ADSL roll-out by a competitive operator

For a competitive operator offering ADSL services to the residential and small business markets, what is the optimum number of local exchanges to serve, and what is the economic impact of offering an analogue voice service as well as broadband Internet access?

This model considers an operator which provides broadband Internet access over ADSL lines and also – optionally – analogue voice services. The network, illustrated below, is based on the incumbent's unbundled local loop, co-locating equipment at the incumbent's local exchange buildings.

The STEM model is presented in a series of views which describe (a) the addressable market and the demand and revenue drivers, (b) costs arising at the local exchange, (c) backhaul costs and (d) other business costs.

Addressable market

The Market, service & CPE view shows how the network offers an ADSL service to two market segments, business and residential. Under one set of scenarios, an additional POTS service is also offered to the same segments. It is assumed that if the POTS service is offered, all customers will take it bundled with their data service.

The customer base for the data service to the business and residential market is defined by a calculation of the addressable market, which is dependent on the number of exchanges served. It is assumed that the operator will choose to roll out to the exchanges with the largest addressable market first, resulting in decreasing marginal returns for each new exchange.

Cost of equipment at the local exchange

The Local exchange view illustrates the costs associated with putting the operator's equipment within the incumbent's exchange, as well the costs of the equipment itself. The main cost driver is the DSL access modem (DSLAM) which is parameterised by the number of shelves contained within it. These shelves can be occupied by either line cards (24 cards per shelf with 8 lines per card) or by low-pass filter cards (24 cards per shelf with 8 lines per card). The line cards are driven by the number of ADSL lines connected, whereas the low-pass filter cards are only required when the analogue voice service is used. Thus more DSLAMs are required when the analogue voice service is offered as their capacity is filled more quickly.

In addition to the unit cost for each DSLAM, there is a co-location charge, the tie-cable charge and the line charge (which is doubled to a full unbundling charge if the analogue voice service is required).

Backhaul costs

The backhaul is not the primary focus of this model and, as such, the Backhaul view is kept relatively simple. The voice traffic is transported via E1 lines with a capacity of 30 voice lines per E1, with a minimum requirement of one E1 line per exchange. The number of lines required is calculated via an Erlang-B calculation which is driven by the total number of voice minutes from each service and a probability of blocking of 2%. The cost of switching is then modelled as a single resource.

The data traffic is transported via E3 lines (34Mbit/s), with the routeing of that data modelled as a single resource. The capacity required above the minimum requirement of one line per exchange is driven by the busy-hour traffic of each service, which is then combined to give a single busy-hour traffic result. This combined busy-hour is needed to reflect the fact that the busy hour for the business service will not coincide with the residential busy hour. Thus a combined busy hour equal to the residential service plus 10% of the business service is used. The base model assumes that backhaul is rented at half of the nominal list price.

Other business costs

The Other business costs view includes costs over and above the network hardware costs, namely network management, interconnection, customer acquisition, customer service and general administrative overhead. These are represented by different resource elements which are chosen to offer flexibility in how these costs are driven. For instance, network management is defined on a per-exchange basis, while interconnect costs and general administrative overhead are defined in terms of percentage of total annual revenue. Installation, customer service and customer acquisition are all defined on a per-connection basis.

Scenarios

The model contains three sets of scenarios, governing (a) the number of exchanges at which equipment is co-located, (b) whether or not the analogue voice service is provided, and (c) the price paid for backhaul. These scenarios and their variants are detailed below.

The Network NPV for low, medium and high roll-outs is illustrated below (no POTS provided, backhaul rental at half of nominal list price).

A run-time copy of this model can be downloaded on request to run on your desktop, complete with comprehensive documentation. This model can be viewed in conjunction with our standard demonstration package. Outputs can be regenerated for a limited range of inputs; prices are available on request for a fully functional model.