Document 5.0 Presentation and demonstration of the modelling tool

1
NETWORK AND SERVICES WORKSHOP
Presentation and demonstration of the modelling
tool Xavier Voisin
Dakar, April 18 21, 2005
ITU/EC Regulatory Capacity Building Project for
ECOWAS countries
2
Model structureWindow of observation

• Taking into account a consistent development time
  frame for global telecommunication services, we
  use a 5-year model
• Value beyond the 5 year window will be captured
  by Terminal Value (explained later)

3
Model structureGranularity

• The model uses a one-year granularity
• This might be long for services with high growth
  
• gt enter Average demand per year and not end-of
  -year demand
• Accordingly pay-back computation is approximate
• gt known issue. Consider it with /- 6 months

4
Model StructureRevenues and costs recognition

• Cost and revenues are computed in the same period
• gt A parameter shifts by N months the revenues
  before running the financial analysis (default
  N4)

5
Model Architecture
Users Scenario
Service model
Service model
Service model
Cost allocation
Revenues
Cost drivers
Cost
Financial data
Financial Results
Sensitivity Analysis Impact of Services
6
Financial DataDiscount Rate

• Discount rate (to compute NPV)
• 12 default value
• Cash Flows are discounted by the time value of
  money at the discount rate to compute today's
  value (Year 1) of future cash flows

7
FinancialTerminal Value

• Terminal value (to compute PV after the window of
  observation)

• Computed from Y5 discounted Cash Flow, multipled
  by a Terminal Value Multiple
• Terminal Value Multiple 8 as default value (with
  12 discount rate)

Mathematics show On infinite duration and with a
constant growth of g and with discount rate of
d, the theoritical TVM would be (1g)/(d-g)
assumes d gt g Gordon-Shapiro model
8
FinancialCorporate Costs

• Internal SGA
• A percentage of the revenues is taken as
  additional cost to support the company's
  corporate costs
• Default value is 20
• Promotion directly linked to the services is also
  computed in addition as Corporate costs

9
Financial Depreciation, Amortization and taxes

• The model is based on CASH FLOW ANALYSIS, not on
  Balance Sheet statement.
• gt Therefore Amortization and Depreciation
  (which are accounting values and not cash flow
  values) are NOT valued
• The financial model is BEFORE taxes. Taxes are
  NOT included

10
SERVICES

• The following services are modeled
• IP Centrex - VoIP
• Multimedia Conference - International PC to Phone
• Unified Messaging - Video On Demand
• High-Speed Internet BB - Content Delivery
• Long Distance By-pass
• IP Offload

11
REVENUES

• Revenue per service is directly linked to service
  description (with tariff policy) and users
  scenario (market assumptions).

Illustration Only
12
COST DRIVERS

• Each CAPEX cost item is associated to one cost
  driver, used as cost variable
• Examples of cost drivers
• CAPS (Call Attempts Per Second)
• Number of Users
• Number of BB ports
• Number of equivalent DS0
• etc.

13
COSTSCAPEX

• Simplified cost structure
• Minimum
• Fixed
• Variable per cost driver
• Yearly decrease to account for technological
  improvement and efficiency
• Default -7 per year

14
COSTSCAPEX

• Network-based CAPEX
• Softswitch - MGC - TDM Service platform
• Trunking Gateways - NGN service platform
• IAD - Network Management
• DSLAM
• BRAS
• ATM Aggregation
• IP Transport

15
COSTSCAPEX

• Service-based CAPEX
• IP Centrex Application - VoIP Application
• LDB Application - IP Offload Application
• VoD Application - VoD Set Top Boxes
• Prepaid Application - Billing Application
• Multimedia Conf. Applications
• Content Delivery Application

16
COSTSOPEX

• OPEX from Network-based elements is based on of
  cumulated CAPEX (before cost erosion) and PY
  cost, based on empirical experience
• OPEX from Service-based elements is based on
• number of persons to run the service and PY cost
• Maintenance cost as a of cumulated CAPEX
• Model allows to add a yearly increase of OPEX
  (default 2)

17
COSTSPromotion

• Service-specific promotion is added, taking into
  account
• The necessity or not to advertise for a service
• A reasonable promotion / revenue ratio
• A reasonable absolute promotional budget
• The full project promotion can be corrected to
  account for a cheaper global promotion campaign
  compared to many individual promotions

18
Cost Allocation

• Some costs are shared among various services
• A Cost Allocation Table allocates each cost to
  the various services prorata either the service
  revenue Y5, or the number of Cost Drivers used by
  the service
• A few costs are not allocated to services, but to
  the full project. These are Common Costs.

19
Cost AllocationExample
Assuming these 3 services using the same item A,
which is a shared resource, and item B wich is a
Common resource
The cost allocated to a service depends on the
mix of services
20
RESULTS

• Global Analysis Cash Flow Statement
• Cash Flow, Cumulated Cash Flow, Terminal Value,
  Net Present Value, Pay-back, Internal Rate of
  return
• Services Analysis
• Revenue per service per year
• Cost per service per year

21
Example of CF Statement
Illustration Only
22
Example of results
Beware Not same Scale !
Illustration Only
Revenues
23
Market scenarios
?

• MAINSTREAM Capture of service users and tariff
  as planned
• BEST CASE Entry of competition on other segments
  growth the market without damaging tariffs
• PESSIMISTIC Entry of competition one year after.
  No impact on tariff, but 20 churn each year.
  First entrant takes 60 of the growth and of the
  churning users. Second entrant takes 40
• CATASTROPHE Competition enters first. Entry one
  year later. Symmetrical case from Pessimistic.
• WORST CASE Entry of competition on same segments
  with a price war damaging both companies

?
?
? in our model
24
Sensitivity Analysis

• Sensitivity to model parameters
• NPV depending on Discount rate and Terminal Value
  Multiple
• Impact of Revenue Shift
• Impact of CAPEX erosion

25
Service scenarios

• Impact of service mix
• How is the full profitability (NPV and IRR)
  impacted by selecting or not a service ?

Illustration Only
26
Known Model Limitations

• Simplified cost structure the model
• Does not consider possible strong volume
  reduction for CAPEX
• Does not consider specific architecture or
  specific dimensioning requirements (device
  duplication, heterogeneous implementations)
• Nevertheless, the structure of the model and the
  support of a tool expert will allow a specific
  adaption and go further in the analysis of a
  dedicated project