Retail-minus pricing model for wholesale broadband access

Transcription

1 Model documentation for PTS Retail-minus pricing model for wholesale broadband access 29 September 2006 Our ref: Analysys Consulting Limited St Giles Court, 24 Castle Street Cambridge, CB3 0AJ, UK Tel: +44 (0) Fax: +44 (0)

2 Retail-minus pricing model for wholesale broadband access Model documentation for PTS Contents 1 Introduction 1 2 Scope of model 1 3 Model structure and overview Major inputs Demand inputs Geographical inputs Revenues Wholesale costs Network design and costs Retailing costs Output 13

3 1 Introduction On behalf of Post&Telestyrelsen (PTS), Analysys has developed a retail-minus pricing model for wholesale broadband access. The model is a five-year discounted cashflow model, with a terminal value included at the end of the five years. It is based on the avoidable costs of TeliaSonera, adjusted to reflect the business of an alternative operator. It estimates the absolute size of the retail margin required by an alternative operator in order to supply each retail product and derives a value for the maximum monthly rental price that could be charged for each wholesale product without causing a margin squeeze. The model is populated with reasonable parameters on the basis of data that was readily available or that was submitted by industry stakeholders. These parameters are not intended to reflect a firm position on the part of either Analysys or PTS but are rather provided as a reasonable starting point for consultation with industry. 2 Scope of model The model considers the eight existing retail products offered by TeliaSonera: four residential products offering downstream bandwidths up to 250kbit/s, 2Mbit/s, 8Mbit/s and 24Mbit/s respectively; and four business products offering bandwidths up to 500kbit/s, 2Mbit/s, 8Mbit/s and 24Mbit/s respectively. The model is also designed to accommodate up to eight additional retail products. The model assumes that an alternative operator seeks to replicate TeliaSonera s retail offerings, and does not include additional costs or revenues associated with providing value-added services such as VoIP or TV over DSL. Similarly, it does not assume that any economies of scope exist with the provisioning of such services. Each retail product is assumed to be supported by a combination of different wholesale access products: Level 1 (DSLAM) access, Level 2(a) access or Level 2(b) access. The options for access are detailed below:

4 Retail-minus pricing model for wholesale broadband access 2 Level 2 2(b) 2b We assume there is a single Level level 2(b) 2b node within each of the thirteen interconnect regions from which it is possible to reach all lines in that region Level 2(a) 2a Level 2(a) 2a Level 2(a) 2a 202 Level level 2(a) 2a )nodes in total, each providing access to lines served from several level 1 nodes Level 1 Level 1 Level Level 3481Level level 1 1 nodes that are DSLenabled, each providing access to a number of lines Exhibit 1: Wholesale access at Level 1, 2(a) and 2(b) [Source: Analysys s assumption] The model assumes that wholesale inputs are available from 1 January 2007 and explicitly forecasts cashflows for the five-year period All costs and revenues are presented in nominal terms and a cost of capital of 10.5% is applied. A terminal value is included. The capital costs in the model are not considered to be in steady state due the short timeframe (five years). Therefore, in assessing the terminal value, it is appropriate to consider the remaining asset value at the end of the plan which is estimated on the basis of a straight-line depreciation over the lifetime of each asset.

5 Retail-minus pricing model for wholesale broadband access 3 We assume that all other operating costs and revenues (including connection costs and customer acquisition) are in reasonably steady state. The model therefore calculates the terminal value as a fixed multiple of final year cashflows, initially set to be 3. 3 Model structure and overview The overall model structure is shown in Exhibit 2: Retail prices Revenue Retail costs Market demand Operator subscribers Wholesale costs Margin calculation Geotype data Operator wholesale strategy Network design Network expenditure Allocation matrix Key Unit cost inputs Major inputs Calculations Exhibit 2: Flow diagram for retail-minus model [Source: Analysys] The model combines a range of inputs to estimate the revenues, retail costs, wholesale costs and network requirements which are in turn allocated to retail and wholesale product pairs 1 to find the margin on each product. 1 Retail and wholesale product pairs represent all possible combinations of retail and wholesale products e.g. Residential 250kbit/s service delivered using level 1 access.

6 Retail-minus pricing model for wholesale broadband access 4 Each of the modules included in the model are detailed in the following sections: 3.1 Major inputs Major inputs to the model are gathered into a single sheet called Input parameters, with the exclusion of market demand forecasts and geographic line data. In particular, the sheet contains: retail products and related data retailing unit costs and trends network assets capex, opex, and price trends; lifetimes, capacities and provisioning overheads wholesale one-off costs and trends other parameters relating to network design and bandwidth requirements. Of particular note are our assumptions concerning overbooking rates for each product. We assume that these increase as bandwidth increases, for example so that an 8Mbit/s product requires less than four times the bandwidth of a 2Mbit/s product. 3.2 Demand inputs Market The model uses a market demand forecast split by retail product based on third-party reports and the opinion of Netlight Consulting (see Exhibit 3). Given the availability of high-bandwidth products and the extent to which the Swedish market is developed, we assume that there will be a significant migration to the higher bandwidth products within the market in the modelled period. Churn within the market is assumed to be 20% per annum.

7 Retail-minus pricing model for wholesale broadband access 5 Market subscribers (million) Exhibit 3: Forecast Swedish broadband market ( ) [Source: Netlight Consulting] Res Res Res Res Bus Bus Bus Bus Modelled operator s market share The modelled operator s subscribers are driven off a share of the gross additions in the market; this is a combination of churning subscribers in the market and the net additions year on year. We assume a 0% market share at the end of 2006, rising to a share of 25% by the end of Geographical inputs We expect that an alternative operator would use different deployment strategies for access within a given region. We have therefore categorised Level 2(a) nodes into geotypes based on some key characteristics. Each geotype is defined using two parameters: line density and distance to the nearest Level 2(b) node per line reached. The reasoning behind this is that the higher the line density, the more likely Level 1 access is to be financially viable, and the shorter the distance to the nearest Level 2(b) node per line reached, the

8 Retail-minus pricing model for wholesale broadband access 6 lower the cost of opting for Level 2(a) access rather than Level 2(b) access. These measures are illustrated below for each of the Level 2(a) nodes: Distance to nearest node 2b per line reached (m/line) 25 Low line density and long distance from the nearest level 2b node - likely to 20 be served by level 2b access High line density likely 5 to be served by level 1 access or LLU ,000 10, ,000 Low line density but Line Density (lines/km2) short distance to level 2b node likely to be served by level 2a access Exhibit 4: Line density vs. distance (2a 2b) per line reached [Source: Analysys] The categorisation to a geotype according to each parameter is defined in the following two exhibits: Line density category Range (lines per km 2 ) Very low line density 0 10 Low line density Medium line density High line density Very high line density Exhibit 5: Geotype categorisation [Source: Analysys s assumption]

9 Retail-minus pricing model for wholesale broadband access 7 Distance to nearest Level 2(b) node divided by Range (miles per line) lines reached category Dense level 2(a) nodes Medium level 2(a) nodes Sparse level 2(a) nodes 5 10 Very sparse level 2(a) nodes 10+ Exhibit 6: Geotype categorisation [Source: Analysys s assumption] Our methodology produces 11 geotypes using a combination 2 of these two parameters. The modelled operator s potential deployment strategy is assumed to be one of the following within a single geotype: serve all lines using Level 1 access or LLU serve all lines using Level 2(a) access serve all lines via Level 2(b) access. The modelled operator s chosen deployment strategy for each geotype defines which wholesale access product its subscribers are supported on. We assume this is mainly Level 2(a) access, as illustrated below: 2 Note: not every combination of the two parameters is used.

10 Retail-minus pricing model for wholesale broadband access 8 Subscribers for modelled operator by wholesale product ('000s) Exhibit 7: Modelled operator s subscribers [Source: Model] Level 1 access Level 2(a) access Level 2(b) access 3.4 Revenues Rental prices for each retail product are based on TeliaSonera s current prices. We have assumed no connection fee applies, based on the assumption that the majority of subscribers commit to a contract period of months, sufficient to qualify for free connection. Monthly rental and connection charges are assumed to remain constant in nominal terms.

11 Retail-minus pricing model for wholesale broadband access 9 SEK per year per subscriber Exhibit 8: TeliaSonera s current retail prices by product (27 September 2006) Source: TeliaSonera 0 Res Res Res Res Bus Bus Bus Bus Subsidies for customer premises equipment (i.e. modems) are assumed to be included in the subscriber acquisition costs. Different charges for upgrading/ing retail products have not been modelled explicitly as we consider that the overall impact of differential charges is unlikely to be significant. The modelled operator s ongoing revenue is calculated based on year average subscribers. The one-off revenue has been calculated from the modelled operator s gross additions. 3.5 Wholesale costs We make the following assumptions for wholesale costs: zero charge per operator zero charge per point of interconnect small charge of SEK311 per-line connected (one third of TeliaSonera s current proposal of SEK933) zero variable charge for traffic carried by TeliaSonera to a Level 2(a) or 2(b) node.

12 Retail-minus pricing model for wholesale broadband access 10 Wholesale line rental is initially set to zero and the model outputs a maximum possible charge that it could rise to without causing a margin squeeze. 3.6 Network design and costs Network design We assume that each Level 1 node is connected directly to the nearest Level 2(a) node. Level (2)a nodes are assumed to form rings of around five nodes each, linking them to one of the 13 Level 2(b) nodes (regional interconnect points). Exhibit 9 shows a network diagram for Level 1, 2(a) and 2(b) access: 10 Gbit/s links Partially- - meshed core network; pairs of es located at each Level 2(b) node for redundancy L2(b) (Telia) 1 Gbit/s link Average length of link on ring: 35.7km (for all Level 2(a) nodes) No need to connect to Level 2(a) node at this location L1 (Telia) L2(a) ( Telia) 100 Mbit/s link L1 (Telia) L2(a) (Telia) L2(a) (Telia) Average length 10.8km (for all Level 1 nodes) L1 (Telia) Individual connections to each Level 1 node Exhibit 9: Level 1, 2(a) and 2(b) network design [Source: Analysys] We have assumed a single Level 2(b) node in each of the 13 interconnect regions, and three additional Telehouses in Stockholm, Goteborg and Sundsvall, which form a core network.

13 Retail-minus pricing model for wholesale broadband access 11 This is assumed to be a partially meshed network, containing 32 links between the nodes. The total straight-line distance of the links is approximately 5600km. Exhibit 10 below illustrates this hypothetical network: Level 2(b) nodes Exhibit 10: Level 2(b) network design [Source: Analysys] Telehouse Since the network is intended only to be sufficient to replicate a simple retail broadband offer, we have assumed that basic is used for conveyance, with repeaters installed at 70km intervals on the longer links to boost the signal. We have assumed the same number of repeaters used in the published PTS hybrid model, due to the similarities between the distance restrictions on transmission and the core network design in both models. Each Level 2(b) node has been assumed to contain two es for redundancy and may be connected to one or more Level 2(a) node rings.

14 Retail-minus pricing model for wholesale broadband access 12 We have assumed that the modelled operator would use dark fibre for conveyance between the Level 2(a) and (b) nodes and in the core network since it is significantly cheaper than using TeliaSonera s leased line offering. As it is unclear whether dark fibre is available at the location of Level 1 nodes, we have assumed that the modelled operator would use TeliaSonera s leased line offering for the Level 1 to 2(a) conveyance. Prices are based on a 140Mbit/s virtual circuit, including both distance and access charges. Also incorporated into our network design is all equipment general to an ISP offering a basic level of service. This includes a Web server, authentication servers (assumed to be required at each core node site) and other standard equipment. We assume that 80% of traffic requires the use of paid for IP transit; the remaining 20% of traffic is assumed to be either on-net or to use peering arrangements with other ISPs and local content providers. Network costs The following sources have been used to provide one-off and ongoing costs for the network elements: costs are broadly based on a Cisco standard price list with a discount applied we have assumed operating costs to be 10% of their capital cost Level 1 to 2(a) conveyance costs are based on TeliaSonera s leased line offering we have used dark fibre prices from the Swedish urban network association as a guide to the cost of conveyance between the Level 2 nodes and in the core network co-location charges are based on TeliaSonera s LLU co-location prices other ISP network costs such as Web servers are based on Analysys s benchmarks IP transit costs: based on indicative prices from Telegeography we have used co-location prices from TeliaSonera to estimate the cost of presence at nodes where there is a point of interconnection; we have also used the same prices as a proxy for the cost of presence at other nodes. Network cost allocation Network assets are shared amongst multiple retail and wholesale product pairs. Therefore it is necessary to allocate the costs between these. The approach we adopt is to calculate the

15 Retail-minus pricing model for wholesale broadband access 13 average cost per unit output of each asset over time, keeping it constant in nominal terms. This is not dissimilar to the approach used in the mobile LRIC model, although we do not attempt to shape the output by the cost trend or by variations in the cost of capital. The cost allocated to each retail and product pair is calculated as the average cost per unit output multiplied by the output required in each year. 3.7 Retailing costs We make the following assumptions about retailing costs, based on Analysys s benchmarks and information provided by industry stakeholders: subscriber acquisition costs: business SEK1500, residential SEK800/gross addition; both include a 10% price decline p.a. (assumed to also include marketing and modem subsidy) bad debt: 2% of operator revenues customer retention: business SEK100, residential SEK80/subscriber/year; both include a 10% price decline p.a. customer care: SEK500/subscriber p.a. includes a 10% price decline p.a. billing systems: SEK120/subscriber p.a. value-added services: SEK25/subscriber p.a. other retailing costs: 6.5% of operator revenues (including: staff costs, general and administrative charges, buildings costs and product development expenditure) IP transit: SEK2400/Mbit/s p.a. includes a 25% price decline p.a. 3.8 Output The model outputs for each pair of retail and wholesale access products the maximum monthly rental price that could be charged for each wholesale product without causing a margin squeeze. The model provides results for each of the 24 pairs = 8 retail products x 3 wholesale products. The model also calculates all other costs, averaged per subscriber per month. Combined, the monthly rental plus the other costs add up to the average monthly revenue per

16 Retail-minus pricing model for wholesale broadband access 14 subscriber for each retail product. Exhibits 11, 12 and 13 show these results for Level 1 access, Level 2(a) access and Level 2(b) access: SEK per month per subscriber Exhibit 11: Level 1 cost breakdown [Source: Model results] 0 Res Res Res Res Bus Bus Bus Bus Wholesale rental Other costs SEK per month per subscriber Exhibit 12: Level 2(a) cost breakdown [Source: Model results] 0 Res Res Res Res Bus Bus Bus Bus Wholesale rental Other costs

17 Retail-minus pricing model for wholesale broadband access 15 SEK per month per subscriber Exhibit 13: Level 2(b) breakdown [Source: Model results] 0 Res Res Res Res Bus Bus Bus Bus Wholesale rental Other costs