1 Rural Broadband Network Development Analytical Model Overview General Overview of Key Elements of an Analytical Model to support subsidized deployment of Rural Broadband networks in commercial non-viable locations April 2009 David N. Townsend & Associates DNTA

2 Rural Broadband Network Development Analytical Model Overview Key Requirements from Recovery Act: Define, identify “unserved” and “underserved” areas; Develop a mechanism for evaluating the appropriate levels of subsidy payments needed to provide service in such areas; The system must be broad and flexible enough to respond to applications from States and other government entities, non- profits, and to support at least one grant in each of 50 states; Demonstrate for each grant “that the project would not have been implemented during the grant period without Federal grant assistance.” (Section 6001(e)(3)) DNTA

3 Rural Broadband Network Development Analytical Model Overview Underlying Concepts: For private, commercial network operators, infrastructure deployment and service provision decisions are based on evaluation of the potential profitability (ROI) of each project; The market will provide coverage up to some boundary, known as the “Market Efficiency Frontier”, beyond which further deployment would be unprofitable (see diagrams); The location of this Frontier is constantly shifting, but is typically well beyond the point of current service availability, especially in a growing market. DNTA

4 Rural Broadband Network Development Analytical Model Overview Analytical Framework, the “Gaps” concept: DNTA

5 Rural Broadband Network Development Analytical Model Overview Simplified depiction of Market Frontier concept: Market Frontier Sustainability Frontier DNTA

6 Rural Broadband Network Development Analytical Model Overview Illustrative Evaluation and Decision Process: DNTA Develop standardized application requirements Applicants submit required data Model estimates expected ROI of project If consistent with application: approve Profitable Application must be manually reviewed, needs further info, or rejected Model calculates subsidy needed to make project viable Unprofitable If substantially below application

7 Rural Broadband Network Development Analytical Model Overview Model Objectives: Quantitative economic assessment of market structure for broadband service in any given location; Focus on determination of Market Frontier, and cost/benefit Business Case for broadband deployment; High-level “macro” analysis that can be applied on a statewide or region-wide basis for comparative purposes; Detailed “micro”-level mechanism to serve as a tool to analyze and validate specific network development subsidy proposals across many locations, sizes, market conditions. DNTA

8 Model Approach and Methodology: Evaluate the underlying economic costs to provide access to broadband service in locations not currently served; Collect data to represent the market structure and factors determining average network deployment costs for various technology platforms under different conditions; Methodology is geographically-based, focusing primarily upon rural areas where current networks are not available; Forward-looking technology and cost assumptions, recognizing that the market will take time to implement these; Key assumptions regarding potential service revenues, based upon demonstrated market trends and benchmarks. Rural Broadband Network Development Analytical Model Overview DNTA

9 Model Structure and Components: Data Inputs  Detailed inputs on market-specific characteristics (see next) Cost Assumptions  Estimated unit costs of each type of network facility and technology Network Development  Algorithms to represent infrastructure buildout, based upon geography, population, penetration, etc. Revenue Assumptions  Trend data and correlations of RPU to income, penetration, other factors based on market research Net Revenue Calculations  Difference between average (annual) costs and expected revenues to introduce new service, expressed on a per-location (e.g., town) basis Results: Market and access gaps, by geographic area, and net subsidy cost to close access gap. Rural Broadband Network Development Analytical Model Overview DNTA

10 Data Requirements: Geographic and demographic data which define the structure of each defined area (state, region, etc.) its current broadband market, according to the exact specified format required for the model’s calculations:  Distribution of towns and/or neighborhoods by population; also geographic size (sq. km).  Accurate data on current degree (%) of availability of broadband networks/services within each geographic/population group. Other market and economic factors: income, overall penetration, etc. Rural Broadband Network Development Analytical Model Overview DNTA