Broadband Business Models to meet deployment targets Dr. Raul L. Katz, Columbia Institute for Tele-Information 1 1

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 Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 2

Supply-side business models: Accelerate deployment 3 3

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 HIGH Dense urban areas with high business and residential density MEDIUM Urban areas/towns with primarily residential density LOW Rural areas with sparse residential density VERY LOW Rural areas with very low density DENSITY AND SIZE OF DEMAND The price of BB plays a critical role in terms of BB diffusion. BB prices are falling worldwide, in particular in developing countries, but are still too high and therefore make BB unaffordable for many people. ITU collects price data annually as part of its ICT Price Basket. This target refers to developing countries only. In most developed countries, BB prices correspond to less than 2% of monthly GNI p.c. (2010) In 2010, in 35 (out of 118) developing countries, the price of an entry-level fixed BB package cost an equivalent of 5% or less of monthly GNI p.c. In 2008, this was the case for only 21 developing countries. Over the 2-year period, fixed BB prices fell by more than 50% in developing countries, and this is likely to continue, especially in view of the emergence of mobile BB. We therefore consider that by 2015, many developing countries will have achieved this target of 5% (and most likely, the developing countries as a group will have achieved it). The current calculation is based on fixed BB, but ITU is planning to collect data on mobile BB as well in the near future. The price target has been computed taking into consideration target 4 (50% of the population should be online by 2015). 4

Supply side business models Stimulate private investment Business model development to address isolated areas begins by understanding deployment economics The price of BB plays a critical role in terms of BB diffusion. BB prices are falling worldwide, in particular in developing countries, but are still too high and therefore make BB unaffordable for many people. ITU collects price data annually as part of its ICT Price Basket. This target refers to developing countries only. In most developed countries, BB prices correspond to less than 2% of monthly GNI p.c. (2010) In 2010, in 35 (out of 118) developing countries, the price of an entry-level fixed BB package cost an equivalent of 5% or less of monthly GNI p.c. In 2008, this was the case for only 21 developing countries. Over the 2-year period, fixed BB prices fell by more than 50% in developing countries, and this is likely to continue, especially in view of the emergence of mobile BB. We therefore consider that by 2015, many developing countries will have achieved this target of 5% (and most likely, the developing countries as a group will have achieved it). The current calculation is based on fixed BB, but ITU is planning to collect data on mobile BB as well in the near future. The price target has been computed taking into consideration target 4 (50% of the population should be online by 2015). 5

Supply side business models Stimulate private investment Deployment economics highlight the business case “choke points” The price of BB plays a critical role in terms of BB diffusion. BB prices are falling worldwide, in particular in developing countries, but are still too high and therefore make BB unaffordable for many people. ITU collects price data annually as part of its ICT Price Basket. This target refers to developing countries only. In most developed countries, BB prices correspond to less than 2% of monthly GNI p.c. (2010) In 2010, in 35 (out of 118) developing countries, the price of an entry-level fixed BB package cost an equivalent of 5% or less of monthly GNI p.c. In 2008, this was the case for only 21 developing countries. Over the 2-year period, fixed BB prices fell by more than 50% in developing countries, and this is likely to continue, especially in view of the emergence of mobile BB. We therefore consider that by 2015, many developing countries will have achieved this target of 5% (and most likely, the developing countries as a group will have achieved it). The current calculation is based on fixed BB, but ITU is planning to collect data on mobile BB as well in the near future. The price target has been computed taking into consideration target 4 (50% of the population should be online by 2015). 6

Supply side business models Stimulate private investment Highlighted “choke points” enable the determination of policy initiatives to stimulate deployment The price of BB plays a critical role in terms of BB diffusion. BB prices are falling worldwide, in particular in developing countries, but are still too high and therefore make BB unaffordable for many people. ITU collects price data annually as part of its ICT Price Basket. This target refers to developing countries only. In most developed countries, BB prices correspond to less than 2% of monthly GNI p.c. (2010) In 2010, in 35 (out of 118) developing countries, the price of an entry-level fixed BB package cost an equivalent of 5% or less of monthly GNI p.c. In 2008, this was the case for only 21 developing countries. Over the 2-year period, fixed BB prices fell by more than 50% in developing countries, and this is likely to continue, especially in view of the emergence of mobile BB. We therefore consider that by 2015, many developing countries will have achieved this target of 5% (and most likely, the developing countries as a group will have achieved it). The current calculation is based on fixed BB, but ITU is planning to collect data on mobile BB as well in the near future. The price target has been computed taking into consideration target 4 (50% of the population should be online by 2015). 7

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 Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 8

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? Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 9

Supply side business models Government intervention National government deploys backbone to reach isolated area (leveraging government utilities infrastructure) Private service provider operating under protected conditions (e.g. regulated monopoly) Facilities or service- based competition Community-owned service provider Scope of government intervention

Supply side business models Government 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 Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 11

ALTERNATIVE MODELS OF GOVERNMENT INTERVENTION Supply side business models Government intervention ALTERNATIVE MODELS OF 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) Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 12

Supply side business models Government intervention Government intervention should consider opportunities and risks IS PROJECT SUSTAINABLE AND PROFITABLE? YES NO IS GOVERNMENT INTERVENING? 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 Market addresses the need of public good Supplier of last resort Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 13

Demand-side business models: Accelerate adoption 14 14

Demand-side business model models should address the demand gap BROADBAND DEMAND GAP REASONS FOR NOT ACCESSING TO THE INTERNET AT ALL Country Households passed (*) Households connected Demand Gap Australia 89 % 69 % 20 % Denmark 96 % 76 % France 100 % 77 % 23 % Germany 98 % 58 % 40 % Israel 83 % 17 % Italy 95 % 55 % Republic of Korea 93 % 7 % Spain 61 % 32 % Sweden 11 % United Kingdom 68 % United States 92 % 62 % 31 % 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 % Sources: Horrigan, J. (2009); Ofcom (2008) Sources: Analysis by the author, based on data from EU; FCC; BMWi; OECD; PTS - Sweden; and Israel Minister of Communication .

Demand side business models Accelerate adoption Three business model initiatives to initially stimulate adoption The price of BB plays a critical role in terms of BB diffusion. BB prices are falling worldwide, in particular in developing countries, but are still too high and therefore make BB unaffordable for many people. ITU collects price data annually as part of its ICT Price Basket. This target refers to developing countries only. In most developed countries, BB prices correspond to less than 2% of monthly GNI p.c. (2010) In 2010, in 35 (out of 118) developing countries, the price of an entry-level fixed BB package cost an equivalent of 5% or less of monthly GNI p.c. In 2008, this was the case for only 21 developing countries. Over the 2-year period, fixed BB prices fell by more than 50% in developing countries, and this is likely to continue, especially in view of the emergence of mobile BB. We therefore consider that by 2015, many developing countries will have achieved this target of 5% (and most likely, the developing countries as a group will have achieved it). The current calculation is based on fixed BB, but ITU is planning to collect data on mobile BB as well in the near future. The price target has been computed taking into consideration target 4 (50% of the population should be online by 2015). 16

Demand side business models Accelerate 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 Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 17

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 The price of BB plays a critical role in terms of BB diffusion. BB prices are falling worldwide, in particular in developing countries, but are still too high and therefore make BB unaffordable for many people. ITU collects price data annually as part of its ICT Price Basket. This target refers to developing countries only. In most developed countries, BB prices correspond to less than 2% of monthly GNI p.c. (2010) In 2010, in 35 (out of 118) developing countries, the price of an entry-level fixed BB package cost an equivalent of 5% or less of monthly GNI p.c. In 2008, this was the case for only 21 developing countries. Over the 2-year period, fixed BB prices fell by more than 50% in developing countries, and this is likely to continue, especially in view of the emergence of mobile BB. We therefore consider that by 2015, many developing countries will have achieved this target of 5% (and most likely, the developing countries as a group will have achieved it). The current calculation is based on fixed BB, but ITU is planning to collect data on mobile BB as well in the near future. The price target has been computed taking into consideration target 4 (50% of the population should be online by 2015). Source: Telecom Advisory Services LLC 18

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 Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 19

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 Objectives of targets: Should be meaningful while not too specific (to be applied to all countries, especially developing countries) Should be measurable (progress could be included in annual report of BB Commission) Should be achievable while remaining ambitious Should be advocated by the BB Commission 20