A simple fibre deployment model

Across the UK, Openreach, Virgin Media and?over 100 altnets?are deploying fibre to the premise. The economics of this deployment depend heavily on the cost of capital, since significant upfront investment is required. Another key variable is the cost-per-premise-passed (CPPP), which is generally substantially higher in rural areas. And of course, the average revenue per user (ARPU) is a critical factor.

To illustrate how these factors interact, we have built a simple model. (Sample output shown above, with the interactive version available here). The model takes these input variables to calculate how many operators are viable in a given area. In low cost areas, multiple networks can build, and still hope to recover their cost of capital. However, in high cost areas only a single network (or none at all) might expect to recover its cost.

The coloured table shows how the number of viable players changes, depending on CPPP and cost of capital. For example, in the top left corner we see that in a region with CPPP of ￡200, if operators have a 6% cost of capital, then four networks will be commercially viable. However, if the cost of capital rises with increasing interest rates, you travel down the table, and fewer networks may be viable. Similarly, as you move to the right into higher cost regions, fewer networks are viable.

The blue numbers are input assumptions that can be varied. For example, if you set long term FTTP penetration to 90% instead of 80%, then commercial deployment - that is, at least one network being viable - extends to include homes with ￡1000 CPPP at a cost of capital of 9%.

This model highlights a number of issues:

• Overbuild per se isn't a problem - it depends where it happens. In areas with CPPP of around ￡300, multiple deployments are viable (though of course early builders would prefer to not be overbuilt)
• Rising interest rates may have a material impact. A 2% increase in cost of capital could reduce the number of viable networks by 1 across much of the country, as well as narrowing the range of commerically viable deployment
• The impact of price competition could similarly reduce the number of viable networks by 1, but this impact is limited to the lowest cost regions

One note of caution on the model's results. In reality, regions don't have homogeneous CPPP. A region with (say) ￡700 CPPP might broadly only support one network. But if it is a mix of materally lower and higher cost premises - say village houses and surrounding farmhouses - then it might be economic to overbuild the low cost premises, but not the whole region. This form of partial overbuild is likely to be important in regions with diverse CPPP.

To play with the model, and for a more detailed discussion of its workings and limitation, please visit the live version on the Communications Chambers website.