technical assistance in bridging the “digital divide” - a cost benefit analysis for broadband connectivity in europe - pwc_final_report

EC/ESA Digital Divide CBA – Final Report 6 October 2004 • Quantification of user benefits – from societal and environmental, to economic and industrial; • Understand what benefits are

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

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

GCSE General Certificate of Secondary

SME Small & Medium-Size Enterprises

VSDL Very high speed digital subscriber line

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.

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

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

Some of the issues the Study considered include:

The extent to which Europe (and not the USA) will derive economic benefit from

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

• 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

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

Availability Base Case Extended Case Availability Base Case Extended Case Country Group 1

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

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

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

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

2000-2006

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

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

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

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

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

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

Figure 2-2 Urban population in EU countries

Urban Population

Urban Population

Urban Population

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,

Luxembourg, Netherlands, Austria, Sweden and Malta

Group 3 Spain, Portugal, Estonia,

Cyprus and Slovenia

50% (Estonia, estimate) – 92% (Spain)

Group 4 Czech Republic, Hungary,

Poland, Slovakia, Greece, Latvia and Lithuania

Very low (Greece) – 85% (Lithuania)

Source: Ovum

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

Figure 2-4 Broadband availability by country - 2003

Cable modem DSL * Ovum Estimate

Source: OECD 4 (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

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

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

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

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

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

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

Residential and SoHo - Rural Availability

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

• 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

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

Figure 2-7 Broadband availability assumption – Group 2 countries

Residential and SoHo - Urban Availabity

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

Residential and SoHo - Rural Availability

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

Figure 2-8 Broadband availability assumption – Group 3 countries

Residential and SoHo - Urban Availabity

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

Residential and SoHo - Rural Availability

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Figure 2-9 Broadband availability assumption – Group 4 countries

Residential and SoHo - Urban Availabity

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

Residential and SoHo - Rural Availability

1,000 2,000 3,000 4,000 5,000 6,000

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

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

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

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

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

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

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

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

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

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

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 out of broadband

roll-− 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:

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

• 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

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

Residential and SoHo - Rural Take-up

2,000 4,000 6,000 8,000 10,000 12,000

-2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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

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

Residential and SoHo - Rural Take-up

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

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

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

Residential and SoHo - Urban Take-up

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

Residential and SoHo - Rural Take-up

500 1,000 1,500 2,000 2,500 3,000 3,500

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

Residential and SoHo - Urban Take-up

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

Residential and SoHo - Rural Take-up

200 400 600 800 1,000 1,200

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

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

• 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

Base Case Extended Case Base Case Extended Case Country Group 1

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

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

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

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

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

Group 1 Countries - rural availability and take-up

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

Group 1 Countries - rural unserved market and rural unmet demand

5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000

-2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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

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

Group 2 Countries - rural unserved market and rural unmet demand

5,000,000 10,000,000 15,000,000 20,000,000 25,000,000

-2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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

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

Group 3 Countries - rural unserved market and rural unmet demand

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000

-2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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

Source: Ovum

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

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000

-2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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

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

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

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

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

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:

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

• 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

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

Remote Access Point

Customer access Backhaul to the PoP

Backhaul from

premises PoP

Typical

Options:

Copper - PDH Fibre - xDSL Fibre - IP

Pt - Pt radio BFWA Satellite

Copper - PDH Fibre - SDH Fibre - IP

Pt - Pt radio BFWA Satellite

Twisted pair Fibre xDSL Fibre - IP

Pt - Pt radio BFWA (incl WiFi) 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

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

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

Backhaul distance to core network

DSL + Satellite

DSL + Fibre / submarine cable

DSL + BFWA

DSL + Pt-Pt radio

DSL + Fibre

DSL+ std network

DSL + fibre orHFC + fibre

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

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

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

Remote access point to PoP / exchange

Passive optical network

(requires established fibre

repeater station

Mesh is a complicated solution, and sophisticated planning tools and time for network analysis also need to be taken into account

device, depending on capcity

Bandwidth and distance limited Repeater nodes require power and accommodation, which adds to costs of this solution Up to 10Mbit/s over short distances

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

Figure 3-4 Satellite backhaul

Item Typical capital cost Notes

annum 10Mbit/s: €600,000 per annum

45Mbit/s: €2.5m per annum

155Mbit/s: €5m per annum

Assumes dedicated capacity

3 year lease in all cases

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

Remote access point

PoP/

exchange

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;

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

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

Per port: €100 for basic ADSL

Up to €160 per port for protocol card Typically, €100 per port

multi-5,000-user DSLAM rack

If expected demand is low (fewer than 200–250 customers) it will be cheaper to install a much smaller DSLAM Port prices vary depending on DSL / other standards supported

€10,000 (cabinet-based)

Up to €160 per port for protocol card Typically, €100 per port

multi-200-user DSLAM rack Requires backhaul to exchange Per port cost depends on configuration and features

configured with ADSL line circuits)

Requires backhaul to exchange

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

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

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

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)

In building systems and

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

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

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

10GHz (licensed)

Base station: €30,000

- €50,000 CPE: €800

Maximum 4,000 customers per base station covering 360°

Typical maximum burst 6Mbit/s Typical maximum distance 35km FWA: 2.5–5GHz

(unlicensed)

Base station: €8,500 CPE: €450

Maximum 1,000 customers per base station Maximum burst 926kbit/s; Maximum distance 3km FWA: 26GHz (point-to-

multipoint)

Base station: €60,000 CPE: €1,800

Maximum 1,000 customers per base station covering 360° line of sight

Can provide services up to 100Mbits

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

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

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

Access options 1a) Satellite transponder: €2.5 million/year

1b) Hub station: <€1.7million 2a) 2Mbps link with 4:1 contention ratio: €2,500 /month 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

A transponder can be shared between multiple users (~1–10,000) depending on the service- level agreement

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

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

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

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 associated expense for installation and commissioning

Maintenance, operations and network management systems

Staff and associated expense for ongoing operations

Annualised costs for building, heating, accomodation,

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

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

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

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

Table 8 Country Group 3 rural areas – 512 kbps access technology cost breakdown

Base case - annual cost (euro) per user

Table 9 Country Group 3 urban areas – 512 kbps access technology cost breakdown

Base case - annual cost (euro) per user

Table 10 Country Group 4 Urban areas – 512 kbps access technology cost breakdown

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

Table 11 Country Group 4 Rural areas – 512 kbps access technology cost breakdown

Base case - annual cost (euro) 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