Economic Analysis of Networking Technologies for Rural Developing Regions*

Mubaraq Mishra

Berkeley Wireless Research Center

*Joint work with Tom Du, Dick Filippini, John Hwang, Lakshminarayanan Subramanian and Reza Moazzami

Motivation

The business motivation: Is there a business case for providing connectivity to rural populations in developing regions?

Interested in the financial viability of the entire eco-system

The technology motivation: Can economic analysis help us determine key technological developments needed to provide low cost connectivity?

Agenda

Akshaya case studyFinancial Analysis of AkshayaExtending the Akshaya Analysis Conclusions

Akshaya: A Case study

Joint project between the State of Kerala in India and Tulip ITWireless IP network set up in the district of Malappuram – 630 eCenters in allBackhaul and last mile links are based on proprietary technologies1 center for every 2000 families

Vettekkod

Kizzisary

Chekkod

PallurkottaTavanoor

Kallarakkunnu

Vangalam

Arikkod

Nilambur

Kalpakanchery

Kakkancherry

Pullamkode

Melmuri

Malappuram

Vivekananda

MEA

PTM

POP

22

6

2

5

12

5

25

236

8

17

30

3

2324

6

424

10

630 No of Akshaya centres connected

20

8

3

5

7

8

10

5

4

16.8 km

Bharti

3.04 km

7.75km

4.5 km

3.48 km

17.5 km

8.5 km

22.3 km

15.68 km

22.5 km

3.5 Km

14.53 km

11.5km3.5km

Sub POP

Akshaya Network Setup

CISCOSYSTEMS

Load Batte ryLineOn On

BatterySmartBoost

ReplaceBa ttery

Test

Load BatteryL ineOn On

BatterySmartBoost

ReplaceBatte ry

Test

CISCOSYSTEMS

Pop

Sub-Pop

Backhaul Radios

Access Network Base Stations

Access Network Subscriber units

CPE Equipment

UPS/Generator/Battery

Access Network

Pop - Hosts backhaul links and Access Base stationAkshaya Center– Kiosk managed by entrepreneurSub-pop - AC which also serves as a POP. Relay - Backhaul relay tower

Technologies consideredAccess Technologies

CDMA450WipLL WiMax

X

X

XXWiFi(Omni)

Bac

khau

l Tec

hn

olog

ies

WiFi(directional)

Fiber

VIP

Total Costs for network deployment

WiFi/WiMax is the most economically viable solution

Fiber/WiMax is the least economically viable

For Wireless, last mile costs dominate backhaul costs

OpEx is huge !

CapEx for network deployment

WiFi/CDMA450 has the lowest deployment

Largest cost for fiber is installation

OpEx for network deployment

WiFi/CDMA450 suffers from recurring spectrum lease cost

Termination costs for a large portion of the OpEx

Conclusions for AkshayaWiFi with directional antennas + WiMax has most attractive economics.WiFi/CDMA450 has lowest cost of deployment.Largest cost for Fiber is installation.Wireless backhaul (both WiFi and VIP) technologies have at most 1/8 the backhaul CapEx VS FiberLargest component of the capital investment for providing connectivity is the cost of the end-user devices.Cost of backhaul/access radio equipment on towers is miniscule

Extending the AkshayaAnalysis

Flat Terrain: If tower heights could be halved: IRR jumps by 1.8%

Lower Population density: Coverage area can be doubled : IRR jumps by ~3%

Cheaper end devices: PC costs can be halved : IRR jumps by ~10%

Extending the AkshayaAnalysis: Handset Scenario

Base case assumptionsConvert the 630 centers into cellular handset retailers6 CDMA450 Base-stationsStart at 2 min usage increasing (by 1 min each year) to 6 min usage per day per subscriberCharge $0.02 per minute~100,000 handsets (~1.58% penetration)

With recurring Spectrum costs: Can subsidize handsets up to $38 each to breakeven With no recurring Spectrum costs: Can subsidize handsets up to $45 each to breakeven

Regulatory Effects (spectrum, duties, etc.)Regulation costs

Upfront licensing fees Recurring spectrum license fee (8%-12% of adjusted gross revenue in India) Custom duties on wireless/PC/Handset Rights of ways costs (Tower lease etc)Termination charges

Total costs regulation costs for the WiFi/WiMaxscenario are 45% of the CapEx and 5 year OpEx

Eliminating regulatory costs would increase the IRR by 74.5%.

ConclusionsEntrepreneur can setup a Rural Wireless network and obtain an attractive 40% IRR Long haul wireless technologies incur must lower cost/unit of demand than FiberBackhaul and Access Point Radio cost is small -hence it makes sense to make more expensive radios if we can improve coverage or reduce power dissipation. Costs linked to regulatory policies constitute a substantial portion of the overall network cost structure

Q & A

Appendix – Comparison of Technologies

Equipment required based on technology

318/16/0WipLL+Fiber

3 (includes redundancy)3/3/0CDMA450+WiFi

318/16/0WiMax+WiFi

318/16/0WipLL+VIP

Average Number of Links per POP/sub-

POP

Number of POPs/Number of sub-POPs/Number of Relay

POPs

Technology

Financial Model - AssumptionsInterested in the financial viability of the entire eco-systemRevenue/Cost

Charge $0.02 per minuteInterconnection termination fee of $0.005 per minuteNetwork utilization starts at 20% grows at 15% per year

OtherPCs cost $500 each3 PCs per centerDiscount rate of 10%

Akshaya Business ModelTulip provides and maintains connectivity to Akshaya Center (AC)Micro loan (2L/center) to local entrepreneur for PC (min. 5 PCs per center) to run and operate ACRevenue model for Akshaya

Monthly fee from AC ($20/month)Government officesCommercial customers (insurance, banks, car manufacturers., etc)

1st family member trained for free, each additional family charged a small fee by entrepreneurTraining subsidized by government

Discussion: Handset Scenario

Base case assumptionsConvert the 630 centers into cellular handset retailers6 CDMA450 Base-stationsStart at 2 min usage increasing (by 1 min each year) to 6 min usage per day per subscriberEach CDMA cell tower with 6 sectored antennas can cover 1000 customersNo upfront spectrum auction cost for 450 MHz bandCharge $0.02 per minute

Handset resultsKey results

At ~100,000 handsets (~1.58% penetration), can subsidize handsets up to $38 each to breakevenEach base station can handle up to 69 simultaneous calls

Revenue (year 5) 4,300,128$ OpEx (year 5) 1,792,285$ Total Upfront CapEx 184,290$

Backhaul 25,170$ Last Mile (Access) 159,120$

Total Annual Handset Capex 746,550$ NPV 689,483$ IRR 28.4%

Handset results (no spectrum costs)

Assume no spectrum costsAt ~100,000 handsets (~1.58% penetration), can subsidize handsets up to $45 each to breakevenEach base station can handle up to 69 simultaneous calls

Revenue (year 5) 4,300,128$ OpEx (year 5) 1,319,271$ Total Upfront CapEx 184,290$

Backhaul 25,170$ Last Mile (Access) 159,120$

Total Annual Handset Capex 746,550$ NPV 1,378,658$ IRR 44.8%

Market size opportunity

China IndiaRural Population 783,000,000 745,000,000 Total Addressable Area (sq km) 4,663,205 3,166,285

Number of Centers 78,300 74,500 Number of PCs 234,900 223,500 Number of BaseStations ($1000 ea) 45,299 30,758 Number of subscriber units ($250 ea) 78,300 74,500 Number of backhaul radios ($500 ea) 90,598 61,516

$ value 227,623,000$ 191,891,000$

Total (million) 419.51$

( 5 people per family, 1 center for every 2000 families, 3 PCs/center)

Value chain

Network design and deployment

Rights of way:Spectrum, towers

Networkequipment

Network operation and maintenance

Billing andcustomer support User devices

Services andapplications

Classification of Telecommunication markets

Key factors: Population densityPurchasing power per userBandwidth demand per user

Urban/developed markets: High Pop density, High purchasing power, high BW demand => Fiber

Rural/developed markets: Low Pop density, High purchasing power, high BW demand => ?

Rural/developing markets: Low Pop density, Low purchasing power, low BW demand => ?

Rural Connectivity Market

Individual purchasing power is low but community purchasing power is highRural networks are coverage constrained while Urban networks are capacity constrainedDemand is difficult to forecastDifficult Markets

Low Literacy Markets are hard to reach, disorganized, and very local in nature. Lack of credit also impedes market development.

Implication: Sharing of devices to reduce cost

NPV Sensitivity Analysis(Network utilization vs. Charge per minute)

A minimum price of $.02 is needed for positive IRR.

NPV Sensitivity Analysis(PC cost vs. # of PCs per center)

A minimum of 2 PCs are needed to generate enough demandfor positive IRR

Basic Network Setting

PeeringPoint

AccessNetwork

AccessNetwork

AccessNetwork

Kiosk

Kiosk Kiosk

T1/T3City/Internet

Backhaul network

POPS

Rural distribution Network

Basic Economic Terms

Capital expenditure (CapEx) Tower costBackup power equipment costInstallation costsRadios/Networking/PC costUpfront Spectrum cost

Operational expenditure (OpEx)SalariesMaintenancePower costRecurring Spectrum lease cost

Basic Economic Terms

Net Present Value (NPV) – Current value of future transactions at given Rate of Return

Internal Rate of Return (IRR) - Discount rate ‘r’ for which NPV = 0

Economic Analysis of Networking Technologies for Rural Developing Regions*MotivationAgendaAkshaya: A Case studyAkshaya Network SetupTechnologies consideredTotal Costs for network deploymentCapEx for network deploymentOpEx for network deploymentConclusions for AkshayaExtending the Akshaya AnalysisExtending the Akshaya Analysis: Handset ScenarioRegulatory Effects (spectrum, duties, etc.)ConclusionsQ & AAppendix – Comparison of TechnologiesEquipment required based on technologyFinancial Model - AssumptionsAkshaya Business ModelDiscussion: Handset ScenarioHandset resultsHandset results (no spectrum costs)Market size opportunityValue chainClassification of Telecommunication marketsRural Connectivity MarketNPV Sensitivity Analysis(Network utilization vs. Charge per minute)NPV Sensitivity Analysis(PC cost vs. # of PCs per center)Basic Network SettingBasic Economic TermsBasic Economic Terms