Economic Analysis of Networking Technologies for Rural Developing Regions*

Mubaraq Mishra

Berkeley Wireless Research Center

*Joint work with Tom Du, Dick Filippini, John Hwang, Lakshminarayanan Subramanian and Reza Moazzami

Motivation The business motivation: Is there a

business case for providing connectivity to rural populations in developing regions? Interested in the financial viability of the entire

eco-system

The technology motivation: Can economic analysis help us determine key technological developments needed to provide low cost connectivity?

Agenda

Akshaya case study Financial Analysis of Akshaya Extending the Akshaya Analysis Conclusions

Akshaya: A Case study Joint project between the State of

Kerala in India and Tulip IT Wireless IP network set up in the

district of Malappuram – 630 eCenters in all

Backhaul and last mile links are based on proprietary technologies

1 center for every 2000 families

Vettekkod

Kizzisary

Chekkod

PallurkottaTavanoor

Kallarakkunnu

Vangalam

Arikkod

Nilambur

Kalpakanchery

Kakkancherry

Pullamkode

Melmuri

Malappuram

Vivekananda

MEA

PTM

POP

22

6

2

5

12

5

25

236

8

17

30

3

2324

6

424

10

630 No of Akshaya centres connected

20

8

3

5

7

8

10

5

4

16.8 km

Bharti

3.04 km

7.75km

4.5 km

3.48 km

17.5 km

8.5 km

22.3 km

15.68 km

22.5 km

3.5 Km

14.53 km

11.5km3.5km

Sub POP

Akshaya Network Setup

Pop - Hosts backhaul links and Access Base station

Akshaya Center – Kiosk managed by entrepreneur

Sub-pop - AC which also serves as a POP.

Relay - Backhaul relay tower

Technologies considered

X X

X

X

WiFi(directional)

Fiber

VIP

WipLL WiMax WiFi(Omni)

CDMA450

Access Technologies

Backh

au

l Tech

nolo

gie

s

Total Costs for network deployment

WiFi/WiMax is the most economically viable solution

Fiber/WiMax is the least economically viable

For Wireless, last mile costs dominate backhaul costs

OpEx is huge !

CapEx for network deployment

WiFi/CDMA450 has the lowest deployment

Largest cost for fiber is installation

OpEx for network deployment

WiFi/CDMA450 suffers from recurring spectrum lease cost

Termination costs for a large portion of the OpEx

Conclusions for Akshaya WiFi with directional antennas + WiMax has

most attractive economics. WiFi/CDMA450 has lowest cost of

deployment. Largest cost for Fiber is installation. Wireless backhaul (both WiFi and VIP)

technologies have at most 1/8 the backhaul CapEx VS Fiber

Largest component of the capital investment for providing connectivity is the cost of the end-user devices.

Cost of backhaul/access radio equipment on towers is miniscule

Extending the Akshaya Analysis

Flat Terrain: If tower heights could be halved: IRR jumps by

1.8% Lower Population density:

Coverage area can be doubled : IRR jumps by ~3%

Cheaper end devices: PC costs can be halved : IRR jumps by ~10%

Extending the Akshaya Analysis: Handset Scenario

Base case assumptions Convert the 630 centers into cellular handset retailers 6 CDMA450 Base-stations Start at 2 min usage increasing (by 1 min each year)

to 6 min usage per day per subscriber Charge $0.02 per minute ~100,000 handsets (~1.58% penetration)

With recurring Spectrum costs: Can subsidize handsets up to $38 each to breakeven

With no recurring Spectrum costs: Can subsidize handsets up to $45 each to breakeven

Regulatory Effects (spectrum, duties, etc.)

Regulation costs Upfront licensing fees Recurring spectrum license fee (8%-12% of adjusted

gross revenue in India) Custom duties on wireless/PC/Handset Rights of ways costs (Tower lease etc) Termination charges

Total costs regulation costs for the WiFi/WiMax scenario are 45% of the CapEx and 5 year OpEx

Eliminating regulatory costs would increase the IRR by 74.5%.

Conclusions Entrepreneur can setup a Rural Wireless

network and obtain an attractive 40% IRR Long haul wireless technologies incur must

lower cost/unit of demand than Fiber Backhaul and Access Point Radio cost is

small - hence it makes sense to make more expensive radios if we can improve coverage or reduce power dissipation.

Costs linked to regulatory policies constitute a substantial portion of the overall network cost structure

Q & A

Appendix – Comparison of Technologies

Equipment required based on technology

Technology Number of POPs/Number of sub-

POPs/Number of Relay POPs

Average Number of Links per POP/sub-

POP

WipLL+VIP 18/16/0 3

WiMax+WiFi 18/16/0 3

CDMA450+WiFi 3/3/0 3 (includes redundancy)

WipLL+Fiber 18/16/0 3

Financial Model - Assumptions Interested in the financial viability of the entire

eco-system Revenue/Cost

Charge $0.02 per minute Interconnection termination fee of $0.005 per minute Network utilization starts at 20% grows at 15% per

year Other

PCs cost $500 each 3 PCs per center Discount rate of 10%

Akshaya Business Model Tulip provides and maintains connectivity to

Akshaya Center (AC) Micro loan (2L/center) to local entrepreneur for

PC (min. 5 PCs per center) to run and operate AC Revenue model for Akshaya

Monthly fee from AC ($20/month) Government offices Commercial customers (insurance, banks, car

manufacturers., etc) 1st family member trained for free, each

additional family charged a small fee by entrepreneur

Training subsidized by government

Discussion: Handset Scenario

Base case assumptions Convert the 630 centers into cellular handset

retailers 6 CDMA450 Base-stations Start at 2 min usage increasing (by 1 min each

year) to 6 min usage per day per subscriber Each CDMA cell tower with 6 sectored antennas

can cover 1000 customers No upfront spectrum auction cost for 450 MHz

band Charge $0.02 per minute

Handset results Key results

At ~100,000 handsets (~1.58% penetration), can subsidize handsets up to $38 each to breakeven

Each base station can handle up to 69 simultaneous calls

Revenue (year 5) 4,300,128$ OpEx (year 5) 1,792,285$ Total Upfront CapEx 184,290$

Backhaul 25,170$ Last Mile (Access) 159,120$

Total Annual Handset Capex 746,550$ NPV 689,483$ IRR 28.4%

Handset results (no spectrum costs) Assume no spectrum costs

At ~100,000 handsets (~1.58% penetration), can subsidize handsets up to $45 each to breakeven

Each base station can handle up to 69 simultaneous calls

Revenue (year 5) 4,300,128$ OpEx (year 5) 1,319,271$ Total Upfront CapEx 184,290$

Backhaul 25,170$ Last Mile (Access) 159,120$

Total Annual Handset Capex 746,550$ NPV 1,378,658$ IRR 44.8%

Market size opportunity

China IndiaRural Population 783,000,000 745,000,000 Total Addressable Area (sq km) 4,663,205 3,166,285

Number of Centers 78,300 74,500 Number of PCs 234,900 223,500 Number of BaseStations ($1000 ea) 45,299 30,758 Number of subscriber units ($250 ea) 78,300 74,500 Number of backhaul radios ($500 ea) 90,598 61,516

$ value 227,623,000$ 191,891,000$

Total (million) 419.51$

( 5 people per family, 1 center for every 2000 families, 3 PCs/center)

Value chain

Network design and deployment

Rights of way:Spectrum, towers

Networkequipment

Network operation and maintenance

Billing andcustomer support

User devicesServices andapplications

Classification of Telecommunication markets Key factors:

Population density Purchasing power per user Bandwidth demand per user

Urban/developed markets: High Pop density, High purchasing power, high BW demand => Fiber

Rural/developed markets: Low Pop density, High purchasing power, high BW demand => ?

Rural/developing markets: Low Pop density, Low purchasing power, low BW demand => ?

Rural Connectivity Market Individual purchasing power is low but

community purchasing power is high Rural networks are coverage constrained

while Urban networks are capacity constrained Demand is difficult to forecast Difficult Markets

Low Literacy Markets are hard to reach, disorganized, and very local in

nature. Lack of credit also impedes market development.

Implication: Sharing of devices to reduce cost

NPV Sensitivity Analysis(Network utilization vs. Charge per minute)

A minimum price of $.02 is needed for positive IRR.

NPV Sensitivity Analysis(PC cost vs. # of PCs per center)

A minimum of 2 PCs are needed to generate enough demandfor positive IRR

Basic Network Setting

PeeringPoint

AccessNetwork

AccessNetwork

AccessNetwork

Kiosk

Kiosk Kiosk

T1/T3City/Internet

Backhaul network

POPS

Rural distribution Network

Basic Economic Terms Capital expenditure (CapEx)

Tower cost Backup power equipment cost Installation costs Radios/Networking/PC cost Upfront Spectrum cost

Operational expenditure (OpEx) Salaries Maintenance Power cost Recurring Spectrum lease cost

Basic Economic Terms Net Present Value (NPV) – Current

value of future transactions at given Rate of Return

Internal Rate of Return (IRR) - Discount rate ‘r’ for which NPV = 0