Broadband Business Models to meet deployment targets Dr

Broadband Business Models to meet deployment targets Dr. Raul L. Katz, Columbia Institute for Tele-Information 1

Broadband business models Ø Business model: the architecture of the value creation, delivery, and capture mechanisms employed to deliver a service, including offerings, strategies, infrastructure, organization, trading practices, and operational processes and policies Ø Supply side: business models to accelerate broadband deployment Ø Policies to stimulate private sector investment Ø Government intervention as a last resort Ø Demand side: business models to accelerate adoption Ø Practices to address demand-side challenges Ø Models to address the affordability gap 2

Supply-side business models: Accelerate deployment 3

Supply side business models Ø Objective: to make sure that universal service targets are met MARKET STRUCTURE DENSITY AND SIZE OF DEMAND SEVERAL OPERATORS HIGH MEDIUM LOW VERY LOW 2 -3 OPERATORS ONE OPERATOR NO OPERATOR Dense urban areas with high business and residential density Urban areas/towns with primarily residential density Rural areas with sparse residential density Rural areas with very low density 4

Supply side business models Stimulate private investment Ø Business model development to address isolated areas begins by understanding deployment economics 5

Supply side business models Stimulate private investment Ø Deployment economics highlight the business case “choke points” 6

Supply side business models Stimulate private investment Ø Highlighted “choke points” enable the determination of policy initiatives to stimulate deployment 7

Supply side business models Stimulate private investment Ø Reduce property taxes and VAT on initial equipment purchase to decrease CAPEX burden Ø Reduce infrastructure costs linked to ROW, pole attachment or spectrum access costs (release spectrum for mobile broadband, lower and standardize pole attachment rates, “Dig-once”/joint trenching rules) Ø Provide grants to fund capital investment Ø Provide low cost real estate for central facilities Ø Enforce infrastructure sharing and wholesale access 8

Supply side business models Government intervention Ø If despite incentives, private sector investment does not materialize, government intervention can be justified if expenditures are outweighed by the broader socio-economic benefits Ø The first question is where should the State intervene? Ø Which communities can be, or are, served by market forces? Ø Which communities will need assistance with initial investment to become self-sustaining? Ø Which communities cannot become self-sustaining and will require ongoing funding? ” Ø The second question is how should the State intervene? 9

Supply side business models Government intervention National government deploys backbone to reach isolated area (leveraging government utilities infrastructure) Facilities or servicebased competition Private service provider operating under protected conditions (e. g. regulated monopoly) Community-owned service provider Scope of government intervention

Supply side business models Government intervention Ø Community-based service provisioning can follow four models Ø Closed network, whereby local government provides retail services Ø Local government wholesales access to a single retail service provider Ø Local government is wholesaler of transport to multiple retail service providers (open access) Ø Local government is provider of dark fiber 11

Supply side business models Government intervention Ø ALTERNATIVE MODELS OF GOVERNMENT INTERVENTION Subsidize incumbent telco/BB to upgrade to “utility” Ø In greenfields, government could build (contracts) for the construction of universal access network Ø Promote competition for government contracts to lower initial costs Ø Government can then auction the broadband infrastructure to highest (qualified) operator Ø Monopoly for wholesale-only/open access “utility” operator? Ø Any “loss” is a one-time infrastructure subsidy (like building a highway and road system) 12

Supply side business models Government intervention Ø Government intervention should consider opportunities and risks IS PROJECT SUSTAINABLE AND PROFITABLE? YES • Preemption of private investment (“crowding-out”) YES IS GOVERNMENT INTERVENING? NO • Alleviate the constraints of the business case to stimulate private investment • Re-creation of access bottlenecks • Erosion of the public utility model NO • Market addresses the need of public good • Supplier of last resort 13

Demand-side business models: Accelerate adoption 14

Demand-side business models should address the demand gap BROADBAND DEMAND GAP Households Country passed (*) connected Demand Gap Australia 89 % 69 % 96 % 76 % 20 % France 100 % 77 % 23 % Germany 98 % 58 % 40 % Israel 100 % 83 % Italy 95 % Republic of Korea Reasons 20 % Denmark REASONS FOR NOT ACCESSING TO THE INTERNET AT ALL Percentage of answers United States United Kingdom 45 % 60 % 17 % Relevant ( lack of interest, busy doing other tasks) 55 % 40 % Price 15 % 28 % 100 % 93 % 7% Service availability 16 % 14 % Spain 93 % 61 % 32 % 22 % 16 % Sweden 100 % 89 % 11 % United Kingdom 100 % 68 % 32 % Easy to use (difficulty , senior citizen, physical handicap) United States 92 % 62 % 31 % Sources: Analysis by the author, based on data from EU; FCC; BMWi; OECD; PTS - Sweden; and Israel Minister of Communication. Sources: Horrigan, J. (2009); Ofcom (2008)

Demand side business models Accelerate adoption Ø Three business model initiatives to initially stimulate adoption 16

Demand side business models Accelerate adoption Ø Aggregate demand: the local government can become an anchor user to guarantee revenues at ramp-up phase of broadband ØCoordinate demand for broadband access from government administration, public safety, local schools and health care facilities ØNegotiate a wholesale rate and long-term contract and define Service Level Agreements Ø Create a flow of revenues that eases the economic pressure on the business case ØOrganize groups of people (schools, communities, SMEs) at the grass-root level Ø Establishment of a Broadband Expertise Centres to spread knowledge on broadband for institutions that do not have ICT as their core task Ø Deploy broadband demonstration areas for consumers and conduct training 17

Demand side business models Address the affordability gap Ø High consumer taxes as a percentage of total cost of broadband ownership are an obstacle to adoption Source: Telecom Advisory Services LLC Ø For every dollar that taxes are reduced over a 5 year period, US $ 1. 4 to 12. 6 will be created in additional GDP 18

Demand side business models: Address the affordability gap Ø Fiscal incentive Ø A reduction in local taxes to small and medium enterprises linked to ICT adoption has been found to stimulate adoption in areas that can have an impact on economic output Ø A subsidy targeted to economically-disadvantaged subscribers addresses the social inclusion problem (Universal Service) Ø However, subscriber subsidies need to be used sparingly 19

Broadband business models: Conclusion Ø The primary business models to guarantee broadband deployment pertain to the private sector Ø Should governments intervene in broadband wireless deployment? Yes, but initially facilitating market forces not preempting them Ø Should Government be the risk-taker of last resort? Maybe Ø Governments, communities, businesses, and operators should coordinate to identify supply and demand conditions and tailor services to tackle unmet needs Ø The establishment of a “business case” to deploy broadband is a joint effort 20