BAY OF PLENTY COUNCILS BROADBAND BUSINESS CASE STUDY CUSTOMER CONNECTION - MILESTONE 5 April 2007 GDI Ground Floor, 201 Wickham Terrace PO Box 782 Spring Hill, Qld 4004. Telephone: +61(7) 3832 1222 Facsimile: +61(7) 3832 1212 Email: info@gdinnovation.com
Contents 1 INTRODUCTION... 3 2 PURPOSE... 5 3 WHY CUSTOMER PREMISES EQUIPMENT IS NECESSARY... 5 4 CHARACTERISTICS OF CUSTOMER PREMISES EQUIPMENT... 6 4.1 PROPRIETARY AND STANDARDS BASED EQUIPMENT... 6 4.2 PHYSICAL CHARACTERISTICS... 7 4.3 MODEM COSTS... 7 5 FORECASTING AND MANAGING CUSTOMER PREMISES COSTS... 7 6 CONCLUSIONS... 9 DISCLAIMER This document has been prepared by Gibsons Digital Innovation (GDI) from information provided by the client and from other sources. Our procedures do not necessarily include confirmation of validation procedures of that information and this document is provided to the client for its exclusive use and benefit only. No other party should rely on it for inferences or forecasts made therein. GDI accepts no responsibility to such parties. In addition, certain inferences and forecasts have been drawn and made on the above basis although every effort has been made to ensure that such inferences and forecasts are reasonable, no responsibility can be accepted by GDI for eventual outcomes. Page ii
1 Introduction This document is part of a project and series of deliverables required by Bay of Plenty councils to develop a broadband business case study for the Bay of Plenty region. The project recognises that a wider geographic availability of broadband services is an economic enabler, and that a lack of these services is increasingly an economic disabler. The report is the fifth of 15 deliverables, culminating in the final report on the business case for the provision of broadband infrastructure in the region. This report and its relationship to other reports in the project are illustrated in figure 1 below: Page 3
Bay of Plenty Councils Broadband Business Case Study Deliverables Summary Broadband Definition A1 Mush Network Design B1 Speeds and scalability policy and related project requirements Base level demand for new infrastructure investment location, value Broadband Architecture Description A2 Current and emerging technologies for broadband delivery and identify applicable hybrids Network Partners B2 Short list of interested parties, from service providers, infrastructure providers, major demand customers (MUSH) Options Open to Councils to Stimulate Investment A3 Relationship options with suppliers and users, risks, mitigation and benefits Funding Sources A4 Benefits/synergies of Core (MUSH) Networks and Broadband Access Networks B3 Values for stakeholders MUSH customers, and infrastructure investors Sources of funding, and applicability criteria Legislation Review B4 Customer Connection A5 Customer Connection A5 Relevant legislation and impact on project options Customer Premises Equipment (CPE) funding options for equipment to be installed in customer premises to terminate broadband services Service Providers A6 RMA Review B5 Relevant legislation and impact on project options, especially Council interpretations of the RMA in relation to infrastructure to support the rollout Engagement models for infrastructure investors and services providers Code of Practice Review B6 Operational A7 Workshop in Tauranga with council staff extension of B5 Model operational costs for one or more likely agreed infrastructure models Sample Costing A8 Final Report Assemble all previous deliverables prepare business case for investment in broadband infrastructure in the Bay of Plenty Brown fields examples in urban and rural areas. Figure 1 Deliverables Structure Deliverable A5 is the Subject of this Report. Page 4
2 Purpose This document describes the connection equipment required for broadband connection in the customer premises, types, cost ranges and options for funding. The potential concern is that the additional cost of customer premises equipment (CPE) can make broadband uptake unattractive, thereby limiting penetration into the region, and hence reducing the resulting economic benefit for the region. 3 Why Customer Premises Equipment is Necessary Broadband services are always digital in form as they are delivered to the client computer or computer network. The same services pass through the backhaul and core networks in the same digital format. However, the distribution network uses a variety of transmission media that require conversion of the electrical digital signals to another form that can be carried over fibre optic cables, wireless networks or copper cables. The conversion process that applies in the distribution network requires a device in the customer premises to present a digital electrical signal to the computer or local network. This device is commonly called a modem, an abbreviation for modulator/demodulator which means incoming and outgoing signals are converted to the appropriate format depending on their direction. Figure 2 shows the conversion process: Figure 2 Customer Premises Equipment (Modem) Page 5
Figure 2 shows the common point of attachment of the modem in the customer s premises to the variety of distribution network modes of delivery to the customer. 4 Characteristics of Customer Premises Equipment 4.1 Proprietary and Standards Based Equipment Although there are many manufacturers of CPE, the equipment can be divided into two types, for the purposes of commercial comparison: i) Proprietary CPE This equipment is unique to the manufacturer and cannot be used with other manufacturer s equipment. This ties in the customer and the service provider to a specific manufacturer and has the following disadvantages: a. There is no competition for the supply of the CPE, so the manufacturer can price to the market tolerance for relatively high prices b. If the manufacturer decides to change or delete the CPE, or stop supporting it, the customer has little choice but to purchase newer equipment This type of CPE is evident with emerging technologies where standards are not yet published or widely complied with, with the result that costs are higher for customers. ii) Standards Based CPE this CPE complies with international standards and allows interworking between manufacturer s equipment. This tends to commoditise the market for this type of product, driving prices to a level that compares with the features and performance of the equipment. One of the best examples of the benefits of mature standards based CPE is that of the Standard known as IEEE 802.11 which describes the popular WiFi wireless broadband equipment used in offices, cafes and airports for connection to the internet for lap tops and PDAs (Personal Digital Assistants). New technologies that will assist in the wider distribution of broadband services in the Bay of Plenty include the WiMAX wireless standard (IEEE 802.16) which because it is new, has little if any interworking between manufacturer s equipment at present. This means that at present, WiMAX installations are likely to tie the customer to one specific manufacturer, with likely higher prices. There is room for optimism regarding the WiMAX standard however, as the Intel computer chip company has announced their support for the WiMAX standard and in due course they will install WiMAX compatible chipsets in personal computers that will communicate with a WiMAX signal at no additional cost in terms of CPE since it will be an integral part of most computers. Intel supports the WiFi standard through the chip sets used in lap top computers, and this means there are no CPE costs at all for most lap top users who wish to access broadband over a WiFi connection. We can expect the same level of low or zero cost connectivity for WiMAX over the next few years. Page 6
4.2 Physical Characteristics Modems are usually the size of a paper back book refer to figure 3: ADSL Modem WiMAX Modem Roof Mounted Antenna for WiMAX Figure 3 Broadband Customer Premises Equipment 4.3 Modem Costs Costs in New Zealand for modems cover the following range: i) ADSL modems - <$100 to $400. The high end costs cover high speed ADSL2+ and Voice over Internet (VoIP) capability, with usually a print server for a home network ii) WiMAX modems - $300 to $600 with additional costs for an outdoor antenna if the range to the base station is more than a few km. Add approx $200 for the antenna and installation costs. In the Bay of Plenty region we can assume many installations will include an antenna, bringing total customer premises costs to as much as $800. We can assume most WiMAX modems will have a VoIP capability to maximise revenue opportunities for the service provider and this will move the installed cost to the $800 area. The current costs of WiMAX modems is relatively high, although the spread of the standard for WiMAX will drive costs and prices down over the next few years, especially through the adoption of the standard by Intel as discussed in section 4.1. 5 Forecasting and Managing Customer Premises Costs At present, CPE costs for the most likely distribution technology, WiMAX, are relatively high and if this project were to proceed immediately, we advise that these costs may be a barrier to adoption for many potential broadband customers because service providers traditionally have only two options to recover these costs: i) Recover the costs up front from the customer a large barrier to service adoption and unlikely to be effective for many residential or small business customers. ii) Lock the customer into a long term contract where the cost can be recovered over the term of the contract. This approach also has problems as internet/broadband customers tend to resist long term contracts due to the volatile nature of the market. Page 7
Most service providers will be of the view that both options are undesirable. Some try to absorb much of the cost, retain ownership of the modem for possible reuse of the client switches to another provider, or not enter the market. This problem has been recognised in other countries and some form of CPE subsidy has been offered to service providers providing service in regional areas. In Australia, this subsidy was HiBIS (Higher Bandwidth Incentive Scheme) and resulted in accelerated growth of broadband services in much of regional Australia. Unfortunately, many service providers appear to have become dependent on the scheme for the ongoing viability of their businesses, and the gradual withdrawal of HiBIS has caused financial distress and even failure of service providers in Australia. This project is expected to have a 2-3 year life as the core network is established and a variety of distribution technologies are deployed by service providers. In the case of WiMAX, we can expect modem prices to fall over this period, potentially to the point where they are effectively zero cost if the functionality is already built into computers and similar equipment. Based on the cost reductions that applied to WiFi modems over a five year period, the trend in cost reduction might be similar for WiMAX modems. Refer to figure 4: Figure 4 Forecast Cost Trends - Broadband Customer Premises Equipment Figure 4 shows the likely downward trend for WiMAX modems, in line with the reductions for WiFi modems which are now typically $100 for a discrete unit. We predict the same rate of price reduction to a similar level of cost for WiMAX discrete modems over a similar timeframe. Note that we also assume the real cost of WiMAX functionality built into a laptop for example, will be effectively zero. Figure 4 also shows an estimated start of service delivery over the core network of mid 2009, where the modem price is estimated to have dropped to about $300. By 2012, this modem is expected to have reached a commodity price of $100 as the WiMAX standard becomes widely interpreted in the same way by manufacturers. The expected price of $300 at the start of services Page 8
delivery might still be a barrier to entry for some customers, and if this is the case, some temporary form of subsidy might be sought at the time. Note however, that we suggest where an antenna is required to generate adequate signal strength for regional customers, we do not anticipate any effective cost reduction, partly because there is a significant labour component in the installation, and because for the most part antennae are already widely available and priced in a competitive market. For these reasons, the antennae cost may remain in the region of $200, while in the best case the modem will drop to $100. In effect, this means many regional customers and/or their service provider will pay a minimum of $300 for connection to a wireless broadband service, and up to $500, based on the forecast in figure 4. 6 Conclusions CPE costs for the most likely distribution technology, WiMAX, may present barriers to takeup by some parts of the market for some time even when total costs reach their lowest point in the case of the need for an external antenna for remote sites. We suggest these costs will not inhibit takeup by most businesses, but may limit the penetration in residential communities. It is recommended that CPE costs be regularly monitored through the course of the project and some subsidy support be considered if necessary to ensure maximum takeup by all parts of the community. Page 9