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Broadband Business Models to meet deployment targets

Dr. Raul L. Katz,Columbia Institute for Tele-Information

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Broadband business models

Business model: the architecture of the value creation, delivery, and capture mechanisms employed to deliver a service, including offerings, strategies, infrastructure, organization, trading practices, and operational processes and policies

Supply side: business models to accelerate broadband deployment Policies to stimulate private sector investment Government intervention as a last resort

Demand side: business models to accelerate adoption Practices to address demand-side challenges Models to address the affordability gap

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Supply-side business models:Accelerate deployment

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Supply side business models Objective: to make sure that universal service targets

are met

MARKET STRUCTURE

SEVERAL OPERATORS

2-3 OPERATORS ONE OPERATOR NO OPERATOR

HIGHDense urban areas with

high business and residential density

MEDIUMUrban areas/towns

with primarily residential density

LOWRural areas with

sparse residential density

VERY LOW Rural areas with very low density

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Supply side business modelsStimulate private investment

Business model development to address isolated areas begins by understanding deployment economics

RETAIL ARPU

WHOLESALE ARPU

RETAIL WHOLESALE MIX

CPE COSTS

CONSTRUCTION COSTS

MARKET SHARE WHOLESALE ACCESS LINKS

DEPLOYMENT PLANS

HOMES PASSED

EQUIPMENT COSTS

RETAIL REVENUES

WHOLESALE REVENUES

OPERATING EXPENSES

AMORTIZATIONAND TAXES

EBITDA

EBIT

FREE CASH FLOWS

BROADBAND MARKET

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Supply side business models Stimulate private investment

Deployment economics highlight the business case “choke points”

RETAIL ARPU

WHOLESALE ARPU

CPE COSTS

CONSTRUCTION COSTS

MARKET SHARE WHOLESALE ACCESS LINKS

DEPLOYMENT PLANS

HOMES PASSED

EQUIPMENT COSTS

RETAIL REVENUES

WHOLESALE REVENUES

OPERATING EXPENSES

AMORTIZATIONAND TAXES

EBITDA

EBIT

FREE CASH FLOWS

BROADBAND MARKET

Capex too high relative to operating profits leads to lengthy horizons for a positive NPV

Primary demand is too small, so even if 100% share, revenues do not allow for positive NPV

RETAIL WHOLESALE MIX

Low share impacts revenue streams

Inefficient operations affect margins

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Supply side business modelsStimulate private investment

Highlighted “choke points” enable the determination of policy initiatives to stimulate deployment

RETAIL ARPU

WHOLESALE ARPU

RETAIL WHOLESALE MIX

CPE COSTS

CONSTRUCTION COSTS

MARKET SHARE WHOLESALE ACCESS LINKS

DEPLOYMENT PLANS

HOMES PASSED

EQUIPMENT COSTS

RETAIL REVENUES

WHOLESALE REVENUES

OPERATING EXPENSES

AMORTIZATIONAND TAXES

EBITDA

EBIT

FREE CASH FLOWS

BROADBAND MARKET

Provide grants to fund capital investment

Provide low cost real estate for central facilities

Reduce ROW or spectrum access costs

Reduce VAT on equipment purchase

Reduce property taxes

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Supply side business models Stimulate private investment

Reduce property taxes and VAT on initial equipment purchase to decrease CAPEX burden

Reduce infrastructure costs linked to ROW, pole attachment or spectrum access costs (release spectrum for mobile broadband, lower and standardize pole attachment rates, “Dig-once”/joint trenching rules)

Provide grants to fund capital investment

Provide low cost real estate for central facilities

Enforce infrastructure sharing and wholesale access

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Supply side business models Government intervention

If despite incentives, private sector investment does not materialize, government intervention can be justified if expenditures are outweighed by the broader socio-economic benefits

The first question is where should the State intervene?

Which communities can be, or are, served by market forces? Which communities will need assistance with initial investment to

become self-sustaining? Which communities cannot become self-sustaining and will require

ongoing funding?”

The second question is how should the State intervene?

Supply side business models Government intervention

Facilities or service-based competition

Private service provider operating under protectedconditions (e.g. regulated

monopoly)

Community-owned service provider

National government deploys backbone to reach isolated

area (leveraging government utilities infrastructure)

Scope of government intervention

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Supply side business modelsGovernment intervention

Community-based service provisioning can follow four models

Closed network, whereby local government provides retail services

Local government wholesales access to a single retail service provider

Local government is wholesaler of transport to multiple retail service providers (open access)

Local government is provider of dark fiber

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ALTERNATIVE MODELS OF GOVERNMENT INTERVENTION

Supply side business models Government intervention

Subsidize incumbent telco/BB to upgrade to “utility”

In greenfields, government could build (contracts) for the construction of universal access network Promote competition for government contracts to lower initial costs Government can then auction the broadband infrastructure to highest

(qualified) operator Monopoly for wholesale-only/open access “utility” operator? Any “loss” is a one-time infrastructure subsidy (like building a highway

and road system)

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Supply side business models Government intervention

IS PROJECT SUSTAINABLE AND PROFITABLE?

YES NO

IS GOVERNMENT INTERVENING?

YES

• Preemption of private investment (“crowding-out”)

• Alleviate the constraints of the business case to stimulate private investment

• Re-creation of access bottlenecks

• Erosion of the public utility model

NO• Market addresses the need of

public good• Supplier of last resort

Government intervention should consider opportunities and risks

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Demand-side business models: Accelerate adoption

BROADBAND DEMAND GAP

CountryHouseholds passed (*)

Households connected

Demand Gap

Australia 89 % 69 % 20 %

Denmark 96 % 76 % 20 %

France 100 % 77 % 23 %

Germany 98 % 58 % 40 %

Israel 100 % 83 % 17 %

Italy 95 % 55 % 40 %

Republic of Korea 100 % 93 % 7 %

Spain 93 % 61 % 32 %

Sweden 100 % 89 % 11 %

United Kingdom 100 % 68 % 32 %

United States 92 % 62 % 31 %Sources: Analysis by the author, based on data from EU; FCC; BMWi; OECD; PTS - Sweden; and Israel Minister of Communication .

REASONS FOR NOT ACCESSING TO THE INTERNET AT ALL

Reasons Percentage of answers

United States

United Kingdom

Relevant ( lack of interest, busy doing other tasks)

45 % 60 %

Price 15 % 28 %

Service availability 16 % 14 %

Easy to use (difficulty , senior citizen, physical handicap)

22 % 16 %

Sources: Horrigan, J. (2009); Ofcom (2008)

Demand-side business modelmodels should address the demand gap

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Demand side business models Accelerate adoption

Three business model initiatives to initially stimulate adoption

RETAIL ARPU

WHOLESALE ARPU

RETAIL WHOLESALE MIX

CPE COSTS

CONSTRUCTION COSTS

MARKET SHARE WHOLESALE ACCESS LINKS

DEPLOYMENT PLANS

HOMES PASSED

EQUIPMENT COSTS

RETAIL REVENUES

WHOLESALE REVENUES

OPERATING EXPENSES

AMORTIZATIONAND TAXES

EBITDA

EBIT

FREE CASH FLOWS

BROADBAND MARKET

Aggregate state demand for critical mass

Provide subsidies to subscribers

Reduce taxes

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Demand side business modelsAccelerate adoption

Aggregate demand: the local government can become an anchor user to guarantee revenues at ramp-up phase of broadband

Coordinate demand for broadband access from government administration, public safety, local schools and health care facilities

Negotiate a wholesale rate and long-term contract and define Service Level Agreements

Create a flow of revenues that eases the economic pressure on the business case

Organize groups of people (schools, communities, SMEs) at the grass-root level

Establishment of a Broadband Expertise Centres to spread knowledge on broadband for institutions that do not have ICT as their core task

Deploy broadband demonstration areas for consumers and conduct training

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Demand side business models Address the affordability gap

High consumer taxes as a percentage of total cost of broadband ownership are an obstacle to adoption

For every dollar that taxes are reduced over a 5 year period, US $ 1.4 to 12.6 will be created in additional GDP

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Source: Telecom Advisory Services LLC

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Demand side business models: Address the affordability gap

Fiscal incentive

A reduction in local taxes to small and medium enterprises linked to ICT adoption has been found to stimulate adoption in areas that can have an impact on economic output

A subsidy targeted to economically-disadvantaged subscribers addresses the social inclusion problem (Universal Service)

However, subscriber subsidies need to be used sparingly

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Broadband business models: Conclusion

The primary business models to guarantee broadband deployment pertain to the private sector

Should governments intervene in broadband and wireless deployment? Yes, but initially facilitating market forces not preempting them

Should Government be the risk-taker of last resort? Maybe

Governments, communities, businesses, and operators should coordinate to identify supply and demand conditions and tailor services to tackle unmet needs

The establishment of a “business case” to deploy broadband is a joint effort