Bridging the Digital Divide a Cost Benefit Analysis for Broadband

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Prepared by:

Final Report Technical assistance in bridging the digital divide:

A Cost benefit Analysis for Broadband connectivity in Europe

6 October 2004

With:


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EC/ESA Digital Divide CBA Final Report 6 October 2004

Contents1 Introduction..................................................................................................................... 4

1.1 Background and Objectives ..................................................................................... 41.2 Issues ........................................................................................................................ 41.3 Our Approach........................................................................................................... 5

2 Existing level of broadband connectivity across Europe................................................ 72.1 Methodology ............................................................................................................ 72.2 Terrestrial broadband availability ............................................................................ 82.3 Terrestrial broadband availability forecasts: 2004 - 2013...................................... 112.4 Satellite broadband availability .............................................................................. 142.5 Broadband take up: 2004 2013 ........................................................................... 16

2.6 Potential broadband demand remaining unserved ................................................. 222.7 Availability and take up of terrestrial broadband - conclusion .............................. 253 Combined system and user costs of broadband connection..........................................27

3.1 Costing considerations ........................................................................................... 273.2 Capital costs ........................................................................................................... 283.3 Operational costs .................................................................................................... 363.4 Typical cost breakdown by technology.................................................................. 363.5 Average cost per user ............................................................................................. 393.6 Total costs by Country Group ................................................................................ 403.7 Costs of providing service to Objective 1 regions ................................................. 413.8 Summary of technology mix .................................................................................. 42

4 Optimal technical solution for broadband connectivity ................................................ 444.1 ADSL and Derivatives ...........................................................................................454.2 Satellite................................................................................................................... 534.3 Hybrid Satellite/BFWA/WiFi ................................................................................ 604.4 Affordability and User Willingness to Pay ............................................................ 634.5 Conclusions on Optimal Mix of Technologies ...................................................... 68

5 Benefits of the provision of broadband connectivity across Europe ............................ 715.1 Introduction ............................................................................................................ 715.2 Economic concepts................................................................................................. 715.3 Implementing the methodology ............................................................................. 785.4 Direct benefits to subscribers ................................................................................. 845.5 Benefits to public sector suppliers of services (Step 3) ......................................... 975.6 Regional analysis of benefits ............................................................................... 1185.7 Conclusions: Overall value of broadband benefits ..............................................120

6 Conclusions on cost benefits for broadband connectivity .......................................... 1226.1 Assumptions for the cost benefit calculation ....................................................... 1226.2 Results of the cost benefit calculation.................................................................. 1276.3 Conclusions .......................................................................................................... 135

7 Framework for the preparation of a business plan...................................................... 1377.1 Background and Objectives ................................................................................. 1377.2 Issues ....................................................................................................................1387.3 Our Approach....................................................................................................... 138

Appendix ........................................................................................................................... 141

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Glossary

ADSL Asymmetric digital subscriber lineADSL2 andADSL2+

Enhanced ADSL greater bandwidth onshort-mid length lines

ARPU Average Revenue Per User B2C Business to Customer BFWA Broadband Fixed Wireless AccessCAPM Capital Asset Pricing ModelCATV Cable TelevisionCBA Cost Benefit AnalysisEC European CommissionEMRP Equity Market Risk PremiumESA European Space AgencyEU European UnionFTTB/U Fibre To The Building/User FTTC Fibre To The Cabinet/Curb

GCSE General Certificate of SecondaryEducation

HFC Hybrid Fibre Co-axICT Information and Communications

TechnologiesLAN Local Area Network

NPV Net Present ValuePLC Powerline CommunicationsPPP Public Private Partnership

PwC PricewaterhouseCoopers LLPSME Small & Medium-Size EnterprisesSoHo Small Office Home OfficeVAT Value Added TaxVoIP Voice Over Internet ProtocolVSDL Very high speed digital subscriber lineWACC Weighted Average Cost of CapitalWiFi WLAN used in the wide area

WLAN Wireless Local Area Network

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ESA STUDY MANAGER

Pierluigi Mancini Ph.D.Applications Strategy Manager Directorate of EU and Industrial ProgrammesEmail: [email protected]

This document has been prepared on the instructions of the European Space Agency (ESA) and with only ESA's interests in mind. PricewaterhouseCoopers LLP, its members, partners, employees and agents neither owe nor accept any duty or responsibility to other parties (you), whether in contract or in tort (including without limitation, negligence and breach of statutory duty) or howsoever otherwise arising, and shall not beliable in respect of any loss, damage or expense of whatsoever nature which is caused by any use you maychoose to make of this document, or which is otherwise consequent upon the provision of the document to

you. Without conferring any greater rights than you would otherwise have at law, we accept that thisdisclaimer does not exclude or indemnify us against any liability we may have for death or personal injuryarising from our negligence or for the consequences of our own fraud. This report represents the Phase I analysis on behalf of the ESA of the state of the Digital Divide in Europe,, on a technology neutral basis. Thereport will provide inputs for a second phase to develop a business case to address the Divide, where further analysis and/or refinement of the findings will be carried out as necessary to gain greater specificity.

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1 Introduction1.1 Background and Objectives

In line with the strategic vision adopted by the European Union, the European societyof tomorrow will be a 'knowledge-based society' in which access to knowledge is for all. Information outreach must therefore be considered as a major objective for Europe. This means extending access to electronic communication services toeveryone, notably in those regions of our continent, which up until now have beendisadvantaged or neglected (rural and mountain areas, islands, far-flung outlyingregions). The enlargement of the Union adds a further dimension to the digital-divide

issue.

The European Space Agency and the European Commission have decided to give joint consideration to the use of space-based technologies to help bridge 'the digitaldivide'. In its White Paper on Space Policy, the Commission has placed this issue -satellites contributing to bridge the digital divide - at the forefront of Europe'sstrategic priorities in the run-up to 2007.

With this as a background, PricewaterhouseCoopers LLP, together with Ovum andFrontier Economics their subcontractors, have been invited by ESA, to prepare adetailed, technology-neutral Cost Benefit Analysis on broadband connectivity for anexpanded Europe.

The studys objectives are:

Through both primary and secondary research, identify and quantify, where possible, the benefits of providing broadband connectivity across an extendedEurope;

Prepare an objective analysis of the optimal technical solutions for broadbandconnectivity, region by region;

Provide an independent perspective on the Cost Benefit ratio for technology-neutral provision of broadband for Europe over a period of at least 10 years; and

Clarify the potential role of satellite-based solutions for broadband connectivityand thus bridging the digital divide in an extended Europe.

1.2 IssuesSome of the issues the Study considered include:

The extent to which Europe (and not the USA) will derive economic benefit fromany EU-initiated project to tackle the digital divide;

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Quantification of user benefits from societal and environmental, to economicand industrial;

Understand what benefits are actually incremental, resulting directly from newuser broadband connectivity; and

How best to identify the optimal technical solution for the provision of broadband service to new users across an extended Europe.

1.3 Our ApproachOur approach to the study is summarised below.

We reviewed the existing level of broadband connectivity across Europe

We analysed the combined system and user costs of a broadband connection byeach technical solution

We identified the optimal technical solution for provision of future broadbandconnectivity across different regions of Europe

We quantified the benefits of the provision of broadband connectivity acrossEurope

We calculated the net benefits of broadband connectivity across an extendedEurope

We set out a framework for the next steps following this study, including the preparation of a business plan based on our findings

Throughout our study we have analysed two different scenarios of broadbandavailability and take-up - a base case and extended take-up case. For clarity, the basecase and extended case assumptions were as shown in the tables below:

Table 1: Broadband connectivity and forecast take-up in Europe

Availability Base Case Extended Case Availability Base Case Extended CaseCountry Group 1

Urban 98% 54% 56% 99% 76% 82%Rural 92% 36% 39% 95% 54% 64%

Country Group 2Urban 97% 37% 41% 97% 74% 81%Rural 62% 19% 20% 78% 39% 42%



2008 2013

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PwC prepared a number of Technical Notes in the course of this study which wereindividually presented and discussed in detail with a large number of representativesfrom the European Space Agency and the European Commission. The content of theseTechnical Notes, as well as the comments received from the stakeholders within bothESA and the EC are reflected in this final report.

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2 Existing level of broadband connectivity across Europe2.1 Methodology

The current and estimated future broadband connectivity in Europe has beendetermined based on research of the current levels of broadband availability and takeup, historic trends of broadband availability and take up, reference to other publishedmaterial and modelling of estimated future availability and demand. The methodologyused in the study to determine the estimated availability and take up of broadbandservices is briefly described in this Section of the report, and described in more detailin the appendix to this report. The costs associated with the deployment of services are

also described in the appendix.

Each of the 25 EU countries has different characteristics, e.g. internet usage, GDP, price of services, market competitiveness, which cause the provision and use of broadband to vary from country to country. To assist the modelling, the 25 countriesof the EU were split into 4 country groups, in order that one or two countries per group could be considered in detail and the results from this detailed analysis thenscaled to the other countries in the group. The factors considered most important whenthe groups were determined were: the expected levels of adoption of broadband withinthe forecast period of 2004-2013; GDP; the split of urban and rural population 1 andthe current percentage of population in EU Objective 1 areas; the current penetrationof telephone lines and the take-up of broadband services. The methodology by whichthe country groups are determined is described in the appendix to this report. Thisanalysis was underpinned by preliminary regional analysis within two countries, Italyand the UK. If the modelling were extended to cover the non-EU ESA member countries, Switzerland and Norway would come within Country Group 1.

With high current and expected future levels of broadband availability and take-up,medium to low levels of rural population and high disposable income, the countries inGroup 1 are: Austria; Belgium; Denmark; France; Luxembourg; Malta; Netherlands;Sweden; United Kingdom. The take up and development of broadband services in theUK and France have been used as a basis for modelling Group 1 countries.

Countries in Group 2 have a higher percentage of population in EU Objective 1 2 areas(10-35%), lower average current levels of broadband adoption, and have high

1 The cost modelling used same data for urban and rural population as used for the benefits analysis.The data was sourced from the European Social Survey, and is shown in Figure 2.2.2 A region whose development is lagging behind others in the EU is given Objective 1 status to

promote its development and structural adjustment. Objective 1 areas may be urban as well as rural.http://europa.eu.int/scadplus/leg/en/lvb/g24203.htm defines Objective 1 regions for the period 2000-2006.

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disposable income. The countries in Group 2 are: Finland; Germany; Ireland and Italy,with Italy being used studied in more detail for the project.

Those countries in Group 3, with high levels of the population living EU Objective 1regions, medium levels of rural population and reasonable levels of current broadbandadoption are: Cyprus; Estonia; Portugal; Slovenia and Spain.

Group 4 is mainly comprised of the 2004 EU member countries of Central and EasternEurope, together with Greece, which has very low levels of broadband take-up. Thesecountries, which have medium-high levels of rural population and medium levels of GDP and disposable income, are: Czech Republic; Greece; Hungary; Latvia;Lithuania; Poland and Slovakia. The take up and development of broadband servicesin Poland been used as a basis for modelling Group 4 countries.

Brief country profiles, for UK, France, Italy, Slovenia, Poland and Greece, together with four regional case studies (two in Italy and two in the UK), which highlight theissues facing different regions of Europe and which provide a qualitative analysis of the issues faced during the development of broadband and infrastructure across thedigital divide, are provided in Appendix C to this report.

2.2 Terrestrial broadband availability

The scope of the problem of broadband provision in Europe can be seen in Figure 2.1,showing the variations in population density across Europe. This shows the populationdensity at the NUTS 3 3 level. There are large rural regions of thinly populated space inSweden, Finland, Ireland, Greece, central France and central Spain. Low populationdensity is also found in north-eastern Germany and in most of the Baltic States.Within these areas of low population, it must be recognised that there are manydistribution profiles. This uneven population distribution is a challenge for service

providers.

The availability of broadband in the EU is dominated by ADSL and cable modem

services and this is expected to continue. Cable modem services, built on top of cableTV infrastructure are primarily provided in urban areas and their provision is veryvaried across the EU. They are rarely cost effective to deploy in isolated urban areasand rural areas. DSL services are provided in urban areas and increasingly in morerural locations. There are currently low levels of availability of fibre to the user /

building (FTTU/B), broadband fixed wireless access (BFWA) and WiFi (wireless

3 Nomenclature of Territorial Units for Statistics (NUTS) are regional areas defined to allow acommon statistical classification to enable the collection, compilation and dissemination of harmonised regional statistics in the Community. NUTS 3 regions have a minimum population of

150,000 and a maximum population of 800.000.

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LAN technology used in the wide area). However, where FTTB is available, it has adramatic effect on the speed and range of services that can to be offered, as can beseen in Italy and Sweden. In the latter years of the forecast period, when demand for services at above 10Mbps is growing particularly among business users, it isanticipated that deployment of fibre will have started in many countries, but few willhave significant FTTB networks, which will be limited to urban areas. However, fibredeployment to street cabinets (FTTC) is expected to be more widely used, takingadvantage of high capacity DSL services (e.g. ADSL2+ and VDSL).

Figure 2-1 Europe's population density for NUTS3 levels areas

Source: IIASA European Rural Development Project

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Figure 2-2 Urban population in EU countries

UrbanPopulation

UrbanPopulation

UrbanPopulation

Austria 56% Greece 68% Poland 56%Belgium 46% Hungary 60% Portugal 64%Cyprus 45% Ireland 54% Slovakia 45%Czech Republic 68% Italy 64% Slovenia 45%Denmark 70% Latvia 45% Spain 56%Estonia 45% Lithuania 45% Sweden 69%Finland 57% Luxembourg 49% UK 74%

France 74% Malta 45%Germany 74% Netherlands 53%Source: European Social Survey

The availability of these DSL and cable modem services cannot be consideredcumulative. The country groupings, and the range of broadband availability to (as %of population) in each country group are given in Figure 2.3 and the availability of

broadband in 2004 is shown in Figure 2.4.

There are currently low levels of availability of fibre to the user / building (FTTU/B), broadband fixed wireless access (BFWA) and WiFi (wireless LAN technology used inthe wide area). However, where FTTB is available, it has a dramatic effect on thespeed and range of services that can to be offered, as can be seen in areas of Italy andSweden.

Figure 2-3 Broadband availability by Country Group in 2004

Countries in Group Broadband availability 2004

Group 1 UK, France, Belgium, Denmark,

Luxembourg, Netherlands,Austria, Sweden and Malta

78% (Sweden) 98% (Denmark)

Group 2 Italy, Germany, Finland andIreland

62% (Ireland) 85% (Germany andFinland)

Group 3 Spain, Portugal, Estonia,Cyprus and Slovenia

50% (Estonia, estimate) 92% (Spain)

Group 4 Czech Republic, Hungary,Poland, Slovakia, Greece,Latvia and Lithuania

Very low (Greece) 85% (Lithuania)

Source: Ovum

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Figure 2-4 Broadband availability by country - 2003

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The availability of broadband in all countries and especially the 10 EU accessioncountries demonstrates that it is not difficult to make rapid progress in providing

broadband access to large proportions of the population. The challenge lies inreaching beyond the urban and more tightly grouped rural regions. This is beingachieved through a combination of commercial WiFi, BFWA and satellite services,

public sector financial support and other initiatives such as regional aggregation andawareness campaigns.

2.3 Terrestrial broadband availability forecasts: 2004 - 2013To develop the broadband take up model, we have made assumptions about the basisof availability by access speed in 2004 and assumptions about the way in whichterrestrial broadband service availability will increase in each proxy country, byaccess speed and type of user. The forecasts for each proxy country are derived fromOvums detailed broadband forecast methodology. The Ovum broadband team worksclosely with network operators, service providers, industry bodies and other players inthe market. It undertakes analysis of what has gone before the size and rate of market development, its regulatory environment and value drivers (e.g. content,services). The model forecast takes into account these factors and also thedevelopment of economic and demographic factors.

4 DSTI/ICCP/TISP(2003)7/FINAL: The Development of Broadband Access in Rural and RemoteAreas, 10-May-2004

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The broadband availability forecasts also assume that broadband services will bemade available where it is commercially viable for service providers to do so, which isrelated to national prosperity. The availability of cable TV networks stimulates the

broadband market, as cable service providers have sunk their initial costs for cable tothe home (in more densely populated areas) and can easily offer attractive service

bundles, without the greater costs that DSL service providers have to bear.

The drivers for increasing availability and take-up of broadband will be similar in allcountry groups. Initially consumers will require those services available with narrow-

band internet access, shown in Figure 2.5 at the lower service levels. As consumers become more familiar with the service and new products become available, so usageand bandwidth demand will increase.

Figure 2-5 Bandwidth and service level requirements of selected consumer applications

Source: Point Topic

Figures 2.6 2.9 show the forecast availability of broadband services for residentialand SoHo users. It is assumed in all cases that SMEs and large enterprises will havehigher broadband availability as they are a desirable customer sector and businessareas are amongst the first to be served. The charts showing service availability for all

broadband user groups are provided in Appendix A to this report. The rate of growthand the limit of take up will vary between country groups. The major factors arediscussed below:

Group 1 countries have very mature telecoms markets in both urban and ruralregions. The regulatory environment has adapted to create a strong competitivemarket which is assisted by high levels of GDP and annual disposable income.Those areas which do not have terrestrial broadband services available are few,

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and the incumbent is often leading the activity to reach nearly 100% availability,enabling the remaining smaller rural exchanges for DSL. The assumedavailability by access speed for residential and SoHo users in urban and ruralareas is shown in Figure 2.6.

Figure 2-6 Broadband availability assumption Group 1 countries

Residential and SoHo - Urban Availabity

-

10,000

20,000

30,000

40,000

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Residential and SoHo - Rural Availability

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Source: Ovum

Group 2 countries are similar to Group 1 countries. They have mature,competitive markets, and high GDP levels and high annual disposable income,

but have large areas which are less attractive to serve, owing to lower GDP,

terrain or general level of development, leading to overall lower levels of broadband adoption. The assumed availability by access speed for residential andSoHo users in urban and rural areas is shown in Figure 2.7

Group 3 countries have a high proportion of their population in Objective 1designated areas. There are medium levels of annual disposable income per household and the availability of broadband is varied. The countries have good

broadband availability in urban areas, but face a challenge in rural areas. Theassumed availability by access speed for residential and SoHo users in urban andrural areas is shown in Figure 2.8

Group 4 includes most accession countries which have medium levels of rural population and medium levels of disposable household income. The broadbandmarket in these countries is just starting to develop but is restricted by lower levels of technology and telephone line adoption. Operators are primarilyconcentrating their broadband offerings in urban areas. The assumed availability

by access speed for residential and SoHo users in urban and rural areas is shownin Figure 2.9.

Terrestrial broadband availability is complemented by the availability of satelliteservices, which are discussed in Section 2.4.

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2.4 Satellite broadband availabilityIn theory broadband satellite services have 100% availability outside local blackspotssuch as urban canyons (where there is no line of sight to the satellite). Europe is

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served by several different satellite operators whose spacecraft provide excellentcoverage of the entire EU area. This notably includes the members of the EuropeanSatellite Operators Association: SES Global, Eutelsat, New Skies, EuropeStar,EurasiaSat, Hellassat, Hispasat, Inmarsat, NSAB, Telenor and Telespazio. Most of these operators have substantial capacity available at Ku-band and to a much lesser extent at C-band. In addition, the major operators are incrementally introducing newcapacity at Ka-band, specifically intended to serve broadband markets. Finally, themobile satellite operator Inmarsat is launching new L-band satellites this year, one of which is intended to support broadband mobile services across Europe from 2005.

Yet the real availability of broadband satellite services depends upon many other things besides in-orbit capacity. Experience has shown that the takeup of such servicesrequires all of the following to be simultaneously in place:

national and Europe-wide licensing of both spectrum and user terminals (whichmust be straightforward and inexpensive)

effective distribution channels (for both user terminals and integrated services packages)

proven high QoS levels

customer support services (with rapid turnout)

affordable usage charges

affordable user terminal prices.

At present few of the above elements are in place to a satisfactory degree in any EUcountry. On the other hand, 2004 is the first year in which most of these issues arestarting to be resolved. Their current status and future prospects are reviewed in detaillater in this report, with particular consideration given to:

the status and capabilities of distribution channels, including customer support

the importance of customer faith in good QoS

the competitiveness of satellite usage charges compared to terrestrial services,and as a subset of this the impact of the price of user terminals upon demand,including setup and licensing costs and the effect of subsidies and grants wherethese exist.

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2.5 Broadband take up: 2004 20132.5.1 Market development

The forecasts for take up are based on the market continuing to develop with healthycompetition and product development, taking into account:

broadband services being made available where it is commercially viable for service providers to do so

lower service prices, driven by competition, efficiencies of scale and network operator cost reductions

lower differentials between narrow-band and broadband prices, making itincreasingly attractive for consumers to switch to broadband

increasingly attractive service packages and bundled services (TV, video-on-demand, Internet access, voice and content)

continuation of some national and regional initiatives to stimulate availabilityand take-up.

The forecasts do not take into account any new initiatives to make significantintervention into the market.

2.5.2 Established broadband take up in 2004

At the end of 2003 there were 22.7 million ADSL and cable modem broadband usersin the 25 countries that now make up the EU. Research carried out in Q1 2004 5 showsthat in the second half of 2003:

overall broadband growth in the major EU countries ranged from 15% in Austriato over 57% in Italy. France, Hungary, Italy, Portugal and the UK all showedmore that 44% growth. However, it should be noted that these growth figuresmay be from a very low base

DSL growth ranged from 16% to 75%, with strongest growth in France,Hungary, Italy and the UK

cable modem growth ranged from 0% to 43%, with strongest growth in Finlandand Spain.

These growth figures will also be affected by churn as consumers switchsuppliers, particularly where service packages and competitive pricing make

5 Source: Point Topic

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change an attractive option. Figure 2.10 shows the take-up of cable modem andDSL, relative to the number of telephone lines in use in each country

Figure 2-10 Cable and DSL broadband take up per telephone line in use Q4 2003

0%

5%

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25%

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BE NL DK AU FI SE ES EE PT FR MT UK DE IT SI LU HU LT LV IE CY PL CZ SK GR

Source: Ovum

There is still plenty of scope for increasing broadband take up in Europe, and this isevident from Figure 2.11, which shows that the highest take-up in the EU is inBelgium, with 12 broadband lines per 100 population. This compares with 24

broadband lines per 100 population in South Korea, one of the worlds highest usersof broadband services. If the number of residential broadband lines per household isconsidered, then we see that in Belgium 27% (Q1 2004), of households have a

broadband connection which compares with a figure of 62% (Q1 2004), in SouthKorea where the number of broadband lines grew by 2.2% in the quarter from Q42003 to Q1 2004, which is a slowing down of the growth rate experienced in earlier recent periods.

Figure 2-11 Broadband take up (cable and DSL total) per head of population

0%

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BE DK NL SE FI AU FR DE UK ES MT PT EE IT LU SI HU CY IE LT LV PL CZ SK GR

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Can South Korea be used as a good model for estimating the growth of broadband inEurope? The main reasons for the great penetration of broadband in Korea are:

a) the Korean government has an initiative for carriers to offer universal accessto broadband Internet with speeds up to 1 Mbit/sec by 2005 to 84% of SouthKorean households. The government has subsidised equipment purchases andconsistently pursued deregulation and liberal market principles

b) there have been sustained high levels of investment in technical education tohelp stimulate infrastructure build and an environment suitable for rapidadoption of the new communication services

c) Korea's closely-knit and homogeneous culture has led to rapid take up of broadband Internet services. More than 93% of homes are within 4 km fromend offices allowing high speed DSL access. Around 94% of Internetcustomers in Korea use broadband services.

d) the online gaming industry in Korea is well developed and very popular.

e) by 2005, the government plans to build high-speed broadband networks using

fibre optic cables offering speeds up to 20 Mbit/s. It also plans to introduceFTTH in 2005. The telecommunications companies are being encouraged toinvest a total of 18.4 trillion KRW (EUR13 billion) to build a countrywideultra-speed information network by providing them with loans and incentives.

f) in April 2002, the Korean government announced a series of loans totalling 80 billion KRW (EUR 56 million) to Korean ISPs to increase the number of homes passed by broadband from 55% of Korean homes to 70% by the end of 2002. The Korean government plans to spend over EUR 8.3 billion to deliver VDSL or fibre to over 80% of the Korean population by the end of 2005.

Whilst some of these factors do not have direct parallels in Europe, they indicate thelevel of broadband adoption that can be achieved when attention and investment isstimulated. The Korean initiatives are wide ranging and they are far more than being asubsidy which reduces the cost of broadband for end-users. Further analysis would beneeded to determine the relative importance of each of the Korean initiatives and theextent to which demographic and cultural differences between Korea and Europe (e.g.multi-tenant buildings, the strong emphasis on education and the enthusiasm for online gaming) would effect the take up of broadband in Europe if similar initiativeswere undertaken.

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2.5.3 Take up by country group: 2004 2013

Two sets of data have been developed for modelling the costs of broadbanddeployment over the period 2004 - 2013:

a Base Case. This is the growth in broadband take up that can reasonably beexpected to develop over the period 2004 2013. The forecasts are different for each country group and they assume that:

the regulatory environment will continue to develop and support the roll-out of broadband

service prices will continue to drop driven by competition andmanufacturing efficiencies achieved through high volumes of productshipments

governments and agencies will encourage the adoption of broadband for the benefits that it brings

applications, content and service bundles stimulate the market

an Extended Case. In each country group a modest increase is assumed over andabove the base case. This case assumes that the terrestrial availability remains

similar to the base case. The increased take up might be due a more stimulatingmarket environment or intervention to attract new users.

2.5.4 Base case for take up

The Base Case for broadband take up is derived from Ovums broadband forecastmethodology. This model has been developed through many years of experience andis refined at each iteration. The Ovum broadband modelling methodology isdeveloped from historic demand information, with country scenarios for telecommunications infrastructure and services derived from published statistics, desk research and expert knowledge. This is complemented and reviewed throughcorrespondence and interviews with country sources such as regulators, operators andequipment vendors. The model incorporates the main types of infrastructure deployedand service segments, breaking each category down into consumer and business, voiceand data, and narrowband and broadband segments, as relevant.

The Base Case model developed for this study provides forecasts for take up by user group (Consumer/SoHo, SME and Large Enterprise), access speed and urban / ruralsplit. The forecasts for residential / SoHo users in each country group are provided inFigure 2.12 to Figure 2.15 and summarised with a comparison with the Extended Casein Figure 2.16. Detailed charts of the broadband Base Case are provided in AppendixA. The charts show:

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higher take up in urban areas than in rural areas. This reflects the greater serviceavailability in urban areas and also the higher levels of competition causingservice providers to offer attractive service bundles

an expectation that businesses will be much more attracted to higher bandwidthservices for desk-based applications, but will still find lower bandwidth servicessufficient for many specific applications, e.g. point of sale terminal connections

the profile for Country Groups 3 and 4 show a significant lag behind CountryGroup 1 and Country Group 2 countries.

Where take up grows to over 100% in the SME and large enterprise sector, thisreflects the fact that one enterprise may have more than one broadband connection.

Figure 2-12 Broadband take up in residential/ SoHo sector in Country Group 1

Residential and SoHo - Urban Take-up

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Urban 10Mbps

Residential and SoHo - Rural Take-up

-

2,000

4,000

6,000

8,000

10,000

12,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Rural 10Mbps

Source: Ovum



-

5,000

10,000

15,000

20,000

25,00030,000

35,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Urban 10Mbps


-1,0002,0003,0004,000

5,0006,000

7,0008,0009,000

10,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Rural 10Mbps

Source: Ovum

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-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Urban 10Mbps


-

500

1,000

1,500

2,000

2,500

3,000

3,500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Rural 10Mbps

Source: Ovum

Figure 2-15 take up in residential/ SoHo sector in Country Group 4


-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Urban 10Mbps


-

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

( , 0

0 0

)

Rural 10Mbps

Source: Ovum

2.5.5 Extended Case for take up

The model develops costs for each country for high levels of broadband take-up, atdifferent access speeds. The levels of high take-up are based on assumptions that the

market will be stimulated in some way. This might be caused by:

the availability of market-stimulating content or applications which have not been considered in the base level scenarios

regulatory intervention, which for example:

drives down the cost of unbundled and wholesale DSL services

establishes broadband universal service obligations

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service provider market and pricing strategies which cause stronger take up thanin the base case

market intervention (beyond the initiatives that are already envisaged in the basecase) to stimulate demand, for example:

community schemes to bring user groups together

company schemes to bring employees onto broadband, enabling flexibleworking

subsidies from municipalities or regional development agencies

utilities or supermarkets being more active in broadband service resale as part of loyalty schemes.

Figure 2.16 shows the levels of take up in 2008 and 2013 for the residential user segment and allows comparison with the base case. Detailed charts of the ExtendedCase take up profiles, broken down by user segment and access speed, are provided inAppendix A.

Figure 2-16 Residential / SoHo segment take up

Base Case Extended Case Base Case Extended CaseCountry Group 1

Urban 54% 56% 76% 82%Rural 36% 39% 54% 64%

Country Group 2Urban 37% 41% 74% 81%Rural 19% 20% 39% 42%



2008 2013Take Up

Source: Ovum

2.6 Potential broadband demand remaining unservedDespite considerable efforts on the part of service providers to deploy services, thisstudy estimates that by 2013, terrestrial broadband services will remain unavailable tosome 4.7m would-be broadband users in the EU. About 1.3m of these will be business

users, predominantly micro-enterprises.

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The situation varies considerably between different country group. Rural areas will beless well served during the period to 2013 and the demand remaining unserved inthese areas is of most interest. As shown in Figure 2.15, in 2004 there is estimated to

be an unserved market of 6.2m households and businesses in Group 1 countrieswithout access to terrestrial broadband services. If the number of would-be users inthis group is assumed to be in line with take-up where services are available, then theestimated unmet demand among Group 1 countries is 380,000 would-be users in 2004,rising to 490,000 in 2013.

Figure 2.18, 2.19 and 2.20 show the Base Case for broadband availability, take-up,unserved users and unmet demand for Country Groups 2, 3 and 4.

As can be seen from the charts, the levels of unmet demand is much lower in CountryGroup 1 than in the other country groups. This reflects the very high availability of

broadband services achieved in Country Group 1, whose member countries are allwealthy and have highly developed telecommunications infrastructures. In contrast,Country Groups 2 and 3 have large rural areas than incorporate Objective 1 regions,often with low population densities in those areas. The level of unmet demand peaksin the middle of the study period, reducing progressively thereafter as terrestrialrollouts extend into at least the outer peripheries of these areas.

We estimate that by 2013, the level of unmet demand in Country Group 2 will be 2.2million and over 0.5 million in Country Group 3. Country Group 4, which includesthe larger accession countries and also Greece has a high level of unmet demand. Intotal there are estimated to be 1.5 million would-be users in the unserved areas of these countries, reflecting the large proportions of their total land mass that remainsoutside of terrestrial broadband coverage even in 2013.

The Extended Take-up Case, which represents a greater level of broadband take-up,might be expected to show a lower level of unmet demand. Yet in fact the opposite istrue. This is because availability of broadband services is unchanged between the two

cases, with only the level of take-up varying. The Extended Take-up Case represents asituation in which more customers take-up broadband in those areas where it isavailable. It is assumed that the potential demand for broadband will be the samewhether it is available or not. Consequently, the Extended Take-up Case produces

both a higher level of take-up in areas with broadband availability and a higher levelof unmet demand where it is not available. The analysis indicates a potential of about7m users, including 2m business users, with a requirement for broadband services thatcannot be met by the anticipated market-driven rollout of terrestrial networks.

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Figure 2-17 Unserved demand Country Group 1, rural areas

Group 1 Countries - rural availability and take-up

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

200 4 200 5 20 06 200 7 20 08 20 09 2 01 0 201 1 201 2 201 3

Total Rural Consumers ( inc bus . ) Rural Avai labi li ty Rural Take-up

Group 1 Countries - rural unserved market andrural unmet demand

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 011 2 01 2 2 01 3

Total Rural Consumers (inc bus. ) Unserved market Unmet demand

Source: Ovum

Figure 2-18 Unserved demand Country Group 2, rural regions

Group 2 Coun tries - rural availability and take-up

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

20 04 2 00 5 20 06 20 07 2 00 8 20 09 201 0 2 011 20 12 201 3

Total Rural Consumers ( inc bus . ) Rural Avai labi li ty Rural Take-up


-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 011 2 01 2 2 01 3

Total Rural Consumers ( inc bus .) Unserved market Unmet demand

Source: Ovum

Figure 2-19 Unserved demand Country Group 3, rural regions

Group 3 Countries - rural availability and take-up

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2 004 2 005 2 00 6 200 7 200 8 200 9 20 10 20 11 20 12 20 13

Total Rural Consumers ( inc bus . ) Rural Avai labi l ity Rural Take-up


-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

200 4 20 05 20 06 20 07 20 08 20 09 20 10 20 11 201 2 20 13

Total Rural Consumers (inc bus . ) Unserved market Unmet demand

Source: Ovum

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Figure 2-20 Unserved demand Country Group 4, rural areas

Group 4 Cou ntries - rural availability and take-up

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

20 04 200 5 20 06 2 007 200 8 20 09 201 0 2 011 20 12 201 3

Total Rural Consumers ( inc bus. ) Rural Avai labi li ty Rural Take-up


-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

20 04 200 5 2 006 200 7 2 008 20 09 201 0 2 011 201 2 2 013

Total Rural Consumers (inc bus . ) Unserved market Unmet demand

Source: Ovum

2.7 Availability and take up of terrestrial broadband - conclusionThe availability of terrestrial broadband services (defined as the proportion of households and businesses that can be served at reasonable cost and within areasonable time of the customer placing an order) is forecast to exceed 95 per cent inurban areas across virtually the whole of the EU by 2010. Availability in rural areaswill generally be much lower. Among the wealthier countries it will typically reach 75

per cent by 2013 but in most of the recent accession countries it will still be no morethan 35 per cent.

Takeup of broadband services, like availability, is expected to be highest in the richestcountries and in urban areas; and lowest in poorer countries with large rural areas. The

proportion of these potential customers who actually take up broadband services isforecast to be close to 100 per cent for SMEs and Large Enterprises but much lower for SoHos and consumers, especially in rural areas. The take up of services areconsidered for a Base case and for a Extended Take-up Case. In the Base Case (thesituation that may occur under normal market conditions) take-up among consumer

households and SoHos by year 2013 varies from over 50 per cent in most of NorthWest Europe to less than 10 per cent in many recent accession countries. In theExtended Take-up Case these figures exceed 66 per cent and 30 per cent respectively.The eventual ceiling on take-up is higher than these figures (ultimately reaching atleast 75 per cent even among consumers in rural areas). It is determined largely byaffordability and user willingness to pay, which is itself in part a reflection of

perceived value. The speed of take-up is determined in the early years partly by supplyconstraints but for most of the period price is the key factor.

The availability of broadband in the EU is dominated by ADSL and cable modemservices and this is expected to continue. Cable modem services, built on top of cable

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TV infrastructure are primarily provided in urban areas and their provision is veryvaried across the EU. They are rarely cost effective to deploy in isolated urban areasand rural areas. DSL services are provided in urban areas and increasingly in morerural locations. There are currently low levels of availability of fibre to the user /

building (FTTU/B), broadband fixed wireless access (BFWA) and WiFi (wirelessLAN technology used in the wide area). However, where FTTB is available, it has adramatic effect on the speed and range of services that can to be offered, as can beseen in Italy and Sweden. In the latter years of the forecast period, when demand for services at above 10Mbps is growing particularly among business users, it isanticipated that deployment of fibre will have started in many countries, but few willhave significant FTTB networks, which will be limited to urban areas. However, fibredeployment to street cabinets (FTTC) is expected to be more widely used, takingadvantage of high capacity DSL services (e.g. ADSL2+ and VDSL).

The cost of the dominant terrestrial services declines rapidly throughout the period asthey benefit from economies of scale. This is offset somewhat in later years by thehigh cost of rolling out fibre access networks, although this does not affect the cost of lower bandwidth services.

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3 Combined system and user costs of broadband connectionThis section of the report provides comparative systems costs for the major technology options available for access and backhaul discussed in this report. For aBase Case of take up and an Extended Case of take up, we provide:

the average cost per user, averaged across the mix of technologies used to deliver broadband services

the total annual costs per country group.

In Section 3.4, the network and service costs are broken out for each major technologyexpected to be used in urban and rural areas. The costs of providing broadband inObjective 1 areas (for those countries which have Objective 1 regions) are estimatedin Section 3.6.

All costs are quoted in nominal Euros. The methodology for the model developed toestimate the costs of deploying broadband across the 25 countries of the EU isdescribed in Appendix B to this report.

3.1 Costing considerations

All major telecoms operators serving the consumer sector are investing in their networks, with three main objectives:

to reduce the complexity, and hence operating costs, of the network. For example, multi-service platforms to be used to deliver different types of service,allowing the operator to reduce the number of different service platforms in thenetwork

to configure the network for effective and efficient growth in broadband servicesand the delivery of content and value-added services which are enabled by

broadband

to enable future migration to voice over IP (VoIP), which will allow increasinglyexpensive TDM switches to be retired.

These three objectives are all closely interlinked and it is not possible to easilyseparate the costs that arise from each. The costs described in this section of the reportare therefore approximate due to the many network changes being undertaken and anumber of other factors:

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increased broadband use will drive core IP network traffic, the cost analysis of which is not included in this paper

the size of a service providers operations will affect their economies of scale

product prices and discounts will vary across the EU we have used typicalequipment prices supplied by vendors

common equipment systems e.g. equipment racks and transmission systems, will be installed to cater for growth, and a fill factor is used to reflect increasingutilisation with time

costs will reduce over the forecast period due to lower costs for network systemsand management systems, the implementation of which will lead to lower operating costs. These factors are included in the cost model.

3.2 Capital costsThe costs of broadband access are made up of capital expenses and operatingexpenses. The capital costs have to be assessed for the components shown in Figure3.1. These are the network nodes within the network, e.g. local exchange, remoteconcentrator, FWA base station, cable modem termination node, and the infrastructureneeded to connect between network nodes (backhaul) and the customer access, e.g.

copper twisted pair, fibre, radio link.

In the cost modelling for the project, the capital costs are depreciated over anappropriate period: 3 years for customer premises equipment (CPE); 5 years for lineinterface cards; 10 years for network systems and backhaul; 25 years for fibre.

Figure 3-1 Access and backhaul options

RemoteAccessPoint

Customer accessBackhaul to the PoPBackhaul from

the PoPCustomers premisesPoP

Typical

Options:

Copper - PDH

Fibre - xDSLFibre - IPPt - Pt radioBFWASatellite

Copper - PDH

Fibre - SDHFibre - IPPt - Pt radioBFWASatellite

Twisted pair

Fibre xDSLFibre - IPPt - Pt radioBFWA (incl WiFi)Satellite

Source: Ovum

The cost of backhaul is a significant component of the overall cost of broadbandservices, particularly when provided to more remote areas. To help reduce this burden,

bandwidth in the backhaul network will be shared between many users, with typicalratios of between 20:1 and 50:1 for residential customers. Service providers offer arange services with lower contention ratios for business users. Such ratios are not

unreasonable, as it is unlikely that all users will be streaming downloads at the same

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time and a reasonable service level will prevail. The provision of different levels of contention is a key differentiator between consumer and business services.

Access node technologies and connection / backhaul services can be deployed incombinations to provide the most cost-effective solution. Typical combinations areshown in Figure 3.2. The boundaries between the segments of the diagram willoverlap considerably, depending on the strategy of the service provider, existinginfrastructure and the market being served. For example, Telecom Italia is servingcustomers which cannot be economically reached by DSL with one-way satellite (withtelephone return path), Telefonica is deploying BFWA to provide both VoIP and

broadband access services, BT is trialing BFWA to serve customers beyond theoperating limit of DSL.

Figure 3-2 Typical access and backhaul options

Backhaul distance to core network

1 2 10 20 100 200 1000 km

Size of user community

1

2

10

20

100

200

1000

Wi-Fi + satellite

BFWA + satellite

DSL + Satellite

DSL + Fibre /submarine cable

DSL+ BFWA

DSL + Pt-Pt radio

DSL + Fibre

DSL+ stdnetwork

DSL + fibre or

HFC + fibre

2 Way satellite

W i F i / B F W A

+ s t

d n / w

W i F i + B

F W A

D S L ( w i t h P a i r b o n

d i n g

)

Technologies described = Access technology + backhaulSource: Ovum - adapted from Broadband Access Solutions and Economics for Rural Areas - Muse 15 Dec 2004

There are many technologies which can be used to provide broadband access and themajor technologies which are likely to be used in Europe are discussed in Section 5 of the report. Capital systems costs vary considerably, and will depend on the access and

backhaul systems deployed, size of the user base within a community and network

configuration. Terrestrial costs will also vary depending on whether a service provider

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has to build its own network, or buy capacity on the wholesale market.Althoughentirely new satellite systems involve very high start-up costs, satellite capacity isreadily available from existing operators at competitive prices and for variableamounts of bandwidth. Technically satellite services have the advantage thatcustomers in remote, rural areas are as easy to connect as those in towns; but retail,distribution and customer support costs in such areas can be a problem for satelliteservice providers, who generally lack the country-wide, mass-market distributionnetworks that have been developed for terrestrial services like ADSL.

3.2.1 Backhaul options and costs

Figure 3.1 shows backhaul from the PoP/ local exchange to the core network and fromthe remote access point to the PoP/ local exchange. If the PoP/exchange building isnew, or is existing but is currently fed with a low-bandwidth backhaul feed, newinfrastructure will be required. The backhaul in Figure 3.1 may be terrestrial, wireless/radio or satellite. A cost summary of some of the terrestrial options available to theoperator is provided in Figure 3.3, and a summary of satellite options in Figure 3.4.

Figure 3.3 Backhaul options - terrestrialItem Typical capital cost Notes

PoP / exchange to network

Point-to-point radiobackhaul

17,000

2,000

Per end-to-end system

Per antenna

SDH transport 10,000 60,000 Per unit, depending on backhaul capacityrequirement

Duct dig and install (if reqd)

Fibre installation

80240 per metre

2,000 - 6,000 per km.

Depends on ground conditions

Depending on existing ducts and method used

Remote access point to PoP / exchange

Passive optical network(requires established fibrenetwork)

Head-end equipment: 40,000

Optical network unit(ONU): 2,500 each

The head-end (or optical line terminationequipment OLT) is shared between all thecabinets, with a maximum of 32 ONUs per OLT

The ONUs are one per cabinet

Mesh radio 12,000 per cabinet andrepeater station

Mesh is a complicated solution, and sophisticatedplanning tools and time for network analysis alsoneed to be taken into account

Gigabit Ethernet* 5,000 per switch Typically limited to eight switches per ring

SHDSL / Pair bonding 500 - 1,500 per device, depending oncapcity

Bandwidth and distance limited. Repeater nodesrequire power and accommodation, which adds tocosts of this solution. Up to 10Mbit/s over shortdistances.

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Figure 3-4 Satellite backhaulItem Typical capital cost Notes

Capacity lease 2Mbit/s: 150,000 per annum

10Mbit/s: 600,000 per annum

45Mbit/s: 2.5m per annum

155Mbit/s: 5m per annum

Assumes dedicated capacity.

3 year lease in all cases.

Full 36MHz transponder.

Full 72MHz transponder.

Includes Teleport costs of 300,000per annum for a 45Mbit/s service

CPE

With 1.2m antenna pair

With 1.8m antenna pair

With 2.4m antenna

With 3.7m antenna

9000

50,000

50,000

150,000

For 2Mbit/s service

For 10Mbit/s service



Plus site installation, power, licensing cost depends on location

3.2.2 Access options and costs

Terrestrial access to the customer may be provided directly from the service providers PoP /local exchange or from a remote access point (Figure 3.5). A costsummary of some of the options available to the operator is provided in Figure 3.6 toFigure 3.11.

Figure 3-5 Access to the customer

Remote

accesspoint

Customer accessBackhaul

to the PoPBackhaul

from the PoP

Customerspremises

PoP/exchange

Source: Ovum

3.2.3 ADSL and derivatives

DSLAM networks are very cost effective, but costs per user rise rapidly in areas withsmall numbers of users, or in which new backhaul needs to be installed. If an area will

always have fewer than 100 customers then a suitable DSLAM can easily be chosen;

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however, finding one that cost-effectively scales from 100 to 1,000 users is muchharder. Remote DSLAMs can also be used to get nearer to the customers, but due tolocal loop unbundling issues, this option may only be available in some countries tothe operators that own their own copper.

Table 2 xDSL from the exchange or remote access pointItem Typical capital cost Notes

Large DSLAM 35,000

Per port: 100 for basic ADSL

Up to 160 per port for multi-protocol card. Typically, 100per port

5,000-user DSLAM rack

If expected demand is low (fewer than 200250customers) it will be cheaper to install a muchsmaller DSLAM. Port prices vary depending on

DSL / other standards supported.

Small DSLAM 6,000 (exchange-based)

10,000 (cabinet-based)

Up to 160 per port for multi-protocol card. Typically, 100per port

200-user DSLAM rack

Requires backhaul to exchange

Per port cost depends on configuration andfeatures

Micro DSLAM 10,000 (cabinet-based. Fullyconfigured with ADSL linecircuits)

Requires backhaul to exchange

Exchange upgrade Variable Building, power, heating, aircon etc

3.2.4 Hybrid fibre coax (HFC)

The business case for deploying a HFC network to deliver broadband services isimproved by the virtue of the service providers existing cable TV business and thecurrent regulatory environment, in which cable network operators are not compelledto open this access networkto others:

there is an established base of customers taking TV services

the costs of the final co-ax link to the customer is already sunk the cable operator has rights of way and ducts established, which reduces the cost

and operational difficulties of fibre installation

at present in Europe, cable operators are under no obligation to open their networks to competitors and so have 100% availability of those customerswishing to take cable broadband service.

The result is that common infrastructure costs for HFC networks are shared acrossmany, closely located customers.

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It is convenient to consider the average cost of deploying HFC, rather than assesscosts of individual cable modem termination systems, optical termination unitssystems and fibre. Typical costs per subscriber passed are detailed in Figure 4.7.

Table 3 HFC costsItem Typical capital cost Notes

New build cost per 1,000home passed

550,000 = 2,750 per user

820,000= 2,050 per user

875,000= 1,455 per user

With 20% take up / home passed



Upgrade of existing co-ax

network to HFC

200 - 400 Per home passed

3.2.5 Fibre to the building / user (FTTB/U)

Fibre to the building or user may be installed in ring, or star configuration, dependingon the service needs and selected transmission technology. It is possible to deployfibre along overhead lines e.g. sharing utility distribution poles, but this method is

potentially a high maintenance solution due to the fibre cable being exposed and thusmore susceptible to damage.

Table 4 FTTB/U costsItem Typical capital cost Notes

Duct dig and install (if reqd)

Fibre installation

80240 per metre

2,000 - 6,000 per km

Depends on ground conditions and way-leaves

Depending on availability of existing ducts andmethods used

In building systems andinstallation

1,100 per user Includes common switching and CPE

3.2.6 Broadband fixed wireless access (BFWA) and WLAN

The low cost of WiFi solutions, typically operating at 2.5GHz, makes unlicensed fixedwireless access popular with small rural operators. With low start-up costs, reasonableservice delivery and reach, and no large licence fee, it is an ideal technology for ruralISPs. However, the QoS and bandwidth available from WiFi systems will probablynot be good enough for some business customers.

BFWA systems operating at 3.5GHz or above, e.g. WiMAX, will provide better QoSthan WiFi at 2.5GHz. Although BFWA CPE costs are relatively high, they areexpected to fall as the technology matures and standardised systems become wellestablished. With a reach of up to 35km for 3.5GHz and higher frequencies, BFWA

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systems are able to serve larger geographic areas of operation than WiFi. It is expectedthat BFWA will fill a market niche as costs fall with higher product volumes.

Table 5 Fixed wireless access and wireless LANItem Typical capital cost Notes

FWA: 3.5GHz or 10GHz (licensed)

Base station: 30,000- 50,000

CPE: 800

Maximum 4,000 customers per base station covering360

Typical maximum burst 6Mbit/s

Typical maximum distance 35km

FWA: 2.55GHz(unlicensed)

Base station: 8,500

CPE: 450

Maximum 1,000 customers per base station

Maximum burst 926kbit/s; Maximum distance 3km

FWA: 26GHz (point-to-multipoint)

Base station: 60,000

CPE: 1,800

Maximum 1,000 customers per base station covering360 line of sight

Can provide services up to 100Mbits

Other costs

Tower /antennainstallation

From 1,500 to 18,000

Towers are not always required. Buildings can be usedwith the agreement of the owner

If the building or tower is not positioned close to the localexchange, backhaul to the exchange will be required

Fixed wireless access

licence (if required)

Variable If the operator has to buy or pay an annual fee for the

licence, this can significantly increase the cost per user

3.2.7 3G

Cellular mobile networks have to be configured and built to provide extensive levelsof coverage across a country or region. The whole network provides access services tomany thousands of users. It is not easy or meaningful therefore to proportionatelyallocate the costs of a wide area cellular network, which is providing voice and dataservices, to those users of a specific type of service. Network capacity and network coverage have to be provided to stimulate customer uptake, whilst the early network

build costs have to be contained when there are few customers. Many cellular operators are not planning to provide total 3G coverage, due to the high marginal costsand low returns and it will be many years before 3G coverage matches that of GSMnetworks, if ever. Instead, GSM networks will be complemented with EDGEtechnology to provide data access to customers, but at lower data rates than 3G can

provide.

We estimate that a typical 3G radio access network (RAN) accounts for 80% of thetotal cost of a 3G network, of which 60% is base station systems, 20% towers andother accommodation. The remaining 20% of total network costs are accounted for by

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the core network components. This large proportion of costs in the RAN leads tonetwork sharing agreements, which again make cost per user difficult to ascertain.

Our 3G costs estimates are based on a fully configured base station, with 3Mbit/s datacapacity, costing EUR 300,000. This base station can provide data access at 384kbit/sfor up to 200 users, with a contention ratio of 20:1. The costs of backhaul and terminalequipment are additional to this base station cost.

3.2.8 Broadband mobile wireless / 4G

Standardisation work has begun on BMW / 4G, with potential to offer access speedsof 10s Mbit/s. Developments are underway with vendors coming from the mobile

phone, 2G/ 3G industries and also from those whose background is BFWA.

Systems will begin to be deployed within the timeframes of this study, but will nothave a major commercial impact on the wide-scale deployment of broadband.

3.2.9 Satellite

The greatest and most obvious benefit of satellite services is that they can be rolledout virtually anywhere and do not require an additional backhaul link. As there arealready many competing satellite systems in Europe at every level of the demandchain, this means that individual locations can be served at short notice without the

need for expensive infrastructure investments. However, large scale use of 2 waysatellites for broadband access could require additional satellite fleet capacity.

Table 6 SatelliteItem Typical capital cost Notes

Access options 1a) Satellite transponder: 2.5 million/year

1b) Hub station:


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satellite capacity and to make the resulting services more affordable would increasethe number of users able to take advantage of them but would not fundamentallyalter this situation. Satellite can therefore be a useful contributor to bridging thedigital divide in Europe but it can no more bridge that divide by itself than can anyother single technology.

3.3 Operational costsThe cost model includes a component to cover operating expenses for terrestrial andsatellite operations. For terrestrial systems an overall operating expense of up to 40%(Country Group 1) is included to cover:

staff and associated expenses for systems installation and commissioning

ongoing maintenance, operations and network management systems related to thenetwork systems deployed

staff costs related to operation and maintenance activities

annualised costs for building, accommodation, heating and lighting.

The operating and related expenses will not be common across Europe as staff andsome other costs will be significantly lower in Country Groups 3 and 4. The operatingexpense factors are shown in Table 7.

Table 7 Operating costs as a percentage of Capex.

Staff andassociated

expense for installation an dcommissioning

Maintenance,operations and

networkmanagement

systems

Staff andassociated

expense for ongoing

operations

Annualisedcosts for building,heating,

accomodation,Country Group 1 10% 5% 10% 15%Country Group 2 9% 5% 9% 14%Country Group 3 7% 5% 7% 10%

Country Group 4 2% 5% 2% 4% Source: Ovum

3.4 Typical cost breakdown by technologyThe availability of broadband in the EU is dominated by ADSL in urban and ruralareas and by cable modem services in the urban areas of many countries. Thisdomination is expected to continue during the forecast period of the study as the costsof these services will be driven down by high product volumes, increased levels of component integration and increasingly efficient operational processes adopted by

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service providers. At the same time there will be factors preventing the overall cost per user from falling more rapidly:

operators will be introducing new broadband platforms to enable the delivery of value-added services

DSL will be introduced into areas which are increasingly expensive to serve

the high initial costs of introducing fibre networks to replace / complement areasof local loop.

In the longer term fibre will increasingly be introduced into the access network, with adramatic effect on the speed and range of services that can to be offered. This isalready starting to happen in some countries. Fastweb in Italy and Bredbandsbolaget(B2) in Sweden are now well established and offer high bandwidth services over fibreand DSL.

The average cost per user comprises:

the annualised capital costs of network systems, where the equipment isdepreciated over a 3-25 year period, depending on its function. There is,therefore, a capital cost component included in these figures to reflect the capitalinvestments that have been made in broadband networks before 2004. Network operations are included.

the annual costs per user for customer service and CPE, which is a significantfactor for satellite services, as the cost of the antenna and CPE installation arenormally borne directly by the customer.

The countries with the greatest need for broadband development are those in Groups 3and 4. To illustrate typical differences in average costs, Tables 10 and 11 give theannual costs per user for deploying the most appropriate technologies in Rural andUrban areas of Country Group 3. Similarly, Tables 12 and 13 provide thisinformation for Country Group 4. HFC cable modem broadband and fibre areunlikely to be deployed as an access technology in rural areas, and as such details are

provided only for urban areas.

Costs are quite similar between Country Group 3 and 4, slight variations being due tothe different rates of availability and take-up between the countries and GDP-basedcost differences.

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Table 8 Country Group 3 rural areas 512 kbps access technology cost breakdown

ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 244 228 213 198 187 177 167 158 150 142Customer service 61 57 53 50 47 44 42 39 37 36Total Cost 305 285 266 248 234 221 209 197 187 178BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 222 194 179 164 149 136 125 117 110 104Customer service 95 85 81 76 71 66 62 60 58 56Total Cost 317 279 260 240 219 203 187 177 168 1592 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 819 729 656 597 549 516 485 456 429 403Customer service 532 474 426 388 357 336 315 296 279 262Total Cost 1,351 1,202 1,082 985 906 852 800 752 707 665

Base case - annual cost (euro) per user

Table 9 Country Group 3 urban areas 512 kbps access technology cost breakdown

ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 175 165 157 148 140 133 127 120 114 108Customer service 58 55 52 49 47 44 42 40 38 36Total Cost 234 220 209 197 187 178 169 160 152 145BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 192 180 156 147 136 127 119 112 105 99Customer service 64 62 55 53 51 49 47 45 44 43Total Cost 256 242 212 200 186 176 166 157 149 142HFC 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 115 109 103 97 92 88 83 79 75 71Customer service 49 47 44 42 40 38 36 34 32 30

Total Cost 165 155 147 139 132 125 118 112 107 101Fibre 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 1272 1126 1020 940 876 823 783 740 700 663Customer service 141 125 113 104 97 91 87 82 78 74Total Cost 1,413 1,252 1,134 1,044 974 914 870 823 778 7362 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 823 732 659 600 552 519 488 458 431 405Customer service 498 443 399 363 334 314 295 277 261 245Total Cost 1,321 1,176 1,058 963 886 833 783 736 692 650


Table 10 Country Group 4 Urban areas 512 kbps access technology cost breakdown

ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Network and operations 266 245 223 205 191 178 169 159 149 141Customer service 66 61 56 51 48 45 42 40 37 35Total Cost 332 306 278 256 239 223 211 198 186 176BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 237 199 181 163 145 131 119 111 104 97Customer service 101 88 82 75 69 64 59 57 54 52Total Cost 338 287 263 238 214 195 178 168 158 1492 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 819 729 656 597 549 516 485 456 429 403Customer service 532 474 426 388 357 336 315 296 279 262Total Cost 1,351 1,202 1,082 985 906 852 800 752 707 665


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Table 11 Country Group 4 Rural areas 512 kbps access technology cost breakdown

ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 175 164 155 147 139 132 125 119 113 107Customer service 58 55 52 49 46 44 42 40 38 36Total Cost 233 219 207 196 185 176 167 158 150 143BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 180 170 146 137 126 118 110 104 98 92Customer service 60 58 52 50 47 46 44 42 41 39Total Cost 240 228 197 187 174 164 154 146 139 132HFC 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 114 107 101 96 91 86 82 77 73 70Customer service 49 46 43 41 39 37 35 33 31 30Total Cost 163 153 145 137 130 123 117 111 105 100Fibre 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 1224 1064 954 873 811 763 722 683 646 612Customer service 136 118 106 97 90 85 80 76 72 68Total Cost 1,360 1,182 1,060 970 902 848 802 759 718 6802 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Network and operations 823 732 659 600 552 519 488 458 431 405Customer service 498 443 399 363 334 314 295 277 261 245Total Cost 1,321 1,176 1,058 963 886 833 783 736 692 650


3.5 Average cost per userTo undertake the cost benefit analysis for the study required an average cost per user for the urban and rural areas of each country. These are shown in Table 8 for theBase Case and Table 9 for the Extended Case. These tables demonstrate a steadydecline in costs over the forecast period. These are average costs which take accountof the mix of technologies (discussed in Section 3.8 and Section 4) which areexpected to be used to serve the EU national markets. The costs are presented asnominal values based on data established in 2004.

Table 12 Average annual cost per user (Euros) - Base Case

Average cost per user (Euros) - Base CaseGroup 1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Urban 233 222 215 211 209 207 206 205 204 202 200Rural 414 367 340 322 309 300 295 290 287 284 282Overall average 264 247 238 232 228 226 224 222 221 219 216Group 2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Urban 259 250 246 245 246 249 250 252 252 250 247Rural 539 493 445 411 386 369 355 347 337 329 322Overall average 299 288 281 276 274 274 273 273 271 268 263Group 3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Urban 247 233 221 211 202 194 187 182 178 174 170Rural 350

Bridging the Digital Divide a Cost Benefit Analysis for Broadband

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