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 (e.g. 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).
Wholesale-only network model
If the roles are separated, we talk of a wholesale-only network model. In a wholesale-only 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 variations of the wholesale-only business models can be identified:
- Passive-layer wholesale-only (also known as Passive-Layer Open Model (PLOM))
- Active-layer wholesale-only (also known as Active-Layer Open Model (ALOM))
- Mediated wholesale-only (also known as Three-Layer Open Model (3LOM))
Passive-layer wholesale-only model
In this model, an entity (e.g. the public authority, 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.
Active-layer wholesale-only model
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 main difference of this model, compared with passive-layer wholesale-only, is that one entity oversees installing active equipment in all access nodes. This on one hand reduces the freedom of operators in designing their own access network, but on the other hand it makes it easier and cheaper to deliver services to all end users in the network.
Mediated wholesale-only model
In the so-called mediated wholesale-only model (or three-layer open model, 3PLOM), the roles of PIP, NP and SP are explicitly separated. In this case, the public authority has the same role as in the passive-layer model, but at the active layer the NP role is assigned by procurement to an external entity. This third-party NP, therefore, acts as a mediator (hence, the name of the model) by placing active equipment in all access nodes, and it builds a wholesale-only, operator-neutral network. Independent service providers get active-layer access, typically by placing their equipment in a central location to deliver their services to all end users. Service providers, on the other hand, perceive the mediated model as very similar to the active-layer model. From the perspective of network owners (PIP), the mediated model requires a similar level of engagement and technical competence as the passive-layer model. The mediated wholesale-only model can therefore be a good option for smaller networks in sparsely populated areas.
Choosing the business model
Depending on its level of involvement, a public authority will have more or less say in the definition of the business model. Demographic, commercial and cultural conditions also play a role in the selection of the model. In general, a business model that allows for a win-win situation for all stakeholders will increase a project’s chance of success. Some of the questions that should be answered in the process are:
- How is the population distributed? Outside urban areas, passive-layer wholesale is usually not recommended.
- Is the plan to subsidise an operator with significant amount of infrastructure and already active as a service provider? Vertical integration may be the only realistic option. Access obligations attached to state-aid rules will need to be implemented.
- Is there enough technical competence within the public authority to take up the NP role? Are there sufficient economies of scale? An active-layer wholesale-only model may be optimal.
- Are there market actors interested in taking up the NP role? Consider a mediated version of the wholesale-only model.
For more details refer to the Broadband Investment Guide.