Economic Analysis of Networking Technologies for Rural Developing Regions*

1. Economic Analysis of Networking Technologies for Rural Developing Regions* Mubaraq Mishra Berkeley Wireless Research Center *Joint work with Tom Du, Dick Filippini, John Hwang, Lakshminarayanan Subramanian and Reza Moazzami

2. Motivation • The business motivation: Is there a business case for providing connectivity to rural populations in developing regions? • Interested in the financial viability of the entire eco-system • The technology motivation: Can economic analysis help us determine key technological developments needed to provide low cost connectivity?

3. Agenda • Akshaya case study • Financial Analysis of Akshaya • Extending the Akshaya Analysis • Conclusions

4. Akshaya: A Case study • Joint project between the State of Kerala in India and Tulip IT • Wireless IP network set up in the district of Malappuram – 630 eCenters in all • Backhaul and last mile links are based on proprietary technologies • 1 center for every 2000 families

5. Kallarakkunnu Chekkod 6 Arikkod 3.04 km 2 Kakkancherry Kizzisary 8.5 km 3.5 Km 12 7.75km Malappuram 22 5 Melmuri 4.5 km 17.5 km 8 5 Vivekananda 3.48 km Nilambur 20 8 5 3 3.5km 16.8 km 11.5km 25 Vettekkod 22.3 km 8 4 Vangalam 17 15.68 km 10 14.53 km Pullamkode Kalpakanchery 5 MEA 6 23 3 Pallurkotta 22.5 km PTM Tavanoor 7 23 24 30 10 6 4 No of Akshaya centres connected 630 24 Sub POP POP Bharti

6. Akshaya Network Setup • Pop - Hosts backhaul links and Access Base station • Akshaya Center – Kiosk managed by entrepreneur • Sub-pop - AC which also serves as a POP. • Relay - Backhaul relay tower

7. Technologies considered Access Technologies CDMA450 WipLL WiMax WiFi (Omni) WiFi (directional) Backhaul Technologies Fiber VIP

8. Total Costs for network deployment WiFi/WiMax is the most economically viable solution Fiber/WiMax is the least economically viable For Wireless, last mile costs dominate backhaul costs OpEx is huge !

9. CapEx for network deployment WiFi/CDMA450 has the lowest deployment Largest cost for fiber is installation

10. OpEx for network deployment WiFi/CDMA450 suffers from recurring spectrum lease cost Termination costs for a large portion of the OpEx

11. Conclusions for Akshaya • WiFi with directional antennas + WiMax has most attractive economics. • WiFi/CDMA450 has lowest cost of deployment. • Largest cost for Fiber is installation. • Wireless backhaul (both WiFi and VIP) technologies have at most 1/8 the backhaul CapEx VS Fiber • Largest component of the capital investment for providing connectivity is the cost of the end-user devices. • Cost of backhaul/access radio equipment on towers is miniscule

12. Flat Terrain: If tower heights could be halved: IRR jumps by 1.8% Lower Population density: Coverage area can be doubled : IRR jumps by ~3% Cheaper end devices: PC costs can be halved : IRR jumps by ~10% Extending the Akshaya Analysis

13. Extending the Akshaya Analysis: Handset Scenario • Base case assumptions • Convert the 630 centers into cellular handset retailers • 6 CDMA450 Base-stations • Start at 2 min usage increasing (by 1 min each year) to 6 min usage per day per subscriber • Charge $0.02 per minute • ~100,000 handsets (~1.58% penetration) • With recurring Spectrum costs: Can subsidize handsets up to $38 each to breakeven • With no recurring Spectrum costs: Can subsidize handsets up to $45 each to breakeven

14. Regulation costs Upfront licensing fees Recurring spectrum license fee (8%-12% of adjusted gross revenue in India) Custom duties on wireless/PC/Handset Rights of ways costs (Tower lease etc) Termination charges Total costs regulation costs for the WiFi/WiMax scenario are 45% of the CapEx and 5 year OpEx Eliminating regulatory costs would increase the IRR by 74.5%. Regulatory Effects (spectrum, duties, etc.)

15. Conclusions • Entrepreneur can setup a Rural Wireless network and obtain an attractive 40% IRR • Long haul wireless technologies incur must lower cost/unit of demand than Fiber • Backhaul and Access Point Radio cost is small - hence it makes sense to make more expensive radios if we can improve coverage or reduce power dissipation. • Costs linked to regulatory policies constitute a substantial portion of the overall network cost structure

16. Q & A

17. Appendix – Comparison of Technologies

18. Equipment required based on technology

19. Financial Model - Assumptions • Interested in the financial viability of the entire eco-system • Revenue/Cost • Charge $0.02 per minute • Interconnection termination fee of $0.005 per minute • Network utilization starts at 20% grows at 15% per year • Other • PCs cost $500 each • 3 PCs per center • Discount rate of 10%

20. Akshaya Business Model • Tulip provides and maintains connectivity to Akshaya Center (AC) • Micro loan (2L/center) to local entrepreneur for PC (min. 5 PCs per center) to run and operate AC • Revenue model for Akshaya • Monthly fee from AC ($20/month) • Government offices • Commercial customers (insurance, banks, car manufacturers., etc) • 1st family member trained for free, each additional family charged a small fee by entrepreneur • Training subsidized by government

21. Discussion: Handset Scenario • Base case assumptions • Convert the 630 centers into cellular handset retailers • 6 CDMA450 Base-stations • Start at 2 min usage increasing (by 1 min each year) to 6 min usage per day per subscriber • Each CDMA cell tower with 6 sectored antennas can cover 1000 customers • No upfront spectrum auction cost for 450 MHz band • Charge $0.02 per minute

22. Handset results • Key results • At ~100,000 handsets (~1.58% penetration), can subsidize handsets up to $38 each to breakeven • Each base station can handle up to 69 simultaneous calls

23. Handset results (no spectrum costs) • Assume no spectrum costs • At ~100,000 handsets (~1.58% penetration), can subsidize handsets up to $45 each to breakeven • Each base station can handle up to 69 simultaneous calls

24. Market size opportunity

25. Value chain

26. Classification of Telecommunication markets • Key factors: • Population density • Purchasing power per user • Bandwidth demand per user • Urban/developed markets: High Pop density, High purchasing power, high BW demand => Fiber • Rural/developed markets: Low Pop density, High purchasing power, high BW demand => ? • Rural/developing markets: Low Pop density, Low purchasing power, low BW demand => ?

27. Rural Connectivity Market • Individual purchasing power is low but community purchasing power is high • Rural networks are coverage constrained while Urban networks are capacity constrained • Demand is difficult to forecast • Difficult Markets • Low Literacy • Markets are hard to reach, disorganized, and very local in nature. • Lack of credit also impedes market development. Implication: Sharing of devices to reduce cost

28. NPV Sensitivity Analysis(Network utilization vs. Charge per minute) A minimum price of $.02 is needed for positive IRR.

29. NPV Sensitivity Analysis(PC cost vs. # of PCs per center) A minimum of 2 PCs are needed to generate enough demand for positive IRR

30. Basic Network Setting

31. Basic Economic Terms • Capital expenditure (CapEx) • Tower cost • Backup power equipment cost • Installation costs • Radios/Networking/PC cost • Upfront Spectrum cost • Operational expenditure (OpEx) • Salaries • Maintenance • Power cost • Recurring Spectrum lease cost

32. Basic Economic Terms • Net Present Value (NPV) – Current value of future transactions at given Rate of Return • Internal Rate of Return (IRR) - Discount rate ‘r’ for which NPV = 0