Center for Information and Communication Technologies Multimedia Services in Residential Broadband Networks - Techno-Economics of Residential Broadband Deployment - Ph.D. Dissertation Defence Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Techno-Economics of Residential Broadband Deployment The thesis was motivated by the questionable financial feasibility of coexisting FTTH and DSL deployment in Denmark Empirical evidence: Existing and expected wide-scale FTTH deployment in Denmark 21% households by 2007 50% households by 2016 Expected wide-scale VDSL deployment in Europe VDSL deployment by T-Systems VDSL deployment by France Telecom Contradiction between (and within) literature and empirical evidence Evidence of wide-scale upgrades of access network infrastructures: “broadband markets are advancing to the next stage of development” (OECD 2005) Literature findings: “FTTH is only profitable in dense urban areas” (Olsen et al. 2006) “The costs are such that high take rates .. are almost mandatory” (Frigo et al. 2004) “FTTH in urban scenario does not lead to positive payback” (Monat et al. 2003) Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment The goal was to perform a multidisciplinary study of telecom vs. entrant deployment strategies Technology Economics Regulation Analyse the nature and near-future transmission requirements of converged voice, video and data services Analyse the approaches of telecoms using Digital Subscriber Line (DSL) technology in comparison to entry strategies based on Fibre-to-the-Home (FTTH) Investigate the effect of coexisting and competing DSL and FTTH Broadband Networks Services Multidisciplinary study with roots in the theory of technology, economics, and regulation Evaluate and compare deployment strategies through financial feasibility Based on the case of Denmark Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment The solution approach is based on comparing financial feasibility under competition using the theory of techno-economics combined with game-theory Selected Theory and Methodology Techno-Economics Developed in RACE 2087/TITAN Described in Ims et al. 1998 Currently under development in FP6-IST-BROADWAN and CP1-021-ECOSYS Recently published results by Olsen et al. (2006) Game-theory Developed within economics during the second part of the last century General references: Fundenberg and Tirole (1991) and Kreps (1990) Uses the Von Stackelberg Game Techno-Economics of Residential Broadband Deployment

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

A new approach is needed to define broadband Previously broadband was defined through transmission capacity: > 56 Kb/s (more than PSTN modem) > 128 Kb/s (more than IDSN) > 512 Kb/s … Today many literature sources use: > 2 Mb/s Near-future demand: > 20 Mb/s The new way to define broadband is dynamic: Broadband Definition 1: Local access link performance should not be the limiting factor in a user’s capability for running today’s applications. Broadband Definition 2: Broadband services should provide sufficient performance — and wide enough penetration of services reaching that performance level—to encourage the development of new applications. Based on: National Research Council, 2002 Techno-Economics of Residential Broadband Deployment

Quality of Packet Based Services is governed by QoS of transmission Packet Based Network Service Provider User Payload Header Payload Header Congestion Multimedia Services have different transmission requirements: Voice services require timeliness (<180 ms delay)  TOS1 Coding used to reduce effect of congestion Video services require throughput (>2-10 Mbps)  TOS2 Coding used to reduce the transmission requirements Data services require consistent data (no package loss)  TOS3 TCP used ensure retransmission of lost packages Techno-Economics of Residential Broadband Deployment

Managed Networks can guarantee QoS of different types of services but only within their boundaries PVC / VLAN mapping at local exchange Voice VLAN Data PVC Voice PVC Data VLAN Network Access Providers can guarantee QoS through: Over Provisioning Loose control Strict control QoS can only be offered from within managed networks Operators need to select provisional strategy Limits revenue sharing on the Internet Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment To this day multimedia services have been complements to existing services but that is likely to change Disruptive potentials Maturity Adoption Voice Video Data Users have kept their traditional services PSTN Cable TV Users have adapted new services IM P2P Traditional services such as PSTN will continue to diminish while new converged services gain maturity and momentum Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment Increased available transmission speeds are being absorbed by new services and applications [Alcatel, ref. 1, 2004] Désiré KARYABWITE, Victoria Falls presentation, Broadband Development Phase 1 (Service Profile 1) Internet Access Speed < 1,5 Mbps Phase 2 (Service Profile 2) High speed broadband Speed 2-8 Phase 3 (now) (Service Profile 3) Broadband Services (Voice, Video and Data) Speed 8-24 Mbps Phase 4 (Near future) (Service Profile 4) Converged Multimedia Platform Speed 24-50 Mbps Techno-Economics of Residential Broadband Deployment

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Investment and Capacity Two approaches are available and competing: DSL by telecoms and FTTH by entrants Active Ethernet FTTH Entrant / Energy Utility Company PON/FTTH Telecom Demand VDSL Investment and Capacity ADSL2+ ADSL Time Telecoms follow a migration strategy based on diminishing copper using DSL technology Entrants / Energy Utility Companies only have a realistic option of deploying FTTH Techno-Economics of Residential Broadband Deployment

Length of copper loops limits the service offerings of DSL Low speed Data High speed IPTV mm. No service SDP Local Exchange PDP Optical Backbone Network SDP DSL technology uses the existing PSTN copper loop Currently DSL equipment (DSLAM) is located in local exchanges Attainable transmission speeds in DSL are determined by cooper loop length As a result customers in the vicinity of local exchanges can get high speed transmission while customers further away can risk getting no service Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment Telecoms can increase service offerings by deploying DSLAM equipment in PDP or SDP DSLAM in PDP 20-40 Mbps theoretical average 7-17 PDP nodes for each LE DSLAM in SDP 67-90 Mbps theoretical average 126-1731 SDP nodes for each LE CAPEX and OPEX increases with number nodes outside of LE and Therefore: cost LE < cost PDP << cost SDP Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment While telecoms can migrate between deployment strategies entrants can only deploy FTTH Techno-Economics of Residential Broadband Deployment

Key decision to find position and number of nodes An entrant only has the option of deploying FTTH Network optimisation Key decision to find position and number of nodes Two FTTH technical solutions Star based active Ethernet Tree based Passive Optical Networks FTTH is technologically superior Facilitates higher transmission speeds “Future Proof” transmission medium Both require expensive groundwork Neither solution is mature Equipment prices will change Regulatory uncertainty

Techno-Economics of Residential Broadband Deployment Empirical study of Hasselager in Denmark demonstrates how telecoms map out strategic roll-out strategies Techno-Economics of Residential Broadband Deployment

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Basic Model Geometric Model Rectangular geographic area divided among homogeneously distributed buildings All buildings are assumed to connect through vertically and horizontal trenches to the nearest Aggregation Node AN LE AN LE CPE AN CPE AN CPE AN

Modelling Financial Feasibility The thesis follows the recommendation of the Danish NRA and uses a variant of PMT called tilted annuity Tilted annuity can vary from year to year at the same rate as the price of the asset is expected to vary Tilted annuity results in costs which, after discounting, cover the purchase price and financing costs of the asset Modelling Financial Feasibility Net Present Value (NPV) Internal Rate of Return (IRR) Constant Payment (PMT) Payback-method Techno-Economics of Residential Broadband Deployment

Modelling Competition Modelling competition through game-theory Cournot Competition / Model Bertrand Competition / Model von Stackelberg Model Techno-Economics of Residential Broadband Deployment

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Denmark was simulated through a dataset from the Danish NRA Techno-Economics of Residential Broadband Deployment

DSL upgrade strategy 1 DSLAM at PDP Least expensive upgrade alternative Profitable in all scenarios Room for competition Technical problems with unbundling Techno-Economics of Residential Broadband Deployment

DSL upgrade strategy 2 DSLAM at SDP Costly and aggressive deployment strategy for telecoms Governed by local loop characteristics Highly affected by equipment price Can forestall entry Techno-Economics of Residential Broadband Deployment

FTTH Deployment Full cost Dominated by trench cost Financially feasible in cities Requires high market share Not feasible in other scenarios Techno-Economics of Residential Broadband Deployment

FTTH Deployment Shared digging and connectivity fee Can be financially feasible in all scenarios Attracting customers is critical Equipment cost becomes dominant Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment In the absence of competition there are limited incentive for an incumbent to deploy advanced DSL Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment When faced with competition deployment becomes a dominant strategy for the incumbent Von Stackelberg game for cities Von Stackelberg game for towns Von Stackelberg game for Rural A Von Stackelberg game for Rural B Techno-Economics of Residential Broadband Deployment

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Summary of Multimedia Networks and Services TV Convergence of Networks Multimedia INTERNET Modem CPE Convergence of Services PSTN Broadband needs to redefined based on services Voice, Video, and data services require different transmission properties to function properly Future networks will be based on the layered concept of next-generation-networks Aggregated current need is ~ 20 Mbps Foreseen near-future need is ~ 50 Mbps Techno-Economics of Residential Broadband Deployment

Summary of techno-economic study Telecoms can deploy financially feasible DSL from PDP or SDP In the absence of competition, telecoms have limited incentive to deploy advanced DSL outside of local exchanges When faced with competition deployment becomes a dominant strategy from telecoms Energy Utility Companies can deploy financially feasible FTTH The single most important factor (and problem they face) is securing a customer base The broadband market in Denmark is close to saturated EUCs predominantly choose active Ethernet while passive optical networks will dominate the future market Techno-Economics of Residential Broadband Deployment

Conclusion and recommendations Fibre will last > 30 years FTTH equipment (cpe and switches) will last < 10 years EUCs have experience in deploying and maintaining cables Telecoms have experience in deploying and maintaining equipment Cost of digging prevents telecoms from deployment Technology and business cases prevent EUCs from deployment Outsourcing of infrastructures is increasing in the telecom world today Recommendations: EUCs are fragmented and individual selection of technologies and business models will result in both success and failure EUCs should consider cooperation with major telecoms (ILEC and CLECs), e.g. through unbundled fibre Techno-Economics of Residential Broadband Deployment

Agenda Introduction Broadband Services Broadband Networks Techno-Economics of Residential Broadband Deployment Simulation Results Conclusions Appendix Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

“Information Chain” Services / Applicaitons Market and Access Networks competition Access Networks Backbone Networks Policy & Regulation Middleware Service Provision Economics Value Chain Business Models Techno-Economics Cost Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment Academic Conclusion Solved an insoluble problem Break problem down and solve individually Milestones are necessary Maturing Need for discipline Techno-Economics of Residential Broadband Deployment

Development Path of IPTV Interactivity Development Path of IPTV Multiplayer Games Customised VoD Content Interactivity Broadcast TV Linear Unidirectional Bidirectional Transmission Interactivity

Techno-Economics of Residential Broadband Deployment Netværkskonvergens Henrik Clausen, IDC Telecom Konference 2006 Fra dedikerede til multifunktionelle netværker Resultat er konkurrence mellem infrastrukturer (infrastructure competition) Ikke én løsning er bedst Hvad er så forskellen? Techno-Economics of Residential Broadband Deployment

DSL Existing Infrastructure Contradiction between literature and empirical evidence: Existing and expected wide-scale FTTH in Denmark: The Danish Energy utility sector is planning FTTH deployment to xx% of danish homes in Techno-Economics of Residential Broadband Deployment

DSL Existing Infrastructure Contradiction between literature and empirical evidence: Existing and expected wide-scale FTTH in Denmark: The Danish Energy utility sector is planning FTTH deployment to xx% of danish homes in Techno-Economics of Residential Broadband Deployment

Techno-Economics of Residential Broadband Deployment Historically transmission speeds have doubled every 1,9 years and are expected to continue doing so Based on: Eldering, 1999 Exponential growth according to Moore’s law Enabled by new transmission technologies 2007 predictions are ~ 20 Mbps BT Technology Journal predicts a demand of 100 Mbps in 2010 Techno-Economics of Residential Broadband Deployment