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Broadband: Basic business models

Choosing the right business model depends on the roles of the market actors in the broadband value chain.

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Depending on which roles (physical infrastructure provider (PIP), network provider (NP), service provider (SP)) the market actors take, different business models arise.

Vertically integrated model

If one market actor takes all three roles, it is said to be vertically integrated and the resulting business model is referred to as a vertically integrated model (all large telecom operators).

Incumbent telecom operators usually own the passive and active infrastructure and offer services to end users. There are variants where the operator offers access to competing service providers at the wholesale level. There have been many instances where public authorities have built broadband networks following vertically integrated models. This was indeed not uncommon in the pioneering years of municipal networks.

In some cases, especially if the vertically integrated actor is deemed to have significant market power (SMP), regulation imposes that network access be opened to competitors, either at the passive or the active layer. In that case, the network owner designs the network to deliver its own services and gives access to its competitors in forms compatible with the network design. Although sometimes incumbents refer to this model as “open access”, this is in reality a vertically integrated model with unbundling (either at physical layer, called local loop unbundling (LLU), or at the active layer, called bitstream access).

Open network model

If the roles are separated, we talk of an open network model. In an open network the infrastructure is available to all market participants at equal conditions. This can take different forms, depending on whether the network owner operates at PIP level alone, or also at the NP level. If the network owner is only involved at the PIP level, the network owner decides either to leave the higher layers to market players (competition in the market) or to contract the NP role to one market actor for a given time period (competition for the market), with the task of providing end-user connectivity to competing service providers.

Consequently, three open network business models can be identified:

  • Passive-Layer Open Model (PLOM)
  • Active-Layer Open Model (ALOM)
  • Three-Layer Open Model (3LOM)

Passive-Layer Open Model (PLOM)

In this model, an entity (e.g. the PA, a local cooperative, or a private investor, depending on the investment model chosen) builds and operates passive infrastructure to be made available to all market actors under fair and non-discriminatory conditions. This entity deploys the passive infrastructure either directly, or through standard procurement to the market consisting of civil engineering and network deployment companies but not telecom operators. The PIP keeps ownership of the passive infrastructure and runs operation and maintenance.

In such a model, the broadband network is open at the passive layer and competing operators like integrated network and service providers or open-access network providers selling connectivity to service providers get access to the end users directly through physical connections.

Generally, there is a backbone physical infrastructure provider connecting the different parts of the region, county or municipality and a local area physical infrastructure provider (delivering first-mile and sometimes area network). In some areas, the same entity takes both roles.

The network and service provider roles may be integrated in some operators, while other service providers may prefer to rely on the connectivity services provided by network providers active in the market. The backbone physical infrastructure provider receives revenue from operators, who lease dark fibre to deliver their services (or those from their customers) to the local areas. Here they lease passive connections (fibre, copper, or simply antenna sites and wireless frequency bands) from the access area physical infrastructure provider to deliver services to the end users. End users may or may not pay a fee for that. Like in all other open-network models, the end users choose the services from their operator of choice for a service fee. The access-area physical infrastructure provider may receive revenue from the end users in form of a (one-off) connection fee and/or a monthly network fee.

The PLOM gives operators maximum freedom and control in the design of their access network. However, in this model, each competing operator needs to deploy active equipment in the access node of each area of service (unless a sharing agreement is reached), which leads to inefficiency and high investment and maintenance costs (CAPEX and OPEX) in areas with low population density. Hence, the passive-layer open model is best suited for relatively large and densely populated areas. The PLOM is typically used by public-run municipal networks in large cities, in which the public authority takes the backbone physical infrastructure provider's role. A prominent example of this case is the Stockholm fibre network.

Active-Layer Open Model (ALOM)

In this model, one entity deploys and operates the passive and active layer (hence acting as an integrated physical infrastructure and network provider). This entity places active equipment in all access nodes and builds an open, operator-neutral network over which all service providers can deliver their services to all end users.

The value chain for the ALOM sees the backbone physical infrastructure provider and network provider roles joined. The backbone network and physical infrastructure provider receives revenue from service providers to deliver their services to the end users through its backbone network and onto the first mile connections. The first mile connections are leased from the access area physical infrastructure provider. Again, the end users choose the services from their operator of choice for a service fee. In a variation of this model, the network fee is paid directly to the physical infrastructure and network provider. In both cases, like in the PLOM, the access-area physical infrastructure provider may receive revenue from the end users.

Three-Layer Open Model (3LOM)

In the so-called three-layer open model, the roles of physical infrastructure provider, network and service provider are explicitly separated. In this case, the public authority has the same role as in the PLOM, but at the active layer, the network provider role is assigned by procurement to one company. The network provider places active equipment in all access nodes and builds an open, operator-neutral network over which all service providers can deliver their services to all end users. In order to guarantee fair and non-discriminatory conditions to all service provider (operator neutrality), the network provider is typically barred from delivering its own services.

The backbone physical infrastructure provider receives revenue from the network provider for dark-fibre lease. In order to reach the end-users, the network provider also leases passive connections (fibre, copper or simply wireless frequency bands) from the access area physical infrastructure provider to deliver services to the end users. Again, the end users choose the services from their operator of choice and pay a service fee. The service fee from the end user to the service provider generally includes a network fee, which is then passed to the network provider.

In a variation of this model, the network fee is paid directly to the network provider. The access-area physical infrastructure provider may receive revenue from the end users in form of a (one-off) connection fee to the physical infrastructure provider and/or a monthly network fee.

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