FTTx Architectures and Why it Matters for the Open Access Debate Marvin A. Sirbu Department of Engineering and Public Poli...
Conclusions Up Front <ul><li>FTTP networks have significant economies of scale </li></ul><ul><ul><li>   facilities-based ...
Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures:  impact on competition </l...
Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures:  impact on competition </l...
Facilities based competition – each competitor builds FTTP network
UNE (LLU) based Competition in FTTP <ul><li>Dark fiber based – network owner wholesales dark fiber </li></ul><ul><li>Wavel...
Open Access based competition – network owner wholesales transport capacity
Sharing Network Infrastructure:  Summary Layer: Shared Infrastructure…  0   Conduit and collocation facilities. 1  (Physic...
Examples of Sharing at Different Layers  <ul><li>0 Open access to ducts </li></ul><ul><ul><li>Portugal </li></ul></ul><ul>...
Multiple Layer Separation Amsterdam Source:  http://www.citynet.nl/upload/Wholesale-bandwidth-Amsterdam-Citynet.pdf
Issues and Problems <ul><li>If you build a wholesale network, will there be service providers? </li></ul><ul><ul><li>Kutzt...
Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures:  impact on competition </l...
Home Run Architecture <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling possible  – wholesa...
Active Star Architecture <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling is difficult  </...
Curb side Passive Star Architecture (PON) <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling...
WDM PON <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling not possible  </li></ul><ul><li>O...
Design Considerations in a PON: A Curb-side PON <ul><li>Both OLTs needed if only one home in each splitter group subscribe...
Design Considerations in a PON:  A Fiber Aggregation Point (FAP) PON <ul><li>Fiber Aggregation Point PON supports all mode...
How many homes should be aggregated  at an Optimal FAP? <ul><li>OFAP allows deferring investment in OLTs until penetration...
OFAP as a  Real Option  to  Phase-in New Technologies <ul><li>OFAP also supports flexibility </li></ul><ul><li>in future s...
OFAP Benefits with an Active Star Architecture <ul><li>Higher utilization of RT and OLT ports </li></ul><ul><li>Neighborin...
Sharing in the “Second Mile” <ul><li>As video becomes dominated by unicast Video on Demand (VOD) metro aggregation network...
Regulatory Implications <ul><li>If regulators want to be able to require dark fiber unbundling, they need to require compa...
Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures:  impact on competition </l...
Simple FTTH Economics:  FTTH Includes Fixed Plus Variable Costs <ul><li>e.g.  for Verizon YE06 </li></ul><ul><ul><li>Fixed...
Cost Per Subscriber vs Take Rate $1730
How Much Revenue to Support FTTH? <ul><li>One operator estimates $90/month per subscriber </li></ul><ul><ul><li>$40 for on...
Cost Per Subscriber vs Take Rate Percent take rate needed to break even Capital that can be amortized with $50/mo/sub Capi...
Cost Per Subscriber vs Take Rate Capital that can be amortized with $50/mo/sub Adapted from Frigo  et. al. Consumers Compe...
Economic Implications: <ul><li>If revenue available to amortize plant is only $30/month, must reach penetration of > 45% <...
Regulatory Implications <ul><li>Facilities-based competition among fiber network providers is unlikely </li></ul><ul><ul><...
Net Neutrality <ul><li>Can third parties compete with vertically Integrated ISPs? </li></ul>Apps + Con- tent Apps + Con- t...
Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures:  impact on competition </l...
Economic Analysis:  Motivating Question <ul><li>Open Access:  Network operator provides wholesale transport to service pro...
Structural separation interferes with the ability to price discriminate <ul><li>Vertically integrated entity  </li></ul><u...
Wholesale Prices and Arbitrage <ul><li>A dark fiber wholesaler can set only one price </li></ul><ul><li>A lit fiber wholes...
We have studied 3 models Assumptions <ul><li>FTTP network only network serving market </li></ul><ul><li>Voice services are...
Two-service model for the  Wholesale-Retail Split <ul><li>Demand Model </li></ul><ul><ul><li>Consumers have different will...
X 1 =Homes taking service1 (data) at price P 1  (Area BDP 1 P 3 ) X 2 =Homes taking service2 (video) at price P 2  (Area A...
Supply Model <ul><li>Annualized Fixed cost for wiring up the entire market consisting of  X  homes =  F </li></ul><ul><li>...
Possible Industry Structures <ul><li>Vertically Integrated entity (Network owner provides retail service) </li></ul><ul><u...
Model Results <ul><li>Not surprisingly, if network owner optimizes Social Welfare ( e.g.  Bristol) consumers are much bett...
3 services model shows less than 5% difference Stockholm and Verizon profits F=5x10 4 C 0 =8 C 1 =20 C 2 =30 C 3 =5  1 = ...
Similar profits are attained in spite of a different distribution of subscribers
What if There Are Competing  FTTP Operators? <ul><li>If services are identical, classic case of natural monopoly </li></ul...
Duopoly Model Results <ul><li>We assume two operators with similar cost structures, one an incumbent, one a new entrant </...
Model assumptions and caveats <ul><li>Retail industry assumed to be perfectly competitive and no entry barriers; retailers...
Regulatory Policy Implications <ul><li>Operators, municipalities or communities that build out FTTP and choose to be whole...
Conclusion <ul><li>What are the different models of competition in FTTP?  </li></ul><ul><ul><li>Facilities based </li></ul...
For Further Information <ul><li>http://www.andrew.cmu.edu/user/sirbu/pubs/Banerjee_Sirbu.pdf </li></ul><ul><li>http://web....
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  • FIOS briefing at http://investor.verizon.com/news/20060927/20060927.pdf
  • © 2008 Marvin A. Sirbu 1

    1. 1. FTTx Architectures and Why it Matters for the Open Access Debate Marvin A. Sirbu Department of Engineering and Public Policy Carnegie Mellon University [email_address] http://www.andrew.cmu.edu/user/sirbu/
    2. 2. Conclusions Up Front <ul><li>FTTP networks have significant economies of scale </li></ul><ul><ul><li> facilities-based competition is unlikely to be sustainable </li></ul></ul><ul><li>Service-level competition can exist over shared network infrastructure </li></ul><ul><ul><li>Sharing possible at different levels </li></ul></ul><ul><ul><li>Sharing of dark fiber requires attention to fiber layout </li></ul></ul><ul><li>There is great variety in the models of sharing which can be found today </li></ul><ul><li>A wholesale-only provider is financially viable </li></ul><ul><ul><li>It is not necessary to be vertically integrated to be profitable </li></ul></ul>
    3. 3. Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures: impact on competition </li></ul><ul><li>Economics of FTTP </li></ul><ul><li>Economics of a Wholesale/Retail split </li></ul>
    4. 4. Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures: impact on competition </li></ul><ul><li>Economics of FTTP </li></ul><ul><li>Economics of a Wholesale/Retail split </li></ul>
    5. 5. Facilities based competition – each competitor builds FTTP network
    6. 6. UNE (LLU) based Competition in FTTP <ul><li>Dark fiber based – network owner wholesales dark fiber </li></ul><ul><li>Wavelength based – network owner wholesales wavelengths </li></ul>
    7. 7. Open Access based competition – network owner wholesales transport capacity
    8. 8. 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
    9. 9. Examples of Sharing at Different Layers <ul><li>0 Open access to ducts </li></ul><ul><ul><li>Portugal </li></ul></ul><ul><ul><li>France </li></ul></ul><ul><li>Dark fiber at layer 1 </li></ul><ul><ul><li>Stokab in Stockholm </li></ul></ul><ul><li>VLAN service at layer 2 </li></ul><ul><ul><li>UTOPIA </li></ul></ul><ul><ul><li>Amsterdam </li></ul></ul><ul><ul><li>Pau </li></ul></ul>
    10. 10. Multiple Layer Separation Amsterdam Source: http://www.citynet.nl/upload/Wholesale-bandwidth-Amsterdam-Citynet.pdf
    11. 11. Issues and Problems <ul><li>If you build a wholesale network, will there be service providers? </li></ul><ul><ul><li>Kutztown, PA wanted to do only up to layer 2 and couldn’t find service providers to run over the network </li></ul></ul><ul><li>Operations finger pointing between wholesaler and retailer </li></ul><ul><ul><li>Provo Utah sold its layer 2 wholesale network to a service retailer arguing that integrated operations are cheaper </li></ul></ul><ul><li>Economies of scale </li></ul><ul><ul><li>Operating company to light the fiber in multiple cities </li></ul></ul><ul><ul><ul><li>Axione </li></ul></ul></ul><ul><ul><ul><li>Packet Front </li></ul></ul></ul>
    12. 12. Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures: impact on competition </li></ul><ul><li>Economics of FTTP </li></ul><ul><li>Economics of a Wholesale/Retail split </li></ul>
    13. 13. Home Run Architecture <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling possible – wholesaler can sell individual fiber </li></ul><ul><li>Also supports open access </li></ul>
    14. 14. Active Star Architecture <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling is difficult </li></ul><ul><ul><li>requires competitors to collocate electronics at remote node </li></ul></ul><ul><ul><li>Must provide feeder fibers for each competitor </li></ul></ul><ul><li>Logical layer unbundling possible - supports open access </li></ul>
    15. 15. Curb side Passive Star Architecture (PON) <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling not possible </li></ul><ul><li>Logical layer unbundling possible - supports open access </li></ul>Separate λ ’s may be used for Data and video
    16. 16. WDM PON <ul><li>Implications for Competition </li></ul><ul><li>Physical layer unbundling not possible </li></ul><ul><li>Optical layer unbundling possible – wholesaler can sell wavelengths </li></ul><ul><li>Also supports open access </li></ul>
    17. 17. Design Considerations in a PON: A Curb-side PON <ul><li>Both OLTs needed if only one home in each splitter group subscribes </li></ul>
    18. 18. Design Considerations in a PON: A Fiber Aggregation Point (FAP) PON <ul><li>Fiber Aggregation Point PON supports all models of competition </li></ul>
    19. 19. How many homes should be aggregated at an Optimal FAP? <ul><li>OFAP allows deferring investment in OLTs until penetration requires it </li></ul>
    20. 20. OFAP as a Real Option to Phase-in New Technologies <ul><li>OFAP also supports flexibility </li></ul><ul><li>in future split ratios </li></ul><ul><li>- 10 Gbps GPON, GEPON </li></ul><ul><li>- WDM PONs </li></ul>
    21. 21. OFAP Benefits with an Active Star Architecture <ul><li>Higher utilization of RT and OLT ports </li></ul><ul><li>Neighboring homes can be served by different technology generations </li></ul>RT & OLT to be deployed as needed <ul><li>Larger serving area </li></ul>
    22. 22. Sharing in the “Second Mile” <ul><li>As video becomes dominated by unicast Video on Demand (VOD) metro aggregation network costs soar </li></ul><ul><li>In smaller communities, access to regional transport to a Tier 1 ISP is a major barrier to entry </li></ul><ul><li>Retail service providers sharing an FTTH access network may also need to share at the metro/regional level in order to be economically viable. </li></ul><ul><ul><li>NOAAnet </li></ul></ul><ul><li>There is a tradeoff with distributed video servers </li></ul><ul><ul><li>Sharing a content delivery network ( e.g. Akamai) may be an alternative. </li></ul></ul><ul><ul><ul><li>This requires distributed colo space and interconnection </li></ul></ul></ul><ul><ul><li>See Han, S. et al “IPTV Transport Architecture Alternatives and Economic Considerations,” IEEE Comm Mag , Feb 2008 </li></ul></ul><ul><ul><li>Lamb L., “The Future of FTTH – Matching Technology to the Market in the Central Office and Metro Network,” NOC 2008. </li></ul></ul><ul><ul><li>NSP, “A Business Case Comparison of Carrier Ethernet Designs for Triple Play Networks,” </li></ul></ul>
    23. 23. Regulatory Implications <ul><li>If regulators want to be able to require dark fiber unbundling, they need to require compatible fiber layout </li></ul><ul><ul><li>OFAP PON vs curb-side PON </li></ul></ul><ul><ul><li>Even larger OFAP for competitive active star </li></ul></ul><ul><ul><ul><li>Need for additional feeder fibers for competitors </li></ul></ul></ul><ul><li>All architectures support logical layer (“bitstream”) unbundling </li></ul><ul><ul><li>IPTV unbundling possible at bitstream layer </li></ul></ul><ul><ul><li>If video distributed over a separate wavelength, issues of access to RF multiplex . </li></ul></ul>
    24. 24. Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures: impact on competition </li></ul><ul><li>Economics of FTTP </li></ul><ul><li>Economics of a Wholesale/Retail split </li></ul>
    25. 25. Simple FTTH Economics: FTTH Includes Fixed Plus Variable Costs <ul><li>e.g. for Verizon YE06 </li></ul><ul><ul><li>Fixed=$850 </li></ul></ul><ul><ul><li>Variable=$880 </li></ul></ul><ul><li>Source: http://investor.verizon.com/news/20060927/20060927.pdf </li></ul>$ Take Rate (R = customers / homes passed) 100% 0% Fixed costs Cost = Fixed + R * Variable Slope = avg cost Adapted from Friogo, et.al. http://ieeexplore.ieee.org/iel5/35/29269/01321382.pdf
    26. 26. Cost Per Subscriber vs Take Rate $1730
    27. 27. How Much Revenue to Support FTTH? <ul><li>One operator estimates $90/month per subscriber </li></ul><ul><ul><li>$40 for ongoing services cost </li></ul></ul><ul><ul><li> $50/month to cover capital costs </li></ul></ul><ul><li>Assume an average of 10 year lifetime, 5% cost of capital </li></ul><ul><ul><li>Fiber lasts 40 years </li></ul></ul><ul><ul><li>Electronics lasts five years </li></ul></ul><ul><li>$50/month can amortize $4700 </li></ul><ul><li>What if Average Revenue Per User (ARPU) is less? </li></ul><ul><li>$30/month can amortize $2800 </li></ul>
    28. 28. Cost Per Subscriber vs Take Rate 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.
    29. 29. Cost Per Subscriber vs Take Rate Capital that can be amortized with $50/mo/sub Adapted from Frigo et. al. Consumers Competition Take Rate
    30. 30. Economic Implications: <ul><li>If revenue available to amortize plant is only $30/month, must reach penetration of > 45% </li></ul><ul><li> room for at most 2 facilities-based providers </li></ul><ul><li>This analysis understates the problem </li></ul><ul><ul><li>No customer acquisition (marketing/sales) cost included </li></ul></ul><ul><ul><ul><li>Customer acquisition drives up Fixed costs pushing breakeven penetration higher </li></ul></ul></ul><ul><ul><li>Unlikely to see >90% total penetration </li></ul></ul>
    31. 31. Regulatory Implications <ul><li>Facilities-based competition among fiber network providers is unlikely </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><li>Regulators should be cautious of waiving open access requirements in return for investment in fiber </li></ul><ul><ul><li>Could lead to remonopolization </li></ul></ul><ul><li>At best duopoly competition </li></ul><ul><ul><li>If service competition limited to ISPs which own facilities  greatly reduced service level competition </li></ul></ul><ul><ul><li>Operators will have Significant Market Power (SMP) </li></ul></ul><ul><ul><li>Reduced service-level competition raises Network Neutrality issue </li></ul></ul>
    32. 32. Net Neutrality <ul><li>Can third parties compete with vertically Integrated ISPs? </li></ul>Apps + Con- tent Apps + Con- tent Apps + Con- tent
    33. 33. Outline <ul><li>Models of Competition in FTTP </li></ul><ul><li>Alternative FTTP architectures: impact on competition </li></ul><ul><li>Economics of FTTP </li></ul><ul><li>Economics of a Wholesale/Retail split </li></ul>
    34. 34. Economic Analysis: Motivating Question <ul><li>Open Access: Network operator provides wholesale transport to service providers </li></ul><ul><ul><li>Do sustainable prices exist for an infrastructure-only provider? </li></ul></ul><ul><li>Build a supply/demand model and calculate welfare effects for different industry structure models </li></ul>
    35. 35. Structural separation interferes with the ability to price discriminate <ul><li>Vertically integrated entity </li></ul><ul><ul><li>Can sell 7 bundles: Voice, Data, Video, Voice-Data, Voice-Video, Data-Video, Voice-Video-Data </li></ul></ul><ul><ul><li>Can set 7 prices </li></ul></ul><ul><li>Dark fiber wholesaler </li></ul><ul><ul><li>Can sell only dark fiber access </li></ul></ul><ul><ul><li>Can set only one price </li></ul></ul><ul><li>Does this make a wholesaler less likely to recover costs vis-à-vis a vertically integrated entity? </li></ul>
    36. 36. Wholesale Prices and Arbitrage <ul><li>A dark fiber wholesaler can set only one price </li></ul><ul><li>A lit fiber wholesaler can set a price for data or video bandwidth but cannot set a separate price for the bundle </li></ul><ul><ul><li>Video bandwidth is sufficient to offer both video and data services to customers, so </li></ul></ul><ul><ul><li>Wholesale price of “bundle” bandwidth and “video” bandwidth must be the same </li></ul></ul>
    37. 37. We have studied 3 models Assumptions <ul><li>FTTP network only network serving market </li></ul><ul><li>Voice services are provided over a separate network </li></ul><ul><li>FTTP network used to provide only data and video services </li></ul><ul><li>Market already served by (cable) incumbent when FTTP provider enters </li></ul><ul><li>FTTP and incumbent network used to provide only data and video services </li></ul><ul><li>FTTP network only network serving market </li></ul><ul><li>FTTP network used to provide voice, video and data service </li></ul><ul><li>Single Service Provider </li></ul><ul><li>2-service </li></ul><ul><li>Duopoly </li></ul><ul><li>2-service </li></ul><ul><li>Single Service provider </li></ul><ul><li>3-service </li></ul>
    38. 38. Two-service model for the Wholesale-Retail Split <ul><li>Demand Model </li></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>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 </li></ul></ul>
    39. 39. X 1 =Homes taking service1 (data) at price P 1 (Area BDP 1 P 3 ) X 2 =Homes taking service2 (video) at price P 2 (Area ACP 2 P 3 ) X 3 =Homes taking service3 (video and data) at price P 3 (Area ACDBZ) Demand Model.. P 1 P 2 A B C D P 3 P 3 Z
    40. 40. Supply Model <ul><li>Annualized Fixed cost for wiring up the entire market consisting of X homes = F </li></ul><ul><li>Annualized Fixed Cost of installing CPE and drop loop = C 0 </li></ul><ul><li>Annual incremental cost of providing data service (Service 1) per home = C 1 </li></ul><ul><li>Annual incremental cost of providing video service (Service 2) per home = C 2 </li></ul><ul><li>Observation : Marginal Cost of Bundle ( C 0 + C 1 + C 2 ) is less than the sum of Marginal Cost of Data ( C 0 + C 1 ) and Marginal Cost of Video( C 0 + C 2 ) </li></ul><ul><li>If X 1 homes take data service, X 2 homes take video service and X 3 take both, annual cost of providing service = </li></ul><ul><li>F + C 0 ( X 1 + X 2 + X 3 ) + C 1 X 1 + C 2 X 2 + ( C 1 + C 2 ) X 3 </li></ul>
    41. 41. Possible Industry Structures <ul><li>Vertically Integrated entity (Network owner provides retail service) </li></ul><ul><ul><li>‘ Verizon’ Model (Profit Maximizing) </li></ul></ul><ul><ul><li>‘ Bristol’ Model (Welfare Maximizing) </li></ul></ul><ul><li>Structurally Separated entities (Network owner, either by regulation or choice, is only a wholesaler. The retail market is assumed to be competitive/contestable) </li></ul><ul><ul><li>‘ Grant County Profit (GCP)’ (Profit Maximizing layer 2 service wholesaler) </li></ul></ul><ul><ul><li>‘ Grant County Welfare (GCW)’ (Welfare Maximizing layer 2 service wholesaler) </li></ul></ul><ul><ul><li>‘ Stockholm Profit (SP)’ Model (Profit Maximizing dark fiber wholesaler) </li></ul></ul><ul><ul><li>‘ Stockholm Welfare (SW)’ Model (Welfare Maximizing dark fiber wholesaler) </li></ul></ul>
    42. 42. Model Results <ul><li>Not surprisingly, if network owner optimizes Social Welfare ( e.g. Bristol) consumers are much better off than if network owner optimizes profit </li></ul><ul><li>If network owner optimizes profit, THERE IS VIRTUALLY NO DIFFERENCE in profit for a vertically integrated firm or a wholesaler. </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>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. </li></ul></ul>
    43. 43. 3 services model shows less than 5% difference Stockholm and Verizon profits F=5x10 4 C 0 =8 C 1 =20 C 2 =30 C 3 =5  1 = 35 σ 1 = 10  2 = 45 σ 2 = 10  3 = 25 σ 3 = 10
    44. 44. Similar profits are attained in spite of a different distribution of subscribers
    45. 45. What if There Are Competing FTTP Operators? <ul><li>If services are identical, classic case of natural monopoly </li></ul><ul><ul><li>Firm with higher penetration has lower costs </li></ul></ul><ul><li>Ruinous competition </li></ul><ul><ul><li>Having sunk cost in fixed plant, each competitor is willing to price at marginal cost </li></ul></ul><ul><ul><li> negative profits </li></ul></ul><ul><li>Stable competition can exist only if there are </li></ul><ul><ul><li>Differentiated services appealing to heterogeneous customer tastes; or </li></ul></ul><ul><ul><li>High switching costs </li></ul></ul>
    46. 46. Duopoly Model Results <ul><li>We assume two operators with similar cost structures, one an incumbent, one a new entrant </li></ul><ul><li>Assuming video and data services are sufficiently differentiated between competitors, both can survive in the marketplace </li></ul><ul><li>If the new entrant is a wholesaler only, or vertically integrated makes no difference in its profit </li></ul><ul><li>An incumbent competing against a dark fiber wholesaler is modestly worse off than when competing against a vertically integrated competitor </li></ul><ul><ul><li>Wholesaler’s inability to price discriminate forces competitor to reduce price discrimination and lose profit. </li></ul></ul>
    47. 47. Model assumptions and caveats <ul><li>Retail industry assumed to be perfectly competitive and no entry barriers; retailers make zero economic profit </li></ul><ul><li>Revenues derived entirely from end customers, not from application service providers </li></ul><ul><li>No economies of scope at retail assumed </li></ul><ul><li>Incremental costs, C i , are the same in both vertically integrated and competitive retail cases </li></ul><ul><ul><li>Competition should drive down incremental costs of services </li></ul></ul><ul><li>Layer 2 costs, C 0 , are the same whether supplied competitively or by wholesaler </li></ul><ul><ul><li>See above </li></ul></ul>
    48. 48. Regulatory Policy Implications <ul><li>Operators, municipalities or communities that build out FTTP and choose to be wholesalers: </li></ul><ul><ul><li>(i) can realize sustainable prices, </li></ul></ul><ul><ul><li>(ii) are likely to create greater welfare (due to innovation spurred by retail competition) and </li></ul></ul><ul><ul><li>(iii) are just as likely to recover costs (vis-à-vis vertically integrated entities) </li></ul></ul><ul><li>Model results contradict claims by operators that vertical integration is necessary to support investment in FTTP infrastructure </li></ul><ul><ul><li> regulatory holiday for FTTP investment is unwarranted. </li></ul></ul>
    49. 49. Conclusion <ul><li>What are the different models of competition in FTTP? </li></ul><ul><ul><li>Facilities based </li></ul></ul><ul><ul><li>Service level (over shared network infrastructure) </li></ul></ul><ul><li>Fiber layout affects options for competition </li></ul><ul><ul><li>OFAP supports fiber unbundling even for PONs </li></ul></ul><ul><ul><li>More feeder fibers required for competition </li></ul></ul><ul><li>FTTP networks have significant economies of scale </li></ul><ul><ul><li>Unlikely to support multiple facilities-based providers </li></ul></ul><ul><ul><li>“ Second Mile” sharing also important </li></ul></ul><ul><li>A Wholesale Operator can earn profits similar to those available to vertically integrated competitors </li></ul><ul><ul><li>It is not necessary to be vertically integrated in order to “earn enough” to pay for the infrastructure </li></ul></ul>
    50. 50. For Further Information <ul><li>http://www.andrew.cmu.edu/user/sirbu/pubs/Banerjee_Sirbu.pdf </li></ul><ul><li>http://web.si.umich.edu/tprc/papers/2006/648/Banerjee_Sirbu%20TPRC_2006.pdf </li></ul><ul><li>http://cfp.mit.edu/groups/broadband/muni_bb_pp.html </li></ul>
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