Governments Can Bring Moore's Law to Broadband Access

Transcription

1 Research Brief Governments Can Bring Moore's Law to Broadband Access Abstract: A strategy to promote the building of fiber networks shows how governments can greatly improve the availability, speed and cost of broadband access. The rate of progress may be similar to that described by Moore's Law. By Peter Kjeldsen Recommendations Government strategies should recognize and accommodate the diversity of broadband connections. Government broadband strategies and initiatives should supplement industry initiatives by looking beyond the three-to-five-year scope. Governments should realize that they can drive the migration to a broadband information society and unleash its full macroeconomic potential. Governments that prioritize broadband access should consider the independent fiber infrastructure (IFI) strategy. Governments should expect strong opposition to the IFI strategy from incumbent carriers. End users and the telecommunications industry should urge governments to adopt the IFI strategy. Publication Date: 18 December 2003

2 2 Governments Can Bring Moore's Law to Broadband Access Introduction In the semiconductor industry, Moore's Law states that the performance of an integrated circuit at a certain cost point doubles every 18 months. This remarkable example of the "learning curve" effect is at the core of the evolution toward an information society. Broadband access is needed to reap the full benefits of the information society, but its development has not matched the progress described by Moore's Law. The limited bandwidth of established transport media, such as copper, coax and microwaves, and the high installation cost of higher-bandwidth transport media, such as optical fibers, have been the primary inhibitors to ubiquitous deployment of bandwidth-agile broadband access. Without infrastructure limitations, broadband access equipment could easily follow a performance-versus-cost curve similar to Moore's Law. Ubiquitous, affordable and scalable bandwidth will not create value in itself, but bandwidth provides the foundation on which services are built, just as processing power has been the foundation of increasingly advanced and value-adding PC software. This document describes how fiber-to-the-home (FTTH) technology can bring Moore's Law to broadband access networks. The strategy described here is contrary to conventional wisdom in the telecommunications industry, primarily because it suggests that allowing a monopoly in one part of the broadband value chain can increase competition throughout the value chain. Only governments that consider broadband penetration to be a high priority and that are willing to adopt a pragmatic view of competition should consider this approach, because it is certain to attract strong opposition from incumbent carriers. The Ideal Broadband Access Scenario From a combined end-user and macroeconomic government perspective, the ideal broadband access scenario would have the following attributes: Ubiquitous availability Bandwidth scalable to the demands of individual end users Affordable prices and aggressive improvement in performance vs. price Low entry barriers for network providers to ensure competition Effective resource allocation from a macroeconomic perspective Governments could create a broadband market environment that meets these criteria by ensuring a synergy between industry and government initiatives. The Technology Is Ready A single-mode optical fiber is a unique transport medium because it offers almost unlimited bandwidth. A single fiber has a capacity of more than Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

3 Tbps, which is about one million times the capacities currently referred to as broadband access. The economic lifetime of most equipment is determined by the point at which its performance becomes outdated. A fiber has an economic lifetime that equals its physical lifetime (that is, 20 to 30 years) because of its vast bandwidth scalability. In most cases, the access equipment that is attached to optical fibers is attributed an economic lifetime of between three and five years. The large difference between the economic lifetime of access equipment and optical fiber suggests that it would be best to separate fiber investments and equipment investments, rather than consider them to be part of the same broadband investment. In addition, separating these investments offers flexibility in terms of choosing a business model, because fiber deployment and access equipment operation might be carried out by different companies. A FTTH network that is built with single-mode fiber in a point-to-point (PTP) topology (that is, with a dedicated fiber or fiber pair running directly from each end user to a central FTTH point of presence) will avoid the topology-induced bandwidth constraints that affect the fiber "trees" often associated with passive optical network solutions. For further details, see "Choose the Right Topology for Your Fiber-to-the-Home Network," TELC-WW-DP A PTP FTTH network built with single-mode fiber has several advantages: The economic lifetime of the fiber infrastructure will equal its physical lifetime, because of the ultra-high bandwidth of single-mode optical fibers. Various types of equipment and multiple equipment generations can share the same FTTH network infrastructure, which makes it possible and advantageous to split FTTH investments into a short-term equipment investment and a longer-term fiber infrastructure investment. Multiple network operators can operate independently over the same fiber infrastructure. In addition, this PTP FTTH infrastructure would change the performanceversus-cost curve for broadband access networks dramatically because capacity upgrades would simply be equipment upgrades. Broadband capacity upgrades would be as simple as PC upgrades, with each subscriber upgrading their equipment when needed. This infrastructure may seem advanced, but the technology required for PTP FTTH networks is available and has been proven in the field for about two decades by deployments of fiber-optic communications systems in long-distance and metro networks. Access networks are the logical next step for fiber optics. Deployments of close to a million FTTH lines in Japan by the end of 2003 demonstrate that the technology is mature enough to take this step Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

4 4 Governments Can Bring Moore's Law to Broadband Access What Governments Can Do There are two reasons for network operators' hesitance in deploying a PTP FTTH solution despite the compelling advantages and the readiness of the technology: In most cases, a PTP FTTH network deployment represents a billiondollar investment, even in small countries. The debt burden and associated risk is incompatible with the economic climate in the telecommunications industry. Network operators will chose an investment strategy based on the expected return on investment (ROI). The PTP FTTH strategy is ideal from an end-user and government perspective, but it cannot compete in terms of ROI with incremental deployment strategies in the short to midterm without appropriate government support and regulation. Government initiatives that could make PTP FTTH networks feasible fall into two categories: Regulatory: An investment in fiber infrastructure for a PTP FTTH network is a long-term investment. As a result, it is subject to various uncertainties, which is reflected by the use of interest rates in investment business cases. Governments can reduce some of these risks and alleviate concerns with appropriate regulation (especially uncertainty about the regulatory climate) and provide political support for deployments. Governments could grant privileges to prospective investors in PTP FTTH infrastructure. In addition, governments could allow or require deployment coordination with other types of public infrastructure (for example, gas and water pipes, power lines and roads), which would make it possible to reduce the required investment significantly. Financial: Governments can provide financial support to prospective investors in FTTH networks either directly or by making long-term, low interest rate capital available. Alternatively, governments could be active players in establishing fiber infrastructures to which all network operators would have equal access. Governments need to remember that the degree of regulatory and financial support required to make PTP FTTH a viable solution will vary by region. The Independent Fiber Infrastructure Gartner Dataquest's independent fiber infrastructure (IFI) strategy provides suggestions as to how governments could support the deployment of a PTP FTTH infrastructure. In this scenario, a government would grant special privileges and stipulate obligations for an independent infrastructure provider (IIP) in a specific geographic coverage area: 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

5 The IIP would be the only company permitted to establish a fiber infrastructure for FTTH in the coverage area. The IIP would have a universal service commitment to all end users within the coverage area of an open PTP FTTH infrastructure, over which any network operator can provide broadband access solutions. The IIP must lease its infrastructure to network operators and service providers on an equal and per-customer basis, controlled by the individual customer's choice of network operator. The IIP must be fully independent of network operators' and service providers' interests. The IIP should, within reasonable limits, be allowed and obliged to coordinate infrastructure rollout with other types of infrastructure project, such as gas and water pipes, power lines and roads, to minimize investment and public inconvenience. The government could provide financial support either by direct funding and ownership or by making long-term, low interest rate credit facilities available to the IIP. The IIP business model shares some characteristics with the highly successful service provider business model, which allows multiple service providers to share the same network. The IIP model allows multiple networks to share the same fiber infrastructure. The nature of FTTH investments implies that an IIP must be owned by investors that are willing to participate in long-term, low-risk investments with modest expectations for ROI. Partial or full government ownership of the IIP should be considered, especially if a government wants to control the PTP FTTH infrastructure rollout to manage issues such as the "digital divide." Fiber installation accounts for most of the cost of the PTP FTTH infrastructure because it is labor intensive. As a result, the rollout will have a positive impact on employment and a large amount of the investment will be returned to the government via income tax. In addition, business taxes will reclaim some of the investment if local contractors are used to install the fiber. Figure 1 shows an example of the IFI solution, where multiple network operators share an IIP-owned PTP FTTH infrastructure Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

6 6 Governments Can Bring Moore's Law to Broadband Access Figure 1 Independent Fiber Infrastructure Implementation CPE Point-to-Point Fiber Architecture Operator A CPE CPE Independent Infrastructure Provider POP Operator B CPE End Users CPE = Customer premises equipment IFI = Independent fiber infrastructure POP = Point of presence Source: Gartner Dataquest (December 2003) The Impact Technology Impact The network architecture and technology suggested in the IFI strategy (that is, PTP FTTH) is superior to any other fixed broadband access solution and presents several technological advantages: In principle, the available bandwidth per user in the PTP FTTH infrastructure is scalable in excess of 1 Tbps, which is about a million times the bandwidths currently referred to as broadband. As a result, the bandwidth will be limited only by the network equipment. With sufficient shipment volumes, optical access equipment will achieve a performance-versus-cost curve similar to that described by Moore's Law. Initially, 100-Mbps connections are likely to be the entry point, because the cost of optical access equipment is almost independent of bandwidth for bit rates up to 100 Mbps. The entry point is likely to moveto1gbpsinafewyears.ashiftto10gbpsinadecadeispossible with sufficient bandwidth demand. No other access technology offers bandwidths close to this. Various types of equipment and multiple equipment generations can share the same FTTH network infrastructure, which gives network operators and service providers maximum flexibility when they create their products Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

7 Efficient resource allocation, because parallel infrastructures and sunk fiber costs are avoided. The low maintenance level ensures low operational cost. Fiber infrastructure is not susceptible to damage from lightning, and has attractive mean-time-before-failure figures. The monthly infrastructure cost per household passed can be less than $10. In addition, the equipment cost per household will be reduced with sufficient shipment volumes. Competitive Impact Implementation of the IFI strategy will have a significant impact on the structure of the broadband value chain (see Figure 2). Incumbent operators tend to dominate the digital subscriber line (xdsl) market because of their infrastructure monopoly despite regulatory efforts to improve access to their copper infrastructure. Alternative operators and service providers are left to compete in the equipment and service parts of the value chain. Fixed wireless access and cable TV operators provide the only competition in the infrastructure part of the value chain. Competition is insufficient, and it takes place between solutions that are not perfect substitutes for each other. Also, each solution has limited bandwidth scalability, and most require simultaneous infrastructure and equipment investments to exploit this scalability. In the IIP scenario, governments should not attempt to regulate an IIP's profit levels. Competition from other types of infrastructure deployment should be used to control the prices that an IIP will be able to charge Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

8 8 Governments Can Bring Moore's Law to Broadband Access Figure 2 Value Chain Comparison: xdsl vs. Independent Fiber Infrastructure The xdsl Value Chain Infrastructure Equipment Services Incumbent Operator Service Provider Alternative Operator Operator With FWA License Service Provider CATV Operator xdsl FWA CATV Value Chain The IFI Value Chain Infrastructure Independent Infrastructre Provider Equipment Services Incumbent Operator Alternative Operator Service Provider FTTH Value Chain CATV = Cable TV FTTH = Fiber to the home FWA = Fixed wireless access IFI = Independent fiber infrastructure xdsl = Digital subscriber line Source: Gartner Dataquest (December 2003) Implementation of the IFI strategy would enable the IIP to hold a monopoly in the infrastructure part of the value chain. This contradicts the trend toward deregulation and increasing competition in the telecommunications sector. But deregulation and competition are only tools for achieving governments' broadband objectives, and should not be seen as objectives in their own right. Governments should consider other tools if deregulation or competition inhibit achievement of their objectives. The IFI strategy counters each of the most common disadvantages of monopolies: Low efficiency and high cost. The suggested IIP has a narrow and welldefined task to deploy and operate an open fiber infrastructure efficiently. The cost base of the IIP would be determined primarily by its ability to buy fiber cables at the best cost, and to install and maintain the cables in a cost-efficient way. These costs can be monitored easily and appropriate action can be taken if the IIP fails to meet its defined objectives. In addition, the IIP's fiber infrastructure is likely to win over competition from parallel and partly overlapping infrastructures operated by different organizations. In most cases, replacing multiple infrastructures with a single infrastructure reduces overall cost. The monthly cost of the suggested IFI solution could be less than $10 per household passed Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

9 The Cost of the IFI Strategy Lack of innovation. Inprinciple,theinfrastructuresuggestedintheIFI strategy scales to bandwidths more than a million times higher than the bandwidths currently referred to as broadband access. Any improvement to this would require a significant breakthrough in physics. Even if such a breakthrough were achieved, it would take many yearstoturnitintoacommercialsolution. Using monopoly power to achieve unfair advantage in other parts of the value chain. This issue is avoided if the IIP is required to be independent of network operator and service provider interests. The creation of an IIP offers significant advantages when evaluating how efficient, competitive and innovative the broadband value chain becomes in the IFI scenario: The entry barriers for prospective network operators are reduced because the IIP is obliged to make its infrastructure available to all network providers on an equal basis, which enables fair competition. Sunk costs related to customers that churn between network operators are limited because the infrastructure investments can be reused by the new network operator. This limits the sunk costs of the former network operator to the equipment capital expenditure (which could be reused for another customer) and provisioning costs, which reduces the risk to network operators and encourages competition. Increased competition among network operators should make it possible for service providers to obtain better deals on network connections. Competition between service providers will ensure that the benefits derived from this will be passed through the value chain to end users. The cost of implementing the network described in the IFI strategy is divided into fiber cost and equipment cost. The cost of FTTH equipment continues to be higher than that of competing technologies, such as xdsl and cable modems, but this is primarily because of a difference in production volumes. The cost of the fiber infrastructure continues to be the prohibiting factor for FTTH rollout. Fiber Cost Installation accounts for most of the cost of fiber cables. The installation cost depends on many variables, including type of area, pace of rollout, degree of coordination and cost-sharing with other types of infrastructure. Based on estimates from various sources, a reasonable estimate of the average cost for the fiber part of a PTP FTTH installation in urban areas is $1,500 per household passed. The monthly cost depends on the time scale and interest rate associated with the investment (see Figure 3). A network operator that analyzes the PTP FTTH investment in terms of opportunity cost may use a three-year period and an interest rate of 10 percent as the basis for the monthly cost Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

10 10 Governments Can Bring Moore's Law to Broadband Access calculation. In this case, the monthly cost is slightly less than $50 per household passed. Alternatively, an IIP investor in the IFI scenario that is willing to use a 20-year time scale and an interest rate of 5 percent as the basis for the calculation will achieve a monthly infrastructure cost of $10 per household passed. In the extreme case of a government providing an interest-free 30-year loan as an incentive, an IIP would only face a monthly cost of $4 per household passed. Figure 3 Monthly Cost per Household Passed of a $1,500 Fiber Installation by Investment Time Scale and Interest Rate $50 $40 $30 Monthly Infrastructure Costs per Household Passed 3 Years 5 Years 10 Years 20 Years 30 Years $20 $10 $0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Interest Rate Source: Gartner Dataquest (December 2003) A cost of $50 per month is too expensive for many households, especially when equipment, service and content costs, and margins have been added to this figure. However, $10 per month would be acceptable to many, and $4 per month would be acceptable to most target households. This demonstrates that the success of FTTH depends on the financial setup. A business model that takes a long-term view of the fiber investment is essential. In addition, the take-up rate must be considered. If this is too low, the cost per active user will be too high even if the cost per household passed is acceptable. There are several approaches that an IIP can use to deal with this issue: Selecting attractive areas based on statistical information. Requiring a certain preinstallation take-up rate in an area before installation begins Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

11 Implementing the network in a way that allows the IIP to delay the last meters of an installation until a customer subscribes (for example, by using tubes or by installing patch panels in street cabinets). The regulatory framework must allow the IIP to use a viable combination of these approaches. 11 Content and Services The relationship between available bandwidth and the services offered is so close that it is often difficult to determine which is the primary driver in terms of development. For example, there is no business sense in developing services that require 10-Mbps bandwidth if there are no networks planning to offer this kind of bandwidth. Similarly, there is little sense in providing large bandwidth pipes if there are no services that can take advantage of the bandwidth. Service provision and content delivery are necessary parts of a FTTH system. Without this part of the value chain, FTTH will be irrelevant to most end users. Merchants have always been quick to adapt to and exploit a new and superior route to free trade. The IFI strategy would produce a network that can be seen as a new and superior trade route, which network operators, service providers and content owners can use to ship their service and content products. The IIP's obligations in the IFI scenario ensure free access to this trade route for all of these merchants, and competition will ensure that they offer competitive solutions to the consumers. Experience from progressive broadband networks, such as FastWeb in Italy, suggests that it is possible to provide significant value-add through broadband services. Any widespread and large-scale adoption of the IFI strategy would need to be announced at least a year before network rollout could begin. Such an announcement would drive development in the service and content parts of the broadband value chain. Gartner Dataquest Perspective Governments have a wide range of responsibilities. The costs and benefits of the IFI strategy must be weighed against the costs and benefits of other major government initiatives in areas such as education, healthcare and transport. Most governments in developed countries view telecommunications particularly broadband as a strategic industry that is closely connected with the envisioned migration to a broadband information society. In most cases, improvements to vital infrastructure, such as roads or railroads, result in measurable improvements in a country's gross domestic product, and there is no reason to assume that the development of broadband infrastructure will be an exception. The migration toward a broadband information society will continue irrespective of action taken by governments, but the speed of the migration will depend on government initiatives. Differences in government initiatives are likely to 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 18 December 2003

12 12 Governments Can Bring Moore's Law to Broadband Access result in differences between the broadband infrastructure of different countries. The controversial suggestion to create an IIP monopoly in the infrastructure part of the broadband value chain is based on a pragmatic approach to increasing competition and innovation throughout the value chain. The IFI strategy does not aim to reinstall former monopolies over the whole value chain. It recognizes that established players in the telecommunications industry focus on short-term issues at the expense of longer-term implications. The IFI strategy offers an affordable, fixed broadband infrastructure solution based on proven technology that will ensure performance-versus-cost dynamics similar to those suggested by Moore's Law in the semiconductor industry. The lack of effective broadband competition in most developed economies is an advantage for incumbent carriers. As a result, governments that find the IFI strategy attractive enough to merit serious consideration must prepare for strong opposition from incumbents. The resources required to counter such resistance should not be underestimated when considering the costs and benefits of the IFI strategy. A government that aims to make its nation a broadband leader needs to undertake a serious political commitment. The IFI strategy demonstrates just how serious this commitment needs to be. Key Issue What will be the impact of regulation, government policy and operator privatization on a public network infrastructure? This document has been published to the following Marketplace codes: TELC-WW-DP-0638 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice