Lyngby, 11. June, 2007 Halldor Matthias Sigurdsson ( halldor@cict.dtu.dk )

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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