There are at least two reasons why regulators and policy makers are concerned about the source of investment necessary for broadband: universal access is needed to close the digital divide, and broadband is crucial to a digital economy. These two concepts combine into the over-arching concept of inclusive economic and social growth.
There are four primary sources of investment funds. First, network investment by the incumbents; second, by new entrants including domestic and foreign service providers; third, public funding; and fourth, by financial investors using leveraged buyouts of poorly performing companies by venture capitalists. It is usual to view telecoms markets according to geographical segments, namely the local loop, the metropolitan area, national long distance and international. But a service-based typology might instead look at ‘basic’ fixed and mobile voice and text-related services, broadband and Internet related services, content and broadcast services such as IPTV, and enterprise managed network services.
During the time when Japan was working towards achieving its national target of eliminating all broadband zero areas (= make broadband service available to all the households nationwide) by the end of FY2010 (March 2011),* the five types of role-sharing between private and public sectors were identified, based on builders and operators of broadband facilities.
Type 1: Broadband facility is built and operated by the private sector. Since broadband should be deployed on a commercial basis in principle, this type 1 is the correct basic model.
Type 2: This type 2 is the same as type 1 in that both building and operation are conducted by the private sector. There may be some areas where the operator is not sure if there exits enough demand and thus cannot make the business decision to start broadband service in the area. In this situation, neighborhood communities or local governments can prepare a list of potential broadband service subscribers and hand this over to the operator.
Type 3: This type 3 is also the same as type 1 in that both building and operation are conducted by the private sector. However, central or local government partially subsidizes the broadband facilities installation cost and this makes much easier for the operator to start broadband service.
Type 4: Local government builds broadband facilities, then a telecommunications operator provides broadband service. This means that the operator does not have to prepare initial investment of broadband facility. In many cases, local government rents the facilities to the operator on IRU contract (see page 51). Under the typical IRU, the operator can use the facility for 10 years for free of charge, but it has to provide the service for the period and maintain the facility at its expense.
Type 5: Local government builds broadband facilities and operates them.
In order to eliminate Broadband Zero Areas, Type 3 and Type 4 were important and the Government of Japan prepared several promotion schemes, which included grants/subsidies for local governments and interest aid, debt guarantees and tax breaks for telecom operators.
3.5.1 Local, National and international Networks
The Local Loop
The major costs of building an extension to the traditional local loop arise less from the cost of the equipment and more from having to seek planning permission and the labour costs of road digging, ducting, wiring and cabling, installing distribution cabinets outside buildings and main distribution frames (MDFs) in the telecom rooms of multi-tenanted buildings. The local loop is therefore not easy to replicate using traditional methods, and for this reason regulators should examine ways to reduce the costs. Measures can include infrastructure sharing, simplify the procedures and lower the cost of issuing of permissions, review regulations governing rights of way and access to buildings.
Over recent years, subscribers have been signing up in larger numbers to networks using broadband wireless known as fixed-wireless access (FWA) for the house and office telephone. FWA offers a means for non-fixed line service providers to enter the local market. Another technology standard that has been used in some markets, Indonesia and Malaysia for example, to provide fixed-wireless broadband access is WiMax.
The most compelling competition for local loop providers has come from mobile network operators (MNOs) and the rapid deployment of 2.5G and 3G networks has spread broadband wireless access (BWA) to many metropolitan, smaller urban areas and many rural areas in most countries. As a result, in the world today there are many more mobile users than fixed line subscribers. This has changed the local landscape for regulation. When the fixed line phone was of paramount importance, regulators were faced with a choice of either supporting the continuation of a monopoly by the incumbent operator or unbundling the local loop. Unbundling was incorporated into the laws and regulations of the US, most of Europe, Australia and India among others. It is done by mandating the right of a new entrant to connect to the incumbent’s local access network at one of three places: at the roadside distribution point or MDF, on the customer-side of the MDF in the incumbent’s exchange building or central office, or on the network-side of the MDF. The last of these three is called co-location and minimizes the need for the new entrant to build their own local access network.
Unbundling is always a hotly contested issue because unlike other forms of interconnection, it involves the incumbent surrendering the use of its own lines to a competitor. There is less controversy when the facility to be unbundled is an essential ‘unbundled network element’ (UNE)*such as a bottleneck facility or an essential service, such as a numbers registry. The advantage of local loop unbundling is that it gives the new entrant an immediate footing in the market, but achieving long-term competition on a sustainable basis may require the new entrant to invest in their own network. One way to encourage this is to place a sunset clause on unbundling after which local loop interconnection becomes unregulated and subject to commercial agreement. This was done successfully in Hong Kong.
Figure 3.6 illustrates pre-NGN architectural and commercial options for local loop unbundling. The first horizontal illustration shows a circuit from the customer to a subscriber line unit (SLU) which identifies the call as either voice or data, routing the first through the switched network and the latter to an Internet service provider (ISP1, ISP2 or ISP3 in the figure) and out into the public Internet, or possibly via ISP3 to a private Intranet. In the second scenario, the new entrant has collocated their digital subscriber line access modem (DSLAM) and the call from the customer now transverses a splitter (S) which routes voice traffic to the old switch and data traffic to the digital ATM switch of either the incumbent (ATM 1) or the new entrant (ATM 2) according to the customer’s preferences. From the ATM data is passed to an ISP and then to the Internet or to an Intranet.
In the third scenario, the new entrant interconnects at or near the customer’s premises. In the figure it is assumed that voice traffic will still transit by way of the incumbent, but this need not be the case. Scenario 3 requires the new entrant to build a network out towards the edge of the local service area, so its total investment will be higher, but it becomes less dependent upon the incumbent carrier for the quality of network services.
In the case of NGN networks unbundling, where this has arisen, poses a different set of issues.*In part this is because the architecture is very different. An NGN uses an architecture of a dual fibre backbone ring, for example Metro-Ethernet, for broadband transmission of high speed data, and sub-loops of fibre to serve local buildings, running the fibre-to-the-Curb (FTTC) or fibre-to-the-building (FTTB). This does away with the need for many exchange buildings or central offices, while digital switches are replaced by Gigabit routers located at strategic nodes around the core network. Subscriber line electronics which identify the individual needs and preferences of subscribers, such as their choice of bandwidths and services such as IPTV, are moved to the edge of the network closer to end users while still being controlled from the centre. Because optical fibre does not conduct electricity an NGN network operator must also invest in their own parallel power grid. At the subscriber end this means unlike the conventional PSTN telephone, a house or office telephone that works off the Internet needs to have its own source of power, which could of course be the telecom company if it is also a power company.
Six out of 10 broadband lines in the USA were Digital Subscriber Lines (DSL) with fibre optic FTTx and FTTH accounting for 16.7% of the market in 2012.*This tells us that fibre, and NGNs at the core, is establishing a foothold in the market, and many developing countries have an opportunity to leapfrog straight into it as a more efficient telecoms platform that supports the digital economy.
New entrants without any legacy networks can move straight to an NGN whereas an incumbent needs to shift over in phases, often using a hybrid of fibre cables and copper wiring. In many cases, the shift requires the write-down of fixed capital assets using accelerated depreciation accounting. For example, an ATM switch may have many years of service left in it, but to achieve a more competitive cost base the incumbent has to replace it. Instead of depreciating the ATM over a period of 15 or 20 years, depreciation will be compressed into maybe 3-5 years. This could cause a problem with regulatory estimates of costs used for financial assessments and price control measures because costs will appear to have increased and this may need to be reviewed by the regulator.
The pressure to accelerate depreciation comes from competition. The arguments that competition will depress the revenues of the incumbent, making it more difficult to commit capital for investment, are not convincing. To become commercially successful on a sustainable basis incumbents have to go through a period of adjustment, even if that means issuing debt to finance change. Without competition, investment in new technology is bound to be slower and the benefits to the digital economy delayed.
One of the conditions for effective competition in metropolitan areas is tariff rebalancing. Traditionally, tariffs for international and long distance traffic were high and often cross-subsidized local call charges. Competition and new ways to communicate, especially over the Internet, have brought long distance tariffs down but without much increasing local tariffs because competition for mobile operators has changed the landscape. The revenues for the future in any case will not be coming from traditional voice traffic, but rather from the demand for broadband access and broadband services such as IPTV, movies-on-demand, and in the corporate sector, cloud computing services. Once the process of competition begins it tends to take on its own momentum, but for markets still dominated by incumbents, regulators have to ask themselves what will make the market attractive to investment from new entrants and frame policies accordingly. When that happens, the local digital economy has a chance to grow.
Closely associated with the growth of a digital economy is the spread of BWA which creates a demand for smartphones, tablet computers and other smart devices. This in turn creates an avalanche of data traffic that often networks cannot easily handle. Regulators can assist the industry and subscribers by placing sufficient radio spectrum on the market and by removing obstacles to lower prices for backhaul capacity. For example, MNOs should be allowed access to the capacity of the fixed line networks, some thought should be given to licensing MNOs to build their own backhaul networks and, following the regulations in India for example, to sharing facilities.
National Long Distance
For geographically large countries a domestic backbone network is an essential facility for linking centres of population and until it exists a country cannot effectively address issues of universal access and the digital divide. It should therefore be a priority objective of policy and regulation. A range of technologies are available, from landlines to satellite, from long-distance microwave to coastal submarine cables. For example, there is now more than 25,000 km of coastal cable now linking the 18,000 islands of the Indonesian archipelago.* The figure 3.8 maps Indonesia’s Palapa ring.FIGURE 3.8Indonesia's Submarine Cable System
Although it may be difficult for new entrants to achieve the economies of scale enjoyed by the incumbent, the very act of connecting up towns and villages countrywide is the surest way to bring the benefits of a digital economy to these areas. That is an economic development issue, and development will generate traffic revenues for the future. It therefore makes good sense for regulators to remove as many barriers to entry as possible.
There are well known ways to do this. Allowing utility companies to lease their spare network capacity to new telecom companies is one step. Promoting the sharing of facilities like telecom towers and power generators is another. Requiring incumbents to adopt open access policies is another, as well as regulating both their leased line and interconnection policies. Allowing unrestricted access to the Internet and to OTT services such as voice and text is yet another.
The ultimate objective is to create national NGN high speed broadband networks that offer ubiquitous coverage. A typical core network transmission technology is GPON (Gigabit Passive Optical Network) which consists of dark fibres until they are lit using DWDM or dense wave division multiplexing. Economies of scale play a role here and governments often see advantages to the national economy of some public subsidy. In Australia, AUD43 billion has been set aside for a network to be built by Telstra on an open access basis. In Malaysia, Ringgit 2.4 billion will be used to subsidize Telekom Malaysia’s High Speed Broadband Network (HSBN) again on an open access basis. In Singapore, SGD1 billion of public funds are being invested in a consortium (NetCo) to build the GPON and an independent wholesaler (OpCo) to operate the network. The incumbent SingTel will retain the right to compete separately.
Optical fibre that has not been lit is dark fibre. Originally this term applied to the unlit capacity of carriers but now it also applies to capacity that is leased to other parties who light it up for their own use. It is not uncommon in the US, for example, for local exchange carriers or LECs to swap capacity with carriers in other districts so as to extend their coverage to areas they previously could not reach. Utility companies, such as railways, road highway networks and electricity grids, will often have spare capacity in their long-distance fibre systems which can be leased out as dark fibre. On the demand side, besides carriers looking for the bandwidth there are multi-site corporate businesses, data centres, universities and government departments looking to lease fibre connections to form closed-user group wide area networks (WANs). For example, in Brazil the government-funded Rede Nacional de Ensino e Pesquisa (RNP) colleges and universities network uses leased dark fibre.
The quantity of dark fibre has grown exponentially, especially within oceanic submarine cable networks. The cost of laying of a cable on land or in the sea is literally a sunk cost which to all intents and purposes is invariant to the strands of fibre in the cable. Unlit fibre is cheap, so it makes economic sense to pack in many fibres. The expense arises when the electronic components are added and the fibre is lit. Increasingly DWDM or dense wavelength division multiplexing is used to transmit light signals along different frequencies or ‘colours’ of the spectrum, but because of the risk of interference between the light paths the dark fibre that is leased is often ‘managed’ in the sense that a ‘coarse’ WDW (CWDW) light path of 20nm (1 nanometre = one billionth of a metre) is maintained as a guard band.BOX 3.9Dark Fibre
No sector of the market has seen a more dramatic increase in capacity and fall in prices than international submarine cables. This originally came about in the late 1990s as “irrational exuberance” in response to the dot.com bubble when the industry regularly over-estimated the rate of growth of Internet traffic.* Investment became detached from the facts on the ground, or on the seabed, and gave rise to a number of online secondary capacity markets in the spirit of the Internet revolution. Prices collapsed following the bursting of the bubble from 2000 onwards and changed the landscape of the international carrier market. Some major players went into receivership, many global carriers partially withdrew from all but their most important regional markets, and when they ventured back in the late-2000s it was often to lease rather than buy or build their own capacity.
From the mid-2000s new cables of terabit capacity began to appear. Some of these are consortium cables involving carriers from the countries with landing stations who buy ‘indefeasible rights of usage’ (IRUs) giving them the right to a certain capacity within the cable. Traditionally consortia were very conservative about IRUs but because of the supply overhang they have become more open to leasing to third parties. Part of this new wave of investment has come from carriers in developing countries, for example from Indian carriers Tata and Reliant in the Asia-Pacific. The bandwidths are humungous, but often less than 10 per cent of capacity is actually lit, but as CDNs spread throughout the world and data centres spring up with the rise of cloud computing the demand will grow.* In areas previously underserved capacity is rising. In Africa it now stands at over 22 terabytes for the East coast, 107 terabytes for the West coast and over 9 terabytes for the Mediterranean coast in the North. In the Caribbean, four major cable systems are now providing connectivity,* while Latin America has been described as “the leading undersea market in 2013.”*
Most challenging economically is to bring submarine cable connectivity to small island developing states (SIDS) such as the Pacific Islands. Satellite services are relatively expensive, even when used on a shared capacity basis, and do not provide the bandwidth of a submarine cable. A World Bank study in 2009 analyses in detail the options for cables.FIGURE 3.9Connectivity Across the Pacific Islands
Source: World Bank (2009) Regional telecoms backbone network assessment and implementation options study: For a better Pacific Connectivity http://www.itu.int/ITU-D/asp/CMS/Events/2009/PacMinForum/doc/POLY_WB_GeneralRepor t_v3%5B1%5D.0.pdf
The original drivers of demand used to be international voice calls and commercial data traffic. That has changed. Many voice calls now go by OTT voice, video and text services such as Skype and Yahoo Messenger and commercial data traffic by Extranets. The driver today is principally the resurgence of Internet traffic, notably media video streaming and data traffic in the cloud between data centres. For example, according to the Cisco Internet traffic forecast for 2012, “51% of all Internet traffic will cross content delivery networks in 2017 globally, up from 34% in 2012.”
Other notable metrics from the Cisco forecast are that “IP traffic is growing fastest in the Middle East and Africa, followed by Asia Pacific. Traffic in the Middle East and Africa will grow at a CAGR of 38% between 2012 and 2017” and that “In 2017, global IP traffic will reach 1.4 zettabytes per year, or 120.6 exabytes per month. Global IP traffic will reach 1.0 zettabytes per year or 83.8 exabytes per month in 2015.”* These figures, even if only partially accurate,* spell the transformation of international telecommunications. Regulators have to be aware of them, have to prepare their markets to sustain the carriage of this data into and out of their jurisdictions. No one single landing station, satellite earth station or international gateway will be adequate to provide the quality of service and the redundancy required to make the economy competitive. Ways must be found to allow investment, competition and diversity into the market for international traffic.