Shedding light on the black hole: The roll-out of broadband access networks by private operators

(1)

Shedding light on the black hole

The roll-out of broadband access networks by

private operators

(2)

(3)

Shedding light on the black hole

The roll-out of broadband access networks by

private operators

Proefschrift

Ter verkrijging van de graad van doctor

aan de Technische Universiteit Delft,

op gezag van Rector Magnificus prof.dr.ir. J.T Fokkema,

voorzitter van het College voor Promoties,

in het openbaar te verdedigen op 16 januari 2008 om 10:00

door Maria Leonie Fijnvandraat

Ingenieur in de technische bestuurskunde

(4)

Dit proefschrift is goedgekeurd door de promotor:

Prof.dr. M.L. Mueller

Copromotor: Dr. W.A.G.A. Bouwman

Samenstelling promotiecommissie:

Rector Magnificus,

Voorzitter

Prof.dr. M. L. Mueller,

Technische Universiteit Delft, promotor

Dr. W.A.G.A. Bouwman,

Technische Universiteit Delft,

Copromotor

Prof.dr.ir. W.A.H. Thissen,

Technische Universiteit Delft

Prof.dr.ir. N.H.G. Baken,

Technische Universiteit Delft

Prof. dr. ir. L.J.M. Nieuwenhuis,

Universiteit Twente

Dr. K. Stordahl, MsC,

Telenor Networks

Dr. B.Preissl,

Wirtschaftsdienst ZBW

Prof.ir. W. Dik,

Technische Universiteit Delft,

Reservelid

ISBN 978-90-79878-03-1

Printing: Gildeprint Drukkerijen, Enschede

Published and distributed by: Next Generation Infrastructures Foundation P.O. Box 5015, 2600 GA Delft, the Netherlands

T: +31 15 278 2564 F: +31 15 278 2563 E: info@nginfra.nl I: www.nginfra.nl

This research was funded by the Next Generation Infrastructures Foundation programme.

Keywords: broadband technology, access networks, strategic decision-making, evolutionary paths, multidisciplinary, risk and uncertainty.

Cover photo: The Circinus Dwarf Galaxy (a supermassive black hole, 13 million lightyears away from Earth) Credit: NASA/AURA/STSCI

Copyright © 2008. M.L. Fijnvandraat. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form of by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission in writing from the copyright owner.

(5)

In memoriam

Prof.dr.René Wagenaar 1954-2007

(6)

(7)

Voor mijn lieve oma

***

(8)

(9)

Acknowledgement

Many people have contributed to the realisation of my dissertation. The first person I want to mention is my copromotor. Harry, we worked together for almost a decade now! Fortunately, we still have to write some papers, so we don’t have to end our working relationship abruptly. I want to thank you for all your suggestions, good ideas, and your help to get my dissertation finished. There were moments I saw the broadband market evolving so quickly that I had the feeling of being caught up by it, which, sometimes, made me questioning myself why I was actually doing research in this field. During these moments, you always convinced me of the added value of my work and really stimulated me to go on with the job! You moreover always stimulated me to challenge myself to aim at a higher quality level. I moreover want to thank you for always being there for me and for your interest and support on a more personal level. I will most definitely use that fountain-pen! I also want to thank my professor Milton Mueller. Although we have been working together for only a short time, you really helped me fitting all the pieces of my complex work together and helped me to create a coherent story.

Working in the ICT section of our faculty during all those years always has been a pleasure to me! The nice atmosphere, the openness, the willingness to discuss all kinds of subjects and all the advices regarding my PhD made that I really enjoyed working there.

During the years of working on my research I also experienced much support from friends and family. Mum, dad, thanks for always believing in me no matter what. I also want to thank my brother Arnoud, for always hearing me out, cheering me up and for showing me in person that ‘promotie dips’, as you experienced yourself during your own PhD, can be overcome and will eventually lead to good results! I furthermore want to thank all my close friends for being there, especially during the last half year of my PhD. Geertje, it was so nice to have you as a good friend at the faculty, working on your PhD as well, close by for chats, lunch and coffee breaks! And then some words for my two nimfjes, Dille and Karianne. Dillemeisje, although we are very different in some ways, we are so much alike and I want to thank you for all the laughs we enjoyed together (other people a little bit less but we don’t care) but also for your support during some difficult periods. I am really curious about the way you will appear on the day of my defense, considering the fact that your first reaction to my question whether you would like to be my paranimf was: “O, my god, but what do I have to wear then?!” I am sure you will look fine although I will not – as you hoped for- buy that expensive new suit for you!

(10)

And last, but most definitely not least, my close friend Karianne. Kari, when I had to write down all the good and bad moments we shared, this would result in a book much thicker than this dissertation! You always were a great support and good partner in crime to talk about PhD frustrations but also a close friend to celebrate all PhD highlights like accepted papers, finished chapters and Committee approval. Although our research subjects were so closely related, we managed to visit a conference together only once (and this was when you already had finished your PhD) and we never managed to write a paper together! As a final attempt I now added this as a recommendation for further research. Who knows, maybe somehow, sometime, we will find the time to write this article together but we most likely will just talk about it during one of our evenings in Lust or Square. Thnx, LS!! The good thing of several years of hard working during a PhD project is the feeling of working towards the moment that you finally have managed to do it. Fitting all the pieces together, overcoming difficult moments, and then, noticing that everything more and more becomes clear. Now, writing down the last sentences of my dissertation, a feeling of relaxation, relieve and self-conquest comes over me. On the other hand, however, a feeling of melancholy comes over me as well at this moment, because it also means the end of an era of working towards this final, so much desired result. It is closely comparable to the feeling you experience when coming closer to the end of a good, thick novel that has captivated you for weeks or even months, which, after having read the last pages, makes you leafing back to experience this beautiful end once again…

But now the work is finally done. I have written my last words and I will start my new ‘novel’.

Marieke Fijnvandraat December 2008

(11)

(12)

(13)

Chapter 1 Introduction

1.1 Background and relevance

The Netherlands are among the leading countries in the world when it comes to DSL and Cable connections (TNO, 2007). According to OECD studies, in June 2007, the Netherlands occupied a second position among OECD countries in terms of broadband penetration, including ADSL and cable subscriptions. Of the entire Dutch population, 59% have ADSL connections and 41% cable connections (TNO, 2007). Although market reports refer to these connections as ‘broadband’, in this study they are not considered real ‘broadband’ connections. Before proceeding, we provide the definition of the term broadband used in this study.

Defining broadband The term ‘broadband’ is a relative rather than a fixed concept. It

is based on the actual availability of bandwidth at a certain place at a certain time. Because the available bandwidth changes over time, broadband means different things at different times. In addition, different countries use different definitions (CPB, 2005). For these reasons, the term ‘broadband’ represents a relatively vague concept that can be defined from technological viewpoint and from an economic perspective. Technically, the term broadband usually refers to a specific amount of bandwidth that can be transmitted over a network towards an end-user. Over the last ten years, transmission speeds have increased considerably, which means that the definition of broadband has changed. From an economic point of view, it is possible to take a different perspective and see broadband as an investment that can be used to create added value. Investments in broadband technology include investments in fixed assets like routers, modems, cables and software. Transporting information from one point to another creates added value through services like teleworking, e-learning and e-health. Thus, from an economic perspective, broadband can be seen as a way of generating economic profit (CPB, 2005). However, in order to establish a fixed point of reference, it makes sense to use some sort of working definition related to bandwidth. For this reason we define the concept of broadband as follows:

A connection of at least 10 Mbps symmetrical bandwidth in the local loop

A connection of this quality is assumed to be suitable for today’s available streaming video and audio and high quality online data-sharing applications, which at the moment are among the major emerging applications. Examples of popular applications are YouTube and Rapidshare, which rated 3rd_{and 12}th_{worldwide in}

terms of traffic in July 2008. YouTube is a worldwide website that allows people to upload, tag and share videos, while Rapidshare enables users to upload up to 100 MB files for sharing.

(18)

Although transmission speeds in access networks have increased significantly in recent years, a symmetrical data connection of 10 Mbps is not yet available in the Dutch residential market. In 2007, the predominant download speed in the Netherlands was 1 to 2 Mbps (European Commission, 2008). Although most people have upgraded their Internet connection since 2003 (Dialogic, 2005), research among broadband users (Dialogic, 2007; Vermaas, 2007) shows that customers in the Netherlands do not use high-speed broadband capacities, which means that the Netherlands lag behind when it comes to the roll-out of real broadband technology like optical fiber networks. This is considered a problem by national as well as European governments, because broadband roll-out is expected to be important in economic as well as social terms. In eEurope 2002, the European Commission stated that “Broadband enabled communication, in

combination with convergence of technologies and services will bring social as well as economic benefits. It will contribute to e-inclusion, cohesion and cultural diversity” (European Commission, 2002, p.8). Below, we discuss both the

economic and social relevance of broadband in greater detail.

Economic relevance of broadband “It is widely recognised that the benefits of

broadband in terms of lower transportation costs can be large for an economy in terms of productivity” (CPB, 2005, p.9). “The telecommunication industry, and in particular the broadband market, is changing rapidly, providing customers with more options to exchange sound, video and data. These communication streams are transmitted along networks that become faster, better and cheaper” (CPB, 2005, p.9).

Several market studies (a.o. Gartner, 2002; Criterion Economics, 2003; CEBR, 2003; The Allen Consulting group, 2003; ACIL Tasman, 2004)1_{underline the}

positive relationship between broadband and economic performance. The sources of the economic benefits of broadband are both direct and indirect in nature (Telecommunication Industry Association, 2003, p.6; Price Waterhouse Coopers, 2004).Increased productivity, job creation, increases in wages and efficiency in time and money, the creation of new or spin-off industries and an increase in the demand for computer broadband equipment are significant benefits of the use of broadband technologies. Also, the Netherlands Bureau for Economic Policy Analysis (CPB) states that broadband can stimulate productivity through improvements in production processes, reductions in transaction costs and innovations like new service applications via broadband infrastructures (i.e. content) (CPB, 2005).

(19)

In addition to these direct effects, the economic benefits of broadband can also be attributed to indirect factors like increased e-commerce, reductions in commuting, increased consumption of entertainment and savings in healthcare (Macklin, 2002), as well as increased efficiency in the distribution of goods, services and information.

Social relevance of broadband Broadband is also very relevant from a social point of view. It can be used to improve the quality of a country’s education and health services, bring government closer to society, and provide jobs and prosperity (Firth & Mellor, 2005). Furthermore, broadband creates a favourable environment for private investment and for the creation of new jobs, which in turn will help boost productivity and modernise public services (European Commission, 2002).

Because broadband telecommunication is seen as a source of social and economic gains, the European Union (EU) and other regions are encouraging the deployment of a secure broadband infrastructure (CPB, 2005, p.9). The common objective shared by various EU member states is to accelerate broadband deployment. In specific terms, the EU will support the upgrade and efficiency of technology for optical fiber access networks (European Commission, 2002). In i2010, the eEurope report succeeding eEurope 2005, the development of broadband networks and services is again given a high priority. The main objective for i2010 is defined as “(a) Single European Information Space offering affordable and secure high bandwidth communications, rich and diverse content and digital services” (European Commission, 2005, p.5).

Private investments in broadband local loop roll-out remain below expectations

In spite of the positive expectations with regard to the social and financial benefits of broadband, private investments in fiber local loop networks and broadband applications are still limited, due to the fact that realising broadband roll-out involves high-risk infrastructural investments. First of all, this has to do with the general characteristics of major infrastructural projects, which make the roll-out of broadband networks extremely costly to develop and require high initial investments (de Vlaam en de Jong, 2002). In addition to the generic characteristics of infrastructures, access networks also have specific characteristics. Both aspects are discussed below in greater detail.

Specific characteristics of broadband infrastructure Although infrastructures are

officially designed to satisfy specific social needs, in fact they shape social change in a much broader and more complex way. Telecommunication infrastructures enable us to communicate and exchange information without being troubled by distance. The roll-out of telecommunication networks is comparable to the

(20)

construction of railways, roads and electricity networks, which all share some of the same characteristics. Investments in infrastructures involve high levels of risk because they are extremely costly to develop and require high initial investments, which can only be earned back, if ever, after many years (De Vlaam en De Jong, 2002) because of high initial fixed costs and long construction times. Telecommunication networks have a number of the characteristics of natural monopolies, like indivisibility. The indivisibility of transport infrastructure facilities implies that it is often inefficient to have more than one local supplier of the service. Also, several facilities may be essential to reach customers and/or competitors and access complementary markets. As a result of these characteristics, new entrants experience high entry and exit thresholds (NZier, 2004). For these reasons, infrastructural investments are among the most complex, delicate and risky decisions. They are characterised by high and often unpredictable cost-of-ownership and their benefits are intangible in nature (Renkema, 2000).

The access network: an extra dimension of complexity On top of generic characteristics of infrastructures, access networks have a number of specific characteristics. Other terms used for describing the access network are ‘last mile’, ‘first mile’ or ‘local loop’. The European Commission defines the local loop as “the physical circuit connecting the network termination point at the subscriber's premises to the main distribution frame or equivalent facility in the fixed public telephone network” (2002/19/EC, Art2 sub e). The network behind the local loop is known as the ‘backbone’ or ‘core network’. Core networks consist of high capacity optical fiber cable and are able to transmit high amounts of data at very high speeds. The local loop, on the other hand, consists of other, ‘traditional’, transmission media, like copper twisted pair and coaxial cable, which allow for much lower transmission speeds than optical fiber. For this reason, the local loop is the ‘bottle neck’ with regard to data transmission in the entire network. It can be imagined as a narrow section of a highway that still has to handle all the traffic, almost inevitably causing traffic jams. The same is true when it comes to for the transition from the core network to the access network. Downloading high amounts of data, for example streaming video, within a reasonable time-frame, demands high transmission speeds in the core network as well as large transmission capacity in the local loop. For that reason, the technology deployed in the local loop needs to be upgraded to technologies that provide higher upload and download speeds. The fact that the local loop connects the local switch to people’s individual homes means that all investments that are needed to upgrade this part of the network to allow for higher transmission speeds must be earned back from the money generated by service and access provisioning to individual households. The costs involved include the costs associated with digging, cables, network equipment and network maintenance. In cases where several network operators compete with each other, the revenues earned from access and services from the individual households

(21)

must be divided among the number of operators, which makes the available returns on investments even smaller.

Critical mass and the chicken-egg problem In addition to these infrastructure-related

factors, there are several other problems associated with investing in infrastructure. Infrastructural projects typically do not deliver benefits as such, but rather generate business value through, for example, facilitating innovations. In other words, most of the time social as well as economic benefits do not end up where investments are made (Expertgroep Breedband, 2002). This problem is clearly a case of the chicken or the egg: useful content will not be developed as long as the infrastructure (high-speed broadband networks) is not available, while suppliers will not invest in infrastructure when it is not clear whether or not there will be useful content. Moreover, these investments are characterised by far-reaching consequences in terms of business efficiency, effectiveness, competitive positioning and innovate capacity (Renkema, 2000, p.5).

The demand side In addition to the factors outlined above, difficulties with regard to

infrastructural investments can be found in the demand side of the market. Operators cannot predict with certainty what their returns will be, because the adoption and usage of new technologies are not constant, but evolve over time. Patterns of technology adoption and diffusion are never fully predictable (Vermaas, 2007, p215). We will now look at end-user demand-related factors.

Market demand is an important condition for continuous investment in access networks. End-users are, however, highly unpredictable and for that reason, it is extremely difficult to estimate future demand. Increased system complexity makes operators more dependent on equipment suppliers. This creates uncertainty for network providers about future revenues and makes it difficult to plan long-term investments in access networks.

The Diffusion of Innovation theory (DoI) argues that the adoption of (new) media by later users depends on the presence of other users. Only where there are sufficient users new users will join in (Van de Wijngaert, 2001). The costs of adopting an innovation at the beginning of the adoption cycle outweigh the benefits for the adopters involved. This group of initial investors plays an important role in the development of a technology. The moment that as many initial investors have adopted the technology that it becomes also worthwhile for the other members of a social system to invest, the critical mass has been reached (Bouwman et al. 2005). The importance of reaching a critical mass was already recognised by the European Commission in 1993, which applied diffusion theory in its “White Paper on growth, competitiveness and employment: The challenges and ways forward into the 21st century” (COM(93)700, 05.12.93). It was written in order to stimulate broadband roll-out to realize the social and cultural benefits and calls for “the development of services and applications so as to attain a critical mass sufficient

(22)

for further infrastructural investments and for attracting new users adding to the value of a given network” (RAND Europe, 2003, p.3).

Also Weening (2006) demonstrated that the combination of the ‘chicken-egg’ problem and operators not being able to reach the critical mass is problematic and causes the delay in the roll-out of fiber infrastructure in the Netherlands. In her study on Smart Cities, she concluded about the Dutch fiber pilot project ‘Kenniswijk’: “within Kenniswijk, services and end-user provisions have been realised, but there is barely any infrastructure” (Weening, 2006, p.99). The chicken-egg problem could not be solved. Problems were mainly related to difficulties concerning infrastructure roll-out and insufficient critical mass” (Weening, 2006, p.99-100) .

Additional complexity is caused by a multi-actor, multi-disciplinary environment

In addition to insufficient demand and the complexity caused by the characteristics of infrastructure in general and more in particular by the access network, additional complexity for network operators is caused by the many actors and their individual objectives and interests and the multidisciplinary environment in which they operate. Below, we provide insight into these additional complexities in greater detail.

Multi-actor environment Different actors have different views on how best to

approach the development towards next generation broadband networks. Network providers, equipment suppliers, service operators, wholesale and residential end-users can all be identified as market players in this respect. The current telecom market is a highly competitive one. The situation is made extra complex by the interdependency between the actors involved. All the players in the market influence one another: on the one hand they depend on each other, while on the other hand they have power over each other, resulting in a complex multi-actor network. Greater insight is needed in the interrelationships between these parties and the way they influence the local loop upgrade strategy of network operators. Moreover, the market for broadband is changing quickly and continuously. Typically, traditional network operators have turned into triple-play providers, offering telephony, Internet access and television, which has significantly increased the complexity in the market in which they operate. Network and service operators no longer serving separate markets, but are now tightly interwoven (convergence). These changes in the market and the position of the various organisations within the value chain consequently have an impact on their internal business processes. Not only departments are changed or added when new services are offered, but logistics, billing systems, marketing and supply processes must also be adapted to this new and changed position within the value chain.

(23)

Multi-disciplinary environment In addition to having to deal with competitors, telecom

operators face a range of significant strategic decisions in various domains. In the technological domain, they have to find their way with regard to the many technological possibilities available and the various migration paths towards the interactive broadband future. As far as upgrading their infrastructure network is concerned, operators in the telecom market are faced with strategic choices. To anticipate future increases in demand and keep up with their competitors, operators have to use existing as well as alternative transmission media. Technological developments take place in rapid succession. The life cycles of most broadband access technologies are very short, which makes for a highly dynamic market. There is a broad range of technological options, including upgrading cable connections, implementing new technologies for copper, installing optical fiber networks, roll-out wireless networks or opt in favour of hybrid solutions. The attractiveness of these technologies is determined by how they score with regard to relevant attributes, not only in terms of transmission capacity, but also with regard to reach, compatibility, standardisation, maturity, and technological and geographical scalability. Greater insight is needed into the relevant characteristics of the various available broadband local loop technologies, for instance their future-proofness, transmission capacity, upgrading costs, etc. Moreover, insight is needed into the possible evolutionary paths from the current state of broadband networks towards connections providing 10 Mbps symmetrical and higher bandwidth speeds. In the economic domain, operators have to choose between several investment methods and to deal with many, often large, investments, ROI timeframes and uncertain revenues. In the policy and regulation domain, they have to deal with regulatory regimes and public broadband initiatives, which adds competition to the private market.

To summarise, we can conclude that operators are still struggling with problems that have to do with a lack of service development and adoption (the chicken egg problem) and not being able to reach the critical mass. These problems are related to the cost sensitivity of the access network segment and the high risks and uncertainties in the residential broadband market (Ims et al., 1998). Furthermore, market response, pricing strategies, uncertainty handling, strategic interaction between competitors and external effects influence the economics of telecommunication operator investment projects (Eurescom, 1999). On top of that, telecom operators find themselves in fast changing business environments. Convergence between services and infrastructures has resulted in a much broader and complex playing field with more competitors. New technologies and end-user services are developed at a high pace, which leads to more and more complex technological migration paths. Moreover, consumers are becoming more demanding when it comes to bandwidth, new services and service quality. Telecom operators must take all these factors into account when making strategic decisions

(24)

regarding where, how and when to invest if they are to make money in what is a highly competitive market. They must choose their market strategy (shaper or quick follower) and make sure they provide the latest technologies to prevent customers from switching to the competition (churning). As a result, although the social and economic benefits of broadband have been recognised by many research institutes as well as by the European Commission, and despite the fact that various policy initiatives have been introduced to stimulate the roll-out of fiber network, these networks have still not been rolled out on a large scale by private operators. It may be clear that the existing national and European policies have not yielded the expected and desired effects. For that reason, it is necessary to take a closer look at the content and processes involved in the roll-out of broadband access (local loop) networks. To gain insight into the content-related side involves an examination of the most important drivers and outcomes of broadband network roll-out from the point of view of private operators. Insight into the process-related side is gained by taking a closer look at the process involved in deciding whether or not to roll-out certain technologies in the local loop. Knowledge in these two areas will provide policy-makers with more options to deploy their policy instruments successfully and stimulate fiber network roll-out successfully.

Research unit This study focuses on the roll-out of broadband networks in the local

loop from the point of view of telecom and cable operators that have their own access networks. The unit of research is the behaviour of telecom providers (or telecom network operators) with regard to the roll-out and upgrades of their access networks. This research examines the way these operators deal with factors from different domains, including market environment, technology and regulation. Other terms used to indicate these telecom network operators are (access) network operators or (access) network providers.

Content-related demarcations Although we are aware that users help create new

broadband services, we focus exclusively on the supply side. We deal with customers only in terms of market demand, as an abstract notion of specific user needs and requirements. We focus from a social shaping point of view to the interrelatedness of technological, economic, regulatory and market-related factors. There is a second demarcation in the area of technology. Although there are all kinds of emerging advanced mobile technologies that are seen as alternative broadband infrastructures, mobile technologies are not included in this research. Only wireless systems that are possible alternatives for (parts of) a fixed broadband access network, the so-called fixed wireless access (FWA) networks, are included. Other applications like Wi-Fi hotspots and in-house networks, like Bluetooth and Powerline communication (PLC), fall beyond the scope of this research.

Geographical demarcation The developments in decision-making concerning

(25)

world, or even in Europe, in a single research project. In addition, decision-making tends to be a typically national phenomenon, which means that each country adopts a different approach. For these reasons, the scope of this study is to a large extent limited to the geographical area of the Netherlands. Decision-making processes in other countries will mainly be used for reasons of comparison. Further cross-boundary insight will be gained through an international survey.

Relevance for stakeholders

Thus far, we have focused mainly in factors that complicate the decision-making process in the highly dynamic broadband environment. However, to know how these factors in the end result in the decisions involved, we also need to take a closer look at the decision-making process. Although decision-makers in telecom companies know roughly how the process works, they are usually unaware of the way the individual technological, regulatory and market-related factors function within the decision-making process and what their correlative influence is. As far as governments are concerned, understanding the complicated nature of the decision-making process with regard to broadband access network roll-out by telecom operators may help making policy more effective in terms of realising investments in broadband access infrastructures. Also, with regard to scientists, greater insight into the evolution of this decision-making process would provide more structure and allows for more focused research. There is a need for an integrated multidisciplinary scientific framework or a unifying theory which describes the way technological, economic, market-related and regulatory factors affect the migration of broadband networks in the local loop.

Such a framework or theory would be relevant to scientists, strategic decision-makers in broadband providing telecom companies and regulators. Although there are many relevant technological, regulatory and market-related factors, it is unclear how these factors are interrelated and which factors are dominant within the different phases of the roll-out process.

1.2 Research objective, research questions

If we look at the complexity in the decision-making process surrounding access networks, as discussed above, a number of knowledge gaps become visible. Firstly, as described earlier, there is no integrated multidisciplinary scientific framework or unifying theory combining technological, financial, market-related and regulatory factors affecting migration of broadband networks in the local loop. Secondly, there is a need for a theory combining complex decision-making theory with technology development and innovation. The third knowledge gap has to do with insight into the elements of various existing decision-making theories that can be applied to the decision-making process surrounding the upgrading of existing

(26)

and roll-out of new broadband access networks. More insight is desirable in which aspects of these theories fit this specific decision-making process in the Telecommunications industry.

It is important to gain more insight into the complex relationships between technological, financial and market-related factors and the migration process from existing networks towards broadband networks (as defined in this research) and next generation broadband networks. This implies that we have to understand the ‘content’ side as well as the decision-making process involved in upgrading broadband access networks.

This brings us to the objective of this research project:

To develop a scientific integrated multidisciplinary model that provides insight into the drivers and outcomes with regard to local loop broadband roll-out by telecom operators and to understand and explain the way decision-making with regard to broadband roll-out evolves.

This insight into content-related and process-related aspects will make the specific decision-making process and drivers and outcomes of broadband roll-out in access networks more transparent and help explain the relationships between decision-makers and the dynamic multi-actor environment in which they operate.

To reach the objective of this research, this thesis answers the following main research question:

What content and process-related aspects determine broadband local loop upgrades, the outcomes of broadband roll-out and the decision-making process regarding the upgrading of broadband access networks?

To answer the main research question, a number of steps will be taken. For each of these steps intermediate research questions are formulated and answered, after which it will possible to formulate an answer the main research question.

Due to the complexity of the area under investigation, it is useful to apply several theories and discuss the various disciplines and the decision-making process. Because this research focuses on the decision-making processes of telecom network operators and on the way decisions are shaped from a content perspective, it is important to apply empirical research methods. Detailed insight into the evolvement of decision-making processes can be gained through in-depth interviews, whereas more generic insights can be gained better through surveys among a broader and more international group of experts. In addition to empirical data, theoretical methods, for instance Meta-analysis are very useful to explore the

(27)

existing theories and concepts within broadband literature and to place the empirical results in a broader context. For these reasons, several research methods will be applied to answer this main research question, forming together a multi-theory, multi-method approach.

There is, moreover, a classic distinction between content-related and process-related approaches, both in decision-making theory and in strategy thinking. In this research we assume that the two are interrelated. The process-related approach has to do with the way the decision-making process evolves, while the content-related approach focuses on the technological, market-content-related and regulatory factors influencing this decision-making process. Chapters 2 and 3 of this thesis focus on the content-related side of this research. on the domain and literature of broadband roll-out respectively. In Chapters 4 and 5, we examine decision-making theory and risk and uncertainty theory. Chapters 6, 7 and 8 focus on content-related as well as process-content-related aspects. Chapter 6 contains the results of our qualitative research into content-related factors and the way decision-making with regard to broadband roll-out evolves in practice. In Chapter 7, we present the results of our quantitative research, while Chapter 8 contains the final conclusions of this thesis, bringing content and process together.

The first step is to gain more insight into the domain in which telecom network operators are operating. More insight is needed to understand the broadband domain and the content-related factors network operators have to deal in their decision-making process. Consequently, the first intermediate research question, comprising three sub questions, is the following:

RQ 1

What are the technological, market-related and regulatory factors that play a role with regard to the upgrading of access networks by telecom network operators towards next generation broadband?

With regard to the technology domain two more detailed sub questions need to be answered if we are to understand the core subject of decision-making with regard to broadband network roll-out:

a) What are important variables determining the choice between several migration paths? b) Which possible migration paths can be and are followed to reach next generation

broadband networks?

To gain insight into the existing theoretical concepts and hypotheses related to factors influencing broadband roll-out, we carried out a systematic literature analysis via a Meta-analysis. The objective of the Meta-analysis is to develop a conceptual model that can be used in the research project. The conceptual model

(28)

provides insight into the relationships between the factors involved in broadband evaluation paths. The development of a conceptual model based on Meta-analysis has proved very effective and efficient (Van den Hooff, 1997). This leads to the second intermediate research question:

RQ 2

What multidisciplinary frameworks or conceptual models regarding broadband roll-out are currently available?

One of the problems with regard to infrastructural investments is the necessary high upfront investment in combination with long ROI periods and an uncertain market environment. These circumstances affect the extent to which network operators are willing to invest. Because, ultimately, investments and revenues determine the ROI time of network investments – and with it the operators’ annual revenues - makes the financial perspective highly important. Additional insight is needed into the financial aspects of broadband investments. Also, it is important to understand the high-risk character of these investment-related decisions, which brings us to the following intermediate research question:

RQ 3

How do network operators assess several investment possibilities concerning upgrading and roll-out broadband networks in the local loop?

An important factor operators must take in consideration with regard to investing in a specific technology to upgrade their network is the level of risk and uncertainty of this technological alternative in relation to aspects like price development, expected demand, future-proofness, etc. These risks and uncertainties affect the likelihood of investments being earned back within the expected timeframe. As a result, assessing risk and uncertainty is an important aspect of network investment-related decisions. To be able to minimise the undesired effects of risks and uncertainties on broadband roll-out investment-related decisions, there are three aspects of these factors that are relevant: the characteristics of the risks and uncertainties themselves, their effects on broadband roll-out and the methods that operators can apply to assess them. This results in the following research question:

RQ 4

Which risks and uncertainties are affecting these investment-related decisions, what are their effects on broadband roll-out and how can risks and uncertainties be assessed and minimised

(29)

In addition to greater insight into the multidisciplinary factors influencing broadband investment-related decisions, as well as the methods that can be applied to choose between several investment-related options, greater insight is needed into the decision-making process that ultimately results in these investment-related decisions. This brings us to the next intermediate research question:

RQ 5

How does the decision-making process by telecom network operators regarding the migration of broadband access networks evolve?

Validation of the conceptual model resulting from the literature analysis and the development of a parsimonious content model regarding the drivers and outcomes of broadband roll-out will take place via a qualitative and quantitative data analysis. The qualitative data analysis is based on expert interviews with strategic decision-makers of major telecommunication operators and network providers in the Netherlands. The data will be analysed via concept mapping. The quantitative validation consists of two online surveys: a pre-test and a main study. Firstly, a small-scale pre-test will be conducted to develop scales and gain insight into the construction of our questionnaire and items. The results of the pre-test provide initial insight into the validity of the conceptual model. The pre-test is carried out to develop scales via exploratory factor analysis, which are used as the basis of our main study, another online survey, which was directed more at stakeholders. The main study first comprises a confirmatory factor analysis to create a measurement model, which in turn is the basis for a structural equation model. The hypotheses originating from the theoretical and content-related background are tested via structural equation modelling with AMOS 7.0. These validation steps are performed based on our final intermediate research question:

RQ 6

Can we develop a parsimonious model that provides insight into the determining factors with regard to broadband-related decision-making by telecom network operators and the outcomes of broadband roll-out?

The approach combining content and process, presenting our research outline as described above, can be visualised as follows:

(30)

Theory

Financial assessment methods and risk & uncertainty

Theory Concepts broadband roll-out Theory Decision-making Conceptual content model on broadband roll-out Process models Risk & uncertainty Garbage can model Logical incrementalism Empirical results Quantitative validation Content model on broadband roll-out P r o c e s s C o n t e n t Empirical results Qualitative validation Domain description Process of broadband Decision-making

Figure 1.1: Research outline

1.3 Thesis outline

This research contains a content-related side and a process-related side. Chapters 2 and 3 shape the content-related part of our theoretical framework and focus on the main drivers and outcomes of broadband roll-out in the technological, market-related and policy-market-related dimensions. Chapter 2 provides greater insight into the technological, market-related and regulatory domains of the environment in which telecom operators operate. In Chapter 3, we explore the available literature and the existing concepts with regard to broadband roll-out in the local loop, as well as the possibility of developing an initial conceptual content model. Chapters 4 and 5 shape the process part of our theoretical framework and focus on the decision-making process of broadband roll-out in access networks and on the impact of risk and uncertainty on the decision-making process.

Chapter 4 provides greater insight into theory on financial assessment methods for broadband infrastructural investments and provides a framework for measuring risks and uncertainties related to these infrastructural investments. In Chapter 5, we focus on theory related to decisions and decision-making, discussing two theories that could be applied to decision-making with regard to broadband roll-out. Chapters 6 and 7 focus on the validation of the content-related side and process-related side of our theoretical framework, via qualitative and quantitative data analysis.

In Chapter 6, we present the results of our qualitative data analysis, which was based on expert interviews with strategic decision-makers from Dutch telecom companies. In Chapter 7, we focus on our final content-related model regarding broadband roll-out, examining validation via a quantitative data analysis based on survey analysis. In Chapter 8, finally, we present the conclusions of this research

(31)

and answer our main research question via answering the intermediate research questions formulated above, discuss the implications of our research for the various stakeholders involved and provide suggestions for further research.

(32)

1.4 References

ACIL Tasman (2004). Economic Impacts of Broadband Adoption in Victoria. Retrieved January 17, 2008, from

http://www.mmv.vic.gov.au/uploads/downloads/BAO/EconomicImpactsofBroad bandREPORTFINAL2004.pdf.

Bouwman, H., Hooff, B. van den, Wijngaert, L. van de & Dijk, J. van (2005). ICT in

Organisations: Adoption, Implementation, Use and Effects. London: Sage

Publications.

Centre for Economics and Business research (CEBR) (2003). The Economic Impact of a Competitive market for Broadband. Retrieved January 17, 2008, from http://www.bigfuture.org/cebr%20Final%20Report.pdf.

CPB (Netherlands Bureau for Economic Policy Analysis) (2005). Do market failures hamper the perspectives of broadband? Retrieved January 17, 2008, from http://www.cpb.nl/nl/pub/cpbreeksen/document/102/doc102.pdf.

Criterion Economics (2003). The Effects of Ubiquitous Broadband Adoption on Investment, Jobs and the US Economy.

Doraszelski, Ulrich (1998). The net present value method versus the option value of waiting: A note on Farzin, Huisman and Kort. Journal of Economic Dynamics & Control, 25 (8), 1109-1115.

Dialogic Innovatie & Interactie (2005). Breedband en de Gebruiker 2004-2005. Utrecht: Vermaas, K., S. Maltha, F. Bongers, J. Segers, & L. van de Wijngaert. Dialogic Innovatie & interactie (2007). Breedband en de gebruiker, 2007. Utrecht:

Karianne Vermaas, Jeroen Segers, Hugo Gillebaard, Bram Kaashoek, and Guido Ongena.

Eurescom (1999), Extended investment analysis of telecommunication operator strategies- Investment analysis framework definition and requirements specification. (Project P901-PF Deliverable 1).

European Commission (2000). Proposal for a Regulation of the European Parliament and of the Council on unbundled access to the local loop (2000/C 365 E/15). Official Journal of the European Communities, 9-12-2000. Retrieved January 17, 2008, from

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2000:365E:0212:0214:EN:p df

European Commission (2000). eEurope 2002: An information society for all. Retrieved January 17, 2008, from

(33)

http://ec.europa.eu/information_society/eeurope/2002/documents/archiv_eEuro pe2002/actionplan_en.pdf.

European Commission (2002). eEurope 2005, an information society for all, An Action Plan to be presented in view of the Sevilla European Council. Retrieved January 15, 2008, from

http://ec.europa.eu/information_society/eeurope/2002/news_library/documents/ eeurope2005/eeurope2005_en.pdf.

European Commission (2005). i2010 – A European Information Society for growth and employment. Retrieved January 17, 2008, from

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2005:0229:FIN:EN:PDF. European Commission (2008). Preparing Europe’s digital future- i2010 Mid-Term

Review. Retrieved June 5, 2008 from

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0199:FIN:EN:PDF. Expertgroep Breedband. (2002). Nederland Breedbandland, recommendations to

the cabinet from the national broadband expert group. The Hague. Firth Lucy and David Mellor (2005). Broadband: benefits and problems.

Telecommunications Policy 29, (2-3), 223–236.

Gartner (2002). The Payoff of Ubiquitous Broadband Deployment. Gartner: Kathie Hackler, Ron Cowles, Jin Shen, and Behram Dalal.

Herder, P.M. and Z. Verwater-Lukszo (2006). Towards next generation

infrastructures: an introduction to the contributions in this issue. International Journal of Critical Infrastructures, 2 (2-3), 113-120.

Ims, L. A., D.Myhre and B.T. Olsen (1998). Costs of upgrading the residential telecommunications infrastructure to broadband. Conference proceedings of GLOBECOM'98: Global telecommunications conference, The Bridge to Global Integration, 6, 3153 – 3158.

Macklin, B.(2002). The value of widespread broadband, Entepreneur.com, August 13, 2002. Retrieved May 20, 2004, from

http://www.entrepreneur.com/article/0,4621,291780,00.html.

NZier (2004). Sustainable infrastructure: A policy framework, Report to the Ministry of Economic Development. Retrieved January 17, 2008, from

http://www.med.govt.nz/upload/18061/nzier.pdf.

Price Waterhouse Coopers (2004). The Broadband Future, Interactive, Networked, and Personalised.

Rand Europe/IDC Benelux (2003). TEN Telecom Guidelines Status Review. Brussels: Jonathan Cave, Maarten Botterman, Renske Ellens, Paivi Luoma, Gert Jan de Vries, Roel Westerhof.

(34)

Renkema, Theo J.W. (2000). The IT value quest, How to capture the business value of IT-based infrastructure., Chichester: Wiley.

The Allen Consulting group (2003). True Broadband Exploring the economic impacts. Retrieved January 17, 2008, from

http://www.citynet.nl/upload/ERN01_Final_Report_2_Broadbandproductivity_1. pdf.

Telecommunication Industry Association (TIA) (2003). The economic and social benefits of broadband deployment. Retrieved January 17, 2008, from http://www.researchictafrica.net/images/upload/Broadbandpaperoct03.pdf. TNO (2007). Marktrapportage Elektronische Communicatie. Retrieved January 15,

2008 from http://www.ez.nl/dsresource?objectid=156081&type=PDF.

Van den Hooff, B., Groot, J. and De Jonge, S. (2005). Situational influences on the use of communication technologies. Journal of Business Communication, 42 (1), 4-27.

Van de Wijngaert (2001). Fysieke en affectieve toegang, geschiktheid; vraag, aanbod en context. In Harry Bouwman (Ed.), Communicatie in de informatiesamenleving (51-71).Utrecht: Lemma.

Vermaas, Karianne (2007). Fast diffusion and broadening use (Doctoral dissertation, University of Utrecht, 2007).

Vlaam de, Helene I.M. and W. Martin de Jong (2002). Infrastructure competition and the creation of value: an Anglo-Dutch comparison of regulatory regimes for the provision of rail and telephony services. International journal of

Technology, Policy and Management, 2 (2), 125-143.

Weening, Heleen (2006). Smart Cities- omgaan met onzekerheid (Doctoral dissertation, Delft University of Technology, 2006).

Weijnen, Margot P.C. and Ivo Bouwmans. Innovation in networked infrastructures: coping with complexity. International journal of Critical Infrastructures, 2 (2/3), 121-132.

(35)

Chapter 2 Domain description

In this chapter, we describe the broadband domain and the main actors involved. In the environment of broadband decision-makers, three main dimensions can be distinguished: technology, market and policy & regulation. In this chapter, we address these three domains. In paragraph 2.2, we focus on the market perspective, consisting of the supply side (competitors and equipment suppliers) and the demand side (end-users). In paragraph 2.3, we focus on existing technologies for the upgrading of broadband, comparing them on the basis of relevant characteristics, and discuss possible migration paths towards Fiber-to-the-Home (FttH) networks. In Paragraph 2.4 we provide greater insight into questions relating to policy and regulation, discussing regulation and legislation, broadband stimulation projects and public fiber initiatives.2

2.1 Three perspectives on broadband in the local loop

In view of the technological, market-related and regulatory developments, network providers have to decide how to invest in network upgrades. Their decisions are based on several considerations related to these three perspectives. There are many relevant technological, regulatory and market-related factors. In this chapter, we look at the developments in the three above-mentioned dimensions and at the way they affect the decision-making process with regard to broadband roll-out. The three dimensions are presented in Figure 2.1. We begin with a brief discussion of these three perspectives on broadband.

2_{To write this chapter, neither new data nor new literature has been gathered after the end of 2007. In}

(36)

Telecom operator - Internal business processes - Investment decisions - Decision-making processes Competitors Suppliers End users Market Technology Policy & regulation

Figure 2.1: The environment of telecom operators

Market - supply side From a supply side perspective, the central question is whether

it is possible to develop viable and feasible business models for the infrastructure and service providers (Bouwman et al., 2006). Operators who own their own network provide network access as well as access to services like Internet, telephony and television. For that reason, broadband operators face competition from network providers and from access providers, which in most cases are market parties providing access to Internet services without a network of their own (ISPs). Thanks to the development of Voice over IP (VOIP), these ISPs are now also able to offer relatively cheap telephony services over the Internet. Another group of actors are equipment suppliers, who provide equipment for telephony networks, including central offices, switches, cabinets, etc.

Market - demand side Although we focus mainly on the supply side, we are aware of

the importance of the demand side. Market developments are driven by push factors as well as pull factors. Market demand is an important driver for a continuous investment in higher bandwidth, the availability of which in turn leads to innovative use. Ultimately, end-user subscriptions determine the annual revenues of telecom operators. New real-time applications, such as multi-actor games, video-conferencing or streaming media, are the cause of increasing demand for bandwidth (Bouwman et al., 2006). When it comes to accepting broadband, users view subscription costs, lack of availability and installation costs as thresholds.

(37)

Higher speed, always-on, cost reduction and control are considered benefits of broadband access to the Internet (Dialogic, 2003; Vermaas, 2007). Furthermore, research indicates that, even though only a small portion of society has embraced the Internet and broadband technology as a way of life, there is a large group of light users that will only adopt broadband if it is the standard (for instance cable is) and prices do not differentiate (Dialogic, 2003). In paragraph 2.2 we take a closer look at the market perspective.

Technology The low throughput of networks linking the core to the ‘in-house’

network, the access network, continues to present a problem (Cuchran et al., 2001), although the capacity of the core telecommunication and data-communication networks as well as ‘in-house’ networks has grown significantly in the last years, increasing from Mbps to Gbps. In their present form, access networks are approaching their technological boundaries. Existing as well as alternative transmission media have to be deployed to anticipate further increases in demand and to allow companies to keep up with their competitors. High-speed broadband networks with at least 10 Mbps symmetrical data speed can be realised via several evolutionary paths, consisting of small incremental network upgrades (see paragraph 2.3). Network operators can choose from a number of options, such as upgrading cable connections, implementing new technologies for copper, installing optical fiber networks or rolling out wireless networks, as well as a host of hybrid transmission solutions. We take a closer look at the technology domain in paragraph 2.3 of this chapter.

Policy & regulation Governmental and regulatory issues are related to the different

roles governments play: policy-makers, investors or regulators (Alleman, 2002). Local and national governments can play different roles. Firstly, governments can play an important role in realising the benefits of broadband (Firth & Mellor, 2005). They can play the role of stimulator, which is an important role particularly in the early stages, when industry or technology requires a new technological standard or infrastructure. One of the questions that need to be addressed is whether broadband should be defined as a public infrastructure in the sense that the infrastructure is owned by the government or that governments invest in infrastructure, or as a domain where market parties have to take the lead. When governments start investing in networks themselves, they fulfil a role of financer. By doing this, they are subjected to strict regulation and run the risk of violating European rules governing market distortion, unfair competition and state aid (see paragraph 2.4). Furthermore, government fulfils the role of regulator. There are several regulatory issues that play a role for network operators with regard to with competition between network providers, interconnection between networks, obligations related to Significant Market Power, competition law, etc. These issues are discussed in paragraph 2.4 of this chapter. Other issues that play a role are

(38)

regulation with regard to tax, general legal liability, piracy, etc. We will not discuss these issues.

Before describing the three perspectives outlined above in greater detail, we introduce the four layer model based on the seven layer Open System Interconnect (OSI) model, which is commonly used in describing the broadband market. The model provides a clear framework that can be used to provide a more structured description of the market.

The four layer model as a general reference model for broadband

An often used technological breakdown to describe the broadband market is the seven layer OSI model. For the sake of practical applicability of this model, a model with four functional layers is now commonly used. These layers are clearly recognisable in the financial power field (Expertgroep Breedband, 2002). Figure 2.2 shows the four layer model of the broadband market. We briefly discuss the four layers of this model.

Content & applications Layer 4

Service provisioning (xSP) Layer 3

Passive Infrastructure Layer 1

Active Infrastructure and switching Layer 2

E

n

d

u

s

e

rs

Figure 2.2: The four layer model

Layer 1 The first layer, the passive infrastructure, contains ducts, cables (optical

fiber, coaxial cable, copper twisted pair) and equipment set-up points, including main distribution frames (MDF) and central offices (CO).

Layer 2 The second layer contains active infrastructure and switching equipment.

This layer uses the transmission capacity provided by layer 1, offers transmission services to layer 3 and provides wholesale services. Layer 2 contains, among other things, active infrastructure in central offices, for instance switching, containing optical ports, transmission equipment and network maintenance. Layer 2 also provides so-called service aggregation, the connection from end-users with their service providers. Network access points, located at end-user homes as well as

Shedding light on the black hole: The roll-out of broadband access networks by private operators

Shedding light on the black hole

The roll-out of broadband access networks by

private operators

Shedding light on the black hole

The roll-out of broadband access networks by

private operators

Proefschrift

Ter verkrijging van de graad van doctor

aan de Technische Universiteit Delft,

op gezag van Rector Magnificus prof.dr.ir. J.T Fokkema,

voorzitter van het College voor Promoties,

in het openbaar te verdedigen op 16 januari 2008 om 10:00

door Maria Leonie Fijnvandraat

Ingenieur in de technische bestuurskunde

Dit proefschrift is goedgekeurd door de promotor:

Prof.dr. M.L. Mueller

Copromotor: Dr. W.A.G.A. Bouwman

Samenstelling promotiecommissie:

Rector Magnificus,

Voorzitter

Prof.dr. M. L. Mueller,

Technische Universiteit Delft, promotor

Dr. W.A.G.A. Bouwman,

Technische Universiteit Delft,

Copromotor

Prof.dr.ir. W.A.H. Thissen,

Technische Universiteit Delft

Prof.dr.ir. N.H.G. Baken,

Technische Universiteit Delft

Prof. dr. ir. L.J.M. Nieuwenhuis,

Universiteit Twente

Dr. K. Stordahl, MsC,

Telenor Networks

Dr. B.Preissl,

Wirtschaftsdienst ZBW

Prof.ir. W. Dik,

Technische Universiteit Delft,

Reservelid

Voor mijn lieve oma

***

Acknowledgement

Table of contents

Chapter 1 Introduction

1.1

Background and relevance

1.2

Research objective, research questions

1.3

Thesis outline

1.4

References

Chapter 2 Domain description

2.1

Three perspectives on broadband in the local loop

E

n

d

u

s

e

rs