© 2008 Marvin A. Sirbu 1

© 2008 Marvin A. Sirbu 1

CarnegieMellon

FTTx Architectures and Why it Matters for the Open Access Debate

Marvin A. Sirbu

Department of Engineering and Public Policy

Carnegie Mellon University

[email protected]://www.andrew.cmu.edu/user/sirbu/


CarnegieMellon Conclusions Up Front

FTTP networks have significant economies of scale facilities-based competition is unlikely to be

sustainable Service-level competition can exist over shared

network infrastructure Sharing possible at different levels Sharing of dark fiber requires attention to fiber layout

There is great variety in the models of sharing which can be found today

A wholesale-only provider is financially viable It is not necessary to be vertically integrated to be

profitable


CarnegieMellon Outline

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





CarnegieMellon

Facilities based competition – each competitor builds FTTP

network

Central Offices

ServiceProvider A

ServiceProvider B

Home 2

Home 1

Data Link Layer EquipmentATM, Gigabit Ethernet, SONET

Separate Networks

Network 1

Network 2


CarnegieMellon

UNE (LLU) based Competition in FTTP

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

Central Office

ServiceProvider A

ServiceProvider B

Home 2

Home 1

Data Link Layer EquipmentNetwork


CarnegieMellon

Open Access based competition – network owner wholesales transport

capacity

Central Office

ServiceProvider A

ServiceProvider B

Home B

Home A

Common Data LinkLayer Equipment

Network


CarnegieMellon

Sharing Network Infrastructure: Summary

Layer: Shared Infrastructure…

0 Conduit and collocation facilities.

1 (Physical Layer Unbundling)

Dark fiber leasing, or perhaps, Optical Layer unbundling (CWDM or DWDM in PONs)

2 (Data Link Layer Unbundling)

Dark fiber and link-layer electronics at each end. For example, Ethernet-based VLAN, or ATM-based PVCs.

3 (Network Layer Unbundling)

Basic network service provided. For example, IP Layer 3 service over cable using policy-based routing to multiple ISPs


CarnegieMellon

Examples of Sharing at Different Layers

0 Open access to ducts Portugal France

1 Dark fiber at layer 1 Stokab in Stockholm

2 VLAN service at layer 2 UTOPIA Amsterdam Pau


CarnegieMellon

10

Multiple Layer Separation Amsterdam

Source: http://www.citynet.nl/upload/Wholesale-bandwidth-Amsterdam-Citynet.pdf


CarnegieMellon Issues and Problems

If you build a wholesale network, will there be service providers?

Kutztown, PA wanted to do only up to layer 2 and couldn’t find service providers to run over the network

Operations finger pointing between wholesaler and retailer

Provo Utah sold its layer 2 wholesale network to a service retailer arguing that integrated operations are cheaper

Economies of scale Operating company to light the fiber in multiple cities

– Axione

– Packet Front





CarnegieMellon Home Run Architecture

Central Office

Equipment

OLT Port

ONU

Central Office Infrastructure

Dedicated fiber to each Home

Feeder Loop Distribution

Loop

ONU Optical Network Unit OLT Optical Line Termination

Implications for Competition

Physical layer unbundling possible – wholesaler can sell individual fiber

Also supports open access


CarnegieMellon

Central Office

Equipment OLT

ONU


Shared Feeder fiber


Loop

N

1

Remote Node with Active Electronics Equipment

Active Star Architecture


Physical layer unbundling is difficult

requires competitors to collocate electronics at remote node

Must provide feeder fibers for each competitor

Logical layer unbundling possible - supports open access


CarnegieMellon

Curb side Passive Star Architecture (PON)

Central Office

Equipment OLT

ONU


Shared Feeder fiber


Loop

32

1

Curbside Passive Splitter – Combiner

λ

λ

λ

λ

λ

λ


Physical layer unbundling not possible

Logical layer unbundling possible - supports open access

Separate λ’s may be used forData and video


CarnegieMellon WDM PON

λ5

λ3

λ1

λ2

λ4

CentralOffice

EquipmentOLT

ONU


Shared Feeder fiber

Feeder LoopDistribution

Loop

32

1

Passive Splitter –Combiner

λ1, λ2, λ3, λ4, λ5 ... λ32


Physical layer unbundling not possible

Optical layer unbundling possible – wholesaler can sell wavelengths

Also supports open access


CarnegieMellon

Design Considerations in a PON: A Curb-side PON

Splitter 1

Splitter 2

Central OfficeOLT Equipment


PON1

PON2

Neighborhood 2

Neighborhood 1


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


CarnegieMellon

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



Neighborhood 2

Neighborhood 1

Splitter 2

Splitter 1

Aggregation

Fiber Aggregation Point PON supports all models of competition


CarnegieMellon

How many homes should be aggregated

at an Optimal FAP?

OFAP allows deferring investment in OLTs until penetration requires it

FTTH Costs for an Urban Deployment

800

900

1000

1100

1200

1300

1400

1500

1600

0 200 400 600 800 1,000

Number of Homes Aggregated at OFAP

NPV of Cost per Home

Home Run

Active Star

PON

DistributedSplit PONHome RunPON


CarnegieMellon

OFAP as a Real Option to Phase-in New Technologies

GPON CO OLTEquipment


Neighborhood 2

Neighborhood 1

Splitter 1BPON

Splitter 1GPON

BPON CO OLTEquipment

Aggregation

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


CarnegieMellon

OFAP Benefits withan Active Star Architecture

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

Central Office OLT Equipment


Neighborhood 2

Neighborhood 1

Feeder 2

Feeder 1

Central Office OLT Equipment

Aggregation point

RT & OLT tobe deployed as needed

•Larger serving area


CarnegieMellon Sharing in the “Second Mile”

As video becomes dominated by unicast Video on Demand (VOD) metro aggregation network costs soar

In smaller communities, access to regional transport to a Tier 1 ISP is a major barrier to entry

Retail service providers sharing an FTTH access network may also need to share at the metro/regional level in order to be economically viable.

NOAAnet There is a tradeoff with distributed video servers

Sharing a content delivery network (e.g. Akamai) may be an alternative.

– This requires distributed colo space and interconnection

See Han, S. et al “IPTV Transport Architecture Alternatives and Economic Considerations,” IEEE Comm Mag, Feb 2008

Lamb L., “The Future of FTTH – Matching Technology to the Market in the Central Office and Metro Network,” NOC 2008.

NSP, “A Business Case Comparison of Carrier Ethernet Designs for Triple Play Networks,”


CarnegieMellon Regulatory Implications

If regulators want to be able to require dark fiber unbundling, they need to require compatible fiber layout

OFAP PON vs curb-side PON Even larger OFAP for competitive active star

– Need for additional feeder fibers for competitors All architectures support logical layer (“bitstream”)

unbundling IPTV unbundling possible at bitstream layer If video distributed over a separate wavelength, issues of

access to RF multiplex.





CarnegieMellon

Simple FTTH Economics: FTTH Includes Fixed Plus Variable Costs

e.g. for Verizon YE06 Fixed=$850 Variable=$880

Source: http://investor.verizon.com/news/20060927/20060927.pdf

$

Take Rate(R = customers / homes passed)

100%0%

Fixed costs

Cost = Fixed + R * Variable

Slop

e =

avg

cost

Adapted from Friogo, et.al.http://ieeexplore.ieee.org/iel5/35/29269/01321382.pdf


CarnegieMellon Cost Per Subscriber vs Take Rate

0

1000

2000

3000

4000

5000

6000

7000

8000

0% 20% 40% 60% 80% 100%

Take Rate

Cost/Subscriber

Variable Cost Total Cost/Sub

$1730


CarnegieMellon

How Much Revenue to Support FTTH?

One operator estimates $90/month per subscriber $40 for ongoing services cost $50/month to cover capital costs

Assume an average of 10 year lifetime, 5% cost of capital

Fiber lasts 40 years Electronics lasts five years

$50/month can amortize $4700 What if Average Revenue Per User (ARPU) is less? $30/month can amortize $2800



0

1000

2000

3000

4000

5000

6000

7000

8000

0 0.2 0.4 0.6 0.8 1

Take Rate

Cost/Subscriber

Variable Cost Total Cost/Sub Capital at $50/mo Capital at $30/mo

Percent take rate needed to break even

Capital that can be amortized with $50/mo/sub

Capital at $30/mo/sub

Adapted from Frigo et. al.



0

1000

2000

3000

4000

5000

6000

7000

8000

0 0.2 0.4 0.6 0.8 1

Take Rate

Cost/Subscriber

Capital that can be amortized with $50/mo/sub

Adapted from Frigo et. al.

Consumers

Competition

Take Rate


CarnegieMellon Economic Implications:

If revenue available to amortize plant is only $30/month, must reach penetration of > 45%

room for at most 2 facilities-based providers This analysis understates the problem

No customer acquisition (marketing/sales) cost included

– Customer acquisition drives up Fixed costs pushing breakeven penetration higher

Unlikely to see >90% total penetration


CarnegieMellon Regulatory Implications

Facilities-based competition among fiber network providers is unlikely

Economies of scale Regulators should be cautious of waiving open access

requirements in return for investment in fiber Could lead to remonopolization

At best duopoly competition If service competition limited to ISPs which own facilities greatly reduced service level competition

Operators will have Significant Market Power (SMP) Reduced service-level competition raises Network

Neutrality issue


CarnegieMellon

Central Offices

Service Provider A

Service Provider B

Home 2

Home 1

Data Link Layer Equipment

Separate Networks

Network 1

Network 2

Net Neutrality

Can third parties compete with vertically Integrated ISPs?

Apps+

Con-tent

Apps+

Con-tent

Apps+

Con-tent





CarnegieMellon

Central Office

ServiceProvider A

ServiceProvider B

Home B

Home A

Common Data LinkLayer Equipment

Network

Economic Analysis: Motivating Question

Open Access: Network operator provides wholesale transport to service providers

Do sustainable prices exist for an infrastructure-only provider?

Build a supply/demand model and calculate welfare effects for different industry structure models


CarnegieMellon

Structural separation interferes with the ability to price

discriminate

Vertically integrated entity � Can sell 7 bundles: Voice, Data,

Video, Voice-Data, Voice-Video, Data-Video, Voice-Video-Data

� Can set 7 prices

Dark fiber wholesaler� Can sell only dark fiber access

� Can set only one price

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


CarnegieMellon Wholesale Prices and Arbitrage

A dark fiber wholesaler can set only one price A lit fiber wholesaler can set a price for data or video

bandwidth but cannot set a separate price for the bundle

Video bandwidth is sufficient to offer both video and data services to customers, so

Wholesale price of “bundle” bandwidth and “video” bandwidth must be the same


CarnegieMellon We have studied 3 models

Single Service Provider

2-service

Assumptions

FTTP network only network serving marketVoice services are provided over a separate networkFTTP network used to provide only data and video services

Duopoly

2-service

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

Single Service provider

3-service

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


CarnegieMellon Two-service model for the

Wholesale-Retail Split

Demand Model Consumers have different willingness to pay for voice, video and

data services: Willingness to pay for a particular service can be modeled by a statistical distribution for a particular market

There is correlation between the willingness to pay for voice, video and data for one particular consumer: One can imagine a 3-space where the coordinates of each point give her willingness to pay for voice, video and data services

For simplicity, here we assume everyone wants voice – so our demand model is 2-space, where the coordinates of each point give the willingness to pay for data and video


CarnegieMellon

X1=Homes taking service1 (data) at price P1 (Area BDP1P3)X2=Homes taking service2 (video) at price P2 (Area ACP2P3)X3=Homes taking service3 (video and data) at price P3 (Area ACDBZ)

Demand Model..

Willingness to Pay

0

20

40

60

80

100

120

140

160

0 20 40 60 80 100 120 140

Data

Vid

eo

P1

P2

A

BC

D

P3

P3

Z


CarnegieMellon Supply Model

Annualized Fixed cost for wiring up the entire market consisting of X homes = F

Annualized Fixed Cost of installing CPE and drop loop = C0

Annual incremental cost of providing data service (Service 1) per home = C1

Annual incremental cost of providing video service (Service 2) per home = C2

Observation: Marginal Cost of Bundle (C0 +C1+C2) is less than the sum of Marginal Cost of Data (C0 +C1) and Marginal Cost of Video(C0 +C2)

If X1 homes take data service, X2 homes take video service and X3 take both, annual cost of providing service =

F + C0(X1+X2+X3) + C1X1 + C2X2 + (C1 +C2)X3


CarnegieMellon Possible Industry Structures

Vertically Integrated entity (Network owner provides retail service)

‘Verizon’ Model (Profit Maximizing) ‘Bristol’ Model (Welfare Maximizing)

Structurally Separated entities (Network owner, either by regulation or choice, is only a wholesaler. The retail market is assumed to be competitive/contestable)

‘Grant County Profit (GCP)’ (Profit Maximizing layer 2 service wholesaler)

‘Grant County Welfare (GCW)’ (Welfare Maximizing layer 2 service wholesaler)

‘Stockholm Profit (SP)’ Model (Profit Maximizing dark fiber wholesaler)

‘Stockholm Welfare (SW)’ Model (Welfare Maximizing dark fiber wholesaler)


CarnegieMellon Model Results

Not surprisingly, if network owner optimizes Social Welfare (e.g. Bristol) consumers are much better off than if network owner optimizes profit

If network owner optimizes profit, THERE IS VIRTUALLY NO DIFFERENCE in profit for a vertically integrated firm or a wholesaler.

The fact that vertically integrated firm has more flexibility to price discriminate is not important since most households subscribe to the bundle, and wholesaler can extract the same rent.

If there is a large fraction of the population with no interest in broadband data, then vertically integrated firm can do 25% better than a dark fiber wholesaler, but still no better than a lit fiber wholesaler.


CarnegieMellon

3 services model shows less than 5% difference Stockholm and

Verizon profits

0

5

10

15

20

25

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Correlation between Willingness to Pay for Services

Pro

fit

per

ho

me

per

mo

nth

VZ 3 Service

Stockholm Profit 3Service

F=5x104

C0=8C1=20C2=30C3=51= 35σ1= 102 = 45σ2 = 103= 25σ3= 10


CarnegieMellon

Similar profits are attained in spite of a different distribution of

subscribers

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

Industry Structure (Correlation of Willingness to Pay between services)

Nu

mb

er

of

Su

bs

cri

be

rs

Video & Voice

Data & Voice

Data & Video

Triple Play

Voice

Video

Data


CarnegieMellon

What if There Are Competing FTTP Operators?

If services are identical, classic case of natural monopoly

Firm with higher penetration has lower costs Ruinous competition

Having sunk cost in fixed plant, each competitor is willing to price at marginal cost

negative profits Stable competition can exist only if there are

Differentiated services appealing to heterogeneous customer tastes; or

High switching costs


CarnegieMellon Duopoly Model Results

We assume two operators with similar cost structures, one an incumbent, one a new entrant

Assuming video and data services are sufficiently differentiated between competitors, both can survive in the marketplace

If the new entrant is a wholesaler only, or vertically integrated makes no difference in its profit

An incumbent competing against a dark fiber wholesaler is modestly worse off than when competing against a vertically integrated competitor

Wholesaler’s inability to price discriminate forces competitor to reduce price discrimination and lose profit.


CarnegieMellon Model assumptions and caveats

Retail industry assumed to be perfectly competitive and no entry barriers; retailers make zero economic profit

Revenues derived entirely from end customers, not from application service providers

No economies of scope at retail assumed

Incremental costs, Ci , are the same in both vertically integrated and competitive retail cases

Competition should drive down incremental costs of services

Layer 2 costs, C0, are the same whether supplied competitively or by wholesaler

See above


CarnegieMellon Regulatory Policy Implications

Operators, municipalities or communities that build out FTTP and choose to be wholesalers: � (i) can realize sustainable prices,

� (ii) are likely to create greater welfare (due to innovation spurred by retail competition) and

� (iii) are just as likely to recover costs (vis-à-vis vertically integrated entities)

Model results contradict claims by operators that vertical integration is necessary to support investment in FTTP infrastructure regulatory holiday for FTTP investment is unwarranted.


CarnegieMellon Conclusion

What are the different models of competition in FTTP? Facilities based Service level (over shared network infrastructure)

Fiber layout affects options for competition OFAP supports fiber unbundling even for PONs More feeder fibers required for competition

FTTP networks have significant economies of scale Unlikely to support multiple facilities-based providers “Second Mile” sharing also important

A Wholesale Operator can earn profits similar to those available to vertically integrated competitors

It is not necessary to be vertically integrated in order to “earn enough” to pay for the infrastructure


CarnegieMellon For Further Information

http://www.andrew.cmu.edu/user/sirbu/pubs/Banerjee_Sirbu.pdf http://web.si.umich.edu/tprc/papers/2006/648/Banerjee_Sirbu

%20TPRC_2006.pdf http://cfp.mit.edu/groups/broadband/muni_bb_pp.html

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© 2008 Marvin A. Sirbu 1