Broadband Network Strategies

June 4~5, 2002 Dr. Nae-Chan Lee

[email protected]

OECD Broadband Workshop 2000, Hotel Lotte World, Seoul, Korea

Korea Information Society Development Institute

Contents

What is Broadband Internet Service ? Impact of Network Investment Patterns of Growth Demand Side Supply Side Network Strategies

Broadband service, interwoven by various networks and functions

Apartment complex

Internet

•

Provider

•

Internet Service Providers (ISPs) (CPs)

• ADSL: copper • ADSL: optic

Core Network

Wire center Control Office • Cable modems: HFC House Building •

Internet Access Providers (IAPs)

Pole •

In-building Service Providers

•

User Interface Contents Network Network Network In-building & Home Automation

Transmission Capacity

 Metropolitan areas: 250 ~ 130 Gbps through (Dense) Wavelength Division Multiplex - Small-and-medium cities and towns: optical cables with maximum transmission rates of 2.5 Gbps Metropolitan Seoul Taejon Seoul Busan Seoul Kwangju Sould Taeku Pusan Kwangju Taejon Busan Taejon Taeku Kaejon Kwnagju Taeku Kwangju Capacity (Gbps) 248.2

191.3

173.9

171.5

132.4

164 163.7

160.4

136.5

 Through KII-G connecting 144 calling zones with optic fibers and installing ATM switches (1995 ~ 2000)

Investment as IT Booster

   Total amount of investment by 2001: $ 4.04 billion Spillover effects: $ 7.07 ~ $ 9.46 billion Job creation: 4,900~8,300 1997 Fiber Trunks FTTO 93 200 FTTC ADSL Total 2 0 295 1998 1999 42 75 88 13 1 144 148 189 10 421 2000 120 2001 143 Total 473 607 618 655 259 248 534 1,302 1,069 1,200 2,000 1,183 4,044

Subscription



8. 5 million (as of April 2002), penetration rate of 50.4 percent 100 inhabitants, recording the highest in the world

Number of Subscribers (Thousand p eop le)

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 8,496

Pattern of Growth

Revenue



Phase I: Launch

-

High cost and retail charges hinder the rollout of the market External subsidies and lowering users’ subscription barriers may be necessary to reach critical mass

•

e.g., local charge, handset subsidies, subscription fee discount Subscriber



Phase II: Takeoff

-

Temporary shortage in supply soon after passing critical mass - Competition spurs market growth



Phase III: Landing

-

Subscribers and revenues are being saturated



As technology advances, new services substitute existing one Time Phase 0 Phase I Phase II Phase III

Evolution of Marketplace

 Phase 0: No broadband service market before July 1998  Phase I: Broadband Internet service, initiated by Thrunet and followed by Hanaro and Korea Telecoms - seven facilities-based providers (FSPs) by the mid of 2000  Phase II: Facilities-based competition, intensified moving up the ‘last-one-mile’ deploying and upgrading access networks - 8.5 million households as of April 2002  Phase III: 13.5 million households with 20 Mbps by the end of 2005, a target of the gov’t (June 2001) - 11 ~ 12 million households, purely market-driven (estimate)

Demand Side

 D-1: Few in Phase I, increase after passing by critical mass -

Customers keep in mind the level of charge first and foremost!

 D 2: Customers’ subscription, influenced by word-of-mouth(50%) and mass media(25%)   D-3: Customers, less inclined to churn(93%) D-4: No network externality unlike voice services packet flows between each customer’s PC and web servers (no on net calls between customers like local or mobile services)  D-5: One-line with dynamic IP for residential use, Multi-line with fixed IP for small-and-medium sized business  Conditions D-2 and D-3 and competition accelerate

marketing costs(Ad, incentive payment),

recording the highest portion among costs

Supply Side

 S-1: less traffic sensitive cost - Modem:

subscriber sensitive

like mobile handset - DSLAM and CMTS, of which capacity are lower than local switch 

Lower degree of Economies of scale

compared to voice services through conditions D-4 and S-1  S-2:

Flat-pricing

- Because equipping with circuit or packet billing system, costly (cf. Packet pricing for Mobile Internet in Japan and Korea) - An increase in packets does not match revenue

Capturing as many customers as possible

 S-3: Procurement costs, initially high, but gradually declines as the economies of scale works in manufactures -

The price of modem has decreased 20 % in 2000 from $ 462 in 1999, while DSLAM 30 % from $ 36,000 during the same period



Best strategy is capturing as many customers as possible

-

Revenue increases proportionately with the number of subscribers

 Observation - Rough guess of Korea Telecoms Revenue in 2002:$ 1.26 billion = ($ 30  12 month  3.5 million ) - Hanaro Telecom and Thrunet recorded the black on the EBIDTA basis in fiscal year 2001.

First-mover or Follower

 Strategy I: Be a first-mover    less inclined to churn (D-3)  preempting the market Procurement costs for related facilities is high High risk of trial and error  Strategy II: Be a follower   Procurement costs may be low and risks may be hedged The market is preoccupied by the incumbent.  Observation  New entrants are first-movers in Korea and Japan in the form of fiber ADSL  The incumbent, reluctant to be a first-mover, e.g., worrying about substitution between dial-up and broadband services

Make-or-Lease

 Means of access indispensable   ADSL: copper local loop or fiber cable Cable Modem: cable TV (HFC) networks  Strategies: Investment or Lease   Which option to take depends on service providers But, if they take the latter option, whether to implement local loop unbundling or open access by regulatory authorities matters.  Observation  Most countries have adopted LLU, but not open access except e.g., Korea(voluntarily in the market), Canada

Skipping over Technologies

 Advances in Technology and Speedy Migration  Broadband: Dial-up  ISDN  ADSL  VDSL or xDSL  Strategies  Strategy I: Taking the opportunity of grabbing the market now - foregone sunk costs and burdens of new tech. investment in the future  Strategy II: Wait until tomorrow, skipping to new technology. - Foregone present market opportunity  Observation  Korea Telecom has skipped over ISDN and jumped to ADSL, while Japan has devoted on ISDN. Japan, hopping onto VDSL ?

Network Extension or New Construction

  Mobile  Advances in Technology - IS-95A/B  cdma2000-1x    EV-DO  EV-DV  IMT-2000 Strategy I : Upgrade, using existing networks Strategy II: Overlay, newly construct - Investment cost may be saved in the form of overlay, but upgrade is necessary in some phases of migration.  Broadband   Strategy I: New facilities(modem, DSLAM) with existing local loop Strategy II: Replacing it by optic fibers   More or less

dependent on Technology

Observation  Korea Telecom, although late comer, has caught up other service providers through network extension.

Thanks for Listening !

For more details on Broadband Internet Service in Korea

“ Broadband Internet Service in Korea (2002)”

For more details on Info and Telecom Services in Korea

broadbandkorea.kisdi.re.kr