How will the technology and policy changes now sweeping through the industry affect the architecture of the utility grid? Will America build an increasingly robust transmission infrastructure, or...
Utilities and BPL: Betting Against the Odds
Why broadband over power line (BPL) can't stand alone as a high-speed Internet offering.
of density in these markets makes achieving scale and favorable economics a challenge.
The Broadband Financial Model: The Devil in the Data
The economics of broadband markets are determined by several key factors, notably: prices and average revenue per user (ARPU), capital expenditures (cap-ex), 4 operating costs (op-ex), customer acquisition costs, and churn. The values for each of these variables depend on the specific geographic areas under study, with rural areas tending to have higher cap-ex and op-ex per line but lower levels of competition (and thus lower customer acquisition costs and lower levels of churn). Urban and suburban areas tend to have lower cap-ex and op-ex per line but higher levels of competition.
We developed a simple model of a retail BPL provider. 5 We use a per-customer discounted-cash-flow model to calculate value per customer, measured as internal rate of return (IRR) per customer. 6 We developed scenarios of different combinations of ARPU, monthly churn and incremental capital expenditure per line to reflect different geographic and market conditions. Higher levels of IRR are achieved under conditions in which cap-ex is low and ARPU is high but, as we discussed above, this combination of factors occurs infrequently.
The contours in Figure 1 show the per-customer IRR for representative combinations of ARPU, monthly churn, and cap-ex, and demonstrate the sensitivity of IRR to changes in these variables. We highlight three specific scenarios that illustrate markets in which utilities may operate. 7
- Area A represents a rural market with a low level of broadband competition. This market is characterized by ARPU between $38 and $42 per month (which is on the high side of the national average for DSL), cap-ex of $700 to $1,000 per line, and a churn rate of 1.3 percent to 1.5 percent. The resulting IRR is between 0 and 10 percent. Applying a 10 percent cost of capital yields a negative net present value (NPV) on a per-customer basis.
- Area C illustrates an urban or suburban market with a high level of broadband competition. This market is characterized by ARPU between $26 and $32 per month, cap-ex per line between $500 and $700, and a churn rate of 1.9 percent to 2.1 percent. The resulting IRR is between -10 percent and 0. Applying a cost of capital of 10 percent yields a negative NPV on a per-customer basis.
- Area B is an example of a niche market. This may be a densely clustered community in an otherwise rural area, with a low level of broadband competition. This market is characterized by ARPU between $38 and $44 per month, cap-ex per line between $300 and $500, and a churn rate of 1.2 percent to 1.5 percent. The resulting IRR is between 10 percent and 20 percent. Applying a cost of capital of 10 percent yields an NPV from $300 to $500 on a per-customer basis.
These low and sometimes negative IRR and NPVs call into question whether entry into broadband markets is financially attractive enough to generate sufficient enthusiasm for utilities to continue to pursue this opportunity. To this, we also