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

Prepared by: Final Report Technical assistance in bridging the “digital divide”: A Cost benefit Analysis for Broadband connectivity in Europe 6 October 2004 With: EC/ESA Digital Divide CBA – Final Report 6 October 2004 Contents 1 Introduction 4 1.1 Background and Objectives 4 1.2 Issues 4 1.3 Our Approach 5 2 Existing level of broadband connectivity across Europe 7 2.1 Methodology 7 2.2 Terrestrial broadband availability 8 2.3 Terrestrial broadband availability forecasts: 2004 - 2013 11 2.4 Satellite broadband availability 14 2.5 Broadband take up: 2004 – 2013 16 2.6 Potential broadband demand remaining unserved 22 2.7 Availability and take up of terrestrial broadband - conclusion 25 3 Combined system and user costs of broadband connection 27 3.1 Costing considerations 27 3.2 Capital costs 28 3.3 Operational costs 36 3.4 Typical cost breakdown by technology 36 3.5 Average cost per user 39 3.6 Total costs by Country Group 40 3.7 Costs of providing service to Objective 1 regions 41 3.8 Summary of technology mix 42 4 Optimal technical solution for broadband connectivity 44 4.1 ADSL and Derivatives 45 4.2 Satellite 53 4.3 Hybrid Satellite/BFWA/WiFi 60 4.4 Affordability and User Willingness to Pay 63 4.5 Conclusions on Optimal Mix of Technologies 68 5 Benefits of the provision of broadband connectivity across Europe 71 5.1 Introduction 71 5.2 Economic concepts 71 5.3 Implementing the methodology 78 5.4 Direct benefits to subscribers 84 5.5 Benefits to public sector suppliers of services (Step 3) 97 5.6 Regional analysis of benefits 118 5.7 Conclusions: Overall value of broadband benefits 120 6 Conclusions on cost benefits for broadband connectivity 122 6.1 Assumptions for the cost benefit calculation 122 6.2 Results of the cost benefit calculation 127 6.3 Conclusions 135 7 Framework for the preparation of a business plan 137 7.1 Background and Objectives 137 7.2 Issues 138 7.3 Our Approach 138 Appendix 141 (1) EC/ESA Digital Divide CBA – Final Report 6 October 2004 Glossary ADSL Asymmetric digital subscriber line ADSL2 and ADSL2+ Enhanced ADSL – greater bandwidth on short-mid length lines ARPU Average Revenue Per User B2C Business to Customer BFWA Broadband Fixed Wireless Access CAPM Capital Asset Pricing Model CATV Cable Television CBA Cost Benefit Analysis EC European Commission EMRP Equity Market Risk Premium ESA European Space Agency EU European Union FTTB/U Fibre To The Building/User FTTC Fibre To The Cabinet/Curb GCSE General Certificate of Secondary Education HFC Hybrid Fibre Co-ax ICT Information and Communications Technologies LAN Local Area Network NPV Net Present Value PLC Powerline Communications PPP Public Private Partnership PwC PricewaterhouseCoopers LLP SME Small & Medium-Size Enterprises SoHo Small Office Home Office VAT Value Added Tax VoIP Voice Over Internet Protocol VSDL Very high speed digital subscriber line WACC Weighted Average Cost of Capital WiFi WLAN used in the wide area WLAN Wireless Local Area Network (2) EC/ESA Digital Divide CBA – Final Report 6 October 2004 ESA STUDY MANAGER Pierluigi Mancini Ph.D. Applications Strategy Manager Directorate of EU and Industrial Programmes Email: pmancini@hq.esa.fr This document has been prepared on the instructions of the European Space Agency (“ESA”) and with only ESA's interests in mind. PricewaterhouseCoopers LLP, its members, partners, employees and agents neither owe nor accept any duty or responsibility to other parties (“you”), whether in contract or in tort (including without limitation, negligence and breach of statutory duty) or howsoever otherwise arising, and shall not be liable in respect of any loss, damage or expense of whatsoever nature which is caused by any use you may choose to make of this document, or which is otherwise consequent upon the provision of the document to you. Without conferring any greater rights than you would otherwise have at law, we accept that this disclaimer does not exclude or indemnify us against any liability we may have for death or personal injury arising from our negligence or for the consequences of our own fraud. This report represents the Phase I analysis on behalf of the ESA of the state of the Digital Divide in Europe,, on a technology neutral basis. The report will provide inputs for a second phase to develop a business case to address the Divide, where further analysis and/or refinement of the findings will be carried out as necessary to gain greater specificity. (3) EC/ESA Digital Divide CBA – Final Report 6 October 2004 1 Introduction 1.1 Background and Objectives In line with the strategic vision adopted by the European Union, the European society of tomorrow will be a 'knowledge-based society' in which access to knowledge is for all. Information outreach must therefore be considered as a major objective for Europe. This means extending access to electronic communication services to everyone, notably in those regions of our continent, which up until now have been disadvantaged or neglected (rural and mountain areas, islands, far-flung outlying regions). The enlargement of the Union adds a further dimension to the digital-divide issue. The European Space Agency and the European Commission have decided to give joint consideration to the use of space-based technologies to help bridge 'the digital divide'. In its White Paper on Space Policy, the Commission has placed this issue - satellites contributing to bridge the digital divide - at the forefront of Europe's strategic priorities in the run-up to 2007. With this as a background, PricewaterhouseCoopers LLP, together with Ovum and Frontier Economics their subcontractors, have been invited by ESA, to prepare a detailed, technology-neutral Cost Benefit Analysis on broadband connectivity for an expanded Europe. The study’s objectives are: • Through both primary and secondary research, identify and quantify, where possible, the benefits of providing broadband connectivity across an extended Europe; • Prepare an objective analysis of the optimal technical solutions for broadband connectivity, region by region; • Provide an independent perspective on the Cost Benefit ratio for technology- neutral provision of broadband for Europe over a period of at least 10 years; and • Clarify the potential role of satellite-based solutions for broadband connectivity and thus bridging the digital divide in an extended Europe. 1.2 Issues Some of the issues the Study considered include: • The extent to which Europe (and not the USA) will derive economic benefit from any EU-initiated project to tackle the digital divide; (4) EC/ESA Digital Divide CBA – Final Report 6 October 2004 • Quantification of user benefits – from societal and environmental, to economic and industrial; • Understand what benefits are actually incremental, resulting directly from new user broadband connectivity; and • How best to identify the optimal technical solution for the provision of broadband service to new users across an extended Europe. 1.3 Our Approach Our approach to the study is summarised below. • We reviewed the existing level of broadband connectivity across Europe • We analysed the combined system and user costs of a broadband connection by each technical solution • We identified the optimal technical solution for provision of future broadband connectivity across different regions of Europe • We quantified the benefits of the provision of broadband connectivity across Europe • We calculated the net benefits of broadband connectivity across an extended Europe • We set out a framework for the next steps following this study, including the preparation of a business plan based on our findings Throughout our study we have analysed two different scenarios of broadband availability and take-up - a base case and extended take-up case. For clarity, the base case and extended case assumptions were as shown in the tables below: Table 1: Broadband connectivity and forecast take-up in Europe A vailabilit y Base Case Extended Case A vailabilit y Base Case Extended Case Country Group 1 Urban 98% 54% 56% 99% 76% 82% Rural 92% 36% 39% 95% 54% 64% Country Group 2 Urban 97% 37% 41% 97% 74% 81% Rural 62% 19% 20% 78% 39% 42% Country Group 3 Urban 96% 45% 50% 97% 75% 81% Rural 61% 12% 13% 75% 28% 30% Country Group 4 Urban 94% 13% 14% 95% 43% 47% Rural 15% 1% 2% 34% 8% 10% 2008 2013 (5) EC/ESA Digital Divide CBA – Final Report 6 October 2004 PwC prepared a number of Technical Notes in the course of this study which were individually presented and discussed in detail with a large number of representatives from the European Space Agency and the European Commission. The content of these Technical Notes, as well as the comments received from the stakeholders within both ESA and the EC are reflected in this final report. (6) EC/ESA Digital Divide CBA – Final Report 6 October 2004 2 Existing level of broadband connectivity across Europe 2.1 Methodology The current and estimated future broadband connectivity in Europe has been determined based on research of the current levels of broadband availability and take up, historic trends of broadband availability and take up, reference to other published material and modelling of estimated future availability and demand. The methodology used in the study to determine the estimated availability and take up of broadband services is briefly described in this Section of the report, and described in more detail in the appendix to this report. The costs associated with the deployment of services are also described in the appendix. Each of the 25 EU countries has different characteristics, e.g. internet usage, GDP, price of services, market competitiveness, which cause the provision and use of broadband to vary from country to country. To assist the modelling, the 25 countries of the EU were split into 4 country groups, in order that one or two countries per group could be considered in detail and the results from this detailed analysis then scaled to the other countries in the group. The factors considered most important when the groups were determined were: the expected levels of adoption of broadband within the forecast period of 2004-2013; GDP; the split of urban and rural population 1 and the current percentage of population in EU Objective 1 areas; the current penetration of telephone lines and the take-up of broadband services. The methodology by which the country groups are determined is described in the appendix to this report. This analysis was underpinned by preliminary regional analysis within two countries, Italy and the UK. If the modelling were extended to cover the non-EU ESA member countries, Switzerland and Norway would come within Country Group 1. With high current and expected future levels of broadband availability and take-up, medium to low levels of rural population and high disposable income, the countries in Group 1 are: Austria; Belgium; Denmark; France; Luxembourg; Malta; Netherlands; Sweden; United Kingdom. The take up and development of broadband services in the UK and France have been used as a basis for modelling Group 1 countries. Countries in Group 2 have a higher percentage of population in EU Objective 1 2 areas (10-35%), lower average current levels of broadband adoption, and have high 1 The cost modelling used same data for urban and rural population as used for the benefits analysis. The data was sourced from the European Social Survey, and is shown in Figure 2.2. 2 A region whose development is lagging behind others in the EU is given Objective 1 status to promote its development and structural adjustment. Objective 1 areas may be urban as well as rural. http://europa.eu.int/scadplus/leg/en/lvb/g24203.htm defines Objective 1 regions for the period 2000- 2006. (7) EC/ESA Digital Divide CBA – Final Report 6 October 2004 disposable income. The countries in Group 2 are: Finland; Germany; Ireland and Italy, with Italy being used studied in more detail for the project. Those countries in Group 3, with high levels of the population living EU Objective 1 regions, medium levels of rural population and reasonable levels of current broadband adoption are: Cyprus; Estonia; Portugal; Slovenia and Spain. Group 4 is mainly comprised of the 2004 EU member countries of Central and Eastern Europe, together with Greece, which has very low levels of broadband take-up. These countries, which have medium-high levels of rural population and medium levels of GDP and disposable income, are: Czech Republic; Greece; Hungary; Latvia; Lithuania; Poland and Slovakia. The take up and development of broadband services in Poland been used as a basis for modelling Group 4 countries. Brief country profiles, for UK, France, Italy, Slovenia, Poland and Greece, together with four regional case studies (two in Italy and two in the UK), which highlight the issues facing different regions of Europe and which provide a qualitative analysis of the issues faced during the development of broadband and infrastructure across the digital divide, are provided in Appendix C to this report. 2.2 Terrestrial broadband availability The scope of the problem of broadband provision in Europe can be seen in Figure 2.1, showing the variations in population density across Europe. This shows the population density at the NUTS 3 3 level. There are large rural regions of thinly populated space in Sweden, Finland, Ireland, Greece, central France and central Spain. Low population density is also found in north-eastern Germany and in most of the Baltic States. Within these areas of low population, it must be recognised that there are many distribution profiles. This uneven population distribution is a challenge for service providers. The availability of broadband in the EU is dominated by ADSL and cable modem services and this is expected to continue. Cable modem services, built on top of cable TV infrastructure are primarily provided in urban areas and their provision is very varied across the EU. They are rarely cost effective to deploy in isolated urban areas and rural areas. DSL services are provided in urban areas and increasingly in more rural locations. There are currently low levels of availability of fibre to the user / building (FTTU/B), broadband fixed wireless access (BFWA) and WiFi (wireless 3 Nomenclature of Territorial Units for Statistics (NUTS) are regional areas defined to allow a common statistical classification to enable the collection, compilation and dissemination of harmonised regional statistics in the Community. NUTS 3 regions have a minimum population of 150,000 and a maximum population of 800.000. (8) EC/ESA Digital Divide CBA – Final Report 6 October 2004 LAN technology used in the wide area). However, where FTTB is available, it has a dramatic effect on the speed and range of services that can to be offered, as can be seen in Italy and Sweden. In the latter years of the forecast period, when demand for services at above 10Mbps is growing particularly among business users, it is anticipated that deployment of fibre will have started in many countries, but few will have significant FTTB networks, which will be limited to urban areas. However, fibre deployment to street cabinets (FTTC) is expected to be more widely used, taking advantage of high capacity DSL services (e.g. ADSL2+ and VDSL). Figure 2-1 Europe's population density for NUTS3 levels areas Source: IIASA European Rural Development Project (9) [...]... sector financial support and other initiatives such as regional aggregation and awareness campaigns 2.3 Terrestrial broadband availability forecasts: 2004 - 2013 To develop the broadband take up model, we have made assumptions about the basis of availability by access speed in 2004 and assumptions about the way in which terrestrial broadband service availability will increase in each proxy country, by access... have terrestrial broadband services available are few, (12) EC/ESA Digital Divide CBA – Final Report 6 October 2004 and the incumbent is often leading the activity to reach nearly 100% availability, enabling the remaining smaller rural exchanges for DSL The assumed availability by access speed for residential and SoHo users in urban and rural areas is shown in Figure 2.6 Figure 2-6 Broadband availability... for residential and SoHo users in urban and rural areas is shown in Figure 2.7 • Group 3 countries have a high proportion of their population in Objective 1 designated areas There are medium levels of annual disposable income per household and the availability of broadband is varied The countries have good broadband availability in urban areas, but face a challenge in rural areas The assumed availability... of these factors do not have direct parallels in Europe, they indicate the level of broadband adoption that can be achieved when attention and investment is stimulated The Korean initiatives are wide ranging and they are far more than being a subsidy which reduces the cost of broadband for end-users Further analysis would be needed to determine the relative importance of each of the Korean initiatives... C-band In addition, the major operators are incrementally introducing new capacity at Ka-band, specifically intended to serve broadband markets Finally, the mobile satellite operator Inmarsat is launching new L-band satellites this year, one of which is intended to support broadband mobile services across Europe from 2005 Yet the real availability of broadband satellite services depends upon many other... services) The model forecast takes into account these factors and also the development of economic and demographic factors 4 DSTI/ICCP/TISP(2003)7/FINAL: The Development of Broadband Access in Rural and Remote Areas, 10-May-2004 (11) EC/ESA Digital Divide CBA – Final Report 6 October 2004 The broadband availability forecasts also assume that broadband services will be made available where it is commercially... concentrating their broadband offerings in urban areas The assumed availability by access speed for residential and SoHo users in urban and rural areas is shown in Figure 2.9 Terrestrial broadband availability is complemented by the availability of satellite services, which are discussed in Section 2.4 (13) EC/ESA Digital Divide CBA – Final Report 6 October 2004 Figure 2-7 Broadband availability assumption... scale and network operator cost reductions • lower differentials between narrow-band and broadband prices, making it increasingly attractive for consumers to switch to broadband • increasingly attractive service packages and bundled services (TV, video-ondemand, Internet access, voice and content) • continuation of some national and regional initiatives to stimulate availability and take-up The forecasts... consumer applications Source: Point Topic Figures 2.6 – 2.9 show the forecast availability of broadband services for residential and SoHo users It is assumed in all cases that SMEs and large enterprises will have higher broadband availability as they are a desirable customer sector and business areas are amongst the first to be served The charts showing service availability for all broadband user groups are... because availability of broadband services is unchanged between the two cases, with only the level of take-up varying The Extended Take-up Case represents a situation in which more customers take-up broadband in those areas where it is available It is assumed that the potential demand for broadband will be the same whether it is available or not Consequently, the Extended Take-up Case produces both a . Prepared by: Final Report Technical assistance in bridging the “digital divide”: A Cost benefit Analysis for Broadband connectivity in Europe 6 October 2004 With: EC/ESA Digital. of broadband adoption, and have high 1 The cost modelling used same data for urban and rural population as used for the benefits analysis. The data was sourced from the European Social. C-band. In addition, the major operators are incrementally introducing new capacity at Ka-band, specifically intended to serve broadband markets. Finally, the mobile satellite operator Inmarsat