With the unbundling of the local loop, and the award of tenders for the last of the 3.5GHz spectrum, opportunities have been created for smaller New Zealand operators and ISPs to offer new services such as triple play bundles (voice, Internet and video).

So what technology solution offers new players the best business case? LLU or naked DSL using Telecom New Zealand’s local loop, bitstream, or WiMAX using 3.5GHz spectrum? Before leaping in, potential entrants should undertake a systematic examination of the possibilities with careful sensitivity testing of key parameters such as forecast demand levels, costs and service tariffs.

The key differences between the outlays for the three technologies are the very high start-up costs for WiMAX and LLU, and the relatively low start-up costs – but likely higher on-going costs – for bitstream.

The technologies

WiMAX is a wireless access system requiring base stations providing coverage in a similar configuration to mobile network base stations. Our analysis is based on deployment of 4-sectored base stations with a total of 28MHz (2×14 MHz) of spectrum. Note that there is an inverse relationship between channel capacity and maximum range: the larger the range, the lower the capacity.

Local loop unbundling (LLU) requires the service provider to “rent” the required phone lines from the incumbent operator. The lines are disconnected from the incumbent’s network in the exchange and are instead connected to the provider’s own DSLAMs which have been installed in the incumbent’s exchanges. The DSLAMs are connected to the provider’s network via backhaul.

Naked DSL (or bitstream) is similar to LLU except the incumbent provides the DSLAM, and controls connectivity. From the DSLAM, the IP stream is delivered to the provider’s network via a backhaul service.

Is there a business case?

We have undertaken some example scenario analysis of potential triple play services in representative exchange areas within New Zealand, using a number of assumptions on the level of customer take-up. While the results are naturally highly sensitive to the input assumptions, there is evidence that the viability of the business case varies for urban, suburban and rural locations. Unsurprisingly, the best return on investment, for all technologies, is in urban areas, due to the greater customer density. Bitstream generates a similar return in both suburban and rural areas. For both LLU and WiMAX, suburban areas provide a better return than rural areas.

In terms of NPV, in our analysis all three technologies have very similar results for the urban exchange area, with NPV becoming positive in the third year of operation (Exhibit 1). Bitstream will eventually have the lowest NPV because of the high ongoing costs. 

Exhibit 1: Urban exchange area: NPV [Source: Network Strategies]

For our suburban case (Exhibit 2), the high WiMAX and LLU start-up costs are more evident through the very low NPV values in the first two years of the model. By the sixth year (2012/13), WiMAX, which has the most rapid rate of increase, has a slightly higher NPV than the other two technologies. Bitstream has the lowest start-up costs, which results in the NPV for bitstream turning positive in the third year, a year earlier than for the other two technologies.

Exhibit 2: Suburban exchange area: NPV [Source: Network Strategies]

In the rural area (Exhibit 3), the trends seen in urban and suburban areas are even more pronounced: the much lower NPV for WiMAX in the first few years due to the higher capital expenditure required, but with a steeper rise in later years. Bitstream has the highest NPV because of the low start up costs, but the rate of increase is low. LLU has high start up costs, but, like bitstream, also has a low rate of increase. Note that one of the factors driving the slow growth is the lower revenue due to the lower number of customers than for urban or suburban areas. WiMAX is likely to have the highest NPV one or two years beyond the forecast horizon.

Exhibit 3: Rural exchange area: NPV [Source: Network Strategies]

Clearly, operators contemplating the investment decision must take a medium to long term view, and actively seek to maximise the revenue potential of their service offerings. Also, in general, many WiMAX operators will not be able to provide quality video services due to spectrum limitations and lack of suitable site locations. Being able to provide video as part of a triple play package is crucial for any operator wishing to compete directly with ADSL2+. Without triple play, WiMAX must be positioned as a very different value proposition when competing directly with wireline technologies.

Footnote

Our own assumptions and estimates have been used for WiMAX equipment prices, sites, LLU charges and other cost items in the example business case model. These results should therefore not be interpreted as proof that any one technology will provide a better business case than another. Commercial business cases must be based on information appropriate to individual circumstances, including equipment prices offered by vendors.