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Prepared by:

Final Report
Technical assistance in bridging the “digital divide”:
A Cost benefit Analysis for Broadband connectivity in Europe

6 October 2004

With:
EC/ESA Digital Divide CBA – Final Report 6 October 2004

Contents
1 Introduction..................................................................................................................... 4
1.1 Background and Objectives ..................................................................................... 4
1.2 Issues ........................................................................................................................ 4
1.3 Our Approach........................................................................................................... 5
2 Existing level of broadband connectivity across Europe................................................ 7
2.1 Methodology ............................................................................................................ 7
2.2 Terrestrial broadband availability ............................................................................ 8
2.3 Terrestrial broadband availability forecasts: 2004 - 2013...................................... 11
2.4 Satellite broadband availability.............................................................................. 14
2.5 Broadband take up: 2004 – 2013 ........................................................................... 16
2.6 Potential broadband demand remaining unserved ................................................. 22
2.7 Availability and take up of terrestrial broadband - conclusion .............................. 25
3 Combined system and user costs of broadband connection.......................................... 27
3.1 Costing considerations ........................................................................................... 27
3.2 Capital costs ........................................................................................................... 28
3.3 Operational costs .................................................................................................... 36
3.4 Typical cost breakdown by technology.................................................................. 36
3.5 Average cost per user ............................................................................................. 39
3.6 Total costs by Country Group ................................................................................ 40
3.7 Costs of providing service to Objective 1 regions ................................................. 41
3.8 Summary of technology mix .................................................................................. 42
4 Optimal technical solution for broadband connectivity................................................ 44
4.1 ADSL and Derivatives ........................................................................................... 45
4.2 Satellite................................................................................................................... 53
4.3 Hybrid Satellite/BFWA/WiFi ................................................................................ 60
4.4 Affordability and User Willingness to Pay ............................................................ 63
4.5 Conclusions on Optimal Mix of Technologies ...................................................... 68
5 Benefits of the provision of broadband connectivity across Europe ............................ 71
5.1 Introduction ............................................................................................................ 71
5.2 Economic concepts................................................................................................. 71
5.3 Implementing the methodology ............................................................................. 78
5.4 Direct benefits to subscribers ................................................................................. 84
5.5 Benefits to public sector suppliers of services (Step 3) ......................................... 97
5.6 Regional analysis of benefits ............................................................................... 118
5.7 Conclusions: Overall value of broadband benefits .............................................. 120
6 Conclusions on cost benefits for broadband connectivity .......................................... 122
6.1 Assumptions for the cost benefit calculation ....................................................... 122
6.2 Results of the cost benefit calculation.................................................................. 127
6.3 Conclusions .......................................................................................................... 135
7 Framework for the preparation of a business plan...................................................... 137
7.1 Background and Objectives ................................................................................. 137
7.2 Issues .................................................................................................................... 138
7.3 Our Approach....................................................................................................... 138
Appendix ........................................................................................................................... 141

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EC/ESA Digital Divide CBA – Final Report 6 October 2004

Glossary

ADSL Asymmetric digital subscriber line


ADSL2 and Enhanced ADSL – greater bandwidth on
ADSL2+ short-mid length lines
ARPU Average Revenue Per User
B2C Business to Customer
BFWA Broadband Fixed Wireless Access
CAPM Capital Asset Pricing Model
CATV Cable Television
CBA Cost Benefit Analysis
EC European Commission
EMRP Equity Market Risk Premium
ESA European Space Agency
EU European Union
FTTB/U Fibre To The Building/User
FTTC Fibre To The Cabinet/Curb
GCSE General Certificate of Secondary
Education
HFC Hybrid Fibre Co-ax
ICT Information and Communications
Technologies
LAN Local Area Network
NPV Net Present Value
PLC Powerline Communications
PPP Public Private Partnership
PwC PricewaterhouseCoopers LLP
SME Small & Medium-Size Enterprises
SoHo Small Office Home Office
VAT Value Added Tax
VoIP Voice Over Internet Protocol
VSDL Very high speed digital subscriber line
WACC Weighted Average Cost of Capital
WiFi WLAN used in the wide area
WLAN Wireless Local Area Network

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EC/ESA Digital Divide CBA – Final Report 6 October 2004

ESA STUDY MANAGER

Pierluigi Mancini Ph.D.


Applications Strategy Manager
Directorate of EU and Industrial Programmes
Email: pmancini@hq.esa.fr

This document has been prepared on the instructions of the European Space Agency (“ESA”) and with only
ESA's interests in mind. PricewaterhouseCoopers LLP, its members, partners, employees and agents neither
owe nor accept any duty or responsibility to other parties (“you”), whether in contract or in tort (including
without limitation, negligence and breach of statutory duty) or howsoever otherwise arising, and shall not be
liable in respect of any loss, damage or expense of whatsoever nature which is caused by any use you may
choose to make of this document, or which is otherwise consequent upon the provision of the document to
you. Without conferring any greater rights than you would otherwise have at law, we accept that this
disclaimer does not exclude or indemnify us against any liability we may have for death or personal injury
arising from our negligence or for the consequences of our own fraud. This report represents the Phase I
analysis on behalf of the ESA of the state of the Digital Divide in Europe,, on a technology neutral basis. The
report will provide inputs for a second phase to develop a business case to address the Divide, where further
analysis and/or refinement of the findings will be carried out as necessary to gain greater specificity.

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1 Introduction
1.1 Background and Objectives
In line with the strategic vision adopted by the European Union, the European society
of tomorrow will be a 'knowledge-based society' in which access to knowledge is for
all. Information outreach must therefore be considered as a major objective for
Europe. This means extending access to electronic communication services to
everyone, notably in those regions of our continent, which up until now have been
disadvantaged or neglected (rural and mountain areas, islands, far-flung outlying
regions). The enlargement of the Union adds a further dimension to the digital-divide
issue.

The European Space Agency and the European Commission have decided to give
joint consideration to the use of space-based technologies to help bridge 'the digital
divide'. In its White Paper on Space Policy, the Commission has placed this issue -
satellites contributing to bridge the digital divide - at the forefront of Europe's
strategic priorities in the run-up to 2007.

With this as a background, PricewaterhouseCoopers LLP, together with Ovum and


Frontier Economics their subcontractors, have been invited by ESA, to prepare a
detailed, technology-neutral Cost Benefit Analysis on broadband connectivity for an
expanded Europe.

The study’s objectives are:

• Through both primary and secondary research, identify and quantify, where
possible, the benefits of providing broadband connectivity across an extended
Europe;

• Prepare an objective analysis of the optimal technical solutions for broadband


connectivity, region by region;

• Provide an independent perspective on the Cost Benefit ratio for technology-


neutral provision of broadband for Europe over a period of at least 10 years; and

• Clarify the potential role of satellite-based solutions for broadband connectivity


and thus bridging the digital divide in an extended Europe.

1.2 Issues
Some of the issues the Study considered include:

• The extent to which Europe (and not the USA) will derive economic benefit from
any EU-initiated project to tackle the digital divide;

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• Quantification of user benefits – from societal and environmental, to economic


and industrial;

• Understand what benefits are actually incremental, resulting directly from new
user broadband connectivity; and

• How best to identify the optimal technical solution for the provision of
broadband service to new users across an extended Europe.

1.3 Our Approach


Our approach to the study is summarised below.

• We reviewed the existing level of broadband connectivity across Europe

• We analysed the combined system and user costs of a broadband connection by


each technical solution

• We identified the optimal technical solution for provision of future broadband


connectivity across different regions of Europe

• We quantified the benefits of the provision of broadband connectivity across


Europe

• We calculated the net benefits of broadband connectivity across an extended


Europe

• We set out a framework for the next steps following this study, including the
preparation of a business plan based on our findings

Throughout our study we have analysed two different scenarios of broadband


availability and take-up - a base case and extended take-up case. For clarity, the base
case and extended case assumptions were as shown in the tables below:

Table 1: Broadband connectivity and forecast take-up in Europe


2008 2013
Availability Base Case Extended Case Availability Base Case Extended Case
Country Group 1
Urban 98% 54% 56% 99% 76% 82%
Rural 92% 36% 39% 95% 54% 64%
Country Group 2
Urban 97% 37% 41% 97% 74% 81%
Rural 62% 19% 20% 78% 39% 42%
Country Group 3
Urban 96% 45% 50% 97% 75% 81%
Rural 61% 12% 13% 75% 28% 30%
Country Group 4
Urban 94% 13% 14% 95% 43% 47%
Rural 15% 1% 2% 34% 8% 10%

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PwC prepared a number of Technical Notes in the course of this study which were
individually presented and discussed in detail with a large number of representatives
from the European Space Agency and the European Commission. The content of these
Technical Notes, as well as the comments received from the stakeholders within both
ESA and the EC are reflected in this final report.

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2 Existing level of broadband connectivity across Europe


2.1 Methodology
The current and estimated future broadband connectivity in Europe has been
determined based on research of the current levels of broadband availability and take
up, historic trends of broadband availability and take up, reference to other published
material and modelling of estimated future availability and demand. The methodology
used in the study to determine the estimated availability and take up of broadband
services is briefly described in this Section of the report, and described in more detail
in the appendix to this report. The costs associated with the deployment of services are
also described in the appendix.

Each of the 25 EU countries has different characteristics, e.g. internet usage, GDP,
price of services, market competitiveness, which cause the provision and use of
broadband to vary from country to country. To assist the modelling, the 25 countries
of the EU were split into 4 country groups, in order that one or two countries per
group could be considered in detail and the results from this detailed analysis then
scaled to the other countries in the group. The factors considered most important when
the groups were determined were: the expected levels of adoption of broadband within
the forecast period of 2004-2013; GDP; the split of urban and rural population1 and
the current percentage of population in EU Objective 1 areas; the current penetration
of telephone lines and the take-up of broadband services. The methodology by which
the country groups are determined is described in the appendix to this report. This
analysis was underpinned by preliminary regional analysis within two countries, Italy
and the UK. If the modelling were extended to cover the non-EU ESA member
countries, Switzerland and Norway would come within Country Group 1.

With high current and expected future levels of broadband availability and take-up,
medium to low levels of rural population and high disposable income, the countries in
Group 1 are: Austria; Belgium; Denmark; France; Luxembourg; Malta; Netherlands;
Sweden; United Kingdom. The take up and development of broadband services in the
UK and France have been used as a basis for modelling Group 1 countries.

Countries in Group 2 have a higher percentage of population in EU Objective 12 areas


(10-35%), lower average current levels of broadband adoption, and have high

1
The cost modelling used same data for urban and rural population as used for the benefits analysis.
The data was sourced from the European Social Survey, and is shown in Figure 2.2.
2
A region whose development is lagging behind others in the EU is given Objective 1 status to
promote its development and structural adjustment. Objective 1 areas may be urban as well as rural.
http://europa.eu.int/scadplus/leg/en/lvb/g24203.htm defines Objective 1 regions for the period 2000-
2006.

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disposable income. The countries in Group 2 are: Finland; Germany; Ireland and Italy,
with Italy being used studied in more detail for the project.

Those countries in Group 3, with high levels of the population living EU Objective 1
regions, medium levels of rural population and reasonable levels of current broadband
adoption are: Cyprus; Estonia; Portugal; Slovenia and Spain.

Group 4 is mainly comprised of the 2004 EU member countries of Central and Eastern
Europe, together with Greece, which has very low levels of broadband take-up. These
countries, which have medium-high levels of rural population and medium levels of
GDP and disposable income, are: Czech Republic; Greece; Hungary; Latvia;
Lithuania; Poland and Slovakia. The take up and development of broadband services
in Poland been used as a basis for modelling Group 4 countries.

Brief country profiles, for UK, France, Italy, Slovenia, Poland and Greece, together
with four regional case studies (two in Italy and two in the UK), which highlight the
issues facing different regions of Europe and which provide a qualitative analysis of
the issues faced during the development of broadband and infrastructure across the
digital divide, are provided in Appendix C to this report.

2.2 Terrestrial broadband availability


The scope of the problem of broadband provision in Europe can be seen in Figure 2.1,
showing the variations in population density across Europe. This shows the population
density at the NUTS 33 level. There are large rural regions of thinly populated space in
Sweden, Finland, Ireland, Greece, central France and central Spain. Low population
density is also found in north-eastern Germany and in most of the Baltic States.
Within these areas of low population, it must be recognised that there are many
distribution profiles. This uneven population distribution is a challenge for service
providers.

The availability of broadband in the EU is dominated by ADSL and cable modem


services and this is expected to continue. Cable modem services, built on top of cable
TV infrastructure are primarily provided in urban areas and their provision is very
varied across the EU. They are rarely cost effective to deploy in isolated urban areas
and rural areas. DSL services are provided in urban areas and increasingly in more
rural locations. There are currently low levels of availability of fibre to the user /
building (FTTU/B), broadband fixed wireless access (BFWA) and WiFi (wireless

3
Nomenclature of Territorial Units for Statistics (NUTS) are regional areas defined to allow a
common statistical classification to enable the collection, compilation and dissemination of
harmonised regional statistics in the Community. NUTS 3 regions have a minimum population of
150,000 and a maximum population of 800.000.

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LAN technology used in the wide area). However, where FTTB is available, it has a
dramatic effect on the speed and range of services that can to be offered, as can be
seen in Italy and Sweden. In the latter years of the forecast period, when demand for
services at above 10Mbps is growing particularly among business users, it is
anticipated that deployment of fibre will have started in many countries, but few will
have significant FTTB networks, which will be limited to urban areas. However, fibre
deployment to street cabinets (FTTC) is expected to be more widely used, taking
advantage of high capacity DSL services (e.g. ADSL2+ and VDSL).

Figure 2-1 Europe's population density for NUTS3 levels areas

Source: IIASA European Rural Development Project

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Figure 2-2 Urban population in EU countries

Urban Urban Urban


Population Population Population
Austria 56% Greece 68% Poland 56%
Belgium 46% Hungary 60% Portugal 64%
Cyprus 45% Ireland 54% Slovakia 45%
Czech Republic 68% Italy 64% Slovenia 45%
Denmark 70% Latvia 45% Spain 56%
Estonia 45% Lithuania 45% Sweden 69%
Finland 57% Luxembourg 49% UK 74%
France 74% Malta 45%
Germany 74% Netherlands 53%
Source: European Social Survey

The availability of these DSL and cable modem services cannot be considered
cumulative. The country groupings, and the range of broadband availability to (as %
of population) in each country group are given in Figure 2.3 and the availability of
broadband in 2004 is shown in Figure 2.4.

There are currently low levels of availability of fibre to the user / building (FTTU/B),
broadband fixed wireless access (BFWA) and WiFi (wireless LAN technology used in
the wide area). However, where FTTB is available, it has a dramatic effect on the
speed and range of services that can to be offered, as can be seen in areas of Italy and
Sweden.

Figure 2-3 Broadband availability by Country Group in 2004

Countries in Group Broadband availability –2004


Group 1 UK, France, Belgium, Denmark, 78% (Sweden) – 98% (Denmark)
Luxembourg, Netherlands,
Austria, Sweden and Malta
Group 2 Italy, Germany, Finland and 62% (Ireland) – 85% (Germany and
Ireland Finland)
Group 3 Spain, Portugal, Estonia, 50% (Estonia, estimate) – 92% (Spain)
Cyprus and Slovenia
Group 4 Czech Republic, Hungary, Very low (Greece) – 85% (Lithuania)
Poland, Slovakia, Greece,
Latvia and Lithuania

Source: Ovum

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Figure 2-4 Broadband availability by country - 2003

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%
Spain
Luxembourg

Finland

Lithuania

France
Austria

Latvia
Sweden
Poland

Ireland

Czech
Estonia*
Malta*
Slovenia*
Cyprus*
Slovakia*
Greece*
Portugal
Belgium

UK
Denmark

Germany

Netherlands

Italy

Hungary
Cable modem DSL * Ovum Estimate

Source: OECD4 (DSL – YE2003; Cable 2003) and Ovum

The availability of broadband in all countries and especially the 10 EU accession


countries demonstrates that it is not difficult to make rapid progress in providing
broadband access to large proportions of the population. The challenge lies in
reaching beyond the urban and more tightly grouped rural regions. This is being
achieved through a combination of commercial WiFi, BFWA and satellite services,
public sector financial support and other initiatives such as regional aggregation and
awareness campaigns.

2.3 Terrestrial broadband availability forecasts: 2004 - 2013


To develop the broadband take up model, we have made assumptions about the basis
of availability by access speed in 2004 and assumptions about the way in which
terrestrial broadband service availability will increase in each proxy country, by
access speed and type of user. The forecasts for each proxy country are derived from
Ovum’s detailed broadband forecast methodology. The Ovum broadband team works
closely with network operators, service providers, industry bodies and other players in
the market. It undertakes analysis of what has gone before – the size and rate of
market development, its regulatory environment and value drivers (e.g. content,
services). The model forecast takes into account these factors and also the
development of economic and demographic factors.

4
DSTI/ICCP/TISP(2003)7/FINAL: The Development of Broadband Access in Rural and Remote
Areas, 10-May-2004

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The broadband availability forecasts also assume that broadband services will be
made available where it is commercially viable for service providers to do so, which is
related to national prosperity. The availability of cable TV networks stimulates the
broadband market, as cable service providers have sunk their initial costs for cable to
the home (in more densely populated areas) and can easily offer attractive service
bundles, without the greater costs that DSL service providers have to bear.

The drivers for increasing availability and take-up of broadband will be similar in all
country groups. Initially consumers will require those services available with narrow-
band internet access, shown in Figure 2.5 at the lower service levels. As consumers
become more familiar with the service and new products become available, so usage
and bandwidth demand will increase.

Figure 2-5 Bandwidth and service level requirements of selected consumer applications

Source: Point Topic

Figures 2.6 – 2.9 show the forecast availability of broadband services for residential
and SoHo users. It is assumed in all cases that SMEs and large enterprises will have
higher broadband availability as they are a desirable customer sector and business
areas are amongst the first to be served. The charts showing service availability for all
broadband user groups are provided in Appendix A to this report. The rate of growth
and the limit of take up will vary between country groups. The major factors are
discussed below:

• Group 1 countries have very mature telecoms markets in both urban and rural
regions. The regulatory environment has adapted to create a strong competitive
market which is assisted by high levels of GDP and annual disposable income.
Those areas which do not have terrestrial broadband services available are few,

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and the incumbent is often leading the activity to reach nearly 100% availability,
enabling the remaining smaller rural exchanges for DSL. The assumed
availability by access speed for residential and SoHo users in urban and rural
areas is shown in Figure 2.6.

Figure 2-6 Broadband availability assumption – Group 1 countries

Residential and SoHo - Urban Availabity Residential and SoHo - Rural Availability
60,000 20,000
18,000
50,000
16,000
14,000
40,000
12,000
(,000 )

(,000 )
30,000 10,000
8,000
20,000
6,000
10,000 4,000
2,000
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

• Group 2 countries are similar to Group 1 countries. They have mature,


competitive markets, and high GDP levels and high annual disposable income,
but have large areas which are less attractive to serve, owing to lower GDP,
terrain or general level of development, leading to overall lower levels of
broadband adoption. The assumed availability by access speed for residential and
SoHo users in urban and rural areas is shown in Figure 2.7

• Group 3 countries have a high proportion of their population in Objective 1


designated areas. There are medium levels of annual disposable income per
household and the availability of broadband is varied. The countries have good
broadband availability in urban areas, but face a challenge in rural areas. The
assumed availability by access speed for residential and SoHo users in urban and
rural areas is shown in Figure 2.8

• Group 4 includes most accession countries which have medium levels of rural
population and medium levels of disposable household income. The broadband
market in these countries is just starting to develop but is restricted by lower
levels of technology and telephone line adoption. Operators are primarily
concentrating their broadband offerings in urban areas. The assumed availability
by access speed for residential and SoHo users in urban and rural areas is shown
in Figure 2.9.

Terrestrial broadband availability is complemented by the availability of satellite


services, which are discussed in Section 2.4.

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Figure 2-7 Broadband availability assumption – Group 2 countries

Residential and SoHo - Urban Availabity Residential and SoHo - Rural Availability
45,000 20,000
40,000 18,000
35,000 16,000
14,000
30,000
12,000
(,000 )

25,000

(,000 )
10,000
20,000
8,000
15,000
6,000
10,000 4,000
5,000 2,000
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

Figure 2-8 Broadband availability assumption – Group 3 countries

Residential and SoHo - Urban Availabity Residential and SoHo - Rural Availability
10,000 10,000
9,000 9,000
8,000 8,000
7,000 7,000
6,000 6,000
(,000 )

(,000 )

5,000 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

Figure 2-9 Broadband availability assumption – Group 4 countries

Residential and SoHo - Urban Availabity Residential and SoHo - Rural Availability
18,000 6,000
16,000
5,000
14,000
12,000 4,000
(,000 )

10,000
(,000 )

3,000
8,000
6,000 2,000
4,000
1,000
2,000
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

2.4 Satellite broadband availability


In theory broadband satellite services have 100% availability outside local blackspots
such as urban canyons (where there is no line of sight to the satellite). Europe is

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served by several different satellite operators whose spacecraft provide excellent


coverage of the entire EU area. This notably includes the members of the European
Satellite Operators’ Association: SES Global, Eutelsat, New Skies, EuropeStar,
EurasiaSat, Hellassat, Hispasat, Inmarsat, NSAB, Telenor and Telespazio. Most of
these operators have substantial capacity available at Ku-band and to a much lesser
extent at C-band. In addition, the major operators are incrementally introducing new
capacity at Ka-band, specifically intended to serve broadband markets. Finally, the
mobile satellite operator Inmarsat is launching new L-band satellites this year, one of
which is intended to support broadband mobile services across Europe from 2005.

Yet the real availability of broadband satellite services depends upon many other
things besides in-orbit capacity. Experience has shown that the takeup of such services
requires all of the following to be simultaneously in place:

• national and Europe-wide licensing of both spectrum and user terminals (which
must be straightforward and inexpensive)

• effective distribution channels (for both user terminals and integrated services
packages)

• proven high QoS levels

• customer support services (with rapid turnout)

• affordable usage charges

• affordable user terminal prices.

At present few of the above elements are in place to a satisfactory degree in any EU
country. On the other hand, 2004 is the first year in which most of these issues are
starting to be resolved. Their current status and future prospects are reviewed in detail
later in this report, with particular consideration given to:

• the status and capabilities of distribution channels, including customer support

• the importance of customer faith in good QoS

• the competitiveness of satellite usage charges compared to terrestrial services,


and as a subset of this the impact of the price of user terminals upon demand,
including setup and licensing costs and the effect of subsidies and grants where
these exist.

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2.5 Broadband take up: 2004 – 2013


2.5.1 Market development
The forecasts for take up are based on the market continuing to develop with healthy
competition and product development, taking into account:

• broadband services being made available where it is commercially viable for


service providers to do so

• lower service prices, driven by competition, efficiencies of scale and network


operator cost reductions

• lower differentials between narrow-band and broadband prices, making it


increasingly attractive for consumers to switch to broadband

• increasingly attractive service packages and bundled services (TV, video-on-


demand, Internet access, voice and content)

• continuation of some national and regional initiatives to stimulate availability


and take-up.

The forecasts do not take into account any new initiatives to make significant
intervention into the market.

2.5.2 Established broadband take up in 2004


At the end of 2003 there were 22.7 million ADSL and cable modem broadband users
in the 25 countries that now make up the EU. Research carried out in Q1 20045 shows
that in the second half of 2003:

• overall broadband growth in the major EU countries ranged from 15% in Austria
to over 57% in Italy. France, Hungary, Italy, Portugal and the UK all showed
more that 44% growth. However, it should be noted that these growth figures
may be from a very low base

• DSL growth ranged from 16% to 75%, with strongest growth in France,
Hungary, Italy and the UK

• cable modem growth ranged from 0% to 43%, with strongest growth in Finland
and Spain.

• These growth figures will also be affected by churn as consumers switch


suppliers, particularly where service packages and competitive pricing make

5
Source: Point Topic

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change an attractive option. Figure 2.10 shows the take-up of cable modem and
DSL, relative to the number of telephone lines in use in each country

Figure 2-10 Cable and DSL broadband take up per telephone line in use – Q4 2003

30%

25%

20%

15%

10%

5%

0%
BE NL DK AU FI SE ES EE PT FR MT UK DE IT SI LU HU LT LV IE CY PL CZ SK GR

Source: Ovum

There is still plenty of scope for increasing broadband take up in Europe, and this is
evident from Figure 2.11, which shows that the highest take-up in the EU is in
Belgium, with 12 broadband lines per 100 population. This compares with 24
broadband lines per 100 population in South Korea, one of the world’s highest users
of broadband services. If the number of residential broadband lines per household is
considered, then we see that in Belgium 27% (Q1 2004), of households have a
broadband connection which compares with a figure of 62% (Q1 2004), in South
Korea where the number of broadband lines grew by 2.2% in the quarter from Q4
2003 to Q1 2004, which is a slowing down of the growth rate experienced in earlier
recent periods.

Figure 2-11 Broadband take up (cable and DSL total) per head of population

14%
12%

10%
8%

6%

4%

2%
0%
BE DK NL SE FI AU FR DE UK ES MT PT EE IT LU SI HU CY IE LT LV PL CZ SK GR

Source: Ovum

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Can South Korea be used as a good model for estimating the growth of broadband in
Europe? The main reasons for the great penetration of broadband in Korea are:

a) the Korean government has an initiative for carriers to offer universal access
to broadband Internet with speeds up to 1 Mbit/sec by 2005 to 84% of South
Korean households. The government has subsidised equipment purchases and
consistently pursued deregulation and liberal market principles

b) there have been sustained high levels of investment in technical education to


help stimulate infrastructure build and an environment suitable for rapid
adoption of the new communication services

c) Korea's closely-knit and homogeneous culture has led to rapid take up of


broadband Internet services. More than 93% of homes are within 4 km from
end offices allowing high speed DSL access. Around 94% of Internet
customers in Korea use broadband services.

d) the online gaming industry in Korea is well developed and very popular.

e) by 2005, the government plans to build high-speed broadband networks using


fibre optic cables offering speeds up to 20 Mbit/s. It also plans to introduce
FTTH in 2005. The telecommunications companies are being encouraged to
invest a total of 18.4 trillion KRW (EUR13 billion) to build a countrywide
ultra-speed information network by providing them with loans and incentives.

f) in April 2002, the Korean government announced a series of loans totalling 80


billion KRW (EUR 56 million) to Korean ISPs to increase the number of
homes passed by broadband from 55% of Korean homes to 70% by the end of
2002. The Korean government plans to spend over EUR 8.3 billion to deliver
VDSL or fibre to over 80% of the Korean population by the end of 2005.

Whilst some of these factors do not have direct parallels in Europe, they indicate the
level of broadband adoption that can be achieved when attention and investment is
stimulated. The Korean initiatives are wide ranging and they are far more than being a
subsidy which reduces the cost of broadband for end-users. Further analysis would be
needed to determine the relative importance of each of the Korean initiatives and the
extent to which demographic and cultural differences between Korea and Europe (e.g.
multi-tenant buildings, the strong emphasis on education and the enthusiasm for
online gaming) would effect the take up of broadband in Europe if similar initiatives
were undertaken.

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2.5.3 Take up by country group: 2004 – 2013


Two sets of data have been developed for modelling the costs of broadband
deployment over the period 2004 - 2013:

• a Base Case. This is the growth in broadband take up that can reasonably be
expected to develop over the period 2004 – 2013. The forecasts are different for
each country group and they assume that:

− the regulatory environment will continue to develop and support the roll-
out of broadband

− service prices will continue to drop – driven by competition and


manufacturing efficiencies achieved through high volumes of product
shipments

− governments and agencies will encourage the adoption of broadband for


the benefits that it brings

− applications, content and service bundles stimulate the market

• an Extended Case. In each country group a modest increase is assumed over and
above the base case. This case assumes that the terrestrial availability remains
similar to the base case. The increased take up might be due a more stimulating
market environment or intervention to attract new users.

2.5.4 Base case for take up


The Base Case for broadband take up is derived from Ovum’s broadband forecast
methodology. This model has been developed through many years of experience and
is refined at each iteration. The Ovum broadband modelling methodology is
developed from historic demand information, with country scenarios for
telecommunications infrastructure and services derived from published statistics, desk
research and expert knowledge. This is complemented and reviewed through
correspondence and interviews with country sources such as regulators, operators and
equipment vendors. The model incorporates the main types of infrastructure deployed
and service segments, breaking each category down into consumer and business, voice
and data, and narrowband and broadband segments, as relevant.

The Base Case model developed for this study provides forecasts for take up by user
group (Consumer/SoHo, SME and Large Enterprise), access speed and urban / rural
split. The forecasts for residential / SoHo users in each country group are provided in
Figure 2.12 to Figure 2.15 and summarised with a comparison with the Extended Case
in Figure 2.16. Detailed charts of the broadband Base Case are provided in Appendix
A. The charts show:

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• higher take up in urban areas than in rural areas. This reflects the greater service
availability in urban areas and also the higher levels of competition causing
service providers to offer attractive service bundles

• an expectation that businesses will be much more attracted to higher bandwidth


services for desk-based applications, but will still find lower bandwidth services
sufficient for many specific applications, e.g. point of sale terminal connections

• the profile for Country Groups 3 and 4 show a significant lag behind Country
Group 1 and Country Group 2 countries.

Where take up grows to over 100% in the SME and large enterprise sector, this
reflects the fact that one enterprise may have more than one broadband connection.

Figure 2-12 Broadband take up in residential/ SoHo sector in Country Group 1

Residential and SoHo - Urban Take-up Residential and SoHo - Rural Take-up
45,000 12,000
40,000
10,000
35,000

30,000 8,000

25,000
(,000 )

(,000 )

6,000
20,000

15,000 4,000
10,000
2,000
5,000

- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

Figure 2-13 Broadband take up in residential/ SoHo sector in Country Group 2

Residential and SoHo - Urban Take-up Residential and SoHo - Rural Take-up
35,000 10,000
9,000
30,000
8,000
25,000 7,000
20,000 6,000
(,000 )

(,000 )

5,000
15,000
4,000
10,000 3,000
2,000
5,000
1,000
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

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Figure 2-14 Broadband take up in residential/ SoHo sector in Country Group 3

Residential and SoHo - Urban Take-up Residential and SoHo - Rural Take-up
8,000 3,500
7,000 3,000
6,000
2,500
5,000
2,000
(,000 )

(,000 )
4,000
1,500
3,000
2,000 1,000

1,000 500

- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

Figure 2-15 take up in residential/ SoHo sector in Country Group 4

Residential and SoHo - Urban Take-up Residential and SoHo - Rural Take-up
8,000 1,200
7,000
1,000
6,000
800
5,000
(,000 )

(,000 )

4,000 600
3,000
400
2,000
200
1,000
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Urban <512kbps Urban 512kbps-10Mbps Urban >10Mbps Rural <512kbps Rural 512kbps-10Mbps Rural >10Mbps

Source: Ovum

2.5.5 Extended Case for take up


The model develops costs for each country for high levels of broadband take-up, at
different access speeds. The levels of high take-up are based on assumptions that the
market will be stimulated in some way. This might be caused by:

• the availability of market-stimulating content or applications which have not


been considered in the base level scenarios

• regulatory intervention, which for example:

− drives down the cost of unbundled and wholesale DSL services

− establishes broadband universal service obligations

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• service provider market and pricing strategies which cause stronger take up than
in the base case

• market intervention (beyond the initiatives that are already envisaged in the base
case) to stimulate demand, for example:

− community schemes to bring user groups together

− company schemes to bring employees onto broadband, enabling flexible


working

− subsidies from municipalities or regional development agencies

− utilities or supermarkets being more active in broadband service resale as


part of loyalty schemes.

Figure 2.16 shows the levels of take up in 2008 and 2013 for the residential user
segment and allows comparison with the base case. Detailed charts of the Extended
Case take up profiles, broken down by user segment and access speed, are provided in
Appendix A.

Figure 2-16 Residential / SoHo segment take up


2008 2013
Take Up
Base Case Extended Case Base Case Extended Case
Country Group 1
Urban 54% 56% 76% 82%
Rural 36% 39% 54% 64%
Country Group 2
Urban 37% 41% 74% 81%
Rural 19% 20% 39% 42%
Country Group 3
Urban 45% 50% 75% 81%
Rural 12% 13% 28% 30%
Country Group 4
Urban 13% 14% 43% 47%
Rural 1% 2% 8% 10%

Source: Ovum

2.6 Potential broadband demand remaining unserved


Despite considerable efforts on the part of service providers to deploy services, this
study estimates that by 2013, terrestrial broadband services will remain unavailable to
some 4.7m would-be broadband users in the EU. About 1.3m of these will be business
users, predominantly micro-enterprises.

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The situation varies considerably between different country group. Rural areas will be
less well served during the period to 2013 and the demand remaining unserved in
these areas is of most interest. As shown in Figure 2.15, in 2004 there is estimated to
be an unserved market of 6.2m households and businesses in Group 1 countries
without access to terrestrial broadband services. If the number of would-be users in
this group is assumed to be in line with take-up where services are available, then the
estimated unmet demand among Group 1 countries is 380,000 would-be users in 2004,
rising to 490,000 in 2013.

Figure 2.18, 2.19 and 2.20 show the Base Case for broadband availability, take-up,
unserved users and unmet demand for Country Groups 2, 3 and 4.

As can be seen from the charts, the levels of unmet demand is much lower in Country
Group 1 than in the other country groups. This reflects the very high availability of
broadband services achieved in Country Group 1, whose member countries are all
wealthy and have highly developed telecommunications infrastructures. In contrast,
Country Groups 2 and 3 have large rural areas than incorporate Objective 1 regions,
often with low population densities in those areas. The level of unmet demand peaks
in the middle of the study period, reducing progressively thereafter as terrestrial
rollouts extend into at least the outer peripheries of these areas.

We estimate that by 2013, the level of unmet demand in Country Group 2 will be 2.2
million and over 0.5 million in Country Group 3. Country Group 4, which includes
the larger accession countries and also Greece has a high level of unmet demand. In
total there are estimated to be 1.5 million would-be users in the unserved areas of
these countries, reflecting the large proportions of their total land mass that remains
outside of terrestrial broadband coverage even in 2013.

The Extended Take-up Case, which represents a greater level of broadband take-up,
might be expected to show a lower level of unmet demand. Yet in fact the opposite is
true. This is because availability of broadband services is unchanged between the two
cases, with only the level of take-up varying. The Extended Take-up Case represents a
situation in which more customers take-up broadband in those areas where it is
available. It is assumed that the potential demand for broadband will be the same
whether it is available or not. Consequently, the Extended Take-up Case produces
both a higher level of take-up in areas with broadband availability and a higher level
of unmet demand where it is not available. The analysis indicates a potential of about
7m users, including 2m business users, with a requirement for broadband services that
cannot be met by the anticipated market-driven rollout of terrestrial networks.

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Figure 2-17 Unserved demand – Country Group 1, rural areas

Group 1 Countries - rural availability and take-up Group 1 Countries - rural unserved market and
rural unmet demand
30,000,000 30,000,000

25,000,000 25,000,000

20,000,000 20,000,000

15,000,000 15,000,000

10,000,000 10,000,000

5,000,000
5,000,000

-
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Rural Consumers (inc bus.) Rural Availability Rural Take-up Total Rural Consumers (inc bus.) Unserved market Unmet demand

Source: Ovum

Figure 2-18 Unserved demand – Country Group 2, rural regions

Group 2 Countries - rural availability and take-up Group 2 Countries - rural unserved market and
rural unmet demand
25,000,000 25,000,000

20,000,000 20,000,000

15,000,000 15,000,000

10,000,000 10,000,000

5,000,000
5,000,000

-
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Rural Consumers (inc bus.) Rural Availability Rural Take-up Total Rural Consumers (inc bus.) Unserved market Unmet demand

Source: Ovum

Figure 2-19 Unserved demand – Country Group 3, rural regions

Group 3 Countries - rural availability and take-up Group 3 Countries - rural unserved market and
rural unmet demand
12,000,000 12,000,000

10,000,000 10,000,000

8,000,000 8,000,000

6,000,000
6,000,000

4,000,000
4,000,000

2,000,000
2,000,000
-
- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Rural Consumers (inc bus.) Rural Availability Rural Take-up Total Rural Consumers (inc bus.) Unserved market Unmet demand

Source: Ovum

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EC/ESA Digital Divide CBA – Final Report 6 October 2004

Figure 2-20 Unserved demand – Country Group 4, rural areas

Group 4 Countries - rural availability and take-up Group 4 Countries - rural unserved market and
rural unmet demand
16,000,000 16,000,000

14,000,000 14,000,000

12,000,000 12,000,000

10,000,000 10,000,000

8,000,000
8,000,000
6,000,000
6,000,000
4,000,000
4,000,000
2,000,000
2,000,000
-
- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Rural Consumers (inc bus.) Rural Availability Rural Take-up


Total Rural Consumers (inc bus.) Unserved market Unmet demand

Source: Ovum

2.7 Availability and take up of terrestrial broadband - conclusion


The availability of terrestrial broadband services (defined as the proportion of
households and businesses that can be served at reasonable cost and within a
reasonable time of the customer placing an order) is forecast to exceed 95 per cent in
urban areas across virtually the whole of the EU by 2010. Availability in rural areas
will generally be much lower. Among the wealthier countries it will typically reach 75
per cent by 2013 but in most of the recent accession countries it will still be no more
than 35 per cent.

Takeup of broadband services, like availability, is expected to be highest in the richest


countries and in urban areas; and lowest in poorer countries with large rural areas. The
proportion of these potential customers who actually take up broadband services is
forecast to be close to 100 per cent for SMEs and Large Enterprises but much lower
for SoHos and consumers, especially in rural areas. The take up of services are
considered for a Base case and for a Extended Take-up Case. In the Base Case (the
situation that may occur under normal market conditions) take-up among consumer
households and SoHos by year 2013 varies from over 50 per cent in most of North
West Europe to less than 10 per cent in many recent accession countries. In the
Extended Take-up Case these figures exceed 66 per cent and 30 per cent respectively.
The eventual ceiling on take-up is higher than these figures (ultimately reaching at
least 75 per cent even among consumers in rural areas). It is determined largely by
affordability and user willingness to pay, which is itself in part a reflection of
perceived value. The speed of take-up is determined in the early years partly by supply
constraints but for most of the period price is the key factor.

The availability of broadband in the EU is dominated by ADSL and cable modem


services and this is expected to continue. Cable modem services, built on top of cable

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TV infrastructure are primarily provided in urban areas and their provision is very
varied across the EU. They are rarely cost effective to deploy in isolated urban areas
and rural areas. DSL services are provided in urban areas and increasingly in more
rural locations. There are currently low levels of availability of fibre to the user /
building (FTTU/B), broadband fixed wireless access (BFWA) and WiFi (wireless
LAN technology used in the wide area). However, where FTTB is available, it has a
dramatic effect on the speed and range of services that can to be offered, as can be
seen in Italy and Sweden. In the latter years of the forecast period, when demand for
services at above 10Mbps is growing particularly among business users, it is
anticipated that deployment of fibre will have started in many countries, but few will
have significant FTTB networks, which will be limited to urban areas. However, fibre
deployment to street cabinets (FTTC) is expected to be more widely used, taking
advantage of high capacity DSL services (e.g. ADSL2+ and VDSL).

The cost of the dominant terrestrial services declines rapidly throughout the period as
they benefit from economies of scale. This is offset somewhat in later years by the
high cost of rolling out fibre access networks, although this does not affect the cost of
lower bandwidth services.

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3 Combined system and user costs of broadband connection


This section of the report provides comparative systems costs for the major
technology options available for access and backhaul discussed in this report. For a
Base Case of take up and an Extended Case of take up, we provide:

• the average cost per user, averaged across the mix of technologies used to deliver
broadband services

• the total annual costs per country group.

In Section 3.4, the network and service costs are broken out for each major technology
expected to be used in urban and rural areas. The costs of providing broadband in
Objective 1 areas (for those countries which have Objective 1 regions) are estimated
in Section 3.6.

All costs are quoted in nominal Euros. The methodology for the model developed to
estimate the costs of deploying broadband across the 25 countries of the EU is
described in Appendix B to this report.

3.1 Costing considerations

All major telecoms operators serving the consumer sector are investing in their
networks, with three main objectives:

• to reduce the complexity, and hence operating costs, of the network. For
example, multi-service platforms to be used to deliver different types of service,
allowing the operator to reduce the number of different service platforms in the
network

• to configure the network for effective and efficient growth in broadband services
and the delivery of content and value-added services which are enabled by
broadband

• to enable future migration to voice over IP (VoIP), which will allow increasingly
expensive TDM switches to be retired.

These three objectives are all closely interlinked and it is not possible to easily
separate the costs that arise from each. The costs described in this section of the report
are therefore approximate due to the many network changes being undertaken and a
number of other factors:

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• increased broadband use will drive core IP network traffic, the cost analysis of
which is not included in this paper

• the size of a service provider’s operations will affect their economies of scale

• product prices and discounts will vary across the EU – we have used typical
equipment prices supplied by vendors

• common equipment systems e.g. equipment racks and transmission systems, will
be installed to cater for growth, and a fill factor is used to reflect increasing
utilisation with time

• costs will reduce over the forecast period due to lower costs for network systems
and management systems, the implementation of which will lead to lower
operating costs. These factors are included in the cost model.

3.2 Capital costs


The costs of broadband access are made up of capital expenses and operating
expenses. The capital costs have to be assessed for the components shown in Figure
3.1. These are the network nodes within the network, e.g. local exchange, remote
concentrator, FWA base station, cable modem termination node, and the infrastructure
needed to connect between network nodes (backhaul) and the customer access, e.g.
copper twisted pair, fibre, radio link.

In the cost modelling for the project, the capital costs are depreciated over an
appropriate period: 3 years for customer premises equipment (CPE); 5 years for line
interface cards; 10 years for network systems and backhaul; 25 years for fibre.

Figure 3-1 Access and backhaul options


Backhaul from
Remote Customer’s
the PoP Backhaul to the PoP Customer access
Access premises
PoP
Typical Copper - PDH Copper - PDH Point Twisted pair
Options: Fibre - SDH Fibre - xDSL Fibre xDSL
Fibre - IP Fibre - IP Fibre - IP
Pt - Pt radio Pt - Pt radio Pt - Pt radio
BFWA BFWA BFWA (incl WiFi)
Satellite Satellite Satellite

Source: Ovum

The cost of backhaul is a significant component of the overall cost of broadband


services, particularly when provided to more remote areas. To help reduce this burden,
bandwidth in the backhaul network will be shared between many users, with typical
ratios of between 20:1 and 50:1 for residential customers. Service providers offer a
range services with lower contention ratios for business users. Such ratios are not
unreasonable, as it is unlikely that all users will be streaming downloads at the same

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time and a reasonable service level will prevail. The provision of different levels of
contention is a key differentiator between consumer and business services.

Access node technologies and connection / backhaul services can be deployed in


combinations to provide the most cost-effective solution. Typical combinations are
shown in Figure 3.2. The boundaries between the segments of the diagram will
overlap considerably, depending on the strategy of the service provider, existing
infrastructure and the market being served. For example, Telecom Italia is serving
customers which cannot be economically reached by DSL with one-way satellite (with
telephone return path), Telefonica is deploying BFWA to provide both VoIP and
broadband access services, BT is trialing BFWA to serve customers beyond the
operating limit of DSL.

Figure 3-2 Typical access and backhaul options

Size of user Backhaul distance to core network


community
1 2 10 20 100 200 1000 km
1
WiFi/BFWA + std n/w
DSL (with Pair bonding)

WiFi + BFWA

2 2 Way satellite
DSL
+ std
10 network
DSL Wi-Fi + satellite
+ BFWA
20
BFWA + satellite

100 DSL + Pt-Pt radio


DSL + Satellite
200 DSL + fibre or
HFC + fibre DSL + Fibre /
DSL + Fibre submarine cable
1000
Technologies described = Access technology + backhaul
Source: Ovum - adapted from “Broadband Access Solutions and Economics for Rural Areas” - Muse 15 Dec 2004

There are many technologies which can be used to provide broadband access and the
major technologies which are likely to be used in Europe are discussed in Section 5 of
the report. Capital systems costs vary considerably, and will depend on the access and
backhaul systems deployed, size of the user base within a community and network
configuration. Terrestrial costs will also vary depending on whether a service provider

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has to build its own network, or buy capacity on the wholesale market.Although
entirely new satellite systems involve very high start-up costs, satellite capacity is
readily available from existing operators at competitive prices and for variable
amounts of bandwidth. Technically satellite services have the advantage that
customers in remote, rural areas are as easy to connect as those in towns; but retail,
distribution and customer support costs in such areas can be a problem for satellite
service providers, who generally lack the country-wide, mass-market distribution
networks that have been developed for terrestrial services like ADSL.

3.2.1 Backhaul options and costs


Figure 3.1 shows backhaul from the PoP/ local exchange to the core network and from
the remote access point to the PoP/ local exchange. If the PoP/exchange building is
new, or is existing but is currently fed with a low-bandwidth backhaul feed, new
infrastructure will be required. The backhaul in Figure 3.1 may be terrestrial, wireless/
radio or satellite. A cost summary of some of the terrestrial options available to the
operator is provided in Figure 3.3, and a summary of satellite options in Figure 3.4.

Figure 3.3 Backhaul options - terrestrial


Item Typical capital cost Notes
PoP / exchange to network
Point-to-point radio €17,000 Per end-to-end system
backhaul
€2,000 Per antenna
SDH transport €10,000 – €60,000 Per unit, depending on backhaul capacity
requirement
Duct dig and install (if req’d) €80–240 per metre Depends on ground conditions
Fibre installation €2,000 - €6,000 per km. Depending on existing ducts and method used
Remote access point to PoP / exchange
Passive optical network Head-end equipment: The head-end (or optical line termination
(requires established fibre €40,000 equipment – OLT) is shared between all the
network) cabinets, with a maximum of 32 ONUs per OLT
The ONUs are one per cabinet
Optical network unit
(ONU): €2,500 each
Mesh radio €12,000 per cabinet and Mesh is a complicated solution, and sophisticated
repeater station planning tools and time for network analysis also
need to be taken into account
Gigabit Ethernet* €5,000 per switch Typically limited to eight switches per ring
SHDSL / Pair bonding €500 - €1,500 per Bandwidth and distance limited. Repeater nodes
device, depending on require power and accommodation, which adds to
capcity costs of this solution. Up to 10Mbit/s over short
distances.

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Figure 3-4 Satellite backhaul


Item Typical capital cost Notes
Capacity lease 2Mbit/s: €150,000 per Assumes dedicated capacity.
annum
3 year lease in all cases.
10Mbit/s: €600,000 per
Full 36MHz transponder.
annum
Full 72MHz transponder.
45Mbit/s: €2.5m per
annum Includes Teleport costs of €300,000
per annum for a 45Mbit/s service
155Mbit/s: €5m per
annum
CPE
With 1.2m antenna – €9000 For 2Mbit/s service
pair
€50,000 For 10Mbit/s service
With 1.8m antenna –
€50,000 For 45Mbit/s service
pair
€150,000 For 155Mbit/s service
With 2.4m antenna
Plus site installation, power, licensing
With 3.7m antenna
– cost depends on location

3.2.2 Access options and costs


Terrestrial access to the customer may be provided directly from the service
provider’s PoP /local exchange or from a remote access point (Figure 3.5). A cost
summary of some of the options available to the operator is provided in Figure 3.6 to
Figure 3.11.

Figure 3-5 Access to the customer

Backhaul Backhaul
from the PoP to the PoP Remote Customer access
PoP/
access
exchange
point
Customer’s
premises

Source: Ovum

3.2.3 ADSL and derivatives


DSLAM networks are very cost effective, but costs per user rise rapidly in areas with
small numbers of users, or in which new backhaul needs to be installed. If an area will
always have fewer than 100 customers then a suitable DSLAM can easily be chosen;

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however, finding one that cost-effectively scales from 100 to 1,000 users is much
harder. Remote DSLAMs can also be used to get nearer to the customers, but due to
local loop unbundling issues, this option may only be available in some countries to
the operators that own their own copper.

Table 2 xDSL from the exchange or remote access point


Item Typical capital cost Notes
Large DSLAM €35,000 5,000-user DSLAM rack
Per port: €100 for basic ADSL If expected demand is low (fewer than 200–250
customers) it will be cheaper to install a much
Up to €160 per port for multi-
smaller DSLAM. Port prices vary depending on
protocol card. Typically, €100
DSL / other standards supported.
per port
Small DSLAM €6,000 (exchange-based) 200-user DSLAM rack
€10,000 (cabinet-based) Requires backhaul to exchange
Up to €160 per port for multi- Per port cost depends on configuration and
protocol card. Typically, €100 features
per port
Micro DSLAM €10,000 (cabinet-based. Fully Requires backhaul to exchange
configured with ADSL line
circuits)
Exchange upgrade Variable Building, power, heating, aircon etc

3.2.4 Hybrid fibre coax (HFC)


The business case for deploying a HFC network to deliver broadband services is
improved by the virtue of the service provider’s existing cable TV business and the
current regulatory environment, in which cable network operators are not compelled
to open this access networkto others:

• there is an established base of customers taking TV services

• the costs of the final co-ax link to the customer is already sunk

• the cable operator has rights of way and ducts established, which reduces the cost
and operational difficulties of fibre installation

• at present in Europe, cable operators are under no obligation to open their


networks to competitors and so have 100% availability of those customers
wishing to take cable broadband service.

The result is that common infrastructure costs for HFC networks are shared across
many, closely located customers.

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It is convenient to consider the average cost of deploying HFC, rather than assess
costs of individual cable modem termination systems, optical termination units
systems and fibre. Typical costs per subscriber passed are detailed in Figure 4.7.

Table 3 HFC costs


Item Typical capital cost Notes
New build cost per 1,000 €550,000 = €2,750 per user With 20% take up / home passed
home passed
€820,000= €2,050 per user With 40% take up / home passed
€875,000= €1,455 per user With 60% take up / home passed
Upgrade of existing co-ax €200 - €400 Per home passed
network to HFC

3.2.5 Fibre to the building / user (FTTB/U)


Fibre to the building or user may be installed in ring, or star configuration, depending
on the service needs and selected transmission technology. It is possible to deploy
fibre along overhead lines e.g. sharing utility distribution poles, but this method is
potentially a high maintenance solution due to the fibre cable being exposed and thus
more susceptible to damage.

Table 4 FTTB/U costs


Item Typical capital cost Notes
Duct dig and install (if req’d) €80–240 per metre Depends on ground conditions and way-leaves
Depending on availability of existing ducts and
Fibre installation €2,000 - €6,000 per km methods used

In building systems and €1,100 per user Includes common switching and CPE
installation

3.2.6 Broadband fixed wireless access (BFWA) and WLAN


The low cost of WiFi solutions, typically operating at 2.5GHz, makes unlicensed fixed
wireless access popular with small rural operators. With low start-up costs, reasonable
service delivery and reach, and no large licence fee, it is an ideal technology for rural
ISPs. However, the QoS and bandwidth available from WiFi systems will probably
not be good enough for some business customers.

BFWA systems operating at 3.5GHz or above, e.g. WiMAX, will provide better QoS
than WiFi at 2.5GHz. Although BFWA CPE costs are relatively high, they are
expected to fall as the technology matures and standardised systems become well
established. With a reach of up to 35km for 3.5GHz and higher frequencies, BFWA

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systems are able to serve larger geographic areas of operation than WiFi. It is expected
that BFWA will fill a market niche as costs fall with higher product volumes.

Table 5 Fixed wireless access and wireless LAN


Item Typical capital cost Notes
FWA: 3.5GHz or Base station: €30,000 Maximum 4,000 customers per base station covering
10GHz (licensed) - €50,000 360°
Typical maximum burst 6Mbit/s
CPE: €800
Typical maximum distance 35km
FWA: 2.5–5GHz Base station: €8,500 Maximum 1,000 customers per base station
(unlicensed)
CPE: €450 Maximum burst 926kbit/s; Maximum distance 3km
FWA: 26GHz (point-to- Base station: €60,000 Maximum 1,000 customers per base station covering
multipoint) 360° line of sight
CPE: €1,800 Can provide services up to 100Mbits

Other costs
Tower /antenna From €1,500 to Towers are not always required. Buildings can be used
installation €18,000 with the agreement of the owner
If the building or tower is not positioned close to the local
exchange, backhaul to the exchange will be required
Fixed wireless access Variable If the operator has to buy or pay an annual fee for the
licence (if required) licence, this can significantly increase the cost per user

3.2.7 3G
Cellular mobile networks have to be configured and built to provide extensive levels
of coverage across a country or region. The whole network provides access services to
many thousands of users. It is not easy or meaningful therefore to proportionately
allocate the costs of a wide area cellular network, which is providing voice and data
services, to those users of a specific type of service. Network capacity and network
coverage have to be provided to stimulate customer uptake, whilst the early network
build costs have to be contained when there are few customers. Many cellular
operators are not planning to provide total 3G coverage, due to the high marginal costs
and low returns and it will be many years before 3G coverage matches that of GSM
networks, if ever. Instead, GSM networks will be complemented with EDGE
technology to provide data access to customers, but at lower data rates than 3G can
provide.

We estimate that a typical 3G radio access network (RAN) accounts for 80% of the
total cost of a 3G network, of which 60% is base station systems, 20% towers and
other accommodation. The remaining 20% of total network costs are accounted for by

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the core network components. This large proportion of costs in the RAN leads to
network sharing agreements, which again make cost per user difficult to ascertain.

Our 3G costs estimates are based on a fully configured base station, with 3Mbit/s data
capacity, costing EUR 300,000. This base station can provide data access at 384kbit/s
for up to 200 users, with a contention ratio of 20:1. The costs of backhaul and terminal
equipment are additional to this base station cost.

3.2.8 Broadband mobile wireless / 4G


Standardisation work has begun on BMW / 4G, with potential to offer access speeds
of 10s Mbit/s. Developments are underway with vendors coming from the mobile
phone, 2G/ 3G industries and also from those whose background is BFWA.

Systems will begin to be deployed within the timeframes of this study, but will not
have a major commercial impact on the wide-scale deployment of broadband.

3.2.9 Satellite
The greatest and most obvious benefit of satellite services is that they can be rolled
out virtually anywhere and do not require an additional backhaul link. As there are
already many competing satellite systems in Europe at every level of the demand
chain, this means that individual locations can be served at short notice without the
need for expensive infrastructure investments. However, large scale use of 2 way
satellites for broadband access could require additional satellite fleet capacity.

Table 6 Satellite
Item Typical capital cost Notes
Access options 1a) Satellite transponder: €2.5 million/year A transponder can be
shared between multiple
1b) Hub station: <€1.7million
users (~1–10,000)
2a) 2Mbps link with 4:1 contention ratio: €2,500 /month depending on the service-
level agreement
2b) Two-way CPE: with 1.2m dish: €4,200
3a) 128/512kbps link with 40:1 contention ratio: €210/month
3b) Two-way CPE with 0.9m dish: €2,100
4a) One-way link @<512khbps with 50:1 contention ratio:
€42/month
4b) One-way CPE: €250

Considering the issues of satellite capacity and terminal equipment prices noted
elsewhere in this report, it appears that satellite services can meet the demand from
some but not all of the potential users who are expected to remain unserved by
commercially driven terrestrial rollouts. Initiatives to introduce new broadband

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satellite capacity and to make the resulting services more affordable would increase
the number of users able to take advantage of them but would not fundamentally
alter this situation. Satellite can therefore be a useful contributor to bridging the
digital divide in Europe but it can no more bridge that divide by itself than can any
other single technology.
3.3 Operational costs
The cost model includes a component to cover operating expenses for terrestrial and
satellite operations. For terrestrial systems an overall operating expense of up to 40%
(Country Group 1) is included to cover:

• staff and associated expenses for systems installation and commissioning

• ongoing maintenance, operations and network management systems related to the


network systems deployed

• staff costs related to operation and maintenance activities

• annualised costs for building, accommodation, heating and lighting.

The operating and related expenses will not be common across Europe as staff and
some other costs will be significantly lower in Country Groups 3 and 4. The operating
expense factors are shown in Table 7.

Table 7 Operating costs as a percentage of Capex.

Staff and M aintenance, Staff and Annualised


associated operations and associated costs for
expense for network expense for building,
installation and m anagem ent ongoing heating,
com m issioning system s operations accom odation,
Country Group 1 10% 5% 10% 15%
Country Group 2 9% 5% 9% 14%
Country Group 3 7% 5% 7% 10%
Country Group 4 2% 5% 2% 4%
Source: Ovum

3.4 Typical cost breakdown by technology


The availability of broadband in the EU is dominated by ADSL in urban and rural
areas and by cable modem services in the urban areas of many countries. This
domination is expected to continue during the forecast period of the study as the costs
of these services will be driven down by high product volumes, increased levels of
component integration and increasingly efficient operational processes adopted by

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service providers. At the same time there will be factors preventing the overall cost
per user from falling more rapidly:

• operators will be introducing new broadband platforms to enable the delivery of


value-added services

• DSL will be introduced into areas which are increasingly expensive to serve

• the high initial costs of introducing fibre networks to replace / complement areas
of local loop.

In the longer term fibre will increasingly be introduced into the access network, with a
dramatic effect on the speed and range of services that can to be offered. This is
already starting to happen in some countries. Fastweb in Italy and Bredbandsbolaget
(B2) in Sweden are now well established and offer high bandwidth services over fibre
and DSL.

The average cost per user comprises:

• the annualised capital costs of network systems, where the equipment is


depreciated over a 3-25 year period, depending on its function. There is,
therefore, a capital cost component included in these figures to reflect the capital
investments that have been made in broadband networks before 2004. Network
operations are included.

• the annual costs per user for customer service and CPE, which is a significant
factor for satellite services, as the cost of the antenna and CPE installation are
normally borne directly by the customer.

The countries with the greatest need for broadband development are those in Groups 3
and 4. To illustrate typical differences in average costs, Tables 10 and 11 give the
annual costs per user for deploying the most appropriate technologies in Rural and
Urban areas of Country Group 3. Similarly, Tables 12 and 13 provide this
information for Country Group 4. HFC cable modem broadband and fibre are
unlikely to be deployed as an access technology in rural areas, and as such details are
provided only for urban areas.

Costs are quite similar between Country Group 3 and 4, slight variations being due to
the different rates of availability and take-up between the countries and GDP-based
cost differences.

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Table 8 Country Group 3 rural areas – 512 kbps access technology cost breakdown
ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 244 228 213 198 187 177 167 158 150 142
Customer service 61 57 53 50 47 44 42 39 37 36
Total Cost 305 285 266 248 234 221 209 197 187 178
BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 222 194 179 164 149 136 125 117 110 104
Customer service 95 85 81 76 71 66 62 60 58 56
Total Cost 317 279 260 240 219 203 187 177 168 159
2 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 819 729 656 597 549 516 485 456 429 403
Customer service 532 474 426 388 357 336 315 296 279 262
Total Cost 1,351 1,202 1,082 985 906 852 800 752 707 665

Base case - annual cost (euro) per user

Table 9 Country Group 3 urban areas – 512 kbps access technology cost breakdown
ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 175 165 157 148 140 133 127 120 114 108
Customer service 58 55 52 49 47 44 42 40 38 36
Total Cost 234 220 209 197 187 178 169 160 152 145
BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 192 180 156 147 136 127 119 112 105 99
Customer service 64 62 55 53 51 49 47 45 44 43
Total Cost 256 242 212 200 186 176 166 157 149 142
HFC 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 115 109 103 97 92 88 83 79 75 71
Customer service 49 47 44 42 40 38 36 34 32 30
Total Cost 165 155 147 139 132 125 118 112 107 101
Fibre 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 1272 1126 1020 940 876 823 783 740 700 663
Customer service 141 125 113 104 97 91 87 82 78 74
Total Cost 1,413 1,252 1,134 1,044 974 914 870 823 778 736
2 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 823 732 659 600 552 519 488 458 431 405
Customer service 498 443 399 363 334 314 295 277 261 245
Total Cost 1,321 1,176 1,058 963 886 833 783 736 692 650

Base case - annual cost (euro) per user

Table 10 Country Group 4 Urban areas – 512 kbps access technology cost breakdown
ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 266 245 223 205 191 178 169 159 149 141
Customer service 66 61 56 51 48 45 42 40 37 35
Total Cost 332 306 278 256 239 223 211 198 186 176
BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 237 199 181 163 145 131 119 111 104 97
Customer service 101 88 82 75 69 64 59 57 54 52
Total Cost 338 287 263 238 214 195 178 168 158 149
2 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 819 729 656 597 549 516 485 456 429 403
Customer service 532 474 426 388 357 336 315 296 279 262
Total Cost 1,351 1,202 1,082 985 906 852 800 752 707 665

Base case - annual cost (euro) per user

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Table 11 Country Group 4 Rural areas – 512 kbps access technology cost breakdown
ADSL 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 175 164 155 147 139 132 125 119 113 107
Customer service 58 55 52 49 46 44 42 40 38 36
Total Cost 233 219 207 196 185 176 167 158 150 143
BFWA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 180 170 146 137 126 118 110 104 98 92
Customer service 60 58 52 50 47 46 44 42 41 39
Total Cost 240 228 197 187 174 164 154 146 139 132
HFC 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 114 107 101 96 91 86 82 77 73 70
Customer service 49 46 43 41 39 37 35 33 31 30
Total Cost 163 153 145 137 130 123 117 111 105 100
Fibre 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 1224 1064 954 873 811 763 722 683 646 612
Customer service 136 118 106 97 90 85 80 76 72 68
Total Cost 1,360 1,182 1,060 970 902 848 802 759 718 680
2 Way Satellite 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Network and operations 823 732 659 600 552 519 488 458 431 405
Customer service 498 443 399 363 334 314 295 277 261 245
Total Cost 1,321 1,176 1,058 963 886 833 783 736 692 650

Base case - annual cost (euro) per user

3.5 Average cost per user


To undertake the cost benefit analysis for the study required an average cost per user
for the urban and rural areas of each country. These are shown in Table 8 for the
Base Case and Table 9 for the Extended Case. These tables demonstrate a steady
decline in costs over the forecast period. These are average costs which take account
of the mix of technologies (discussed in Section 3.8 and Section 4) which are
expected to be used to serve the EU national markets. The costs are presented as
nominal values based on data established in 2004.

Table 12 Average annual cost per user (Euros) - Base Case

Average cost per user (Euros) - Base Case


Group 1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 233 222 215 211 209 207 206 205 204 202 200
Rural 414 367 340 322 309 300 295 290 287 284 282
Overall average 264 247 238 232 228 226 224 222 221 219 216
Group 2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 259 250 246 245 246 249 250 252 252 250 247
Rural 539 493 445 411 386 369 355 347 337 329 322
Overall average 299 288 281 276 274 274 273 273 271 268 263
Group 3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 247 233 221 211 202 194 187 182 178 174 170
Rural 350 332 318 304 295 286 282 280 282 286 276
Overall average 271 255 243 234 225 219 214 211 210 209 204
Group 4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 242 228 214 203 191 180 171 163 156 149 143
Rural 448 416 377 346 330 314 303 293 284 280 267
Overall average 248 234 221 210 200 191 183 177 172 167 161

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Table 13 Average annual cost per user (Euros) - Extended Case

Average cost per user (Euros) - Extended Case


Group 1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 234 223 216 212 209 207 205 203 201 199 196
Rural 416 372 345 326 313 302 295 289 283 278 274
Overall average 265 249 239 233 229 226 224 221 219 216 213
Group 2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 260 249 244 242 241 242 243 244 243 241 238
Rural 539 490 440 405 380 362 348 339 328 320 309
Overall average 300 286 277 271 268 266 265 264 262 259 254
Group 3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 249 233 220 211 201 193 186 181 176 172 168
Rural 351 333 319 305 295 287 282 279 280 281 266
Overall average 273 254 241 232 223 217 212 209 208 208 201
Group 4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Urban 243 228 214 202 190 180 170 163 155 149 142
Rural 448 406 362 329 310 292 281 270 261 256 240
Overall average 249 233 220 209 198 188 180 174 168 163 156

3.6 Total costs by Country Group


The total costs for broadband deployment, shown in Tables 14 and 15, for the Base
Case and Extended Case respectively show the total expected costs over the forecast
period. These annual costs are based on the total costs per user in any year. The annual
costs include capital expenditure, with systems and infrastructure depreciated over a
3-25 year period. The forecast includes a capital component for systems deployed
before 2004, which are being still being depreciated. The annual costs also include
operating expenditures based on the number of broadband users in that year. These
include ongoing per-user network operating costs and customer service.

In the Base Case shown in Table 14, the total annual costs increase by nearly 6 times
between 2004 and 2013. During this period, there is 7 fold increase in broadband users
is forecast.

Table 14 Base Case – Total cost by country group (Euros million)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Group 1 2909 4892 6853 8589 10066 11324 12377 13260 13980 14557

Group 2 2113 3320 4657 6077 7567 9080 10541 11936 13187 14236

Group 3 551 867 1198 1521 1805 2059 2282 2494 2687 2872

Group 4 97 199 336 510 709 931 1164 1411 1656 1899

Total EU25 5671 9277 13044 16697 20147 23394 26364 29101 31510 33564

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Table 14 Extended Case – Total cost by country group (Euros million)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Group 1 2918 5002 7129 9071 10761 12208 13410 14398 15186 15800

Group 2 2120 3404 4850 6394 8007 9629 11187 12662 13990 15114

Group 3 555 918 1303 1671 1987 2262 2497 2717 2920 3129

Group 4 97 203 347 530 741 975 1224 1488 1756 2023

Total EU25 5691 9527 13628 17666 21497 25074 28318 31265 33852 36066

3.7 Costs of providing service to Objective 1 regions


The costs for providing broadband to Objective 1 regions, for the 11 countries of the
EU which have some regional areas classified as Objective 1, are provided in Table
20.

These figures have assumed that the population which are in Objective 1 regions are
spread between urban and rural areas in line with the national average.

The costs are the annual costs, based on the total cost of providing service, where the
costs are depreciated over a 10 year period.

Table 15 Estimated cost of providing broadband to Objective 1 regions – Base Case (Euro million)

Objective 1* 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

AUSTRIA 3% 2 4 6 7 8 9 10 11 11 12

FINLAND 21% 10 16 23 29 37 44 51 58 64 69

FRANCE 3% 22 38 53 66 77 87 94 101 107 111

GERMANY 17% 179 277 386 502 624 749 870 987 1091 1180

GREECE 99% 14 28 47 71 96 123 150 177 203 226

IRELAND 26% 7 11 15 19 24 29 33 38 42 45

ITALY 33% 176 273 381 496 616 739 858 974 1077 1165

PORTUGAL 65% 60 95 130 162 189 211 229 244 257 266

SPAIN 58% 184 291 400 501 584 652 705 753 791 821

SWEDEN 5% 6 10 14 17 20 23 25 27 28 29

UNITED KINGDOM 9% 67 115 161 201 235 264 288 308 325 338

* Proportion of population in Objective 1 areas

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3.8 Summary of technology mix


Each country group has a different mix of technologies in urban and rural areas to
meet the forecast rollout of broadband. A description of these technologies is provided
in Section 4 and the technology mix in each country group in 2013 is shown in Figure
3.3.

Figure 3-3 Technology mix in Country Groups 1-4 (urban and rural areas) - 2013

100%
0.2% 0.9% 1.1% 2.1% 0.3% 1.7% 2.0% 3.8%
2.3% 2.9% 6.1% 2.3% 2.9% 6.0%
6.9%
4.7% 4.0% 8.1% 7.3%
90% 10.2% 5.5% 4.4% 3.8%
5.9% 2.9%
6.3% 22.8%
80%
23.0% 24.1% 24.2% 21.7%
23.9%
70%

60%

50%

40%
69.8% 79.7% 63.3% 62.7% 70.5% 81.4% 64.1% 64.2%
30%

20%

10%

0%

CG1 CG2 CG3 CG4 CG1 CG2 CG3 CG4


Base Case Extended Take-up Case

ADSL HFC FTTB BFWA Satellite

The technology mix varies by the speed of the service being offered and also varies
over the period of the forecast. For example, over the forecast period, 65% - 68% of
urban Group 1 users of 512 kbit/s services are assumed to be served by ADSL and
30% - 35% by HFC. In rural areas, the ADSL component goes up to 90% or more,
with BFWA filling in for most of those users that are not reached by DSL, together
with some rural cable broadband in larger rural locations which are served by cable.
Above 10Mbit/s, 95% - 86% off services are provided primarily by fibre (but with
mainly business customers in the early days), and DSL variants (e.g. VDSL) at the
end of the period taking up to 13% of the market. As time goes on the differentiation
between services like VSDL (fed by fibre and delivered from a remote concentrator
unit) and fibre to the building, serving Ethernet platforms or multi-service platforms,
will be invisible to the consumer. It will be the package of services that interests them.

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There is a similar picture for Group 2 countries but with the expectation that 2 way
satellite will fill a greater market need, rising to serve up to 4% of the rural market for
broadband services below 10Mbit/s.

Group 3 and 4 countries are expected to have a significant proportion of BFWA,


needed to fill in the more remote areas which are uneconomic to serve with DSL. Up
to 15% of the lower speed market is forecast to be served by BFWA by 2013 and up
to 30% of the, albeit small, market for services over 10Mbit/s. In the Base Case
satellite takes up to 7% of the rural market in these Group 3 and 12% in Group 4.

The technology mix stays very similar in the Extended Case, but with the expectation
that 2 way satellite could serve around 12% of rural users at speeds below 10Mbit/s.
This reflects an important contribution that satellite could make to bridging the digital
divide, by being an exemplar or spearhead service. Potential users in remote and
thinly populated areas that have not yet been reached by terrestrial rollouts are much
more likely to demand broadband services if they have observed their neighbours
using and benefiting from them. Even just a handful of broadband users could increase
and accelerate awareness and understanding of broadband cost-benefits in the
surrounding population, which might otherwise take years to develop. Satellite
services may therefore create outbreaks of demand far from the fringes of terrestrial
rollouts and such outbreaks may then spread rather in the manner of a contagion. In
addition, if and when terrestrial services do eventually arrive, take-up is likely to be
higher and faster because the market has been effectively “primed”.

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4 Optimal technical solution for broadband connectivity


What is meant by the “optimal mix” of technologies? It is the combination of
broadband access technologies which best meets three not necessarily convergent
requirements. The optimal mix of technologies:

• makes broadband services available to a large proportion of the potential user


base at an affordable price;

• provides a range of access service rates through a competitive market; and

• allows service providers to benefit from economies of scale, with lower systems
costs and efficient operations.

Determining the optimal mix of technologies is complex. Many factors have to be


considered:

• capabilities of each technology

• geographic areas being served (population density, rural/urban, topography,


wealth)

• mix of user types (residential/business)

• bandwidth requirements of the users

• mix of broadband access technologies and backhaul infrastructure already in use

• service pricing and user affordability.

The determination of optimal mix in the modelling is based on detailed knowledge of


these parameters, using typical deployment scenarios for which good data is available.
The technologies identified as part of the optimal mix are those which combine
technical fitness for purpose (reliability, performance, scalability) with relatively low
costs per user and therefore attractive service pricing.

The capabilities of each technology are discussed below, highlighting the strengths
and weaknesses that have led to its inclusion or exclusion from the optimal mix.
Service pricing and the underlying cost trends over the period 2004 – 2013 have been
estimated according to the expected rate of technology development (standards and
products), product volumes and established market share. Particular attention has been
paid to those technologies that have the greatest capability to serve rural and remote
areas. At the end of this section user affordability is also reviewed, as the final factor
determining the optimal technology mix.

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4.1 ADSL and Derivatives


In all country groups and for all user types, ADSL is predicted to be the predominant
broadband access technology in both the below 512kbit/s and the 512kbit/s – 10Mbit/s
access speeds. (ADSL is taken here to include DSL derivatives such as ADSL2+ in
later years and also SHDSL, which provides symmetric services primarily to
enterprises.)

The reasons are clear:

• ADSL and other DSL variants are highly standardised, supported by ITU
standards which are (with some regional or country annexes) adopted world
wide. This common base leads to high volumes of product being available from
many competitive vendors. It is virtuous circle: high volumes and strong
competition lead to higher levels of integration, enhanced chipsets and lower
prices. DSL technology is being built into routers, home gateways, wireless LAN
DSL gateways and other internet access devices. The DSL product volumes
already shipped have helped vendors to invest strongly in product innovation. As
a result they continue to reduce prices and they have an established customer
base which no longer requires high investment in sales and marketing.

• Operators are able to exploit the local loop in which they have invested strongly
in recent years in line qualification, testing methods and automated processes.
With some operators activating many tens of thousands of lines a month, they
have needed to develop efficient operating processes. Regulatory conditions
which require incumbent operators to open their local loops to competition, and
the establishment of wholesale network operations (providing network operators
with massive purchasing and negotiating power), have allowed ISPs and all
operators to also benefit from significant economies of scale. The size of the
market then allows wholesale providers to create differentiated products, with
different access speeds, contention ratios and traffic volumes (peak and long
term), which further help to create competitiveness.

The original DSL design philosophy was to maximise infrastructure sharing and hence
minimise costs per user. This principle is shown in Figure 4.1. DSLAMs capable of
handling approximately 5,000 customers per multiplexer were developed and high
contention ratios set in the DSLAMs, up to 50:1 for residential customers.

Whilst large DSLAM racks may be viable in urban areas, rural areas have insufficient
potential customers to allow this kind of sharing. Large common equipment racks
would be expensive due to low levels of equipment fill, which in turn would lead to
high costs and even lower takeup. This problem can, however, be overcome in many
areas through the deployment of small cabinet-based DSLAMs served by SHDSL
bonded copper lines. This technology is one of the main reasons that ADSL is forecast

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to be the dominant technology even in many rural areas. Yet there are other issues
associated with rural areas that can affect the viability of ADSL.

Figure 4-1 Cost reduction through infrastructure sharing


Bandwidth across the backhaul and core networks is
expensive. Restricting the capacity from the
This shelf contains all the common cards, such
DSLAM saves money in the core network but
as the ATM switch fabric, which although
reduces the QoS for the customer.
relatively cheap, costs need to be shared over a
maximum number of lines to reduce per-user
costs.

Core network DSLAM


These shelves contain line cards, which are
relatively cheap. Capacities have increased
from 2 or 4 line circuits per card to 24 or
48 lines per card.
Source: Ovum

4.1.1 Reach, Rural Areas & Impact upon Service Speeds


All terrestrial broadband technologies have limited reach. ADSL customers ideally
need to be within a five or six kilometre loop length of a DSLAM. For higher speed
services (i.e. above 2 Mbps using VDSL) the practical distance is no more than 1.5
kilometres for typical operating speeds. Essentially, the further from a DSLAM the
customer is, the lower the bandwidth that can be supplied. This has particular
implications for rural areas, where:

• households are more dispersed than in urban areas and consumers may be many
kilometres from the exchange

• local exchange buildings may not be located in the most densely populated areas

• the more affluent customers (the ones that the operator really wants to reach)
may be the furthest from the exchange

• copper pairs will be routed along streets and the loop length may be more than
double the straight line distance between the exchange and the customer.

4.1.2 Backhaul
The cost of backhaul is a also a problem for rural broadband deployment. In many
rural exchanges the only provisioned equipment may be small PSTN multiplexers.
These are often served by 2Mbit/s PDH links over copper, wireless or optical fibre.

If the exchange has a fibre or wireless feed, a simple upgrade of the transmission
equipment might be required to provide the additional capacity to provide broadband

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services from the exchange. However, there may be the potential for congestion
deeper in the network, for example, if a radio system or copper is used to bridge two
parts of a network. In practice, careful network planning is needed.

If copper feeds the exchange then this will probably require an expensive upgrade to
fibre or wireless, otherwise the potential customer services may be severely restricted.
Old transmission systems may also need to be replaced, at further expense.

A new operator entering a market will have no existing point of presence (PoP) or
exchange building, and will therefore have to create new backhaul to its nearest
existing PoP which is connected to the operator’s core fibre SDH or ATM backbone.

The backhaul bandwidth capacity required to serve a rural areas depends on:

• services offered

• quality of service offered

• network architecture (whether star or concatenated) and transmission techniques.

The type of services and the QoS required are linked, although obviously it is down to
the operator to specify both. If the main service to be offered is basic Internet access
then QoS level has to satisfy customers’ expectations – and in rural areas customers
may accept a lower level of service than that provided in other areas. However, other
services, such as TV and video for example, require high levels of QoS to function
properly and this cannot be compromised just because the customer is living in a rural
area.

High QoS levels may be achieved through the provision of large amounts of
bandwidth, which is a simple way of reducing contention and delay. However, new
network architectures and transmission techniques can be used (at a further cost) to
deliver improved QoS more efficiently. These techniques are not covered in this
report.

4.1.3 Existing infrastructure


As well as the backhaul, other infrastructure may need to be upgraded to support the
new broadband equipment. Rural exchange buildings were built to hold basic voice
equipment. Issues with such buildings include:

• little space to hold additional equipment

• no air-conditioning facilities

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• often poorly located for broadband purposes

• limited additional power supply capacity.

All of these can be addressed, but at additional cost.

4.1.4 ADSL Summary


ADSL is the dominant broadband access technology in most European countries,
especially for the lower range of service delivery speeds. In densely populated urban
areas with short loop lengths, DSL technologies can also allow triple play services to
be offered over 4-5Mbit/s network interfaces. In the next ten years we will continue to
see further improvements in access speeds, reach, prices, operational processes, higher
levels of integration and power management.

These strengths will mean that DSL is the preferred choice for broadband access for
many years. DSL is expected to retain more than 69% of the technology mix share at
the two lower speed groups in Groups 1 and 2 by 2013. Even in Group 3 and Group 4,
which need different technologies to reach their extensive rural markets, DSL is
expected to achieve an overall technology share of at least 65%.

4.1.5 Hybrid Fibre Coax (HFC)


Coaxial cable networks installed to deliver broadcast TV services are very capable
mediums for delivery of broadband. The networks have fewer technical capacity
limitations than the copper local loop, but do require the installation of a fibre
terminating node for every 200 – 500 users, depending on the bandwidth offered to
each user. Careful network planning is required to deal with increasing numbers of
users and bandwidth demands.

Cable networks have been built more recently than copper local loops and where
cables are run in established ducts, fibre can be pulled through to the point at which
fibre nodes feed the coax network, without expensive digging costs. Even where this
is not the case, fibre-optic deployment is relatively cheap in areas where the ground is
soft, allowing fibre cable to be ploughed in. In contrast, it is almost impossible in
areas of hard stone.

The technologies for hybrid fibre co-ax networks have been developed through
industry collaboration and the establishment of the DOCSIS and Euro-DOCSIS
standards. This has enabled vendors and cable operators to benefit from economies of
scale but without the diversity and scale of DSL.

In areas in which cable TV is present, we assume the provider will also provide cable
modem services using a hybrid fibre-coax network. Where cable operators focus on
broadband provision, they take very good market share as they are able to offer

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attractive, innovative service packages, which include TV, telephony and broadband,
to an established market base.

European countries vary considerable in the deployment of coax based cable TV


(CATV) networks. Some, like Italy, have little or none; some have CATV networks
but have made very little progress in upgrading them to HFC; and some (e.g. Belgium
and Netherlands) have very extensive CATV networks which have already been
upgraded to HFC. As cable operators become more financially secure, there will be
further consolidations and changes of ownership. However, further major HFC
network expansion is not considered likely. The technology will therefore consolidate
its position where it is already strong but is unlikely to expand greatly into new
geographic areas.

4.1.6 Fibre To the Building/User (FTTB/U)


Fibre to the building/user is considered to be the primary solution for services above
10Mbit/s. It will be complemented in this market by broadband fixed wireless access
operating in frequency bands above 20GHz.

FTTB is expensive to install, and has only been used for non-business purposes in a
few locations. However, where it has been deployed and the service packages well
thought through, then a strong business case can be demonstrated. Support from a
municipality or a relationship with an established utility is a considerable advantage
when planning and building a fibre network, as it may help reduce the problems and
costs of establishing way leaves and rights of way. It is possible that existing ducts
may be available in which to run fibre cables, offering considerable cost savings. It
may be possible to establish reseller arrangements with landlords of apartment blocks,
leading to beneficial tae up rates, in order to reduce the risk of network build.

It is expected that in the period of this study, FTTB or local distribution point will be
provided in an increasing number of urban areas to support Ethernet and Ethernet
VDSL services. The service provider can offer multiple TV channels, interactive TV,
voice, data and Internet access to consumers as well as community services such as
surveillance, monitoring and community TV.

Fibre to the kerb and fibre to the cabinet are also options, but in these cases, the
service provider needs very reliable and environmentally hardened cabinets to ensure
low maintenance demands in the field. Some progress has been made in these areas,
but much remains to be completed with the participation and support of systems and
fibre vendors.

The copper local loop has been subject to unbundling regulations, requiring incumbent
operators to make the access available to alternate service providers. It is not expected

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that fibre access installed to develop hybrid fibre coax networks will be subject to
open access regulation. However, some operators are concerned about whether remote
cabinets served by fibre will be subject to regulatory requirements.

4.1.7 Broadband Fixed Wireless Access (BFWA)


BFWA bypasses the local loop by using radio technology to connect the customer to
the core network. This overcomes issues related to local loop unbundling and digging
optical fibre ducts. However, BFWA has had a slow start as a basis for broadband
services. Issues of spectrum availability have had to be addressed and network
planning can be complex. Its suitability also varies according to geography. For
example, on a flat plain it may be a good solution as there are few obstacles in the
way, but it would not be suitable for steep sided mountainous valleys.

BFWA services generally use higher frequency bands, with allocations somewhere in
the range of 2.4GHz up to more than 40GHz. The higher the frequency band the
system works in, the greater the bandwidth available. However, as the frequency
increases, so the range and the ability to receive signals that are not in the direct line
of sight decreases. Less range means more base stations are required to cover a given
area, and the line-of-sight requirement means lower penetration of the area covered, or
installing even more base or repeater stations to fill the gaps. Some parts of the
spectrum are licensed and some are not. Licences can be expensive and carry strict
conditions, but non-licensed spectrum can be 'noisy' and therefore susceptible to
interference. It may be expensive to acquire a license for some bands, although some
spectrum auctions have failed and the licensing process rethought. Light-touch
licensed bands, in which the use of spectrum is regulated, but at a low cost, is an
attractive means of controlling use of the band, without imposing additional costs
which might prevent market entry

Most equipment can work at a range of different frequencies and so can be modified
to suit different frequency allocations in different countries. Depending on the
frequency and modulation scheme being used, radio service distances can range from
1 kilometre to 35 kilometres, and bandwidths can range from 64kbit/s to hundreds of
Mbit/s.

4.1.8 ISM Services


The lowest-frequency FWA bands, in the 2.4GHz and 5GHz regions, can be used
without a licence in most countries. They are often known as the ISM (industrial,
scientific and medical) bands and a huge variety of devices generate signals in this
range, from microwave ovens to garage-door controls. They are now becoming
increasingly important for low-cost fixed wireless services, and also as the frequency
bands used by wireless LAN services. This multiple use of the spectrum can cause

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significant interference. Services in these unlicensed bands also have lower bandwidth
capabilities and a lower operating range.

4.1.9 Wireless LAN and WiFi Services


With the agreement of the IEEE standard 802.11a/b, public access wireless LAN
hotspots are being installed in thousands of locations. The concept of a 'hotspot' is to
have a small area, such as an airport lounge or a cafe, where people can access the
Internet directly from a laptop computer using a very local radio signal. Some
Wireless ISPs (WISPs) are providing broadband access services with 802.11a/b
technology to serve small communities which do not have access to other broadband
services. Although the equipment is relatively inexpensive, issues of service quality,
management and scalability make the technology unattractive for wide-scale use.

Although there are operators with established WLAN services in many countries, the
limitations noted above lead us to anticipate that it will remain limited in volumes and
to be superseded by WiMAX-based BFWA services as these become established and
product volumes allow prices to fall (see below). Nonetheless, WiFi/WLAN can be
very useful in combination with other technologies, for instance satellite, as a means
of local demand aggregation in remote and thinly populated areas.

4.1.10 WiMAX
IEEE standard 802.16, otherwise know as WiMAX, covers the frequency bands in the
range between 2GHz and 11GHz. This flexibility and frequency range allows
operators to tune into the frequency plan of its home country whilst allowing
bandwidths of just under 100Mbit/s per sector. WiMAX has been developed to have
the same advantages as 802.11 but be better suited for use in the access network.

The 3.5GHz band shares the same technical characteristics as the 2.4GHz and 5GHz
bands, but it is a licensed band in most countries. Most technologies that work in this
area can also work in the 2.4GHz and 5GHz bands. New technologies have now been
developed that enable operators to deliver broadband FWA with both voice and data
(bursting at Megabit rates) to customers using the 3.5GHz band. At the same time,
using the 3.5GHz band has benefits because it allows reasonably wide-area coverage.
Although technically 3.5GHz is less dependent on line-of-sight access than higher
frequency systems, in practice it must be considered as a line-of-sight technology.

4.1.11 LMDS
Operating above 20GHz, Local Multipoint Distribution Service (LMDS in US
terminology) can deliver bandwidths in the region of 150Mbit/s and above. LMDS
was designed from the start for two-way communications and was intended to be a
true competitor to xDSL and even fibre-optic access. Although there was a rush of
interest in licensing and launching services in these bands at the time of the telecoms

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boom, the actual results have been disappointing. The costs proved too high, and the
technical difficulties too great, to support viable services at frequencies over 20GHz.
There are only a handful of end users of these services today, and these are generally
on a trial basis. The most promising applications for the time being are probably in
backhaul for mobile base stations.

4.1.12 40 GHz Services


Trials have been carried out with systems working at over 40GHz. One possible
application is to provide infill for broadcast TV coverage in mountainous regions. The
range at 40GHz is very short, but such services may be well adapted to cover a narrow
mountain valley, for example.

4.1.13 Self backhaul


As well as being a solution for connecting rural customers, BFWA can also be used to
address the backhaul issue. Most fixed wireless access systems work in point-to-multi-
point sectors. One sector can be configured to provide backhaul to the local exchange
rather than providing customer access. This solution avoids the need for a separate
fibre-optic or point-to-point radio system. However, this cost saving has two trade-
offs that must be taken into account:

• the number of possible customers per base station is reduced

• the backhaul is limited to the amount of bandwidth available in one sector. In a


3.5GHz system this will be approximately 50Mbit/s.

4.1.14 BFWA Summary


Although slow to gain market share, fixed wireless access could prove to be very
useful in rural areas if there are suitable operating and regulatory conditions. In many
countries, spectrum bands have been licensed as a means of increasing competition in
the telecoms market. The business case for most operators bidding for licences has
been to serve business customers and they have not yet concerned themselves with
rural deployment. In many cases also, the incumbent operator may not be allowed to
bid for a licence, which prevents them using the technology as a complementary
solution to DSL for rural deployment.

Although services operating above 10GHz are restricted by reach and line-of-sight
limitations, below 10GHz available technologies can offer broadband services
(500kbit/s to 6Mbit/s) over distances of up to 35 kilometres, but distances of 10-15
kilometres are more normal for reliable communications. This has a massive
advantage over DSL, as below 10GHz technologies can reach over most terrain and
with recent antenna and signal processing developments can cope with non-line of
sight links. Careful radio planning and site location is needed however.

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These advances in technology, together with changes in regulations and licensing


procedures, means there is light at the end of the tunnel for BFWA. WiMAX is also
bringing equipment costs down and allowing self-installation for the very first time -
both will improve BFWA's chances of success in the future.

BFWA will probably always struggle to find a strong market in areas which can be
served by DSL. There will however be rural areas and specialist customer types that
will benefit from the availability of BFWA services. Some BFWA technologies could
also be used in heavily populated areas to provide a cheap but low-quality connection
for Internet access.

In our forecasts, BFWA starts with a very small share of the market. It grows to a
maximum of 5% in Group 1 and Group 2 rural areas by 2013, restricted by the
prevalence of DSL. Groups 3 and 4 are assumed to have a greater need for BFWA,
rising to 15% technology share in 2013 for lower speed services and 30% for services
over 10Mbit/s to some user groups.

4.2 Satellite

Although satellite systems are highly efficient for delivering broadcast services and
for providing instant wide-area coverage, they have struggled to make inroads into the
market for two-way broadband services. This is a function both of the relatively small
amount of spectrum available to them and of the physics involved in transmitting from
a small user terminal to a satellite thousands of kilometres away. The result is the one
great drawback of satellite solutions: they are expensive. This also affects their
scalability: users who can afford a satellite service at 512kbps may be deterred by the
cost of a 2Mbps service and satellite systems simply do not have the capacity to
deliver two-way services at rates of 10Mbps or above, except to a handful of high-
value business users.

The satellite industry is responding to these limitations by introducing new capacity at


Ka-band. Currently in Europe this is being done incrementally, through individual,
more advanced satellites being added to the fleets of the established European
operators such as SES, NSS and Eutelsat. Their impact has only just started to be felt
in the past few months.

Satellite may develop more attractive service options when the next generation of
advanced satellites is brought into service. The technologies involved (large
deployable antennas producing very high transmit power with multiple spot beams
and improved frequency re-use) have now been proven on a variety of civil and
military satellites. Several systems are due to enter service by 2005, with an effective
capacity per satellite up to 20 times greater than that of existing Ku-band satellites.

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However, although systems like Astrolink, SpaceWay and WildBlue are proposed to
enter commercial service in North America in 2005, most analysts agree there is only
a 50% chance that this will occur, with subsequent rollout to Europe even less certain.
The Inmarsat-4 system will deploy in this period but can provide only limited capacity
at L-band for mobile broadband users at speeds below 512 kbps. Therefore this study
assumes that additional broadband capacity will only become available incrementally
in Europe until 2009, which is taken to be the earliest date from which any new
European-oriented system could begin commercial operation. This has the effect of
reducing average capacity costs to around 40% of current levels by 2013. In
estimating this trend we have considered the more advanced satellite designs now
being proposed with 100 beams and capacities that are theoretically 50 times greater
than those available on existing Ku-band satellites. However, a conservative approach
has been taken in estimating the actual capacity achieved. This is based on proven
technologies developed in the 1990s, taking some account of increased efficiencies in
more recent designs but moderating these because the fullness of their planned
capabilities remains theoretical and total available capacity would come from a mix of
old and new satellites.

4.2.1 Satellite system capacity


There is no single, easy answer to the question “how many broadband users can be
supported on satellite systems?” It depends upon many factors, among the most
important of which are the number of users per satellite beam or transponder, average
bandwidth per user, maximum bandwidth per satellite and total available spectrum.
The total number of broadband users that can be supported per 36MHz transponder is
commonly cited as 5,000 but this is too high for existing Ku-band satellites when
taking account of the mix of user types and their increasing demands over time.

A key consideration is the contention ratio, i.e. the number of users supported over a
given channel. A contention ratio of 50:1 would be required to achieve 5,000 users per
transponder and this is at the outer margin of the QoS levels generally considered
acceptable. Even then it is suitable only for consumers, not businesses. The present
study has assumed the following average contention ratios, which produce overall
averages of a 20:1 contention ratio and 3,000 subscribers per transponder. This is at
the upper end of the scale for delivery of acceptable service quality but is in line with
current service offerings.

• Consumers: 50:1

• SoHos: 40:1

• SMEs: 8:1

• Large corporates: dedicated links.

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Actual system capacity is also determined by data transmission rates, which in turn
depend upon user applications. Applications via satellite are also usually asymmetric,
typically with downlinks (forward channels) to the user being around four times faster
than uplinks (return channels) from the user. The average usage profile has therefore
been assumed to change over time from a 256kbps uplink and 1Mbps downlink in
2004 to a 1Mbps uplink and a 4Mbps downlink in 2013. (This represents a lower level
of service to rural users than is expected to be available in urban areas, i.e. similar to
the situation that prevails today.) Countering this are increases in data compression
and system efficiency arising from the introduction of new standards and coding
systems such as 8 psk modulation and MPEG4. The net effect is an assumed doubling
of bandwidth requirement per user over the period.

A further consideration is the total amount of spectrum available. As shown in Figure


4.2, in Europe there is 500 MHz allocated to Fixed Satellite Services in the Ka-band in
each direction for user links (with additional spectrum available for feeder links). A
system like SpaceWay with 48 125 MHz channels per satellite and eight to ten times
frequency reuse would take up all of this spectrum, suggesting that only one large,
dedicated broadband satellite could operate at full capacity in each orbital position
over Europe. Indeed, the need for greater spectrum efficiency is one of the drivers
behind the development of more advanced broadband satellites, each of which would
also fully utilise the 500 MHz of available spectrum but would support far more users.

Figure 4-2 Spectrum allocation in Ka-band

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Fortunately the separation required between satellites would be only two or three
degrees due to the pointing accuracy of the Ka-band systems and the range of
available positions would be very broad, from about 20 degrees West to 30 degrees
East. It would therefore be theoretically possible to deploy large numbers of Ka-band
satellites with good coverage of Europe (as indeed is the case today at Ku-band).
There are practical limitations on how many satellites could be deployed, however.
Good slots over Europe are at a premium and are mostly occupied by Ku-band
satellites that support large populations of DTH TV users, cable head ends and other
services. The growth of High Definition Television may also reduce the amount of
spare capacity available for broadband access services, although it has also been “a
technology in waiting” for many years and its widespread commercial success is still
uncertain.

A natural evolution path is for satellite operators to replace existing Ku-band birds
with dual-purpose satellites capable of continuing existing services at Ku-band (some
of them evolving to interactive TV) while also serving new broadband access markets
at Ka-band. This would preclude the deployment of dedicated broadband access
satellites at those locations. In other cases, users would either have to own two dishes
(one for TV at Ku-band and one for broadband access at Ka-band) or have a dual-
purpose dish that required re-pointing when switching between different satellites.
Thus the total number of advanced Ka-band satellites deployed is always likely to be
less than the total number of orbital slots theoretically available.

The number of broadband satellite users that could be supported on Ka-band capacity
over Europe by year 2013 has been estimated at about 0.2 million per SpaceWay-type
satellite, or 0.5 million if the more advanced designs are flown. Since up to 20 orbital
slots might be available, as many as 10 million Ka-band users might be supported. In
practice, however, fewer slots would be available and some of these would be
occupied by satellites with lesser capacity than the most advanced designs, or with
multi-purpose roles. A total of between 1.5 million and 2 million broadband users at
Ka-band appears to be a feasible range. This would require at least two and possibly
as many as four advanced Ka-band satellites. (A larger figure of up to 4m users,
requiring several additional advanced satellites, might just be feasible within the
constraints on orbital slots and spectrum.) A maximum of about one million
subscribers of different kinds could also be supported on Ku-band satellites. The
introduction of new Ka-band satellites would lead many of these users to migrate to
the more efficient systems, freeing up valuable Ku-band capacity for other uses such
as interactive and High Definition TV and leaving only a few hundred thousand users
on existing satellites. An alternative scenario (and one which is more commonly
portrayed in satellite manufacturers’ proposals) would see much larger numbers of
users with lower average bandwidth requirements, especially in the early years. Many
of these would then migrate to terrestrial services offering higher bandwidths as they

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were rolled out. However, given the anticipated increase in bandwidth required to
support future broadband applications, this does not seem to be a likely scenario.

In conclusion, a combination of existing and new satellites could serve at least 2m of


the 4.7m users forecast to be beyond the reach of commercially-driven terrestrial
services in the Base Case. In the most optimistic scenario it might even be possible to
serve most of these users by satellite. However, the 7m users forecast in the Extended
Take-up Case could only be served by satellite if most of them were satisfied with
relatively low speed services and if most of the possible orbital slots were occupied by
advanced broadband satellites (a dozen or more might be required). This does not
seem feasible. Therefore, although satellite services could make a vital contribution to
filling the broadband gap in rural areas, they will probably lack the capacity to fill it
entirely.

4.2.2 User Terminal Equipment Considerations


Many pundits have suggested that prices of below 500 Euros are necessary to achieve
large-scale take-up (with the specific objective of getting within 20% of terrestrial
technology prices). The Base Case has a 12% annual reduction reflecting historical
experience from the Inmarsat system, which has a 20 year record of competitive
international sales from multiple manufacturers. Production volumes for Inmarsat
terminals were lower than those anticipated for broadband access terminals, so that the
assumptions used are conservative. The Extended Case assumes that prices fall faster,
at up to 15% per annum from 2009, driven by the larger market opportunity created by
new Ka-band satellite systems. (It is important to note that price reductions are driven
by production volume, not Ka-band technology.) This produces the following prices,
which fall short of the 500 Euro target but are within the US$1,000 target set by some
US Ka-band satellite operators.

Terminal Type 2004 Base Case 2013 Extended Case 2013


<512kbps 2,295 Euros 758 Euros 683 Euros
512kbps-2Mbps 2,715 Euros 860 Euros 775 Euros

Discussions with manufacturers of both satellite and terrestrial mobile terminals has
consistently shown that neither will commit to the high volume production levels
necessary to achieve price targets like 500 Euros without intervention by third parties
to place large-volume orders. Even then it is doubtful that such orders could be
sufficient to achieve the intended effect: terrestrial mobile manufacturers require runs
of one or two million units to justify setting up the necessary mass-production lines
and satellite terminal manufacturers currently lack the capability to do so. In 2002
EMS was poised to deliver an order for 20-30,000 terminals to SES but the deal was
never concluded. Their “first, second and third generation” Ka-band DVB-RCS
terminal products were anticipated to achieve price reductions within a couple of years

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from US$4,500 to US$2,400 to US$1,200, although retail prices would presumably


have been higher. Production runs of at least 100,000 terminals would probably be
needed to achieve prices of 500 Euros, whilst true mass production would be needed
to achieve lower prices.

This suggests that whilst broadband satellite terminals will become significantly less
expensive over the next decade, they will not reach the levels necessary to be directly
price-competitive with terrestrial technologies, even if there is strong intervention by
third parties to place large-volume orders. The key question is therefore not whether
satellite services can penetrate mass markets, but how large is their niche?

4.2.3 Licensing Considerations


The need to obtain individual licences for two-way satellite terminals remains a
requirement in many European countries. Although the situation is improving with the
streamlining of procedures and the introduction of blanket licensing of terminals by
type, licensing requirements still have the effect of increasing both the cost and the
timescale involved in deployment. An additional minor consideration is that as
customers are required to install a satellite dish, there may be planning issues in
conservation areas.

4.2.4 Retail, distribution and customer support


Distribution and customer support is most problematic in rural areas, especially for
new entrant technologies and for service providers who lack an existing sales and
distribution infrastructure. This affects satellite services every bit as much as
terrestrial technologies.

Satellite solutions are not generally an easy sale: two-way equipment often requires
installation by an expert and integration with office networks in the case of SME’s can
create a significant requirement in terms of man-hours. Suitable personnel are not
readily available in most rural areas, especially in the less developed European regions
where the demand opportunity is greatest. The time taken to reach customer premises
for both installation and repair is expensive and can lead to unacceptably slow
response times.

Similar problems affect the costs of customer acquisition. Both marketing and selling
to rural customers tends to be more expensive per head than in urban areas. For these
reasons the cost model has ascribed higher retail costs to satellite services than to
terrestrial technologies, in addition to the installation charges levied by service
providers which are incorporated within CPE costs.

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4.2.5 QoS Considerations


Over the past several years satellite services have demonstrated their ability to deliver
high QoS levels, including interworking with terrestrial technologies, for most
applications and telecoms standards. For instance the Europe*Star satellite has been
used to demonstrate integrated delivery of video streaming services to DSL customers.
The demonstration utilized MPEG4 and IP-DVB standards to compress and securely
broadcast both live and non-real-time video streams from a central hub to Digital
Video Broadcast terminals at telecom operators’ DSLAM sites and on to their end
users. Indeed, the development of MPEG4 in particular has been undertaken with the
close involvement of the satellite industry and the broadcasters who form a key part of
the satellite user community.

Historically growth of satellite services has been hampered by proprietary systems


that have been difficult and expensive for ISPs and other service providers to
interconnect. There is currently a general expectation in the industry that the adoption
of two key standards – DVB-RCS and DOCSIS – will fundamentally change this
situation, enabling much easier and cheaper integration of satellite systems into
service delivery networks. The first of these (Direct Video Broadcast Return Channel
Via Satellite) is a European developed standard which has now been proven in
extensive trials, including several European broadband access pilot projects. Its
widespread and successful adoption is no longer seriously in doubt. The second (Data
Over Cable Services Interface Specification) is a US developed standard with a
European version, both of which were modified to accommodate certain unique
features related to satellite links. However, it has not yet entered commercial service.
Several broadband satellite systems have adopted the standard (e.g. the Canadian Anik
2 satellite with user equipment from ViaSat) but it is too early to judge how well it
will work. For the purposes of this study it has been assumed that one if not both of
these standards will become a de facto global standard and achieve considerable
economies of scale. No specific impact on prices has been ascribed to them, however.
It should also be noted that some satellite players, for instance HNS with Spaceway,
are relying on proprietary solutions and this may have some adverse effect upon
economies of scale for the industry as a whole.

Overall, satellite systems are not really constrained by QoS issues for most services.
The major exceptions relate to services requiring real time interactivity. An obvious
example is videoconferencing - yet the public has accepted even low-speed Inmarsat
services that are popular with front-line TV reporters. The issue can be more serious
with a few very specialist applications, for instance in e-health. Probably the greatest
constraint is in the realm of gaming but since the price of satellite services largely
limits them to business and official uses, this is not a significant commercial problem.
The takeup of voice services over satellite does not appear to have been constrained
by issues of delay or echo. For most other services there are no major QoS issues and

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the ultimate constraint remains one of capacity. For this reason, both the Base Case
and Extended Case exclude satellite services at above 10Mbps (except for broadcast
reception), as being too costly for widespread use.

4.2.6 Summary on Satellite Services


The expansion of satellite services into the broadband access sector is held back by
several factors, most of which are a function of the small scale of its existing market
base. The most important obstacles are probably a distribution network that is still in
its infancy and the lack of a competitively priced two-way service. We anticipate that
both problems will be progressively reduced during the study period but that price will
remain a significant constraint, with the result that although satellite is likely to
become an increasingly cost-effective way of providing broadband services, its use
will generally be limited to remote, rugged and thin-route rural areas. Its future in
most other areas probably lies in helping to build demand for more capable services
that are subsequently delivered through the rollout of less expensive terrestrial
networks.

The Base Case forecast of about one million satellite users represents just 0.75% of
the total broadband market in Europe. However, the regional distribution is very
skewed. Only a tiny number of satellite users are in urban areas and even in rural
areas, there are wide variations between different regions. Satellite accounts for only
1% of rural broadband users in Country Group 1, whilst in Country Groups 2, 3 and 4
it accounts for 4%, 7% and 12% of rural users respectively. In the Extended Case,
with advanced Ka-band systems, satellite still only delivers 1.33% of total broadband
services but it is a major technology for broadband delivery in Country Groups 3 and
4, accounting for 2%-4% of total users and for 13%-14% of users in rural areas. In
both the High and Base Cases satellite is comparable in importance to BFWA for rural
service delivery in all Country Groups except Country Group 1. This means that
overall, satellite and BFWA are roughly equal in importance behind ADSL as the
optimal technologies for rural areas.

4.3 Hybrid Satellite/BFWA/WiFi


The most popular satellite broadband access services to date have been those in rural
Italy and Spain, often involving a hybrid satellite/WiFi platform. Up to 40 per cent of
Spanish satellite installations by Satlynx involve WiFi networks, for instance those
using Cisco’s Aironet system, which cost less than 1,000 Euros and can cover a radius
of up to 1km.

Pilot projects have also been run in several European countries over the past year in
which broadband services have been delivered to rural communities through a
combination of BFWA and a variety of other satellite systems (e.g. the TWISTER
projects in France, Ireland, Italy and Poland). The initial implementations mostly

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involve WiFi or Wireless LAN systems used to aggregate demand but it is anticipated
that BFWA will predominate in the longer term. In these pilot projects satellite links
have mostly been used to provide the backhaul to the core network, either because the
backhaul is very long or because the topography makes terrestrial wireless links
impractical.

It is difficult to determine how widespread these developments are because some of


them involve the unlicensed part of the FWA spectrum. For instance, in the UK
Ofcom report that they do not know how many satellite terminals are being used in
this way as part of local initiatives, nor how many end users might be involved in each
case.

So far these services have mostly used two-way satellite terminals that are little
different to those used for individual broadband access. (Some have also used one-
way hybrid services.) They appear to have proved effective in meeting the low levels
of demand typically generated in these projects, where only a handful of users are
connected to the satellite backhaul link.

The question of how such services would be extended if and when demand increases,
both in terms of numbers of users and bandwidth per user, has not yet been answered.
One possibility would be to install multiple satellite terminals, each providing
backhaul to just a small number of users. This may well prove to be the most cost-
effective solution. Another possibility is that the satellite industry will develop
terminals and services optimised for this kind of backhaul use, capable of handling
increasing demand without incurring the step-functions in cost that tend to occur once
traffic levels pass 8Mbps and which have been noted above in connection with
providing backhaul for DSL cabinets.

This is potentially a critical area for further development. Given the difficulties and
high costs associated with selling and supporting satellite services into rural areas and
the uncertain future shape of the satellite distribution model, demand aggregation at
the local level offers one of the most hopeful ways in which satellite services and
indeed other access technologies could be made more viable in rural areas.

4.3.1 Sub-optimal Technologies


4.3.1.1 3G
3G cellular technology, with the ability to provide Internet data access speeds of up to
384kbit/s, is starting to be introduced into Europe. It is expected that much of the data
traffic to 3G terminals will be generated by applications specific to mobile terminals,
which are different to those used on other forms of broadband access technology (e.g.
use by mobile maintenance teams). However, 3G may also be used by enterprises with
Wide Area Networks to link roaming staff to the network and in some cases to extend

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at least a subset of WAN capabilities into areas with poor fixed telecoms
infrastructure. This is most likely to happen in areas where 2G mobile is used today in
place of inadequate fixed telephony services.

In situations in which a PC is connected to the Internet through a 3G terminal or


adapter card, this is expected in most cases to be a temporary solution needed by a
mobile broadband user. The use of 3G services (complemented by EDGE in areas not
served by 3G) will always be priced at premium rates, which will deter most users
from adopting 3G as their primary solution for broadband access. There are a few
situations in which 3G networks will be attractive as a prime form of access to fixed
premises: for example, a remote region with high levels of seasonal holiday visitors
may have strong demand from users willing to pay a premium service price, whilst the
owners of holiday accommodation in the region may be unwilling to invest in an
annual contract for fixed broadband services.

3G is therefore expected to be only a peripheral component of overall broadband


availability, serving primarily specialist mobile business users.

4.3.2 Broadband Mobile Wireless (BMW)/4G


Standardisation work has begun on BMW/4G, with potential to offer access speeds of
10s Mbit/s. Developments are underway with vendors coming from the mobile phone,
2G/ 3G industries and also from those whose background is BFWA. Systems will
begin to be deployed within the timeframes of this study but it is unlikely they will
have a major commercial impact on the wide-scale deployment of broadband before
2013.

4.3.3 Mobile Broadband Satellite


The Inmarsat-4 system is due for launch in late 2004 and commercial operation in
2005. It has been designed to deliver broadband services to mobile users, with the
objective of extending 3G-type services to areas beyond the coverage of terrestrial
networks. The system operates in the L-band, where bandwidth is at a premium. It is
therefore limited to speeds up to 432kbps, with the majority of users likely to be
operating at around 144kbps. User terminals will mostly be laptop or palmtop sized.
The main target market consists of enterprises with Wide Area Networks, which
require some of their staff to have access to the network whilst roaming or in remote
areas. The system is intended to complement 3G through compatibility at the
application level, so that applications which run over a 3G terminal will run in a
similar manner on a satellite terminal. A few thousand users are likely to operate in
the European region and these have been incorporated into the main satellite forecast.
(Most users will be working in less developed parts of the world, although they may
be based in Europe.)

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4.3.4 Powerline communications (PLC)


PLC technology has been under development for more than 5 years and has been the
subject of many trials. Some operators have launched commercial services. In Spain,
for example, Endesa and Iberdrola have launched commercial services. Companies
offering PLC services face a major challenge to get the market established in the face
of cable modem and ADSL services as a minimum number of subscribers may be
needed before a service if offered in a particular area.

Powerline is a theoretically interesting technology – it is attractive due the inherent


use of established electricity distribution network, but has many attributes which make
it unlikely to succeed. Some small, trial and early commercial deployments are taking
place, but the technical limitations of the technology and its late presence in the
market will prevent it being a major contender for broadband access. PLC technology
may find a niche market in home or school networks which offer more attractive
possibilities for this technology. Powerline technology is already strongly bettered on
cost, performance and future capability in all respects by alternative solutions. To
succeed, PLC will have to overcome a number of problems:

• its very short range badly hampers scalability

• high system cost per line (up to Euro2000 in sparse rural areas) even for low-
speed services (512k) are unlikely to be driven down by volume

• international standards are not developed

• interference remains a severe problem.

4.4 Affordability and User Willingness to Pay


Capacity and service availability are irrelevant unless potential users consider the
services to be affordable and are willing to pay for them. Moreover, there is strong
evidence from the marketplace that price is not the main driver to broadband take-up.
For example, France and the UK have very similar take-up rates for terrestrial
broadband services (about 12% and 13% of households respectively), yet average
monthly charges in France are less than half those in the UK (19 Euros versus 41
Euros for 512kbps residential services and 71 Euros versus 170 Euros for 2Mbps
business services). It seems that take-up is currently constrained more by supply or
availability than by price or affordability.

This is reinforced by several of the recent accession countries, notably Poland and
Slovenia, which have remarkably similar price levels but radically different take-up
rates (under 2% versus 8%). To complete the picture, Greece, which has lower prices
than any of the other countries mentioned except France, has the lowest take-up of all
the EU25.

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Affordability and willingness to pay are expected to become progressively more


important as rollout and take-up increase to true mass-market levels. This is because
an increasing proportion of users are then price-sensitive consumers rather than
enterprises whose demand is driven by business needs. The Extended Take-up Case in
particular reflects this, with higher take-up stimulated by lower prices.

A similar situation exists with respect to satellite services. Although the highest take-
up is in the country with the lowest prices (Italy), the picture elsewhere shows little
discernable connection between the two. Indeed, the ubiquitous availability of satellite
services means that national pricing is less clearly definable than with terrestrial
equivalents: yet take-up varies wildly across the EU. In the UK, where direct grants to
users in Objective 1 areas have made satellite user terminal equipment virtually free,
take-up has been no higher than in France where grants are available, if at all, only
indirectly through local authorities. In Germany, where users generally pay the full
market price, take-up has been much higher than in either France or the UK.

It is not even possible to say with confidence that affordability is a major constraint on
the take-up of satellite services in the less wealthy accession countries, since
penetration levels are currently too low to judge this. The most important factor
appears to be the presence or absence of effective distribution channels, although other
considerations such as ease of licensing are also significant. It is probable, though it
cannot be proved, that a major element in users’ willingness to pay the higher prices
for satellite services is their perception of whether or not terrestrial rollout will reach
them within a year or two, coupled with an expectation that terrestrial services will
remain much cheaper.

The most important factor appears to be the presence or absence of effective


distribution channels, although other considerations such as ease of licensing are also
significant. It is probable, though it cannot be proved, that a major element in users’
willingness to pay the higher prices for satellite services is their perception of whether
or not terrestrial rollout will reach them within a year or two, coupled with an
expectation that terrestrial services will remain much cheaper.

4.4.1 Cost comparisons for service delivery


The study indicates that in 2004 there is a significant cost differential between satellite
and terrestrial services. It also shows that this differential will not really improve by
2013. In fact, although this differential is forecast to reduce in absolute terms, in
relative terms the opposite is true. The annual cost, including user equipment, of
delivering a 512kbps satellite service to a rural region in a Group 2 country is forecast
to fall from 1,351 Euros to 665 Euros over the decade to 2013. The equivalent ADSL
service is expected to fall from 447 Euros to 185 Euros and a BFWA equivalent from
445 Euros to 169 Euros. Thus although the satellite service falls in cost by more than

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half, relatively speaking it goes from being 3 times more expensive than ADSL and
BFWA, to being respectively 3.6 and 3.9 times more expensive. Therefore, as Figure
4.3 shows for rural services in Group 2 countries, satellite services will become much
more affordable for users in areas not covered by terrestrial services but will not be
price competitive in areas that are.

Figure 4-3 Relative costs of terrestrial and satellite services

Base Case Annual Costs, Euros/User


Rural <512kbps, Group 2
1600

1400

1200

1000
2004
800 2013
600
400

200

0
ADSL BFWA 1-way Sat 2-way Sat

Source: Ovum

It is arguable that the latest designs for advanced broadband satellites, coupled with
mass-procurement of satellite terminals, will produce much steeper cost reductions
than those noted above. To some extent this is captured in the Extended Take-up Case
but the study has taken a conservative approach, rather than assuming the full
realisation of these hoped-for improvements. Moreover, similar if not greater
advances in terrestrial technologies must be considered at least equally likely, given
their greater and more certain economies of scale.

However, a sensitivity analysis has been conducted to assess the possible impact of
mass-produced satellite terminals and more cost-efficient satellite capacity. The
results are shown graphically in Figure 4.4. The sensitivity scenario described as Case
1 assumes procurement of at least 100,000 user terminals from a single manufacturer,
to achieve a price of Euros 500 per unit. It also assumes that advanced satellites
achieve a reduction in bandwidth price to one third of current levels by 2013, with the
more efficient capacity coming on line progressively from 2009. Case 2 assumes even
larger procurements, achieving a unit price for satellite terminals of Euros 300, with

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satellite design efficiencies achieving the maximum potential currently planned by


manufacturers, reducing bandwidth prices to one fifth of current levels.

Figure 4-4 High level sensitivity analysis of product volume on satellite terminal costs

Extended Take-up Case Annual Costs Satellite Cost Sensitivity


Rural <512kbps, Group 2, Euros/User Annualised Costs in Euros/User
1500 1500

1000 1000

500 500

0 0

ADSL BFWA 2-way Sat Sat Sat 2004 2013 2013 2013 2013
(Case 1) (Case 2) Base Case Base Case Ext. Takeup Case 1 Case 2

2004 2013 CPE Space & Ground Segment OPEX & Retail

Source: Ovum

As the graphs show, this would reduce the cost of satellite solutions to levels just
below current costs for ADSL and BFWA services. However, satellite would still be
roughly twice the cost of those terrestrial services, since they also reduce dramatically
in price over the study period.

The split of costs between CPE, space segment and other costs are shown in Figure
4.5. Even assuming that average OPEX and retail costs per subscriber fall with
increasing sales volumes, it is clear that satellite services cannot become directly cost
competitive with ADSL and BFWA. On the other hand, if the costs illustrated in Case
1 and Case 2 could be achieved, then satellite could become as attractive a solution in
areas lacking terrestrial coverage as ADSL is today where it is available. This suggests
that the 4.7m to 7m potential subscribers expected to remain beyond terrestrial
coverage by 2013 would be addressable by satellite services if these improvements in
satellite costs were achieved.

4.4.2 Demand aggregation


Another aspect of affordability that may go some way to changing this situation, for
both users and service providers, is demand aggregation. Delivering services to
sparsely populated rural areas is expensive even for satellite service providers,
because of the high customer acquisition and support costs. This has been factored
into the cost model, weighting satellite services to reflect that they are often a more
difficult and labour-intensive sale than terrestrial equivalents. If, however, customer
demand is aggregated into a smaller number of entities such as local authorities, then

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customer acquisition becomes more affordable. In effect the demand aggregators form
a free local distribution network for the service providers.

Figure 4-5 CPE and space segment cost splits

Satellite Cost Sensitivity Cases


Annual Costs in Euros/User
1600
1400
1200
1000
800
600
400
200
0
2004 2013 2013 2013 2013
Base Case Base Case Ext. Takeup Case 1 Case 2

CPE Space & Ground Segment OPEX & Retail

Source: Ovum

Demand aggregation can be facilitated by the use of hybrid solutions that combine
satellite backbone links with local service delivery through either BFWA or WiFi
systems (as demonstrated in the TWISTER pilot projects in Europe). In this way costs
to the users are further reduced by sharing infrastructure and satellite capacity costs,
although the potential for this is limited by the need to maintain good QoS levels and
to allow for growth in the users’ combined bandwidth demand over time. Such growth
in demand may eventually necessitate more expensive satellite terminals and
dedicated high bandwidth capacity leases, rather than less expensive shared
bandwidth. Ultimately growth in demand may make it economical to replace the
satellite links by terrestrial links.

4.4.3 Systems and user costs conclusions


The EU faces a challenge in meeting the needs of several million would-be broadband
users in rural areas forecast to be beyond the market-driven reach of terrestrial
services. Satellite systems could support a substantial proportion of these potential
users but probably not all. Furthermore the cost of satellite solutions will remain much
greater than those of equivalent terrestrial services, although this gap will reduce in
absolute terms. Bridging the digital divide in such areas will therefore require the
deployment of more than one technology.

Satellite broadband services are likely to be optimal in the following cases:

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• very thin-route markets, ranging from isolated users to small groups of up to


around 20 users in a hamlet or village, especially where there is a requirement for
long distance backhaul and where local authorities act as demand aggregators

• locations where the topography increases the costs of terrestrial networks by


several times the average deployment cost for those technologies

• interim service provision for a few months to meet urgent demand (especially
from SMEs and SoHos) in advance of known terrestrial rollouts

• medium-term service provision (especially for SMEs and SoHos) where


terrestrial rollouts are very uncertain or known to be several years off

• provision of service to large, multi-site enterprises requiring a uniform solution,


typically involving integrated VPN services.

Terrestrial broadband services are likely to be optimal in most other cases, since the
additional cost required to extend their rollout will be substantially less than that for
satellite services.

The market-driven growth of existing satellite systems illustrated in the Base Case,
consisting of about one million subscribers, is unlikely to satisfy all the sources of
demand indicated above. The Extended Take-up Case, involving almost two million
subscribers and the additional deployment of up to four advanced broadband satellites,
would probably meet all such cases. Although it would be technically possible to
support larger numbers of users, it is considered unlikely that sufficient demand would
exist to make this necessary, given the high cost of satellite services compared to
those delivered by terrestrial technologies.

4.5 Conclusions on Optimal Mix of Technologies


In urban areas across the whole of Europe, the optimal mix of technologies for the
delivery of broadband access services is quite clear, as detailed below.

• For services below 10Mbit/s: HFC where CATV networks already exist and
ADSL where they do not. In practice this means that ADSL gains 65% to 70%
market share everywhere except Country Group 2, where in the virtual absence
of established CATV networks (in Italy, used as the basis for modelling) it gains
nearly 90%. Both of these technologies will achieve levels of affordability in
urban areas that enable them to penetrate consumer as well as business markets.
They will also be able to efficiently deliver services in the 2-5 Mbit/s range,
making them optimum for a wide range of consumer and business applications.

• For services above 10Mbit/s: FTTB is overwhelmingly dominant, with between


70% and 90% market share. In Country Groups 1 and 2 only ADSL will provide

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a complement to fill in gaps in coverage by FTTB. In Country Groups 3 and 4


ADSL, HFC and BFWA will each take about 10% of the market, primarily as a
result of providing lower cost alternatives from a wide range of service providers.

For rural areas the picture is more complex, with a larger range of technologies taking
significant market share and greater variation between Country Groups.

• In the highly developed, relatively wealthy and comparatively densely populated


rural areas that are typical of Country Group 1, ADSL will completely dominate
services below 10Mbit/s and will be the only technology to significantly
complement FTTB for services above 10Mbit/s. The most sparsely populated and
remote areas will mostly be served by BFWA but these amount to no more than
5% of rural users, typically in Objective 1 regions, with very little use of HFC
and negligible use of satellite.

• Rural areas in Country Group 2 will differ from those in Country Group 1 in
having no use for HFC, whilst BFWA and satellite together will account for
about 10% of rural users, mostly in sparsely populated or mountainous regions
and those with Objective 1 status. Their primary target markets in these areas will
be SoHos and SMEs, whereas ADSL will also be serving large numbers of
consumers.

• Country Groups 3 and 4 are likely to see the lowest levels of rural ADSL takeup
(though Group 3 still at around 70% for services below 10Mbit/s in urban areas),
with BFWA taking around 15% of the market. Satellite will be the third ranking
technology, well ahead of HFC which is limited to a few pockets. The primary
markets for non-ADSL technologies will be SoHos and SMEs, although the low
costs of BFWA will allow some penetration of consumer markets also. This
profile reflects the large extent of the rural areas in these countries and the low
population densities and affordability levels within them, which will tend to
sharply curtail the expansion of most terrestrial technologies outside of the urban
and suburban areas. For the same reason services above 10Mbit/s will see BFWA
taking a major role, with around 30% of the market compared to 55% for FTTB
and 15% for ADSL.

Overall, most urban users, whether business or consumers, are likely to find HFC and
ADSL equally optimal solutions for low to medium speed services. They will find
FTTB more optimal for higher speed services as it becomes available. Where urban
users have affordability issues or experience slow or patchy rollout of these services
(both of which will occur mostly in recent accession countries), they may adopt
BFWA instead.

Most rural consumers will find ADSL to be the only truly optimal solution. Some of
those in difficult topographical environments or areas that are both remote and

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sparsely populated will adopt BFWA or demand-aggregated BFWA/satellite hybrid


services, but for the most part these solutions will be limited to rural businesses who
have a more absolute need for broadband.

• Because of their more price-inelastic demand, rural businesses are far more likely
than consumers to adopt any technology that can deliver broadband service at the
time they come to realise they need it. For this reason the relatively expensive
satellite services will be adopted almost solely by business users, although many
of these will be “prosumers” working in one-person SoHos. BFWA services will
be optimal for business users in rural areas where the topography is undramatic
and ADSL has not yet been rolled out; for rural users who require very high data
speeds; and in remote areas where there are so few potential users that even
BFWA is viable only with demand aggregation schemes, typically administered
by local authorities. These may involve either self-backhaul or satellite backhaul.
In short, ADSL, BFWA and satellite services provide an optimal rural
technology mix by extending the reach of broadband services into environments
that offer progressively lower revenues per square kilometre.

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5 Benefits of the provision of broadband connectivity across


Europe
5.1 Introduction
This section of the report presents the findings of our study of the benefits of
broadband in Europe.

Our approach focuses on the development of quantitative estimates of the economic


benefits of widespread broadband access throughout Europe. We consider a range of
types of economic benefit and we have developed a detailed model for each one. This
report describes the modelling strategy and explains the data, assumptions on which
the model is built. It also reports the results of each stage of the modelling.

Throughout the study, we have attempted to provide as objective an estimate of the


economic benefits as possible. However, with any such forecasting exercise, there is a
significant degree of uncertainty involved. Where this is the case, we have explained
our forecasting strategy and have consistently adopted a conservative approach to
ensure that benefits are not being overstated.

We begin in Section 5.2 with a discussion of the economic theory underlying the
estimation of economic benefits. This is followed in Section 5.3 by an outline of the
methodology that we have used in carrying out the estimation. Sections 5.4 and 0
describe in more detail the broadband applications that we have examined and the
benefits associated with each one. In Section 5.5.5, we discuss the indirect benefits
that may accrue from broadband usage. We draw conclusions from our analysis in
Section 5.7.

5.2 Economic concepts


This section discusses the meaning of economic benefits and outlines the strategy
adopted in the estimation of the benefits of broadband. We begin in Section 5.2.1 with
a discussion of the theory underlying the evaluation of economic benefits. This is
followed in Section 5.2.3 with an explanation of how these benefits are measured. We
conclude in Section 5.2.4 with a summary of the modelling steps.

5.2.1 What do we mean by economic benefits?


The economic benefits of a good or service can be divided into three groups:

• The direct benefits to the consumers of a good or service. These are explained in
more detail in Section 5.2.2

• Network external effects arising from the consumption of a good or service.


These are explained in Section 5.2.2.1

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• Other external effects. These are explained in Section 5.2.2.2

5.2.2 Direct economic benefits


In cost benefit analysis, the economic benefit of a good or service is reflected in
society’s willingness to pay for it. When looking at the aggregate level, willingness to
pay for a good or service is reflected in the demand curve which shows the
relationship between the price of a good and the quantity that is purchased and
consumed. The area under the demand curve provides an indication of the aggregate
willingness to pay for a good or service and therefore a measure of its economic
benefit. The difference between this benefit and the cost of producing the good or
service is its net economic benefit.

This concept is illustrated in Figure 5.1.

Figure 5-1: Economic benefit

Net
Neteconomic
economic
benefit
benefit

p Cost
Cost
c

In Figure 5.1, the pink area under the demand curve represents consumers’ willingness
to pay for the q units of the good or service at price, p. The dark shaded area
represents the cost of providing q units of the good or service. The area shown
between the costs and the demand curve therefore represents the net economic benefit
arising from the production and consumption of the good. This report concerns only
the benefits (i.e. willingness to pay) for the good or service. The cost calculation is
reported elsewhere.

5.2.2.1 Network externalities


In many cases, the consumption of a good or service has implications for people other
than the person directly consuming it. This is referred to as an ‘externality’.
Telecommunications services are examples of services which exhibit externalities. If
someone subscribes to a telecommunications network, they receive benefits from the
services they use. In the simplest case, this benefit is simply the ability to make

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telephone calls. However, other people also benefit from this subscriber’s decision to
join the network since they can now call the new subscribers. This is a particular type
of externality known as a ‘network externality’.

In the case of broadband, these network externalities are more than just the ability to
make telephone calls. Entire services can be delivered via broadband connections,
replacing conventional channels of service delivery with a more efficient alternative.
For example, processing driving licence applications or tax returns can be automated
and carried out over the internet, thus reducing processing costs. The Government or
any other agency which is required to provide such services benefits when the number
of broadband subscribers increases and when it is used to carry out online
transactions.

This type of benefit is not limited to the public sector. Private companies may also
benefit from having people connected to broadband access since, once people are
connected, goods and services can be provided on-line and these subscribers become
potential customers. The effect of this is seen in some countries in which content
providers enter revenue-sharing agreements with access providers.

5.2.2.2 Other externalities


In addition to the benefits described above in Section 5.2.2.1, there is a third category
of economic benefits arising from broadband access. These are also externalities and
are additional to the network externalities described above in Section 5.2.2.1.

They arise from the reduction in negative external effects which occurs when services
are provided electronically instead of through traditional means. These are sometimes
referred to as indirect benefits of broadband. A commonly cited example of this is the
reduction in pollution arising from a reduction in the use of motor vehicles when
working from home, instead of travelling to work where this is enabled through the
availability of broadband.

In this report, we refer to this category of benefit as ‘indirect benefits’.

5.2.2.3 Summary
The economic benefit of broadband is the sum of these three components:

• The direct benefits accruing to broadband subscribers;

• The benefits to providers of services; and

• The indirect benefits arising to other people as a result of the use of broadband.

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5.2.3 Measurement of benefits


This section explains the strategy that we have adopted in evaluating each of these
three categories of benefit.

5.2.3.1 Direct benefits


In the case of a conventional good, the calculation of the direct benefits accruing to
consumers is done by estimating the size of the area under the demand curve.
However, the situation with broadband is more complex.

A broadband connection per se has no value to customers. Rather, the value to


customers of broadband access arises from the applications for which it is used.6
These applications range from simple internet browsing and email through to more
complex applications such as video-downloads, remote network access, real-time
video links etc. Subscribers pay individually for some of these applications (e.g. video
downloads) while others may be free (e.g. internet browsing). Subscribers receive
benefit from the package of applications that they consume over their broadband
connection. The net economic benefit is the difference between the total benefit that
subscribers receive from these applications and the amount they pay for them.

In practice, it is difficult to evaluate this economic benefit directly as there is very


limited information on the price and quantity of individual applications that are
provided over broadband. This makes estimating demand curves for these services
very difficult. It is particularly difficult because subscribers do not pay additional
charges for a number of applications.

However, there is an alternative way of estimating the direct benefits of broadband.


Subscribers also pay a fixed charge for broadband access. Clearly, any person who
chooses to pay for a broadband subscription must regard the value of the applications
which they use over the connection as greater than the subscription charge (net of any
additional charges they pay for the particular applications). If this was not the case,
they would choose not to subscribe.

The amount paid in subscription charges therefore provides an indication of the value
of broadband to consumers. It is, in fact, a minimum estimate of the benefits accruing
to subscribers from broadband since, for the majority of subscribers, the benefits they
receive will exceed the amount they pay in access charges. This is illustrated in
Figure 5.2 below.

6
Throughout this report, we refer to all activities carried out on broadband connections as
‘applications’.

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Figure 5-2: Evaluating the economic benefits of broadband


Price paid for
Price paid for
applications
applications

Benefit from Net


Netbenefit
benefitfrom
from
broadband applications
applications
applications

Subscription
price

Subscription
Subscription
revenues
revenues
Subscriber 1

Subscriber 2

Subscriber 3

Subscriber 4

subscriber
Potential

The columns in Figure 5.2 represent the different valuations that people have of the
services provided over broadband. Subscriber 1 has the highest valuation while the
potential subscriber (column 5) has the lowest. Subscriber 1 and subscriber 2 pay for
individual applications provided over broadband connections (shown in light grey)
while subscribers 3 and 4 only use applications provided for free (e.g. internet
browsing). The net value placed on broadband services by Subscribers 1 to 4 is greater
than the subscription price so they all choose to subscribe. However, the value placed
on broadband services by the fifth person in Figure 5.2 is less than the subscription
price so they choose not to subscribe.

The red shaded area is the total amount paid for subscription. This represents an
approximation of the benefit of broadband services. It is clear from Figure 5.2 that it is
a conservative approximation of the value of the benefit of broadband since the dark
grey shaded area is the additional direct benefits that subscribers receive from
broadband connections but which are not captured by the subscription revenues. These
benefits are not included in our estimation of the benefit of broadband. They are
excluded from our calculation for two reasons:

• Measurement. As with all products, it is difficult or impossible to estimate


people’s true willingness to pay. This is because, other than asking them, there is
no simple way of estimating it. Even asking people about their willingness to pay
has problems. It is possible to carry out opinion surveys however these have a

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number of measurement problems. One of the most significant is that people


often don’t know what their willingness to pay for a product is, until they are
required to make a purchase.

• Significance. Willingness-to-pay is a measure of the theoretical amount that an


operator could earn from providing services to customers. However, in practice,
it is very difficult for providers of services actually to charge this price because it
is usually possible to discriminate between customers (i.e. charge different prices
to different customers) only to a limited extent. Typically, the more standardised
a product the more competitive the market and the more difficult it is to
discriminate between customers. Willingness-to-pay is therefore the correct
measure of economic benefit from a social welfare point of view. However, it is
of limited use from the point of view of commercial providers.

As stated above, the area shown in pink in Figure 5.2 is a conservative estimate of the
economic benefit of broadband. However, we have focused on it because robust
measurement is possible and because it is of more direct relevance to commercial
providers of broadband services.

It should be noted that the amount that people are willing to pay for subscription (i.e.
the area shaded in pink) is determined by the total net benefit that people derive from
broadband access. This includes both benefits from applications that are provided for
free and those that are paid for on an individual basis. In the case of applications that
are provided for free, the net benefit equals the gross benefit (i.e. because customers
do not pay to use them individually). In the case of applications that are paid for, the
net benefit is the gross benefit minus the amount that is paid for the use of the
individual applications. This can also be thought of as the consumer surplus derived
from these applications. In this case, the subscription payment can be thought of as
extracting surplus derived from subscriber usage of individual applications.

We have also calculated the economic benefit to subscribers of specific applications.


These benefits are not additional to those reflected in subscription revenues. Instead,
they are used to illustrate the value of broadband, as estimated using the value of
subscription revenues.

5.2.3.2 Benefits to providers of services


When people subscribe to broadband, the suppliers of some services (to those
subscribers) are able to provide these services to these subscribers in a more efficient
way than using conventional means. They therefore receive benefit from an increase
in broadband subscriptions. This is an example of a network externality, as described
in Section 5.2.2.1. The magnitude of this benefit can be estimated by measuring the
costs that are saved when people choose to receive these services via broadband
connections instead of via conventional means.

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In the case of goods and services provided on a commercial basis, it is expected that
some of the cost savings arising from more efficient delivery channels would be
passed on to consumers through lower prices. This would be reflected in the lower
price paid by consumers for goods and services, ordered over the internet compared
with those that they purchase through conventional retail channels. The benefit that
subscribers obtain from being able to access these lower prices would be included in
subscribers’ direct valuation of broadband access. However, the benefits that are
retained by the suppliers of services would be additional. It is not possible to
determine in advance how the process of competition will allocate these benefits
between suppliers and consumers.

In the case of public sector services, citizens might benefit from being able to obtain
public sector services online but the providers of public sector services clearly also
benefit from the lower costs of providing these services to customers. This benefit is
additional to the direct benefits received by subscribers.

5.2.3.3 Indirect benefits


There are a number of indirect benefits arising from an increased use of broadband.
Some of these benefits are quantifiable while some are more difficult or impossible to
quantify. The benefit that is the most straightforward to quantify is the reduction in
pollution that comes from a reduced need to travel when services are provided over
broadband connections instead of through conventional means.

There may also be additional indirect benefits which arise through increased
educational attainment, reduction in illiteracy, reduced crime rates, increased incomes
in poor and/or rural areas etc. It is clear that these indirect benefits do exist and it is
possible to illustrate them with case studies but it is difficult to quantify or evaluate
them.

5.2.4 Summary
Our estimate of the economic benefit of broadband follows the methodology outlined
above and can be divided into four steps.

• Step 1. The value of the direct benefits to subscribers is estimated on the basis of
broadband subscription revenues.

• Step 2. We illustrate the origin of these direct benefits to subscribers through


estimates of the economic benefit of individual applications.

• Step 3. In addition to these direct benefits, there are also benefits to the suppliers
of services. In our analysis, we have focused on the benefits to the suppliers of
public sector services.

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• Step 4. Finally, we have estimated the indirect benefits associated with the use of
broadband.

This approach is illustrated in Figure 5.3.

Figure 5-3: Study methodology


Benefits to suppliers
Direct benefit to Indirect
of services (public
Total benefit = subscribers + + benefits
sector benefits)
(Step 1) (Step 4)
(Step 3)

Direct benefits
from individual
applications
(Step 2)

5.3 Implementing the methodology

Each of the steps illustrated in Figure 5.3 represent a separate stage in the benefits
calculation and each one has a separate methodology. However, there are a number of
general methodological issues which arise in the calculation. In this section, we
highlight several of the most important of these issues and, for each one, we discuss
the approach that we have adopted.

5.3.1 Selection of applications


As explained in Section 5.2, the benefits of broadband arise from the applications
which are used over it. These applications are therefore at the centre of the evaluation
of economic benefits and the choice of which applications to consider is an important
stage in the estimation of the benefit of broadband.

We used the following criteria to select them:

• Relevance to governments and policy makers

• We have given consideration to the need for the applications to be available to all
consumers. The applications should be usable in rural as well as urban locations
and should be applicable throughout the European Union.

• We have given consideration to published government policies for the provision


of services over the internet and the services referred to in benchmarking studies
of e-government services provided to date. In particular, we have chosen
representative applications in the areas of:

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− e-government;

− e-learning;

− e-health; and

− e-business

• Representative

− There are a wide number of applications for which broadband access can
be used, including public sector uses, work-related, entertainment etc. . In
selecting our applications, we have attempted to analyse a set of
applications that is broadly representative of the applications that are
currently available.

− There are a number of applications that could work under both narrowband
and broadband. We have chosen applications where there is an appreciable
improvement in the quality of the application due to broadband, or where
the scope for further development of the application has been increased
due to broadband.

− Some broadband applications, such as internet browsing, are currently in


use across Europe. Others are only available in some European countries.
Examples of this include some e-government applications or on-line
supermarket shopping. Other applications or types of application are not
currently being used anywhere but are under development and are likely to
come into widespread use over the few years. In selecting the applications
to include in the study, we have chosen a range which covers both those
currently available in some countries and others which are likely to
become available in the near future.

• Services for which data is available.

− In order to make our estimate of the benefits of broadband as robust as


possible, we base our estimates on actual data from case studies or other
data sources. Our selection of applications to include in the analysis is
therefore partly based on applications for which data is readily available.

In our estimations we have calculated the benefits derived from accessing the different
applications via broadband access. In some cases, these applications could also have
been accessed via narrowband connections. However, in our view, it is appropriate to
allocate the benefits that we have identified to broadband for a number of reasons:

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• We have developed a forecast of the economic benefits associated with the use of
broadband networks. There may be additional benefits associated with users of
similar applications over narrowband connections. However, these would be
additional to the benefits that we have identified.

• A quantitative approach lies at the heart of our estimation of the benefits of


broadband. We have therefore focused on applications which currently exist and
are being used in reasonable numbers and for which quantitative data is
available. These are intended to be indicative of the applications that might be
used by subscribers. In some cases, it is possible that these applications could
also be used via narrowband connections. However, in the future, we would
expect applications increasingly to be only realistically available via broadband
connections. It is therefore reasonable to expect that, applications would
increasingly be available only via broadband.

• The user experience of broadband access is clearly superior to narrowband


access. This is reflected in the fact that customers are willing to pay significantly
more for broadband access than narrowband access. The speed and the always-on
nature of broadband access means that subscribers are more likely to use any
given application when they have a broadband connection than when they have a
narrowband connection, irrespective of whether the application could, in
principle, be used on a narrowband connection.

Given this, we therefore consider that it is appropriate to attribute the benefits that we
have identified in this report to broadband networks.

The set of applications that we have analysed in the estimation of the economic
benefits of broadband are given in Table 16.

Table 16: Applications


# Application Category Private/ Calculation
public stage
1 Teleworking e-business Private Step 2/Step 4
2 On-line grocery shopping e-business Private Step 2/Step 4
3 E-commerce e-business Private Step 2/Step 4
4 On-line government transactions e-government Public Step 3/Step 4
5 Information and communications e-learning Public Step 3
technologies (ICT) in schools
6 Web-based learning e-learning Public Step 3/Step 4
7 Interactive medical consultations e-health Public Step 3/Step 4

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5.3.2 Take-up
A key determinant of the total economic benefit of broadband is the number of people
that subscribe. This has a direct impact on the forecasts of subscription revenues and it
has an indirect impact on the usage of the different applications. The forecast of the
number of subscriptions across Europe is therefore an important component of the
benefits calculation.

The forecasts of broadband take-up across the EU-25 countries are based on numbers
provided by Ovum. Figure 5.4 and Figure 5.5 show these subscription number
forecasts for the EU-15, the acceded EU-10 and total EU-25.

Figure 5-4
Business Broadband Takeup

30

25
Subscriptions (million)

20
EU15
15 EU10
EU25
10

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Figure 5-5
Residential Broadband Takeup

120

100
S u b scrip tio n s (m illio n )

80
EU15
60 EU10
EU25
40

20

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Source: Ovum

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For each application, we present the magnitude of the benefits in the base case
scenario of broadband take-up. We also present in the final results, an estimate of the
economic benefit of a ‘high’ take-up scenario.

In addition to the forecast of subscription numbers, the calculation of the benefits is


also based on a forecast of the take-up of each application (e.g. the number of people
using their broadband connection to telework). These forecasts are based on current
and projected levels of application usage. The specific way in which this is done
varies between applications. It is described in the general description of the
methodology used to calculate the benefits arising from the application.

It has been suggested that the benefits of the applications may increase faster once
penetration gets closer to 100%, as the value of the network in terms of new
technological possibilities is increasing fast when close to universal access.

• In practice, we do not think that this is the case for a number of reasons:

• The theory of network externalities suggests that under certain assumptions, as a


network increases in size, the value of joining the network to new subscribers
also increases. However, it is likely that later joiners to a network are, in fact,
those with the lowest valuation of being connected to the network and it is not
until the network is of a sufficient size that they decide that the benefits outweigh
the costs. There may be other people for whom the benefits never outweigh the
costs. We expect that these people would never join the network. It is therefore
not true that, a priori, the economic benefit of broadband networks is likely to
increase as network penetration reaches 100%.

• As broadband subscription increases, we would expect public sector


organisations to invest in reengineering of back-office systems and increasingly
introduce process automation. We would therefore expect the average benefit to
suppliers of services, particularly public sector services, to increase as the
number of subscribers increases. However, as the number of users of public
services via electronic channels increases, the total costs associated with
providing services through traditional channels will decline. For example,
administrative organisations can be reduced in size, staff numbers reduced,
facilities down-sized etc. These cost-savings are generally scalable which means
that, if a minority of citizens was using traditional channels, the total costs would
be correspondingly smaller. This means that there would not be any major
economic benefit associated with achieving 100% broadband penetration.

• It may be the case that, for some services, there is a significant fixed cost which
would be avoided if broadband usage reached 100%. An example of this might
be e-voting in which a degree of minimum coverage of the traditional channels
would be required irrespective of the number of users. However, this is likely to

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apply only to a minority of applications. It is also likely that authorities would


adapt traditional channels of service delivery if the numbers of users decline
dramatically as a result of increased on-line usage. E-voting is a good example,
in which a small number of subscribers could be served more efficiently via
postal-voting than via the traditional network of offices. Governments may
therefore adapt traditional channels in order to reduce costs, as take-up of
electronic channels increases. This means that the benefits associated with
achieving 100% penetration would be correspondingly lower.

• Finally, it is unrealistic to assume that 100% take-up of electronic channels could


ever be achieved, even if broadband coverage was 100%. Even in a situation of
full network availability, the different services will need to be made available via
traditional means, especially in the case of public services where the right of
access needs to be ensured.

• As a result, although the potential cost savings may increase as penetration


increases we would not expect any major change in the economics benefits
associated with a 100% penetration. The estimates presented in this report have
been based on reasonable assumptions on penetration and take up. To the extent
that the benefits may increase faster as penetration reaches higher levels, our
estimates are conservative.

5.3.3 Calculation issues


A number of the values used in the benefits calculation are common across the
different applications. In this section we provide a brief discussion of the approach
that we have adopted for each one.

5.3.3.1 External costs


Step 4 of the benefits calculation concerns the indirect benefits of broadband access.
There are a number of different elements to this and some are more readily
quantifiable than others. The element that is the most easy to quantify is the benefits
of a reduction in the external cost of transport which arises as a result of increased use
of broadband. The external costs of transport include infrastructure operation costs,
infrastructure depreciation, congestion, external accident costs, air pollution, noise and
climate change. Estimates of external costs at the national level are not available.
However, as a general principle, we would expect that the external costs associated
with transport to be lower outside of major cities. We have therefore estimated the
average national external cost per passenger kilometre by adjusting downward by 50%
the figure calculated for urban areas. We have used a similar figure for other countries
in Europe.

5.3.3.2 Split between rural and urban users


We have separately analysed the benefits associated with use of broadband in both
rural and urban areas. These are two key reasons why these may vary:

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• Take-up. The primary reason is that the total population in rural areas is likely to
be different from that in urban areas. Typically, in Europe, the urban population
is higher than the rural population, although this varies between countries and
according to the definitions used to classify rural and urban areas. In addition,
broadband penetration rates in rural areas may be different from those in urban
areas according to price, incomes and household type. Our calculations are all
based on rural-urban subscription take-up forecasts provided by Ovum.

• Unit benefits. The benefit per subscriber may also vary between rural and urban
areas. People living in rural areas may travel further to work or to access
government services. The per user benefits of carrying out these activities using
broadband may therefore be greater in rural areas than in urban areas.

We have included both of these factors in our analysis of the benefits of broadband in
rural and urban areas.

5.3.3.3 Alternative scenarios


In addition to the base case and the high case scenario, we have undertaken the
analysis under an alternative scenario. In our standard scenarios the penetration in
rural areas is lower than that observed in urban areas. This is consistent with the
information available. Our alternative scenario considers the benefits of broadband in
a situation in which the take up in rural areas is equated to the take up in urban areas.
Estimating the benefits of broadband under an equal take up scenario gives an
indication of the technological divide between rural and urban areas.

5.4 Direct benefits to subscribers


As discussed in Section 5.2, the benefits to broadband subscribers arise from the
benefits from the applications which are used over the connection. Subscribers pay for
some of these applications, while others are used for free. The value to subscribers
from these applications is reflected in subscribers’ willingness to pay for access. An
estimate of the minimum value of these benefits can therefore be obtained from the
value of access subscription revenues (Step 1 in Figure 6.3). Our methodology for
estimating these revenues and the results of the calculation are given in Section 5.4.1.

In order to understand the source of these benefits, we also estimate the benefit that
subscribers obtain from using selected applications (Step 2 in Figure 6.3). These
estimates help to explain why consumers are willing to pay for broadband
subscriptions (i.e. they are illustrations of the direct economic benefit to subscribers).
It is important to note that these benefits are not additional to the estimates of benefits
derived from access revenues. However, we do use these application calculations to
estimate the indirect (i.e. external) benefits of broadband. These are described in
Section 5.5.5.

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The applications that we have selected are teleworking, on-line grocery shopping and
e-commerce. Our estimates of the benefits of selected applications and the
methodology used in the calculation are given in Section 4.2.

5.4.1 Direct benefits to subscribers (Step 1)


The revenues generated from broadband subscriptions are calculated by multiplying
the forecasts of broadband take up for each country by the forecast of average revenue
per subscriber. We have forecast subscription revenues from business and residential
subscribers independently because businesses typically pay higher subscription prices
than residential users of broadband. Data on current ARPUs is available from
published research.7 However, this is not available for all countries in Europe. We
have used published data on ARPUs where it is available and have estimated ARPUs
in countries where it is not8. The difference between business and consumer ARPU is
based on the price differential between prices paid by residential subscribers and small
businesses in 2002.9 The figures for 2004 used in our model are given in Table 17.

7
Arthur D. Little, Global Broadband Report
8
We have based our assumption about ARPUs in accession countries on the basis of the ARPU
for the Czech Republic.
9
National Statistics, International e-Commerce Benchmarking

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Table 17: Monthly ARPU for broadband access (2004)

ARPU, €/month Residential Business


Austria 30 € 72 €
Belgium 32 € 76 €
Cyprus 28 € 67 €

Czech Republic 28 € 67 €
Denmark 32 € 75 €
Estonia 28 € 67 €
Finland 30 € 72 €
France 29 € 110 €
Germany 44 € 100 €
Greece 30 € 71 €
Hungary 28 € 67 €
Ireland 30 € 72 €
Italy 24 € 86 €
Latvia 28 € 67 €
Lithuania 28 € 67 €
Luxembourg 32 € 75 €
Malta 32 € 75 €
Netherlands 32 € 76 €
Poland 28 € 67 €
Portugal 30 € 72 €
Slovakia 28 € 67 €
Slovenia 28 € 67 €
Spain 24 € 56 €
Sweden 34 € 44 €
United Kingdom
33 € 77 €

Source: Global Broadband Report, November 2003, Arthur D. Little, Eurostat, Frontier analysis

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We assume that average subscription revenue per subscriber declines by 4% per year
during the forecast period. This price trend is consistent with published forecasts of
subscription price declines10 and is comparable with long-run price declines for other
consumer technologies such as mobile phones. It is also consistent with average
annual falls in the price of broadband over the past few years.

It is reasonable to think that, as more services become available via broadband,


people’s willingness to pay for broadband subscriptions will increase. However,
historical evidence from European markets suggests that, it has been difficult for
broadband access providers to capture this value and prices have tended to fall over
time. If, in future, access providers are able to increase the ARPUs of their customers,
the assumption of an annual 4% decline in ARPUs would represent a conservative
estimate of the benefits of broadband.

The results of our estimation of subscription revenues from business and residential
subscribers are summarised in Table 18.

Table 18: Access revenues from business and residential subscribers (basecase)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Residential
(€bn) 6.7 10.8 14.9 18.5 21.5 24.2 26.4 28.3 29.8 31.0
Business (€bn) 4.1 7.2 10.3 13.1 15.4 17.2 18.6 19.6 20.3 20.7
Total (€bn) 10.8 18.0 25.2 31.5 36.9 41.4 45.0 47.9 50.1 51.7

Source: Frontier analysis

It should be noted that this estimate represents a conservative estimate of the


economic benefit of broadband. We do not include an estimate of the consumer
surplus11 associated with broadband which would be additional to this.

5.4.2 Illustrations of direct benefits (Step 2)


Our basic estimate of the economic benefits of broadband to business and residential
subscribers is based on subscription revenues and is explained above in Section 5.4.1.
This benefit arises from the use of applications ranging from free services such as
internet browsing and email to downloading media content and video-based two-way
communication.

In Sections 5.4.2.1 to 4.2.3, we discuss the economic benefits directly attributable to


some specific applications. The applications that we have chosen are teleworking, on-

10
Arthur D. Little; Global Broadband Report, page 81.
11
See Section 5.2 for a more detailed explanation of this concept.

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line grocery shopping and e-commerce. These benefits estimates should be regarded
as illustrations of the direct economic benefits to subscribers of broadband access.
Most of the benefits arising from these applications are not additional to the benefits
identified and evaluated in Section 5.4.1.

5.4.2.1 Teleworking
Teleworking is the substitution of office-based work for remote working, usually at
home. Broadband makes distance working easier and more effective because it allows
remote access to the office network, access to general information in a quick and
efficient way and instantaneous and economic communication with colleagues and
clients.

Working at home reduces the daily cost of commuting to the office and so the benefits
of broadband teleworking can be estimated on the basis of the commuting costs that
are saved. These costs can be divided into two categories

• Direct costs – the monetary costs of commuting, including public transport, cars
and taxis and the non-monetary cost of the time spent commuting.

• External costs – the environmental costs of commuting, including congestion and


pollution costs.

Methodology
The key quantifiable benefit from teleworking comes from the associated reduction in
the cost of commuting. The first step in the analysis is therefore to estimate the
average cost of commuting in each of the EU countries. This figure is used to
estimate the annual benefits in each country attributable to teleworking. The benefits
of teleworking over the next ten years are then calculated on the basis of the average
benefits for each country and a forecast of the take-up of teleworking.

Some of this information is available directly for each country in the EU. Where this
is not the case, estimates have been made on the basis of relevant data or reasonable
assumptions.

• We obtained direct information for some EU countries on:

− the means of transport employed to travel to work;

− the average number of commuting trips;

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− the average distance and time involved in commuting12, 13; and

− differences in distance, time and mode of transport between rural and


urban areas14.

• This data is not directly available for all EU countries. In cases where it is not,
parameter values were estimated using data on total distance travelled by citizens
in these countries.

• Information on the total direct and indirect resource cost per passenger km of the
different modes of transport is publicly available and has been used in the
calculation.15

• The value of time spent commuting is defined as the opportunity cost of the time
involved in commuting and depends largely on salaries. As salaries increase, the
value of time spent commuting also increases. The strength of this relationship is
referred to as the salary elasticity of the value of time. It is estimated that the
value of this is 0.816 (i.e. a 10% increase in salary would result in an 8% increase
in the value of time spent commuting). We used this information to estimate the
value of time in the different EU countries, based on the differences in wages in
the EU.

• The external costs of transport (e.g. pollution, congestion etc.) were obtained for
Europe and are assumed to be constant in the different EU countries.17 External
costs are assumed to be 10% higher than average in urban areas, and 10% lower
in rural areas. We exclude these from the calculation of direct benefits to
subscribers but include them in the calculation of indirect costs, as discussed in
Section 5.5.5.

The annual benefit attributable to teleworking over the next 10 years is calculated by
linking average benefits with take-up forecasts of teleworking. There are several
factors which will influence the number of broadband teleworkers:

• Job type. Teleworking is only relevant to certain types of occupation. The


number of people employed in these types of job therefore provides an upper

12
Office for National Statistics, Labour Force Survey
13
Department for Transport
14
Department for Transport
15
http://www.transportforlondon.gov.uk/tfl/fares-tickets/2004/index.shtml, Department of the
Environment, Transport and the Regions, Transport Economics Note (TEN), DETR 2001
16
Institute for Transport Studies, Values of Travel Time Savings in the UK
17
INFRAS/IWW cited in The way to sustainable mobility - cutting the external costs of
transport

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limit on the number of potential teleworkers. Data on the number of potential


teleworkers (i.e. the number of employees in jobs which are suitable for
teleworking) is available for each country in Europe.18

• Growth forecasts. It is clear that teleworking is not a perfect substitute for


presence in a working environment. It is therefore unlikely that all people in
relevant occupations will choose to telework. However, as teleworking becomes
more common and more widely accepted by employers, it is likely that the
number of potential teleworkers who choose to work from home will increase.
We have current data for each country in Europe on the proportion of the
workforce that works from home19. Current rates and the potential maximum
rates of teleworking across Europe are shown in Table 19.

18
SIBIS, Statistical indicators benchmarking information society, statistics & indicators.
19
SIBIS, Statistical indicators benchmarking information society, statistics & indicators.

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Table 19: Teleworking


Country Proportion of workforce that Proportion of the
works from home at least one workforce that are
day per week (2004) potential teleworkers
Austria 2.1% 32.0%
Belgium 2.3% 31.0%
Cyprus 0.7% 12.0%
Czech
Republic 0.5% 13.0%
Denmark 2.7% 29.0%
Estonia 0.7% 22.0%
Finland 4.8% 39.0%
France 2.2% 24.0%
Germany 1.8% 38.0%
Greece 2.1% 21.0%
Hungary 0.1% 11.0%
Ireland 0.5% 28.0%
Italy 0.7% 33.0%
Latvia 1.5% 13.0%
Lithuania 0.1% 15.0%
Luxembourg 0.8% 29.0%
Malta 0.1% 20.0%
Netherlands 9.0% 41.0%
Poland 0.8% 12.0%
Portugal 0.4% 13.0%
Slovakia 0.7% 20.0%
Slovenia 0.5% 20.0%
Spain 0.2% 22.0%
Sweden 5.3% 31.0%
United
Kingdom 2.5% 33.0%

Source: SIBIS, Frontier analysis

We assume that the proportion of people working at least one day from home
increases through the forecast period, starting with the rates shown in Table 24. We
assume that, by the end of the forecast period, the number of teleworkers will have
reached 50% of the potential maximum shown in Table 17.

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• Broadband penetration. Some forms of teleworking can be done without a


broadband connection. It would therefore be incorrect to assume that all
teleworking is done by broadband subscribers. It is likely that availability of
broadband will increase the likelihood that a person will telework. However,
there is no detailed information available on relationship between broadband
subscriptions and teleworking. We have therefore assumed that the teleworkers
are evenly distributed between broadband subscribers and non-broadband
subscribers.

• Frequency. We also assume that teleworkers work from home for an average of
one day each week. This is consistent with the SIBIS statistics that provide
information on the share of employed population who spend at least one full
working day per week. However, in many cases, workers may spent at least one
day working from home. Our estimate of the benefits of teleworking is therefore
a conservative one.

These forecasts are consistent with other independent forecasts. One of these
estimated that 2.0% of the workforce in the EU15 countries were home-based
teleworkers in 1999 and forecasted that teleworking rates would have risen to between
10% and 40% of the workforce in selected European countries by 2005.20

Results
Table 20 shows the estimated benefits of telecommuting for the EU25.

Table 20: Benefit of teleworking (basecase)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 0.1 0.4 0.8 1.3 2.0 2.8 3.8 4.9 6.2 7.5
Source: Frontier analysis

5.4.2.2 On-line grocery shopping


The internet allows the possibility of substituting traditional grocery shopping,
involving physical presence, for purchases on-line. This ability is enhanced by the use
of broadband, which allows a faster and more reliable type of connection required for
this type of application. Many goods and services are purchased over the internet. An
indication of the magnitude of this business is the total value of internet sales which
increased in the UK from €26.9bn to €37.3bn between 2001 and 2002. In the US, the
total value of retail e-commerce sales was $56bn in 2003.

These sales cover a wide range of products and services and there are a number of
benefits arising from them. One benefit is an increase in efficiency through lower
retail costs. Some of this efficiency improvement will be passed on to customers as a

20
The Spread of telework in 2005, Karsten Gareis, Norbert Kordey; 2000

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result of competition. However, there are other types of benefit arising from
purchasing goods on-line. These are benefits arising from reduced travel and time
costs. In this part of the study, we have considered on-line grocery shopping. There
are a number of reasons for this. The first is that grocery shopping is something that is
undertaken by households throughout Europe. It is therefore potentially transferable
between countries. It is also something that is done frequently, amounting to
significant costs for families, in terms of the time spent and the transport costs
incurred. Finally, on-line grocery shopping is an application that is currently available
in some countries and therefore potentially provides actual data on take-up and costs.

Methodology
An estimate of the benefit of on-line grocery shopping can be obtained from the
difference between the cost to the shopper of traditional grocery shopping and the cost
to the shopper of on-line shopping. This analysis does not include any efficiency
improvements or related price differential between goods bought on-line and those
bought in the traditional way. These are included in the analysis of price differentials
discussed in Section below.

The costs involved in traditional shopping can be classified as:

• Direct costs – these are the monetary costs of travelling to the shop, including
public transport, taxi fares and car costs. It also includes the value of time
employed in travelling to the shop and shopping.

• External costs – these are the environmental costs of commuting and include
congestion and pollution costs.

On-line shopping requires time spent in front of the computer. It also involves a cost
of delivery. We estimate this on the basis of the delivery free paid to supermarkets.

There is very limited cross-country data available on shopping-related travel


behaviour. However, such data21 was recently collected in the UK as part of a major
regulatory enquiry22. We have used this to estimate shopping-travel behaviour in other
countries Variations between countries in the distance travelled and the mode and cost
of transport used for shopping were estimated in a similar way to that used for
teleworking.

The value of shopping time is defined as the opportunity cost of the time involved in
shopping. The time involved in shopping includes:

21
Means of transport employed to travel to the supermarket, the average number of shopping
trips and the average distance and time involved in travelling to the supermarket.
22
Supermarkets report, Competition Commission UK, 2001.

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• the time travelling to the shop; and

• the time spent in the shop.

The time spent in the shop is estimated to be 30 minutes on average and is assumed to
be constant across the different EU countries. Using an estimate of the value of time,
as discussed in Section 5.4.2.1, we estimate the value of the time involved in
traditional grocery shopping across the different EU countries.

The cost of on-line shopping will be determined by:

• the average number of times that online shopping takes place in a month; and

• the average time spent doing the on-line shopping.

There is limited information available on the patterns of on-line grocery shopping.


We therefore based our modelling on reasonable assumptions:

• The average number of on-line shopping per month is estimated to be equal to


the number of monthly traditional shopping trips.

• The average time spent doing on-line shopping is assumed to be 20 minutes.

• The cost of delivery will depend on the number of customers that are served in a
day, salaries etc. These services are provided by commercial organisations and
are therefore typically commercially confidential and not in the public domain. In
our calculation, we have therefore used the delivery charge set by supermarkets
selling on-line as the basis for our assumption about costs. We have removed
indirect taxes from this charge to obtain an estimate of the resource costs of
grocery delivery.

• The value of time is estimated as value of travelling time as explained above.

The monthly benefits of on-line grocery shopping of an average consumer are linked
to take-up forecasts to provide an estimate of the total benefits from on-line shopping.
Our forecast of the take-up of grocery shopping is calculated in the following way:

• We estimate the current proportion of people that are buying groceries on-line in
2004. Data on this in also not readily available. We have based our estimate of
the proportion of grocery shopping that is carried out on-line in the UK on the
total grocery shopping for one of the large retailer.23

23
The Guardian, Sept 4, 2003

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• We estimate current levels of on-line grocery shopping in other countries using


survey data on willingness to carry out shopping transactions on-line across
Europe.

• Data on the impact of broadband on subscribers’ willingness to carry out grocery


shopping on-line is not available for European countries. We have therefore
assumed that the proportion of people carrying out on-line shopping over
broadband is proportionate to the number of broadband subscribers in the
population as a whole. However, it is likely that broadband subscribers would be
more likely to undertake on-line shopping than other internet users. This is
confirmed by survey in the US which concludes that broadband users are six
times more likely to shop on-line for groceries.24 The assumption on which our
model is based is therefore conservative and is therefore likely to underestimate
the impact of broadband on the take-up of on-line grocery shopping.

• The forecast of growth in on-line grocery shopping in Europe is based on


published forecasts of growth trends in the US25.

The results of the calculation of benefits of on-line shopping are shown in Table 21.

Table 21 Benefit of online grocery shopping (basecase)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 0.03 0.09 0.16 0.27 0.39 0.53 0.69 0.87 1.07 1.28

5.4.2.3 E-commerce
Customers are increasingly undertaking transactions over the internet. For firms that
are able to provide online services more cheaply, this gives them the opportunity to be
more efficient and reduce costs associated with traditional sales channels. Some of
the savings due to these lower costs will be passed on to consumers, while others will
be kept by companies. The proportion of savings that are passed on to customers will
depend on the degree of competition in the market. More savings will be passed on to
consumers in more competitive markets. We have included this effect in our
calculation of the private benefits of broadband to subscribers. This is likely to be a
conservative estimate of the total benefits to society since it only includes the benefits
that are passed onto consumers. Any efficiency savings retained by companies will be
additional to the benefits that are received by customers.

24
www.pewinternet.org, The Broadband Difference
25
Jupiter Research

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Methodology
In order to estimate the benefits of online shopping using broadband, we collected the
following information:

• the difference in price between goods and services bought on-line and those
bought through traditional channels;

• revenues of online shopping; and

• the difference between broadband and dial up shopping patterns.

The benefits to on-line shoppers arising from lower costs and therefore lower prices is
calculated by multiplying the average price differential between on-line and traditional
goods by total retail sales revenues for each country.

Further, in order to estimate the proportion of online benefits that are directly
attributable to broadband we would need an indication of the different take up of
broadband and dial-up usage. The benefits of e-commerce attributable to broadband
are proportionate to the take up of broadband usage compared to dial-up usage.

Some of the information described for the calculation was directly available.
However, in some cases we needed to make some assumptions in order to extrapolate
the inputs to the calculation across the different EU countries.

• Our estimates of the price differential between online transactions and traditional
purchases are based on survey data.26 This found that, on average, the prices of
products sold over the internet are 7% cheaper than high street prices for the
same products. Online prices include delivery fees.

• Data on revenues from e-commerce are also available by industry sector for the
UK. 27 This information refers to the revenues from sales to households (B2C
revenues).

• E-commerce revenues for all EU countries were estimated on the basis of data
for all EU countries on total revenues by industry sector28 and the number of
businesses selling on-line.

26
http://www.which.net/
27
2002 e-commerce survey of business: Value of e-trading by non-financial sector UK
businesses.
28
Eurostat.

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• This information was combined with the information on the price differential of
online/offline purchases to give us the lower limit of the benefits of internet
shopping.

• In order to identify the proportion of e-commerce benefits which are attributable


to broadband, we assumed that on-line shopping behaviour is similar for
broadband and narrowband users. Since people are more likely to shop on-line if
they have a broadband connection, this is likely to be a conservative estimate.

• To estimate the evolution of benefits of broadband over the period considered


(2004-2013) we assumed that the growth rate of e-commerce will match that of
the US between 1999 and 2004.29

• We have estimated the proportion of benefits attributable to rural and urban areas
based on the proportion of the population living in those areas, as it is likely that
internet orders will be carried out regardless of the location.

Our estimates of the broadband benefits of e-commerce are shown in Table 27.

Table 27: Consumer benefits of e-commerce (basecase)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 1.88 2.36 2.97 3.73 4.69 5.90 7.42 9.34 11.74 14.77

Source: Frontier analysis

5.5 Benefits to public sector suppliers of services (Step 3)


Section 5.4 describes the benefits accruing to the users of broadband. Significant
benefits also accrue to providers of services to broadband subscribers. Public sector
applications are services that the government can now deliver in part or in full using
broadband, rather than through conventional channels. The applications that we
choose to consider can be categorised as e-government, e-learning and e-health.

The following sections provide an explanation of the benefits arising from these
public sector applications.

5.5.1 E-Government
European governments currently provide a number of services through contact with
customers via traditional mail or over the counter. Examples include social benefits
payments, tax returns and vehicle licensing. A number of such government services

29
United States Department Of Commerce, News, US census bureau, Estimated Quarterly US
retail e-commerce sales.

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could be made available online via broadband and, in fact, this is already the case in a
number of countries.

The potential benefits include:

• lower costs to the user – reduced time required and travel costs;

• lower cost to the providers of services – automation of services, process


reengineering; and

• higher quality services.

In order to estimate the benefits of e-government, we reviewed the evidence on


potential cost reductions arising from the delivery of public services on-line.

In addition to costs-savings, there are also likely to be improvements in the quality of


public services arising from their delivery on-line. This could include access to a
greater amount of information, more timely responses to applications and greater
transparency in government. The value of such quality improvements is difficult to
quantify but they are likely to be significant and are often used by Governments as the
primary justification for providing services on-line. Our calculation of the benefits of
broadband to public sector service providers is therefore likely to be a conservative
estimate of the value of benefits.

Government carries out many different types of on-line transaction with citizens.
These will vary between countries and information on volumes and availability of
such services by country is limited. We have therefore focussed on two specific
services which we regard as being significant throughout Europe.

• vehicle licensing; and

• online tax returns.

5.5.1.1 Online vehicle licensing


We estimate the benefits of on-line vehicle licensing on the basis of an evaluation of
actual examples of where such a scheme has been introduced. Customers have the
option to apply for vehicle licences from home or the workplace online, with the
licence being sent through in the post. This is model which can also be applied to
other government services. The benefits arise from lower transaction costs compared
with traditional mechanisms. As the change is primarily one of delivery channel, we
have assumed that quality improvements are not significant.

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The costs of traditional processing of a vehicle licensing application in the UK


include:

• The direct costs of customer travel to the post office. These costs are based on
average distances travelled, petrol costs and public transport costs.

• The indirect costs of travel to the post office. These include the value of time of
the customer and the time taken to travel to the post office. We use the average
trip time of 37 minutes. For the waiting time at the post office, we have used the
figure used in the business case 3 minutes.

• Cost of posting the reminder - 38 €cents per reminder.

• Cost of processing the application - €2.32.

On-line applications are processed following online contact with the customer. The
costs to the customer include:

• The indirect costs of value of time whilst online. We assume that the average
customer is online for 5 minutes.

• A reduced on-line transaction cost of €0.87 per transaction.

The calculation of the benefit compares the difference in costs between the two
delivery channels. This gives us the net benefit for one year of take up in the UK. We
then calculated the total benefit by linking this to take-up forecasts for each EU
country.

The results of the analysis are presented in Table 22.

Table 22: Benefit of online vehicle licensing (basecase)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 0.14 0.30 0.33 0.37 0.41 0.44 0.47 0.50 0.53 0.56

Source: Frontier analysis

5.5.1.2 Online self assessment tax forms


In recent years, countries across Europe have moved towards an electronic system of
tax self-assessment and take-up rates are now significant. The provision of these
services electronically should offer benefits for employees, employers and the tax
authorities. The source of these benefits would be:

• convenience to the taxpayer;

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• reduced administrative and marketing burdens to the tax department;

• switching to a lower cost channel of service provision would lead to efficiency


savings for the tax department;

• improved data quality flowing between parties will also offer significant
monetary benefits; and

• the convenience of e-services may facilitate a reduced rate of tax avoidance, and
a higher degree of completeness in self-assessment.

The electronic forms are analogous to paper based forms, yet the on-line service also
allows interactive advice and feedback throughout the process. The channel of
delivery would be lower cost because the electronic submission would allow a quicker
rate of processing. This stems from two mechanisms: correspondence between parties
can occur instantaneously, rather than with the delay resulting from the use of postal
services, and a lower incidence of human error due to the interactive benefits of on-
line services results and a lower requirement to follow up queries from erroneous data
inputs.

Methodology
It has been estimated by the UK government that the benefits of on-line transactions
are over €5 per customer. There may be other benefits such as improvement in quality
of service which are more difficult to quantify. In addition, there may be reductions in
the amount of time required to fill in a tax return when it is done on-line. However, no
figure on this is publicly available therefore we have not included this in the
calculation.

We have based our take-up forecasts on the experience of on-line tax returns in the
UK during 2002, 2003, 200430. We have adjusted take up in other European countries
based on population and governmental e-readiness.31The results of the calculation are
given in Table 23.

Table 23: Benefits of on-line tax returns (basecase)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 0.03 0.04 0.05 0.07 0.09 0.13 0.17 0.23 0.30 0.41

Source: Frontier analysis

It is possible that the benefits the Governments of providing services on line will
increase significantly as broadband coverage reaches 100%. The rationale behind

30
eGovernment Leadership: High Performance, Maximum Value.
31
Cap Gemini Ernst & Young’s, Online Availability of Public Services.

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this view is that, as an increasing number of transactions are carried out on-line,
Government will be able to eliminate duplicate processes which are used for
processing transactions through traditional methods. There is some merit in this
argument. In the early stages of on-line service provision, governments are required
to maintain parallel channels for processing transactions through the traditional and
on-line methods. However, it is likely that traditional methods of processing
transactions are, broadly-speaking, scalable. This means that, as transactions switch
from traditional channels to on-line transactions, it is possible to reduce the staff and
other operating costs involved in the traditional channels. To this extent, unit cost
savings would not dramatically increase as broadband coverage reaches 100%.

However, another factor should also be taken into consideration – upstream process
automation. In the early stages of provision of on-line services, there tends to be a
duplication of procedures. On-line channels tend to provide inputs into what remains
an essentially traditional process. In the early stages of on-line public sector service
provision, costs do not significantly decline. However, as an increasing number of
people carry out transactions on line, it makes sense for governments to invest in
large back-office automation systems. Since these represent a large fixed cost, high
volumes of on-line transactions are required for it to save costs for Government.
However, once these investments are made and there are significant volumes of on-
line transactions, the cost-savings of e-government may be significant.

A final consideration is whether it is, in fact, feasible to expect 100% utilisation of


on-line services. It is unlikely that 100% broadband take-up will be reached within
the forecast period and, even it is reached, it is not certain that there would be 100%
take-up of on-line public services. It is likely that Government will be required to
maintain a limited capacity to process transactions in the traditional way for the
foreseeable future.

5.5.2 E-learning
E-learning refers to the use of information and communications technologies (ICT) in
teaching. In practice, the meaning of e-learning has evolved rapidly with the
development of technology. According to Davies, Wolfenden and Birmingham
(2004)32, educational ICT infrastructure today consists of improved hardware
provision, universal connectivity to broadband internet and e-mail communication
system, centrally provided support, training and content provision.

32
Davies, Wolfenden and Birmingham, “Applying ICT effectively in teaching and learning”,
Department of educational studies, University of Oxford and Oxfordshire County Council – position
paper for “The next level in e-learning” Oxford Internet Institute International Policy Forum, 22-23
January 2004.

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E-learning can raise standards and improve attainment, increase retention and improve
outcomes, broaden choice, provide support for children at risk, increase access to
learning for disadvantaged communities, remove barriers to achievement, reduce the
number of adults without level 2 qualifications33 and ensure wider participation and
fairer access to higher education34. These views are mirrored within the academic
community. Figure 5.6 illustrates the results of a survey of higher education. On being
asked the reasons for choosing e-learning (referred to here as virtual learning
environments), enhanced teaching emerged as the primary reason, followed by
efficiency and access and wider participation.

Figure 5-6: Reasons for considering the use of "virtual learning environments" in university level
education (2003)

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Source: UCISA

Based on the evidence available, we summarise the use of broadband as conferring


benefits in the following forms:

33
Level 2 qualifications generally refer to qualifications received for vocational or non-
vocational training at the age of 16. According to the DfES, Level 2 includes NVQ Level 2, GNVQ
intermediate, RSA Diploma, City & Guilds craft, BTEC, SCOTVEC first or general diploma, those
with 5+ O level, GCSE grades A-C or equivalent and a portion of those with Scottish CSYS, SCE
higher or equivalent, A,S level or equivalent and trade apprenticeships.
34
Department for education and skills “Towards a unified e-learning strategy”, Consultation
document, July 2003.

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• Improving the quality of education delivered.

− More information could be provided in one teaching session. ICT in


schools may include online libraries, discussion boards, and synchronous
communication tools, to help teachers to strengthen their curricular and
teaching practices in professional collaborations to develop and review
teaching materials.

− A greater variety of subject choice – students in schools or university could


take minority subjects such as certain languages if they could connect
online to classes being taught these minority subjects.

− Training and testing could be more tailored to the needs of the students.

• Using broadband may reduce the costs of delivering education.

− Instantaneous online access to documentation instead of having to order


and receive documentation through the post.

− Reduced need for specialist staff – access to specialist staff would be


available to pupils interactively online without the need to travel.

There are many areas in which broadband may be used in education. We have focused
this study on measuring the benefits in two specific contexts:

• using broadband as part of information and communications technologies (ICT)


to improve educational attainment in schools; and

• using broadband to provide higher education for distance learners.

5.5.2.1 ICT in schools


A recent study indicated that the impact of exposure to ICT raises educational
attainment in 11-16 year olds. Society benefits from better performance at GCSE
because higher qualified workers are more productive at work. An employees’
productivity is reflected in the size of his or her wage. The magnitude of increase in
wages due to increased use of ICT would thus serve to quantify the increased
productivity in the economy. ICT in this context includes the use of computers and the
internet at home and in the school. According to a recent report, 15% of schools reap
the benefits of ICT in a comprehensive way35. Experienced educationalists concurred
that current trends in the use of ICT were heavily towards broadband enabled online
use.

35
Department for education and skills “Towards a unified e-learning strategy”, Consultation
document, July 2003.

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Improved performance in examinations


A recent study linked improved performance at schools with exposure to ICT36. It
found that exposure to ICT improves performance in key school examinations. High
exposure to ICT37 was found to raise performance in science by 0.56 of a grade in
post-16 public exams and in design and technology by 0.41 of a grade. High exposure
to ICT in modern languages was found to raise performance by the equivalent of 0.82
and by the equivalent of 0.37 in geography. The results of this study were combined
with information on the relationship between wages and educational attainment to
estimate the impact of ICT on average earnings.

Methodology
To estimate the size of the benefit of ICT in schools, we forecast the number of pupils
whose grades would be improved as a result of exposure to ICT in schools. This was
done in the following way:

• The number of pupils benefiting from ICT was calculated on the basis of
educational and population data from EU countries38.

• We estimated the average impact of ICT on educational attainment among


children who leave school at 16.

• We estimated the impact of increased educational attainment on average wages.

• We calculated the benefit for each cohort, which consists of the earning
difference in the first year after leaving school and the future earning differences.
The future earnings were discounted with a yearly rate of 7 %, which is within
range suggested by the literature for calculating benefits in the public area like
Health, Education and Welfare.39

• We attributing 25% of these benefits to impact associated with broadband and the
use of the internet. This is likely to be a conservative estimate.

The results of our analysis are shown in Table 24.

36
BECTA/DfES “ImpaCT2: The impact of information and communication technologies on
pupil learning and attainment”, ICT in schools research and evaluation series – No. 7.
37
Pupils were required to complete a questionnaire that included a section on the extent to which
the computer had been used for learning within a specified subject area in each of three settings:
during lesson time, outside lesson time but within school and outside school including home use. This
allowed the pupils to be split into two categories: high exposure to ICT and low exposure to ICT.
38
OECD, Education Online Database.
39
Robert J. Brent “Applied Cost-Benefit Analysis” Edward Elgar Publishing Limited 1996.

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Table 24: Benefits of broadband for children who leave school at 16


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(EU25) €bn 0.186 0.188 0.190 0.193 0.195 0.197 0.199 0.201 0.203 0.205

Source: Frontier analysis

5.5.2.2 Web-based learning


The term web based training can apply to all levels of education, from primary school
to higher education and corporate training. In order to avoid duplication with benefits
calculated in Section 5.5.2.1, we focus in this section on benefits from higher
education (university level).

Web based training can consist of a variety of different forms of training. At it


simplest level, it involves web searches and the use of web sourced information.
However, in this section, we focus on a more active form of training through the use
of interactive contact with a trainer. Figure 5.7 shows the current breakdown of forms
of e-learning environments in higher education. It is expected that this breakdown will
evolve so that a steadily larger proportion of usage will be fully online courses.

Figure 5-7: Current form of usage of 'virtual learning environments' in higher education in the UK

5%
13%

10%

58%

14%

Web supplemented, online participation is optional for the student


Web dependent, participation required through interaction w ith content
Web dependent, participation required through communication w ith staff/students
Web dependent, participation required through interaction w ith content and communication
Fully online course

Source: UCISA

To calculate the benefits of web-based training, we compare the costs of providing


conventional education with the costs of web-based training of university level
courses. The benefits to society include the following:

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5.5.2.3 Current costs of traditional delivery of higher education


In the costs of higher learning we have included the following costs:

• Transportation costs – our estimates of the cost of transport and the value of time
lost in travelling are discussed in Section 5.4.2.

• The cost of time for the student (based on his/her value of time and the time
taken to train). We assume that a traditional higher education course takes 36
hours to teach40. We assume that online training takes 67% less time than
classroom based training (Whalen and Wright, 1999)41.

• The cost of time for the teacher (based on his/her value of time and the time
taken to train). We assumed that a teacher’s average salary is approximately
€25,000 per year in order to calculate the value of time.

• We assume that books are required for both online courses and conventional
courses.

5.5.2.4 Costs of web-based training


The costs of web-based training consist of the following42.

• Hardware costs (these costs take account of the maximum number of courses that
can be delivered with a set of hardware).

• Course development costs (these vary substantially depending on whether the


course is designed to be a self contained unit, or whether it is meant to be used in
conjunction with an interactive trainer).

• Course trainer time and costs (based on his/her value of time and the time taken
to train).

• The student value of time (based on his/her value of time and the time taken to
train).

The estimate of the benefits is based on the difference between traditional and web-
based learning for one country. These are then projected into the future and over time.

40
National Centre for Social Research “National Adult Learning Survey 2002” Department for
education and skills Research report 415.
41
Whalen and Wright “Methodology for cost-benefit analysis of web-based tele-learning: case
study of the Bell Online Institute”, The American Journal of Distance Education, Vol. 13 No. 1. 1999.
42
Costs based on study: Whalen and Wright “Methodology for cost-benefit analysis of web-
based tele-learning: case study of the Bell Online Institute”, The American Journal of Distance
Education, Vol. 13 No. 1.

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The next step required is to calculate these benefits out to 2013 and to calculate the
benefits for each country.

To calculate the benefits of higher education using broadband, we calculate the


percentage of all students following online based courses (1% of non-vocational
taught learning)43. We assume that on-line availability increases over time. However,
this growth will occur at different stages. In order to forecasts growth in on-line higher
education, we have divided the EU25 countries into different groups. Our assumptions
about availability in these groups is summarised in Table 25.

Table 25: Availability of on-line higher education


Introduction of on-line higher-education Availability in 2013
Group 1 1% in 2004 55%
Group 2 1% in 2006 36%
Group 3 1% in 2008 27%
Group 4 1% in 2010 10%

To calculate the benefits across Europe, we calculate benefits for other European
countries by adjusting travel distance and the value of time, as outlined above for
teleworking. The number of higher education students in each country is taken from
OECD.44

The results of the calculation are presented below in Table 26.

Table 26: Benefits of higher education online learning


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 0.00 0.02 0.07 0.16 0.32 0.56 0.89 1.34 1.92 2.65

Source: Frontier analysis

Our analysis does not include the benefits of improvements higher quality training
resulting from provision of services on-line. However, there is some evidence to
suggest that provision of high-education services on-line does increase the quality of
education and training.

43
Fitzgerald, Taylor and LaValle, National Centre for Social Research “National Adult Learning
Survey (NALS) 2002”, Department for Education and Skills.
44
OECD, Education Online Database

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Case study: Quality improvements due to Web-based training at the


University of Central Florida45

University of Central Florida research demonstrates that students in


mixed-mode and fully online courses have generally outperformed
students in similar classes based on the traditional teaching model.
Analysis of a large enrolment political science course offered in mixed-
mode serves as an example where the mid-range 50% of outcomes
ranged from 68.9 to 85.1 in the face-to-face course but ranged from
81.6 to 88.5 in the mixed mode course.

5.5.3 E-Health
We consider the benefits of two forms of e-health.

• Use of interactive broadband links from home to have a consultation with a


doctor.

• The use of telemedicine to reduce the costs of specialist referrals and treatment.
These are available for a number of specialist diseases. We present case studies
of these.

5.5.3.1 Interactive consultations


A certain proportion of all doctor consultations could take place without the doctor
having physical contact with the patient. These consultations could therefore take
place interactively online. The benefits would be the following:

• Reductions in costs to the patient in terms of the direct costs of travel to see the
doctor

• Reductions in travel and waiting time that could be quantified in monetary terms.

• Reductions in indirect costs to the GP if interactive consultations are less time


consuming.

The benefits available and the approach adopted to valuing the benefits is based on
cost benefit studies available in the literature46

45
“Access, quality and cost: e-learning’s contribution”. www.webct.com
46
the methodology followed and some of the data is based on Wootton, Bloomer, Corbett, Eedy,
Hicks, Lotery, Mathews, Paisley, Steele and Loane “Multicentre randomised control trial comparing
real time teledermatology with conventional outpatient dermatological care: societal cost-benefit
analysis” British Medical Journal Vol. 320 6 May 2000.

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Cost of traditional doctor consultations


The traditional costs of visiting the doctor’s surgery include:

• The costs of travel to the doctor’s surgery.

• The value of time involved in a visit to the doctor. We assume that this is 37
minutes. We also assume that the average waiting time is approximately 5
minutes and the average consultation time is approximately 13.3 minutes.47

The costs to the NHS are the following:

• The indirect cost of the value of time of the doctor – we use a value of 2.87
€/min.48

Costs of carrying out consultations online

The cost to the customer of an online consultation is:

• The value of time whilst online.

The costs to the health provider:

• The indirect cost of the value of time of the doctor49.

Calculation of the benefits


The calculation of the total benefits of on-line consultations compares the difference
in costs between the two forms of consultation for the population as a whole. This
requires an estimate of the total number of consultations, the proportion of these
which might be carried out online and the rate of take-up of on-line consultations.
Data on consultations is not readily available for all EU countries. We have therefore
used the UK figure and adjusted it according to population size for other EU
countries. Not all conditions for which people visit doctors are suitable for online
consultations. We assume that 37%50 of consultations are suitable for carrying out on-
line. Finally, we assume that the take-up of on-line consultations is gradual and

47
Royal College of General Practitioners
48
MedEconomics
49
Wootton, Bloomer, Corbett, Eedy, Hicks, Lotery, Mathews, Paisley, Steele and Loane
“Multicentre randomised control trial comparing real time teledermatology with conventional
outpatient dermatological care: societal cost-benefit analysis” British Medical Journal Volume 320, 6
May 2000.
50
Based on personal communication with medical practicioners

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reaches 75% of the maximum potential take-up by the end of the period. We adjust
take-up profiles for other countries according to the state of Government e-readiness51.

The results of our calculation of the benefits of on-line doctor consultations are shown
in Table 27.

Table 27: Benefit of online surgery consultations


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25
(€bn) 0.00 0.00 0.00 0.08 0.19 0.33 0.51 0.72 0.97 1.24

Source: Frontier analysis

5.5.4 Telemedicine for specialist treatment


Telemedicine refers to the use of information and communications technology to
provide health care services to individuals who are some distance from the healthcare
provider. Its role is therefore to enhance the quality and/or efficiency of the health
care.

There are several diseases whose treatment requires the handling of large amounts of
information on a regular basis and the availability of highly trained staff. Examples
include the treatment of diabetes, dermatology and pulmonary conditions. Their
treatment represents substantial costs to national governments. In such instances,
telemedicine could provide quality improvements or efficiency savings for certain
aspects of the treatment. In particular, telemedicine using broadband could result in
the following savings:

• Need for fewer highly trained (and costly) staff if the existing staff can be used
more efficiently through interactive online communications.

• Reductions in the costs of transporting patients to see specialists.

• Reduction in costs of administering patients with ongoing treatment requirements


(such as diabetes).

• Use of a lower cost channel to transfer the information.

• The use of broadband assisted telemedicine could also present quality


improvements. These would be in the form of:

51
Silber, D. “The Case for eHealth” Presented at the European Commission’s first high-level
conference on eHealth May 22/23 2003.

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• Faster access to information.

• Earlier receipt of information, allowing the specialist to concentrate on solving


the problem rather than searching for information.

• A review of the literature concludes that:

• There is great optimism for the widespread uptake of telemedicine.

• There are few robust studies that would allow a quantification of the benefits of
using telemedicine on a wider scale across Europe.

• The benefits of telemedicine are very case specific, and depend on the
circumstances, distances involved and diseases concerned. Taking the studies and
extrapolating them across Europe would be inappropriate.

• For example, the relative costs between teledermatology consultations52 and


usual care in North Carolina, United States, found higher costs of $15 per
telemedicine patient. In contrast, a study of the differences in costs between
telehomecare and hospitalisation carried out at Pennsylvania State University
found large benefits in terms of savings from telehomecare53. Similarly, in terms
of quality improvements, a study of the benefits of providing homecare patients
with interactive real time contact with nursing staff found that there were no
differences in the quality indicators, patient satisfaction or use54.

A more appropriate approach would be to consider the benefits of using telemedicine


in certain specialist circumstances. We describe three such case studies below in Box
1, Box 2 and Box 3.

52
Whited, Datta, Hall, Foy, Marbrey, Grambow, Dudley, Simel and Oddone “An Economic
analysis of a store and forward teledermatology consult system” Telemedicine Journal and e-health
Vol 9, No. 4, 2003.
53
Dansky, Palmer, Shea and Bowles “Cost analysis of Telehomecare” Telemedicine Journal and
e-health.
54
Johnston, Wheeler, Deuser and Sousa “Outcomes of the Kaiser Permanente tele-home health
research project” ARCH FAM MED, Vol. 9 January 2000.

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Box 1 - virtual outreach55

We consider the benefits of telemedicine across Europe using the results of a


study that looks at the differences in costs between having a conventional
consultation with a specialist and having one using what is referred to as
‘virtual outreach’. Virtual outreach consists of a real time joint consultation
between the doctor present with the patient in the practice, and a specialist in
the hospital.

The study is based on a direct comparison in the costs of carrying the two
modes of consultation using two hospitals in London and Shrewsbury and 29
doctor’s surgeries in inner London and Wales.

The doctors referred a total of 3,170 patients, of whom 2,094 consented to


take part in the study. The investigators randomised 1,051 patients to the
virtual outreach group and 1,043 to standard outpatient appointments. The
study investigated the costs to the health service and the total costs to the
patient (including direct and indirect costs) of using each method of
consultation.

Over the length of the six-month study, the study found that the overall costs
for the outreach patients were greater (£724 per patient) than for
conventional consultations (£625 per patient) – an extra cost of £99 per
patient through the use of telemedicine.

55
Jacklin, Roberts, Wallace, Haines, Harrison, Barber, Thompson, Lewis, Currell, Parker and
Wainright “Virtual outreach: economic evaluation of joint teleconsultations for patients referred by
their general practitioner for a specialist opinion” British Medical Journal Volume 327 12 July 2003.

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Box 2 - Broadband assisted telemedicine for Diabetes

There are several chronic diseases that require continual patient healthcare.
Diabetes is one of them. In the past, disease management has cost three-
quarters of the United State’s healthcare expenditures. Diabetes is one of the
most costly chronic diseases to the economy. It affects 30 million people
worldwide and incurs a total annual economic cost of US$98 billion56. This
figure includes both treatment costs and indirect costs attributed to disability.
In the UK, there are 1.4 million sufferers and the government spends almost
£5 billion per year57 out of a total annual health budget of approximately £59
billion.

The high costs for diabetes treatment are particularly suited to online
automation. This is because the high costs of treating diabetes derive from:

• diabetes patients requiring regular monitoring of food intake and regular


adjustments to dosage.
• diabetes patients require real-time help, real-time information provision
and the need to keep in contact with the physician.

Automating certain parts of the process that reduce the costs of making this
costly support available would reduce costs.

Limited valuations of potential savings have been made. A firm based in


Tennessee, U.S., called PhyCor had – between 1994 and 1998 – ensured that
none of the diabetes patients in its care needed to be hospitalised. In 1996,
the programme had shown net savings of $510,13358. Whilst these savings
relate to the automation of treatment – they do not, take account of the
additional savings that would occur by substituting the costs of monitoring
equipment with online support via a work or home PC.

56
Figures from Mazzi and Kidd “A framework for the evaluation of internet based diabetes
management” Faculty of Medicine, University of Sydney.
57
BBC News website from 12 April 2000.
58
Chris Petrakos “Finding a cure” Modern Physician, 1 September 1998.

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Box 3 - Broadband assisted telemedicine for outpatient pulmonary


care59
This study looks at differences in costs in providing outpatient pulmonary
care to a rural population. The study is located in the United States and
specifically at a rural facility that provides inpatient and outpatient primary
care and general surgical care to a dispersed population. The study
considered the costs of:

• referral to the specialist centre located in Milwaukee – requiring


the patient to spend 2-3 days away from home.
• telemedicine where patients underwent a consultation with their
local physician in Iron Mountain and connected via live
teleconference with the specialist in Milwaukee (equivalent to
using interactive broadband).
• The use of onsite care where patients receive in-person outpatient
specialist pulmonary consultations at the site of their local
physician in Iron Mountain.
Cost differences were analysed over the period of 1 year. Telemedicine was
found to me more cost effective ($335 per patient/year) compared to routine
care ($585 per patient/year) and on-site care ($1166 per patient/year).

These experiences demonstrate that the benefits of telemedicine over broadband vary
substantially by form of treatment and location. It is therefore difficult to generalise
the estimates of the benefits across treatments and across countries. However, one
aspect of these case-studies is clear. The benefits of broadband used to improve the
application of telemedicine will be more effective over long distances, which suggests
that rural communities will derive a greater benefit over urban communities.

5.5.5 Indirect benefits


In addition to the benefits to subscribers and to the providers of services, an increased
use of broadband is likely to have significant external impacts. In this section, we
consider three types of such benefits:

• benefits from reduced pollution;

• benefits to rural population; and

• benefits from improved educational levels.

59
Agha, Schapira, Maker (2002); Cost Effectiveness of Telemedicine for the Delivery of
Outpatient Pulmonary Care to a Rural Population

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5.5.6 Benefits from reduced Pollution


The use of broadband for teleworking, home shopping and the provision of public
services reduces the distances that people travel. This is likely to have significant
benefits through reduced pollution, particularly in densely populated urban areas.

We have estimated the size of this effect for the applications identified in Section 5.4
and Section 0. The results of our calculation are shown in Table 28.

Table 28: Benefits from reduced pollution


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 0.03 0.07 0.12 0.19 0.29 0.41 0.55 0.72 0.92 1.15

Source: Frontier analysis

5.5.7 Rural benefits


Rural areas face a number of economic disadvantages compared with urban areas. The
cost of living and the cost of providing public services in rural areas is often higher
than in urban areas. In many countries, this is reflected in lower incomes per capita in
rural areas compared with urban areas, population declines, lower educational
attainment levels, higher unemployment etc. In principle, the widespread adoption of
broadband in rural areas could help to alleviate some of these disadvantages.

Population density in rural areas is lower than in urban areas and therefore travel
distances are long. The cost of commuting and the cost of providing services in rural
areas are therefore typically higher than in urban areas. As outlined in this report,
broadband can help to reduce these costs by enabling people to carry out these
functions on-line. The resulting benefit per user is greater in rural areas than in urban
areas. This is a direct quantifiable benefit of broadband in rural areas. There are also
many examples around the world of where broadband is being used to provide these
services already. These provide a model for further roll-out of similar services through
Europe.

It is anticipated that widespread adoption of broadband in rural areas will have a


number of knock-on effects over the long-term. Better communications will help
businesses to relocate to rural areas which will maintain employment opportunities.
Better provision of services such as health-care, banking etc. will also improve the
quality of life in rural areas and alleviate problems of rural poverty and depopulation.

In our calculations, we have separated broadband benefits between urban and rural
areas. The benefits per subscriber are higher in rural areas than in urban areas for the
reasons outlined above. However, the population living in rural areas is lower than in
urban areas and the anticipated rates of broadband take-up is also lower. This means

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that the total value of benefits to rural subscribers is lower than urban subscribers. The
results of the calculation are shown in Table 29.

Table 29: Broadband benefits to rural subscribers


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Benefits per
subscriber
(rural) (€) 515 495 474 461 451 443 437 432 429 426
Benefits per
subscriber
(urban) (€) 532 510 491 477 464 453 442 433 424 417
Total benefit
(rural) (€bn) 1.7 2.9 4.3 5.7 7.1 8.4 9.5 10.6 11.6 12.5
Total benefit
(urban) (€bn) 8.6 14.2 19.7 24.8 29.4 33.4 37.0 40.2 42.9 45.3

Source: Frontier analysis

5.5.8 Knock on benefits due to improved educational levels


Whilst some of the benefits of broadband adoption for education can be quantified
through improved academic outcomes and subsequent higher wages, it is likely that
there are other positive impacts from the use of broadband in education. In many
instances these are very difficult to capture. However, the direction and magnitude of
the likely effects may be inferred from recent research conducted in these areas. These
main areas include:

• efficiency gains from schooling not captured by wage rates;

• gains from on and off the job training;

• reduced crime rates;

• improved health outcomes; and

• improved job mobility

In the analysis carried out above, the change in market wage upon quantifiable
improvements in education quality was used as an indication of productivity
improvements caused by improved schooling. However, there may be additional
benefits to the economy. A study by Dearden, Reed and Reenan, 200060 found that the

60
Dearden, Reed and Reenen (2000), Who Gains when Workers Train, The Institute for Fiscal
Studies

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effects of training on wages are about half the size of the effects on industrial
productivity. Specifically, a 5% point increase in proportion of workers trained in an
industry is associated with a 4% increase in value added per worker and only a 1.6%
rise in wages. Market wages therefore captures only 1.6% of the increase in
productivity but further efficiency gains of 2.4% are realised but not captured by the
proxy. The firm instead retains these gains. Thus, it seems likely that looking at only
employees wages under estimates the social benefit of broadband adoption and the
resulting increase in worker productivity.

In a similar manner to the documented correlation between education performance and


broadband use, we may infer that productivity improvements will be larger when
employees take part in corporate training using broadband. In the absence of any
immediate reason to believe otherwise, this would increase workers’ productivity to
the benefit of both firms and producers in an analogous manner to that described
above.

Improved schooling as a result of broadband adoption may have broader socially


desirable outcomes than those captured by increases in wage rates and individual
firms’ efficiency gains. Better performances at school have been shown to be
associated both with a higher incidence of “staying on”, in turn shown to be socially
desirable in most instances and market participation upon graduation (Andrews and
Bradley, 1997).

Several studies in the UK also indicate that various positive education outcomes are
coincident with lower crime rates. For example, Farringdon (1999)61 found that low
education attainment increases the probability of offending by 8.6%. Heterogeneity in
the education measures and criminal statistics complicate formal treatment of this
effect, yet the results imply that improved schooling may have a non-trivial effect on
the cost of crime in the UK.

Further, there has been a substantial amount of academic attention focused on the link
between education and health outcomes. This relationship can be sub-divided between
intra and inter generational considerations. Relevant factors in the former include the
direct impact on health of improved economic factors such as employment choices
and income. However, Ross and Mirowlsky (1999) show that even after accounting
for these indirect effects, roughly half of the positive influence of education on health
remained.62 Non-economic factors include health-related behaviour and psychological
factors, both of which are inherently difficult to treat rigorously in an empirical

61
Farrington D, Predicting Persistent Young Offenders”, in McDowell and Smith (eds)
“Juvenile Delinquency in the United States and United Kingdom”, New York, Macmillan Press. 1999
62
Ross C and Mirowlsky J, "Economic Hardship Across the Life Course." American
Sociological Review 64:548-569, 1999

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framework. Inter-generational effects are evident in research linking an individual’s


education and the health status of their children. Wolfe and Havemen (2001)63 provide
a review of the literature on this area with substantial evidence that child health is
positively related to parent’s education.

Finally, it seems likely that improved education levels resulting from the use of
broadband would yield a more mobile labour force. Indeed, in addition to the
educational benefits conducive to adaptability, the direct use of broadband may also
increase job mobility. The benefits of job mobility are well understood and improving
this characteristic of workforces has been an important aim for many western
authorities.

To summarize, the benefits of adopting broadband will not be entirely captured by the
direct benefits measured earlier. The nature of effects not captured by this measure are
varied, and many inherently difficult to measure. However, previous research implies
that these effects are likely to be positive and potentially large.

5.6 Regional analysis of benefits


This study has primarily focused on the economic benefits of broadband at the
national level across Europe. However, in addition to this, we have also considered the
benefit that would accrue to four specific regions within Europe. The four that have
been considered in more detail are:

• The Highlands and Islands of Scotland in the UK;

• The South West region of England in the UK;

• Peimonte in Italy; and

• Basilicata in Italy.

The demographic and economic characteristics of these regions are discussed in more
detail elsewhere in this report. However, we provide here a brief summary of the
characteristics of these regions:

63
Wolfe B and Havemen R Accounting for the Social and Non-market Benefits of Education,
The Contribution of Human and Social Capital to Sustained Economic Growth and Well-being. in
OECD/Human Resources Development Canada. Vancouver: University of British Columbia Press.
2001.

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5.6.1 Highlands and Islands of Scotland


The population of this region is 272,000 and is one of the most sparsely populated
regions of the EU with a population density of 9 persons per km2 compared with an
EU average of 116 per km2.

The economic base of the region is primary industries (agriculture, forestry and
fishing) and, increasingly, tourism. The manufacturing industry is diverse and is
typified by SMEs and micro-enterprises. New activities in key technology industries
such as medical products and pharmaceuticals, contrast with traditional sectors such as
oil-related engineering and textiles. BT’s ADSL broadband is available to more than
70% of Scottish households. However, the current maximum line length for ADSL
places a technological limit on the number of homes in the Highlands and Islands that
can be served by DSL technology.

5.6.2 South West England


8.6% of Britain’s population (8.6% of the total UK population) lives in the South
West of England. This population has been growing quickly since 1991, primarily due
to inward migration. The region is predominantly rural but with some large urban
areas. The economy is mixed and shows significant sub-regional inequalities.

ADSL broadband is already available in exchanges serving more than 85% of the
whole region’s population. BT’s programme of ADSL roll-out will cover all but the
most rural areas by 2005 and is undertaking trials of BFWA systems in Cornwall and
other regions of the UK.

5.6.3 Piemonte
Piemonte is a region in the north west of Italy, with Turin as its major city. The region
has a population of 4.3 million and is home to some of Italy’s most vibrant businesses.
It also has well-developed agriculture and successful agri-food systems. Agricultural
employment is approximately 4.6 % of total employment, generating 2.9 % of the
regional added value. The main problems for the agricultural sector are the inadequate
size of the holdings, the ageing farming population, difficulties in water resource
management, deficiencies in marketing and technological innovation, a shortage of
specialised manpower in some areas and the fall in demand for beef and veal.

There are a large number of small nodes in the TI network in Piemonte. As TI makes
decisions to undertake DSL upgrades on a commercial basis, depending on demand, it
is likely that the smaller nodes will be upgraded late or never. However, Piemonte has
a strong industrial and commercial base, and will help stimulate business and home
demand for broadband services.

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5.6.4 Basilicata, Italy


Basilicata is a largely rural region of southern Italy. It has an area of 9,992 Km², a
population of approximately 610,000 and population density of 61/ Km², which is low
when compared with the national average of 190/ Km². The chief town is Potenza,
with a population of 69,700 and 44% of the population live in towns of over 10,000
population. A region whose development is below the European average, Basilicata is
92% farm land and forests and nearly three quarters of its territory is mountainous or
hilly, a remarkable natural environment that accounts for the low population. The area
has a strong agricultural base, but 70 % of the holdings cover less than 1 ha and
agriculture generates only 7.5 % of the regional added value. The region's GDP rose
2.1% per annum from 1992 to 1998, growth well above the national rate.
Unemployment remains high at 18.5% in spite of a marked decline in recent years.
The automotive, furniture and agri-foods industries make a positive contribution to the
region's trade balance.

In a region such as this, there will be a strong business case to upgrade the larger local
exchange to provide DSL service, but with the smaller switches and multiplexers it
will be a commercial challenge due to the low population and small villages in rural
areas.

5.6.5 Economic benefits


We have applied the model used to calculate the economic benefits of broadband at
the national level to these regions. We have calculated the average benefits per
residential and business subscriber in rural and urban areas for each of the and applied
these to the number of subscribers in these regions. The results of this calculation are
given in Table 30:

Table 30: Summary of regional benefits (€m)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Highlands and
Islands 12.0 21.4 29.9 35.9 41.5 45.3 48.4 51.2 53.3 54.7
South West UK 184.6 319.9 446.1 551.6 636.3 699.5 748.2 785.1 813.8 836.5
Piemonte 120.2 193.3 264.4 328.6 384.3 432.4 473.4 509.9 541.3 570.2
Basilicata 13.3 20.1 27.8 34.4 39.9 45.3 50.8 55.2 59.5 63.3

Source: Frontier analysis

5.7 Conclusions: Overall value of broadband benefits


The potential economic impact of broadband is very significant. Throughout the study
we have adopted a conservative approach to estimating the benefits. This therefore
represents a conservative estimate and, in practice, we expect the benefits to be higher.

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The benefit of broadband access also varies significantly between countries. This is
predominantly determined by the size of the country – the greater the number of
broadband subscribers, the greater the economic benefits. However, the benefits also
vary for a number of other reasons. Many of the benefits derive from a reduction in
the cost of transport or time saved as a result of not having to travel. The value of time
and the cost of transport also varies significantly between countries.

In addition to the direct economic benefits arising from widespread use and adoption
of broadband access, we have also considered the indirect benefits. These are
primarily the result of a reduction in pollution brought about by a reduction in the
distance that people travel for work or for shopping.

The total economic benefits that we have considered under our base case scenario are
summarised in Table 31.

Table 31: Summary of benefits (€bn)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 10.3 17.1 24.0 30.6 36.5 41.8 46.5 50.7 54.5 57.8

Source: Frontier analysis

Approximately 94% of this benefit accrues to subscribers themselves. Approximately


5% accrues to the providers of public services and 1% are external benefits arising
from a reduction in external costs.

We have also calculated the benefits of broadband under a ‘high-case’ scenario which
is based on a forecast of higher subscriber numbers for each year of the forecast
period. The results of this calculation are given in Table 32.

Table 32: Summary of benefits (high-case) (€bn)


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU25 (€bn) 10.3 17.4 24.8 31.9 38.4 44.2 49.4 54.0 58.0 61.7

Source: Frontier analysis

In addition to this, we also calculated the economic benefits that would arise if take-up
in rural areas was the same as that in urban areas. This would result in an increase in
the benefits of 26.6 €bn (NPV) in rural areas.

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6 Conclusions on cost benefits for broadband connectivity


In this Cost Benefit Analysis we have estimated the total benefits (urban and rural)
and the total costs arising from widespread broadband access, with the broad
conclusion that the total benefits outweigh the total costs. However, as might have
been anticipated, we have noted significant differences between urban and rural areas.

This section draws on the conclusions of the previous sections on costs and benefits
and provides assumptions and results of the cost benefit (net benefits) calculation.

To make conclusions on Cost Benefit, the cost and benefit forecasts derived from the
study for the period of measurement have been combined into one financial model,
which also incorporates the financing costs of the rollout of the required
infrastructure.

6.1 Assumptions for the cost benefit calculation

6.1.1 Background
Cost-benefit analysis compares the total benefits of consuming goods with the total
costs. This is the sum of the producer and consumer surplus. For each individual
consuming a good or service, the consumer surplus is a measure of the difference
between the amount that the individual was prepared to pay for it and the amount that
they actually pay for it. This concept is illustrated in Figure 6-1 where the total
consumer surplus is represented by the dark shaded area between the demand curve,
D, and above the equilibrium market price, p.

Figure 6-1:
Consumer
Consumer Consumer
surplus
surplus surplus

Source:
Frontier
p
Economics
D

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The producer surplus is the economic profit (i.e. the profit in excess of the cost of
capital of the company) that a company makes in supplying the good. Where goods
are provided in a competitive market, it is assumed that the producer surplus is zero,
which means that consumer surplus is a measure of the net economic benefit to
society of consuming a good.

An alternative method for calculating the economic benefit of the consumption of a


good is total gross benefit (i.e. the area between the demand curve and the x-axis in
Figure 6-1) minus the cost of producing the good. The total economic benefit can be
estimated as the sum of the consumer surplus and the revenue generated from the sale
of the good. Estimating the economic benefits arising from products like broadband
access is more complex. In principle there is little or no value derived from the access
itself. Rather, the value is derived from the services provided over the broadband
access network. However, the revenue those consumers are prepared to pay for the
broadband access (in addition to the amount they pay for the services themselves)
reflects the ‘excess value’ that they gain from consuming the services themselves (i.e.
the consumer surplus). The total economic value is therefore the sum of:

• the consumer surplus generated by the services delivered over the broadband
access network;

• the revenue from consuming services; and

• the revenue generated by broadband access itself.

6.1.2 Net Present Value calculation


As we focus on determining the Net Present Value of broadband connectivity, the first
section below is devoted to a discussion of the appropriate risk adjusted discount rate
to apply to the relevant costs and benefits.

6.1.2.1 Discounting to present value


The net present value of any project in which costs and benefits are spread over a long
period will be fairly sensitive to the discount rate chosen (recognising that money
received today is worth more now than money received at some future date). The
costs and benefits of implementing this project accrue over a period of more than ten
years. But the majority of costs occur at the beginning of the period and the benefits
come later and grow over time. A benefit worth one euro in 2013 is worth less than a
cost of 1 euro incurred today, for two reasons:

• In the absence of risk (or uncertainty), empirical studies show that individuals
(and corporates) discount future costs and benefits; there is a ‘time preference
rate’. This is consistent with the fact that someone who foregoes consumption
today, and places the money on deposit at the risk-free rate of interest, can enjoy

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more consumption tomorrow. It also reflects the fact that the average (European)
individual’s future income stream grows over time, so that the value of a future
Euro is less than today’s Euro.

• Investors are risk averse. There is uncertainty associated with the exact amount
of the future costs and benefits, and hence a premium is required. In other words,
users of broadband benefits will discount future benefits at a rate that exceeds the
risk-free rate, due to the possibility that the expected benefits are not received.

The next section outlines the methodology used to calculate the discount rates.

6.1.2.2 Risk-free rate


Redemption yields on various financial instruments are available as a proxy for the
risk-free rate. We estimate that the most appropriate instrument for this Cost Benefit
Analysis is a Euro-denominated German government bond. We have selected a bond
maturing in April 2014, as this most nearly matches the CBA time period. On August
9th 2004, the nominal yield on this instrument was 4.08 % (source: Bloomberg
financial information).

6.1.2.3 Commercial discount rate, or cost of capital


Determination of the cost of capital requires the calculation of two types of premia
over and above the risk-free rate:

• There is a debt premium, which reflects the incremental risk on private sector
debt instruments over and above sovereign instruments. This premium is
observable in the market in the form of the ‘spread’ on bonds issued by the
private sector. On 9th August 2004 the ‘spread’ for a typical investment grade
(‘BBB-’) rated company the yield was 1.57% (source: bondsonline.com). Adding
this spread or premium to the risk-free rate gives a cost of debt for a typical
European commercial venture of 5.63%.

• The calculation of the cost of equity is more complex. For this project it is the
sum of the risk free rate (a proxy for the minimum return required), and the
equity market risk premium (EMRP - the additional return required for investing
in equities of average risk) multiplied by the sector beta.

The standard (Capital Asset Pricing Model or CAPM) formula for the nominal cost of
equity is as follows:

Ke = Rf + β*EMRP

where:

Ke = nominal cost of equity

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Rf = nominal risk-free rate (4.08%)

β = equity beta

EMRP = equity market risk premium (5%)

The EMRP is based on long term observation that a greater return is required for
equity than for government bonds. Evidence from developed markets suggests 6-8%
as a reasonable range (data sourced from historic academic studies) – although more
recent studies suggest lower values. The current PwC global standard EMRP is 5%.

An important driver of the cost of equity for a given business is its equity beta, which
measures the riskiness of that company relative to the stock market as a whole. The
beta gives the amount by which the company's share price varies compared to
variations in the market as a whole (a beta at 1 will thus be the same as the market and
will be the "average" risk). PwC’s Economic Advisory Practice’s standard practice is
to use a 5-year average of monthly betas because these estimates typically have lower
standard errors and explain a greater proportion of the variance than the corresponding
weekly estimates. To calculate an industry or sector beta it is necessary to take the
average observed (or ‘equity’ beta) of each of the sample companies, and de-lever
(remove the effect of gearing) this to generate an industry ‘asset’ beta. This is then re-
levered (to reflect the level of gearing) using industry average gearing to generate the
industry equity beta, which can be used in the CAPM to give a cost of equity.

The sample of companies used to generate the industry discount rates was restricted
by the need to choose only those entities that are publicly listed, and have a share
trading history of close to 5 years; this is necessary to obtain a rigorous beta
observation. In addition, as the assumptions of this study are that broadband
connectivity across Europe will impact most industries, we have assumed that the cost
of capital is a simple average across each of the industry sectors. Our analysis
generated an equity beta of 1.02.

6.1.2.4 Gearing
As noted above, the equity beta is unlevered to remove the effect of gearing. For
consistency we therefore base our gearing estimates on five-year historic averages.
(Source: Bloomberg financial information.)

6.1.2.5 Calculation of discount rate or cost of capital


The formula for the nominal post-tax discount rate is as follows:

nominal post-tax WACC = Ke * [E/(D+E)] + Kd *[D/(D+E)]

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where:

E = Value of equity (average of last five years)

D = Value of debt (average of last five years)

The simple average discount rate for the European industry, and hence that used for
this project’s benefits and all costs incurred is therefore 6.57%. We added a 50 basis
points premium allowing for technology risk of connecting/maintaining broadband
networks across “developing” EU countries. The total discount rate that we have
applied for our calculations is 7.07% as calculated below:

Discount Rate Calculation

Cost of debt
Interest Rate 5.65%
Tax adjustment 70%
Kd 3.96%

Cost of Equity
Rf 4.08%
Beta 1.02
Risk Premium 5.0%
Ke 9.18%

WACC
Debt 50%
Equity 50%
Kd 4.0%
Ke 9.2%
WACC 6.57%
Technology Risk Premium 0.50%
Total WACC 7.07%

6.1.2.6 Application to costs and benefits


The above discount rate has been applied to the costs and benefits arising as a result of
this project. We have assumed that cost and benefits fall at the end of year in which
they accrue, and have discounted them in a manner, which yields a Net Present Value
(NPV) of each stream as at 1 January 2004. Therefore we are applying the discount
rate on costs and benefits in the year 2004. This is a conservative approach and
considers a discount for cost benefits of the current year.

6.1.2.7 VAT
When carrying out cost benefit analyses it is normally assumed that an economy
operates at full employment. Conventional theory suggests that at full employment
any Broadband-related VAT would simply replace VAT from the sale of other
products.

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We do not consider the impact of VAT in our quantitative analysis.

6.1.3 Base and Extended Take-up case assumptions


For each country, a base case and extended case for availability and take-up were
analysed (detailed assumptions are outlined in the Introduction and in Section 3 of this
report).

6.2 Results of the cost benefit calculation

In this section we summaries our results for the Base case scenario, which provides in
our view conservative results as well as the Extended Take-up case scenario results.
Detailed results of both cases are provided in the Appendix of this report. We provide
the following results:

• Total annual net benefits

• Net benefits per subscriber

• Net Present Values (NPV’s) of net benefits

• NPV cost:benefit ratios

6.2.1 Total annual net benefits and net benefits per subscriber

6.2.1.1 Base case:


We have differentiated our calculation for Urban and Rural areas, and our forecasts in
these two categories for nominal costs and benefits in each of the years under analysis
are as follows:

Cost Benefits (Base Case)


Million Euro 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Period 1 2 3 4 5 6 7 8 9 10
Urban
Costs 4,749 7,735 10,862 13,918 16,843 19,603 22,157 24,472 26,433 27,997
Benefits 8,576 14,162 19,693 24,828 29,400 33,432 36,985 40,120 42,889 45,347
Net Benefits 3,827 6,427 8,831 10,910 12,557 13,829 14,829 15,647 16,457 17,349

Rural
Costs 1,846 2,943 4,115 5,259 6,338 7,325 8,220 9,005 9,690 10,276
Benefits 1,689 2,930 4,303 5,726 7,098 8,374 9,542 10,604 11,575 12,470
Net Benefits -158 -13 189 467 760 1,049 1,321 1,600 1,885 2,194

Total
Costs 6,595 10,678 14,977 19,177 23,181 26,928 30,377 33,477 36,122 38,273
Benefits 10,264 17,092 23,996 30,554 36,498 41,806 46,527 50,724 54,464 57,817
Net Benefits 3,669 6,414 9,020 11,377 13,317 14,878 16,150 17,247 18,342 19,544

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We took the benefit figures as provided in Section 5. The cost figures provided in
Section 4 were based on operating expenses and depreciation. In the table above we
have added annual cost of capital (financing costs) to the depreciated capital and
operating costs. The net benefits are therefore calculated as follows:

• Benefits - operating expenses – depreciation - cost of capital = net benefits

In order to calculate the annual cost of capital we prepared a summary of the projected
annual capital expenditure and applied our discount rate (see above) to the cumulated
net book value of these investments in each year.

The results show higher costs for the Urban areas in comparison to those in Rural
areas. This is because the largest countries have very large urban populations, which
means that although the cost per user is higher in rural areas (see below), the overall
rural cost is less. Additionally, with the volumes of take-up being discussed, the costs
in some rural areas will still be quite low, as economies of scale come into play. We
outline in the appendix of this report how these costs and benefits break down by
country.

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The table below shows the cost, benefits and net benefits split into urban and rural
areas per subscriber:

Cost benefit per subscriber (Euro, undiscounted, Base Case)


Subscriber (m) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total subscriber 19.40 33.68 49.19 64.53 79.11 92.76 105.48 117.27 128.15 138.13
Urban subscriber 16.12 27.76 40.11 52.10 63.37 73.86 83.64 92.73 101.14 108.86
Rural subscriber 3.28 5.92 9.08 12.43 15.74 18.90 21.83 24.54 27.01 29.27
Urban
Costs 295 279 271 267 266 265 265 264 261 257
Benefits 532 510 491 477 464 453 442 433 424 417
Net Benefits 237 232 220 209 198 187 177 169 163 159

Rural
Costs 563 497 453 423 403 388 377 367 359 351
Benefits 515 495 474 461 451 443 437 432 429 426
Net Benefits -48 -2 21 38 48 56 61 65 70 75

Total
Costs 340 317 304 297 293 290 288 285 282 277
Benefits 529 508 488 473 461 451 441 433 425 419
Net Benefits 189 190 183 176 168 160 153 147 143 141

The table shows, that the benefits per subscriber are comparable for rural and urban
regions, however the costs per subscriber are significantly higher in rural areas due to
the remote location of the subscribers. Therefore the net benefits per subscriber are on
a short term negative in rural areas. This means that the costs on a short term are
exceeding the benefits, which indicates a strong requirement for public sector support.

6.2.1.2 Extended Take-up case:


The Extended Take-up case assumes higher tack-up rates and therefore larger
subscriber numbers as described above. As for the base case we have differentiated
our calculation for Urban and Rural areas, and our forecasts in these two categories for
nominal costs and benefits in each of the years under analysis are as follows:
Cost Benefits (Extended Take-up)
Million Euro 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Period 1 2 3 4 5 6 7 8 9 10
Urban
Costs 4,777 7,987 11,420 14,801 18,017 21,007 23,722 26,138 28,150 29,725
Benefits 8,576 14,468 20,429 26,038 31,059 35,474 39,334 42,704 45,651 48,241
Net Benefits 3,799 6,481 9,009 11,238 13,042 14,467 15,612 16,566 17,501 18,516

Rural
Costs 1,855 2,994 4,244 5,501 6,718 7,842 8,877 9,786 10,601 11,332
Benefits 1,689 2,929 4,334 5,829 7,311 8,724 10,044 11,266 12,397 13,450
Net Benefits -166 -65 89 328 593 881 1,167 1,481 1,797 2,118

Total
Costs 6,632 10,981 15,665 20,302 24,735 28,850 32,599 35,924 38,750 41,058
Benefits 10,264 17,398 24,763 31,868 38,370 44,198 49,378 53,971 58,048 61,692
Net Benefits 3,633 6,417 9,098 11,566 13,635 15,348 16,779 18,047 19,298 20,634

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The table below shows the cost, benefits and net benefits split into urban and rural
areas per subscriber:

Cost benefit per subscriber (Euro, undiscounted, Extended Take-up)


Subscriber (m) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total sub. 19.40 33.68 49.19 64.53 79.11 92.76 105.48 117.27 128.15 138.13
Urban sub. 16.12 27.76 40.11 52.10 63.37 73.86 83.64 92.73 101.14 108.86
Rural sub. 3.28 5.92 9.08 12.43 15.74 18.90 21.83 24.54 27.01 29.27
Urban
Costs 296 288 285 284 284 284 284 282 278 273
Benefits 532 521 509 500 490 480 470 461 451 443
Net Benefits 236 233 225 216 206 196 187 179 173 170

Rural
Costs 565 506 468 443 427 415 407 399 392 387
Benefits 515 495 478 469 464 462 460 459 459 459
Net Benefits -51 -11 10 26 38 47 53 60 67 72

Total
Costs 342 326 318 315 313 311 309 306 302 297
Benefits 529 517 503 494 485 476 468 460 453 447
Net Benefits 187 191 185 179 172 165 159 154 151 149

As in the base case, the benefits per subscriber are comparable for rural and urban
regions, however the costs per subscriber are significantly higher in rural areas due to
the remote location of the subscribers.

6.2.2 Net Present Value


Recognising that money received today is worth more now than money received at
some future date, we have discounted the net benefits from 2004-2013 for time value
and risk (that the earnings stream may turn out to be different to that expected). The
sum of the discounted values is the Net Present Value (NPV) of the flows within the
period of measurement. Using the base and high case assumptions for broadband
connectivity and take-up, and the discount rate calculated as outlined in this section
above, we forecast that the NPV of the net benefits is:

NPVs (2004-2013) Rural Urban Total


Euro billion
Base Case 5 79 84
Extended Take-up 5 82 87

In this shorter term view the rural areas have a low NPV, close to zero, because of the
relatively high costs to connect the customers to the broadband network. The NPVs of
the Extended Take-up case are lower in the rural area due to the higher costs in
relation to the larger degree of connectivity.

We note, however, that simply calculating the NPV of the net benefits within the
period of measurement does not take account of the full benefits likely to be gained

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after 2013 as a result of infrastructure costs incurred on broadband rollout towards the
end of the period. In order to include these additional net benefits, we have calculated
a “terminal value” is equal to the total of all the forecast future benefits and costs
beyond the period end, calculated using growth rates in perpetuity for each of the two
forecast streams. This terminal value is then discounted back to today's values to
create an addition to the NPV originally calculated from the costs and benefits in
period of the study.

We have assumed a growth rate in perpetuity of 1% per annum for benefits on the
basis that once the infrastructure is in place, benefits should grow at a steady rate into
the future. For costs, we have assumed a 0% per annum growth rate (so flat in nominal
terms, but reducing in real terms), on the basis that most of the infrastructure costs
will have been incurred either by the end of the period, or shortly thereafter, leaving
mostly operating and maintenance costs going forward. These assumptions lead to a
total NPV for the base case of the net benefit including terminal value of €297bn
(and €312bn for the Extended Take-up case):

Total NPVs Rural Urban Total


Euro billion
Base Case 37 260 297
Extended Take-up 37 275 312

These results demonstrate that on a longer term (exceeding the year 2013) the rural
areas have clearly positive NPV’s. This highlights the long term prospective for the
rural area.

The NPV’s of this report are slightly higher than presented in our technical note in
July. One reason is a lower discount rate, due to changes on the financial market. In
addition to that we reviewed our assumptions on the operating expenses numbers.

To put this in context, with the expanded Europe now having a populated of some 455
million people, this result implies that, on average, net benefit per capita over the ten-
year period will be approximately €652 (Extended Take-up: €686), or approximately
€66 per annum (Extended Take-up: €69 per annum).

Terminal value can sometimes appear to be overly optimistic given that it is based on
forecasts a long way into the future. We have thus calculated this value using different
growth rates in perpetuity to demonstrate how the NPV might differ with more or less
conservative assumptions. These are shown in section 6.2.4 below (Sensitivities).

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6.2.3 NPV cost: benefit ratios


An alternative and perhaps more appropriate method of measuring net benefit is in a
ratio of benefit to costs (NPV of the benefits divided by the NPV of the costs). This
ratio is 1.69:1 for the base case and 1.68:1 for the Extended Take-up case, taking into
account the benefits and costs accrued in the period after 2013. A ratio of 1.69x
implies that the NPV of benefits is 69% higher than the NPV of costs. In addition to
the ratio for the total NPV we did a separate calculation for the ratios for urban and
rural areas with the following results:

NPV Ratios Rural Urban Total


Base Case 1.32 1.83 1.69
Extended Take-up 1.29 1.83 1.68

The same calculation looks less optimistic if you take only the first ten years into
consideration as demonstrated in the table below:

NPV Ratios Rural Urban Total


2004-2013
Base Case 1.13 1.70 1.55
Extended Take-up 1.11 1.69 1.53

On the basis that the case for public sector support of broadband rollout across the
entire European Union was always going to be marginal, this should be regarded as a
strongly positive ratio. This benefit ratio is however significantly lower in rural areas
compared to urban. The ratio in the rural areas is 1.13x in the period between 2004-
2013, indicating a much more marginal case for investment in those regions. A ratio
of up to 1.32x for rural regions can be derived taking into account the more material
net benefits estimated to arise in the period after 2013. The lower ratio in rural areas
implies a much more marginal case for market forces providing broadband, and
supporting the case for public sector funding if the objective of offering up to 100%
availability is to be achieved.

Given the many different assumptions that drive this ratio, we have performed
sensitivities to demonstrate how it may differ according to more or less conservative
assumptions on discount rate and terminal growth rates. These are again shown in
section 6.2.4 below. The lower ratios evident in the extended take-up scenario are
reflective of the higher costs of providing connectivity to the additional users in rural
areas, compared with the incremental benefits experienced from the increased take-up.

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In the Appendix D we provide further detailed results of our analysis. These results
include:

• NPV’s of net benefits per country group

• NPV’s of net benefits per country

6.2.4 Sensitivities
For this report showing the preliminary results of our study, we included sensitivities
based on different assumptions on the discount rate and terminal perpetuity rates for
both cost and benefits applied in the calculation of the base case cost benefit ratio and
NPV (sensitivities calculations for the Extended Take-up case are shown in the
Appendix of this report).

Despite the detailed rationale for our selection of the discount rate, as described in
Section 5, this calculation is, by definition, not an exact science. The same might be
said of the decision to select perpetuity rates for the growth of costs and benefits of
1% and 0% respectively for the purposes of calculating a terminal value. The tables
below show how the cost benefit ratios and NPV’s of the net benefit may vary
according to changes in both the discount rate and terminal perpetuity rate. The base
case assumptions are highlighted in grey.

6.2.4.1 Cost Benefit Ratio sensitivities


The following tables below show how the benefit:cost ratio may vary according to
changes in both the discount rate and terminal perpetuity rate.

Cost Benefit Sensitivity Analysis, Base Case (Perpetuity Rates)


(Benefits/Costs) Perpetuity Rate (Costs)
2 -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
0.0% 1.73 1.67 1.60 1.52 1.45 1.37 1.29
0.3% 1.77 1.71 1.64 1.56 1.48 1.40 1.32
0.5% 1.82 1.75 1.68 1.60 1.52 1.44 1.35
0.8% 1.87 1.80 1.72 1.65 1.57 1.48 1.39
Perp. Rate 1.0% 1.93 1.85 1.77 1.69 1.61 1.52 1.43
(Benefits) 1.3% 1.98 1.91 1.83 1.75 1.66 1.57 1.47
1.5% 2.05 1.97 1.89 1.80 1.71 1.62 1.52
1.8% 2.12 2.04 1.95 1.86 1.77 1.68 1.57
2.0% 2.20 2.11 2.02 1.93 1.84 1.74 1.63
Discount rate: 7.07%

The ratios vary significantly if you apply changes to the perpetuity rates (table above)
and/or the discount rates (table below). However the ratios are in all cases larger than
1.0x, which implies that the NPV of benefits exceeds that of costs in all analysed
cases.

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Cost Benefit Ratio Sensitivity Analysis, Base Case (Pertpetuity/Discount Rates)


(Benefits/Costs)
Discount Rate
1.69 5.57% 6.07% 6.57% 7.07% 7.57% 8.07% 8.57%
0.0% 1.52 1.52 1.52 1.52 1.52 1.53 1.53
0.3% 1.57 1.57 1.57 2 1.56 1.56 1.56
0.5% 1.63 1.62 1.61 1.60 1.60 1.59 1.59
0.8% 1.70 1.68 1.66 2 1.64 1.63 1.62
Perp. Rate 1.0% 1.77 1.74 1.71 1.69 1.68 1.66 1.65
(Benefits) 1.3% 1.85 1.81 1.77 2 1.72 1.71 1.69
1.5% 1.94 1.88 1.84 1.80 1.77 1.75 1.73
1.8% 2.04 1.97 1.91 2 1.83 1.80 1.77
2.0% 2.15 2.06 1.99 1.93 1.89 1.85 1.82
Perpetuity Rate (Costs): 0%

6.2.4.2 NPV sensitivities:

NPV Sensitivity Analysis, Base Case (Pertpetuity/Discount Rates)


Billion Euro Discount Rate
297 5.57% 6.07% 6.57% 7.07% 7.57% 8.07% 8.57%
0.0% 296 268 244 224 206 191 178
0.3% 326 292 264 240 220 202 187
0.5% 359 318 285 258 234 215 198
0.8% 395 347 308 276 250 228 208
Perp. Rate 1.0% 436 379 333 297 267 241 220
(Benefits) 1.3% 481 413 361 319 285 256 233
1.5% 531 452 391 343 304 272 246
1.8% 588 495 425 369 326 290 260
2.0% 654 544 462 398 349 309 276
Perpetuity Rate (Costs): 0%

Similar to the ratio analysis above, this sensitivity analysis shows that the NPV’s vary
significantly if you decrease or increase the discount rate. A change in the discount
rate of 0.5% results in a change of more than 10% of the NPV.

NPV Sensitivity Analysis, Base Case (Perpetuity Rates)


Billion Euro Perpetuity Rate (Costs)
297 -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
0.0% 275 260 243 224 202 176 145
0.3% 291 276 259 240 218 192 161
0.5% 309 294 277 258 235 209 179
0.8% 328 313 296 276 254 228 197
Perp. Rate 1.0% 348 333 316 297 274 249 218
(Benefits) 1.3% 370 355 338 319 297 271 240
1.5% 394 379 362 343 321 295 264
1.8% 421 406 389 369 347 321 291
2.0% 450 435 418 398 376 350 320
Discount rate: 7.07%

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The table above demonstrates the degree of uncertainty of the results if you change
assumption for the period following 2013. Changes in the perpetuity rates for benefits
and costs after 2013 can result in NPV’s in the range of Euro 150 – 400 Billion.

6.3 Conclusions
Drawing on the outputs of each of the preceding tasks, we have formulated the
following key conclusions of our study:

• Our analysis indicates a total general benefit:cost ratio of 1.69x for the provision
of broadband services across the European Union, taking into account the greater
net benefits accruing after 2013. This implies that the NPV of the benefits is 69%
larger than that of the costs and thus should be regarded as a strongly positive
ratio as it suggests that the rewards of rolling out infrastructure to bridge the
digital divide in Europe are likely to be substantially greater than the investment
required to do so.

• This benefit ratio is however significantly lower in rural areas compared to


urban. The ratio in the rural areas is 1.13x in the period between 2004-2013,
indicating a much more marginal case for investment in those regions. A ratio of
up to 1.32x for rural regions can be derived taking into account the more material
net benefits estimated to arise in the period after 2013.

• The majority of unmet demand – areas which are not covered by terrestrial
networks - for broadband in Europe is forecast to be in the rural regions. Given
the likelihood that commercially acceptable returns on investment in broadband
networks in these areas will not be forthcoming for at least 10 years, the private
sector is unlikely to be persuaded of the commercial merits of rolling out
terrestrial broadband networks into them, despite the fact that these areas hold the
key to bridging the digital divide in Europe. As a result, between 4.5m and 7m
would-be users of broadband services are expected to remain unserved.

• It is estimated that the optimal technology mix for extending broadband


availability across Europe over the next 10 years will be predominantly through
ADSL, Broadband Fixed Wireless Access (BFWA) and Satellite.

• The total Net Present Value of the net benefits achieved from the combined
urban and rural regions, including a value for future costs and benefits after 2013,
is estimated at €297bn, or approximately €66 per annum for each head of
population in the newly extended Europe.

• The potential role of satellite in bridging the digital divide across Europe may be
key if the objective of offering near 100% connectivity across all the EU is to be
achieved. It is estimated that satellite may prove to be the optimal method (in
terms of financing and speed of rollout) to meet the demand from many of the

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4.7m to 7m unserved users across Europe, especially those in the most


challenging locations. Only 1m of these otherwise unserved users could be
carried by existing satellite systems; larger numbers would require additional,
more cost-efficient systems.

• The preliminary results of this Cost Benefit Analysis have highlighted that, as
anticipated, there remains a sizeable demand for broadband within Europe that is
unlikely to be met by market forces in the medium term (mostly in rural areas). A
logical next step will be to examine more deeply the extent of this gap in
broadband provision, highlight potential solutions to filling the gap and prepare
business plans for projects to put the optimal solutions into practice.

The results of the calculations are based on detailed market analysis and knowledge of
the sector, however as demonstrated through the sensitivity analysis there is potential
for a degree of variation in these results, and they should thus not be used for key
decision making prior to be scrutinized in more detail.

We have analysed the rural regions in more detail with the following conclusion:

Total results: The results show higher benefits and costs for the urban regions in
comparison to the rural regions. This is because the largest countries have very large
urban populations (up to 80% of total population). The detailed analysis in our report
also highlights that total costs exceed total benefits for the initial years under study,
with negative net benefits evident in the first 3-5 years of the period of measurement.
This is due to the time lag of generating incremental benefits following the high level
of investment in infrastructure in those years.

Per subscriber: The benefits per subscriber are comparable for rural and urban regions,
however the costs per subscriber are significantly higher in rural areas due to the
remote location of the subscribers. Therefore the net benefits per subscriber are, in
the short term, negative in rural areas. This implies that costs exceed benefits in that
period, and suggests that a requirement for public sector support is likely to achieve
the availability scenarios of our study.

Ratios: The difference in the ratios between urban and rural areas shows that the net
benefits in the rural areas are significantly lower than in urban areas. The ratios in
rural areas are closer to 1.0x, implying a much more marginal case for market forces
providing broadband in rural areas.

The results highlight the likelihood that public sector support will be required if the
EU is to meet the objective of offering up to 100% broadband availability across
Europe, with particular focus on the rural areas.

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7 Framework for the preparation of a business plan


Drawing on the conclusions of this study, we outline in this section a framework for
the next phase of work, which will comprise the creation of a detailed business plan
for the implementation of the optimal technical deployment strategy across an
extended Europe.

This business plan preparation includes requirements to cover the following issues:

• Analysis of the relationship between market-driven (and financed) rollout and


requirements for public sector funding;

• Consideration of the potential funding solutions for the rollout, including:

− Regional funds

− National subsidies

− EU subsidies

− Private sector investment

• Consideration of optimal procurement options for each technology

The Business Plan phase should also consider in more detail the dynamic between
public and private funding of broadband access. It will be important for detailed
consideration to be given to the need for public sector subsidies in the case where the
public sector itself is one of the beneficiaries of widespread broadband access (e.g.
through low cost delivery of education or healthcare services). In addition, if there are
indirect social benefits (e.g. through social cohesion or wider political participation),
there may be a further rationale for public intervention.

7.1 Background and Objectives


There is a clear strategic case for the European Union to promote a broadband rollout
across Europe to close the Digital Divide. The analysis done to date also suggests that
there are strategic benefits and overwhelming economic benefits for Europe in such a
project, primarily for users but also for producers and service providers.

However, the broadband sector is still at the stage where there are uncertainties about
the market and cost projections on which provisional economic and financial
conclusions have been based. The Commission itself and Member States would like a
greater degree of confidence on these points before going to the development stage
and incurring significant public expenditure. It is also important that the development

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phase should be based on clear plans for securing private sector involvement, which
are feasible, attractive to the private sector, and likely to deliver value for money.

The main objective of the next phase of this project is therefore the development of a
business plan for broadband rollout to provide a basis for approval by the ESA and the
EC, and to act as a launch pad for development, procurement and implementation.

7.2 Issues
It is important that the next phase deals with all issues, as they arise, to which the
analysis could be sensitive. In our view the most important issues are likely to be:

• Validating assumptions on market demand for each technology and application.


On this basis reasonable forecasts then need to be confirmed about potential
ranges of income focussing particularly on the global market for the broadband
operator. The critical factor will be the potential connectivity and take up. The
reasonableness of assumptions on the systems architecture and the costs then
need to be checked.

• Using these revenue and cost forecasts, the next phase of work needs to establish
a credible Base Case and risk analysis to provide the basis for two sets of
conclusions;

− an economic Cost Benefit Analysis drawing on the considerable work done


to date and summarised in the Commission’s working paper, so that the
public sector as a whole can see the economic and social arguments for
proceeding with the project;

− a detailed financial business plan, based on which conclusions can be


reached about the prospective viability of the venture to the private sector
on different assumptions about public sector contribution.

• The business plan will also be a critical tool for considering the different
institutional structures and procurement methods that could be used, including a
Public Private Partnership (“PPP”). Subject to the cash flow projections and risk
analysis we expect there to be potential for the public sector to develop a Project
through a PPP and private sector Special Purpose Company. But alternative
scenarios, including a Joint Operating Company in which the public sector is
more involved, and potentially a Public Operating Company, also need to be
considered depending on the outcome of the financial analysis.

7.3 Our Approach


We outline below our approach to the development of the business plan.

The scope of work would include:

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A detailed analysis of unmet demand for Broadband in European countries

• Building on the results of this Cost Benefit analysis, the next phase of work will
include deeper analysis of likely provision of broadband by market forces in
order to better understand and quantify the likely unmet demand in Europe. More
detailed consideration of demographics, ICT literacy, user desires and ability /
willingness to pay for broadband services (as opposed to narrowband) will also
be important. This analysis will have as an output, a detailed forecast of demand
unmet by market forces, and a proposal by country of the optimal technology to
reach this demand.

Preparation of a business plan for optimal technical solutions for unmet broadband
demand

• This will include technical scoping of the solutions, objectives of the project (i.e.
size and location of market to be addressed, rationale for technical scoping etc),
capital and operating cost forecasts, and revenue forecasts based on likely trend
of broadband subscription costs over the period of measurement and the potential
need for financial public sector support (or subsidy) to assist the private sector to
deliver the project. A key component of the preparation of the forecast revenue
stream will be consideration of the value chain in the provision of broadband
services depending on the technical solution, and in turn, focusing on the
mechanism for revenue generation.

Consideration of the potential synergies with National Broadband programmes and


funding solutions for the rollout

Given the pan-European nature of such a project, it will be vital for this study to
consider how Member States National Broadband strategies and funds could support
or interlink with a proposed EC/ESA programme to assist on reaching those areas
forecast not to be reached by market forces in the medium term. The analysis should
include examining the role of each of the following sources of funds for the project:

• Regional funds

• National subsidies

• EU subsidies

• European Investment Bank

• Private sector investment (debt and equity – potentially through a “PPP”)

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Analysis of the case for public sector ‘support’ for additional rollout

Using the output from the analysis above, as well as the cost benefit arguments from
this study, this will include consideration of the implications of any proposed project
for state aid, as well as the cost savings that could be attributed to such a project where
the public sector itself is one of the beneficiaries of widespread broadband access (e.g.
through low cost delivery of education or healthcare services). In addition, if there are
indirect social benefits (e.g. through social cohesion, ease of knowledge sharing or
wider political participation), there may be a further, potentially much more
compelling rationale for public intervention.

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Appendix

A. Existing level of broadband connectivity across Europe

B. Combined system and user costs of a broadband connection

C. Country and region Profiles

D. Cost benefits for broadband connectivity across Europe

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