Europe s broadband investment needs:

Transcription

1 1 Europe s broadband investment needs: Quantifying the investment needed to deliver superfast broadband to Europe 15 May 2013 Point Topic Ltd 73 Farringdon Road London EC1M 3JQ, UK Tel. +44 (0) tim.johnson@point-topic.com

2 2 Contents Executive summary Point Topic s approach Results Methodology Next steps Appendix: Data Tables... 21

3 3 Executive summary Achieving the EU s targets The European Union has set ambitious targets for the availability of broadband services as part of it Digital Agenda programme. The biggest in terms of its cost and impact on society is that by 2020 all European homes should have access to broadband services providing download speeds of 30Mbps or above, otherwise known as Next Generation Access broadband or NGA. The cost of achieving this will be high, but estimates of the investment required vary widely. Now Point Topic has brought together new research and new approaches to broadband needs and costs to provide more accurate estimates of investment requirements than have been possible before. The results suggest that the EU will have to invest about 82 billion to reach the objective of 100% NGA coverage. This is much less than is often suggested. For example, the European Commission generally quotes a range of 180 to 270 billion as the cost of achieving all the Digital Agenda targets. How the costs are distributed The 82bn is dominated by the 52bn cost for reaching rural areas, although only 14% of the EU s homes are there. A further 22bn will be needed to cover the semi-rural sector. But a modest 8bn should be enough to bring NGA to all the 148 million households, 71% of the total, which make up Europe s cities, towns and suburbs. Broadband investment need by type of area Area Definition Investment need Urban More than 600 people per square km 8bn Semi-rural Between 100 and 600 people per square km 22bn Rural Less than 100 people per square km 52bn Total investment to deliver superfast to the remainder of the EU 82bn The high cost of rural coverage dominates the picture as far as individual countries are concerned. Of Europe s big four, France, as the most rural, has the biggest investment need at 17.5bn. The UK on the other hand, although similar in population, needs only 7.5bn. Among the medium-sized countries Spain, Sweden, Greece and Ireland require relatively large investments. At the other end of the scale, countries which are relatively small, or highly urbanised, or both, have more modest needs, typically less than 350m, although that may still be high in terms of expenditure per head. Within this broad picture, Point Topic highlights two areas of special interest, identified as the Urban Opportunity and the Rural Challenge.

4 4 Urban Opportunity The Urban Opportunity is in those big cities of Europe which still have limited NGA coverage. Rolling out NGA in these areas should produce a straightforward commercial return from sales of broadband services, as well bringing economic growth and social benefits. But in the current economic climate such investments are slow to materialise. Here is an area where modest public interventions could unlock much-needed growth, to the benefit of the whole of Europe as well as the areas directly concerned. The biggest urban opportunities are almost all in the economically troubled countries of southern Europe, specifically Greece, Spain and Italy. Investments here would provide a stimulus and longterm benefits where they are most needed. Athens alone is estimated to need an investment of 220m to achieve 100% NGA coverage. Rural Challenge The Rural Challenge represents the opposite. Here the cost of providing NGA for all will be much higher than can be covered by ordinary commercial returns and the social and economic benefits will be relatively small as well. In fact, Point Topic believes, the open-ended financing of rural NGA costs will not be acceptable to governments or taxpayers. Schemes which contribute a flat-rate subsidy for every rural household connected are a more likely alternative. Point Topic s estimates of rural funding needs are based on a flat rate cost averaging 2,000 per household covered. Point Topic has calculated the size of the Rural Challenge on this basis for every province in the EU. By relating the investment needs of a province per head of population to its Gross Domestic Product per head it is possible to make comparisons of the relative burden of meeting the challenge between provinces and countries. The provinces where the burden is high, or at least above average, are those where the Rural Challenge will be hardest to meet. The results show the higher-challenge provinces are spread fairly evenly across the EU, not confined to the poorer countries of the south and east. This is partly because the assumed costs of rural NGA reflect local price levels in each country. The areas facing High or Above average challenges are often peripheral in their countries, or else simply areas of low economic activity, such as the thinlypopulated hearts of France or Spain, or the provinces of former East Germany. Looking at the countries which face the biggest proportionate rural challenge, Ireland and the Baltic States (Estonia, Latvia and Lithuania) come top. All these countries are highly rural, with a sharp gap between their urban and deeply-rural areas. The gap between town and country creates a bigger than average challenge even in less rural countries such as Austria, France and Sweden. It is countries like these which will face the greatest difficulty in achieving 100% NGA coverage. At the other end of the scale, six countries (Belgium, Cyprus, Luxemburg, Malta, Netherlands and Slovakia) have no provinces with more than an average Rural Challenge. Five other countries (the UK, the Czech Republic, Italy, Spain and Portugal) face relatively small challenges.

5 5 Methodology The report also describes the methodology on which these results are based. Its essential features are: 1. Using the new research results from the Broadband Coverage in Europe in 2011 project, carried out for the European Commission by Point Topic. These provide figures for the coverage of NGA by province for the whole EU for the first time 2. Taking a new approach to mapping urban and rural areas by separating them out using a European Kilometre Grid. This identifies the coverage and population of low-cost urban areas and high-cost rural ones much more clearly than before 3. Using to the full the consistent demographic and economic data and mapping provided for the whole EU at provincial level by the EC s Nomenclature of Units for Territorial Statistics (NUTS) scheme. Among other things this enables the comparison of cost levels and affordability between countries and provinces. 4. Applying simple and transparent cost models for each of the land-cover segments considered (urban, semi-rural and urban). These take account of the variation in NGA investment costs because of the difference in income and price levels between countries. Next steps Finally the paper looks at the further steps to be taken to apply these techniques to more detailed and in-depth analyses in future. They include going to more granular geographies, producing more sophisticated cost models, gathering more detailed data on the availability and performance of broadband technologies, adding data on actual take-up and producing forecasts for both availability and take-up. Point Topic believes that a wide range of organisations involved with the European broadband market will be able to make good use of the data and analytical tools explained here. The results will increase confidence and reduce risk for their policy initiatives and business and network planning. That should lead to the faster and more efficient achievement of Europe s ambitious broadband targets.

6 6 1 Point Topic s approach An alternative view Many estimates have already been made of the investment which will be required to provide universal availability of broadband across the whole European Union. Yet another should not be added without good reason. But Point Topic s recent research enables us to bring new data and new approaches to the task. We believe this makes it possible to produce estimates which are both more accurate and more flexible than before. Besides using data which was simply not available previously our estimates are based on simple, transparent models which can easily be adapted to reflect new information or different assumptions. Estimating broadband investment needs would be important in any case, but the exercise is given a special focus because of the targets set by the European Commission s Digital Agenda programme. The biggest and most ambitious of them is Target 2, to ensure that all European homes can connect, if they choose, to superfast broadband by Also called NGA, for Next Generation Access, superfast broadband is defined as delivering at least 30Mbps (megabits per second) of data downstream. The target is to make superfast broadband available to 100% of EU homes, not to cover 100% of the EU land area. The cost of building the infrastructure to reach this target is a matter of controversy, in terms of both size and value for money. The European Commission generally quotes a range of 180 to 270 billion i as the cost of all the Digital Agenda targets ii, with Target 2 responsible for the lion s share. Other estimates are mostly in the same area, for example, the FTTH Council quotes an estimate of 202 billion iii as the total cost of meeting the Digital Agenda targets with fibre-to-the-home. Against this Point Topic s estimate, which is about 80 billion, might seem unduly low. But the discrepancies can be accounted for largely by the different underlying assumptions. One figure which comes close to Point Topic s conclusions was provided by Pantelis Koutroumpis, then at Imperial College, in a study for the European Investment Bank iv. Koutroumpis concludes that for the case corresponding most closely to the assumptions used by Point Topic v the cost of achieving Target 2 would be 514 per household, corresponding to 107 billion for Europe as a whole. Most of the difference between this figure and Point Topic s is due to Koutroumpis assumption of 19% rural population which will be more expensive to serve - rather than Point Topic s measured total of 14%. A unique contribution One key advantage which our analysis has compared with earlier ones is access to the results of the Broadband Coverage in Europe in 2011 project vi, commissioned by DG Connect vii on behalf of the European Commission and carried out by Point Topic in This project has provided for the first time a map of actual broadband coverage across all the EU countries at county, department or provincial level. Thus the areas which already have NGA coverage and, more important in this case, those which do not, can be accurately located, characterised and sized on a complete and consistent basis. This provides one essential foundation for a full estimate of broadband investment needs.

7 7 To complement the coverage research, Point Topic has also developed a strong geographical framework for analysis in its European Kilometre Grid. The EKG provides mapping of all the EU countries by kilometre squares with land use and population data for each one. Since population density is the biggest single factor dictating the economics of broadband coverage, the combination of the EKG with actual coverage data shows what is required to complete coverage and provides the basis for estimating what the work is likely to cost. Having a view of broadband coverage which looks within each province to identify areas with urban, semi-rural and rural population densities also makes it possible to use more fine-grained data for economic potential and cost estimates. So Point Topic s model makes use of provincial-level statistics for GDP and demographics to take account of the economic strength of different areas. Such statistics are available on a consistent basis for the whole EU from Eurostat as a product of the NUTS system (from the initials of Nomenclature of Territorial Units for Statistics in French). viii NUTS is intended to support the harmonisation of EU statistics and socio-economic analysis by providing consistent data at three regional levels. Point Topic s analysis focuses on the smallest regions, called NUTS 3. These correspond to divisions with many different names at country level provinces, counties, Kreise, départements etc. but we refer to them as provinces throughout this report. Finally, in this paper, we add simple, transparent cost models for rolling out broadband in different countries and types of area. This simplicity has major advantages in terms of understanding the effects of assumptions and, if necessary, changing them. At the same time, much more advanced cost models are obviously essential, for example for making decisions about investments in specific areas. One strength of Point Topic s overall approach is that can provide the geographical framework for much smaller areas than provinces, for example for using advanced cost models with much greater precision than previously. Meanwhile we believe we are able to provide high-level results which are more soundly based and more easily tested and revised than before. In the remainder of this paper we set out the key conclusions we have arrived at by using our approach, then explain the assumptions and methodology used and briefly look at the opportunities for taking our approach further. Various charts are presented in the body of the paper and the datasets used for the charts are provided as numerical tables in the appendix. The full dataset, showing the urban, semi-rural and rural (USR) segmentation for each of the nearly 1300 provinces and other areas identified is available to subscribers to Point Topic s Broadband Europe Complete service. It provides complete demographic statistics and broadband coverage and investment estimates for each USR segment.

8 8 2 Results Europe as a whole The top-level conclusion from our research is simple; completing superfast broadband coverage across the whole European Union, starting from the situation as of end-2011, would cost about 82 billion. That amount is dominated by the 52 billion cost for reaching rural areas, defined as those with a population density of less than 100 persons per square kilometre. Covering the semi-rural areas, home to 15% of the EU s population, would cost another 22 billion. Completing coverage in the urban areas, those with a population density of 600 per square kilometre or more, would cost only 8 billion, even though this is where 71% of the population lives. ix Europe by country Rural costs are the dominant factor in the distribution of costs between countries as well. The bigger countries naturally have the bigger investment needs but in each size group it is the countries with the biggest rural sectors which lead. France has the biggest requirement of all at 17.5 billion whereas the UK, similar in population but with only 37% of the land area x, needs only 7.5 billion. In the middle range, note that the model used here relates the costs of broadband rollout to national GDP per head in terms of purchasing power parity, and this makes a big difference to estimated rural costs. For example, compare Sweden and Greece. Greece has a bigger population than Sweden and one of the lowest levels of NGA coverage in Europe, but it is more urban and has a much lower cost level. As a result Sweden has a higher investment need than Greece billion as against 2.4 billion - although the Swedish economy will be much better able to afford the amount required than the Greek one.

9 9 At the low end of the scale there are ten countries showing investment needs of under 350 million. One group are countries which are relatively small, or highly urbanised, or both the Netherlands xi, Belgium and Luxembourg together with Malta and Cyprus. Most already have good coverage and their rural sector is small in absolute terms. The other group are all former Soviet Bloc countries the Baltic States (Estonia, Latvia, Lithuania) plus Bulgaria and Estonia. These have relatively good NGA coverage already, plus small rural sectors in absolute terms and low cost levels. Europe by province Point Topic s model produces estimates of the investment needed to provide 100% NGA coverage for each province of the EU. This total is arrived at by summing estimates of the needs for the urban, semi-rural or rural segments of each province. The cost of completing NGA rollout in each USR segment is based on their population and land area, as provided by the European Kilometre Grid, together with their existing level of NGA coverage. As a result it is possible to focus separately on the investment needs of the urban, semi-rural and rural segments, whether for individual provinces, countries or Europe as a whole. This can be used to highlight the very different prospects for urban and rural areas. Urban Opportunity For example, the USR segmentation can show where the best short-term opportunities lie for the EU in current economic conditions. In particular it points to the need to promote the rapid delivery of more complete urban coverage rather than giving priority to rural areas. The assumption behind the model is that the cost of rolling out NGA in urban areas will be relatively low per household. On this basis it should be possible to finance the completion of urban rollout commercially from broadband sales revenues. But many EU country markets are not strong enough to deliver self-financing in current conditions. As the graph below shows, almost all the

10 10 metropolitan areas with the biggest need for NGA investment are in economically troubled countries of southern Europe Greece, Italy and Spain. Athens in particular can be seen as the biggest single NGA investment opportunity in Europe, needing almost 220m euros to provide complete coverage for its urban area. Salonika needs another 60m. Such an investment would deliver substantial benefits to the Greek economy by raising productivity and improving international competitiveness. It would bring many material and social benefits to the general public and should provide a profitable business for its owners. But there is no guarantee in current circumstances that the investment will be made in the near future, whether in Athens or many other cities across Europe where it could produce an equally attractive total return. Here is an area where quite modest public intervention could unlock much needed growth, delivering genuine additionality to what the market is able to achieve on its own at present. Many other conurbations are in a much stronger position of course. London appears near the top of the list in term of total investment needs because of its sheer size, even though it already has 81% NGA coverage. Paris does not appear at all because it has already reached 100%. Market forces should deliver the Digital Agenda objectives in more prosperous cities like these. At the same time, policy-makers will need to look out for NGA not-spots, for example in business districts where the incentive to provide low-cost superfast broadband is weak. Rural Challenge At the other end of the scale, most EU countries face a major future cost to bring the benefits of superfast broadband to their rural areas. The investment per household will inevitably be high, far more than will be recovered by ordinary broadband charges, and the case for wider economic and social benefits is also more difficult to make. On the other hand, the cost for providing rural NGA will vary hugely, depending very much on local circumstances and ingenuity. In these circumstances Point Topic believes that the approach to funding rural NGA should be based on a fixed subsidy per household rather than an individual costing per project. Our estimates for rural NGA investment needs are based on this idea. We have chosen to use a fixed average one-off cost per household of

11 11 2,000 for Europe as a whole, although the exact amount varies between countries to reflect purchasing power parity. On this basis we have calculated the size of the Rural Challenge for every province in the EU. We have defined it as the funding need per head as a percentage of the local GDP per head. The challenge will be greatest in the provinces where there is: a high proportion of rural and semi-rural homes, usually over 50% low GDP per head compared with the national average, usually under 80% usually 0% existing NGA coverage in rural and semi-rural areas. The average value of the Rural Challenge for all the provinces which are expected to have NGA broadband funding needs is just over 1%. xii But the exact percentages are not important. More usefully this approach enables us to divide the provinces of Europe into five groups, with funding needs ranging from Low (under 0.1%) to High (over 2%). The results are shown on the map overleaf. The basic pattern is clear. The big cities and more densely populated provinces have Low (often zero) or Below average challenges. Many more provinces with typical mixes of urban and rural are in the Average challenge category. The remainder, keyed with green or dark green, are the predominantly rural areas facing Above average or High challenges. Significantly, these higher-challenge areas are spread fairly evenly across the EU, not confined to the poorer countries of the south and east. This is partly because the assumed costs of rural NGA take account of local price levels in each country. A lot of the high-challenge areas are more peripheral in their countries but others simply reflect areas of low economic activity, as with the little-populated hearts of France or Spain or the provinces of former East Germany. To get a more balanced view it is useful to plot countries according to the proportion of their population which is living in higher-challenge areas. The chart shows 21 of the EU member states ranked by this measure of the rural challenge they face. (The other six member states, Belgium, Cyprus, Luxemburg, Malta, Netherlands and Slovakia, have no provinces in the High or Above Average categories.)

12 12 EU provinces by size of Rural Challenge

13 13 The single biggest factor in the ranking is how rural each state is. Ireland, the country facing the biggest rural challenge, with 58% of homes in High or Above Average challenge areas, is also the most rural country in Europe in terms of the proportion of homes in areas with less than 100 persons per km 2. The three Baltic states, Estonia, Lithuania and Latvia are not far behind. All these countries show a sharp contrast between their urban and rural populations with relatively few in the semirural category, having between 100 and 600 persons per km 2, in between. The issue of population density combines with the economic gap between town and country to create a bigger than average challenge even in less rural countries such as Austria, France and Sweden. Of the 76 high rural challenge provinces in these three countries, over three quarters have less than 80% of the national average GDP. Only one of the rest reaches 90%. The rural challenge is substantial even for some of the richer countries in Europe. At the other end of the scale, leaving aside the six countries which do not appear on the chart at all, there are some countries which face a smaller challenge than might be expected. Portugal and Spain have above-average urban populations and already have quite a high proportion of rural and semirural homes passed. The UK is the most urban country in the EU, except for Malta, and so has only a small rural population to serve. For Italy and the Czech Republic the rural challenge is more evenly spread. Both are relatively urban, with virtually 0% NGA coverage in rural areas across the whole country as of end-2011 and a less than average variation in GDP per head. The result is that NGA investment requirements are mostly Average only one of the Czech Republic s 14 provinces has an above-average need. In terms of total investment need per head Italy and the Czech Republic rank ninth and fourteenth among EU countries but they are only nineteenth and twentieth on the rural challenge list. 3 Methodology European broadband coverage research This paper could not be written without data on NGA coverage by province as a starting point. In turn, NGA coverage estimates need to take account of the overlaps between different technologies, or even between the coverage areas of services using the same technology but provided by competing operators. DG Connect recognised that such data is in any case essential for tracking the objectives of the Digital Agenda and so commissioned the Broadband Coverage in Europe in 2011 (BCE 2011) study, which was carried out by Point Topic. A key issue for the BCE 2011 project was to find a more accurate way of finding the overlaps of coverage than simply estimating at the national level. To solve the problem, Point Topic proposed to collect coverage data for each technology at the provincial level and also to take account of the differing coverage between urban and rural areas. Then the sum of estimates at the provincial level would be demonstrably more accurate and informative than a single estimate made at the national level. The top-level results of BCE 2011 have now been published as a report on the Digital Agenda website. The published data has been used as the basis for this paper.

14 14 Note that this approach has limitations. Data on NGA technology coverage by province remains confidential to DG Connect, because much of it is based on commercially sensitive information provided by telecom network operators. Even the estimates for net NGA percentage coverage per province are available only within percentage bands. To that extent the estimates for investment needs are not able to take account of the full range of variation between provinces. Point Topic is developing independent technology coverage estimates based on published data, and other channels such as crowdsourcing, which will be available for future projects and more in-depth studies. A second limitation is that the base data applies to end-2011 and is already becoming out-of-date. Point Topic is now completing the next edition of the project, BCE 2012, which is due to be published in the summer of Besides being more up-to-date this will also be more accurate than BCE 2011 and will start to show trends with time. If required, Point Topic can produce an update to this paper based on the BCE 2012 results. European kilometre grid The second significant innovation supporting Point Topic s analysis of the European broadband market is its use of a kilometre grid to provide the geographical framework. Point Topic s European Kilometre Grid or EKG is based on the Corine Land Cover environmental database. xiii Corine divides the countries it covers into squares one kilometre across and provides population density and basic land-use data for each square. Point Topic has adapted and simplified the database so that it can be used as a framework for broadband geography for the whole EU and other European countries. The results for one small part of Europe are shown in the map below covering the Bay of Naples. The city of Naples and its suburbs show up as yellow squares of Urban continuous land-use. More thinly built-up areas are light blue, industry is dark blue and squares dominated by agriculture are coloured red. Even in this densely populated part of Italy there is some forest land, showing in green, most notably the roughly circular area in the middle right of the map which plots the slopes of Mount Vesuvius. Two purple squares in the middle of this circle identify the truly uninhabited crater of the volcano. The map also shows why the EKG approach is so important to making a soundly-based assessment of Europe s broadband needs. The Italian province of Napoli, roughly corresponding to the area on the map, has to be counted as a densely populated urban area when seen as a whole. But a close look shows that it offsets one of the most densely populated cities in Europe with quite extensive agricultural areas and even some wilderness. The different areas will require very different broadband solutions. The adjustment to expectation is reversed when looking at provinces which are normally classified as highly rural. On close examination much of the population is often seen to be concentrated in urban or semi-urban areas. From a broadband investment point of view these areas can be quite easy and cheap to reach. Large parts of a province, particularly in mountainous or arctic areas, may be virtually uninhabited so even the problem of reaching the rest of the population is not quite so challenging as first appears.

15 15 An EKG view of land cover in part of Italy Applying this approach to estimating broadband investment needs, Point Topic has used the EKG to classify every kilometre square in the EU by one of three population density bands, as set out in the table. Table 1 Density bands used to estimate broadband investment needs Density band (people/km 2 ) Description Homes in Europe (m) Coverage in Europe Over 600 Urban % 100 to 600 Semi-rural % Under 100 Rural % The boundaries of the bands have been chosen because they roughly reflect different levels of difficulty for broadband investment. The Urban band should in principle be self-financing as far as the roll-out of NGA broadband is concerned. The Semi-rural band will need a significant level of subsidy from one source or another, and the Rural band will generally need an even higher subsidy. The upper boundary for the rural band is deliberately set at the same population density as is often used to define rural areas by national or regional governments (and the European Commission) that is at 100 people per square kilometre. But it is important to realise that the definition of rural

16 16 based on the kilometre grid is fundamentally different from the administrative definitions normally used by governments. The government definitions are usually based on administrative areas of different sizes, usually going down to the smallest areas with some separate administrative identity, such as communes for example. These areas reflect actual communities and typically they will include a town or village and its surrounding countryside. The EKG looks at these areas in a different way and will pick out the village separately from its surroundings. The two types of definition are both valid but for different purposes. Demographics and economics Another important enabler of this pan-european view of broadband needs has been the improvements in providing consistent statistics for all the countries concerned. The NUTS scheme means there is a ready-made framework of areas, particularly the NUTS 3 provinces, for which Eurostat provides a uniform set of statistics and geographical data (population, GDP per head, land area, shape files for geographical information systems). This provided an essential base for the BCE 2012 project and the analysis presented here. There are still some gaps. National statistical offices track population closely but often have a much less accurate view of household numbers. Eurostat publishes a figure for the number of persons per household for each country but does not provide any detail on regional variation, although this can be quite considerable rural households are usually larger than urban ones, for example. The practical effect here is that, as Point Topic s analysis usually has to rely on a single number for household size across a whole country, the number of rural households and hence the cost of providing rural services will tend to be overstated. Another issue is the use of GDP per head as a measure of the affordability of broadband investment in different provinces. The GDP of a province can be much inflated by the effects of commuting, so that capitals and other big cities tend to have much higher GDP than surrounding areas. The most extreme example is Inner London West in the UK, which has 5.8 times the average GDP per head for the EU as a whole, at 136,500, while some neighbouring areas are actually below the EU average. Of course the commuters to Inner London West take good salaries home to their dormitory suburbs. Thus family income rather than GDP per head would be a better measure of broadband affordability but consistent data on income at the provincial level is not available. These are minor issues for the broad overview which this paper aims to provide, but need to be taken fully into account when assessing the needs of a particular province. Price and affordability comparisons Once a complete dataset was available, providing broadband coverage, demographics and economic data for each province, we were able to explore what this approach could reveal about broadband needs, with reference to investment in particular. To do this we: 1. Devised a simple Europe-wide model for estimating the investment costs of rolling out NGA broadband in USR areas. The model breaks costs down into local and international components.

17 17 2. Adapted the model for each EU country to take account of local cost levels 3. Applied the model for each country to each province and provincial USR area to produce estimates of investment needs 4. Summed investment needs by province and country and compared the totals with local GDP levels to provide a measure for the affordability of the investment in each area. This provided the basis for sizing the Rural Challenge for each province. Cost modelling Table 2 Overall cost model Density segment People/km square NGA investment per home passed International cost per home Local cost per home Financing needs Urban Over Self-financing Semi-rural 100 to Partial intervention Rural Under 100 Limited to 2, ,900 Major intervention The cost model used is summarised in the table above. It is based on Point Topic s work on estimating broadband investment needs in the UK. The model relates costs simply to population density, which is generally recognised as the biggest single factor determining the economics of broadband rollout. Although many other factors obviously affect costs in individual cases Point Topic s approach seems to predict overall average costs quite well. The results for the UK map reflect BT s actual roll-out decisions quite closely and were used in the UK government s early planning of its broadband intervention. xiv The model for the urban and semi-rural density bands is based on the costs of providing VDSL services in an area, sometimes called FTTC or FTTC+VDSL. xv This does not mean that VDSL is the only NGA solution envisaged by the model but rather that the VDSL cost level sets a benchmark for alternative technologies. For the purposes of this paper, the total capex cost (including long-distance backhaul for example) of providing VDSL for a single street cabinet covering an area of radius 700 metres, approximately 1.6km 2 in area, is put at 60,000. The cabinet is assumed to serve all the homes in the area up to a limit of 600, corresponding to a minimum capex of 100 per home. Urban areas are defined as those having a population density of at least 600 persons per km 2 which corresponds to 273 households per km 2, at a typical 2.2 persons per household, giving a maximum capex of 220 per household. But note that the great majority of homes in urban areas will be at higher densities than this, with capex going as low as 100 per household. To allow for lowerdensity areas and the inevitable inefficiencies in provisioning we assume an average investment requirement of 150 per home passed in urban areas.

18 18 Applying the same cabinet cost and coverage assumptions to the semi-rural areas implies that basic costs per household will range from a minimum of 220 to 1,320. Taking the average and adding 17% for inefficiencies leads to an average cost per home passed of 900. A different approach is needed in fully rural areas. Here NGA will be provided through service to selected points rather than blanket coverage of a whole district so the same model cannot be used. In fact both solutions and costs will vary greatly depending on local circumstances. At the same time it is unlikely that taxpayers and governments will support a blank cheque, whatever it costs approach to achieving rural coverage. Hence we assume that investment will be limited by the perceived value of the service rather than being driven only by cost. We suggest that an average of 2,000 per household is about what will be acceptable while at the same time being enough to stimulate a lot of investment activity. In estimating the size of the Rural Challenge we have assumed that the 2,000 premium is taken up for every household in rural areas which does not already have NGA coverage, but the actual outcome will generally fall short of 100%. Local and international costs The final element of the cost model takes account of the difference between international costs which will be much the same in all countries and local costs which will vary according to the price levels in different countries. For example, digital signal processor chips are international commodities which have much the same basic price everywhere but the cost of digging ditches to lay fibre reflects local pay scales. To take account of this, the model assumes that international costs, basically for telecommunications equipment, are set at 100 per home passed, while local costs vary around the average shown in the table above according to the general level of income in the country concerned. Then the total expected investment needs per home passed in particular country are the fixed international cost plus the variable local cost. GDP per head (according to Purchasing Power Parity) for each EU country was used as a proxy for income per head. This was divided by the overall average annual GDP per head for the EU as a whole ( 23,500) to give a local cost ratio for the country concerned. This ratio was then applied to the average local costs in Table 2 above to calculate the local costs per household for each country. Estimating investment needs The additional investment required for each USR segment of each province was calculated on the basis of the cost model described above. Here additional investment means the investment required to provide NGA service to the proportion of the segment which was not covered as of end At one end of the scale, substantial investments are still needed in many urban areas. Because these should be funded, in the long term, from broadband service revenues these offer a special Urban Opportunity as discussed in Section 2 above. Here the attractiveness of the opportunity is more or less directly related to its absolute size. On the other hand, investment in the rural and semi-rural segments will present a Rural Challenge. Here it is more useful to look at how big the challenge is compared with local resources than to focus

19 19 on its absolute size. This was done first by calculating the total Rural Challenge investment needed per head of population in each province xvi, and then relating that to the GDP per head in the province. The result indicates both the direct affordability of the investment and also the scale of the return needed to justify it in terms of extra economic growth and other benefits. Each province was then classified by Rural Challenge group according to their funding needs as a percentage of their GDP per head. The groups are High (2% or more), Above Average (1.5% or more but below 2%), Average (0.5% or more but below 1.5%), Below Average (0.1% or more but below 0.5%) and Low (under 0.1%). The grouping was used to produce the map of the whole EU included in Section 2. 4 Next steps This paper provides only an initial view of how Point Topic s broadband mapping methodology can be applied to address issues such as broadband investment needs. The basic approach outlined here is already being extended to produce more detailed and specific results. Directions of improvement include going to more granular geographies, producing more sophisticated cost models, gathering more detailed data on the availability and performance of broadband technologies, adding data on actual take-up and producing forecasts for both availability and take-up. Using more granular geographies includes mapping to the smallest available administrative areas, which may be communes or census output areas, depending on the country. Alternatively, users of marketing applications generally prefer postal geographies. Most countries have at least a postsector scheme which typically involves areas of a few thousand households. The UK has a framework of over 1.7 million unit postcodes, averaging only15 households each, and Point Topic has well established mapping of broadband availability and take-up at this level. Other geographies may be useful as well. For example, telephone exchange areas are important for evaluating the competition between DSL and alternative technologies. All these geographies will usually be overlaid with the EKG framework to segment the areas into different density bands. It is easy to apply different density bands from those used in this paper to reflect different decision-making needs. The EKG will also evolve in future to provide a subkilometre grid. The eventual aim will be mapping which identifies and locates every individual premises. As far as cost modelling is concerned there is no lack of suggestions for greater sophistication than has been applied here. Point Topic believes that a high-level top-down model, estimating costs at country or even provincial level, has to be fairly simple. Even so the model presented here could be improved by testing the broad-brush assumptions more thoroughly and providing more detailed support for both the international cost component and the variation in local costs between countries. Beyond that, actual costs vary so much from place to place, often depending on very specific local circumstances, that there is little value in modelling costs except for particular projects in specific areas in which case detailed costing is essential. This is particularly the case for the rural segment where actual costs need to be considered for each small settlement or even individual houses. This

20 20 is why we think the best approach to rural NGA will be the simplest, to offer a premium per home connected for bids which meet performance and coverage requirements. More granular geographies and realistic costings for specific projects will need to be supported by more detailed information about availability and take-up. Crowdsourcing will provide the best solution here. Portals which attract large numbers of unique users, whether for speed testing or selling books, can also collect a mass of data on user technologies, speeds and service providers. The data can be used to map technology and service provider presence and performance. There are difficulties too location data may be limited, user privacy must be respected, non-users and notspots are not included but overall this data can paint the picture of what is available much more fully than any other available source. Point Topic uses such data in its mapping of the UK for example. Not least, Point Topic plans to add take-up estimates by province and finer geographies to its coverage data, and to forecast both coverage and take-up into the future. Fixed broadband coverage and connections are driven by fairly straightforward economic and social factors and limited by well-defined constraints. Point Topic has successfully forecasted both in the UK for some years and believes the same approach will work in other countries. The results will increase confidence and reduce risk for policy initiatives and business and network planning. That should lead to the faster and more efficient achievement of Europe s objectives for broadband.

21 21 Appendix: Data Tables Europe s NGA investment needs ( b) NGA investment needs by country ( m) EU cities with the biggest broadband investment needs ( m) Countries by size of rural challenge (% of homes passed) Key to country codes Europe's NGA investment needs ( b) Urban Semi-rural Rural

22 22 NGA investment needs by country ( m) Urban Semi-rural Rural Row Labels Sum of Urban investment needed ( m) Sum of Semi-rural investment needed ( m) Sum of Rural investment needed ( m) Total investment needed France FR 1,241 5,309 10,908 17,459 Germany DE 1,099 5,679 8,859 15,637 Italy IT 2,438 3,119 6,670 12,227 United Kingdom UK 1,157 1,297 4,850 7,304 Spain ES ,028 6,388 Poland PL ,124 3,369 Sweden SE 72 1,146 1,972 3,190 Greece GR ,568 2,424 Ireland IE ,752 2,060 Austria AT ,416 2,040 Denmark DK ,539 2,001 Romania RO ,409 Czech Republic CZ ,404 Finland FI ,078 1,387 Hungary HU Portugal PT Slovakia SK Bulgaria BG Lithuania LT Slovenia SI Luxembourg LU Belgium BE Latvia LV Estonia EE Cyprus CY Malta MT Netherlands NL

23 23 EU cities with the biggest broadband investment needs ( m) Athens, GR 210 Rome, IT 189 Naples, IT 157 Barcelona, ES 131 Turin, IT 98 Milan, IT 97 Madrid, ES 60 Lille, FR 58 Bari, IT 58 Salonika, GR 58 Urban investment needed ( m)

24 24 Countries by size of rural challenge (% of homes) Country Above average High Ireland IE 20.0% 37.8% Estonia EE 0.0% 48.2% Lithuania LT 0.0% 43.5% Latvia LV 0.0% 38.3% Hungary HU 22.7% 11.5% Sweden SE 26.8% 3.2% Slovenia SI 24.9% 3.4% Greece GR 7.3% 20.3% Austria AT 15.8% 11.4% France FR 13.4% 12.1% Denmark DK 21.3% 0.8% Poland PL 13.1% 7.9% Bulgaria BG 5.7% 15.3% Romania RO 13.4% 5.7% Finland FI 14.0% 4.6% Germany DE 9.9% 7.4% Portugal PT 7.0% 7.2% Spain ES 8.8% 3.5% Italy IT 6.5% 3.4% Czech Republic CZ 4.9% 0.0% United Kingdom UK 2.3% 2.2% European Union EU total 9.8% 7.4%

25 25 Key to country codes Country Country code AT BE BG CY CZ DE DK EE ES FI FR GR HU IE IS IT LT LU LV MT NL NO PL PT RO SE SI SK UK EU Austria Belgium Bulgaria Cyprus Czech Republic Germany Denmark Estonia Spain Finland France Greece Hungary Ireland Iceland Italy Lithuania Luxembourg Latvia Malta Netherlands Norway Poland Portugal Romania Sweden Slovenia Slovakia United Kingdom European Union

26 26 i We use the Euro as the common currency of this research throughout the report. Exchange rates as of May 2013 are roughly 1 = $1.29 = ii An example is at Digital Agenda: Commission spells out plan to boost investment in broadband, 20 Sep The Communication adopted by the Commission today outlines the policy and practical steps the Commission and Member States can take to trigger the 180 to 270 billion of investment required to bring fast broadband to all households by iii Creating a brighter future: the cost of meeting Europe s network needs, FTTH Council Europe, July 2012, available at iv An assessment of the total investment requirement to reach the Digital Agenda broadband targets, Study for the European Investment Bank, Pantelis Koutroumpis. The full report has apparently not been published but a summary presentation is available at: ec.europa.eu/information_society/newsroom/cf/document.cfm? More details are also quoted in The economic impact of fixed and mobile high-speed networks, Jussi Haetoenen, EIB Papers, Volume 16, No 2, 2011 v The figure chosen is for Koutroumpis Advanced scenario, providing actual rather than theoretical speeds of 30Mbps or above to households and assuming a full contribution from the cable networks. vi Broadband coverage in Europe in 2011, Point Topic, September Available on the Digital Agenda website from vii The European Commission s Directorate General for Communications Networks, Content and Technology, responsible for the Digital Agenda programme. viii See ix These estimates assume construction of just a single network to cover each unserved area, with no duplication of investment. In fact there will be duplication but it will mostly be in the lower-cost urban areas so the additional expenditure will be relatively small as a percentage of the whole. x France s land area here includes its overseas departments xi The Netherlands is shown here as needing no investment since it already has 100% NGA coverage according to the figures provided in the BCE 2011 report. However, later data shows that this is not correct and actual coverage is, although high, significantly below 100% xii Note that this figure overstates the funding need as a proportion of actual GDP. The GDP figure refers to just a single year but the funding needs will be spread over several years and the potential returns over many more. xiii The Corine Land Cover database now covers 38 European countries and is published and copyright by the European Environment Agency. It is used for the European Kilometre Grid according to the EEA s standard reuse policy. xiv A more detailed description of the cost model and its application to the UK is available in a Point Topic report, Assessing NGA Attractiveness, published 19 July 2009 and available through the Point Topic broadband markets service. xv That is, where a fibre connection to a telephone street cabinet is terminated by a VDSL carrier over a twisted copper pair to the end-user s premises. xvi Allowance is made for the proportion of the Rural Challenge funding requirement which can be recovered on a commercial basis to give the net funding requirement for each province.