Maximizing Profitability: Tropos Networks and the Wireless ISP

Transcription

1 Maximizing Profitability: Tropos Networks and the Wireless ISP A Business Case Whitepaper February, 2005 Photo courtesy of NASA Image exchange. Image use in no way implies endorsement by NASA of any of the products, services, or materials offered by Tropos Networks, Inc.

2 Executive Summary Do you, as an Internet Service Provider, want to offer a broadband access solution where cable and DSL are not available or are too expensive? Do you want to take advantage of the trend of cities building mixed-use wireless networks for public safety, city, residential, and roaming use? Is your company ready to use wireless as a low-cost, quick-to-deploy alternative last mile infrastructure? With very efficient use of wired backhaul, no need for CPE subsidies or truck rolls, and a pay-as-you go capital expenditure model, metro-scale Wi-Fi networks can achieve EBITDA positive results in the first year after deployment on a very low total outlay. This white paper demonstrates that, for under $160,000 in capital outlay for a combination network operations center (NOC) and point of presence (POP) plus $31K per square mile of capital expenditure for Tropos MetroMesh routers and element management, a wireless ISP (WISP) can build a network to support a broad spectrum of revenue opportunities including residential broadband services, roaming, standard and value-added business broadband, public safety and municipal government. For this limited capital investment, incomepositive results can be achieved with a base of subscribers as small as 2,500. Assuming only 10% penetration of prospective broadband users (less than half of the U.S. average for areas where broadband service is available) and a subscriber charge of $29 per month, the network would need to pass fewer than 25,000 homes to achieve positive income. Larger networks have even better economics. For example, a network with 10% penetration of 71,800 homes passed will have a total capital outlay of less than $15.98 per home passed, and an operating expenditure of $15.10 per subscriber. The EBITDA per subscriber will be more than $18.24 based on a mixed-use subscriber ARPU of $ Want to gain greater economies of scale? If you increase penetration to 34% of homes passed in the example network (approximately 25,000 provisioned subs), network operations costs shrink to less than $3.00 per subscriber. You can also increase the network s geographic coverage as operating cash flow permits. Newly covered areas can generate positive cash flow with fewer than 10 users per incremental square mile of coverage. 2

3 Introduction Over the past decade, broadband data network deployment and use has grown rapidly. Today, broadband penetration in the U.S. stands at more than 20% of households passed by broadband access. Outside of the U.S., broadband penetration rates are even higher. For example, Korean penetration is greater than 50%. In addition, enterprises now take broadband networks as a given. Coupling the popularity of wired broadband with the pace at which society is becoming mobile, it is clear that people desire anywhere, anytime broadband access. To meet this demand, traditional cellular voice networks are being enhanced with data capabilities. While cellular systems provide anywhere, anytime voice access, technology has limited the data capabilities of these networks to narrowband short message service (SMS). To move toward broadband data access, the cellular industry is rolling out 2.5G/3G services with the promise of broadband data. Unfortunately, large cell sizes limit the speed of these networks to much less than wired networks, and the use of proprietary technology requires expensive add-in client devices for access. In addition, the severe asymmetry of 3G solutions make them unsuitable for the growing number of applications that require broadband return paths (video surveillance, peer-to-peer applications, photo sharing, etc.). In parallel to 2.5G/3G development, home and office Wi-Fi LANs have freed users from a wired broadband data connection in a local area. The success of Wi-Fi is unprecedented in three years the installed base of Wi-Fi clients has reached over 60 million, and more than 1000 devices have been certified by the Wi-Fi Alliance. While these Wi-Fi LANs offer wireless access with low (or no) client cost, today they provide only in-office or in-home coverage. Hot spots in locations such as coffee shops open Wi-Fi networks for public access, but lack broad coverage. Thus, they are the equivalent of phone booths in a cell phone world. Tropos Networks combines the anytime, anywhere coverage of cellular with the lowcost and broadband characteristics of Wi-Fi to offer the best of both worlds. Tropos has produced the first MetroMesh architecture capable of cost-effectively and securely delivering broadband data to standard Wi-Fi clients with coverage spanning entire metroareas. The result is true, symmetrical broadband (>1Mbps) on the street, easy and low cost installation and operation, and metro-scale coverage. In fact, Tropos MetroMesh networks can deliver 5x or more bandwidth than 3G solutions at 1 4 the cost to deploy and operate. For more information on Tropos Networks and its technology, please see the Tropos Networks Corporate Fact Sheet, Metro-Scale Wi-Fi Using Tropos Networks MetroMesh Architecture, and Price-Performance Comparison: 3G vs. Tropos Metro-Scale Wi-Fi. All documents are available at 3

4 Compare Technologies Tropos Networks MetroMesh architecture can enable a WISP to provide a broadband service with higher symmetrical price performance than competing technologies while returning EBITDA positive results in the first year of operation. The result is a price/ performance proposition superior to 1xEV-DO or DSL. Figure 1 illustrates the competitive price/performance of a Tropos-enabled WISP service. Typical Network Topology A typical MetroMesh networkis capable of costeffectively and securely delivering broadband data to standard Wi-Fi clients in coverage areas spanning not just hot-spots or hot-zones, but entire metroareas. Actual throughput in the range of 1-5 Mbps (symmetrical) is consistently delivered to standard < $10 Monthly Service Price > $150 5 Mbps/5 Mbps Bandwidth Offering Downstream/Upstream 56 Kbps/56 Kbps Dial-Up Wi-Fi client devices. Tropos outdoor MetroMesh routers deliver these benefits using the revolutionary, patented Tropos cellular mesh architecture and the Tropos Predictive Wireless Routing Protocol (PWRP ) which, eases deployment and scaling through a self-organizing network allows wired backhaul to be added in line with subscriber growth by eliminating the need to wire every MetroMesh router maximizes available throughput, achieving at least 2x that of competing routing approaches requires less than 5% of available network bandwidth for control traffic, no matter what the size of the network ensures reliability with an efficient self-healing architecture offers accessibility and mobility to standard Wi- Fi clients, which eliminates CPE subsidies and truck rolls. Tropos Enabled WISP Network DSL Figure 1: Service Offering Price/Performance Cable 1xEV-DO D e d i c a t e d Figure 2 depicts a WISP network consisting of a set of Tropos MetroMesh routers, some acting as gateways, wired backhaul and a NOC/POP with public Internet peering. Outdoor MetroMesh routers may be mounted on assets such as streetlight poles or telephone poles. The MetroMesh router mesh may backhaul using fixed wireless, LAN, or WAN connectivity to the POP/NOC. Figure 2: Typical Tropos Network Deployment 4

5 After Tropos MetroMesh routers are deployed throughout the coverage area, the network automatically handles cell and network configuration and optimization by creating and maintaining end-to-end paths that offer the highest throughput to the end-user regardless of interference conditions or user location. Careful link-by-link wireless planning is unnecessary because the fully distributed PWRP automatically sets up and maintains routes by dynamically identifying the path from MetroMesh router to MetroMesh router across multiple hops that will achieve the highest throughput between the Wi-Fi client and a wired backhaul connection. PWRP adapts based on changing interference conditions or new backhaul options that open up as MetroMesh routers are added to extend or fortify the existing coverage area. PWRP provides resiliency against link and MetroMesh router outages, ensuring there is no system-level single point of failure. PWRP allows dynamic installs and disconnects of MetroMesh routers throughout the network, enabling lower operating cost through dynamic network configuration. Business Case Setup This business case illustrates the positive financial results that a WISP may realize using Tropos technology. Input to the business case is based on market research and discussions with customers. The model assumes full deployment of the network mesh in year 1 with incremental backhaul and peering bandwidth added as needed by subscriber counts and usage intensity. This network delivers broadband throughput comparable to cable modem service (i.e. ten times the bandwidth of 3G technologies) at lower cost per POP/NOC Includes: subscriber with positive EBITDA in year 1 and project Routers Peering cash-flow breakeven in year 3. Figure 3 demonstrates a component level network diagram for a Tropos Wi-Fi network deployment. The network consists of a single NOC / POP with servers (supporting OSS, DNS, DHCP, , etc.), public Internet peering, and a firewall/vpn for enhanced services. In our example, the MetroMesh routers are deployed within a 30 square mile geography providing a potential subscriber base of 71,800+ homes passed, 225+ public safety or municipal officials passed and 1,600+ businesses passed. Fixed Wireless, e.g., Canopy Servers (OSS, DNS, DHCP, , etc.) Firewall & VPN Fixed Wireless Equipment DSL NOC T-1/E-1 PUBLIC INTERNET Figure 3: Component Level Network Diagram Ethernet to Fiber Ring Backhaul MetroMesh Router Gateways Wireless MetroMesh Routers Clients 5

6 The model assumes an anchor tenant such as a municipal authority or public safety office is acquired prior to any infrastructure deployment. This assumption provides an initial revenue stream, at below market rates, in return for no-cost MetroMesh router mounting rights. Revenue A WISP s results will vary depending on available number of subscribers, subscriber penetration rate, and fees. Subscribers The number of provisioned subscribers is modeled by determining the available number of subscribers for each service and projecting a penetration rate of the available subscribers. The available subscriber set is determined by service as follows: Residential Home subscribers - Determine number of households passed. The U.S. Census Bureau s City and County Data Book for the Year 2000 Census provides the number of households within the boundaries of most towns and cities. The example in this paper assumes 71,800 households in a 30 square mile area. We assume one available subscriber per available household. - Determine available broadband subscribers among households. This can be ascertained by multiplying percentage of U.S. population who are Internet subscribers times the percentage of Internet subscribers who are broadband subscribers. This information can be obtained from forecast firms such as Jupiter Media Metrics, Yankee and e-market. See Figure 4 below. Residential roaming subscribers - We assume that 25% of home subscribers will purchase an in-city roaming service. Standard business subscribers - Determine number businesses passed Total manufacturing, wholesale, and retail businesses from U.S. Census Bureau s City and County Data Book for the Year 2000 Census. - Determine available number of businesses. We focus our model on the total number of businesses with less than 20 employees. Census data indicates that 70% of businesses have 20 or fewer employees. To be conservative, 50% of these available businesses are assumed to be part of our total available market. We also assume one available subscriber per business passed. Figure 4: U.S. Broadband Subscriber Forecast as Percentage of Population 6

7 Secure private business mobile - We assume that 20% of business subscribers will be mobile subscribers. Secure government mobile - We assume one account per sworn police officer. In our example, there are 237 officers. Subscriber Penetration Rate Residential Home Subscribers - We assume that new subscriber take rates of remaining available subscribers is sufficient to achieve a penetration rate of 3% of homes passed in year 1 and ramping up to 15% in year 3 - We assume subscriber churn rate is 12% annual - The result is a very conservative service provider penetration of less than 1 2 of the forecast US broadband subscriber penetration in year 2006 for broadband enabled geographies. Residential Mobile Subscribers - We assume that new subscriber take rate is a constant 25% of residential home subscribers. - The result is a consistent, low cost revenue stream achieving 12% market share by year Figure 5: Residential Subscriber Penetration Standard Business Subscribers - We assume that the new subscriber take rate of remaining available subscribers is sufficient to achieve a penetration rate of 2% of businesses passed in year 1 ramping up to 11% of businesses passed in year 3. - We assume subscriber churn is 36% annually. - The result is we achieve a conservative 21% market share by year Secure Mobile Business Subscribers - We assume new subscriber take rate is a constant 20% of standard business subscribers. - The result is a constant, conservative Figure 6: Business Subscriber Penetration 7

8 revenue stream of less than 7% market share by year Market Share Given the assumption of a green field market deployment without competition and the available subscriber forecast, Figure 7 demonstrates that a WISP can conservatively capture 50% of the available residential market and 20% of the available standard business market. Pricing Pricing for the residential service is chosen by considering desired pricing strategy, price performance (see Figure 1), and competitor pricing (see Table 1). To utilize a conservative price to enable easy penetration, an activation fee of $25 and a monthly recurring price of $29 are chosen for the model. Similar pricing methodologies are chosen for the mobile residential, business and secure business mobile services. The secure public safety service is priced at $40 per month per user, about half of the price of allyou-can-eat GPRS for significantly higher bandwidth. This below-market rate is offered in exchange for the city providing free access to MetroMesh router mounting locations. Standard product lifecycles, market forces and alternative technologies are expected to drive price erosion over the business case timeline. A 5% annual price erosion factor is built into the model. Figure 7: Market Share Market Price Access Service Throughput Range 1 Range 2 Dial-up w/software 64 kbps kbps $15 - $25 accelerator symmetric CDMA 1xRTT 144 kbps $25 - $90 The selected pricing strategies and subscriber penetration rates results in a mixed use subscriber average revenue per unit (ARPU) of $35.37 in year 1 and $32.03 in year 3. Note that actual ARPU may vary due to differing subscriber service mix and pricing. DSL 3G 144 kbps - 2 Mbps symmetric/assymetric 40 kbps kbps asymmetric Table 1: Residential and Commercial Access Prices (Based on March 2003 Service Provider Web Sites) $30 - $150 $35 - $80 Wi-Fi Hotspot 1-5 Mbps Symmetric $20 - $40 Cable 256 kbps to 4 Mbps asymmetric $35 - $80 1 Inclusive of upstream and downstream bandwidths for both consumer and business services. 2 Price includes cost of customer equipment where applicable. 8

9 Capital Expenditures A typical network configuration has the required elements defined above. The capital expenses associated with this installation, NOC build out, etc., are included in the business case. This business case scenario assumes a green field infrastructure deployment. The NOC is assumed to be hosted in a carrier neutral co-location facility such as Equinix. The network is a meshed cell deployment in a metropolitan area covering 30 square miles. An initial MetroMesh router density of 10 cells per square mile is utilized. The total number of cells deployed in the model is grown at the greater of: 1) the forecast subscriber demand or 2) user defined number MetroMesh routers per square mile. Dynamic cell growth occurs when the subscriber demand exceeds that which the user defined network can support. To model dynamic growth, a set of industry standard design rules and equal load distribution is assumed throughout the network (e.g. 3.6 Mbps per cell). Subscriber demand is determined based on number of subscribers and forecast demand per user by service (e.g. 12kbps per provisioned residential subscriber). This data results in a MetroMesh router supporting up to 300 users. Of course, not all users are simultaneously active. For backhaul in our scenario, we have assumed 50% of Tropos gateways utilize pointto-multipoint equipment such as Motorola Canopy. The remaining 50% of the gateway backhaul is achieved through dedicated T-1s from the gateway to the NOC / POP. Regardless of the backhaul methodology, capital expenditures (e.g. router / fixed wireless capacity) are made for additional equipment when user demand requires. In the model, capital expenditures in year 1 are $1.13M to build the NOC and for a 10 cells per square mile over 30 square miles. In year 2 and later, additional capital investment per home passed supports incremental fixed wireless backhaul capabilities from the Tropos gateways to the POP/NOC and increased MetroMesh router density as subscribers increase. Capital requirements can be reduced by selecting a co-location facility within geographic proximity of the cell deployment, through hardware capital leasing programs, or rolling out per square mile coverage as revenues warrant. Capital expenditures for a Tropos-powered Wi-Fi network are much less than competing service architectures (e.g. 3G) as WISPs will not need to acquire expensive spectrum licenses or build capital intensive cell sites. Service providers may expand their network s geographic footprint simply deploying additional cells. Additional cell deployments require less than 10 subscribers per square mile to generate positive income. Alternatively, the WISP may elect to enter new geographic markets with even lower capital expenditure and operating expense defined by this business case. This may be achieved through the WISP leveraging the existing NOC/ POP with appropriate backhaul from the new MetroMesh router geography. 9

10 Operating Expenses Sufficient operating expenses are employed to support network operation. The major cost drivers of operational expenses are public Internet peering, network support, and sales and marketing. Due to the modular scalability of the Tropos solution, the model can and does incorporate a build to order methodology which adds incremental operational expenses as subscriber counts grow. Annual metrics ensure incremental expenses are only incurred as the subscriber base grows, network traffic increases, profitable operational scale achieved, and process improvement gained. For this scenario, a 50/50 mix of dedicated and fixed wireless backhaul is used. Keeping with the build to order notion, the subscriber demand in year 1 requires 20 T-1s to support the dedicated backhaul bandwidth requirements. DS-3 backhaul is assumed to be utilized starting in year 4 as higher bandwidth MetroMesh routers become available. Backhaul is assumed to be aggregated at common points in the network with the shortest distance to the POP / NOC. DS-3 pricing is generally more sensitive to total mileage than T-1s, hence the assumption of strategically locating backhaul aggregation points. T-1 costs start at $ 500 per T-1 and are reduced by 10% per year. DS-3s start at $7,500 and are also reduced at 10% per year. Public Internet peering in the model is forecast as an aggregate of subscribers, traffic per subscriber on the network, and a forecast for off-net work traffic requirements. Off-network traffic requirements are set at 75% of the total traffic forecast. Examples of potential on-net subscriber to subscriber traffic are file sharing, , instant messaging. The model adds incremental capacity as needed. Peering costs/subscriber are decreased over time based on historical market trends of declining peering and bandwidth prices. For this model with carrier neutral co-location assumed, peering starts with a very conservative $165 per Mbps and is reduced 10% per year. Network Operations Center (NOC) headcount is driven based on metrics similar to that which service providers use to manage NOC performance (i.e. average time per call handled and forecasting number of calls). NOC expenses are managed downward by driving incremental improvements in the average call time from 30 minutes down to 15 minutes in the later years of the model. Marketing expenses in year 1 are assumed to follow a market branding/awareness strategy through multiple mailings of marketing collateral to all homes passed yielding a per subscriber acquisition cost of $200. Marketing expenses in following years are managed as a percentage of revenue which is reduced as revenue grows, starting at 27% in year 2 and reduced to less than 10% in later years. 10

11 Cost Advantages of a Tropos Solution Other broadband access technologies require subscribers to purchase or lease equipment prior to service activation. Often times, the equipment must be heavily subsidized by the service provider. The growth in residential Wi-Fi LANs and sale of Wi-Fi enabled PCs, laptops and handhelds will limit the need for customers to acquire any additional CPE equipment. The availability of these devices simplifies customer acquisition, reduces capital expenses, and enables automation of the activation process. Thus, the cost of providing and subsidizing subscriber equipment is not included in this business case. By employing wireless backhaul, much of the cost of telco links that weigh heavily on traditional service provider business models can be eliminated. Where wired backhaul is required, it can be provisioned centrally with higher capacity links that have much lower cost-per-bit rates. With the aggressive use of wireless backhaul, our model shows telco costs that are as low as 10% of those associated with competing solutions. Future infrastructure upgrades to support higher capacity and subscriber bandwidth can be relatively expensive for other broadband last mile technologies. For example, 1xEV-DO will likely require cell upgrades and additional spectrum licensing fees, and DSL will likely require fiber to the home both extremely expensive. Upgrade costs for Tropos MetroMesh router technology (eg., to g or Wi-MAX) will be quite low. Existing cells are simply swapped out when and where additional capacity is needed, again on a pay-as-you-go basis. Therefore, in addition to the short term cost advantage depicted in this business case, the relatively inexpensive upgrades will provide an additional cost per subscriber advantage over other technologies. Business Case Results By varying the model inputs, multiple potential WISP deployment scenarios (e.g. dense populated metro area, mid-sized city, green field installation) and variable sensitivities can be simulated. The business case results presented are for the scenario described in the previous section. Figure 8 demonstrates the positive financial gains a WISP may realize from even a conservative deployment. An infrastructure deployed with Tropos equipment and software can enable a service provider with a very conservative set of assumptions, including 10% market penetration, to achieve breakeven results in year 3. Positive cash flow results are achieved in year 1 by acquiring approximately 2,200 subscribers to Figure 8: Business Case Results 11

12 amortize the POP / NOC and 10 subscribers per square mile of MetroMesh router deployment (i.e. for this white paper business case, positive results are achieved after an average of 2500 subscribers are acquired). Figure 9 demonstrates that OpEx is less than $16.40 per subscriber per month as early as year 3. During year 3, the business also breaks even. The costs continue to decrease as operational efficiencies are gained and additional subscribers are added. Additional Opportunities to Improve Business Case A service provider may improve the business case results by developing incremental services to increase network utilization, increase ARPU, reduce ACPU, and amortize POP/NOC expenses across a larger number of Figure 9: ACPU versus OpEx subscribers. Examples improvements are: 1) Value added features a. Enabling subscriber roaming to/from hotspots (e.g. Boingo, Wayport) b. VoIP c. Service bundles d. VPN services 2) Additional Services a. Premium business services b. Public mobile access c. Municipal government d. Roaming agreements with other Wi-Fi providers 3) Add addition geographic MetroMesh infrastructure 4) Ramp up available subscriber penetration to greater than 15% of homes passed 5) Devise a strategic rollout plan for MetroMesh router deployment to target highest homes- and businesses-passed geographies. Modeling Philosophy The conservative modeling and build based on demand philosophy utilized in the business case is designed to minimize downside business risk and yield room for upside reward. Downside risks in the model are competitive price pressure, subscriber forecast attainment, and capital acquisition. The upside rewards are reduced costs for larger deployments, cost effective bandwidth vendor negotiations, increased subscriber acquisition (i.e. targeting geographic deployments with limited competition), and additional revenue-adding features/ services. 12

13 Conclusions Tropos products enable network operators, service providers and government departments to provide ubiquitous, metro-scale, broadband, wireless data coverage for users in any locale. Tropos solution creates a truly wireless network, free from the requirement of per node wired backhaul associated with Wi-Fi hot spot deployments using access points. Tropos products enable larger coverage areas, decreased installation costs and decreased operational costs. CPE subsidies are eliminated as are truck rolls. Capital is used very efficiently as the network is built on a pay-as-you-need-it basis. The summarization provided in this white paper only discusses a limited set of the variable inputs and functionality in the business model. Many variables are built into the business model to aid with business planning. The Tropos Networks team welcomes an opportunity to meet with WISPs and further discuss the business case results. The WISP may utilize the business case model as a tool to aid in planning for your specific scenario and model sensitivities. For more information regarding the metro-scale Wi-Fi business case or deploying equipment from Tropos Networks, please see for information on how to contact a Tropos representative. 555 Del Rey Avenue Sunnyvale, Ca phone fax sales@tropos.com 2005 Tropos Networks, Inc. All rights reserved. Tropos Networks, MetroMesh and Tropos Control are trademarks of Tropos Networks, Inc. All other brand or product names are the trademarks or registered trademarks of their respective holder(s). Information contained herein is subject to change without notice. The only warranties for Tropos products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be construed as constituting an additional warranty. Tropos shall not be liable for technical or editorial errors or omissions contained herein. 13