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Identifying and overcoming the challenges of migrating to NGN/NGA

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© Copyright Ovum Consulting 2009
Identifying and overcoming the challenges of
migrating to NGN/NGA
Workshop - Migration to Next Generation Regulatory Environment
Rodrigo Barreto
Principal Consultant
Ovum Consulting - Regulation and Policy Practice
16 September 2009
2
© Copyright Ovum Consulting 2009
Contents
Re-examining the strategic drivers for NGN/NGA
Assessing the business case for NGN/NGA
The role of regulation and policy in the development of NGN/NGA
Assessing the RoI for NGN/NGA investments
3
© Copyright Ovum Consulting 2009
Strategic Drivers for Transformation
Consumers
Competition
Capital Market
& shareholders
Regulators (point of
view of incumbent)
• Continuous demand for additional
value at same or lower price point
• Fixed to Mobile substitution
• ARPU erosion
• Loss of market share
• Changes in balance of power in the
value chain
• Demand for higher returns of
investment / higher profitability
• Pressure for long term value
creation
• Efficient pricing for access and
termination
• Demand for openness / non-
discrimination
• Protect existing and develop new
revenue streams
• Create customer stickness through
service differentiation and bundles
• Defend position in Value Chain / re-
intermediation in voice and
broadband wholesale services
• Continuous focus on Operational
Efficiency
• Address infrastructure obsolescence
and future proof the network
• Relaxation of regulation for new
technologies in geographic areas
with effective competition
Stakeholders Pressure Points Drivers for change
To do nothing is not an option! Transformation to NGN/NGA is inevitable!
NGN/NGA enables new services
x-Play offers are better enabled by NGN/NGA
OLOs may migrate to Next Gen. Bitstream
NGN/NGA incur lower OPEX in the long term
Legacy infrastructure reaching end of life
NGN/NGA may enjoy period of de-facto
regulatory holidays
4
© Copyright Ovum Consulting 2009
Strategic Drivers – Pressure Points
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Millionsofminutes
0.0
5.0
10.0
15.0
20.0
25.0
Eurospermonth
Fixed Mobile Average revenue per fixed line (traffic only)
0
20
40
60
80
100
120
20% 25% 30% 35% 40% 45% 50% 55%
Market Concentration
ARPU($PPP)
Fixed mobile substitution and erosion of traffic revenue per line
Illustrative example - France
Nielsen’s law for broadband speed evolution
Broadband speeds increase ~50% every years
Broadband ARPU erosion as a function of level of competition
Illustrative example with data points from SE, DK, UK, FR, SP and PT
Expectations on Sector Productivity
Study on Economic impact of telco sector in Europe - Telefonica
Source: Ovum and NRA statistics
Source: FTTH Council
Source: Cebr
Source: ARCEP statistics
5
© Copyright Ovum Consulting 2009
Why do we keep calling it “next generation” when it is already here?
Source: Ovum, NRAs, Operators
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2005 2006 2007 2008
Millionsofminutes
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Telephony (legacy) Telephony (over IP) IP subscription %age of total
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
H1 06 H2 06 H1 07 H2 07 H1 08 H2 08
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Telephony (legacy) Telephony (over IP) IP subscription %age of total
Fixed Telephony over BB vs Fixed Telephony over NB
Illustrative example - France
FTTH/B connections and %age of total broadband
Selected countries as of End 2008
Fixed Telephony over BB vs Fixed Telephony over NB
Illustrative example - Denmark
Source: Ovum
Source: Ovum
6
© Copyright Ovum Consulting 2009
Contents
Re-examining the strategic drivers for NGN/NGA
Assessing the business case for NGN/NGA
The role of regulation and policy in the development of NGN/NGA
Assessing the RoI for NGN/NGA investments
7
© Copyright Ovum Consulting 2009
Back of the envelope valuation
• Usually based on benchmarks
• Provides an initial estimate of the scale of investments
• Can be prepared quickly (few weeks)
• Cheap (€,€€€)
• Helpful to understand some of the high level decisions to be
made / options available
• Unreliable for investment appraisal
High level geographic segmentation
• Cost modelling based on Geotypes
• Analysis at district level
• More robust estimates of scale of investments
• Can be prepared in a matter of one to two months
• Reasonable cost to prepare (€€,€€€)
• Unveil further issues and decisions to be made in relation to
technology and deployment strategy
• Can be used as first stage of investment appraisal
Implementation project
• Based on actual network design in pre-defined areas
• Detailed projects at post-code/street/premises level
• Further inputs from analysis of technical availability of
space in ducts
• Can take many months per area
• Identify most punctual issues (some other issues will only
appear during the implementation phase)
Detailed geographic segmentation
• Bottom up modelling (possibly using scorched node
approach and knowledge of duct availability)
• Analysis at sub-district / neighbourhood level
• Approx. 6 months to prepare and costly (€€€,€€€)
• Help to evaluate viability of deployment in specific areas
and to understand further options (eg co-investment,
infrastructure share, build vs lease)
• Used to approve investments and for assessment of
regulated costs
Four levels of business case assessment
+500% / - 50% +50% / -50%
+15% / -15% +10% / -10%
1 2
3 4
8
© Copyright Ovum Consulting 2009
What are the main access network costs to be considered?
Complex set of engineering rules is required to identify number of infrastructure elements
and lengths of cables and ducts (always considering ranges of types and modularity).
Optical interconnection node
Cabinet
Manhole
Flexibility Point
Ducts
Intra-building infrastructure
Aerial deployment/ Civil
Fibre cost (includes fibre
cable)
Micro trenching/ Civil
Outdoor Installation
(includes fibre pull)
Optical Network Unit
Splicing
IP infrastructure
Macro trenching
/ Civil (new ducts)
Example of CAPEX split for FTTH (GPON) deployment
Source: Ovum study prepared for ANACOM
9
© Copyright Ovum Consulting 2009
Typical CAPEX cost categories
Micro trenching/ Civil
Aerial deployment/ Civil
Fibre cost
Fibre Installation
Micro trenching/ Civil
Aerial deployment/ Civil
Fibre cost
Fibre Installation
N/A
Splitter CabinetsSplitter CabinetsRemote Nodes
Macro trenching/ Civil
Aerial deployment/ Civil
Fibre cost
Fibre Installation
Macro trenching/ Civil
Aerial deployment/ Civil
Fibre cost
Fibre Installation
Macro trenching/ Civil
Aerial deployment/ Civil
Fibre cost
Fibre Installation
In-building installation
Optical Network Units
Optical Network UnitsN/A
Optical Line Termination
IP Routers
Optical Line Termination
IP Routers
Optical Line Termination
IP Routers
Fibre to the HomeFibre to the BuildingFibre to the Cabinet
10
© Copyright Ovum Consulting 2009
Typical OPEX cost categories
Decommission Street Cabinets/
Splitter Cabinets installation
Interconnection
Network personnel
OSS/BSS
Decommission Street Cabinets/
Splitter Cabinets installation
Copper jumpering
Interconnection
Network personnel
OSS/BSS
Decommission Street Cabinets/
Remote Nodes installation
Copper jumpering
Remote Nodes - Power supply
Interconnection
Network personnel
OSS/BSS
Splitter Cabinets
Fibre deployment
Optical Network Units
Splitter Cabinets
Fibre deployment
VDSL modems
Optical Network Units
Remote Nodes
Fibre deployment
VDSL modems
Optical Line Termination
Optical Network Units
installation
IP Routers
Leasing ducts
Optical Line Termination
Optical Network Units
installation
IP Routers
Leasing ducts
Optical Line Termination
IP Routers
Leasing ducts
Fibre to the HomeFibre to the BuildingFibre to the Cabinet
Other
Network running
Maintenance
11
© Copyright Ovum Consulting 2009
How does Operational Efficiency gets into the equation?
Source: Ovum study prepared for ANACOM
Cumulative savings in OPEX alone can pay for CAPEX investment!
But then, there is also potential income with disposal of buildings …
12
© Copyright Ovum Consulting 2009
Assessing the penetration of Bundles
• The market should be analysed as a whole and implications
of progress of bundle penetration in the adoption of
individual services should be carefully assessed.
Understanding impacts on Churn, SAC and SRC
• Cable operators (pioneers with multi-play offer) have long
understood the benefits of bundles for customer retention.
But, with the proliferation of multi-play offers, will relative
churn rates remain low or will they gradually increase?
Other costs to consider
• Content costs become an important component
• Billing, CRM and BI platforms need to be adjusted to work
in multi-play environment
• Inter operator IT systems also need to be adapted to work
with NGA
• Other important migration related costs:
•Write-offs of not fully depreciated assets replaced
during the deployment of NGN/NGA
•Compensations paid for stranded assets
Estimating ARPU
• ARPU trends becomes a complex issue to assess
• ARPU is composed of different types of Revenue
Generating Units (RGUs) each with different trends
• Promotional discounts provided for bundles
• Cross-services allowances (eg buy VoD and gain
100 weekend minutes)
• Gradual evolution in consumption of value added
services / paid-for content
• ARPU estimated through layered estimates of revenue per
RGU, promotional budgets, and VAS revenues
Revenue and non-network costs considerations
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Voice only Broadband only PayTV only Voice + Broadband
PayTV + Broadband Voice + PayTV Triple Play FTTx
Source: Ovum study prepared for ANACOM
0 20 40 60 80 100 120
PayTV
PayTV + Broadband
PayTV + Broadband +
Telephony
Source: Zon Multimedia
13
© Copyright Ovum Consulting 2009
Contents
Re-examining the strategic drivers for NGN/NGA
Assessing the business case for NGN/NGA
The role of regulation and policy in the development of NGN/NGA
Assessing the RoI for NGN/NGA investments
14
© Copyright Ovum Consulting 2009
Addressing vertical and horizontal barriers in the access network
Flexibility Point
New Ducts
Street Cabinets
Internal building
fibre infrastructure
• Technical standard for
new constructions
• Rules for negotiation
with building
administration
• Rules for mutualisation
• Rules for the building
“operator”
Former
Local Exchange
Existing Ducts
• Compensation to unbundlers
for phase-out of MDFs
• Unbundled fibre offer
• Duct sharing
• Backhaul products, eg:
•Dark fibre
•WDM
•Ethernet based
backhaul
• Harmonised rules for
planning permission
• Clear rules about co-
location
• Rules for Sub-loop
unbundling
• Technical standards
• Harmonised rules for
planning permission
• Rules for co-investment
• Rules for sharing
Regulation has an important role to eliminate or reduce
operational, physical and economic bottlenecks!
The ERG has an ongoing project looking at these issues: “Next
Generation Access – Implementation issues and wholesale
products” (PRD2)
15
© Copyright Ovum Consulting 2009
Regulation and Policy are shaping the market structure for NGA
Broadband Next Generation Access
Some governments are also using funds from
economic stimulus packages to leverage
investment in NGA (eg US, Portugal)!
16
© Copyright Ovum Consulting 2009
IP interconnection for NGNs remains an area of uncertainty!
Market analysis
• Current analysis of origination and termination services are
focused on telephone networks. Will it continue to apply to
converged services delivered over an NGN?
• Will there be a need to define additional interconnection
markets? eg:
• Access to SIP servers
• Authentication services
Interoperability standards
• Market driven but regulatory guidance/incentive, in some
cases, may accelerate the process (eg UK)
QoS for NGN services
• New applications that require access to (control of)
transport related QoS functionalities
• Requires non-discrimination and definition of minimum
levels of QoS
Access to service platforms
• Interoperability at service layer will most certainly create
new bottlenecks which will need to be addressed by
regulation
Charging regime
• Interconnection of IP networks normally operate on a bill
and keep regime
• Policy makers (including the EC) ponder that under B&K,
the network that terminates the traffic is not likely to have
SMP (the economic bottleneck is removed)
• However, there is little/no incentive to transport traffic under
B&K (know as hot-potato issue)
• Service providers tend to prefer the established business
model where the Calling Party Network Pays (CPNP)
Charging Mechanism
• With CPNP, what are the merits of Capacity Based
Charging (CBC) vs Event Based Charging (EBC)?
Cost modelling
• What costing approach should be used? FAC/FDC, LRIC or
pure LRIC? HCA or CCA? Flat, tilted or adjusted tilted
annuities? What costs should be recovered through
wholesale charges?
• Several services (some regulated and some not) share a
common infrastructure. What costs are allocated to what
services?
• NGN network elements are much less sensitive to traffic
volumes. How to correctly identify CVRs / incremental
costs?
17
© Copyright Ovum Consulting 2009
Contents
Re-examining the strategic drivers for NGN/NGA
Assessing the business case for NGN/NGA
The role of regulation and policy in the development of NGN/NGA
Assessing the RoI for NGN/NGA investments
18
© Copyright Ovum Consulting 2009
Different rollout strategies
Summary of coverage based
on selection of areas (eg sub-
districts) to be covered and
pace of deployment
Financial parameters
providing indication of
eg:
- Capital requirements
- Cash generation
- Profitability
- Value creation
Risky investments require that one knows his/her options!
IRR @
12.3%
Reference
case
IRR @
12.3%
Reference
case
IRR @
12.3%
Reference
case
IRR @
12.3%
Reference
case
Coverage (% of
households/premises)
Dense Urban Areas 100% 100% 100% 100% 100% 100% 100% 100%
Urban Areas 100% 75% 71% 50% 100% 30% 100% 75%
Suburban Areas 73% 15% 10% 10% 18% 5% 91% 15%
Rural Areas 5% 5% 5% 5% 5% 5% 5% 5%
Resulting level of coverage 81% 55% 53% 46% 64% 38% 87% 55%
Return of Investment
Indicators
NPV of EBITDA (€ million) 2,627 2,483 1,427 1,286 920 835 106 96
NPV of Cash Flow (€ million) 0 477 0 48 0 104 0 15
NPV of CAPEX (€ million) 2,626 2,107 1,104 947 946 533 756 671
NPV of OPEX (savings) (€ million) -158 -286 677 612 29 26 2,032 1,991
Number of years for Payback
(Discount rate @ 12.3%)
8 6 8 7 8 8 OPA 8
Number of years for Breakeven
(Positive EBITDA)
1 1 1 1 1 1 3 3
IRR 12.3% 50.2% 12.3% 20.0% 12.3% 28.0% 12.3% 14.4%
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Illustrative Example!
OPA – Outside Period of Analysis
Different Scenarios of Deployment
(eg use of technology, options of infrastructure sharing, etc)
© Copyright Ovum Consulting 2009
Thank you!
Contact details:
rodrigo.barreto@ovum.com
+44 20 7551 9020