Our overall model approach: characterization

Our basic modeling relies upon the Long Run Incremental Cost (LRIC) approach in a bottom-up manner. That means we model the total cost of the services considered under efficient conditions, taking into account the cost of all network elements needed to produce theses services.

We consider three different types of players in the NGA market: • first mover, not being the incumbent

• incumbent as first mover • second mover

They may deploy their NGA networks in one or the other of the above described technical architectures (VDSL, PON, P2P, chapter 4.1). We assume that these players will serve all customer groups:

• residential, single play: voice

• residential, dual play: voice and internet

• residential, triple play: voice, internet and IP-TV

• business, mixed broadband services (VPN, Internet, Voice, …)

Additional services (e.g. video on demand, gaming, …) are not modeled, but could be included by adding an adequate margin of these services only (and not the additional total revenues), since the cost are not contained in the model either.

The first mover, not being the incumbent, has to roll out the NGA network to those areas (clusters) where the business will be viable, in a greenfield approach. It can take a first mover price for its services.

The incumbent as first mover will as well roll out the NGA network in the viable areas. It may have some advantages in sharing its infrastructure for telecommunications services not being considered in this model (like leased lines). Furthermore it gains an extraordinary income by closing down and selling the MDF locations no longer needed76_{. It receives the same retail prices as we have assumed for the other first}

mover.

The second mover also covers the relevant clusters with a second broadband infrastructure, being able to cover 100% of the homes in that area. But depending on the regulatory options (chapter 4.1.4) it does not need to construct all infrastructure on its own, but could rent parts of the infrastructure (ducts, fibres, etc.). Unless we assume the option of SLU or LLU the second mover has to provide for the availability of fibre (rented or constructed) to all homes. We assume the retail price a second mover may achieve to be less than the prices for the first movers by 10%.

76 The extraordinary revenue of the MDF sale reduces the investment needed per cluster (and is therefore distributed over time by reduced depreciations). The average sales revenue per MDF and country can be chosen and is set by default to 1 mill. € (KPN reference), except Portugal and Spain (0,5 mill. €).

4.2.1 Static modelling

The model approach we have chosen is static. We compare the cost of the NGA business in a future year and compare it with the income received for a dedicated market share. Increasing the market share percent per percent and comparing the resulting revenue per customer with the cost per customer we determine the point, where, if at all, the income equals the cost. This is the critical market share above which the NGA business is profitable.

In reality every operator entering the new NGA business will experience ramp up cost until it reaches this critical market share. To neglect this cost underestimates the real cost experienced and even increases the effective market share needed to recover the ramp up cost. Thus our results have to be interpreted as the minimum share needed, the reality might be worse concerning viability and replicability.

Of course choosing this static approach neglects to consider the different dynamics of the market players. Usually the incumbent starts with a very high market share, especially if one includes the wholesale access business. On the contrary, a first or second mover, which is not the incumbent, normally starts with a lower market share or in exceptional cases even from the scratch. Thus, the ramp up cost for the incumbent will be lower, increasing the gap described in the results.

4.2.2 LRIC greenfield and existing infrastructures

The LRIC approach implies to consider all costs incurred for the production of the services, e.g. those for all ducts needed. We have taken this approach for all cases considered. While for the competitive operators, as first or second movers, this will describe the cost they really experience because they newly construct, for an incumbent the situation is different. An incumbent may use already existing infrastructures like ducts or buildings. If these are not depreciated yet they are related with cost. When they are already depreciated, only minor cost would incur. In both cases the use of already existing infrastructure changes the point of view for the economic decision to roll out a NGA network (e.g. time to market, architectural decisions, …) and may improve the economics itself, lowering the really needed critical market share and allowing to roll out in areas which might not be viable under a full cost consideration.

Since all results we present are based on the LRIC approach the costs for all infrastructure needed is considered as well in the incumbent case. They may be taken as opportunity cost. For the interpretation of the results one should keep these circumstances in mind.

4.2.3 Customer demand and market shares

We use the customer demand in the model in two dimensions. The first is the share or mix of demand for the different types of services (single play, double play, triple play, …), the second is the market share the operator achieves and serves for the customer mix.

The customer mix in our model is not based on market research, but on reasonable assumptions, how many customers may remain with single play, how many will take up double or even triple play. For business customers we took the average proportion of business customers of 10% of the residential. The default relation within the residential customers for single, dual or triple play is 20%, 65% and 15%, but the model can be adjusted to adopt different proportions.

The market share an operator achieves is not based on any assumptions, because the way we model the results of viability uses the market share as a variable, being increased as long as the cost are still higher than the income in a specific cluster. The result is the critical market share needed to reach viability. Compared to other models the market share therefore is not an input, but the main output variable. Thus the question an operator in our model world might answer is not: ‘what is the probable market share I can reach’ (and put it into the model, e.g. to calculate the NPV), but rather: ‘is it possible to reach even more than the critical market share the model gave me as output’.

The market share we use to determine the critical point is a share of all possible customers, of all residential homes or households plus a mark up of 10% for the business customers. This possible market includes as well all households using Cable TV operators instead of traditional fixed network operators, mobile-only households or households, that even do not have any telecommunication services at all. Only a part of it will be the market for broadband services. Hence the addressable or the broadband market are smaller than our total market base. This has to be kept in mind interpreting the market share we use in our study.