FTTx Architectures and Why it Matters for the Open Access Debate

1
FTTx Architectures and Why it Matters for the
Open Access Debate

• Marvin A. Sirbu
• Department of Engineering and Public Policy
• Carnegie Mellon University
• sirbu_at_cmu.edu
• http//www.andrew.cmu.edu/user/sirbu/

2
Conclusions Up Front

• FTTP networks have significant economies of scale
• ? facilities-based competition is unlikely to be
  sustainable
• Service-level competition can exist over shared
  network infrastructure
• Sharing possible at different levels
• Sharing of dark fiber requires attention to fiber
  layout
• There is great variety in the models of sharing
  which can be found today
• A wholesale-only provider is financially viable
• It is not necessary to be vertically integrated
  to be profitable

3
Outline

• Models of Competition in FTTP
• Alternative FTTP architectures impact on
  competition
• Economics of FTTP
• Economics of a Wholesale/Retail split

4
Outline

• Models of Competition in FTTP
• Alternative FTTP architectures impact on
  competition
• Economics of FTTP
• Economics of a Wholesale/Retail split

5
Facilities based competition each competitor
builds FTTP network
6
UNE (LLU) based Competition in FTTP

• Dark fiber based network owner wholesales dark
  fiber
• Wavelength based network owner wholesales
  wavelengths

7
Open Access based competition network owner
wholesales transport capacity
8
Sharing Network Infrastructure Summary
Layer Shared Infrastructure
0 Conduit and collocation facilities.
1 (Physical Layer Unbundling) Dark fiber leasing, or perhaps, Optical Layer unbundling (CWDM or DWDM in PONs)
2 (Data Link Layer Unbundling) Dark fiber and link-layer electronics at each end. For example, Ethernet-based VLAN, or ATM-based PVCs.
3 (Network Layer Unbundling) Basic network service provided. For example, IP Layer 3 service over cable using policy-based routing to multiple ISPs
9
Examples of Sharing at Different Layers

• 0 Open access to ducts
• Portugal
• France
• Dark fiber at layer 1
• Stokab in Stockholm
• VLAN service at layer 2
• UTOPIA
• Amsterdam
• Pau

10
Multiple Layer Separation Amsterdam
Source http//www.citynet.nl/upload/Wholesale-ba
ndwidth-Amsterdam-Citynet.pdf
11
Issues and Problems

• If you build a wholesale network, will there be
  service providers?
• Kutztown, PA wanted to do only up to layer 2 and
  couldnt find service providers to run over the
  network
• Operations finger pointing between wholesaler and
  retailer
• Provo Utah sold its layer 2 wholesale network to
  a service retailer arguing that integrated
  operations are cheaper
• Economies of scale
• Operating company to light the fiber in multiple
  cities
• Axione
• Packet Front

12
Outline

• Models of Competition in FTTP
• Alternative FTTP architectures impact on
  competition
• Economics of FTTP
• Economics of a Wholesale/Retail split

13
Home Run Architecture

• Implications for Competition
• Physical layer unbundling possible wholesaler
  can sell individual fiber
• Also supports open access

14
Active Star Architecture

• Implications for Competition
• Physical layer unbundling is difficult
• requires competitors to collocate electronics at
  remote node
• Must provide feeder fibers for each competitor
• Logical layer unbundling possible - supports open
  access

15
Curb side Passive Star Architecture (PON)

• Implications for Competition
• Physical layer unbundling not possible
• Logical layer unbundling possible - supports
  open access

Separate ?s may be used for Data and video
16
WDM PON

• Implications for Competition
• Physical layer unbundling not possible
• Optical layer unbundling possible wholesaler
  can sell wavelengths
• Also supports open access

17
Design Considerations in a PON A Curb-side PON

• Both OLTs needed if only one home in each
  splitter group subscribes

18
Design Considerations in a PON A Fiber
Aggregation Point (FAP) PON

• Fiber Aggregation Point PON supports all models
  of competition

19
How many homes should be aggregated at an
Optimal FAP?

• OFAP allows deferring investment in OLTs until
  penetration requires it

20
OFAP as a Real Option to Phase-in New
Technologies

• OFAP also supports flexibility
• in future split ratios
• - 10 Gbps GPON, GEPON
• - WDM PONs

21
OFAP Benefits withan Active Star Architecture
RT OLT tobe deployed as needed

• Higher utilization of RT and OLT ports
• Neighboring homes can be served by different
  technology generations

• Larger serving area

22
Sharing in the Second Mile

• As video becomes dominated by unicast Video on
  Demand (VOD) metro aggregation network costs soar
• In smaller communities, access to regional
  transport to a Tier 1 ISP is a major barrier to
  entry
• Retail service providers sharing an FTTH access
  network may also need to share at the
  metro/regional level in order to be economically
  viable.
• NOAAnet
• There is a tradeoff with distributed video
  servers
• Sharing a content delivery network (e.g. Akamai)
  may be an alternative.
• This requires distributed colo space and
  interconnection
• See Han, S. et al IPTV Transport Architecture
  Alternatives and Economic Considerations, IEEE
  Comm Mag, Feb 2008
• Lamb L., The Future of FTTH Matching
  Technology to the Market in the Central Office
  and Metro Network, NOC 2008.
• NSP, A Business Case Comparison of Carrier
  Ethernet Designs for Triple Play Networks,

23
Regulatory Implications

• If regulators want to be able to require dark
  fiber unbundling, they need to require compatible
  fiber layout
• OFAP PON vs curb-side PON
• Even larger OFAP for competitive active star
• Need for additional feeder fibers for competitors
• All architectures support logical layer
  (bitstream) unbundling
• IPTV unbundling possible at bitstream layer
• If video distributed over a separate wavelength,
  issues of access to RF multiplex.

24
Outline

• Models of Competition in FTTP
• Alternative FTTP architectures impact on
  competition
• Economics of FTTP
• Economics of a Wholesale/Retail split

25
Simple FTTH Economics FTTH Includes Fixed Plus
Variable Costs
Cost Fixed R Variable

• e.g. for Verizon YE06
• Fixed850
• Variable880
• Source http//investor.verizon.com/news/20060927
  /20060927.pdf

Slope avg cost
Fixed costs
100
0
Take Rate (R customers / homes passed)
Adapted from Friogo, et.al.
http//ieeexplore.ieee.org/iel5/35/29269/01321382.
pdf
26
Cost Per Subscriber vs Take Rate
1730
27
How Much Revenue to Support FTTH?

• One operator estimates 90/month per subscriber
• 40 for ongoing services cost
• ? 50/month to cover capital costs
• Assume an average of 10 year lifetime, 5 cost of
  capital
• Fiber lasts 40 years
• Electronics lasts five years
• 50/month can amortize 4700
• What if Average Revenue Per User (ARPU) is less?
• 30/month can amortize 2800

28
Cost Per Subscriber vs Take Rate
Percent take rate needed to break even
Capital that can be amortized with 50/mo/sub
Capital at 30/mo/sub
Adapted from Frigo et. al.
29
Cost Per Subscriber vs Take Rate
Take Rate
Consumers
Capital that can be amortized with 50/mo/sub
Competition
Adapted from Frigo et. al.
30
Economic Implications

• If revenue available to amortize plant is only
  30/month, must reach penetration of gt 45
• ? room for at most 2 facilities-based providers
• This analysis understates the problem
• No customer acquisition (marketing/sales) cost
  included
• Customer acquisition drives up Fixed costs
  pushing breakeven penetration higher
• Unlikely to see gt90 total penetration

31
Regulatory Implications

• Facilities-based competition among fiber network
  providers is unlikely
• Economies of scale
• Regulators should be cautious of waiving open
  access requirements in return for investment in
  fiber
• Could lead to remonopolization
• At best duopoly competition
• If service competition limited to ISPs which own
  facilities ?greatly reduced service level
  competition
• Operators will have Significant Market Power
  (SMP)
• Reduced service-level competition raises Network
  Neutrality issue

32
Net Neutrality

• Can third parties compete with vertically
  Integrated ISPs?

Apps Con- tent
Apps Con- tent
Apps Con- tent
33
Outline

• Models of Competition in FTTP
• Alternative FTTP architectures impact on
  competition
• Economics of FTTP
• Economics of a Wholesale/Retail split

34
Economic Analysis Motivating Question

• Open Access Network operator provides wholesale
  transport to service providers
• Do sustainable prices exist for an
  infrastructure-only provider?
• Build a supply/demand model and calculate welfare
  effects for different industry structure models

35
Structural separation interferes with the ability
to price discriminate

• Does this make a wholesaler less likely to
  recover costs vis-à-vis a vertically integrated
  entity?

• Vertically integrated entity
• Can sell 7 bundles Voice, Data, Video,
  Voice-Data, Voice-Video, Data-Video,
  Voice-Video-Data
• Can set 7 prices

• Dark fiber wholesaler
• Can sell only dark fiber access
• Can set only one price

36
Wholesale Prices and Arbitrage

• A dark fiber wholesaler can set only one price
• A lit fiber wholesaler can set a price for data
  or video bandwidth but cannot set a separate
  price for the bundle
• Video bandwidth is sufficient to offer both video
  and data services to customers, so
• Wholesale price of bundle bandwidth and video
  bandwidth must be the same

37
We have studied 3 models
Assumptions

• FTTP network only network serving market
• Voice services are provided over a separate
  network
• FTTP network used to provide only data and video
  services

• FTTP network only network serving market
• FTTP network used to provide voice, video and
  data service

• Market already served by (cable) incumbent when
  FTTP provider enters
• FTTP and incumbent network used to provide only
  data and video services

38
Two-service model for the Wholesale-Retail Split

• Demand Model
• Consumers have different willingness to pay for
  voice, video and data services Willingness to
  pay for a particular service can be modeled by a
  statistical distribution for a particular market
• There is correlation between the willingness to
  pay for voice, video and data for one particular
  consumer One can imagine a 3-space where the
  coordinates of each point give her willingness to
  pay for voice, video and data services
• For simplicity, here we assume everyone wants
  voice so our demand model is 2-space, where the
  coordinates of each point give the willingness to
  pay for data and video

39
X1Homes taking service1 (data) at price P1 (Area
BDP1P3)X2Homes taking service2 (video) at price
P2 (Area ACP2P3)X3Homes taking service3 (video
and data) at price P3 (Area ACDBZ)
Demand Model..

40
Supply Model

• Annualized Fixed cost for wiring up the entire
  market consisting of X homes F
• Annualized Fixed Cost of installing CPE and drop
  loop C0
• Annual incremental cost of providing data service
  (Service 1) per home C1
• Annual incremental cost of providing video
  service (Service 2) per home C2
• Observation Marginal Cost of Bundle (C0 C1C2)
  is less than the sum of Marginal Cost of Data (C0
  C1) and Marginal Cost of Video(C0 C2)
• If X1 homes take data service, X2 homes take
  video service and X3 take both, annual cost of
  providing service
• F C0(X1X2X3) C1X1 C2X2 (C1 C2)X3

41
Possible Industry Structures

• Vertically Integrated entity (Network owner
  provides retail service)
• Verizon Model (Profit Maximizing)
• Bristol Model (Welfare Maximizing)
• Structurally Separated entities (Network owner,
  either by regulation or choice, is only a
  wholesaler. The retail market is assumed to be
  competitive/contestable)
• Grant County Profit (GCP) (Profit Maximizing
  layer 2 service wholesaler)
• Grant County Welfare (GCW) (Welfare Maximizing
  layer 2 service wholesaler)
• Stockholm Profit (SP) Model (Profit Maximizing
  dark fiber wholesaler)
• Stockholm Welfare (SW) Model (Welfare
  Maximizing dark fiber wholesaler)

42
Model Results

• Not surprisingly, if network owner optimizes
  Social Welfare (e.g. Bristol) consumers are much
  better off than if network owner optimizes profit
• If network owner optimizes profit, THERE IS
  VIRTUALLY NO DIFFERENCE in profit for a
  vertically integrated firm or a wholesaler.
• The fact that vertically integrated firm has more
  flexibility to price discriminate is not
  important since most households subscribe to the
  bundle, and wholesaler can extract the same rent.
• If there is a large fraction of the population
  with no interest in broadband data, then
  vertically integrated firm can do 25 better than
  a dark fiber wholesaler, but still no better than
  a lit fiber wholesaler.

43
3 services model shows less than 5 difference
Stockholm and Verizon profits
F5x104 C08 C120 C230 C35 ?1 35 s1 10 ?2
45 s2 10 ?3 25 s3 10
44
Similar profits are attained in spite of a
different distribution of subscribers
45
What if There Are Competing FTTP Operators?

• If services are identical, classic case of
  natural monopoly
• Firm with higher penetration has lower costs
• Ruinous competition
• Having sunk cost in fixed plant, each competitor
  is willing to price at marginal cost
• ? negative profits
• Stable competition can exist only if there are
• Differentiated services appealing to
  heterogeneous customer tastes or
• High switching costs

46
Duopoly Model Results

• We assume two operators with similar cost
  structures, one an incumbent, one a new entrant
• Assuming video and data services are sufficiently
  differentiated between competitors, both can
  survive in the marketplace
• If the new entrant is a wholesaler only, or
  vertically integrated makes no difference in its
  profit
• An incumbent competing against a dark fiber
  wholesaler is modestly worse off than when
  competing against a vertically integrated
  competitor
• Wholesalers inability to price discriminate
  forces competitor to reduce price discrimination
  and lose profit.

47
Model assumptions and caveats

• Retail industry assumed to be perfectly
  competitive and no entry barriers retailers make
  zero economic profit
• Revenues derived entirely from end customers, not
  from application service providers
• No economies of scope at retail assumed
• Incremental costs, Ci , are the same in both
  vertically integrated and competitive retail
  cases
• Competition should drive down incremental costs
  of services
• Layer 2 costs, C0, are the same whether supplied
  competitively or by wholesaler
• See above

48
Regulatory Policy Implications

• Operators, municipalities or communities that
  build out FTTP and choose to be wholesalers
• (i) can realize sustainable prices,
• (ii) are likely to create greater welfare (due to
  innovation spurred by retail competition) and
• (iii) are just as likely to recover costs
  (vis-à-vis vertically integrated entities)
• Model results contradict claims by operators that
  vertical integration is necessary to support
  investment in FTTP infrastructure
• ? regulatory holiday for FTTP investment is
  unwarranted.

49
Conclusion

• What are the different models of competition in
  FTTP?
• Facilities based
• Service level (over shared network
  infrastructure)
• Fiber layout affects options for competition
• OFAP supports fiber unbundling even for PONs
• More feeder fibers required for competition
• FTTP networks have significant economies of scale
• Unlikely to support multiple facilities-based
  providers
• Second Mile sharing also important
• A Wholesale Operator can earn profits similar to
  those available to vertically integrated
  competitors
• It is not necessary to be vertically integrated
  in order to earn enough to pay for the
  infrastructure

50
For Further Information

• http//www.andrew.cmu.edu/user/sirbu/pubs/Banerjee
  _Sirbu.pdf
• http//web.si.umich.edu/tprc/papers/2006/648/Baner
  jee_Sirbu20TPRC_2006.pdf
• http//cfp.mit.edu/groups/broadband/muni_bb_pp.htm
  l