The WIK-Model Bottom-up cost analysis for the telecommunications network Geneva, Dr. Frank Schmidt, WIK

2 Content What is the WIK-Model Main Characteristics Reasons for development Structure of the WIK-Model Core network analysis Access network analysis Annualisation The case for a bottom-up model

3 What is the WIK-Model? Main Characteristics Bottom-up network model Tool for forward-looking cost analysis Follows closely the LRIC (FL-LRAIC) methodology Covers all parts of the network Subscribers access network Core/conveyance network Independent of network operator data Strong network planning part High flexibility to cope with different network scenarios

4 What is the WIK-Model? Partition model of the PSTN/ISDN Subscriber Access Network Access Network Backbone Network local loop MDF SLIC Remote concentrator ADM/SDH Fibre rings Remote concentrator ADM/SDH Fibre rings Local exchanges Transit exchanges International gateways DX4/SDH Meshed fibre topology POIs Local exchanges Transit exchanges International gateways DX4/SDH Meshed fibre topology POIs ANISNI traffic sensitive part non-traffic sensitive + traffic routing

5 What is the WIK-Model? Reasons for development Regulation of a dominant carrier Overcoming the asymmetric information problem Understanding telcos network costs Identification of cost drivers/cost causality Making regulatory rate setting more transparent Developing a platform for discussion Identifying the reasons for diverging views

6 What is the WIK-Model? Further applications Estimating the cost of universal service long run incremental/avoidable cost of service provisioning Calculating the cost of network roll-out Model does not demand data from an already existing network Network planning part allows true forward looking analysis Support of managerial decisions Setting cost oriented tariffs Improving network efficiency

7 Structure of the WIK-Model Main characteristics Starting point: Demand Definition of the network and the relevant elements Allocation of demand to network elements Dimensioning of network elements Calculation of investment and annual cost Calculation of service costs on the basis of network usage

8 Structure of the WIK-Model Input data MDF-locations; number of lines census data carrier database if available Demand: Outgoing traffic per average line local, national, international Network design and engineering Technology, hierarchy, fill factors,... Investment and cost data Asset prices (MEA concept) Rate of return; asset lives

9 Structure of the WIK-Model Network dimensioning Starting with demand and MDF-locations the whole network is constructed endogenously Therefore the model has built-in engineering modules with a high degree of flexibility The resulting set of database files serves as the basis for cost analysis The engineering part adds complexity to the model but allows an analysis independent from operators data

10 Structure of the WIK-Model WIK-Model Subscribers access network Core network/ conveyance network

11 Core network analysis Core network model consists of various modules: Classification of nodes (remote, local, backbone..) Assignment of lower level to upper level nodes Generation of a traffic matrix Traffic routing and circuit group dimensioning logical network layer Transformation of the logical network layer into an efficient transport network transmission layer infrastructure layer

12 Core network analysis Starting point: Initial node locations Local exchanges for Spain Derived from census data

13 Core network analysis Node classification and assignation

14 Core network analysis Analysis of a network cluster

15 Core network analysis Network design in the functional layer model Two-tier backbone network Upper level and lower level backbone nodes form a meshed network structure Degree of meshing determined by thresholds One-tier or two-tier access network Star or double star topology on the logical layer Ring structure on the transport layer Local switching functions in intermediate nodes

16 Core network analysis Network design (logical layer) 4 International gateway

17 Core network analysis Network design (transport layer)

18 Core network analysis Constructing an efficient transport network Heavily meshed logical layer between backbone nodes

19 Core network analysis Constructing an efficient transport network Calculation of an optimal biconnected network topology

20 Core network analysis Calculation of Investment The network analysis yields a set of nodes with the corresponding traffic flows and the number of main lines connected a set of links between nodes with the corresponding traffic flows the realization of the logical network layer in the transport network with the corresponding transmission equipment and outside plant Investment is calculated network element by network element

21 Access network analysis Access network module has the following tasks: Identify customer locations Manual work on the basis of maps With GIS-Interface if available Group customers to network clusters Assign each cluster to MDF-Sites Find efficient cable routes within and between clusters Conduct detailed investment analysis

22 Access network analysis Model has been used to set tariff for unbundled local loop access in Germany Model is available from German NRA Major extensions and modification are planned Modeling of FITL network More sophisticated algorithms for calculating efficient cable routes Interface to GIS-System to reach a more detailed database (customer locations, roads, natural barriers...)

23 Annualisation of Investment Assets are valuated at actual prices Cost of capital and depreciation Weighted average of cost of capital Economic depreciation as ideal solution Annuity with plant specific real interest rate as practical approximation Operating and maintenance cost Derivation of mark-ups for different plant categories (switching equipment, transmission, cable...) Investment serves as a proxy cost driver

24 The case for a bottom-up model Dependence on incumbents database can be reduced significantly Improved understanding of telcos network costs Transparent rate setting process Model serves as a platform for discussion Reasons for diverging views can be identified Not a substitute for top-down analysis; rather a useful complement

25 Wissenschaftliches Institut für Kommunikationsdienste (WIK) GmbH Postfach Bad Honnef Germany Tel.: Fax: website: Applications of the model so far: Germany: Unbundled loop (1999), Interconnection (2000) Austria:Interconnection (2000)