© 2008 marvin a. sirbu 1 carnegie mellon fttx architectures and why it matters for the open access...
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© 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/
© 2008 Marvin A. Sirbu 2
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
© 2008 Marvin A. Sirbu 3
CarnegieMellon Outline
Models of Competition in FTTP Alternative FTTP architectures: impact on competition Economics of FTTP Economics of a Wholesale/Retail split
© 2008 Marvin A. Sirbu 4
CarnegieMellon Outline
Models of Competition in FTTP Alternative FTTP architectures: impact on competition Economics of FTTP Economics of a Wholesale/Retail split
© 2008 Marvin A. Sirbu 5
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
© 2008 Marvin A. Sirbu 6
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
© 2008 Marvin A. Sirbu 7
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
© 2008 Marvin A. Sirbu 8
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
© 2008 Marvin A. Sirbu 9
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
© 2008 Marvin A. Sirbu 10
CarnegieMellon
10
Multiple Layer Separation Amsterdam
Source: http://www.citynet.nl/upload/Wholesale-bandwidth-Amsterdam-Citynet.pdf
© 2008 Marvin A. Sirbu 11
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
© 2008 Marvin A. Sirbu 12
CarnegieMellon Outline
Models of Competition in FTTP Alternative FTTP architectures: impact on competition Economics of FTTP Economics of a Wholesale/Retail split
© 2008 Marvin A. Sirbu 13
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
© 2008 Marvin A. Sirbu 14
CarnegieMellon
Central Office
Equipment OLT
ONU
Central Office Infrastructure
Shared Feeder fiber
Feeder Loop Distribution
Loop
N
1
Remote Node with Active Electronics Equipment
Active Star Architecture
Implications for Competition
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
© 2008 Marvin A. Sirbu 15
CarnegieMellon
Curb side Passive Star Architecture (PON)
Central Office
Equipment OLT
ONU
Central Office Infrastructure
Shared Feeder fiber
Feeder Loop Distribution
Loop
32
1
Curbside Passive Splitter – Combiner
λ
λ
λ
λ
λ
λ
Implications for Competition
Physical layer unbundling not possible
Logical layer unbundling possible - supports open access
Separate λ’s may be used forData and video
© 2008 Marvin A. Sirbu 16
CarnegieMellon WDM PON
λ5
λ3
λ1
λ2
λ4
CentralOffice
EquipmentOLT
ONU
Central Office Infrastructure
Shared Feeder fiber
Feeder LoopDistribution
Loop
32
1
Passive Splitter –Combiner
λ1, λ2, λ3, λ4, λ5 ... λ32
Implications for Competition
Physical layer unbundling not possible
Optical layer unbundling possible – wholesaler can sell wavelengths
Also supports open access
© 2008 Marvin A. Sirbu 17
CarnegieMellon
Design Considerations in a PON: A Curb-side PON
Splitter 1
Splitter 2
Central OfficeOLT Equipment
Central Office Infrastructure
PON1
PON2
Neighborhood 2
Neighborhood 1
Central OfficeOLT Equipment
Both OLTs needed if only one home in each splitter group subscribes
© 2008 Marvin A. Sirbu 18
CarnegieMellon
Design Considerations in a PON: A Fiber Aggregation Point (FAP) PON
Central OfficeOLT Equipment
Central Office Infrastructure
Neighborhood 2
Neighborhood 1
Splitter 2
Splitter 1
Aggregation
Fiber Aggregation Point PON supports all models of competition
© 2008 Marvin A. Sirbu 19
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
© 2008 Marvin A. Sirbu 20
CarnegieMellon
OFAP as a Real Option to Phase-in New Technologies
GPON CO OLTEquipment
Central Office Infrastructure
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
© 2008 Marvin A. Sirbu 21
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
Central Office Infrastructure
Neighborhood 2
Neighborhood 1
Feeder 2
Feeder 1
Central Office OLT Equipment
Aggregation point
RT & OLT tobe deployed as needed
•Larger serving area
© 2008 Marvin A. Sirbu 22
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,”
© 2008 Marvin A. Sirbu 23
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.
© 2008 Marvin A. Sirbu 24
CarnegieMellon Outline
Models of Competition in FTTP Alternative FTTP architectures: impact on competition Economics of FTTP Economics of a Wholesale/Retail split
© 2008 Marvin A. Sirbu 25
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
© 2008 Marvin A. Sirbu 26
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
© 2008 Marvin A. Sirbu 27
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
© 2008 Marvin A. Sirbu 28
CarnegieMellon Cost Per Subscriber vs Take Rate
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.
© 2008 Marvin A. Sirbu 29
CarnegieMellon Cost Per Subscriber vs Take Rate
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
© 2008 Marvin A. Sirbu 30
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
© 2008 Marvin A. Sirbu 31
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
© 2008 Marvin A. Sirbu 32
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
© 2008 Marvin A. Sirbu 33
CarnegieMellon Outline
Models of Competition in FTTP Alternative FTTP architectures: impact on competition Economics of FTTP Economics of a Wholesale/Retail split
© 2008 Marvin A. Sirbu 34
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
© 2008 Marvin A. Sirbu 35
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?
© 2008 Marvin A. Sirbu 36
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
© 2008 Marvin A. Sirbu 37
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
© 2008 Marvin A. Sirbu 38
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
© 2008 Marvin A. Sirbu 39
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
© 2008 Marvin A. Sirbu 40
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
© 2008 Marvin A. Sirbu 41
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)
© 2008 Marvin A. Sirbu 42
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.
© 2008 Marvin A. Sirbu 43
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
© 2008 Marvin A. Sirbu 44
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
© 2008 Marvin A. Sirbu 45
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
© 2008 Marvin A. Sirbu 46
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.
© 2008 Marvin A. Sirbu 47
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
© 2008 Marvin A. Sirbu 48
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.
© 2008 Marvin A. Sirbu 49
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
© 2008 Marvin A. Sirbu 50
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