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Unlikely and Perhaps Utterly Unbelievable: $80 Cost Per DSL Line Already in Place
Sunday, 31 July 2011 01:04
All data hidden. The Big Telco Plan asserts about 5M homes cost $80 or more per month to serve and therefore need a subsidy. It's almost impossible for this to be true under any appropriate measure. The standard cost for a large carrier with equipment in place is about $8/month. That figure is confirmed by the most respected on Wall Street, John Hodulik and Craig Moffett. It's more costly to serve less dense regions, but for locations with equipment in place I can't see any legitimate way to justify a number above $15-20/month. That's about half the homes claimed as costing over $80/month.
     Where new equipment needs to be deployed, the broadband plan data implies dramatically less capital to reach the unserved homes if the last 1% is excluded. Over 72 months, that's $15-35/month. The total for those needing new facilities is therefore between $30 & $55 per month, way under the $80-250 in the plan figures. Subsidies are appropriate, but only at a fraction of the level proposed.
     Unfortunately, the Big Telco Plan does not include the model used to calculate their figures.
    Takeaway: The figures here contradict the Broadband Plan, the best on Wall Street, and typical costs of bandwidth, routers, support calls, DSLAMs, and the other components of broadband cost.. They might be fine, but I believe it should be tossed aside until the data is verified. Here are some of my guesses at where it's distorted.
Note - I would have liked to factcheck this with them but I got the report Friday night and finished this Sunday for a flight to Montana. So the following is tentative, but I believe correct.
1) I bet they are using the backhaul/bandwidth costs of small carriers, not the large carriers  The Costquest model in the Big Telco Plan is very similar to the one Costquest did for the Broadband Plan itself. That included the main data used in wireless but not for wired. (below) As came up repeatedly in the broadband workshops, the little carriers are often screwed; in fact, the plan calculated that nearly half the cost penalty for rural carriers was the high bandwidth cost they often pay. The Costquest figures below suggest small carriers pay 7 times as much as large ones. The gap is actually greater, because Verizon, AT&T, and Qwest have their own fiber to almost every exchange. Delivering more bandwidth may require some upgrades but that dramatically cheaper than buying capacity in a rural market with monopoly like prices. This easily could be overstating the costs by $10-$15/month, but I can't tell if they withhold the data.

2) It appears the Big Telco Plan model assumes the carriers have no copper lines in place to these homes when of course they have nearly all connected today. I make that guess because the Costquest model seems to have a figure for the cost of constructing lines to every home. "The model “lays” cable along the actual roads in the service area to connect customer premises with their serving central office or headend," Costquest reports. These copper lines already exist and generally are depreciated, so that's totally inappropriate. A similar factor is backhaul fiber, which the big guys also have. That might explain another $15-20/month.

3) Much of the cost factors, including maintenance of the copper and the exchange, are shared with other services, including both residential and business phone lines. As far as I can see, Costquest doesn't seem to have accounted for that factor, which would also be huge.

4) The private jets that take the CEOs to their golf games and the Superbowl are probably buried in overhead. I don't think we need to subsidize that cost, or the $tens of billions the Bells underfunded pensions and retiree health.
5) The Costquest wireless model (below) included 19% for marketing costs. Since these are homes that couldn't get broadband before, it shouldn't cost anything like that to get them signed up.

6) And probably much more. I bet they won't release the data because it wouldn't pass the smell test. No reporter or policy person should use these figures without independent verification or enough detail to judge for yourself. Unwillingness to release the data necessary to check the model suggests to me it's b_______ . Jim Stegman and team are very good. In fact, I recommended them to the Broadband Plan before they were hired. That also means they are capable of choosing data selectively to reach the conclusion the client desires.
Costquest produced the Broadband Assessment Mosel for the National Broadband Plan as well as the Big Telco cost data.
 
Below is a general overview by the BAM Cost Element of the process used to develop the wireless opex base cost:
1. Ground Lease Opex - The first direct expense factor listed in the Broadband Assessment Model is ground
lease expenses. The ground lease opex is based on tower operating cost data provided by the FCC, Crown
Castle data reviewed, and other related data. From these sources we derived the monthly ground lease
opex per cell site by density area.
2. Tower Space Lease Opex - Similar to above, tower space lease costs were derived using data provided by
the FCC, Crown Castle data, and other publically available data. When analyzing the data we determined
that an average monthly tower lease rate of $1,700 was reasonable. We then adjusted this average rate
Broadband Assessment Model (BAM) Documentation
31 | P a g e Copyright CostQuest Associates, 2010-All Rights Reserved
to account for differences in density resulting in tower lease rates per cell site of $2,100 for urban; $1,750
for suburban and $1.300 for rural.
3. Operations & Engineering - Operations and engineering monthly costs of $370 per cell site was a
combination of RAN maintenance, technology and engineering expenses provided by the FCC.
Additionally, a monthly utilities expense of $350 per cell site was based on data provided by the FCC and
other industry data reviewed.
4. Core Equipment Opex - The core equipment operating and maintenance opex was calculated using
information provided by the FCC. Based on this information, we determined that the core operating
expenses and maintenance opex could be reasonably estimated by taking 8% of the estimated core
equipment costs. This figure was then divided by the total cell sites to reach an estimated core equipment
monthly operating and maintenance opex.
5. Microwave Backhaul Opex - Monthly co-location tower lease costs for the first antenna was determined
to be $650 per cell site based on industry data and information provided by the FCC. The co-location
tower monthly lease cost for each additional antenna is $543 per cell site. The monthly maintenance opex
of $75 per cell site was based on industry information and data provided by the FCC.
6. Microwave Backhaul Opex (Cell-Split Sites) - Monthly tower lease microwave backhaul expenses for cellsplit
sites were also developed. The cost to attach the first antenna at a split microwave cell site was
determined to be $250 per month per cell site. The opex to attach each additional antenna at a split
microwave cell site was calculated by taking one-half of the aforementioned cost of $250 per month (e.g.,
$125) and multiplying it by an adjustment factor of 1.67 under the assumption of a 3-hop daisy chain
configuration. This resulted in monthly opex for each additional antenna at a split microwave cell site of
$209 per cell site. The maintenance factor of $75 per cell site was not changed under this method.
7. Leased Backhaul Expense - We relied on data from the National Exchange Carrier Association’s (“NECA”)
Middle Mile Cost Study, Hatteras Network’s The Complete Executive’s Handbook on Ethernet Backhaul,
Visiant Strategies, Inc.’s US Mobile Backhaul 2010 Study, other industry information & research, and
information provided by the FCC to estimate the leased backhaul opex. Based on this information, we
estimated monthly backhaul costs For Fast-E (100 Mbps) of $1,124 for urban areas, $1,653 for suburban
areas, and $2,880 for rural areas; For Gig-E (1,000 Mbps),backhaul lease opex per month were estimated
to be $4,174 for urban areas, $6,158 for suburban areas, and $10,720 for rural areas
8. Company-Owned Backhaul Opex - Company-owned backhaul operating costs were based on the BAM
Telco regression model discussed earlier in this report.
9. Transport & Access Opex - Transport and access expenses were segregated into three components:
wholesale, packet, and ISP interconnection cost per subscriber. To estimate the wholesale cost per
subscriber we started with the estimated average subscriber minutes of use at 850. We then assumed
that 15% of all calls are long distance. This combined with the industry assumption of $0.15 per minute of
use for wholesale cost gave us the necessary components to estimate the final wholesale cost per
subscriber. The final estimated wholesale cost per subscriber was $1.91 or 850 * 15% * $0.15. The packet
cost per subscriber was estimated using a similar methodology. The industry assumption for packet cost
per minute of use is $0.05 thus the estimated packet expense cost per subscriber is $0.64 or 850 * 15% *
Broadband Assessment Model (BAM) Documentation
32 | P a g e Copyright CostQuest Associates, 2010-All Rights Reserved
$0.05. Finally, the ISP interconnection rate per subscriber was estimated using the $0.0007 per minute of
use as regulated by the FCC, we adjusted this to $0.001, and $0.0015 per minute of use for suburban and
rural density areas respectively. We then multiplied these rates by the average minutes of use per
subscriber of 850. Thus our final ISP interconnection cost per subscriber for urban areas was $0.595 or
850 * $0.0007; for suburban $0.850 or $0.001 * 850; and for rural $1.275 or $0.0015 * 850.
10. Marketing & Selling Opex - We relied primarily on publically provided data aggregated by Yankee
Research Group (“Yankee”) to estimate the monthly marketing and selling operating opex. Based on this
data, we calculated an overall marketing expense as a percentage of service revenue of 19 percent. To
then estimate the incremental marketing & selling opex, we calculated the marginal marketing & selling
cost per customer and compared this to the average marketing cost per customer. Dividing the marginal
marketing cost per customer by the average marketing cost per customer resulting is an incremental
marketing opex scaling factor. Applying the opex scaling factors to our original marketing expense per
service revenue factor of 19% results in an incremental marketing & selling opex of 12.25%.
11. Wireless Equipment Opex – The wireless equipment cost opex was based on data from publically
available financial data aggregated by Yankee Research Group.. We calculated equipment opex as a
percentage of equipment revenue for the years 2004 through 2008. We then determined that the
wireless equipment opex can be reasonably estimated based on a factor of 1.5 multiplied by the
equipment revenue.
12. Roaming Opex - Roaming opex was estimated using CITA’s 2008 Wireless Industry indices as released on
May of 2009. Based on a regression analysis of the roaming revenue expense as compared to the service
revenue, we determined roaming opex could be reasonable estimated based on a factor of 2.23% of
service revenues.
13. General & Administrative Expense – To estimate the incremental general & administrative (G&A) opex,
we ran three regression analyses on industry data to determine a reasonable methodology for predicting
G&A opex. We looked at the correlation of G&A expenses as compared to revenue, customers and
network PPE. Based on the results of our regression analysis, we concluded a monthly G&A incremental
opex could be estimated using $2.84 per incremental subscriber.
14. Bad Debt Expense -A bad debt factor of 2% of total revenue was derived from looking at industry specific
10K’s and from the use of industry knowledge.
Last Updated on Sunday, 31 July 2011 12:16