxed share for each cluster and dstrbutng the remanng fxed cost accordng to the number of node locatons (MPoP) per cluster. The man cost of these NGN/NGA archtectures s borne by the access network, especally by the cvl engneerng cost of dggng trenches etc. The dfferent NGA networks therefore are modelled n detal n a bottom up manner The bottom-up modellng requres calculatng the network cost tem per tem, consderng each fbre per end customer, the splces, manholes and ODF ports needed, cable szes and optmal trench szes, space and energy requrements etc. All these tems are consdered accordng to the archtectural solutons descrbed n secton The ncumbent as nvestor We consder two dfferent types of players n the NGA market: An ncumbent as nvestor A compettve entrant as wholesale access seeker. The ncumbent may deploy hs NGA network n one of the above descrbed techncal archtectures (GPON, P2P, GPON over P2P or WDM PON). The nvestor wll roll out

109 Archtectures and compettve models n fbre networks 99 the NGA network to those areas (clusters) where the busness wll be vable, n a Greenfeld approach. The wholesale access seeker does not need to construct all nfrastructure on hs own, but could use the access network from the ncumbent. Thus, the compettor can enter the market ether by fbre unbundlng, or by usng btstream access at MPoP or at core level. We assume the retal prce a compettor may acheve for hs servces to be less than the prce for the nvestor by 5% Demand The model apples an average subscrber wth a demand of about 400kbps capacty n the busy hour of the day and an Average Revenue Per User (ARPU) of per month. Ths s based on the customer mx of sngle play (voce only), double play (voce and broadband), trple play (voce, broadband and IPTV) and busness users (mx of voce, broadband nternet and VPN) as shown n Table 3-3. Compared to prevous studes by WIK ths s a relatvely hgh ARPU as we generally argue that ARPUs wll not substantally ncrease through the transton to the NGA. The reason for a hgher ARPU s that n ths model the operator has borne the cost of nhouse cablng and the CPE and we assume that he wll prce the servce accordngly to at least cover (some of) ths cost. The assumed ARPU s the same for all consdered archtectures. Table 3-3: Customer mx Traffc n the Busy Hour per subscrber (n kbps) Revenue per subscrber (n ) Share of subscrbers Voce only % Voce and Broadband % Voce, Broadband and IPTV % Busness customer % Average user % When analyzng the wholesale access scenaros we have decreased the ARPU of compettors by 5% to per month reflectng the ncumbency advantage of e.g. brand and customer base. Also n the compettor case ths ARPU remans the same regardless of the consdered scenaro (e.g. P2P unbundlng or GPON btstream). The ARPU of the statc and dynamc modellng approach s used to determne the compet-

110 100 Archtectures and compettve models n fbre networks tve edge of the scenaros, the crtcal market share and the vable clusters. We wll develop a more sophstcated demand approach n the olgopoly modellng for determnng the compettve results Major assumptons on capex and opex Capex The cost model annualzes the nvestment postons derved n a bottom-up manner by multplyng them wth the correspondng captal cost factor. Ths factor s specfed accordng to the tlted annuty formula whch takes nto account the WACC (Weghted Average Cost of Captal) as relevant nterest rate, the economc lfetme and the average relatve prce change that s to be expected over the consdered tme perod. It s expressed as follows: ) ) ) where n = economc lfetme of network element and PC = expected prce change of the equpment. The model consders as addtonal nvestment postons assets that are not drectly, but ndrectly assgned to the network deployment, such as motor vehcles, offce equpment, land and buldngs etc. These postons are consdered as mark-ups to be appled to the (drect) nvestment calculated for the network deployment. The factors are nput parameters and are set for each drect nvestment poston separately, e.g. trenches, manholes, sleeves etc. Ths ndrect nvestment s then assgned to the modelled network deployment and annualzed to yearly ndrect cost (ndrect CAPEX) by multplyng t wth the Captal Cost Factor descrbed above. The multplcaton of the nvestment postons wth the captal cost factor results n annualzed drect and ndrect captal cost (CAPEX). Economc lfetmes are consdered separately for all nvestment components requred drectly or ndrectly for the network deployment. For the passve nfrastructure from customer s premse to MPoP we assume the economc lfetme to be 20 years, for actve equpment n the MPoP (OLTs, Ethernet swtch ports) 7 years and 5 years for the CPE unt. We assume a WACC of 10% to be adequate for the scenaros consdered takng nto account the rsk of deployng a fbre network. In all our calculatons ntroduced n ths report prce changes are set to zero.

111 Archtectures and compettve models n fbre networks Opex In addton, the model consders costs resultng from operatng the network and carryng out regular mantenance works (OPEX). In general, these costs are calculated as a mark-up whch s appled to the drect and ndrect nvestment postons, dstngushng between passve (0.5% mark-up) and actve equpment (8% mark-up). For aeral cables we assume a hgher OPEX mark-up (15%) than for cables deployed n ducts snce aeral cables are more senstve to damages and requre more mantenance. However, they are less nvestment ntensve than duct cables so that ths mark-up s appled to relatvely low values. The model determnes the cost of energy and floorspace rental n a bottom-up manner. Based on dscussons wth equpment vendors we have assumed average energy consumpton on a per port per month bass. We can therefore easly track cost of energy n the MPoP through the number of ports requred. Energy consumpton per port s hgher for WDM PON than for GPON OLTs and hgher for 10 Gbps Ethernet ports than for 1 Gbps ports. We have not tracked the energy consumpton of CPEs because the subscrbers bear energy cost themselves. From a green IT or macro-economc pont of vew t would be mportant to also take CPE energy cost nto account when comparng technologes, snce more power consumng technologes at the central ste are less power consumng at the end customer stes (e.g. Ethernet P2P). We have only focused on the operator case. Regardng floorspace we have made assumptons on the number of ports (ODF, Ethernet, OLT) that ft nto a standard 2 m² footprnt rack based on feedback from equpment vendors. ETSI racks are consdered to be deployed back to back. Equpments (OLT, Spltter, Ethernet swtch, ) do not share racks, so rack space s tracked separately for each equpment port type. In the case of GPON and WDM PON rack space n the MPoP s predetermned by the assumpton of 100% coverage n a cluster because ths also determnes the number of network sded ODF ports, OLTs and PON (upstream) Ethernet Ports. Contrarly, n case of P2P and GPON over P2P the network sded ODF ports and the actve electroncs and hence the requred rack space - depend on the number of subscrbers. It was assumed that the ncumbent plans hs floorspace accordng to a 70% take-up on hs network (retal and wholesale customers). In addton to the rack-dependent floorspace 30 m² per MPoP have been consdered as base floorspace needed for offce, restrooms, crculaton areas etc. equally for all archtectures. Havng determned the requred floorspace n m² we assume both an ntal nvestment per m² to set-up the room (1000 ) and a monthly rental cost per m² (20 ). A retal cost of 5 per subscrber per month was assumed. These costs cover customer acquston, sales and marketng, customer care and bllng. We beleve ths to be at the lower end of such costs at least f compared wth today s market level.

112 102 Archtectures and compettve models n fbre networks Fnally, a common cost mark-up of 10% s appled to the sum of operatonal and captal expenses. Common costs are expenses for postons whch are not drectly nvolved wth the network, but whch are needed for other processes of the enterprse. Among others management, admnstraton, human resources and strategy and research (overheads) are postons whch are part of these costs Wholesale cost and prces Wholesale prces for the compettor s busness case have been determned as LRIC (Long Run Incremental Cost) of the network elements of the ncumbent whch are used for wholesale access,.e. they drectly base on the cost determned for the ncumbent. Snce a sgnfcant part of costs s fx the total cost per customer strongly depends on the number of customers on the ncumbent s network. Wholesale prces have been determned under the assumpton that the ncumbent s network operates at a 70% takeup. Ths rate corresponds to the market share of the FTTH network aganst the competton of moble and cable networks. 54 Ths also means that these are the lowest possble wholesale prces under the LRIC assumptons. Dependng on the scenaro, they nclude actve equpment n the MPoP (e.g. scenaro GPON wth btstream access at MPoP) or even transport through the ncumbent s concentraton network (e.g. scenaro GPON wth btstream access at core layer). Secton 2.3 explans the components n more detal. The cost of the optcal nhouse cablng s also part of the wholesale charge. All analyss s cluster-specfc, so the wholesale prce n Cluster 1 s ndependent from the wholesale prce n other clusters. 55 Wholesale prces used n ths cost model to calculate the busness model of a compettor are always a fxed monthly access charge per user per month (lnear access charge). On top of the LRIC network cost per customer a wholesale cost of the ncumbent s wholesale dvson s appled to determne the access charge for wholesale access seekers. Ths wholesale dvson cost was assumed to be 0.90 per user per month (less than 20% of the assumed retal cost that ncumbent and compettors both spend for each subscrber). The prmary analyss assumes a Greenfeld deployment of NGA n whch the network s bult from scratch. We do however also do a senstvty run, n whch the ncumbent benefts from exstng duct nfrastructure and reduces hs nvestments. Under ths senstvty we have calculated a case n whch compettors buy wholesale at Greenfeld LRIC and a case n whch Brownfeld LRIC are the bass of the compettors wholesale prce nputs. The results can be found n secton The correspondng share n Germany of the fxed network today amounts to about 80% of potental subscrbers. 55 In the competton model an average of the frst 4 clusters has been chosen and dscussed.

113 Archtectures and compettve models n fbre networks Dynamc approach In the steady state analyss we do not consder the ramp-up perod that s requred to frst deploy the network and then to acqure customers untl the market reaches a steady state and the copper network s fully substtuted. Sgnfcant nvestments are requred upfront, e.g. all cvl works whch s why nvestment peaks relatvely early. Archtectures exhbt dfferences n ther nvestment profle over tme whch could have an mpact on ther rankng n relatve fnancal performance. For example, whle P2P generally s the most expensve soluton t allows one to spread nvestments n actve electroncs better over the course of actual subscrber acquston than GPON. In order to analyse ths we have modelled a successve deployment n Euroland s frst sx clusters because these have shown to be proftable for at least some of all four archtectures (the two rural geotypes have not been run through the dynamc model extenson). The dynamc analyss s more nclned to model the actual deployment over large parts of a country consstng of dfferent clusters. 56 We have analysed nvestments and costs over a perod of 20 years (no revenues were taken nto account) to assess the relatve performance of archtectures. So we have only looked at the nvestor s sde n ths analyss and not at the wholesale access seeker s Network roll-out To defne the tme-path of the FTTH roll-out we have assumed that an operator would have restrctons on the operatonal resources for deployng FTTH (e.g. cvl works subcontractors) that lmt hm to a maxmum capacty of 2mn passed homes per year. We have assumed that he wll focus deployment on the three densest and most proftable clusters ntally and use any remanng capacty as t becomes avalable to deploy clusters 4-6. As a result the operator has the deployment path that s shown n Table 3-4. Deployment n clusters 1-4 commences n year 1 and ends between year 3 (Cluster 1) and year 5 (Cluster 4). Only when these dense clusters have been passed does deployment n clusters 5 and 6 begn. The deployment n all sx clusters s completed after 8 years passng about 14mn homes. 56 In the steady state analyss the results are prmarly stand-alone cluster-specfc.

114 104 Archtectures and compettve models n fbre networks Table 3-4: Deployment of FTTH n Euroland (passed homes per year) Cluster Total customer base Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 1 1,763, , , , ,163, , , , , ,646, , , , , ,062, , , , , , ,460,360 1,363,932 1,096, ,989, ,572 2,000,000 85,484 Agan, the deployment path s the same for all archtectures. However, there are dfferences n how actve electroncs are deployed over tme: In the case of GPON and WDM PON OLTs have to be deployed together wth the roll-out of the passve network. Ths means that e.g. a GPON OLT s deployed n the MPoP for every 64 homes passed 57 and - snce ntally only 10% of homes are acqured - wll run at a relatvely low effcency ntally. Contrarly GPON over P2P wll deploy one OLT for every 64 acqured subscrbers 58 and wll hence operate at a hgher level of effcency even at low penetraton levels Subscrber acquston Acquston of subscrbers s modelled on the bass of a generc penetraton that grows relatvely quckly to a 70% take-up wthn 5 years. Every year that new homes passed are added, penetraton starts at 10% for these homes and grows to 70% over 5 years. Ths means that the total roll-out area of e.g. Cluster 1 wll have reached an overall take-up of 70% at the end of year 7 n whch the homes passed n year 3 have reached sad target penetraton. Consderng all sx clusters of Euroland, the ramp-up s concluded n year 13 when all clusters have reached 70% penetraton. Table 3-5: Evoluton of take-up rate n the dynamc model Year of servce avalablty Take-up rate 10% 20% 40% 60% 70% Replacement nvestments and prce adjustments We have consdered replacement nvestments for all network elements wthn the 20 year perod. All equpment prces and costs have been set constant, so replacement nvestments occur at the level of the ntal nvestment and drect costs such as retal cost reman at the same level throughout the 20 year perod. 57 Snce we account for 10% spare capacty n spltters the true load s actually even a lttle lower % spare capacty means that the OLT wll actually serve about 57 users.

115 Archtectures and compettve models n fbre networks Interest rate and present values Dscountng of nvestment and cost postons was conducted by applyng the WACC of the steady state model (10% p.a.) Other parameters All nput parameters such as equpment lfetmes, prces etc. have been taken from the steady-state model. 3.2 Our results Area of proftable coverage and crtcal market shares A major set of results of the steady state model conssts of the crtcal market shares requred for the vablty of the FTTH roll-out for the ncumbent and the relevant wholesale access seeker as well. Market share always refers to a share of the total potentally addressable market and s n many sectons synonymously used wth take-up or penetraton rate. The crtcal market share s the mnmum share of the total potentally addressable market where the operator deploys hs network at lower cost per subscrber than the ARPU. The calculaton of the crtcal market share s done separately for each cluster and the results for the clusters are ndependent from each other. As the maxmum achevable market share we assume for fxed lnes 70% (takng nto account DOCSIS, moble-only households, and households that do not use telecommuncatons servces at all), a cluster s consdered not to be vable f the crtcal market share for ths cluster exceeds ths value. It s worth notng that the ncumbent may reach the crtcal market share for vablty by hs own retal busness, by hs wholesale busness or a combnaton of both. The followng two tables (Table 3-6 and Table 3-7) show the crtcal market shares requred for deployng P2P and GPON over P2P archtectures and the proftablty of the correspondng wholesale scenaro (fbre unbundlng). In case of P2P, the ncumbent could proftably roll out up to the suburban cluster or up to 50.7% of the customer base. However, f he deploys a GPON over P2P archtecture he could expand hs vablty up to Cluster 6 and thus cover 64.4% of the addressable subscrbers. The vablty of ths archtecture ncreases up to sx percentage ponts n Cluster 6 compared to P2P prmarly due to the smaller number of Ethernet ports requred or the port reducton by the OLTs. Moreover, replcablty (another operator buldng a second NGA dentcal to the ncumbent s) of the FTTH nfrastructure for both technologes s theoretcally possble only n the densest cluster or for about 8% of the populaton. In all other vable areas the nves-

116 106 Archtectures and compettve models n fbre networks tor needs a crtcal market share of more than 38% to become proftable, whch makes the market entry of an nfrastructure compettor neffcent. It s evdent from the tables that the frst two scenaros are dentcal wholesale cases. Even though the P2P roll-out requres hgher market shares for the ncumbent to be vable n total, the network segment rented va unbundled fbre (from the customer s premse to the network sded ODF port) s the same and therefore exhbts equal wholesale prces n both cases. In both cases we have assumed that the fbre unbundler always mplements P2P n hs own network. Therefore the frst two wholesale scenaros lead to dentcal results for the compettor. Table 3-6: P2P Crtcal market shares Archtecture: P2P Crtcal market shares Geotype Cluster ID Potental customers Incumbent Compettor (LLU) Dense urban 1 1,763,916 29% 9% Urban 2 2,163,672 41% 10% Less Urban 3 2,646,000 53% 24% Dense Suburban 4 2,062,480 52% 25% Suburban 5 2,460,360 67% > 100% Less Suburban 6 2,989,056 76% > 100% Dense Rural 7 4,331,208 > 100% > 100% Rural 8 3,448,368 > 100% > 100% Table 3-7: GPON over P2P Crtcal market shares Archtecture: GPON over P2P Crtcal market shares Geotype Cluster ID Potental customers Incumbent Compettor (LLU) Dense urban 1 1,763,916 26% 9% Urban 2 2,163,672 38% 10% Less Urban 3 2,646,000 49% 24% Dense Suburban 4 2,062,480 47% 25% Suburban 5 2,460,360 61% > 100% Less Suburban 6 2,989,056 70% > 100% Dense Rural 7 4,331,208 > 100% > 100% Rural 8 3,448,368 > 100% > 100% Notable here s the huge dfference between Cluster 4 and 5 n the wholesale access seeker s proftablty. Ths s caused by the shape of the compettor s cost curve whch becomes flat at relatvely low take-up rates contrary to the steeper curve of the ncumbent. The cost curves per subscrber and month for both ncumbent and fbre unbundler wth the correspondng ARPU lnes are llustrated n the followng fgures.

117 Archtectures and compettve models n fbre networks 107 Fgure 3-1: P2P Cost curves of ncumbent and compettors (Cluster 4) 100,00 Cost per subscrber & month 90,00 80,00 70,00 60,00 50,00 40,00 30,00 Incumbent Fbre LLU ARPU Incumbent ARPU Compettors 20,00 10,00-0% 20% 40% 60% 80% 100% Market share Fgure 3-2: P2P Cost curves of ncumbent and compettors (Cluster 5) 100,00 Cost per subscrber & month 90,00 80,00 70,00 60,00 50,00 40,00 30,00 Incumbent Fbre LLU ARPU Incumbent ARPU Compettors 20,00 10,00-0% 20% 40% 60% 80% 100% Market share

118 108 Archtectures and compettve models n fbre networks Fgure 3-1 shows the cost and revenue curves for Cluster 4 whch s the margnal cluster for the compettor. In the next cluster (Fgure 3-2) hs cost curve s shfted upwards, never gong below the ARPU. The crtcal market shares for GPON and WDM PON archtectures are shown n the next two tables (Table 3-8 and Table 3-9). Except for Cluster 1 the vablty potental of rollng out FTTH on the bass of GPON archtecture s hgher than wth WDM PON. Smlar to the GPON over P2P technology the ncumbent could proftably roll out hs network up to the Less Suburban cluster correspondng to 64.4% of the potental customer base. Agan, there s no possblty for replcaton of the FTTH nfrastructure except for the densest Cluster 1, snce the crtcal market shares needed for a proftable roll-out n all other vable areas are hgher than 38%. Btstream access at the core network requres less market share to be proftable than btstream access at the MPoP level. Furthermore, comparng the three competton scenaros below wth the unbundlng scenaro n Table 3-6, one can state that, for smlar ARPUs, busness models on the bass of unbundlng requre hgher crtcal market shares than busness models based on btstream access. 59 For nstance, the unbundlng scenaro already requres a crtcal market share of 24% n our Less Urban cluster to be proftable, whle GPON btstream access s vable already at 4% / 8% crtcal market share n the same cluster. Table 3-8: GPON Crtcal market shares Archtecture: GPON Crtcal market shares Geotype Cluster ID Potental customers Incumbent Compettor Btstream Core Compettor Btstream MPoP Dense urban 1 1,763,916 26% 4% 6% Urban 2 2,163,672 38% 3% 5% Less Urban 3 2,646,000 48% 4% 8% Dense Suburban 4 2,062,480 47% 5% 10% Suburban 5 2,460,360 60% 16% 28% Less Suburban 6 2,989,056 69% > 100% > 100% Dense Rural 7 4,331,208 98% > 100% > 100% Rural 8 3,448,368 > 100% > 100% > 100% 59 Ths result goes conform wth the Ladder of Investment concept of the ERG, now BEREC.

119 Archtectures and compettve models n fbre networks 109 Table 3-9: WDM PON Crtcal market shares Archtecture: WDM PON Crtcal market shares Geotype Cluster ID Potental customers Incumbent Compettor WDM PON Unbundlng Dense urban 1 1,763,916 25% 4% Urban 2 2,163,672 39% 3% Less Urban 3 2,646,000 50% 6% Dense Suburban 4 2,062,480 49% 6% Suburban 5 2,460,360 63% 92% Less Suburban 6 2,989,056 72% > 100% Dense Rural 7 4,331,208 > 100% > 100% Rural 8 3,448,368 > 100% > 100% Another nterestng comparson s the one between GPON btstream core and WDM PON unbundlng: As both tables show, the crtcal market shares of entrants are equal for the frst two clusters but the relatve proftablty of WDM PON unbundlng decreases as clusters become less dense. Ths behavour s explaned by the hgher CPE cost for the WDM PON archtecture, whch overcompensates the savngs from the lower wholesale charge (see secton ). The crtcal market shares of the dfferent scenaros ndcate that n all archtectures and wholesale access scenaros consdered, potentally several compettors could survve n the market. The hghest potental number of compettors occurs n the case of GPON btstream access at the core network. Crtcal market shares only provde a theoretcal maxmum of potental compettors n the market. In partcular they do not allow to defne an equlbrum between the ntegrated ncumbent and the compettors. The strategc nteracton between compettors whch also determnes the actual number of compettors n the market s produced by our olgopoly model (see chapter 2). The cost and ARPU curves for the ncumbent and the related compettor s scenaros are llustrated n the followng fgures for GPON (Fgure 3-3 and Fgure 3-4) and WDM PON (Fgure 3-5 and Fgure 3-6) showng n each case the last proftable cluster for both operators. Smlar to the other two archtectures the cost curve of the wholesale scenaros s flatter than the ncumbent s one due to lower economes of scale. Thus, the compettor cannot expand hs vablty to the same cluster as the ncumbent.

120 110 Archtectures and compettve models n fbre networks Fgure 3-3: GPON cost curves of ncumbent and compettors (Cluster 5) 90,00 Cost per subscrber & month 80,00 70,00 60,00 50,00 40,00 30,00 20,00 Incumbent Btstream access MPoP Btstream Access Core ARPU Incumbent ARPU Compettors 10,00-0% 20% 40% 60% 80% 100% Market share Fgure 3-4: GPON Cost curves of ncumbent and compettors (Cluster 6) 100,00 Cost per subscrber & month 90,00 80,00 70,00 60,00 50,00 40,00 30,00 20,00 Incumbent Btstream access MPoP Btstream Access Core ARPU Incumbent ARPU Compettors 10,00-0% 20% 40% 60% 80% 100% Market share

121 Archtectures and compettve models n fbre networks 111 Fgure 3-5: WDM PON Cost curves of ncumbent and compettors (Cluster 4) 90,00 Cost per subscrber & month 80,00 70,00 60,00 50,00 40,00 30,00 Incumbent WDM Unbundlng ARPU Incumbent ARPU Compettors 20,00 10,00-0% 20% 40% 60% 80% 100% Market share Fgure 3-6: WDM PON Cost curves of ncumbent and compettors (Cluster 5) 90,00 Cost per subscrber & month 80,00 70,00 60,00 50,00 40,00 30,00 Incumbent WDM Unbundlng ARPU Incumbent ARPU Compettors 20,00 10,00-0% 20% 40% 60% 80% 100% Market share

122 112 Archtectures and compettve models n fbre networks Investment and cost dfferences of technologes statc approach Investment Ths secton analyses nvestment and ts breakdown nto access network and MPoP related elements. Table 3-10 shows total nvestment values for each archtecture and cluster at 70% take-up and Fgure 3-7 llustrates the correspondng values per subscrber. 60 It s evdent that a GPON roll-out requres less nvestment than all other archtectures regardless of the cluster geotype. Except for the thrd cluster WDM PON shows the second lowest nvestment and the smallest dfference to GPON. As expected P2P s the most nvestment ntensve technology n all clusters. The table also hghlghts the ranks of the dfferent archtectures (1 lowest nvestments, 4 hghest nvestments). Table 3-10: Total nvestment per cluster at 70% market share (n Euro, excl. nvest n IPTV equpment) Cluster ID P2P GPON over P2P GPON WDM PON 1 1,635,366,872 (4) 1,555,206,492 (3) 1,440,199,143 (1) 1,509,953,842 (2) 2 2,561,483,941 (4) 2,463,597,630 (3) 2,355,780,633 (1) 2,450,763,909 (2) 3 3,640,644,636 (4) 3,521,369,571 (2) 3,409,503,170 (1) 3,531,819,963 (3) 4 2,711,585,679 (4) 2,619,329,432 (3) 2,548,335,778 (1) 2,607,106,253 (2) 5 3,790,501,685 (4) 3,680,408,786 (3) 3,566,194,709 (1) 3,638,063,505 (2) 6 4,986,264,055 (4) 4,853,230,188 (3) 4,746,971,414 (1) 4,834,521,602 (2) 7 8,755,484,768 (4) 8,568,721,800 (3) 8,405,447,141 (1) 8,513,102,826 (2) 8 11,854,443,121 (4) 11,718,576,564 (3) 11,574,690,285 (1) 11,609,743,918 (2) Total 39,935,774,757 (4) 38,980,440,463 (3) 38,047,122,274 (1) 38,695,075,817 (2) 60 The values shown n Table 3-10 and throughout ths chapter show nvestments n the NGA up to the MPoP only. For determnng the total costs per user and crtcal market share a natonal IPTV platform n the core network was also accounted for. The total nvestments of 15mn were spread over the clusters.

123 Archtectures and compettve models n fbre networks 113 Fgure 3-7: Total nvestment per subscrber and cluster at 70% market share (excl. nvest n IPTV equpment) Incumbent nvest per subscrber (70% take-up) P2P GPON over P2P GPON WDM PON Dense urban Urban Less Urban Dense Suburban Suburban Less Suburban Dense Rural Rural In order to better understand the relaton between the four archtectures and ther spread through the dfferent clusters we have classfed the nvestment nto access network and MPoP related nvestments. The followng tables (Table 3-11 and Table 3-12) show ths breakdown for Cluster 1 and 3 wth the correspondng shares of total nvestment. One can see that the man reason for the advantage of GPON compared to P2P and GPON over P2P conssts n the much lower nvestment n MPoP components due to the use of spltter n the outsde plant. Only n case of WDM PON there s less nvestment n MPoP equpment, however ths savng s overcompensated by hgher CPE nvestment due to the ncreased prce per unt. The nvestment n a standard P2P rollout s always hgher than n a GPON over P2P case whch s due to the hgher number of Ethernet ports requred. Furthermore, t s notable that nvestment n floorspace exhbts sgnfcant dfferences among the archtectures. P2P requres more than two tmes hgher floorspace nvestment than GPON and even nearly 40 tmes more than WDM PON n the frst cluster. However, these huge dfferences only have a very lmted mpact on the overall nvestment performance of technologes because the nvestment share of ths factor s neglgble (< 1%).

124 114 Archtectures and compettve models n fbre networks Despte of the dfferences n the mplementaton of the four technologes, the overall nvestment deltas between the archtectures are relatvely small. Ths follows manly from the fact that the network elements whch are most nvestment ntensve (nhouse cablng and drop cable) and whch are dentcal for all alternatves account for around 75% of total nvestment, whle the feeder segment n whch nvestment savngs of e.g. GPON vs. P2P can reach over 100% n the dense areas, has a share of total nvestment of less than 10% n dense clusters. The dfference n feeder nvestment s not as large as one would ntally foresee. The reason s that n ths Greenfeld deployment cvl works have to be undertaken n all cases anyway. Only where the hgher fbre count of P2P exceeds the capacty of the standard trench and a wder trench s requred does ths actually lead to addtonal cvl works cost for P2P. In Euroland ths s only the case n the densest Cluster 1. In all other clusters the standard trench has enough capacty to host all requred cables. Therefore, from Cluster 2 on the hgher fbre count of P2P only leads to addtonal nvest n cables but not to nvest n trenches and duct nfrastructure. The lower the fbre count becomes as the clusters become less dense, the less pronounced are the dfferences between P2P and GPON. 61 Therefore, the overall nvestment deltas between P2P and GPON reman moderate and range from 14% (Cluster 1) to 2% (Cluster 8). 61 A Brownfeld senstvty n secton 0 wll show how strong the dfferences between P2P and PON archtectures become when takng the feeder fbre count nto account for selectng usable duct nfrastructure.

125 Archtectures and compettve models n fbre networks 115 Table 3-11: Investment n network elements (Cluster 1) Cluster 1 Investment n (70% take-up) P2P Share of total nvestment GPON over P2P Share of total nvestment GPON Share of total nvestment WDM PON Share of total nvestment Access Network CPE 135,204,161 8% 155,484,786 10% 155,484,786 11% 233,227,178 15% Inhouse fbre 515,707,301 32% 515,707,301 33% 515,707,301 36% 515,707,301 34% Drop cable 632,759,654 39% 632,759,654 41% 632,759,654 44% 632,759,654 42% Dstrbuton pont - 0% - 0% 52,359,615 4% 52,359,615 3% Feeder cable 88,415,780 5% 88,415,780 6% 40,111,359 3% 40,111,359 3% MDF - 0% - 0% - 0% 4,117,748 0% Backhaul cable - 0% - 0% - 0% 11,106,585 1% Total 1,372,086,897 84% 1,392,367,521 90% 1,396,422,715 97% 1,489,389,440 99% MPoP ODF customer sded ports 44,424,224 3% 44,424,224 3% 802,847 0% 66,488 0% ODF network sded ports and patch cablng 50,566,356 3% 50,566,356 3% 1,210,554 0% 100,253 0% Spltter - 0% 35,586,405 2% - 0% - 0% OLT - 0% 23,724,270 2% 34,906,410 2% 14,454,000 1% Ethernet Ports 162,244,994 10% 3,022,200 0% 4,363,301 0% 5,781,600 0% "Last Ethernet Port" 151,110 0% 151,110 0% 151,110 0% 8,760 0% Floorspace 5,893,290 0% 5,364,405 0% 2,342,205 0% 153,300 0% Total 263,279,975 16% 162,838,971 10% 43,776,428 3% 20,564,401 1% Total nvest NGA*) 1,635,366, % 1,555,206, % 1,440,199, % 1,509,953, % *) Total nvest n NGA wthout nvestment n IPTV equpment

126 116 Archtectures and compettve models n fbre networks Table 3-12: Investment n network elements (Cluster 3) Cluster 3 Investment n (70% take-up) P2P Share of total nvestment GPON over P2P Share of total nvestment GPON Share of total nvestment WDM PON Share of total nvestment Access Network CPE 202,815,900 6% 233,238,285 7% 233,238,285 7% 349,857,428 10% Inhouse fbre 773,597,790 21% 773,597,790 22% 773,597,790 23% 773,597,790 22% Drop cable 2,026,707,904 56% 2,026,707,904 58% 2,026,707,904 59% 2,026,707,904 57% Dstrbuton pont - 0% - 0% 86,921,100 3% 86,921,100 2% Feeder cable 237,302,426 7% 237,302,426 7% 211,398,839 6% 211,398,839 6% MDF - 0% - 0% - 0% 7,588,350 0% Backhaul cable - 0% - 0% - 0% 40,728,744 1% Total 3,240,424,020 89% 3,270,846,405 93% 3,331,863,919 98% 3,496,800,155 99% MPoP ODF customer sded ports 66,639,510 2% 66,639,510 2% 1,332,790 0% 113,333 0% ODF network sded ports and patch cablng 75,853,147 2% 75,853,147 2% 2,009,616 0% 170,886 0% Spltter - 0% 53,394,390 2% - 0% - 0% OLT - 0% 35,596,260 1% 57,947,400 2% 24,637,500 1% Ethernet Ports 243,379,080 7% 4,966,920 0% 7,243,425 0% 9,855,000 0% "Last Ethernet Port" 551,880 0% 551,880 0% 551,880 0% 13,140 0% Floorspace 13,797,000 0% 13,521,060 0% 8,554,140 0% 229,950 0% Total 400,220,617 11% 250,523,167 7% 77,639,251 2% 35,019,808 1% Total nvest NGA*) 3,640,644, % 3,521,369, % 3,409,503, % 3,531,819, % *) Total nvest n NGA wthout nvestment n IPTV equpment

127 Archtectures and compettve models n fbre networks Cost In the prevous secton the focus was on the analyss of the nvestment requred for the roll-out of a certan technology. We now analyze the cost composton of the ncumbent and compettors as we consder the annualzed cost of NGA nvestment and drect cost whch nclude floorspace rental, energy, concentraton and core network as well as retal costs. Fgure 3-8 up to Fgure 3-11 show exemplary for Cluster 3 cost shares of the ncumbent s deployment at maxmum penetraton (70%) for dfferent FTTH archtectures. In lne wth the nvestment values analysed above, the drop cable segment exhbts the hghest cost share regardless of the technology deployed (between 39% and 42%). The second largest cost component s the nhouse cablng (14%-16%), except for WDM PON case where the cost for CPE domnates wth 16% cost share due to the hgher equpment prce assumed. 62 Retal cost ranges between 13% and 15% along the dfferent archtectures, CPE cost between 9% and 11% (except for WDM PON). As expected, the costs of Ethernet ports have a sgnfcant mpact only n case of P2P where t generates 9% of the total cost. Contrary to ths, the PON archtectures cost of actve equpment (OLTs and PON Ethernet ports) n the MPoP account for a maxmum of 2% of the total cost. Fgure 3-8: P2P Cost structure of ncumbent at 70% market share (Cluster 3) concentraton network; 1% ODF cs; 1% ODF ns; 1% feeder cable; 4% others; 2% ncumbent self provsonng wholesale cost; 1% P2P market share: 70% backbone network; 5% drop cable CPE; 9% Ethernet ports; 9% retal; 13% nhouse cablng; 14% drop cable; 39% nhouse cablng retal Ethernet ports CPE backbone network feeder cable ODF ns ODF cs concentraton network ncumbent self provsonng wholesale cost others 62 We wll show a senstvty on CPE prces n secton 0.

128 118 Archtectures and compettve models n fbre networks Fgure 3-9: GPON over P2P Cost structure of ncumbent at 70% market share (Cluster 3) spltter; 1% ODF cs; 1% OLT; 1% ODF ns; 2% concentraton network; 1% others; 2% ncumbent self provsonng wholesale cost; 1% GPON over P2P market share: 70% backbone network; 5% feeder cable; 5% drop cable nhouse cablng retal CPE drop cable; 41% backbone network CPE; 11% feeder cable ODF ns OLT ODF cs retal; 14% spltter concentraton network ncumbent self provsonng wholesale cost nhouse cablng; 15% others Fgure 3-10: GPON Cost structure of ncumbent at 70% market share (Cluster 3) concentraton network; 1% dstrbuton pont; 2% OLT; 2% others; 2% ncumbent self provsonng wholesale cost; 1% GPON market share: 70% feeder cable; 4% drop cable backbone network; 5% nhouse cablng retal CPE; 11% drop cable; 42% CPE backbone network feeder cable OLT retal; 14% dstrbuton pont concentraton network nhouse cablng; 16% ncumbent self provsonng wholesale cost others

129 Archtectures and compettve models n fbre networks 119 Fgure 3-11: WDM PON cost structure of ncumbent at 70% market share (Cluster 3) backhaul; 1% dstrbuton pont; 2% OLT; 1% others; 1% ncumbent self provsonng wholesale cost; 1% WDM PON market share: 70% backbone network; 5% feeder; 4% drop cable CPE nhouse cablng retal; 14% drop cable; 41% retal backbone network feeder nhouse cablng; 15% dstrbuton pont OLT backhaul ncumbent self provsonng wholesale cost CPE; 16% others In the relevant clusters 1-6 the cost comparson of our four network topologes has shown the followng results: GPON s the cheapest technology, followed by GPON over P2P, WDM PON and P2P (see Table 3-13). Wth the excepton of Cluster 1 where WDM PON and GPON over P2P swtch ranks, ths s consstent over the relevant clusters. Table 3-13: Total cost per customer per month at 70% take-up (n Euro) Cluster P2P GPON over P2P GPON WDM PON The next four fgures depct the cost composton of a compettor for the fve wholesale scenaros and at 20% market share (examples shown for Cluster 3). One can see that 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% on average. The cost share of the wholesale provson wll be reduced to 57% n case of fbre unbundlng.

130 120 Archtectures and compettve models n fbre networks Fgure 3-12: Cost structure of fbre unbundler at 20% market share (Cluster 3) compettor's ODF; 3% floorspace rental ; 1% colocaton setup; 1% others; 0.5% concentraton network; 3% Fbre LLU market share: 20% CPE; 8% core network; 7% fbre LLU charge retal Ethernet Swtch Port CPE Ethernet Swtch Port; 8% fbre LLU charge; 57% core network concentraton network compettor's ODF retal ; 12% floorspace rental colocaton setup others Fgure 3-13: Cost structure of a btstream MPoP access seeker at 20% market share (Cluster 3) core network; 7% concentraton network; 4% Last Ethernet port; 0.1% Btstream MPoP market share: 20% CPE; 11% retal; 13% btstream charge; 65% btstream charge retal CPE core network concentraton network Last Ethernet port

131 Archtectures and compettve models n fbre networks 121 Fgure 3-14: Cost structure of a btstream core access seeker (GPON) at 20% market share (Cluster 3) core network; 8% colocaton at core level; 0% Btstream Core level market share: 20% CPE; 11% retal ; 14% btstream charge; 68% btstream charge retal CPE core network colocaton at core level Fgure 3-15: Cost structure of a WDM unbundler at 20% market share (Cluster 3) core network; 8% colocaton at core level; 0% WDM Unbundlng market share: 20% retal ; 13% CPE; 16% access charge; 64% access charge CPE retal core network colocaton at core level

132 122 Archtectures and compettve models n fbre networks Wholesale prces As explaned before, wholesale prces for the compettor s busness case have been determned based on the LRIC ncurred for the ncumbent at a 70% take-up whch s the maxmum penetraton rate we assume for the ncumbent s network. Dependng on the scenaro they can - n addton to the cost of the access network (whch ncludes the optcal nhouse cablng cost) nclude cost for actve equpment n the MPoP or cost for transport n concentraton/the backhaul network. Fgure 3-16 provdes an overvew of the resultng wholesale prces. In lne wth the components ncluded n the wholesale charge, btstream access at the core level s more expensve than access at the MPoP or WDM unbundlng along all clusters. Note that a comparson between the fbre unbundlng charge and the wholesale prces of the other competton scenaros s not drectly possble, snce they are based on dfferent access technologes accordng to the scenaro defnton. Accordngly the most vald nterpretaton s the comparson of the two GPON btstream scenaros. The wholesale prce ncrease for the btstream access at the core level s relatvely small. The reason s that the concentraton network transport component of the access charge at the core level s based upon a 70% network load whch results n very low transport cost per customer, consderng that the domnant part of the concentraton network costs s fx. Furthermore, t s nterestng to note that n some clusters the WDM PON access charge s below the GPON access charge level, but as we have seen GPON always leads n terms of overall cost and thus crtcal market shares. The reason s prmarly the CPE prce that s borne by every subscrber. We have run a senstvty on the WDM PON CPE prce and other parameters n the next secton.

133 15,26 15,20 15,91 14,83 20,11 20,39 20,87 20,08 24,14 24,60 25,08 24,30 23,41 24,04 24,65 23,93 28,85 29,27 29,82 29,16 32,05 32,66 33,20 32,52 Archtectures and compettve models n fbre networks 123 Fgure 3-16: Wholesale prces 35,00 30,00 25,00 20,00 15,00 P2P LLU GPON BSA MPoP GPON BSA Core WDM PON Unbundlng 10,00 5,00 0,00 Dense urban Urban Less Urban Dense Suburban Suburban Less Suburban Senstvtes: Impact on crtcal market shares Investment reducton for the ncumbent ( Brownfeld deployment ) In bottom up LRIC modellng we consder the stuaton that an nvestor constructs a new, state of the art forward lookng fbre network, takng nto account future demand (Greenfeld scenaro). In the real world the nvestors often face the stuaton that locatons and nfrastructure already exst whch may be reused by a new network generaton n order to save nvestment. Ths wll be consdered n our modellng approach by takng the exstng MDF locatons as scorched nodes of the new network (maybe some of the MDF wll be dsmantled), not lookng for new locatons, thus the remanng are a subset of the exstng. Regardless of any dsmantlng scenaros, the cost of the locatons that are n use are fully consdered. The nvestor s decson nevertheless s drven by the level of (addtonal) nvestments he has to make, consderng that there are exstng ducts havng spare capacty whch could satsfy part of the demand of the new network, thus resultng n less nvestment expendtures. We face that stuaton by defnng a scenaro whch we call Brownfeld n contrast to the above mentoned Greenfeld scenaro, where we reduce the nvestment for the passve network components ducts, trenches and manholes 63 by dedcated per- 63 For ease of expresson n ths secton we call these components duct nfrastructure only, snce the ducts determne ther ablty to be reused. Drect bured lnes could not be reused.

134 124 Archtectures and compettve models n fbre networks centages due to the NGA archtecture and ther fbre demand and due to the part (segment) of the access network, where ths spare capacty s located. Ths Brownfeld scenaro s part of the senstvtes we consder n all our models. Proceedng lke ths requres that duct nfrastructure exsts whch stll has spare capacty n an amount beng able to host all of the new requred fbre cables. If only part of the cables could be hosted, a new trench has to be dug anyhow, so no sgnfcant savngs would be acheved. Our basc assumpton s that on average the spare components have exsted for half of the total equpment lfe tme, thus we assume that the new FTTH network can use the duct nfrastructure of an older network for an average remanng lfetme. In the cases where the exstng nfrastructure has been renvested n the shorter term future (e.g. due to poor consttuton of the ducts) an nvestor may decde to renvest now before the new fbre cables wll be plugged n. Otherwse renvestment can hardly be managed wthout broadband customer nterrupton (relatvely soon after they have taken up the servce). In consequence for the components beng reused we only consder half of the nvestment one would need n a Greenfeld envronment. E.g. we assume the few fbres n the backhaul segment of the hghly aggregated WDM PON archtecture wll ft nto the already exstng ducts of the old concentraton network by 100%. Due to the already used ducts and the sooner renvestment we for smplcty assume that 50% of the nvestment may be saved, thus we reduce the nvestment for the trenches, ducts and manholes of the backhaul segment by 50%. We also dd an addtonal senstvty to consder that all ducts may stll be usable for more than the fbre equpment lfetme consdered (20 years). In the feeder network segment the fbre plants of GPON and WDM PON are equal, and the fbre plants for P2P and GPON over P2P are also equal, requrng one fbre per home passed. Accordngly, P2P plants have 64 tmes more fbres than the PON plants. Therefore, we assume n our Brownfeld scenaros that for the frst two archtectures (GPON and WDM PON) all feeder fbres ft nto already exstng ducts, thus reducng the necessary nvestment for the feeder duct nfrastructure by 50% at the maxmum. For the second two archtectures, needng sgnfcantly more fbres, we assume that only n 20% of the cases the exstng duct network may also host the new fbre cables, resultng n an nvestment reducton of 10% of the feeder duct nfrastructure. We beleve these assumptons to be optmstc, snce we assume here that n Euroland all feeder cables are already constructed n a ducted manner. In the drop network, the fbre plants of all network archtectures are equal, all havng one fbre from the home passed to the dstrbuton pont (DP). In ths network segment sharng of exstng ducts only can take place where ducts are deployed. For our Brownfeld scenaro we assume optmstcally that ducts exst n half of the areas where there

135 Archtectures and compettve models n fbre networks 125 s no aeral constructon 64 and that all of these ducts can be shared wth the new fbre cables. For the ducts to be nstalled these assumptons reduce the requred nvestment for duct nfrastructure by 25% n the drop cable segment. The resultng nvestment reductons are gven n Table The Brownfeld scenaro n ths study consders the reduced nvestment for the calculaton of the ncumbent s proftablty. The comparson wth the wholesale based compettors stll assumes the Greenfeld LRIC based wholesale prces as an nput, snce prce regulaton n all European countres operates accordngly. An addtonal senstvty analyses the results f ths assumpton of exstng regulatory practce would no longer hold and wholesale prces also reflected the nvestment savngs of the Brownfeld approach. Table 3-14: Investment reducton for duct nfrastructure per network segment n a Brownfeld approach Network Segment P2P GPON over P2P GPON WDM PON Backhaul % Feeder 10% 10% 50% 50% Drop 25% 25% 25% 25% Table 3-15 compares the resultng crtcal market shares for Greenfeld and brownfeld scenaros. Lower nvestment requrements n a brownfeld approach enable the ncumbent to ncrease the proftable coverage wth P2P and WDM PON up to the Less Suburban Cluster 6. For all technologes costs and crtcal market shares decrease. The strongest effects occur for the WDM PON archtecture. As Table 3-17 shows, total network costs here decrease from 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 slghtly lower than for WDM PON, and range from 5% (Cluster 1) to 10% (Cluster 8). The nvestment savngs become more transparent by segment (see Table 3-16). The effectve reducton n the drop segment ranges from 7% to 20% dependng on the cluster and s smlar for all archtectures, as one could expect wth the same fbre plant n all archtecture varants. In the feeder segment, the savngs for P2P are around 7% and for GPON around 40%. The savngs n the backhaul segment amount to around 40% for WDM PON n the relevant cluster. In terms of total cost, nvestment savngs reduce costs by 5% to 10% for GPON and 4% to 7% for P2P. 64 For aeral deployment shares see Table 3-2.

136 126 Archtectures and compettve models n fbre networks Table 3-15: Incumbent crtcal market shares (Greenfeld vs. Brownfeld) Cluster ID P2P - Greenfeld P2P - Brownfeld GPON over P2P - Greenfeld GPON over P2P - Brownfeld GPON - Greenfeld GPON - Brownfeld WDM PON - Greenfeld WDM PON - Brownfeld 1 29% 25% 26% 23% 26% 23% 25% 22% 2 41% 34% 38% 32% 38% 31% 39% 31% 3 53% 45% 49% 41% 48% 40% 50% 41% 4 52% 45% 47% 41% 47% 40% 49% 41% 5 67% 60% 61% 55% 60% 52% 63% 54% 6 76% 68% 70% 63% 69% 59% 72% 62% 7 > 100% > 100% > 100% 95% 98% 86% > 100% 89% 8 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100%

137 Archtectures and compettve models n fbre networks 127 Table 3-16: Incumbent nvestment at 70% market share Cluster ID P2P - greenfeld P2P - brownfeld Effectve reducton of nvest GPON over P2P - greenfeld GPON over P2P - brownfeld Effectve reducton of nvest GPON -greenfeld GPON - brownfeld Effectve reducton of nvest WDM PON - greenfeld WDM PON - brownfeld 1 Total Investment % % % % Drop % % % % Feeder % % % % Backhaul % 2 Total Investment % % % % Drop % % % % Feeder % % % % Backhaul % 3 Total Investment % % % % Drop % % % % Feeder % % % % Backhaul % 4 Total Investment % % % % Drop % % % % Feeder % % % % Backhaul Total Investment % % % % Drop % % % % Feeder % % % % Backhaul Total Investment % % % % Drop % % % % Feeder % % % % Backhaul Total Investment % % % % Drop % % % % Feeder % % % % Backhaul Total Investment % % % % Drop % % % % Feeder % % % % Backhaul Effectve reducton of nvest

138 128 Archtectures and compettve models n fbre networks Table 3-17: Incumbent total cost per subscrber and month at 70% market share Cluster ID P2P - greenfeld P2P - brownfeld Effectve reducton of cost GPON over P2P - greenfeld GPON over P2P - brownfeld Effectve reducton of cost GPON -greenfeld GPON - brownfeld Effectve reducton of cost WDM PON - greenfeld WDM PON - brownfeld 1 Total Cost 29,85 28,68 4% 27,67 26,50 4% 26,55 25,25 5% 27,49 26,15 5% Drop 6,77 5,64 17% 6,77 5,64 17% 6,77 5,64 17% 6,77 5,64 17% Feeder 0,95 0,90 5% 0,95 0,90 5% 0,43 0,26 39% 0,43 0,26 39% Backhaul ,12 0,07 40% 2 Total Cost 34,17 31,84 7% 32,00 29,67 7% 31,18 28,56 8% 32,42 29,71 8% Drop 11,33 9,07 20% 11,33 9,07 20% 11,33 9,07 20% 11,33 9,07 20% Feeder 1,21 1,14 6% 1,21 1,14 6% 0,94 0,59 38% 0,94 0,59 38% Backhaul ,22 0,13 39% 3 Total Cost 38,19 35,33 7% 36,03 33,17 8% 35,37 32,04 9% 36,62 33,17 9% Drop 14,86 12,13 18% 14,86 12,13 18% 14,86 12,13 18% 14,86 12,13 18% Feeder 1,69 1,57 7% 1,69 1,57 7% 1,51 0,91 39% 1,51 0,91 39% Backhaul ,29 0,17 40% 4 Total Cost 37,73 35,35 6% 35,58 33,20 7% 35,04 31,96 9% 36,33 33,25 8% Drop 13,51 11,31 16% 13,51 11,31 16% 13,51 11,31 16% 13,51 11,31 16% Feeder 2,29 2,11 8% 2,29 2,11 8% 2,28 1,39 39% 2,28 1,39 39% Backhaul Total Cost 43,02 40,52 6% 40,87 38,38 6% 40,14 36,80 8% 41,50 38,16 8% Drop 18,30 16,01 13% 18,30 16,01 13% 18,30 16,01 13% 18,30 16,01 13% Feeder 2,94 2,73 7% 2,94 2,73 7% 2,65 1,60 40% 2,65 1,60 40% Backhaul Total Cost 46,21 43,56 6% 44,07 41,42 6% 43,50 39,63 9% 44,83 40,96 9% Drop 20,59 18,25 11% 20,59 18,25 11% 20,59 18,25 11% 20,59 18,25 11% Feeder 3,83 3,53 8% 3,83 3,53 8% 3,81 2,30 40% 3,81 2,30 40% Backhaul Total Cost 57,77 55,33 4% 55,69 53,25 4% 54,97 50,34 8% 55,68 51,04 8% Drop 28,36 26,46 7% 28,36 26,46 7% 28,36 26,46 7% 28,36 26,46 7% Feeder 6,79 6,24 8% 6,79 6,24 8% 6,75 4,01 41% 6,75 4,01 41% Backhaul Total Cost 92,44 87,71 5% 90,50 85,77 5% 89,53 80,20 10% 88,82 79,48 11% Drop 53,56 49,98 7% 53,56 49,98 7% 53,56 49,98 7% 53,56 49,98 7% Feeder 14,24 13,09 8% 14,24 13,09 8% 14,17 8,42 41% 14,17 8,42 41% Backhaul Effectve reducton of cost

139 Archtectures and compettve models n fbre networks 129 We now assume that the wholesale prces are based on the ncumbent s brownfeld costs (and no longer on the Greenfeld LRIC) and analyse the mpact on the competton scenaros. As expected, wholesale access seekers mprove ther vablty compared to a Greenfeld envronment, as Table 3-18 shows. All btstream access seekers can expand ther proftable coverage at least by one cluster. The lmt of vablty for the fbre unbundler remans n Cluster 4 but the crtcal market share decreases sgnfcantly n ths margnal cluster (from 25% to 15%). Table 3-18: Compettors crtcal market shares (Greenfeld vs. Brownfeld) Cluster ID LLU - Greenfeld LLU - Brownfeld Btstream Core - Greenfeld Btstream Core - Brownfeld Btstream MPoP - Greenfeld Btstream MPoP - Brownfeld WDM unbundlng - Greenfeld WDM unbundlng - Brownfeld 1 9% 8% 4% 3% 6% 6% 4% 4% 2 10% 8% 3% 2% 5% 4% 3% 3% 3 24% 12% 4% 3% 8% 6% 6% 4% 4 25% 15% 5% 4% 10% 7% 6% 4% 5 > 100% > 100% 16% 6% 28% 11% 92% 8% 6 > 100% > 100% > 100% 12% > 100% 22% > 100% 32% 7 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% 8 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% So far, we have assumed that only (up to) 50% of the nvestment (where possble) may be saved due to the already used ducts and the sooner renvestment requred. We now run an addtonal senstvty assumng a full duct lfetme of exstng nfrastructure. The resultng nvestment reductons are shown n Table For all network segments we now consder twce as much savngs as n the standard brownfeld scenaro. Ths means that n case of GPON and WDM PON the ncumbent can even save the entre duct nfrastructure nvestment n feeder and backhaul segment as all fbres ft nto already exstng ducts. Table 3-19: Investment reducton for duct nfrastructure per network segment n a Brownfeld approach when consderng full duct lfetme Network Segment P2P GPON over P2P GPON WDM PON Backhaul % Feeder 20% 20% 100% 100% Drop 50% 50% 50% 50% Such drastc savngs result n lower crtcal market shares for both ncumbent (Table 3-20) and compettor (Table 3-21). The strongest mpact occurs for GPON and WDM PON due to the hgher reducton n feeder and backhaul (relevant only for WDM PON) segment. Nevertheless, the ncumbent s not able to expand hs proftable coverage

140 130 Archtectures and compettve models n fbre networks compared to the prevous calculaton as the lmt of proftable roll-out remans n the Less Suburban Cluster 6 for all archtectures. Ths also holds for the competton scenaros except for the fbre unbundler, who can expand hs vablty one cluster further. Table 3-20: Impact of assumng full duct lfetme on ncumbent s Brownfeld vablty Cluster ID P2P - Brownfeld P2P - Brownfeld senstvty GPON over P2P - Brownfeld GPON over P2P - Brownfeld senstvty GPON - Brownfeld GPON - Brownfeld senstvty WDM PON - Brownfeld WDM PON - Brownfeld senstvty 1 25% 22% 23% 20% 23% 19% 22% 18% 2 34% 28% 32% 25% 31% 24% 31% 24% 3 45% 36% 41% 33% 40% 31% 41% 31% 4 45% 38% 41% 35% 40% 32% 41% 32% 5 60% 52% 55% 48% 52% 43% 54% 45% 6 68% 61% 63% 56% 59% 49% 62% 51% 7 > 100% 96% 95% 88% 86% 74% 89% 76% 8 > 100% >100% > 100% > 100% > 100% > 100% > 100% > 100% Table 3-21: Impact of assumng full duct lfetme on compettor s Brownfeld vablty Cluster ID LLU - brownfeld LLU - brownfeld senstvty Btstream Core - brownfeld Btstream Core - brownfeld senstvty Btstream MPoP - brownfeld Btstream MPoP - brownfeld senstvty WDM unbundlng - brownfeld WDM unbundlng - brownfeld senstvty 1 8% 8% 3% 3% 6% 5% 4% 3% 2 8% 6% 2% 2% 4% 4% 3% 2% 3 12% 8% 3% 2% 6% 4% 4% 3% 4 15% 11% 4% 3% 7% 5% 4% 3% 5 > 100% 25% 6% 4% 11% 7% 8% 4% 6 > 100% > 100% 12% 5% 22% 9% 32% 6% 7 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% 8 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100%

141 Archtectures and compettve models n fbre networks 131 Lower NGA penetraton Even though a 70% maxmum take-up on a next generaton fbre-based fxed network that has replaced copper appears realstc to us we have conducted a senstvty analyss for whch we assume a maxmum take-up of only 60%. On the modellng sde the only changes for the ncumbent are that he wll plan hs MPoP floorspace for 60% nstead of 70% take-up. Ths reducton of floorspace cost, however, does not have mpacts on hs crtcal market shares n any of the clusters. Accordngly, one can smply analyse Table 3-6 to Table 3-9 and draw the lmt of vable roll-out at 60% for the ncumbent. Ths reduces the vable reach by one cluster for all archtectures except for GPON over P2P where the ncumbent loses 2 clusters. Snce the wholesale prce was determned on the bass of the maxmum take-up rate, the mpact on the compettor cases s much more sgnfcant as they have to cope wth an ncrease of the wholesale prce. Not only do compettors lose vable coverage for one cluster n btstream cases and two clusters n the fbre LLU case, they also experence sgnfcant ncreases n crtcal market shares n some clusters that reman vable. Only n case of WDM unbundlng the lmt of proftable roll-out remans the same as n the base case, the crtcal market share, however, ncreases from 6% to 13% n the last proftable cluster. Table 3-22: Compettors crtcal market shares (70% vs. 60% ncumbent maxmum take-up) Cluster ID LLU - 70% ncumbent max take-up LLU - 60% max ncumbent take-up Btstream Core - 70% ncumbent max take-up Btstream Core - 60% ncumbent max takeup Btstream MPoP -70% ncumbent max take-up Btstream MPoP - 60% ncumbent max takeup WDM unbundlng - 70% ncumbent max take-up WDM unbundlng - 60% ncumbent max take-up 1 9% 10% 4% 4% 6% 7% 4% 4% 2 10% 15% 3% 4% 5% 7% 3% 4% 3 24% > 100% 4% 8% 8% 14% 6% 12% 4 25% > 100% 5% 9% 10% 16% 6% 13% 5 > 100% > 100% 16% > 100% 28% > 100% 92% > 100% 6 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% 7 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% 8 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% Table 3-23 shows the mpact of settng 60% take-up as a maxmum penetraton level on wholesale prces. There s a smlar ncrease of the prces n the range between 9% and 13% for all archtectures. However, the overall effect on proftablty dffers between the competton scenaros due to the dfferent shape of ther cost curves.

142 132 Archtectures and compettve models n fbre networks Table 3-23: Impact of settng 60% take-up as target on wholesale prces (ncrease n %) Cluster Type P2P LLU GPON Btstream MPoP GPON Btstream Core WDM PON Unbundlng Dense urban 9% 10% 10% 9% Urban 11% 11% 11% 11% Less Urban 12% 12% 12% 12% Dense Suburban 12% 12% 12% 12% Suburban 13% 13% 13% 13% Less Suburban 13% 13% 13% 13% Wholesale prce ncrease Our wholesale prcng has been determned endogenously as LRIC of the ncumbent s cost at the maxmum market share we have deemed reasonable to acheve. However, there can be dfferent reasons why the wholesale prce for the market wll be hgher than the true LRIC, such as rsk premums or asymmetrc avalablty of nformaton that prevent the regulatory authorty from determnng the real LRIC. A senstvty was run that ncorporates a 10% wholesale prce mark-up to determne the mpact on the busness case of access seekers. Due to the flat cost curves of the wholesale scenaros and the domnant share of the access charge n the total cost of the access seeker a 10% wholesale prce ncrease has a strong mpact on vablty. Ths holds especally true for the fbre unbundlng case where agan vable reach s reduced to the frst two clusters. Table 3-24: Impact of wholesale prce ncrease on the crtcal market shares of access seekers Cluster ID Compettor (LLU) Senstvty LLU 10% mark-up Compettor Btstream Core Senstvty Btstream 10% markup Compettor Btstream MPoP Senstvty Btstream 10% markup Compettor WDM PON unbundlng Senstvty WDM unbundlng 10% markup 1 9% 10% 4% 4% 6% 7% 4% 4% 2 10% 14% 3% 4% 5% 6% 3% 4% 3 24% > 100% 4% 7% 8% 12% 6% 10% 4 25% 73% 5% 8% 10% 14% 6% 11% 5 > 100% > 100% 16% > 100% 28% > 100% 92% > 100% 6 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% 7 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100% 8 > 100% > 100% > 100% > 100% > 100% > 100% > 100% > 100%

143 Archtectures and compettve models n fbre networks 133 CPE prce senstvty As shown n secton , CPE cost has a sgnfcant mpact on total cost especally when deployng WDM PON (16% cost share) due to the hgher equpment prces assumed. The base case n our models assumes that the WDM PON CPE s 50% more expensve than the GPON CPE, due to the more complex optcal electroncs. Gven the current uncertanty about future CPE cost trends we have conducted a senstvty analyss n whch we assume three possble CPE prce scenaros for the WDM archtecture dependng on the prce of a GPON CPE: WDM CPE prce two tmes hgher than GPON CPE prce, at GPON prce level and lower than GPON prce (75% of GPON CPE). Table 3-25 analyses the mpact of a CPE prce varaton on the ncumbent s vablty. Settng the prce equal to GPON CPE prce mproves vablty of WDM PON compared to all other archtectures and along all clusters. Ths effect occurs stronger when settng the prce below the GPON prce level. An ncrease of the CPE prce s as expected followed by an ncrease of the crtcal market shares, however, wthout havng an mpact on the number of proftable clusters. The nfluence of the three senstvty scenaros on the compettor s vablty s smlar to the ncumbent s case when lookng at the crtcal market shares of the WDM unbundler (see Table 3-26). The compettor can expand hs proftablty by one cluster, f the prce for CPE s set equal to or lower than the prce for GPON CPE. Table 3-25: Impact of WDM CPE prce senstvty on the crtcal market shares of ncumbent Cluster ID WDM PON (base case, CPE prce = 1.5*GPON prce) WDM PON (CPE prce = 2*GPON prce) WDM PON (CPE prce at GPON level) WDM PON (CPE prce = 0.75*GPON prce) 1 25% 27% 23% 23% 2 39% 42% 36% 35% 3 50% 54% 46% 45% 4 49% 53% 46% 44% 5 63% 68% 59% 57% 6 72% 78% 67% 65% 7 > 100% > 100% 94% 91% 8 > 100% > 100% > 100% > 100%

144 134 Archtectures and compettve models n fbre networks Table 3-26: Impact of WDM CPE prce senstvty on the crtcal market shares of access seekers Cluster ID WDM unbundlng (base case, CPE prce = 1.5*GPON prce) WDM unbundlng (CPE prce = 2*GPON prce) WDM unbundlng (CPE prce at GPON level) WDM unbundlng (CPE prce = 0.75*GPON prce) 1 4% 5% 4% 3% 2 3% 4% 3% 3% 3 6% 9% 4% 4% 4 6% 10% 5% 4% 5 92% > 100% 12% 9% 6 > 100% > 100% > 100% > 100% 7 > 100% > 100% > 100% > 100% 8 > 100% > 100% > 100% > 100% Investment and cost of dfferent technologes dynamc approach Movng from a statc to a dynamc approach, where the tme path of nvestment accordng to a partcular roll-out and the re-nvestment pattern s taken nto consderaton, has some mpact on the relatve nvestment and cost performance of the dfferent archtectures. We wll frst consder nvestment only and then analyse nvestment and cost Investment In the dynamc analyss nvestments are spread over tme dependng on the tmng of FTTH deployment n each cluster and the successve acquston of customers. The man nvestment drver s the deployment of the outsde FTTH plant from the user to the MPoP whch defnes the tme of the nvestment peak. The total nvestment nto passve and actve network elements over the full 20-year perod s shown n the followng table. As n the statc modellng GPON has the lowest and GPON over P2P the second lowest nvestments. Up to the thrd cluster WDM PON requres less nvestments than P2P, n clusters 4-6 P2P requres less nvest. In the steady state WDM PON ranks second place n denser clusters. In the ramp-up WDM PON s total nvestment are hgher due to CPE replacement nvest (WDM CPE s most expensve).

145 mn Archtectures and compettve models n fbre networks 135 Table 3-27: Undscounted total nvestments over 20 years (mn Euro) and rankng (1 lowest, 4 hghest) Cluster ID P2P GPON over P2P GPON WDM PON 1 2,333 (4) 2,043 (2) 1,982 (1) 2,224 (3) 2 3,390 (4) 3,041 (2) 2,988 (1) 3,296 (3) 3 4,624 (4) 4,206 (2) 4,146 (1) 4,525 (3) 4 3,396 (3) 3,102 (2) 3,060 (1) 3,460 (4) 5 4,461 (3) 4,178 (2) 4,145 (1) 4,631 (4) 6 5,709 (3) 5,400 (2) 5,342 (1) 5,977 (4) Total 23,914 (3) 21,970 (2) 21,661 (1) 24,113 (4) The followng fgures (Fgure 3-17 and Fgure 3-18 ) show how undscounted nvestments per year evolve for all archtectures. Because the deployment path and subscrber acquston s the same for all archtectures the evoluton of annual nvestments s also very smlar for the four consdered NGA archtectures (examples shown for Cluster 1 and 6). Fgure 3-17: Annual nvestment Cluster Invest p.a. n mn Cluster P2P GPON over P2P GPON WDM PON Year

146 mn 136 Archtectures and compettve models n fbre networks Fgure 3-18: Annual nvestment Cluster Invest p.a. n mn Cluster Year P2P GPON over P2P GPON WDM PON Up to ths pont the effects of dscountng future nvestments have not been consdered. The followng table shows the total nvestments at ther present value (dscounted at 10% p.a.). Dscountng nvestments leads to an exchange of ranks for P2P and WDM PON. Table 3-28: Dscounted total nvestments over 20 years (mn Euro) Cluster ID P2P GPON over P2P GPON WDM PON 1 1,427 (4) 1,317 (2) 1,257 (1) 1,354 (3) 2 2,138 (4) 2,009 (2) 1,961 (1) 2,086 (3) 3 2,936 (4) 2,784 (2) 2,739 (1) 2,892 (3) 4 1,970 (4) 1,867 (2) 1,843 (1) 1,923 (3) 5 2,290 (4) 2,197 (2) 2,164 (1) 2,238 (3) 6 2,652 (4) 2,556 (2) 2,531 (1) 2,611(3) Total 13,414 (4) 12,729 (2) 12,496 (1) 13,104 (3) Large parts of the total nvestment (nhouse and drop cablng account for over 70% of total nvestments) are actually the same for all archtectures. In every case the majorty of total nvestments s related to the network deployment n the early years. Therefore relatve changes of cost dfferences occur f archtectures are more or less nvestment heavy than GPON n the early years. Ths prmarly depends on the share of nvestments drectly ted to the network roll-out (happenng earler) as opposed to nvestments drven by subscrber acquston (happenng later). The followng table provdes an overvew of network levels and ther nvestment drvers.

147 Archtectures and compettve models n fbre networks 137 Table 3-29: Investment relevance, drver and dfferences between archtectures Network level Relevance of total nvest Drver Inhouse cablng Hgh (up to 36% of nvest) Subscrber none Drop cable Hgh (up to 60% of nvest) Homes passed none Dstrbuton pont Low (less than 5%) Homes passed Feeder cable Low n dense clusters (~5%), medum n less dense clusters (~13%) Homes passed Dfferences archtectures between Only GPON and WDM PON Hgher nvest for P2Ptopologes MDF Low Homes passed WDM PON only Backhaul Low-Medum (less than 10%) ODF Low (less than 6%) Actve electroncs at MPoP Low-Medum (less than 10%) Homes passed Homes passed (customer sded ports) Subscrber (network sded ports) Homes passed (GPON, WDM PON) Subscrber (P2P, GPON over P2P) WDM PON only Hgher nvest for P2Ptopologes Hgher for P2P Ths explans why 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 smaller share of nvestment that s drven by the actual number of customers. Whle Ethernet ports n P2P are subscrber drven, GPON s nvestment n OLTs s not. The larger share of varable (customer drven) nvestment generates a slghtly better rsk profle for P2P compared to GPON. WDM PON and GPON share the same passve network from the user s home to the former MDF locaton. WDM PON has a lower share of nvestments n the early years because even though OLTs for WDM PON are 5 tmes as expensve than GPON OLTs the hgh level of concentraton means far less OLTs are requred and overall the nvestment n OLTs s less than half that of GPON. Accordngly, even though the WDM OLT s an ntegral part of the early year roll-out drven nvestment, ts nvestment share s lower than the GPON OLT equvalent. Because nvestment per CPE s 50% hgher for WDM PON a hgher part of the total nvestment s dependent on subscrber acquston. The overall effect s a slghtly lower share of nvestments for WDM n the early years. 65 Contrary to ths the share of total nvestments for GPON over P2P n the frst 6 years s slghtly hgher than GPON s (~74% Cluster 1). The reason les n the addtonal nvestment nto feeder and ODF ports whch s completely drven by the network roll-out and not by subscrber acquston and therefore occurs early. 65 Note that the reference n all cases s the share of total nvestments. We are not comparng absolute levels of nvestment, whch as we have shown earler are lowest for GPON.

148 cumulated share of total nvest 138 Archtectures and compettve models n fbre networks Fgure 3-19: Percentage of total nvestment durng ramp-up (example Cluster 1) Cluster 1 80,0% 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% P2P 13,1% 27,9% 45,6% 54,4% 63,2% 68,7% GPON over P2P 14,7% 31,3% 50,7% 59,9% 69,0% 74,7% GPON 14,9% 31,3% 50,2% 58,4% 66,4% 71,5% WDM PON 13,3% 28,3% 45,6% 53,7% 61,7% 66,9% Year To compare the mpact of dscountng nvestments we have computed the nvestment dfference of the other technologes to GPON (whch has the lowest nvestment level) and dvded ths by the nvestments nto GPON. Ths was done for both dscounted and undscounted nvestments ndvdually for each cluster and for the sum of clusters 1-6. Dscountng future nvestment to a present value does not change the rankng between archtectures. However, the relatve dfferences to GPON decrease for P2P and WDM PON because they have a lower share of ther total nvest durng ramp-up than GPON. Dfferences to GPON ncrease n case of GPON over P2P because t has a hgher share of ts total nvest durng ramp-up than GPON.

149 Archtectures and compettve models n fbre networks 139 Table 3-30: Relatve nvestment dfferences to GPON Cluster Sum of total nvest P2P P2P at present value Sum of total nvest GPON over P2P GPON over P2P at present value Sum of total nvest WDM PON WDM PON at present value 1 18% 14% 3% 5% 12% 8% 2 13% 9% 2% 2% 10% 6% 3 12% 10% 1% 2% 9% 8% 4 11% 7% 1% 1% 8% 4% 5 8% 6% 1% 1% 6% 3% 6 7% 5% 1% 1% 6% 3% Total 10% 7% 1% 2% 8% 5% When nterpretng Table 3-30 one has to keep n mnd that the roll-out s focused on the denser clusters frst (Cluster 1 fnshed n year 3) and less dense clusters are fnalsed later (Cluster 6 fully covered n year 8) Cost The analyss now consders present values of nvestment, ther assocated OPEX and drect costs whch are floorspace rental, energy, concentraton and core network as well as retal costs ( total expenses ). We are hence lookng at the expense sde of the operator s cash flow. Ths once agan does not change the overall rankng of archtectures: GPON remans the lowest cost technology, GPON over P2P comes next 66 followed by WDM PON and P2P. The dfferences between technologes decrease when comparng total (dscounted) expenses and nvestment. Table 3-31: Rankng of archtectures relatve to lowest total expenses over 20 years at present value (1: lowest expenses, 4: hghest expenses) Cluster P2P expenses at present value GPON over P2P expenses at present value GPON expenses at present value WDM PON expenses at present value Total The followng table shows detals for the total cost over clusters 1-6 at present value. 66 Excepton: In the dense urban cluster WDM PON ranks second.

150 140 Archtectures and compettve models n fbre networks Table 3-32: Present value of nvest and cost over 20 years Cluster 1-6 Invest + OPEX + Common Cost at present value P2P expenses at present value GPON over P2P expenses at present value GPON expenses at present value WDM PON expenses at present value CPE 1,926,728,564 8% 2,215,737,848 10% 2,215,737,848 10% 3,323,606,773 15% Inhouse cablng 2,947,101,520 13% 2,947,101,520 13% 2,947,101,520 14% 2,947,101,520 13% Passve network up to ODF (ncl. floorspace nvest for actve equpment) 11,102,838,544 48% 11,102,257,961 51% 11,041,790,729 51% 11,108,317,322 50% Network sded ODF port + patch cablng + spltter for GPON over P2P 289,102,242 1% 492,454,531 2% 9,188,345 0% 762,996 0% P2P Ethernet ports 1,951,903,720 8% 0 0% 0 0% 0 0% PON OLT & PON Ethernet ports 0 0% 316,036,416 1% 647,543,196 3% 335,038,558 2% Drect Cost + Common Cost at present value MPoP energy 105,818,479 0% 26,687,866 0% 60,211,705 0% 18,755,358 0% Floorspace rental 124,140,573 1% 122,949,414 1% 52,330,097 0% 1,388,713 0% Concentraton/backhaul network 381,658,132 2% 381,658,132 2% 381,658,132 2% 168,239,087 1% Core network 1,190,313,113 5% 1,190,313,113 5% 1,190,313,113 5% 1,194,003,373 5% Retal 3,112,308,200 13% 3,112,308,200 14% 3,112,308,200 14% 3,112,308,200 14% TOTAL EXPENSES 23,131,913, % 21,907,505, % 21,658,182, % 22,209,521, %

151 Archtectures and compettve models n fbre networks 141 There are sgnfcant dfferences between archtectures regardng energy and floorspace rental: P2P has 2 tmes hgher energy cost than GPON and nearly 6 tmes hgher costs than WDM PON. P2P also has about 2.5 tmes hgher floorspace rental cost than GPON and about 90 tmes more than WDM PON. However, the weght of these elements s neglgble (not more than 1%) n the overall cost comparson. On the other hand, retal and core network cost whch account for close to 20% of the total expenses are dentcal for all archtectures. Ths explans why the dfferences between archtectures decrease sgnfcantly compared to the pure nvestment analyss. We have appled the same methodology to analyse the dfferences between archtectures that was used n the prevous secton on nvestment (total expense dfference of e.g. P2P to GPON dvded by the total expenses of GPON). Results are shown n the followng table. Table 3-33: Cost dfference to GPON: Total expenses (nvest and OPEX, drect and common costs) at undscounted and present value Cluster ID P2P sum of expenses P2P expenses at present value GPON over P2P sum of expenses GPON over P2P expenses at present value WDM PON sum of expenses WDM PON expenses at present value 1 12% 11% 2% 3% 3% 2% 2 10% 8% 1% 2% 4% 3% 3 9% 7% 1% 1% 3% 3% 4 8% 6% 1% 1% 4% 3% 5 7% 6% 1% 1% 3% 2% 6 6% 5% 1% 1% 3% 2% Total 8% 7% 1% 1% 3% 3% The drecton of the mpact of dscountng total expenses generally remans the same as n the sole analyss of nvestments. The spread between GPON and P2P or WDM PON decreases. The spread between GPON and GPON over P2P ncreases. Agan, we fnd t especally nterestng that GPON over P2P remans only slghtly more expensve than GPON. In relatve terms, the dfference measured n present value of dscounted expenses between GPON and GPON over P2P becomes neglgble (~1%); P2P generates ~7% more expenses (Cluster 1 to 6), than GPON; WDM PON 3% hgher expenses WDM PON senstvty: Revenues from sale of MDF locatons The ncumbent mght realse 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.

152 142 Archtectures and compettve models n fbre networks 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 MDF dsmantlng only occurs n the case of WDM PON. We have assumed that the sales revenue per MDF locaton s hgher n the denser cluster than n the less dense clusters. One-tme profts are realsed after the former copper network s swtched off. We have assumed that ths wll occur one year after the maxmum penetraton n a cluster s reached to reflect a certan delay, e.g. to ease the transton for compettors. Gven our deployment path ths means that the ncumbent realses these net revenues n year 8 (Cluster 1) earlest and n year 12 (Cluster 6) latest. The followng table shows the net revenues per MDF, per cluster and dscounted net revenues per cluster. Table 3-34: Sales from MDF dsmantlng Cluster net revenue per dsmantled MDF (mn) Dsmantled MDFs Net revenue from MDF dsmantlng per cluster (mn) Dscounted net revenue per cluster (mn) Total We have subtracted the dscounted net revenues from the present value of WDM PON total expenses, workng under the assumpton that these revenues can fully be used to mprove the WDM PON busness case. When comparng ths modfed present value of total expenses WDM PON actually ranks frst place wth lowest dscounted expenses n Cluster 1, so t actually becomes cheaper than GPON. WDM PON also overtakes GPON over P2P n Cluster 2 and ranks second after GPON. In all other clusters WDM PON remans n thrd place but the dfference to GPON decreases.

153 Archtectures and compettve models n fbre networks 143 Table 3-35: Comparson of dscounted total expenses (mn Euro) Cluster P2P expenses at present value GPON over P2P expenses at present value GPON expenses at present value WDM PON expenses at present value WDM PON expenses at present value reduced by present value of MDF sales revenue, (rankng) 1 2,735 2,539 2,469 2,520 2,459 (1) 2 3,735 3,504 3,452 3,553 3,484 (2) 3 4,988 4,717 4,672 4,795 4,743 (3) 4 3,426 3,242 3,218 3,312 3,269 (3) 5 3,859 3,689 3,655 3,745 3,717 (3) 6 4,390 4,216 4,192 4,285 4,258 (3) Total 23,132 21,908 21,658 22,210 21,930 (3) Ths s not only because dsmantlng revenues are hgher n the denser clusters and dscounted less because they occur earler. Consderng the spread between GPON and WDM PON the undscounted MDF revenue potental only suffces to close the gap n clusters 1-3. In clusters 4-6 the gap between GPON and WDM PON total expenses at present value s hgher than the undscounted sales revenues from MDF dsmantlng. Therefore WDM PON cannot take the frst place even when consderng MDF sales revenues and also does not gan enough to overtake GPON over P2P even though the spread s reduced Summary of cost modellng results Proftable coverage, nvestment, cost and competton n the steady state analyss If 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 (about 50% of the populaton could be covered wth P2P or WDM PON, about 64% could be covered wth GPON over P2P and GPON). Theoretcally, a FTTH nfrastructure can be replcated by a second nvestor only n the Dense Urban Cluster 1 or for about 8% 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 whch makes replcablty mpossble. In the relevant clusters 1-6 the cost comparson of our four archtectures has shown the followng results: GPON s the cheapest technology, followed by GPON over P2P, WDM PON and P2P. Wth the excepton of Cluster 1 where WDM PON and GPON over P2P swtch ranks, ths s consstent over the relevant clusters.

154 144 Archtectures and compettve models n fbre networks 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 6. Utlzng exstng duct nfrastructure benefts the two pont-to-multpont archtectures GPON and WDM PON most, because they have fewer fbres n the feeder and backhaul segments and hence a hgher chance of avodng cvl works. The nvestment savngs by segment are as follows: The effectve reducton n the drop segment ranges from 7% to 20% dependng on the cluster, and s the same for all archtectures, snce the archtectures do not dffer n ths segment. In the feeder segment, the savngs for P2P are around 7% and for GPON around 40%. The savngs n the backhaul segment amount to around 40% for WDM PON. The segment specfc savngs n nvestment translate to overall cost savngs of 5% (Cluster 1) to 11% (Cluster 8) for the WDM PON archtecture whch benefts most. 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). The lowest cost savngs occur wth P2P from 4% (Cluster 1) to 7% (Cluster 3). 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 although not more than by 2-4%- ponts. 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. The crtcal market shares of the dfferent scenaros ndcate that n all archtectures and competton scenaros potentally several compettors could survve n the market. The hghest potental number of compettors may occur n the case of btstream access and wavelength unbundlng at the core. 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. 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.

155 Archtectures and compettve models n fbre networks 145 If the wholesale prces also reflect the nvestment savngs of the ncumbent (Brownfeld case) 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. We have calculated the mpact of devatons from LRIC based wholesale prces on the structural condtons of competton. Under the assumpton of fxed ARPUs 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 Impact of the ramp-up on costs and technology rankng Takng a partcular roll-out and the re-nvestment pattern nto account, the relatve performance of the archtectures s somewhat mpacted because of dfferent tme paths of nvestment. Although most of the nvestment s front-loaded for all archtectures, a lower part of the GPON nvestment 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. However, the overall relatve performance only changes moderately: GPON remans the lowest cost technology, GPON over P2P comes next followed by WDM PON and P2P. The dfferences between technologes, however, 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. As n the statc modellng 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). 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%.

156 146 Archtectures and compettve models n fbre networks Bblography Analysys (2007), The Busness Case for Sub-Loop Unbundlng n Dubln, Study for ComReg. Anderson, S.P., A. de Palma and J. Thsse (1992), Dscrete Choce Theory of Product Dfferentaton, Cambrdge, Mass., and London: MIT Press. Armstrong, M. (2002), The Theory of Access Prcng and Interconnecton, n: M. Cave, S. Majumdar, and I. Vogelsang (eds.), Handbook of Telecommuncatons Economcs, Amsterdam: North Holland, Badsteber, C., Noka Semens Networks (2010), Next Generaton Optcal Access Shapng the Colourful Future of Broadband Access. Belleflamme, P. and M. Petz (2010), Industral Organzaton: Markets and Strateges, Cambrdge Unversty Press. Bourreau, M. and P. Dogan (2005), Unbundlng the Local Loop, European Economc Revew 49, Brto, D, Perera, P. and J. Vareda (2008), Incentves to Invest and to Gve Access to Non- Regulated Next Generaton Networks, Workng Papers 08-10, NET Insttute. Brto, D, Perera, P. and J. Vareda (2010), Can Two-Part Tarffs Promote Effcent Investment on Next Generaton Networks?, Internatonal Journal of Industral Organzaton 28, Cambn, C., and Y. Jang, (2009), Broadband Investment and Regulaton: A Lterature Revew, Telecommuncatons Polcy 33, Chen, Y. and M. H. Rordan (2007), Prce and Varety n the Spokes Model, Economc Journal 117, de Bjl, P. and M. Petz (2005), Local Loop Unbundlng n Europe: Experence, Prospects and Polcy Challenges, Communcatons and Strateges 57, de Bjl, P. and M. Petz (2006), Local Loop Unbundlng: One-Way Access and Imperfect Competton, n: R. Dewenter and J. Haucap (eds.), Access Prcng: Theory and Practce, Elsever Scence, Elxmann, D./Ilc, D./Neumann, K.-H./Plückebaum, T. (2008), The Economcs of Next Generaton Access, Study for the ECTA European Commsson (2010a), Commsson Recommendaton on Regulated Access to Next Generaton Access Networks (NGA), Brussels, 20/09/2010 C(2010) European Commsson (2010b), Commsson Decson concernng Cases UK/2010/1064 and UK/2010/1065, Brussels, 1/06/2010, C(2010) Foros, O. (2004), Strategc Investments wth Spllovers, Vertcal Integraton and Foreclosure n the Broadband Access Market, Internatonal Journal of Industral Organzaton 22, Gans, J. (2001), Regulatng Prvate Infrastructure Investment: Optmal Prcng for Access to Essental Facltes, Journal of Regulatory Economcs 20,

157 Archtectures and compettve models n fbre networks 147 Gans, J., and S. Kng (2004), Access Holdays and the Tmng of Infrastructure Investment, Economc Record 80, Gual, J. and P. Seabrght (2000), The Economcs of Local Loop Unbundlng, paper prepared for DGCOMP (European Commsson), Unversty of Navarra and Unversty of Cambrdge. Guthre, G. (2006), Regulatng Infrastructure: The Impact on Rsk and Investment, Journal of Economc Lterature 44, Hoerng, S. (2010), Competton between Multple Asymmetrc Networks: Theory and Applcatons, CEPR Dscusson Paper 8060, October. Hor, K. and K. Mzuno (2006), Access Prcng and Investment wth Stochastcally Growng Demand, Internatonal Journal of Industral Organzaton 24(4), Hor, K. and K. Mzuno (2009), Competton Schemes and Investment n Network Infrastructure under Uncertanty, Journal of Regulatory Economcs 35(2): Ilc, D./Neumann, K.-H. and T. Plückebaum (2009), The Economcs of Next Generaton Access Addendum Ilc, D./Neumann, K.-H. and T. Plückebaum (2010), Szenaren ener natonalen Glasfaserausbaustratege n der Schwez Klumpp, T. and X. Su (2008), Open Access and Dynamc Effcency, mmeo. Kotakorp, K. (2006), Access Prce Regulaton, Investment and Entry n Telecommuncatons, Internatonal Journal of Industral Organzaton 24, Inderst, R., Kühlng, J., Neumann, K.-H. and M. Petz (2010), Investtonen, Wettbewerb und Netzzugang be NGA, WIK Dscusson Paper No. 344, September. Laffont, J.-J., and J. Trole (1994), Access Prcng and Competton, European Economc Revew 38, Laffont, J.-J. and J. Trole (2000), Competton n Telecommuncatons. Cambrdge MA: MIT Press. Ntsche, R. and L. Wethaus (2009), Access Regulaton and Investment n Next Generaton Networks: A Rankng of Regulatory Regmes, ESMT Workng Paper. Schuster, S., Noka Semens Networks (2010), Use of the Optcal Wavelength Grd, Presentaton at WIK Conference, Berln, 26/04/2010, modfed by WIK TKK (2010a), Entwurf ener Vollzehungshandlung für den Markt "Physscher Zugang zu Netznfrastrukturen (Vorlestungsmarkt)", M 3/ TKK (2010b), Besched für den Markt "Physscher Zugang zu Netznfrastrukturen (Vorlestungsmarkt)", M 3/ Vallett, T. (2003), The Theory of Access Prcng and Its Lnkage wth Investment Incentves, Telecommuncatons Polcy 27, Vareda, J. (2009a), Access Regulaton and the Incumbent Investment n Qualty Upgrades and Cost Reducton, mmeo.

158 148 Archtectures and compettve models n fbre networks Vareda, J. (2009b), Qualty upgrades and Bypass under Mandatory Access, mmeo. Vareda, J. and S. Hoerng (2010), Racng for Investment under Mandatory Access, The B.E. Journal of Economc Analyss & Polcy 10(1). Vogelsang, I. (2003), Prce Regulaton of Access to Telecommuncatons Networks, Journal of Economc Lterature 41, von Ungern-Sternberg, T. (1991), Monopolstc Competton n the Pyramd, Journal of Industral Economcs 39, Wllamson, R., Klen, J., Reynolds, M. and R. Jones (2008), Assessment of the theoretcal lmts of copper n the last mle, Fnal report prepared for OFCOM, July 6. Wulf, A.-H. (2007): Access Requrements and Access Optons n a VDSL Envronment, Presentaton at WIK s VDSL Conference, Köngswnter, Germany

159 Archtectures and compettve models n fbre networks 149 Annex 1: Key parameters of cost modellng Cvl engneerng parameters In our model we consder duct and aeral deployment as possble deployment forms (no drect bured lnes were assumed). Duct constructon cost are hghest n the dense populated areas and amount to 100 per m n Cluster 1, whle decreasng to 60 per m n the last two clusters. Contrarly, aeral deployment costs are assumed to be equal for all clusters (15 per m), however, aeral cablng s not used n the two densest clusters but s deployed to a larger degree n the rural clusters (up to 60%). Aeral deployment s only relevant for the drop segment, n the feeder and backhaul segment all cables are deployed n ducts. Furthermore, we assume an nvest of 548 per dstrbuton sleeve and 860 per manhole along all clusters and segments. Port prces Based on dscussons wth equpment vendors and on WIK s modellng experence we have defned port prces for the actve equpment nstalled at the MPoP. The followng table provdes an overvew of the prces assumed. Table A-1: Port prces for actve equpment 1 Gbps Ethernet port 10 Gbps Ethernet port Standard OLT port WDM OLT port Invest per port ODF The fbres comng from the outsde plant are termnated on the customer sded ports of an ODF n the MPoP and are accessble per patch cables. We assume a prce of 23 per ODF port and 11 per patch cable. In case of fbre unbundlng the compettor places an addtonal ODF of hs own at rented collocaton space n the MPoP where he operates hs own Ethernet Swtch. The compettor s ODF s connected va connecton cable to dedcated customer sded ports of the ncumbent s man ODF. Therefore, we assume a hgher prce for the compettor s ODF port (46 ). Energy consumpton We have assumed average energy consumpton on a per port per month bass. Energy consumpton per port s hgher for WDM PON than for GPON OLTs and hgher for

160 150 Archtectures and compettve models n fbre networks 10Gbps Ethernet ports than for 1Gbps ports. The prce per kwh of energy s set to The energy consumpton and the resultng cost for the dfferent actve equpment tems are shown n Table A-2. We have not consdered the energy consumpton of CPEs because the subscrbers bear energy cost themselves. Table A-2: Energy consumpton and cost 1 Gbps Ethernet port 10 Gbps Ethernet port Standard OLT port WDM OLT port Energy consumpton per month (kwh) Energy cost per port per month ( ) CPE prces The prces for equpment nstalled at customer s premses depend on the access archtecture deployed. We have assumed a prce of 100 for the P2P router and 115 for a GPON ONT. In our base case we assume that the WDM PON CPE s 50% more expensve (172.5 ) than the GPON CPE due to the more complex optcal electroncs requred.

161 Archtectures and compettve models n fbre networks 151 Annex 2: NGA technologes not consdered FTTN/VDSL Wth FTTNode/VDSL (also FttCurb) the copper access lnes are shortened and already termnate at the street cabnet as the feeder segment between MPoP/MDF and street cabnet s replaced by fbre. Because the remanng copper segment s shorter t now only conssts out of the drop cable segment sub-loop (Fgure 2-2) -, hgher bandwdths can be realsed, e.g. wth VDSL technology. The street cabnets need to be upgraded to host DSLAMs (energy, ar condton etc.), whch termnate the electrcal copper sgnal and concentrate t n an Ethernet protocol over fbre up to the MPoP. Snce the dstance between the DSLAM n the street cabnet and the Ethernet swtch n the MPoP, the feeder cable segment, s no longer lmted by copper transmsson characterstcs t may become longer than before. Accordngly, MDF locatons could be closed down, or reman as a mere nfrastructure node pont because of the exstng duct nfrastructure, and be replaced as an actve node by an MPoP further up n the network. Because VDSL technology stll bases on a copper sub-loop t s stll dependent on copper loop length and lne qualty. The avalable bt rates of VDSL are very much dependent on the length of the copper lne 67 and the advantages of VDSL regardng bandwdth over ADSL dsappear at sub-loop dstances of more than 500m. In addton the transmsson characterstcs of copper lnes vary strongly and also depend on cross talk effects of neghbourng pars. Compared to FTTH technologes performance of FTTN therefore s very heterogeneous and falls far behnd the potentals of a full fbre based loop. 68 We have excluded ths archtecture from our consderatons due to ts poorer performance compared to FTTH. DOCSIS 3.0 Data Over Cable Servce Interface Specfcaton (DOCSIS) s the standard accordng to whch data and voce sgnals are transmtted n parallel over the exstng cable-tv networks. The up to date standard s DOCSIS 3.0, whch allows for up to 400 Mbps down and 108 Mbps upstream capacty 69 n a shared channel. A group of customers s connected to an actve fbre node by the exstng coaxal cable dstrbuton (access) net- 67 See Wulf (2007) or Wllamson/Klen/Reynolds/Jones (2008). 68 VDSL technology reaches 40Mbps downstream and more over dstances of up to 1km. For longer dstances the bandwdth decreases sgnfcantly. Over short loops below e.g. 250m bandwdth mght even realze up to 100Mbps. The upstream bandwdth s typcally below half of the downstream bandwdth. Typcal sub-loop lengths strongly depend on country specfc copper access network desgn and may be longer than 1 km for a sgnfcant number of customers. 69 EuroDOCSIS 3.0 wth all bundle optons for up- and downstream channels, thus beng the maxmum capacty.

162 152 Archtectures and compettve models n fbre networks work. The fbre node s connected va fbre lnes to a central Cable Modem Termnaton System (CMTS), where the voce/data sgnals wll be separated from the TV-Sgnals (RF-TV). Usng Fgure 2-2 as a generc reference the coaxal cable s n the drop cable segment, the fbre node s located n the spltter and the CMTS s located n the MPoP. Thus the DP s the pont where the transmsson meda changes from coaxal cable to fbre, and many customers are concentrated to that fbre. Communcaton s organzed comparable to GPON by admnsterng the communcaton and possble communcaton conflcts by the CMTS nstead of the OLT. Bandwdth per end customer s determned by the number of end customers per fbre node. A typcal relaton of today s spread between 2000 and 70 end users per node. The maxmum average bandwdth per end customer then can reach 5.7 Mbps maxmum. In many areas of Europe the coaxal cable-tv networks are an already exstng communcaton nfrastructure whch can be or already s upgraded to bdrectonal communcaton as alternatve to the classcal telecommuncaton networks. A natural mgraton path towards hgher bandwdth s ncreasng the number of fbre nodes and movng them closer to the end customer, untl they end n FTTB and FTTH solutons. Ths can be done n a smooth process of ncremental steps for sngle network segments, not requrng large one tme nvestments. Ths s an advantage of the already exstng operators. A new entrant wll not nvest n coaxal cable nfrastructure, but would deploy a GPON FTTB/FTTH archtecture wth RF channel f he wants to come close to the cable-tv busness models. Snce the bandwdth per end customer s a magntude lower compared to the FTTH archtectures we consder and because technology and busness model wll be mgrated to GPON when nfrastructure s upgraded for bandwdth ncrease, we dd not nclude the DOCSIS 3.0. archtecture n our analyss. Actve Ethernet In Actve Ethernet archtectures a concentratng Ethernet swtch s placed between the MPoP and the customer locaton, e.g. n a cabnet at the dstrbuton pont (Fgure 2-2). The drop cable segment conssts of dedcated fbres per home and the feeder segment needs only very few fbres, one per Ethernet swtch at the DP. Smlarly to FTTN/FTTC the ntermedate locaton n the feld (e.g. the dstrbuton pont) requres energy and ar condton to host the actve swtch. Typcally ths archtecture allows one to offer 100 Mbps symmetrcal traffc per end customer home, whch wll be overbooked at the frst Ethernet swtch, who manages the shared use of the feeder fbre. Compared to an Ethernet P2P soluton ths approach s less flexble to offer hgher bandwdth for ndvdual customers, because swtches wth all speed ports are more expensve and the smaller spaces at the DP do n most cases

163 Archtectures and compettve models n fbre networks 153 not allow for a second hgh speed swtch at ths locaton and anyhow such a swtch would not scale very well. Thus Actve Ethernet s based on a Pont-to-Multpont fbre plant wth all the nflexblty for future use as already descrbed above. The prmary advantage of ths archtecture s the savngs on feeder fbre count and potentally MPoP floorspace due to ODF and swtch port reducton. However, that s very lkely more than outweghed by the cost of actve dstrbuton ponts (swtches, cabnets, energy ). Snce decentral swtches also ncrease operaton cost for servce and mantenance, these archtectures of the early FTTH roll-out are no longer mplemented n new deployments at least to our knowledge. We have therefore excluded ths archtecture from ths study due to ts poorer performance compared to Ethernet P2P and ts expected hgher cost. Mult-fbre deployment Multple-fbre archtectures deploy more than a sngle fbre per home, e.g. four as n the Swsscom approach, n the drop cable segment and (optonally) n the feeder cable segment. Ths s a rsk sharng strategy opton that allows several co-nvestors to share the nvestment nto NGA and obtan parallel access to the same end customer. Basc thnkng behnd ths approach s that even f the total nvestment for multple fbres n the drop segment s hgher, sharng the nvest reduces the nvestment per nvestor compared to a sngle fbre approach. The nvestng operator connects at least one fbre per home to ts ongong feeder network up to the MPoP. The second to fourth operator each shares fbres n the drop cable segment to the end customer homes and n prncple has the choce to connect these fbres to ts own separately ducted feeder network (e.g. local power utlty ducts) at the Dstrbuton Pont or to also share fbres n the feeder nfrastructure up to the MPoP and collocate there. The Mult-fbre approach n the drop cable segment stll allows one to deploy a fbre Pont-to-Pont or fbre Pont-to-Multpont archtecture for the customer access, dependng on how many fbres the dfferent nvestors deploy n the feeder segment. In Swtzerland the typcal archtectures as far as we know are based on Pont-to-Pont fbre plants. We have analysed the mplcatons of mult-fbre deployment already n our 2009 studes for ECTA 70 and have assessed the advantages and dsadvantages as a compettve approach n more detal n a study for the Swss regulator BAKOM 71. Includng the Mult-fbre approach wthn ths study would have complcated t and at least duplcated the amount of scenaros consdered. But the general results of the stud- 70 See Ilc/Neumann/Plückebaum (2009). 71 See Ilc/Neumann/Plückebaum (2010).

164 154 Archtectures and compettve models n fbre networks es mentoned can also be transferred, thus we exclude the Mult-fbre consderaton here. FTTB In FTTB archtectures the complete copper loop down to the basement of the end customer buldngs s replaced wth fbre but the nhouse cablng remans the already exstng copper or coax-based nfrastructure. Mn-DSLAMs or ONUs can serve as fbre termnaton nodes n the buldng basement. Each buldng therefore only requres one fbre n the generc FTTB archtecture thus reducng the fbre count strongly not only n the feeder but also n the drop segment. FTTB can be deployed on top of a Pont-to-Pont or Pont-to-Multpont fbre plant, resultng n dfferent savngs of the fbre count n the feeder segment. Based on a Pont-to- Multpont fbre plant the savngs are hgher, but requre a GPON technology to admnster the traffc. FTTB Pont-to-Pont has ndvdual fbres per buldng, thus allowng one to connect each buldng wth an ndvdual connecton, as requested by the potental customers nsde, and enablng a hgher degree of flexblty for future upgrades. FTTB also means that the maxmum capacty of each user s lmted by the bandwdth provded to the buldng and the number of other subscrbers n the same buldng. In the near future 1Gbps, 2.5 Gbps or 10 Gbps lnks may stll be suffcent for common European Mult-Dwellng-Unt compostons. However, as the number of tenants per buldng ncreases, the access lnk bandwdth per user that can be guaranteed decreases. In the long term FTTB archtectures mght need to be mgrated to FTTH to allow suffcent bandwdths. Therefore, FTTB could be consdered as an alternatve to FTTC when mgratng from copper based loops to FTTH, already now allowng for hgher bandwdth and more stable product qualty. Upgradng to FTTH, however, can only be effcently done when consderng at least ducts n the drop segment wth suffcent space for further fbres, lke there are potental customers. As we have taken a rather forward lookng approach we have decded to only assess FTTH solutons, whch exclude any copper cable complextes and product qualty dependency. EPON There are a varety of standards that defne the communcaton of actve electroncs on a Pont-to-Multpont FTTH fbre plant. However, of the many (TDM) PON systems proposed only GPON (Ggabt PON) and EPON (Ethernet PON) have been used for mass deployment. Some characterstcs of GPON n comparson to EPON are shown n Table A-3. Due to the fxed tme nterval based admnstraton procedures of bandwdth alloca-

165 Archtectures and compettve models n fbre networks 155 ton n GPON t s better suted to support TDM connectons to dedcated customers, thus allowng more end customer flexblty than EPON. Concernng fbre count and characterstcs of the use of Pont-to-Multpont vs. Pont-to- Pont fbre plants there s no dfference between both technologes. In ths study we therefore have exclusvely referred to the GPON standard because t s the domnant technology appled n Europe and the US. EPON as far as we can see has no relevance for future FTTH deployment n Europe. Table A-3: Comparson of PON standards GPON EPON Standard ITU-T G.984 Ethernet-Frst-Mle standard, IEEE 802.3ah Deployed n Europe, USA Japan, Korea Capacty Up to 2.5Gbps down, up to 1.25 Gbps up Max splttng 1:64, n future 1:128 1:32 Protocols supported Ethernet, TDM, ATM Ethernet Max reach Source: WIK-Consult 20km 60 km (n future) 1.25Gbps symmetrcal 20km more (n future)

166 156 Archtectures and compettve models n fbre networks Annex 3: Results n the lterature related to NGA Insghts from earler work on telecommuncatons markets partly apply to an NGA context. A number of works on one-way access concern optmal access prces set by a regulator n a second-best sense (Ramsey prcng),.e. respectng the partcpaton constrants of the frms nvolved. Most of these works consder homogeneous servces on the retal market. Other works modfy the assumpton that all servces are homogeneous and postulate that there are two types of frms, the ncumbent wth market power and a set of frms who act as a compettve frnge,.e whch offer homogeneous servces among themselves and thus do not possess market power. In such frameworks the lterature has formulated rules accordng to whch access should be granted for gven retal prces. In partcular, the "effcent component prcng rule" (ECPR) receved a lot of attenton. It says that entrants should pay access charges equal to the ncumbent s drect costs of access plus the opportunty costs of proft contrbutons forgone by the ncumbent n sellng access rather than sellng to endusers. 72 For optmalty ths approach requres entrants to have no market power downstream. The works on the ECPR are not drectly relevant to our context snce our am s to consder varous frms that can exert market power. Qute a large lterature exsts on unbundled access (motvated by developments n the European context). We refer to Gual und Seabrght (2000), a contrbuton that was made at the request of DGCOMP at the European Commsson, and de Bjl and Petz (2005) whch provde overvews over relevant economc ssues, n partcular from the vew pont of a regulator. Unbundled access tres to strke a balance between the nterests of the owner of the access network and other partes who seek access. In the absence of externaltes prvately negotated solutons may mplement the effcent soluton. However, n the presence of externaltes the owner of the access network may have an ncentve to refuse access by thrd partes. Mandated access s then needed to allow for competton and to assure that neffcent bypass s avoded. Few works allow for mperfect competton at the retal level, arguably a key feature n actual telecommuncatons markets. Some of these shall be brefly dsscussed below. Laffont and Trole (1994) nvestgate a Ramsey prce settng that ncludes the access prce n a market wth an mperfectly compettve retal segment. Ramsey prcng leads to hgher markup n market segments n whch demand s rather nelastc. Armstrong and Vckers (1998) consder an mperfectly compettve and possbly asymmetrc market n whch one of the two frms s more effcent. They show that optmal regulaton has an, at frst sght, surprsng feature: The one-way access prce should be used such that the more effcent frm obtans an even larger market share than absent regulaton. Ths s due to the fact that n the type of dfferentated product models commonly analyzed, the unregulated market outcome features a larger market share of the less effcent frm than what s socally optmal. 72 For an elaborate dscusson, see Armstrong (2002); see also Laffont and Trole (2000) and Vogelsang (2003).

167 Archtectures and compettve models n fbre networks 157 De Bjl und Petz (2006) dstngush between two types of models, a Hnterland and a No-Hnterland model. In the No-Hnterland model total demand for subscrpton s fxed. Ths mples that all potental consumers are subscrbers. A hgher prce level that leaves market shares unchanged amounts to a transfer of rents from consumers to frms, whle total welfare remans constant. By contrast, n the Hnterland model some consumers are captve n the sense that they only consder subscrbng to one partcular network operator. However, these consumers are, as a group, senstve to prce changes: The hgher the prce charged by a network operator the more consumers who are captve to ths operator decde to abstan from the market. In effect, total demand depends on prces, and a hgher prce level that leaves market shares unchanged s not welfare neutral. Here, such a hgher prce level leads to a deadweght loss. De Bjl and Petz show that allocatve and welfare effects crtcally depend on the type of model. In partcular, n the No-Hnterland model the access prce s neutral to the allocaton and to the equlbrum proft of the entrant. Ths mples that the entrant s nvestment ncentve are not affected by access regulaton. Ths general neutralty result breaks down n ther Hnterland model (whch they develop n a duopoly context) because total demand s prce elastc and thus hgher access prces that leave the entrant s mark-up as well as ts market share n the compettve segment unchanged are not neutral to the entrant s proft. In the No-Hnterland model an access regme that s more favorable to the ncumbent smply shfts rents from consumers to the ncumbent. From a statc consumer welfare perspectve regulatng access prces at margnal costs s called for. However, from a dynamc perspectve the regulator has to allow for rents on the ncumbent s sde because otherwse the nvestment wll not be undertaken. Whle the neutralty result s nterestng as a theoretcal nsght, t does not apply to markets n whch some consumers stay wth a non-nga provder. Therefore, the de Bjl/Petz No-Hnterland model s conceptually dfferent from the No-Hnterland model developed below because we here allow for a separate cable operator as one of the market partcpants, wth the effect that the neutralty result for NGA servces does not hold n any of our models. In general, a less favorable access regme for the entrants wll result n lower entrants profts, affectng the entrants nvestment ncentves. Whle exstng work on one-way access can uncover some economc forces at play, they cannot be drectly lnked to real-world markets because they are too stylzed. Two mportant aspects are mssng: 1) flexblty wth respect to the number and nature of market partcpants and 2) flexblty wth respect to cost and demand characterstcs reflectng the asymmetres between market players. We provde such a flexble approach whch, furthermore, allows for a varety of alternatve regulatory regmes In a dfferent context, Hoerng (2010) developed a model whch shares wth the present analyss the features that t allows for market asymmetres and a fnte number of market players. However, ths framework s not drectly applcable because of dfferent nsttutonal features and the focus on twoway access prces.

168 158 Archtectures and compettve models n fbre networks Wth respect to nvestment ncentves, t s mportant to recall the, n general, ambguous lnk between the realzed level of nvestments and the ntensty of competton n the product market. Ths lne of research has been ntated by Arrow (1962). 74 An mportant nsght n ths lterature s that an ncumbent frm whch replaces an older technology may have weaker nvestment ncentves than a newcomer because t replaces ts exstng profts from the old technology. Ths so-called replacement effect tends to lead to weaker nvestment ncentves by an ncumbent frm. However, n a context wth entry, a sucessful entrant may largely destroy the ncumbent s profts due to the superorty of ts new technology. Because of ths, the ncumbent may have stronger ncentves to nvest than an entrant. Whle most works on telecommuncatons markets take the nvestment decsons as gven, these works can be extended to nclude such consderatons. 75 To evaluate nvestment ncentves, one has to consder dfferental profts that are due to the nvestment under consderaton. Results are rather straghtforward f, as we assume for FTTH nfrastructure, only one of the frms has the opton to nvest. In ths case, when comparng profts resultng n the absence of the nvestment to those when the nvestment has been made, access regulaton that leads to an ncrease n profts can be consdered as regulaton that stmulates nvestments. If more than one operator can nvest, the exact nature of the nvestment game has to be specfed. There are a number of formal theoretcal nvestgatons that explctly consder such lnks between one-way access and nvestment ncentves. Frst, several works analyze the ncumbent s ncentves to ncrease the qualty of ts access network. 76 In partcular, Foros (2004) s concerned wth regulaton as a means to acheve effcent nvestment and to avod foreclosure of the frm seekng access. Second, Gans (2001), Gans and Kng (2004), Hor and Mzuno (2006, 2009), and Vareda und Hoerng (2010) analyze the ncentves of two frms n an nvestment race to establsh an access network. Thrd, Bourreau und Dogan (2005) analyze a dynamc model to nvestgate the entrant s ncentves to nvest n ts own access network. Here, the ncumbent strategcally grants access to delay the nvestment by the entrant. Our focus wll be on market outcomes for gven nvestments that are based on the costmodellng results (see chapter 3). However, our approach wll allow us to quantfy the gans from certan nvestment decsons. Thus, t can also shed some lght on nvestment ncentves of the dfferent market players. Furthermore, we can evaluate the effect of regulaton on these gans from nvestment. 74 For a frst ntroducton nto ths topc, see chapter 18 n Belleflamme und Petz (2010). 75 For dscussons and overvews see Vallett (2003), Guthre (2006), and Cambn und Jang (2009). 76 See Foros (2004), Kotakorp (2006), Vareda (2009a, 2009b), Brto et al. (2008, 2010), Klumpp and Su (2009) and Ntsche and Wethaus (2009).

169 Archtectures and compettve models n fbre networks 159 Annex 4: The competton models: Formal dervatons Hnterland model Preference space There are two consumer segments, N c Compettve'' consumers who opt between pars of networks, and N captve'' ones who ether adhere to one network or do not e subscrbe. There are n 2 networks, each at one of the n nodes of a complete graph of sze N whch descrbes compettve consumers' space of preferences over c whch they are unformly dstrbuted. The dstance between two nodes s l 2Nc / n( n 1). All compettve consumers subscrbe to some network. Horzontal dfferentaton s modelled n Hotellng fashon through a lnear transport cost td, where t 0 and d s the dstance between the subscrber and hs network. Hgher t s nterpreted as orgnatng from more horzontal dfferentaton due to more vared offers by networks. Below we wll let transport costs dffer between pars of networks, wth t t 0. j j Captve consumers are located on addtonal rays of sze R, each emanatng from the node of network (Ths s the Hnterland model of elastc subscrpton demand generalzed to multple asymmetrc backyards), wth 1 R Ne. In each Hnterland, some n y consumers wll subscrbe n equlbrum. On Hnterland, consumers have a R transport cost of d, where d s the dstance to network. Subscrber numbers n Indvdual subscrber numbers are q 0 wth market total Q 1 q, and market shares are s q Q. Total penetraton of the market s Q / N c N 1. Sub- / e

170 160 Archtectures and compettve models n fbre networks scrbers of network receve a gross utlty of w S f, where S s the surplus from beng connected to network (a vertcal dfferentaton parameter derved from qualty and brand mage), and f s the monthly subscrpton fee. The S must be large enough so that all compettve consumers subscrbe, and ther level also matters for adheson of the captve segment. We assume throughout that no compettve lne j s cornered by one of the networks, thus the ndfferent consumer on lne j s located n ts nteror, at a dstance x j from network defned by S f t x j j S j f j t j( l xj ). Solvng for x j yelds network 's part of segment j as x j l 1 2 2t j S f S f. j j On the other hand, on each captve segment consumers at dstance y from network subscrbe whle S f y 0,.e. we normalze the value of the outsde opton of captve consumers to zero. The ndfferent elastc consumer s at y 1 S f. Defnng j 1 / 2tj j, 1/ (wth the correspondng ( n 1 )-vector and dag ) and summng subscrbers over segments yelds network 's subscrber number q j x j Nc y n j Wth q j S f S f S f. / f j j and q f j j /, network 's own- and crosselastctes of demand are f q j f j,. j j j q j j Let E be the n 1 vector of ones and I the n n dentty matrx. Let X be an n n matrx wth the values X j j and X j 0 for j, and Y an n n matrx wth the values Y j j and Yj j for j ( E Y, YE ). Let S, f, q be the n 1 vectors of S, f, q. Then

171 Archtectures and compettve models n fbre networks 161 Nc q E Y n S f q 0 Yf, where q 0 s the vector of demands at zero subscrpton fees. Total demand s Q f Eq N c S f, wth market demand elastcty (let f fe ) f Q n 1 fe. Consumer surplus s: CS q S f q n 1 n j xj j S f 1 j 4 j 2 0 x t xdx 2 j y 2 0 ydy y Costs, access and profts Networks have fxed retal cost K (whch can nclude annualzed backbone nvest- 2 C q c q d q / ment cost for entrants) and varable per subscrpton cost of 2 (where d 0 wth constant returns n the varable part). Let c be the n 1 of c and dag D d. Wholesale cost of the nfrastructure are a fxed cost 0 varable cost q c q C vector K and The nfrastructure s owned by a subset of m n networks, and network obtans a n share 0 of the access profts, 1 1, and let dag. If there s a vertcally ntegrated ncumbent 1 then m 1 and 1 1, 0 for 1. Access s charged accordng to a two-part tarff A aq, where A 0 f the tarff s lnear. All networks pay ths access prce to the nfrastructure owner(s) (for the latter access payments and recepts for own customers cancel out). Network 's profts are 0 K0 na. f aq C q K A a c Q f The frst terms correspond to retal profts after access cost, whle the bracket on the rght captures the respectve share of wholesale profts (whch may be zero). Total welfare then conssts of W CS n 1.

172 162 Archtectures and compettve models n fbre networks Equlbrum fees Q f / (.e. each network's fee only affects total demand through Notng that f ts own Hnterland) each network's FOC for proft-maxmzaton becomes f q j j Necessary SOCs are f j j d f c d q a a c. j j 2 0, whch are satsfed as long as d / leads to: q X f c Dq ae a c. 0 0 Solvng for f leads to equlbrum fees f j j X Y XDY I XDq X c ae a c 2. Stackng the frst-order condtons. Wth constant returns to scale ( D 0 ) we obtan f. 1 X Y q X c ae a c The dependence of X Y on n the frst bracket mples that havng backyards leads to lower fees, as one should expect. The last term on the rght-hand sde translates the nfrastructure owners' ncentves to keep fees low and total demand hgh. For the purpose of comparson wth the tradtonal Hotellng model, consder also constant returns to scale and no backyards,.e. D 0 and 0, together wth for all fees j. Usng that Nc 1 f E c ae YS c. n n 1 2n 1 T 1 1 T 1 I EE I EE 1 2n 2n1 n1 0, we fnd the equlbrum The terms n the latter expresson are the followng whch we know from standard Hotellng models: 1. Returns due to local market power; 2. Indvdual margnal cost; 3. Costs common to all provders (here access cost); 4. Surcharges due to relatve surplus (qualty mnus cost). It s known that wth nelastc demand ( 0 ) access charges just drve up the subscrpton fee, and so here they do. j

173 Archtectures and compettve models n fbre networks 163 Endogenzng the access charge Snce all frms n ths model use access to the FTTH nfrastructure, the LRIC access charge s a c where /Eq, 0 K0 a q a s the vector of quanttes as a functon of the access charge a. We obtan the access demand functon Eq a Eq E 1 q0 YX Y XDY I XDq0 X c c0e 1 E Y X Y XDY XE a c 0 0 EYf b b a c, 1 0 where b 0 s the equlbrum access quantty wth access prce equal to margnal 0 cost, and b 1 0 ndcates how access prces above margnal cost reduce access demand. Lettng a c 0 0 be the access margn, access revenue s b0 b 1, wth maxmum at ~ b0 / 2b1. The condton defnng the LRIC access charge s then b b, 0 1 K0 whch, n the nterval 0, ~, has the unque soluton 0 b0 b 2 0 2b 4b K

174 164 Archtectures and compettve models n fbre networks No-Hnterland model Consumers There are N consumers who opt between pars of frms (retalers). There are n 2 c frms, each at one of the n nodes of a complete graph of sze N c whch descrbes compettve consumers' space of preferences over whch they are unformly dstrbuted. The dstance between two nodes s l 2Nc / n( n 1). All consumers subscrbe to some frm. Horzontal dfferentaton s modelled n Hotellng fashon through a lnear transport cost td, where t 0 and d s the dstance between the subscrber and hs frm. Hgher t s nterpreted as orgnatng from more horzontal dfferentaton due to more vared offers by frms or dfferent technologes. Below we wll let transport cost dffer between pars of frms, wth t t 0. j j Subscrber numbers n Indvdual subscrber numbers are q 0 wth market total Q 1 q, and market shares are s q / Q. Subscrbers of frm receve a gross utlty of w S f, where S s the surplus from beng connected to frm (a vertcal dfferentaton parameter derved from qualty and brand mage), and f s the monthly subscrpton fee. The S must be large enough so that all compettve consumers subscrbe, and ther level also matters for adheson of the elastc segment. We assume throughout that no compettve lne j s cornered by one of the frms, thus the ndfferent consumer on lne j s located n ts nteror, at a dstance x j from frm defned by S f t x j j S j f j t j( l xj ). Solvng for x j yelds frm 's part of segment j as x j l 1 2 2t j S f S f. j j Defnng subscrber number j / 2tj j 1 and summng subscrbers over segments yelds frm 's q j x j N n c j S f S f. j j j

175 Archtectures and compettve models n fbre networks 165 Wth q demand are / f j j and q f j j /, frm 's own- and cross-elastctes of f q j f j j, j j q. Let E be the n 1 vector of ones and I the n n n matrx wth the values X j j and X j 0 for n Y Y for n matrx wth the values j j and j j YE 0 ). Let S,f,q be the 1 Nc q E Y n S f q 0 Yf, n vectors of S, f, q. Then n dentty matrx. Let X be an j, and Y an j ( E Y 0, where q 0 s the vector of demands at zero subscrpton fees. Total demand s Q f Eq N. Consumer surplus s: c CS q S q S f f n 1 n 1 j j 0 x j x t 2 j 4 j j xdx Costs, access and profts Frms have fxed downstream cost K and varable per subscrpton cost of 2 C q cq dq / 2 (where d 0 wth constant returns n the varable part). Let c be the n 1 -vector of c and D dag. These downstream costs are assumed to contan any nfrastructure-related cost not attrbutable to the wholesale FTTH nfrastructure. Wholesale cost of the FTTH nfrastructure are a fxed cost K 0 and varable cost C0q c0q. The FTTH nfrastructure s owned by a subset of m n frms, and frm obtans a n share 0 of the access profts, 1 1, wth dag. If there s a vertcally ntegrated ncumbent 1 then m 1 and 1 1, 0 for 1. Access s charged accordng to a two-part tarff A aq, where A 0 f the tarff s lnear. Let d

176 166 Archtectures and compettve models n fbre networks 1 for any frm that uses the FTTH nfrastructure, and 0 for any frm that does not (e.g. cable operators), wth the vector of the. If 1 then frm pays for access prce to the nfrastructure owner(s) (for the latter access payments and recepts for own customers cancel out). Network 's profts are. 0 K 0 AE q c a A K q C q a f The frst terms correspond to retal profts after access payments, whle the bracket on the rght captures the respectve share of wholesale profts (whch may be zero). Total welfare s the sum of consumer surplus and profts:. 1 n CS W Equlbrum fees We have. 1 j j j j j j j n j f q f q Each frm's FOC for proft-maxmzaton becomes. 0 0 j j j j j j j c a a q d c f q f Necessary SOCs are 0, j j j j d f whch are satsfed as long as j j d / 2. Stackng the frst-order condtons leads to:. 0 0 Y c a a Dq c f X q Solvng for f leads to equlbrum fees Y c a a c X q XD I XDY Y X f

177 Archtectures and compettve models n fbre networks 167 Wth constant returns to scale ( D 0 ) we obtan f Y. 1 X Y q X c a a c 0 0 The last term on the rght-hand sde translates the nfrastructure owners' ncentves to keep fees low and demand of retal servces based on ther nfrastructure hgh. Endogenzng the access charge Assumng that frm 2 s a cable company that does not use access to the FTTH nfrastructure, we have E e2, and the LRIC access charge s a c where N q a c K q /, 0 K0 / a q a s the vector of quanttes as a functon of the access charge a. We obtan the access demand functon q a q 1 q0 YX Y XDY I XDq0 X c c0 1 Y X Y XDY X Y a c 0 0 Yf b b a c, where b 0 s the equlbrum access quantty wth access prce equal to margnal 0 cost, and b 1 0 ndcates how access prces above margnal cost reduce access demand. Lettng a c 0 0 be the access margn, access revenue s b0 b 1, wth maxmum at ~ b0 / 2b1. The condton defnng the LRIC access charge s then b b, 0 1 K0 whch, n the nterval 0, ~, has the unque soluton b0 b 2 0 2b 4b K