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Broadband Network Strategies

Korea Information Society Development Institute. Broadband Network Strategies. June 4~5, 2002 Dr. Nae-Chan Lee nclee@kisdi.re.kr. OECD Broadband Workshop 2000, Hotel Lotte World, Seoul, Korea. Contents. What is Broadband Internet Service ?. Impact of Network Investment. Patterns of Growth.

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Broadband Network Strategies

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  1. Korea Information Society Development Institute Broadband Network Strategies June 4~5, 2002 Dr. Nae-Chan Lee nclee@kisdi.re.kr OECD Broadband Workshop 2000,Hotel Lotte World, Seoul, Korea

  2. Contents What is Broadband Internet Service ? Impact of Network Investment Patterns of Growth Demand Side Supply Side Network Strategies

  3. Broadband service, interwoven by various networks and functions Apartment complex • ADSL: copper • ADSL: optic House Internet Core Network Wire center Control Office Building • Cable modems: HFC Pole • Internet Service Providers (ISPs) • Contents Provider (CPs) • Internet Access Providers (IAPs) • In-building Service Providers • User Interface In-building & Home Automation Contents Network Network Network

  4. Transmission Capacity • Metropolitan areas: 250 ~ 130 Gbps through (Dense)-Wavelength Division Multiplex • Small-and-medium cities and towns: optical cables with maximum transmission rates of 2.5 Gbps • Through KII-G connecting 144 calling zones with optic fibers and installing ATM switches (1995 ~ 2000)

  5. Investment as IT Booster • Total amount of investment by 2001: $ 4.04 billion • Spillover effects: $ 7.07 ~ $ 9.46 billion • Job creation: 4,900~8,300

  6. Subscription • 8. 5 million (as of April 2002), penetration rate of 50.4 percent 100 inhabitants, recording the highest in the world

  7. Revenue Subscriber Time Phase 0 Phase I Phase II Phase III Pattern of Growth • Phase I: Launch • High cost and retail charges hinder the rollout of the market • External subsidies and lowering users’ subscription barriers may be necessary to reach critical mass • e.g., local charge, handset subsidies, subscription fee discount • Phase II: Takeoff - Temporary shortage in supply soon after passing critical mass - Competition spurs market growth • Phase III: Landing - Subscribers and revenues are being saturated • As technology advances, new services substitute existing one

  8. Evolution of Marketplace • Phase 0: No broadband service market before July 1998 • Phase I: Broadband Internet service, initiated by Thrunet and followed by Hanaro and Korea Telecoms • seven facilities-based providers (FSPs) by the mid of 2000 • Phase II: Facilities-based competition, intensified moving up the ‘last-one-mile’ deploying and upgrading access networks • 8.5 million households as of April 2002 • Phase III: 13.5 million households with 20 Mbps by the end of 2005, a target of the gov’t (June 2001) • 11 ~ 12 million households, purely market-driven (estimate)

  9. Demand Side • D-1: Few in Phase I, increase after passing by critical mass • Customers keep in mind the level of charge first and foremost! • D-2: Customers’ subscription, influenced by word-of-mouth(50%) and mass media(25%) • D-3: Customers, less inclined to churn(93%) • D-4: No network externality unlike voice services • packet flows between each customer’s PC and web servers (no on-net calls between customers like local or mobile services) • D-5: One-line with dynamic IP for residential use, Multi-line with fixed IP for small-and-medium sized business • Conditions D-2 and D-3 and competition accelerate marketing costs(Ad, incentive payment), recording the highest portion among costs

  10. Supply Side • S-1: less traffic sensitive cost • Modem: subscriber sensitive like mobile handset • DSLAM and CMTS, of which capacity are lower than local switch • Lower degree of Economies of scale compared to voice services through conditions D-4 and S-1 • S-2:Flat-pricing • Because equipping with circuit or packet billing system, costly (cf. Packet pricing for Mobile Internet in Japan and Korea) • An increase in packets does not match revenue

  11. Capturing as many customers as possible • S-3: Procurement costs, initially high, but gradually declines as the economies of scale works in manufactures • The price of modem has decreased 20 % in 2000 from $ 462in 1999, while DSLAM 30 % from $ 36,000 during the same period • Best strategy is capturing as many customers as possible • Revenue increases proportionately with the number of subscribers • Observation • Rough guess of Korea Telecoms Revenue in 2002:$ 1.26 billion = ($ 30  12 month  3.5 million ) • Hanaro Telecom and Thrunet recorded the black on the EBIDTA basis in fiscal year 2001. • Revenue increases proportionately with the number of subscribers • What if alternative services such as wireless Internet, Power Line Communication and IP sharing come in on the scene too early ?

  12. First-mover or Follower • Strategy I: Be a first-mover • less inclined to churn (D-3)  preempting the market • Procurement costs for related facilities is high • High risk of trial and error • Strategy II: Be a follower • Procurement costs may be low and risks may be hedged • The market is preoccupied by the incumbent. • Observation • New entrants are first-movers in Korea and Japan in the form of fiber ADSL • The incumbent, reluctant to be a first-mover, e.g., worrying about substitution between dial-up and broadband services

  13. Make-or-Lease • Means of access indispensable • ADSL: copper local loop or fiber cable • Cable Modem: cable TV (HFC) networks • Strategies: Investment or Lease • Which option to take depends on service providers • But, if they take the latter option, whether to implement local loop unbundling or open access by regulatory authorities matters. • Observation • Most countries have adopted LLU, but not open access except e.g., Korea(voluntarily in the market), Canada

  14. Skipping over Technologies • Advances in Technology and Speedy Migration • Broadband: Dial-up  ISDN  ADSL  VDSL or xDSL • Strategies • Strategy I: Taking the opportunity of grabbing the market now • foregone sunk costs and burdens of new tech. investment in the future • Strategy II: Wait until tomorrow, skipping to new technology. • Foregone present market opportunity • Observation • Korea Telecom has skipped over ISDN and jumped to ADSL, while Japan has devoted on ISDN. Japan, hopping onto VDSL ?

  15. Network Extension or New Construction • Broadband • Strategy I: New facilities(modem, DSLAM) with existing local loop • Strategy II: Replacing it by optic fibers •  More or less dependent on Technology • Mobile • Advances in Technology • IS-95A/B  cdma2000-1x  EV-DO  EV-DV  IMT-2000 • Strategy I : Upgrade, using existing networks • Strategy II: Overlay, newly construct • Investment cost may be saved in the form of overlay, but upgrade is necessary in some phases of migration. • Observation • Korea Telecom, although late comer, has caught up other service providers through network extension.

  16. Thanks for Listening ! For more details on Broadband Internet Service in Korea“ Broadband Internet Service in Korea (2002)” For more details on Info and Telecom Services in Koreabroadbandkorea.kisdi.re.kr

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