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Financing the broadband access revolution

Written by  Vince Pizzica
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Vince PizzicaIssue:Asia-Pacific I 2008
Article no.:7
Topic:Financing the broadband access revolution
Author:Vince Pizzica
Title:CTO
Organisation:Alcatel-Lucent, Asia-Pacific
PDF size:197KB

About author

Vince Pizzica is the CTO of Alcatel-Lucent in Asia-Pacific; he is responsible for optimizing Alcatel-Lucent’s R&D, intellectual property and technological competencies in the region. Prior to this appointment, he was the CTO and Director of Customer Solutions of Alcatel-Lucent in Australia. A telecom veteran, Mr Pizzica has more than 21 years’ experience in the telecommunications industry and held a number of senior positions before joining Alcatel-Lucent. Some of his more prominent roles include the Leader of Telstra’s technology strategy, Chief Architect of Telstra’s FMO, Future Mode of Operation, project and National General Manager for Personalised Services. Mr Pizzica was also the General Manager, Trusted Network, of Siemens in Australia where he was responsible for developing new business opportunities in security and payment oriented services. Mr Pizzica is also a past member of the boards of Global Platform Incorporated and the MULTOS Consortium, both of which develop smart card standards and business applications globally. Mr Pizzica holds a Masters of Science degree from the University of Essex in the United Kingdom and a Bachelor of Engineering degree from the University of Queensland.

 

Article abstract

Growing demand for broadband-based service will, in time, force the replacement of current copper-based networks by fibre-to-the-home networks. Since it will be difficult to guarantee adequate returns on investment for these expensive networks if several networks are competing in the same region, the need for government regulated infrastructure sharing seems likely. Although private investment in these networks is growing, government investment will also be needed, as will government action to foster service competition and encourage usage uptake.

 

Full Article

For many people ‘broadband’ implies nothing more than a connection to the Internet. However, over time it has evolved into a multipurpose access vehicle to a range of services (e.g. voice, video telephony and video entertainment services), of which the Internet is just one. As in other parts of the world, the future for broadband in Asia looks increasingly bright and it is clear that broadband access will find wide application in meeting the needs of people across the region and increasing effectiveness of key industrial sectors. Broadband has the potential to transform the way health services in Asia are delivered, for example by supporting remote medical diagnostics that can enable the elderly to continue to live at home while having their health monitored remotely. The key to broadband living up to its potential is the ability to find an appropriate financing model. As broadband becomes more prevalent, how financing is shaped becomes increasingly important. To understand the role that financing plays and how that role has evolved, it is important to understand the industry’s evolution and examine the interplay of telecom network transformation, government oversight and private investment. Over the past hundred years, every country in the world built its telecommunications infrastructure largely out of copper and funded this almost entirely through a government-owned and operated telecommunications entity. In the very beginning, the network’s copper wires were shared because the network usage (voice communications) of any given home was quite limited and generated revenue that was too small to justify providing dedicated access. The so-called ‘party line’ phone system was employed to maximize the return on this initial investment by allowing a single shared phone line to be distributed in a street and shared by a number of neighbouring homes and businesses. As the number of long distance voice private consumers and businesses grew, the increased demand led to a shift from the original shared access service model to one where a single phone line was allocated per premise and even multiple lines for a single business. Concurrent with this evolution from a shared access network to a dedicated copper-based voice access infrastructure, the government entity that funded this infrastructure typically evolved from the more traditional post office into post and telecommunications bureau. Korea Telecom, for example, had its origins in the Hansung Telegraphy Ministry established in 1885. Then in 1981 the Ministry’s responsibility for telecommunications was transferred to an organization that was called the Korea Telecom Authority. In other countries, the post and telecommunications operations were often split into two separate bureaux - a ‘post office’ and a ‘telecommunications office’ as telecommunications technologies and applications continued to grow beyond simple voice and became more complex. The next phase in this evolution, the broadband era, has ushered in a new round of development that impacts the telecommunications network, the entity that provides the network service, and the method by which networks are funded. This phase is characterized by a telecommunications sector that is largely privately owned and operated. The telecommunications office has been either partly or fully privatised into the telecommunications service providers that exist today in nearly every country. In a reflection of this trend, Korea’s Telecom Authority ceased to have sole responsibility for telecommunications services in Korea when KT, a fully privatised company, was established in 2002. The companies are subject to government imposed regulations and competition pressures. The incumbent carriers own the old copper assets built via the public utility model. Their competitors, the new market entrants, must either build their networks from scratch or rent capacity on the old copper network. The unbundled local loop regulations that are commonplace globally compel network owners to rent their available network capacity to others. No matter whether they are the incumbents who own the copper wires, or their competitors who sometimes own coaxial cable networks the challenge remains the same - satisfying increasing demand for high bandwidth services as the copper and coax infrastructures age. This challenge is being met through the use of optical fibre. Fibre is being deployed closer and closer to the consumer through the use of FTTC (fibre to the curb) and eventually, FTTH (fibre to the home) technologies. The use of FTTH technology allows the fibre to be shared for high bandwidth services. The one big difference is that today this fibre investment is increasingly privately funded whereas the copper network was deployed through government investment. For instance, in Korea, thanks to deregulation over the past decade, a number of new service providers entered the telecommunications market and began to fund and deploy fibre-based networks. Many advanced broadband networks are now available and the country has an impressive number of users. At the end of February 2007, KT had 1.69 million fibre optic subscribers, Hanaro, 930,000, and LG Powercomm 590,000, giving a total of 3.3 million FTTH subscribers in Korea. KT has recently announced plans to bring fibre to every Korean household by 2010. This move from government funding to private financing, however, significantly changes the motives and potentially alters the outcomes. In the past, the goal of the government entity was to connect anyone who wanted a phone service. In developed markets this objective was mandated and resulted in almost complete national coverage. In today’s privatised environment many competitive operators have seen a more attractive option, to build a mobile network rather than build a duplicate copper network or give money to the incumbent to rent the copper network. As a result, there are more competing mobile network operators than fixed network operators. In many markets, fixed network operators have focused more on the business market than the residential market because of the relatively lower entry costs. In a private investment environment, profitability and return on investment become the drivers and there is an increased likelihood that the companies providing service will target profitable, high revenue customers and neighbourhoods to the detriment of those that are less commercially valuable. When broadband began over a decade ago, xDSL technologies leveraged the old copper. Where coax existed for cable TV, cable modems emerged to compete in broadband Internet access. In some cases, the coax cable originally deployed for cable TV services effectively competes with the telecommunications incumbents through the use of technology that enables voice over coax. As pressure mounts to add more bandwidth for new services operators will move to a fibre per home. Alternatively, this might someday become a ‘wavelength per home’. Although the fibre may remain shared, each user gets their own colour of light within the fibre; this permits optically separate connections and virtually unlimited bandwidth to each home. A fibre to the home investment only makes sense when an entire neighbourhood is cut over from copper to fibre. Infrastructure based competition could result if more than one access network is deployed either in parallel to every home or selectively to homes that choose services from a particular service provider. Although a single fibre access network delivering all the services to all the homes in its serving area can make good economic sense, the business models are likely to fail when more than one infrastructure provider serves the same users because the return on investment of all the providers would be diluted. By shutting down the older copper-based infrastructure and replacing it with a shared fibre infrastructure, communities and service providers alike will benefit from the reduced service delivery costs. Today, a wide range of services are delivered on separate infrastructures - all funded, ultimately, by the end user - and services will be more affordable when a common infrastructure is used. In this broadband era characterized by privatisation, government has an increasingly important role to play. Business modelling has shown that private investment is capable of deploying about half of a national fibre infrastructure. The government’s challenge is to put in place regulation to fund the remaining half and ensure that not only high value users receive high quality services. There is a digital divide, and developing policy to effectively turn ‘have-nots’ into ‘haves’ is a key challenge. Governments have a responsibility to create a competitive telecommunications landscape that fosters profitable investment while delivering value to end users. Some forms of infrastructure-based competition results in strong competition but is focused only upon high value customers. Governments need to encourage forms of competition that do not dilute investment in more profitable areas and thereby prevent investment elsewhere, possibly some form of wholesale or structural separation model for infrastructure. Governments can improve the efficiency of their own services (education, taxes, healthcare, etc.) by delivering them on-line to communities; this can also drive the early adoption of broadband. The Japanese government, for example, is financing rural broadband deployment and, in collaboration with municipalities and service providers, is subsidizing nearly one-third of the construction costs. The evolution of telecommunications networks in Asia has been, and will be, determined by technology, government and investments. As the broadband era progresses, the balance between private investment and government support will guarantee the success of broadband deployment across Asia and the successful migration of networks from copper to fibre. Governments have an important role to play in maintaining growth and ensuring that all citizens have access to broadband services, but cannot single-handedly provide the funding needed for advanced networks broadband service. A growing number of service providers will provide the private portion of the funding for the next wave of development. To realize the potential of broadband governments and investors must agree on common goals for improved competition, increased deployment efficiency and improved service offerings.

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