Monday, December 14, 2015

FTTN vs FTTP (2): Fast, cheaper, sooner vs Do it once. Do it right.

NB: Update 7, 8 Jan 16
There is a calc error** that I have amended for in the below figures. See more here. Revisions indicated with **.
==Original post
Last week,  said on 7.30 Report: Leigh Sales posed an NBN question
Leigh Sales and Malcolm Turnbull, PM"So why then do you continue to back a broadband network that relies on a decrepit copper network?" ie FTTN

The Australian PM, Malcolm Turnbull in response said "under the approach we are taking to the NBN, we will get the network completed six to eight years sooner than it would be under Labor's proposed method and $30 billion cheaper or at less expense to the Government, which makes broadband more affordable."

In a previous post, I compared FTTP and FTTN assuming the networks were available at the same time. Here I would like to compare where there is a delay in the availability of FTTP at a household.

Model
I created a model to compare the costs and benefits of FTTP and FTTN, and accounted for the delay.
The CAPEX, OPEX and Revenue come from recently leaked NBN Co. estimates to replace ailing Optus HFC cable with either FTTN or FTTP. All these figures are generated for a single household. To get to a national perspective, multiply the outcome by 2.5M households ie 10M total households by 25% FTTN rollout.

I use four comparisons:
  • sales generated over time
  • cash generated / expended over time
  • profit or loss generated by NBN Co over time, and
  • GDP impact ie Sales (customer benefit), OPEX (supplier benefit) and NBN Co profit/loss (shareholder benefit).
The results of the model, show two time frames, after Year 10, and Year 20 for a variety of delays between arrival of FTTP - Yr 0 (at the same time), Yr2 , Yr 4, Yr 6, Yr 8. The last two scenarios being the ones suggested by the PM. The Year 10 and 20 scenarios assume that revenue, and OPEX are consistent over the 20 year timeframe.

FTTP Revenue: $785pa OPEX: $350pa, CAPEX: $4,400
FTTN Revenue: $640pa OPEX: $570pa. CAPEX: $2,100
(NB:** Now revised to FTTN OPEX $440pa Revenue $490pa - amended figures below.)
These figures come from the NBN Co, Optus HFC replacement slides from Delimiter, as discussed in the earlier post.

Output of the Model
All figures in thousands of dollars. Negatives/losses in brackets. Some rounding to whole numbers.
Figures derived from model linked above. Model is in OSX Numbers, and translated in xls.
Revised** numbers only affect FTTN figures. FTTN Revenue / Opex down $150pa, $130pa. But some rounding errors when adding together.

FTTP commences at Yr 8: (Old/Revised**: not amended if diff < 10%;^)
Yr 10FTTNFTTPYr 20FTTNFTTP
GDP12.8 / 10**6GDP26 / 20**20
Sales6.4 / 5**1.5Sales13 / 10**9
Cash(1.4)^(3.5)Cash(0.7) / (1.0)**0.8
Profit/(Loss)(1.4)^(1)Profit/(Loss)(0.7) / (1.0)**1.7

FTTP commences at Yr 6: (Old/Revised**)
Yr 10FTTNFTTPYr 20FTTNFTTP
GDP12.8 / 10**9GDP26 / 20**23
Sales6.4 / 5**3Sales13 / 10**11
Cash(1.4)^ (2.7)Cash(0.7) / (1.0)**1.7
Profit/(Loss)(1.4)^(0.5)Profit/(Loss)(0.7) / (1.0)**2.5

FTTP commences at Yr 4: (Old/Revised**)
Yr 10FTTNFTTPYr 20FTTNFTTP
GDP12.8/ 10**12GDP26 / 20**26
Sales6.4 / 5**5Sales13 / 10**12.5
Cash(1.4)^ (1.8)Cash(0.7) / (1.0)**2.5
Profit/(Loss)(1.4)^1Profit/(Loss)(0.7) / (1.0)**3.4

FTTP commences at Yr 2: (Old/Revised**)
Yr 10FTTNFTTPYr 20FTTNFTTP
GDP12.8/ 10**15.2GDP26 / 20**29.1
Sales6.4 / 5**6.3Sales13 / 10**14.1
Cash(1.4)^(0.9)Cash(0.7) / (1.0)**3.4
Profit/(Loss)(1.4)^1.7Profit/(Loss)(0.7) / (1.0)**4.3

FTTP commences at Yr 0: (Old/Revised**)
Yr 10FTTNFTTPYr 20FTTNFTTP
GDP12.8/ 10**18GDP26 / 20**32.2
Sales6.4 / 5**7.8Sales13 / 10**15.7
Cash(1.4)^ 0Cash(0.7) / (1.0)**4.3
Profit/(Loss)(1.4)^2.6Profit/(Loss)(0.7) / (1.0)**5.2

Analysis
What these figures show, is that:
- FTTP is much more profitable for NBN Co. than FTTN, even when running eight years later. Profit in this case is Revenue less OPEX less Depreciation, where FTTN is depreciated over ten years, and FTTP is depreciated over 25 years. FTTN never makes a profit, nor generates positive cashflow even after 20 years. There is a cash benefit relative to FTTP though. Roughly $2100^ is saved in the case where FTTP starts eight years later than FTTN. But by Yr 20, FTTP has generated $1500 ($1800**) more cash, for the Yr 8 scenario. (Unchanged by Revision**).
- FTTP generates as much GDP as FTTN, so long as FTTP is no more than four (eight**) years later [Revised **]
- the PM is correct. when FTTP is six or eight years later than FTTN, greater customers sales and GDP is generated by FTTN. But a four year delay, makes the outcome by Yr 10 and thereafter almost identical. (Revised**: FTTP generates as much GDP as FTTN, even if eight years late at Yr 20).
- FTTP is generally superior to FTTN whenever the gap between availability is less than four years.
- none of the FTTN scenarios is profitable for NBN Co.

The Yr 10 - 20 figures must be more suspect for FTTN revenue, since the likelihood of revenue stability after the ten year useful life of the FTTN network (especially relative to the FTTP network) must be suspect. The FTTP is upgradeable for the foreseeable future, and likely to Yr 20.

Next
The next step is to compare the $30B statement. Can the PM's statement that $30B is saved by using his MTM (ie FTTN, HFC) rather than FTTP really amount to a $30B saving? That will have to be addressed in the next post.


Sunday, December 6, 2015

FTTP vs FTTN; when is spending $4,400 better value than spending $2,100?

NB: Update: 7 Jan 16. 
The Delimiter comment picked up a calc error** in the below post.
I did allocate the FTTN costs/revenue over 1 year not 1.3 years, which inflates the OPEX pa and the Revenue pa for FTTN. The total diff FTTN vs FTTP being about the same, as the Rev and OPEX changes offset. Makes the OPEX diff $5 per month, and the Revenue $25 per month in favour of FTTP over FTTN. So about the same difference overall. Great to see Delimiter readers paying so much attention to the detail. Revisions identified below with **.
Thanks to david 04/01/2016 at 3:55 pm at the Delimiter comments for the catch.
== Original post

The National Broadband Network (NBN) is Australia's plan to connect all Australians to faster broadband. The current Liberal/National government plans to connect about 25% of premises to cheaper to install ($2,100 per household), faster to roll out FTTN. The previous Labor government aimed to connect 93% of premises to more expensive to install ($4,400 per household) and slower to roll-out FTTP.

ANALYSIS
It costs $4,400 to install fibre to the premises (FTTP) but only $2,100 to install fibre to the node (FTTN). Recent figures from NBN Co suggest that when the OPEX (Operating Expenses) paid per year to run these services and Revenue generated from these services is taken into account, then FTTP may be better value than FTTN in as short a period as 6 1/2 years. See the Graph below, which shows Cash generated by FTTP exceeds that generated by FTTN after 6 1/2 years. The graph shows total costs for FTTP and FTTN (including CAPEX and OPEX) become equivalent ten years after installation. Coincidentally, the graph shows FTTP breaks even (total revenue exceeds total costs, including CAPEX), at the same time, after ten years. The equivalent breakeven time for FTTN is 30 years, using the numbers below. This graph does not take into account build time, which I will deal with in a second post. **Cash impact of graph unchanged.
Model online to download at DOI: https://dx.doi.org/10.6084/m9.figshare.2008689.v1


I did some analysis on the recently published HFC slides (pdf; from Delimiter's 25.11.15 page) which compare FTTP and FTTN Capex, Opex and Revenue. I tweeted them recently (on 2 Dec; first, second, third).

Click on image to enlarge
 

DATA
The HFC slide analysis indicates:  FTTP $20pm (per household) less OPEX; $10pm more REV (per household) than FTTN. With a $30 per month financial benefit, a $2,300 CAPEX diff pays for itself in 76mths (6 1/2 years). The  $2,300 CAPEX difference is FTTP $4,400 CAPEX/hh, less FTTN $2100 CAPEX/hh (per household). (NB: Calc error Revision**: FTTP $90pa per houshold less OPEX, $300pa per household more Revenue than FTTN).

The analysis is based on: 350k households in HFC slide (see image)
FTTP CAPEX $4400/hh | OPEX $125M pa | REV $275M pa
FTTN CAPEX $2100/hh | OPEX $200M pa | REV $225M pa (NB:** This should be over 1.3yrs.)

If you work out these total costs and revenues per household, that equates to:
FTTP CAPEX $4400 | OPEX $350 pa / hh | REV $785 pa / hh
FTTN CAPEX $2100 | OPEX $570 pa / hh | REV $640 pa / hh  (NB:** Opex $440 pa/hh Rev $490 pa/hh)

This data suggests FTTP is better value than FTTN when you take into account OPEX and Revenue after 6 1/2 years. FTTP is not only cheaper to run per annum (OPEX $220 less for FTTP; $570 vs $350 i.e. close to $20 per month), but generates more average revenue ($785 vs $640, close to $10 per month). This difference totals about $30 per month FTTP > FTTN greater margin per household for NBN Co. This is a total net benefit of $360 per household per year for using FTTP over using FTTN. The CAPEX difference of $2300 ($4400 -  $2100) would be earned back in 76 months i.e. $2300 / $30. Over 25% of say 10M households, that works out in total to be a benefit of $900M per year ($360pa * 10M * 25%). So over the say ten year life of FTTN, the benefit is approaching $9B total. The longer FTTN remains in place, the greater the foregone benefit for not switching to FTTP. (NB:** OPEX $90 less for FTTP; Revenue about $300 more for FTTP; diff about $30 per mth).

This annual and total benefit does not take into account extra CAPEX expense to replace the FTTN with FTTP. This would be an extra difference between FTTN and FTTP.

Thus, assuming these figures are correct FTTP would pay for itself, compared to FTTN within 6.5 years, according to NBN Co's numbers on the slide linked above, based on differences in Opex and Revenue, regardless of nearly 100% greater CAPEX on FTTP.

But this is the first time the HFC slide has brought all those numbers easily together. Such information could have been presented in the cost benefit analysis but these numbers tell such an interesting story, that surely I would have remembered that.

Summary: It makes sense to spend $4,400 CAPEX on FTTP (rather than $2,100 on FTTN CAPEX) when the OPEX and Revenue make the margins much more favourable for FTTP than for FTTN. The OPEX and Revenue figures from the HFC slide indicate about $30 per month margin benefit (OPEX plus revenue difference) for FTTP over FTTN or $385 per annum. This margin benefit makes FTTP more attractive than FTTN after 6 1/2 years of installation.

old/Revised **FTTNFTTP
CAPEX per HH$2,100$4,400
OPEX TOTAL pa$200M$125M
OPEX per HH pa$570/$440**$350
Rev TOTAL pa$225M$275M
Rev per HH pa$640/$490**$785
Margin per HH pa$70/$50**$435