Fixed broadband - Australia s next utility? Communications Policy & Research Forum 29, 30 September 2008 Robert James imediate Consulting John de Ridder de Ridder Consulting Final
How do we get as many houses using broadband as water, electricity and wastewater? x x x Can you imagine only 70% of homes with electricity? Why is fixed broadband so different? Would consumers, industry & gov benefit if it was 100%? Can we make it happen in say 5 to 10 years? Why has narrowband to broadband been so hard? 2
Today s discussion a different definition of broadband not speed lessons from the IT industry how fixed broadband will evolve through 3 key steps overseas experience - briefly lessons from network utilities - briefly how to make broadband accessible to the community 3
Faux Broadband: appearance versus substance Rarely reaches the headline speed No known reliable speed Access, backhaul and core all uncertain Maha Krishnapillai, Optus Aust Comms Summit 2008 Throughput and latency- who knows? Might be neutral or not Some applications and content favoured Can support some applications sometimes A pale imitation of the real thing! 4
Purpose Built Network vs Network for any Purpose True Broadband = One Network for Anything! 5
From Vertical to Horizontal: First IT, now Communications IT went horizontal in 1990 s, now fixed communications Some companies gone (e.g. Wang),some prospered (e.g. IBM) Choice of IP in mid 90 s set the direction for today - convergence, de-layering, and pricing paradigm. IP is what end users want one network for anything IP broadband access network as simple as electricity network Like electricity, everything happens at the IP network edge Broadband has a killer application application independence! Turning point from scarcity to abundance The IT industry has already plotted the course we know the technology path communications is following! 6
From Legacy s to One 1990 s Legacy 2000 Phoney B Band 2010 s First Generation 2020 s Second Generation Copper STS Telephony STS Tel (Telephony) Coax ( Pay TV) IP Telephony TV 1 st Gen of s IPTel Bus IP 2 nd Gen One IP Voice IP Anything 1 st Era Legacy s 2 nd Era - Transition 3 rd Era End Game Broadband was shoehorned into application networks in the first era Second era (Transition) is a set of dedicated sub-pipes telephony, TV and ISP Third era is the endgame one pipe for everything 7
Natural Evolutionary Path for Fixed Access: but transitions must be managed with foresight! 1990 s Legacy 2000 Transition 2010 s 1 st Gen 2020 s 2 nd Gen Telephony Pay TV STS Telephony IP Telephony TV 1 st Gen of s STS Tel IPTel Bus IP 2 nd Gen One IP Voice IP Anything Era 1 (Legacy) Era 2 (Phoney BB) Era 3 1 st Gen Era 4 End Game Competition Model Calls (1992) Access Services Applications Regulatory Focus Revenue Drivers & Network Funding Preselection, Interconnection N Calls + 1 x Access Unbundling Open Access Net Neutrality N Calls + N x Access 0 x Calls N x Access 0 x Calls + 1 x Access The revenue opportunities reduce in number over time 8 fewer ports, fewer things to charge for
Not everyone benefits equally from these changes 9 1990 s Legacy Telephony Pay TV 2000 Phoney B B STS Telephony IP Telephony TV 1 st Gen of s 2010 s 1 st Gen STS Tel IPTel Bus IP 2020 s 2 nd Gen 2 nd Gen One IP Voice IP Anything Trend is to : Fewer s and Openness & Net Neutrality This benefits everyone except the network operator: 8 7 6 5 4 3 2 1 0 Externalities grow as Digital Economy develops Ever richer opportunities e.g. Google Consumers get more year by year and pay less! Revenue reducing to just Access 1990 2000 2010 2020 Community gains Commonwealth Application Net Apps Provider gains End User Provider End User gains Network Provider can lose How to improve the business case for the network operator? 9
Three Options to Create a Business Case for Change 1990 s Legacy 2000 Phoney B B 2010 s 1 st Gen 2020 s 2 nd Gen 9 8 7 6 5 4 3 2 1 0 Telephony Pay TV STS Telephony IP Telephony TV 1 st Gen of s STS Tel IPTel Bus IP 2 nd Gen One Externalities Endless Opportunities More for Less Fewer Products, Most Revenue outside Access 1990 2000 2010 2020 10 IP Voice IP Anything Only Three Options to improve Operator Business Case (excluding cross subsidies) Commonwealth Application Provider End User 3. Government Pays More: Public Business Case Provider 2. B Party Pays More: e.g. Google Pays 1. User Pays More: Access + Usage 1 & 3 are Practical
What s Next Full Step or Half Step? Half Step to of s STS Tel Versus of s STS Tel IPTel Bus IP Half Step - Half Way House Full Step Retail and Wholesale Part open access, part vertically integrated In transition to pipe of pipes If ROI on vertically integrated > horizontal, will create barriers to next step Wholesale Only Open: any pipe to any buyer In transition to one pipe can have same ROI, will ease transition to new model Full step better for industry, needs right ROI to be attractive to incumbents 11
Lessons from Overseas: Can fixed broadband be profitable? Is NTT making money on FTTH? Is Verizon FTTH investment case making money? No No Ultrabroadband telco investment models Paris, April 4, 2008 Dr. Raúl L. Katz Problems Solutions 1. Low dwelling density or low take up 2. Previous subsidy (e.g. ADSL via ULL) destroys business case 1. A natural monopoly 2. New must replace old 3. Benefits not captured by network owner (open access/net neutrality) 3. Government subsidy, B Party Pays or User Pays for Usage 4. (profitless) Infrastructure competition 4. Regulated Network Utility Only one network can be profitable in urban areas 12
Three approaches that have been tried and have failed 3. New services will arise and network owner keeps all revenues. Problem is that a real broadband pipe can support all applications the revenues from new services don t contribute to the pipe business case (e.g. Google Street View) if net neutral Simple answer: a utility approach with access revenues paying for the access network 13 New Triple Play Old 2. Telephony Grab: new challenger gets share of existing telephony from incumbent by offering triple play. Problem is that incumbent has a business case to fight back. Starts with duplication and price wars. Ends in Stalemate. Vertical Retail + Wholesale 1. Vertical Integration: as an incumbent, use retail revenues from a vertically integrated model to reduce the % take up needed see Corning graph. Problem is retail price - $40 @ 100%, $80 if two networks sharing ( assuming high price doesn t impact take up much!!!)
Industry Structure with One Network Goals (LTIE) Amazon Google MySpace itunes Facebook Applications: Richly linking people & businesses YouTub e Retailing of Telephone, ISP and TV (becoming broadband access provision) Infrastructure: Provision of Network and Connectivity Proliferate new applications Reinvent old applications Network neutrality Simplicity & convenience Open access multiple retailers Near 100% availability Near 100% take rate Affordable and fast Trade-offs: Competition at higher layers versus lower Horizontal ROI near Vertical ROI to attract network operators 14
Utility Wholesale Access Pricing Options - 1 1. Retail Plans Prices grow with Gigabytes $ Gigabytes 2. Single cost based wholesale price: Too low destroys business case Too high destroys entry level pricing No right price! $ Gigabytes 15
Utility Wholesale Access Pricing Options - 2 3. Speed based pricing: Artificially throttles entry level services Small minority get full benefit of investment Wastes capability $ Gigabytes 4. Recommended Access Pricing: Everyone gets unconstricted pipe Affordable entry level pricing Plus pay for use like a utility Allows comparable service pricing Funds expansion and upgrade of network Usage charges will fall with time Better for Everyone 16
Water, Gas, Power Line, Sewer or FTTH? Same architecture Same poles or ditches (civil works dominate costs) Same economics All can be affordable: Simple product definitions, No network duplication (2 networks double the cost, but not the revenues) uniformity of approach moderate retail margins Same network utility model 17
Broadband Access another valued Utility Water Just H2O, Unconstricted Download 1000 s of applications Gas Just CH3CH(OH)CH2CH3 Unconstricted Download A few applications Electricity Just 240v, 50Hz Unconstricted Download 1000 s of applications Just a Clear pipe Unconstricted Upload A few applications Wastewater 101101 Just Bit : 101101 Unconstricted Upload and Download 1111101000 s of applications Bits A Utility: Reliable, Simple, Unconstricted, Pay for Use, Near 100% Availability and Usage 18
Just 5 Steps to the 5th Utility (and Real Broadband Access for All) 5. User Requirement 2 - Affordable Utility Pricing: affordable monthly fee + pay for use (gigabytes) 4. User Requirement 1 The Real Deal Utility : unconstricted - get the capability you pay for, like water 3. Service Providers and Application Providers Needs Utility Access: open access and net neutrality 2. Network Owners Need Business Case for Change (Good) Utility ROI (don t expect Horizontal ROI<< Vertical ROI) 1. Establish Appropriate Industry Context for Fixed B band Utility Regulation: as a natural monopoly like other pipe utilities Real Broadband can be as affordable as water or wastewater and be used by as many homes! 19
Robert James imediate Consulting 0417 103 281 robert.james@imediate.net 20 John de Ridder de Ridder Consulting 0409 804 278 deridder@bigpond.com