INTERCONNECT COMMUNICATIONS A Telcordia Technologies Company INT Next Generation s Creating a Dedicated Cost Model INTERCONNECT COMMUNICATIONS A Telcordia Technologies Company INTER Image Stuart Miles / istockphoto.com Hugh Collins Director, InterConnect Communications
Next Generation s - Creating a Dedicated Cost Model ii Written and published by: InterConnect Communications Ltd Merlin House Station Road Chepstow Monmouthshire NP16 5PB United Kingdom Telephone: +44 (0) 1291 638400 Facsimile: +44 (0) 1291 638401 E-mail: info@icc-uk.com Internet: http://www.icc-uk.com Design and layout: InterConnect Communications Ltd Copyright : InterConnect Communications Ltd 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, mechanical, photocopying, recording or otherwise, without the prior permission, in writing, of InterConnect Communications Ltd. Note: This document is intended only as a discussion of selected issues relating to the subject matter. It is neither a definitive statement nor a legal document, nor does it purport to suggest any detailed commercial strategy. For this reason, readers are advised to liaise with the appropriate authorities and, if necessary, seek suitable legal and/or technical advice prior to making business decisions. Whilst InterConnect Communications Ltd has exercised every care in the preparation of this document, no responsibility can be accepted for any omissions or errors contained herein.
Next Generation s - Creating a Dedicated Cost Model 1 Synopsis The advent of Next Generation s (NGNs) creates new challenges for network operators, service providers and regulators. Without a detailed understanding of the costs of delivering services, businesses have no real idea about product or service profitability, and regulators then cannot impose appropriate rates for either retail or wholesale services (assuming always that it would be legitimate to do so given the level of competition and market conditions). Such an understanding can be achieved through the use of a suitable NGN-focused cost model. The cost model also enables exploration of investment options, e.g. should incremental or big bang approaches be taken to investment (higher initial investment = lower unit costs = higher risks). This paper explores some of the issues involved and describes an NGN cost model developed by InterConnect Communications.
Next Generation s - Creating a Dedicated Cost Model 2 Contents Introduction: the Rationale for Cost Modelling Next Generation s 3 The Challenge of Accurate Cost Modelling of an NGN 3 Regulatory Requirements for NGNs 4 Outline of the NGN Model 5 Future Traffic Volumes and Required Investments 7 Cost Modelling Issues 7 NGN Access 8 Core-Access Demarcation 8 Routing Table Capacity Calculations 10 Quality of Service - Traffic Classes 10 Technologies and Protocols that can be Modelled 10 Conclusions 11
Next Generation s - Creating a Dedicated Cost Model 3 Introduction: the Rationale for Cost Modelling Next Generation s Traditionally, cost modelling of telecommunications networks has been carried out based on principles of cost causation and network utilisation by each service. Models have been built up incorporating routing tables to develop cost/volume relationships (CVRs) between individual network elements e.g. switching and transmission functions which are then in turn used to calculate individual service costs. These service costs reflect directly the amount of network resources used and also the quantity of data passed over the network. For regulatory costing, networks have been first separated into an access network and a core network with wholesale charges being recovered from only the costs of providing and running the core network. The models have been based on existing networks, which has resulted in principles such as Current Cost Accounting (CCA) and Modern Equivalent Assets (MEA) being developed to generate outputs which attempt to simulate today s costs and technologies for deploying such a network. A NGN network presents new challenges for cost modelling as it is much more difficult to apply the traditional cost causation principles or create routing tables and CVRs. This paper therefore looks at the ways in which an NGN can be costed, describes how services use the different network elements, and offers some approaches to how the costs of the network elements can be allocated to the range of services carried over the common NGN network platform. The Challenge of Accurate Cost Modelling of an NGN InterConnect Communications recognised that a new, accurate and more flexible cost model for the new multi-service NGN networks was needed. As ever, not being able to understand the cost drivers and model the costs of an NGN network would lead to significant risk, both for regulators and for network operators. How can regulators determine efficient network design or cost-based rates when the operators themselves don t know what really drives unit costs? A variety of scenarios can be tested and their cost implications calculated using an appropriate NGN modelling tool. The scenarios can include fundamentally different network deployments, network element ownerships, and a range of evolutionary strategies. Top-down models based on operator accounts and business plans will continue to be needed as NGNs develop, to provide a reality-check to any regulator-derived bottomup model and to ensure reward for innovative investment.
Next Generation s - Creating a Dedicated Cost Model 4 InterConnect s own NGN model is based on our experience of the current infrastructure cost modelling tool that we have developed and successfully used over many years. However, the simple extrapolation of current models alone - without significant fresh modelling tools design - is not adequate when faced with the challenge of delivering a range of new and complex services over a radically different network infrastructure. In addition, the inclusion within the model of radically new services, such as IPTV, that could never be carried over circuit switch-based networks, and the need to consider the whole spectrum of new services, render simple extensions of existing network models totally inadequate. So while the InterConnect NGN modelling tool is a new initiative and can deal with NGN deployments that are just minor tweaks of the existing schemes, it can also deal with far more radical and far-reaching change-outs and enhancements. Diagram Application Servers Email WEB Voice VoD IPTV DSLAM/MSAN AAA DNS DHCP A-RACS CE Router Tier 1 Core MPLS Router Tier 2 Core MPLS Router I-RACS CE Router BGP4 Gateway Interconnect ATM Access Access BRAS CE Router Core Interconnect Gateway ENUM POTs Phones Media Gateway PPP IP MPLS PSTN Interconnect Gateway PSTN Breakout Figure 1 - Typical NGN Configuration Regulatory Requirements for NGNs What regulatory regime will be required for NGNs? Whilst some might argue that no new approaches or instruments are required, or that concepts and services remain as before and only a few details need to be addressed, InterConnect believes the regulatory requirement will be different depending on the concentration of ownership and control of NGN deployments, and on the regulatory policies to be followed. Some regulatory regimes have been built on the concept of Significant Market Power or
Next Generation s - Creating a Dedicated Cost Model 5 dominance; others are more dirigiste, requiring - for example - retail price controls on all licensed operators, large and small. The InterConnect NGN model is capable of modelling the whole spectrum of regulatory possibilities. We feel that many users will find this ability attractive and very useful in setting policy or strategy for dealing with the inevitable coming of NGNbased services. In cost terms, the boundary between access and core networks in is blurred, at least in the opinion of some experts. We at InterConnect find it useful to define the access/core network boundary on the basis of cost-causation. Where network element quantities and costs are driven by volume, they can be defined as part of the core network. Conversely, where network element quantities and costs are driven by the number of access circuits, they can be defined as part of the access network. It is worth noting that, in general, the costs of the access network are rising as a proportion of the whole, and increasing access bandwidth capability is in turn allowing more data-hungry services to be used, so the demand for backhaul in the core network is rising too. NGN architectures are being designed and deployed in a variety of ways, as a consequence of local choices, and with a wide range of deployment velocities. Whilst centralised call processing typical in NGNs simplifies deployment, increased intelligence at the edge tends to reduce most services to essentially bits only, albeit with significant spectrum of data rates across the service mix. However, there is no clearly-best approach. This fact alone demands significant flexibility in any network or service modelling tool. Outline of the NGN Model Given that the modes of NGN deployment, technology used and cost allocation are so different from regime to regime, the InterConnect model is designed to flexibly model the costs of NGN networks in the following aspects: Core and access networks; All the technologies which can be used: ATM, IP, MPLS, PPP; Voice, Data, Video and IPTV services, and has the capability to add new service types easily; xdsl, FTTC and FTTH in the Access ; It can handle up to ten classes of traffic to reflect different Quality of Service requirements;
Next Generation s - Creating a Dedicated Cost Model 6 It has a 24 by 7 volume profile for each traffic class network busy hour is derived from first principles. The model makes very few basic assumptions in order to retain flexibility. Naturally, it does assume that the access network can handle all traffic types such as Voice, Video and web surfing and, as an option, that the core network may have specialised isolated domains that handle a specific traffic type such as voice. For example, it may be that in order to underpin voice service quality or availability, voice traffic is specifically filtered off into a special domain at the core/edge boundary. The InterConnect NGN model is able to flexibly allocate costs to the subscriber or to the service, depending on the principle of cost causation. So, for example, if the cost lies in the access network and the cost driver is not dependent on traffic volume, then the cost element is allocated to subscriber access. Of course, for services the subscriber volume is not typically a cost driver, or only to a minor extent. Therefore the model allocates costs to services based on their usage of network elements (such as minutes for voice; megabits for data). The model deals with main categories including Connectivity and Application and vertically into Access, Core and Interconnect elements. This facilitates the flexible and consistent allocation of corresponding costs so that an accurate reflection of real cost drivers is created. To reflect different operator business models, network elements can readily be allocated to business structures so that both current and future possible operator/ service provider business models can be tested. This includes (but is not limited to) Internet Service Providers, based ISPs, Core network-only and Access network-only Service Providers. For Core networks, variable costs are allocated based on resource or capacity usage, and any remaining fixed costs are allocated using EPMU (or other allocation methods if required). This allows, amongst other features, for Interconnect Charging models (where relevant) to be created within the model for regulatory or business case exploratory purposes, whilst taking into account the different approaches taken in different regimes to cost allocation.
Next Generation s - Creating a Dedicated Cost Model 7 Future Traffic Volumes and Required Investments The InterConnect NGN model structure is well structured leading to it being conceptually simple and has been kept generalistic in order to more easily model all possible services and business structures. This makes the model capable of forecasting up to 5 (or more) future years network Capex and Opex expenditure, using the same routing table but with the extrapolating of estimated future years traffic mix and volumes. The output from the model results in usage costs for each unit of service volume such as average cost per data Megabit, per voice minute, or per customer access link for each year. Cost Modelling Issues Clearly - amongst others - the model should support LRIC methodologies. However, there are some basic obstacles to doing this based on operator accounts ( top-down ). Suitable historic accounts for a top-down modelling approach will almost certainly not exist for services such as IPTV. The costs of network equipment and links will also not be well established and of course the operational cost estimates for a full NGN deployment will almost certainly be unreliable during the early stages of roll-out. Considering modelling future years, a number of issues arise. Traffic volumes are uncertain across the range of traffic types, and likely to grow much more rapidly than in the past PSTN environment 1, making traffic and cost estimation for the future open to interpretation. The rate and dimensioning of future investments, perhaps to cope with rapid traffic mix changes can only be estimated. For example, what percentage of any currently deployed NGN will be successfully re-used in future? Whilst these issues can be addressed by designing a model to cover future network configurations, it should be recognised that the accuracy of future cost estimates will be dependent on the accuracy of demand forecasts. The solution embraced by the InterConnect NGN modelling tool is to create a bottomup build-up of the significant business costs, which in turn are derived from business plan data and the early years build out costs if they are appropriate or available. Then the model uses the annualised cost of Capex employing the widely-used BU LRIC tilted annuities approach 2. Future year Capex costs are estimated based on future estimated demand volumes and hence Capex requirements. The future year service costs are derived by applying the traffic/service routing tables in respect of Traffic in Mbps and packets, sessions and also numbers of access lines, and aggregating network element costs to service unit costs. 1 For example, recent rapid growth in use of web-based services such as YouTube or BBC iplayer has resulted in rapidly increasing backhaul requirements 2 For flexibility, other forms of depreciation can be used if chosen
Next Generation s - Creating a Dedicated Cost Model 8 NGN Access There is a great deal of uncertainty about the applications that will need to be supported and hence the optimum design and deployment of Next Generation Access s (NGAs). Clearly the development of IPTV is a key factor in this respect. Technologies proposed for NGAs vary widely, from increasingly capable forms of xdsl over copper, to hybrid fibre/copper, or to all-fibre solutions. On the radio side strong cases are being made for WiMAX and for LTE/4G. However, as a shared resource with finite bandwidth available, the capacity of wireless networks to handle large numbers of simultaneous high-speed users must always be in question. The chosen optimum technology mix for an NGA will depend on the business model and ambitions of the operator, and crucially on the current position of that operator. New start-ups may favour a radio solution with its potential for instant coverage, whereas incumbent telcos will tend to build on what they have in place (usually a pervasive copper network), rather than propose starting from scratch. At this stage, demand and revenues supported by any type of FTTx initiative (of whatever form) and IPTV are uncertain. In practice, commercial reality will of course drive network upgrade options, particularly in an uncertain regulatory environment (vide Deutsche Telekom (DT) and their fibre / VDSL debate with the EU - open access or reserved for DT?). National or regional policy concerns may also affect NGA roll-out without intervention of some kind is there the potential for a new digital divide, with urban customers on short loops able to receive IPTV / multi-media services (and HDTV) while those in rural areas may not be able to receive such services? Are next generation services to be made available only to some fortunate subscribers in urban areas, leaving small towns and rural areas behind? To combat this risk we note that there are numerous local initiatives in the UK, for example, to build city, town or community fibre or broadband radio access networks, often with an element of public sector or community support or funding. Different types and speeds of NGA roll-out lead in turn to uncertainties for the design and dimensioning of the aggregation and core IP transport and optical networks, and thus for cost allocation (which should be that associated with an efficient operator). Core-Access Demarcation Another issue relating to NGN is the fact that often there is no simple, straightforward demarcation between core and access and access-style routers do not give a simple
Next Generation s - Creating a Dedicated Cost Model 9 core/access demarcation that can be readily used in a NGN model. The InterConnect NGN modelling environment, however, has enough flexibility to deal with any approach to this issue. Subscriber and traffic-dependent costs are not clearly separate, but can be separated by the traffic volume/access circuit cost driver rule. The InterConnect NGN model calculates the split of costs between access and core for any given service mix and network evolution strategy. The IP network is intelligent but most intelligence is at the edge or in the core. The old concept of local switching intelligence and dumb phones doesn t really exist in the NGN where the cost driver (in the business sense) is actually the whole network. The current regulatory definition of customer access and core is, in fact, not the basis of the design and investment in NGN technologies. NGN Model Overall Structure List of Elements Traffic Data by Service (inc Busy Hour) Service by Element Routing Factors Dimensioning Rules and Infrastructure Lengths Dimensioning: Routers Servers Transmission Access NMS Buildings and Cabinets Etc. Element Volumes Step 1: Estimate Element Volumes Element Unit Costs Element Costs Step 2: Costing Capex and Opex Annualisation Inputs Annualised Element Costs Step 3: Cost Annualisation Problem Dependent Allocation Rules Element Filter Step 4: Define cost elements to be included for retail or wholesale services to be costed Traffic Volumes and Routing Factors for Services to be Costed Service Unit Costs Step 5: Define cost elements to be included for services to be costed Figure 2 - Overall Structure of InterConnect NGN Model
Next Generation s - Creating a Dedicated Cost Model 10 Routing Table Capacity Calculations The InterConnect NGN model uses service routing tables in order to allocate costs. NGN network elements do not provide functions equivalent to yesterday s familiar network elements. However, any individual service will use a series of network resources to deliver service to the subscriber. The routing tables within the model are configurable and contain information pertaining to resource utilisation of network elements. Of course, some devices within the network are only used to support a particular individual service. For example, media relays are used solely to support voice calls. Within the InterConnect NGN model, each service is characterised by the amount of data and packets that one instance uses per second. The routing tables within the model combine volumes and usage of each service to allocate network costs to services. The model therefore uses capacity (Mbps, packets or sessions) as the traffic volume cost driver. In the access network, however, we use the number of access lines of each type. Voice minutes are converted to Megabits to measure the load imposed by voice in the same units as other services. Quality of Service - Traffic Classes The data traffic filling the network and fundamentally underpinning the services is described in the InterConnect NGN model by up to 10 Traffic Classes, each with their own Quality of Service requirements, hour-by-hour traffic profiles and data rates defined in both transmit and receive directions. As new services are modelled new traffic classes can be easily added to estimate costs. Currently identified and modelled Traffic Classes are: Best efforts Internet Surfing/ downloads; Peer-to-Peer (P2P) file sharing; Voice; Video On Demand; Broadcast IPTV. Technologies and Protocols that can be Modelled Today there is a rich gamut of protocols and technologies used to create NGNs. The InterConnect NGN model has been designed to model current and any foreseeable technological or protocol development. Currently modelled technologies and protocols include:
Next Generation s - Creating a Dedicated Cost Model 11 Access Technologies ADSL ADSL2 ADSL2+ FTTC + VDSL FTTH PON Direct fibre Access Protocols PPPoA PPPoE ATM Radius VLAN Core Protocols Interconnect Protocols IP ATM MPLS SIP H.248 VLAN IP MPLS VLAN Conclusions InterConnect has developed an NGN cost model covering all aspects of the network (core and access) and service platforms. Accurate cost allocation rules are the key to the model. In summary these are: Service-specific costs - allocate costs to services based on key cost drivers (e.g. minutes for voice or Mbps for data); Core network costs - shared variable costs allocated on capacity required; For most core network elements the fixed cost is low, so arguably a linear traffic driven model is appropriate for most network elements; Access network costs - fixed costs driven by number of access lines; NGN Access has very limited similarities to today s access definitions NRAs should not use today s definitions to lock-in old technology; With rapidly changing costs and volumes over time, deriving a long run average is difficult compounded by the uncertainties that negate any theoretically-sound economic approach to the time/cost/volume. The InterConnect NGN modelling tool will significantly assist regulators and service providers to make important choices that will, undoubtedly seriously affect the telecoms environment. Important and significant commercial decisions need to be made in the face of commercial technical and regulatory uncertainty. The model allows the ready exploration of radically different network models and evolution plans, demonstrating key pinch points in any plan. The choice of doing something now or perhaps being more patient and waiting can be evaluated and strategies tested out. The model can highlight a business plan problem, for example will service revenues cover costs and will there be the cost hump caused by deployment that will not be covered in the long term by increased revenue streams?
Next Generation s - Creating a Dedicated Cost Model 12 The Author The holder of an MA (Honours) degree in Mechanical Sciences and Management Studies from Cambridge University, Hugh Collins has 35 years experience in the telecoms sector. His early roles focused on strategic planning and market analysis and this focus has remained central to much of the consulting work he has undertaken since. Hugh has been with InterConnect since 2002, in which time he has advised a number of governments on regulatory policy and privatisation matters and prepared detailed market analyses to support decisions on service pricing and licence requirements. He has also advised on competition policy and the optimum number of licences in country markets, using industry sector models to provide the correct forecast and structural advice. Prior to joining InterConnect, Hugh was the Managing Director of Telesphere Ltd, providing advice to the telecommunications industry on strategy development, technology evaluation, business and financial modelling, and market analysis and forecasting. Before that, he was a Partner at Booz Allen and Hamilton, responsible for building up the firm s communications industry practice team, and served in senior roles for Communications Studies and Planning Ltd (CSP), responsible for a range of market research, business analysis, forecasting and strategy studies for companies and government bodies in the communications and information technology sectors in the UK, Western Europe, North America and elsewhere. Hugh has specialist skills in business and financial modelling including LRIC, strategy development, technology evaluation, market analysis, telecommunications policy, and regulatory advice. In addition to leading a number of major regulatory development projects in Europe and the Middle East, his recent work has covered 3G licensing, licence bid preparation, regulatory and commercial due diligence, interconnect and retail service pricing, the development of mobile cellular policy and universal service schemes and funding. He is a Member of the Chartered Management Institute, the Institution of Engineering and Technology, the International Institute of Communications, and a Member and ex-board Member of the International Telecommunications Society. Hugh may be contacted on +44 1291 638400 or e-mailed at hughcollins@icc-uk.com InterConnect Communications InterConnect Communications is a wholly-owned subsidiary of Telcordia Technologies Inc., based in the United Kingdom, and a leading provider of consultancy services on the commercial, regulatory and technical aspects of network interconnection. With our many years of experience spanning most aspects of telecommunications regulation, network interconnection and access issues, and our management of the well-received TRMC NGN Master Class, InterConnect Communications is ideally placed to help regulators, network operators and service providers both established and new understand the implications of the evolving NGN environment and develop and implement suitable strategies. InterConnect also has considerable experience and expertise in the development of cost accounting methodologies and creation of cost models. For more details of InterConnect s services, please visit our website at http://www.icc-uk.com
Merlin House, Station Road, Chepstow, Monmouthshire, NP16 5PB. United Kingdom INTERCONNECT COMMUNICATIONS A Telcordia Technologies Company Telephone: +44 (0) 1291 638400 Facsimile: +44 (0) 1291 638401 Internet: http://www.icc-uk.com INTERCONNECT COMMUN A Telcordia Technolog