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The sense and nonsense of a new fiber infrastructure in Gelderland

A new broadband network strategy for the province of Gelderland

Students N.F.J. Hubbers BSc

M.C. van Kortenhof BSc G. Verberne BSc

Innovation Management TU/e @ [email protected]

Twitter: @BreedbandGld Supervisor

dr.ir. Bert M. Sadowski Industrial Engineering & Innovation Sciences TU/s

Summary

A fast and open broadband network is heading to play a more important role in the development and usage of all sorts of new types of products and services. With such a network deployed, the province of Gelderland can have a competitive advantage over the other provinces, increase the livability for its inhabitants and create an attractive location for businesses. The development of a high speed broadband network is, however, slow. Especially in the rural area, many households will not be provided with a high speed connection due to high investment costs. This has led to the following research question: Should the Province of Gelderland interfere in the facilitation and financing of a high speed Broadband network and to what extend? For now, fiber technology seems to be most future proof and the roll out of fiber to the home (FttH) is therefore a key figure in the analysis to the fiber penetration. The Netherlands as a whole still has a low fiber penetration and that of Gelderland compared to other province is moderate. To stimulate the deployment of the fiber network, the province of Gelderland can intervene in 4 Areas: 1. Homes in rural area, 2. Boosting social and business service development, 3. Industrial areas and 4. Homes in urban areas. The stimulation of the deployment of rural areas has highest urgency. By means of financial injections, the 10-15% of the households who do not have access to broadband and will not have in the upcoming years could be connected. In the industrial area, the province should have a more facilitating role in stimulating fiber deployment by means of demand bundling projects. The urban area is successful in deploying fiber solely by market parties and therefore the Province should act as a regulator, holding sight of the openness of the fiber network. This openness is the main political implication in the markets’ fiber development and should therefore be regulated if necessary. There is however only scarce knowledge available on how to regulate for openness. The development of commercial and social services making use of the fiber network can be stimulated by means of adhering to four guidelines.

The sense and nonsense of a new fiber infrastructure A new broadband network strategy for the province of Gelderland

Students:

Supervisor: dr.ir. Bert M. Sadowski

Industrial Engineering & Innovation Sciences TU/e

Number of Pages Number of Appendices

Content Foreword ______________________________________________________________________________ 6 1 Introduction into Broadband _________________________________________________________ 8

N.F.J. Hubbers BSc M.C. van Kortenhof BSc

G. Verberne BSc Innovation Management TU/e

The sense and nonsense of a new fiber infrastructure in Gelderland 5

1.1 Why do we need Broadband? ____________________________________________________ 8 1.2 What is broadband?____________________________________________________________ 10 1.3 Optic fiber as best alternative of technologies _____________________________________ 12

2 Fiber in the Province of Gelderland __________________________________________________ 14 2.1 Current situation: Key figures ___________________________________________________ 14

2.1.1 Netherlands vs. the world: fiber penetration low _______________________________ 14 2.1.2 Gelderland vs The Netherlands: Moderate fiber deployment ____________________ 16

2.2 Vision of the Province: Whole Gelderland digital accessible.! ________________________ 18 2.3 Four areas of intervention_______________________________________________________ 18

3 Business models for fiber deployment ________________________________________________ 20 4 Intervention area A: The rural area ___________________________________________________ 22

4.1 Current situation: Market failure_________________________________________________ 22 4.2 Costs of connecting the non-profitable rural area __________________________________ 22 4.3 Role of the Province: Financing __________________________________________________ 24 4.4 Feasibility ____________________________________________________________________ 26

5 Intervention area B: Boosting social and business service development ___________________ 26 5.1 Current situation ______________________________________________________________ 26 5.2 Creating an Open network ______________________________________________________ 28 5.3 Implications __________________________________________________________________ 28

6 Intervention area C: Industrial areas__________________________________________________ 30 6.1 Current situation ______________________________________________________________ 30 6.2 Role of the government: Facilitating ______________________________________________ 30 6.3 Business models and costs of connecting the industrial area _________________________ 30

7 Intervention area D: Urban areas ____________________________________________________ 34 7.1 Current situation: Market successful in picking up _________________________________ 34 7.2 Possible interventions __________________________________________________________ 34

Conclusion: Feasibility _________________________________________________________________ 34 References ____________________________________________________________________________ 34 Appendices ___________________________________________________________________________ 36

Appendix I: Interview with Martijn Bruil _______________________________________________ 36 Appendix II The use of Social Media ___________________________________________________ 36


Foreword

We proudly present our report on the feasibility of a fiber network for the province Gelderland, one of the twelve provinces of The Netherlands. This report was written for the course 0EM25 Governing Innovations, given at the Technical University of Eindhoven.

The Netherlands has always been a number one leader in the field of broadband connectivity by means of a reliable, high speed cable infrastructure. When fiber made its appearance, the county unfortunately lost this position and got overtaken by Asian, North European and Eastern Europe countries. Since 2006, The Netherlands is investing significantly in constructing a fiber network in order to increase its position within our global economy. This report scientifically contributes to the knowledge of the feasibility of a fiber network within the province of Gelderland. It became clear from the beginning, that more knowledge is needed for an optimal roll out of the network within the province and within the Netherlands.

This report is of course not comprehensive or completely fulfilling, but we are proud at the contributing result. We made use of a large set of data and involved key figures from the industry who participated enthusiastically in our research. We like to thank all participants for their contribution.

We believe that a solid fiber network is essential for a sustainable economic future!

Group 08 of The Governing Innovation Course 2012 Eindhoven University of Technology

Nick Hubbers Matthijs van Kortenhof Guus Verberne

MSc student Innovation management




1 Introduction into Broadband

Since 2000, there has been a continuous strategic and political discussion about the (non-) sense of a new fiber infrastructure in the Netherlands. The broadband industry, in particular the cable and incumbent telecommunications firms, have been reluctant to invest in this new infrastructure. (Sadowski, Nucciarelli, & de Rooij, 2009). The Dutch government has been unable to convince the different players in the market to undertake this investment and to coordinate the actions of the different players (Sadowski, 2009). Consequently the Netherlands has dropped from first place to third place in having the fastest broadband connection. (Akamai, 2012 Q2). With a predicted 30 to 40 percent increase in the speed of the broadband connections for the year 2020 (TNO ICT and Dialogic, 2010), the question rises if this aging of the infrastructure causes concern? If so, what can the (local) government do to prevent the infrastructure from falling behind in capacity needed? This has led to the following report in which the current broadband situation for the Province of Gelderland is analyzed. This current situation is compared to the goals of the Province which leads to central research question:

Should the Province of Gelderland interfere in the facilitation and financing of a high speed Broadband network and to what extend?

To answer this question, current literature available is used and combined with knowledge gain in the course on governing innovations given at the TU/Eindhoven by dr. prof. B. Sadowski. This report has a structure in which we zoom in from a broad understanding of the broadband infrastructure to a detailed level in which we propose methods for intervening in different types of areas.

1.1 Why do we need Broadband? In the recent 10 years, the Internet has become indispensable in our society. Electronic communication is essential for the functioning of firms, institutions and governments. Companies and institutions that successfully integrate Internet into their processes, are often more successful than those that do not (Ontwikkelingsmaatschappij Oost Nederland NV, 2006). The use of ICT furthermore offers new opportunities for addressing social issues such as aging, safety, care, education and mobility. Since the dependence on data communication grows, the demand for high quality and reliable data connections increases daily. Affordable high-quality communication-links are thus a precondition for economic and social success. To make the strong growth of electronic communication possible, there’s a need for (new) broadband services and fast, reliable, affordable and open broadband networks. An accelerated development of broadband-services and infrastructures is therefore of socio-economic importance and part of the European Lisbon agenda.

Broadband is essential for regional development A high quality, open and affordable broadband infrastructure is a strategic precondition for economic and social development of the region. Business and non-profit services replaces partially the grown industrial and agricultural activity and provide new employment. Broadband can ultimately help creating jobs as a result of network effects but only if a set of additional policies are put in place (Katz & Suter, 2009).


Figure 1 Layers in the Broadband infrastructure (source: Ost Nederland NV 2006)

Passive infrastructure

High investement Low operational costs ROI like real estate

Active infrastrucure

Medium investment Lower Operational costs than passive

Service provisioning

Low investement High Operational costs High needed ROI (Because of risk)


Broadband also helps to create a favorable climate for businesses and boosts the economic activity and the local economy. In her European commission blog (Kroes, 2011) states that “increasing broadband penetration by just 10 percentage points can boost GDP by 0.9 – 1.5%”. In another study (Rohman, 2012) found evidence that the doubling the broadband speed will contribute to 0.3% growth compared with the growth rate in the base year.

Existing infrastructures meet less and less the requirements of the future It is known that the existing infrastructure do not meet the requirements for the transition in the long term and switching higher capable network technologies such as optic fiber is inevitable (this is further explained in section 1.3 This has led us to a Triple play coverage of 73% percent of the Dutch homes. 51 percent of the Dutch inhabitants have a Smartphone with broadband access and over a billion messages per day are being send over the internet- communication app Whatsapp. (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Other services which can be developed due to the increase in bandwidth are direct video connections between professionals and classrooms; Increased image quality in public video surveillance and remote healthcare (Provincie Gelderland, 2011). As seen in figure 4. Next generation network technologies such as fiber technology pierces through the DSL wall, enabling the development of these new services.

Optic fiber as best alternative of technologies) The existing fiber networks to date are constructed by operators and are usually closed networks. This means that the infrastructure service provider selects only a few services which they permit, preferably subsidiaries in the same holding. The few open networks that are realized have a very high accession threshold, especially for small innovative services. This off course has an inhibitory effect on innovation (werkgroep marktplaatsen Oost-Nederland, 2005).

1.2 What is broadband? There is little consensus among researchers and organizations on the exact definition of a broadband network. Nevertheless they share the common understanding that a broadband network consist of certain characteristics such as a high speed and permanent connection. It consist not only of the infrastructure but also on the services provided on the broadband infrastructure. In the current situation, most of the broadband networks are implemented via the existing copper phone net with help of ADSL technology or via COAX with help of cable modems (Provincie Gelderland, 2011). Broadband networks can also be implemented by the use of new infrastructures like glass fiber. This type of glass fiber networks are being delivered by market parties like Reggefiber.

The broadband infrastructure layers Broadband networks have a complex value chain. With the establishment of the business models, in general, a (simplified) distinction is made between three functional layers: (see Figure 1 Layers in the Broadband infrastructure (source: Ost Nederland NV 2006) • The bottom layer is the "passive infrastructure". This layer includes the underground piping

(conduits), the (fiber optic) cables and technical spaces. • The passive layer must be activated. This happens on the second layer 'active infrastructure and

switching. This layer consists of the devices that shoots the lights in the fiber optic cables. This layer uses transmission capacity of the first layer and provides transmission services to the third layer. The layer contains the active equipment that is stored in the district’s technical areas, such as optical ports, switches ('stations') and routers.

• An active network has no value as no services (such as telephony and internet) are delivered on the network. These services are delivered on the third layer: 'service provisioning. Service providers (such as an Internet service provider "ISP") grants access to services such as access to the Internet, television, video-on-demand, remote management, remote backup or telecom. (Ontwikkelingsmaatschappij Oost Nederland NV, 2006)

The emergence of New Services Broadband development can be seen as a radical innovation, creating new markets but also destroying the old one as presented by Schumpeter. With the development of the broadband and bandwidth increases, new services emerge.


Figure 2 Fiber technologies as radical innovation: emerge of new services source: (Sadowski, 2012)

Figure 3 Downstream bandwidth per technology vs. expected demand Source: (TNO ICT and Dialogic, 2010)

Figure 4 Upstream bandwidth per technology vs. expected demand source: (TNO ICT and Dialogic, 2010)


This has led us to a Triple play coverage of 73% percent of the Dutch homes. 51 percent of the Dutch inhabitants have a Smartphone with broadband access and over a billion messages per day are being send over the internet- communication app Whatsapp. (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Other services which can be developed due to the increase in bandwidth are direct video connections between professionals and classrooms; Increased image quality in public video surveillance and remote healthcare (Provincie Gelderland, 2011). As seen in figure 4. Next generation network technologies such as fiber technology pierces through the DSL wall, enabling the development of these new services.

1.3 Optic fiber as best alternative of technologies In 2010, the Ministry of Economic Affairs gave orders to the research institute TNO to do independent research on the future demand and supply of the Next Gen infrastructures regarding broadband in the Netherlands. In this report (TNO ICT and Dialogic, 2010) propose a number of alternatives for high speed permanent broadband connections up to 2020. TNO developed some possible paths for the development of the xDSL, HFC and FttH networking technologies (FttH= fiber, HFC Docsis = COAX cable, xDSL = Copper Phonelines) and the expected demand in broadband bandwidth (see Figure 3 Downstream bandwidth per technology vs. expected demand Source: (TNO ICT and Dialogic, 2010) Figure 4 Upstream bandwidth per technology vs. expected demand source: (TNO ICT and Dialogic, 2010)). They concluded that the current landscape in which DSL and HFC are competing will change over the next decade. Within these changed landscape, TNO expects that HFC and FTTH gradually grow into new competitors since both will cover the expected growth in demands for many years. DSL technology over copper is not able to fulfill these demands (without further fiber upgrades). DSL will remain, in the longer term, important for the "Bottom" of the broadband market. FttH however, supports the “indefinite bandwidth” promise. This aspect gives FttH, despite its high investment costs, an important competetative advantage compared to HFC. Another unique selling point for FttH compared to DSL and HFC is the support of full symmetrical bandwidth. Concluding from this we propose that both COAX as well as optic fiber (or fiber) can be used for filling the bandwidth need in the upcoming 10-20 years, optic fiber however is better suitable for fulfilling the further future bandwidth demand. This is also acknowledged by the (werkgroep marktplaatsen Oost-Nederland, 2005) who state that optic fiber is the most future proof solution. For this reason we will focus on the development of fiber in this report.

Who is using optic fiber now The current situation in the broadband market is confusing. On the one hand we observe that companies like KPN, Essent, Versatel, BBned, etc do have high quality fiber networks in large parts of the Netherlands. The use however is still low. Now, only larger organizations with multiple locations, complex automation and high Internet- and telephone bills are able to assess the value of a broadband infrastructure. Fiber connection is therefore still mainly something for the happy few. For a large group of small and medium enterprises (SMEs) and public organizations is fiberglass, as currently


offered by infrastructure providers, financial not feasible. This makes the innovation potential suboptimal and limited to a handful of large companies and institutions. On the other hand there are also many positive signs: players are more and more willing to facilitate an open broadband infrastructure despite the dilemmas this can create. Local broadband initiatives, together with market parties, have succeeded in creating an open broadband infrastructure at such a low price that it became affordable for SMEs and small organizations. The number of households connected through fiber will be elaborated in the chapter 3.

Figure 5: Fibre penetration 2012

Figure 6 Homes passed


2 Fiber in the Province of Gelderland

2.1 Current situation: Key figures Within this part we research the key figures and statistics of the current situation within the province Gelderland and we try to give answers to questions like: What is the size and growth of the fiber network? What comparisons can be found between provinces? Before this, we try to give a brief comparison of The Netherlands compared to other countries in the world.

2.1.1 Netherlands vs. the world: fiber penetration low This reports’ emphasis is on the reachability of fiber within the province Gelderland, nevertheless we first give a brief comparison of how Netherlands is situated compared to other countries in world, this is important because it gives insight in the complete picture.

Size Researchers generally express the size of the fiber glass network in terms of no. of household passed or no. of households subscribed. In a current study of FTTH Council Europe it was investigated which countries had highest penetration rate of FTTH and FTTB subscribers. Figure 5: Fibre penetration 2012 sums the result of their study. With Penetration rate is meant: Homes connected divided by the number of premises in the service area. It shows that in general, countries in the Asia Pacific region are far ahead of Europe and the US. Differences are significant since they range from 42 – 57% for Asia pacific region to approximately 2 – 17% for Europe. The Netherlands is ranked at a 21st place in the world and 13th place in Europe with approximately 5% subscription. Interestingly, this percentage consists almost entirely of home subscribers, the no. of business subscribers is virtually nil. It is also interesting that the Eastern European countries are pioneers in comparison to relatively innovative Western European countries. Within the former, the majority of subscriptions are FTTB and thus probably to multiple living units or business use. An explanation for this is given in a Dutch report consisting of facts and trends regarding Fiber (FTTH platform Nederland, 2012): most of the East European countries make use of European funds that are intended to bridge the digital gap for sparsely populated countries. Since The Netherlands is densely, we will not be eligible for such a fund.

Growth Another way of modeling is by means of the number of households passed, which means the number of households that can relatively easily be provided with Optic Fiber. shows that there is a negative exponential relation between countries with high no. of homes passed and countries with almost no homes passed.


Province Total Households in

Province Homes passed 4Q 2011

Homes passed 1Q 2010




Drenthe 208.040 6,4% 0,4% 0,0% 0,0% 0,0% Flevoland 154.670 56,7% 50,7% 31,4% 8,5% 2,4% Friesland 279.280 13,4% 0,0% 0,0% 0,0% 0,0% Gelderland 847.230 12,8% 5,5% 2,9% 2,5% 1,8% Groningen 274.180 0,5% 0,4% 0,4% 0,4% 0,4% Limburg 501.200 0,4% 0,0% 0,0% 0,0% 0,0% Noord Brabant 1.047.650 16,2% 15,0% 7,0% 2,3% 1,6% Noord Holland 1.245.160 10,5% 6,2% 5,3% 4,1% 1,9% Overijssel 472.990 28,3% 19,9% 11,9% 3,2% 2,5% Utrecht 537.400 22,8% 10,9% 7,7% 5,1% 3,1% Zeeland 165.569 0,0% 0,0% 0,0% 0,0% 0,0% Zuid Holland 1.578.520 8,1% 3,4% 2,4% 2,2% 2,0% Tot. Netherlands 7.311.889 12,8% 7,8% 4,8% 2,6% 1,6%

Table 1: Percentage of homes passed per province

Figure 7: Homes passed per province


The Netherlands takes a 6th place in this ranking with approximately 500.000 extra homes passed over the period December 2011 and June 2012 (FTTH Counsil Europe). Two years earlier, at the end of 2009, a total 348.660 homes were passed (Stratix 2010). The no. of households passed per period a thus growing and expectations are that this connection rate will keep increasing in the following years. Currently, 950.000 homes are “passed” and 30% of those houses are actually using this connection through the purchase of services.

2.1.2 Gelderland vs The Netherlands: Moderate fiber deployment The dispersion of FTTH over the Netherlands is everything but evenly. Interestingly, the main cities in The Netherlands are reticent from large investments in a fiber network. In the provinces Limburg and Zeeland are almost no fiber connections made and the northern provinces have started to roll out fiber too. The highest coverage of fiber can be found in Flevoland, Overijssel, Utrecht and Noord-Brabant (Glasmonitor 2012). As Figure 7: Homes passed per province shows, Gelderland is taking a 6th place with 12,8% of homes passed and 4% of the homes subscribes (meaning that they are willing to purchase fiber services). Notable is that Flevoland is taking the lead in the number of homes passed. This can be explained by the fact that Flevoland is a relatively new territory (physically completed in 1968) and its infrastructure is equivalent. Therefore, the costs for renewing the network are relatively lower compared to other provinces. The provinces following Flevoland have smaller differences in number of households passed / subscribed, showing a more linear pattern. Looking at the percentages in Figure 7: Homes passed per province, Gelderland can be qualified as a medium player in the Fiber market; not leading nor lagging. The map below shows the current map of all provinces of the Netherlands and its penetration of fiber. Especially the areas underneath Overijssel, on the right of Flevoland and municipality Nijmegen have a fairly high percentage of fiber penetration (80 – 100%) Especially smaller and medium sized municipalities have high rates. Reason for this is that networks in smaller municipalities have been equipped with fiber years ago, so that the number of subscribers has increased sustainably. From a functional perspective can be said that in large cities the construction of a fiber network is more difficult due to complicated excavation. In short, we can conclude that there are large differences between provinces in such a way that Gelderland is playing an average roll in the construction of a fiber network. In addition is can be said that also within province differences are present when looking at the municipalities. This counts for Gelderland too, with three concentrated areas with high penetration rates and other areas being low to moderately penetrated. Finally, the more general conclusion can be drawn that the construction of fiber is going faster in small to medium sized municipalities.

Growth Comparing Gelderland with other provinces in relation to growth of the network, we compared data from different tables at different time periods. This resulted in Table 1: Percentage of homes passed per province, showing percentages of the homes passed in relation to the total homes in that province. Although the timespan between last period and the other periods is twice as large, it still gives us a view on the pace of fiber construction for Gelderland. On average, 12,8% of the homes in Netherlands have been passed for fiber at the end of 2011. Interestingly, Gelderland has the same percentage and therefore runs in a nominal pace currently. In the past however, this percentage was lower than the national percentage. As the table shows, the Province was lagging in 2008, 2009 and 2010. It thus seems that Gelderland has been attempting to overtake other provinces and stay above national average.


2.2 Vision of the Province: Whole Gelderland digital accessible.! Whole Gelderland digital accessible. The province wants to ensure that citizens and businesses better access to digital services. The province Gelderland is firmly committed to this objective (Provincie Gelderland, 2011) (Provincie Gelderland, 2012). An open and fast broadband brings Gelderland a business competitive advantage. For the inhabitants of Gelderland, all kinds of services become more easily accessible such as remote care and education. The province wants to investigate in the stimulating role they can take and want to create sufficiently open networks to establish an open service deployment (Bruil, 2012). In order get more answers in how to do this, the province of Gelderland wants to use the learning effects gain from a number of pilots. The province starts with a maximum of four pilots in 2012, two of them will have an emphasis on the physical layer and two on the service provisioning layer. In particular the province wants to have a number of questions answered with the pilots (Provincie Gelderland, 2011):

• To what criteria should a network fulfill so that the best service development is stimulated (open networks) and how do you do that?

• What conditions must be fulfilled so that market/third parties pick up the development of broadband in the rural, unprofitable areas?

• Can the necessary needed financial instruments be deployed as revolving and, if so, to what extent?

The four pilots start in Arnhem / Nijmegen, Harderwijk, Bronckhorst / Berkelland and Buren. This will be done together with business parties and municipalities. (Province of Gelderland, 2012). With regard to the business areas, the province of Gelderland has the ambition to provide as many as possible (100 +) with broadband access through demand aggregation. In order to support the demand aggregation, the Province has the possibility to financially support the municipalities up to 50% of the project costs. (Ontwikkelingsmaatschappij Oost Nederland NV, 2006)

2.3 Four areas of intervention In motion 34 ‘Whole Gelderland digital accessible ‘ accepted on 29 June 2011, the Province of Gelderland distinguish between five basic situations in which the province can interfere in the construction of fiber. Combined with the interview with (Bruil, 2012) and the report written by (Ministerie van Economische Zaken Landbouw en Innovatie, 2012) we distinguish the following intervention areas in order of importance for intervention by the Province.

A Homes in rural area B. Boosting social and business service development C. Industrial areas D. Homes in urban areas

In the chapters 4-7 we will further elaborate on the current situation of those areas and the possible strategically interventions the Province could take in order to realize the vision as discussed in the previous section. This reports focus is on the most important intervention area: Homes in rural area. Without government intervention, this area seems to be in trouble in the short future.


Figure 8: Business models in different layers

Figure 9: Value chain with four different types of integration


3 Business models for fiber deployment

Before the best feasible business model for each intervention area can be discussed the current business models for the different functional layers need to be explained briefly. Figure 8: Business models in different layers provide the information about the period of investment, type of service/product and the monthly fees for the fiber infrastructure (FTTH platform Nederland, 2012). There are multiple participants on the different levels of this business model. Figure 9: Value chain with four different types of integration presents the value chain from the first layer to third layer that can be arranged in roughly four different ways (FTTH platform Nederland, 2012). Vertical integration consists when one single organization manages and controls every layer in the value chain. A new player has to build its own fiber infrastructure to enter the market. The second possible model to arrange the value chain is a shared passive layer. The organization that controls the fiber infrastructure only controls that passive first layer; it leases its access to active operator, who is also the service provider. A third method is a combination of previous ones. The organization that manages and controls the fiber infrastructure is also the active operator, but leases its access to the operating systems and infrastructure to a service provider. The last method to arrange the value chain is a complete separation of all three layers. Now there are at least two passive network operators that are only active in the first layer. There are also multiple active operators, only active in their own layer and in the third layer multiple service providers. The value chain of the largest fiber infrastructures of the Netherlands are presented in . To regulate this in favor for competitive prices for consumers and businesses there is an authority called “Onafhankelijke Post en Telecommunicatie Autoriteit” or in short OPTA. Every three years OPTA analyses the market for electronic communication services (OPTA, 2012).


4 Intervention area A: The rural area

4.1 Current situation: Market failure Currently, 98% of the Dutch households is able to gain access to Broadband with a speed of 30Mbps and, due to the nationwide cable network, over 90% disposes of 100 Mbps ( (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Therefore a remaining area of 2 % is not covered with broadband at all. In our interview (Bruil, 2012) indicated that this percentage for Gelderland was even 9%, since the province has relatively large amount of widely stretched areas that can be classified as rural. Therefore, stimulating the rural areas is the most important area out of the four areas mentioned above for the province. In general it can be stated that the problem of construction of Fiber in rural areas is one of all provinces. The report (Ministerie van Economische Zaken Landbouw en Innovatie, 2012) has investigated to which criteria an area should meet in order to be profitable: • Providers like Reggefiber see areas as unprofitable when homes cost more than 1.000,- euro to

link to the network. It is estimated that 15% of the homes in The Netherlands will be within this group.

• In approximately two third of the Netherlands Broadband is available. The remainder 5% of the houses not connected (costs are over 3000,- euro or higher to connect) are seen as unprofitable.

The province Gelderland is aware of the fact that there will arise a dichotomy between area’s that deliver the highest return on investment and areas that deliver lower to none return on investment. They confirm the conclusion of Ministery of economic affairs in that 10-15% of homes or 50.000 till 100.000 homes carry the risk of not being connected in short terms (Provincie Gelderland, 2011). In order to stimulate the connection, the province has done and still does several actions. Past years, Gelderland has supported several projects like Fiber to the Farm (FTTF) and doing the honor of the negotiations with the Rabobank. In the FFTH project, support was given in researching the possibility for connecting 10.000 homes in rural areas. Unfortunately, the negotiations stranded because of financing issues. The province also participates in negotiations with banks in arranging relatively favorable financing for inhabitants in rural areas.

4.2 Costs of connecting the non-profitable rural area Distributing a fiber network all over the Netherlands has a few drawbacks; perhaps the largest drawback is the costs for FTTH in rural areas. The costs increase rapidly when the subscription density decreases in a certain area. This results in network operators who are less willing to invest in fiber because there return on investment decreases or even completely disappears. Calculations using a sample case: Steenwijkerland In order to calculate the costs for on rural areas in Gelderland we base our calculations on the case done by Arcadis, which calculated the investment costs for a rural area called Steenwijkerland in Overijssel (Provincie Overijssel, 2010). The results of this calculation are generalized for the province of Gelderland based upon to the interview with (Bruil, 2012) who states that the calculations on the province of Overijssel are comparable to Gelderland. Core Adresses Investment Per connection

Steenwijk binnen 9282 € 11.000.230,00 € 1.185,11 Steenwijkerwold 760 € 808.212,00 € 1.063,44 Oldemarkt 1142 € 1.461.876,00 € 1.280,10


Vollenhove 1659 € 1.943.997,00 € 1.171,79 Blokzijl 581 € 654.964,00 € 1.127,30 Sub 13424 € 15.869.279,00 € 1.182,16 Steenwijkerland buiten 6784 € 54.863.817,00 € 8.087,24 Totaal 20208 € 70.733.096,00 € 3.500,25

Table 2 Calculations for Steenwijkerland


The municipality of Steenwijkerland consists of roughly 20.000 households from which 6700 households are considered non profitable for the network operators because they are located in the outer area. The costs for connecting all the 20.000 households are approx. 70 million euro which is 3500,- euro per connection. This is approx. 2500,- euro more than a connection in an urban area. As seen in Table 2 Calculations for Steenwijkerland, the connection costs for the non-profitable 6700 households are approx. €8000. The 13000 households who are considered profitable have a connection cost per household of approx. 1180€. If whole Steenwijkerland (20.000 households) is being provided with optic fiber and considering a process-improvement in the deployment of optic fiber reducing costs with 25%, the total costs for such an investment will result in €3,77 million per year. (After depreciation of 54 million in 30 years based on a 4% discount rate and a maintenance sum of 0,5%). Because of the OPTA regulations, approx. 20€ per subscription is paid to the network operator. Therefore we conclude that for a rural area such as Steenwijkerland, 78% of the households need to have a subscription over fiber in order to (merely) cover the costs for the network operator. This makes it unlikely that network operators connect complete Steenwijkerland with optic fiber. Most logical, the non-profitable households are being excluded. Resulting in a approx. 30-40% of needed subscriptions in order to cover the costs. The province of Gelderland counts approx. 50.000 to 100.000 of those non-profitable households (Provincie Gelderland, 2011). Using the average costs of 8000€ per connection, this requires an investment of 400 million to 800 million. Applying the 25% reduction in costs due to process-improvements this results in 300 million to 600 million investment costs which is not being made by the market parties. In order to make this investment profitable, the coverage should increase ass wel as the number of services (resulting in an increase in the subscription fee paid to the network operator) and investment should be spread among subscribers over the complete municipality. Applying the same cooperation logic which is used in Steenwijkerland, the investment costs per connection can be spread among the complete (rural) municipality including the inner and outer area. This leads to an average of 2.700 euro per connection. The investment per connection than exceeds the profitable classified household by 1700€ based on a 30 year depreciation. For this area investigation is needed in new business models which support the extra investment needed of 1700 euro.

4.3 Role of the Province: Financing Two different options to finance the fiber infrastructure in the rural areas are discussed. These options are proposed by the Ministry of Economic affairs, agriculture and innovation (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). The first option is financing with public money, there are three different variations but here only the one that is recommended by the European commission is discussed. Tendering of a fiber infrastructure project is allowed as long as it is within the European laws. The government can subsidize each household partly for its connection for example for an amount of 1500,- euro. A part for the money can be used for deployment, the residual for the subscriber costs for the first three years. In this case the remaining 1200,- still has to be paid by means of passive operator loans and higher subscriber fees. However, the threshold for a household is lower.


The second option is financing with European money. There are European trust funds and there is the European investment bank. There is a combined fund in the Netherlands especially for innovation projects. This fund is partly European money (1,9 billion) and partly from the Dutch government (2,1 billion). A considerable amount is reserved for the deployment of a fiber infrastructure.

The value chain model that is best suited in these situations is probably one where there is much competition between service providers. Due to the high costs of deployment it is goosey to have a vertical integration where there are multiple passive operators active. As for the remaining models it depends on the regulations between the different layers and European rules.

4.4 Feasibility Connecting every household in Gelderland is probably not realistic in coming decades. (Bruil, 2012) Moreover, the costs are too high and the need to connect every household is dubious. Although, a model like the one used for Steenwijkerland could be very useful for Gelderland. The populated landscape is comparable with the Overijssel landscape, costs when combining outer rural areas and smaller towns could be a solution for many of households in Gelderland. Using public or European subsidies could lower the obstacle to participate in a bundled project. Much higher number of subscribers could be achieved; examples where it already worked out are Neunen and Eindhoven.

5 Intervention area B: Boosting social and business service development

5.1 Current situation The Province sees merit in an open network in where there is an opportunity for every party with an acceptable offer to gain access to the physical network in order to sell services to consumers or businesses. Briefly spoken, a broadband network consists of the three layers presented earlier in figure 9, and a fourth layer; that of applications like E-mail or any other service that functions via internet. The third layer currently consists of three services: Internet, Television and Telephony. There are plans to offer more services next to the existing three, for services in where internet does not offer enough bandwidth. One can think of Educational institutions, libraries, health care institutions camera and surveillance services etc. which are interested in these services because of their high demand for data capacity. This gives instances and companies the opportunity to further develop their ICT-demand and -system.

Since this view on an open network is relatively new, views on how to establish this easy access are currently investigated. It is not quite sure how this result can be reached in the most optimal way. The province Gelderland admits that this problem exits and is willing to participate in delivering a significant contribution in stimulating the openness of the ICT infrastructure. How are they going to deliver this contribution? The next part describes ways of how they deal with researching the best way to stimulate this and gives guidelines in achieving openness.


5.2 Creating an Open network As described earlier in this report, the province is currently executing pilots in which they try to collect information about how to stimulate the construction of a physical fiber network in rural areas on the one hand, and collect information on how to stimulate openness of the ICT infrastructure on the hand (Provincie Gelderland, 2011). According to (Bruil, 2012), the province sees an open network as: A network in which every provider can deliver a service in a relatively easy, effortless way. This means not only the existing providers of internet, television and telephony, but also the institutions described above (health care, camera and surveillance services etc). Because these pilots are currently executed and no results of it have been published so far, no definite information is yet available on what is the best way to stimulate openness in their eyes. A report has been written however, on how provinces can deal with this problem, by addressing useful guidelines (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Therefore, we decided to elaborate on these guidelines:

First of all, we mention that results of a research of TNO indicated that from a technical viewpoint, there are no limitations on layer 2. This means that is technically possible to give additional parties access to the network (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). In addition we like to state that the parties we are discussing here demand for access to layer 2, that of operators. The first step a province could take, may or may not be in collaboration with municipalities, is to investigate the current situation. This should give insight into the demand in a certain region. Past experience learns that especially primary education, libraries, museums and health care institutions have this demand (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Second, gather information from potential parties and knowledge institutions on how the possibilities can match the total demand of the region. This gives, next to the demand per project, more insight in the total demand (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Third, the province can facilitate if needed; e.g. in the form of an aggregation process. This way, a system could be set up for comparable institutions like educational institutions. These institutions can than collaborate within the same system and enhance their performance. Think of video conferencing or virtual lessons (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Fourth, connect yourself at the program of the “Digitale Stedenagenda” in order to share information with other regions on comparable projects (Ministerie van Economische Zaken Landbouw en Innovatie, 2012).

5.3 Implications One of the implications of establishing a connection of the industry in the second layer of the network is the mismatch between supply and demand. At the supply side, there is often not enough experience on digitalizing their sector on electronic services to end consumers as addition to their conventional services (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). The province could consider supporting these parties with subsidies or loans to investigate these opportunities. This way, these parties get better insight on whether a traditional internet connection offers sufficient bandwidth or whether they require an own service. The same counts for the aggregation process: In order to speed up this process, the province could facilitate by means of financial resources. It might however be difficult to determine which services could take most advantage of these recourses.


6 Intervention area C: Industrial areas

6.1 Current situation Research from a research agency Dialogic showed that already 44 out of the 50 large business parks in Gelderland are equipped with a fiber infrastructure. However, there are still many companies without a fiber connection. Some of these companies decide to arrange a connection by itself, although this is easier to finance for larger companies. Today there is still a small group of ~ 10% that has a need for a fiber connection. Most of these companies are small ICT companies or companies that lack internet capacity. Many of these companies are willing to pay the estimated costs for a fiber connection.

6.2 Role of the government: Facilitating TNO expects that especially for the rural business parks the internet capacity becomes insufficient within a few years. The local governments in Gelderland should therefore create awareness and stimulate the remaining business parks to invest in a fiber infrastructure (Statennotitie provincie Gelderland, 2011).

Only if no market initiative worked, the Province of Gelderland can use the method of financing through subsidies. In the past the province of Gelderland had a number of annual subsidies available for the deployment of fiber in Industrial areas of the province. This subsidies were up to € 25,000 per site. this money was not directly invested in the construction of fiberglass, but was used for the hiring of a third party which task was to bundle demand for fiber broadband and with that bundled demand, trying to convince supplying parties in deploying fiber broadband. In this way about 25 sites in the province were connected through fiber (Ontwikkelingsmaatschappij Oost Nederland NV, 2006). We propose that this financing option should be continued, however the government should give the third party the assignment to held sight on the openness of the network. This can be done in the form of regulations.

6.3 Business models and costs of connecting the industrial area Organizing fiber infrastructures for industrial areas is based upon two different models. Both the models are demand bundling models, which divides the costs between several businesses on a business park and increases the adoption rate. The two suggested models by the province of Gelderland and Overijssel are customer owned and carrier owned models (Ontwikkelingsmaatschappij Oost Nederland NV, 2006). The difference in the two different models can be attributed to the level of vertical integration. In the first model, ownership and operation of the passive infrastructure are disconnected from active infrastructure and services. In this model the entrepreneurs, the park management organizations, the municipality or an appropriate specialized organization for example will become owner and operator of the cables. For the completion of the active layer and the provision of network access to service providers, an operator is (telecom company) is selected. This operator pays a monthly fee per customer to the owner of the passive infrastructure. The operator himself receives his money of the customers and / or service. In the second model a telecommunications company places, owns and operates the infrastructure (passive and active). The telecommunications company is also the operator in this model. Customers and possibly service providers pay to the operator.


Figure 10: Costs for passive and active layer


A telecom company may also provide services in this model (at layer 3), but should also allow service providers to compete on the network. Although both models can be profitable (and started) merely on market activity, the providence of Gelderland subsidizes in case of a market failure for an industrial area to a maximum of 25000,- euro to outsource a bundling project (Bruil, 2012).

Calculating the costs: a sample Case In this sample case of an industrial area with 200 companies. The needed fee per company are estimated at circa €190 per month per company for the network operator. This is calculated on the assumption that 30% of the companies have participated and have an active subscription. Figure 10: Costs for passive and active layer presents the assumptions that are used to calculate these monthly costs for the passive and active layer. The monthly costs can vary because the estimation is based upon many assumptions depending on factors, such as; the number of clients/connections, deviation between current business parks and the average and the fiber infrastructure that can be joined with the revitalization of new business parks. (Ontwikkelingsmaatschappij Oost Nederland NV, 2006).


7 Intervention area D: Urban areas

7.1 Current situation: Market successful in picking up After discussing the situation for the important rural area, boosting social and business service development and the industrial area, this part will now briefly discuss the last situation, the urban area. There is no question about the success rate of a fiber infrastructure in the urban areas for the foreseeable future. Currently, the province Gelderland does not stimulate the construction of a fiberglass network at all. They trust on the fact that the market will take developments in these areas up by itself in a sufficient pace. Another reason is that the province for some urban areas still has confidence in the existing cable network (Bruil, 2012). This is also the reason why they see the urban area as least important for stimulating. Therefore the province has not reserved funds (subsidies or loans) within their budget.

7.2 Possible interventions Instead of a facilitating and financing role, which the province might have at the construction of a fiber network in rural areas, the province might act merely as a regulator within urban areas. This means they do not actively stimulate fiber, but they also don’t oppose it. This could result in a system where licensing procedures are optimized and high fees are avoided. This way, both parties have their benefits. The province should therefore regulate with municipalities in order to investigate whether regulations and procedures can be made more efficient (Ministerie van Economische Zaken Landbouw en Innovatie, 2012). Our advice is that this role of the province should not be changed in the future, and is not expected to change in the future (Bruil, 2012). As demand rises, the market will finally reply to this demand.

Second, the province could play a role in regulating for conversations between municipalities and third parties in case of a new residential. When a new residential is to be build, there is a big chance that the current cable network should be adapted of supplemented. This is for the biggest part responsibility of the municipality, but the province might have guiding role in this. Unfortunately, It is not clear what the role of the province currently is in this perspective.

In order to accomplish high quality and low prices for habitants in urban areas, a shared passive layer or completely separated layer is preferable. Due to the high competition between several service providers and active operators, the market secures the quality and subscribers fees. More competition decreases prices and increases quality. The municipalities can function as supervisor to audit the quality and subscribers fees. Furthermore, the passive layer is regulated by the OPTA, therefore, a single passive operator is not a direct problem.

Conclusion: Feasibility

The feasibility of a fiber infrastructure in Gelderland depends for the largest part on financial and political possibilities. The financing and political opportunities are based upon the four different initiatives to encourage the installation of a fiber infrastructure. Due to the wide variety of external factors, such as, number of connections per square km, costs per connection and government regulations, the initiatives are individually discussed. Moreover, each initiative is divided in political and financial feasibility.

References

Statennotitie provincie Gelderland. (2011, 06 29). Beantwoording motie 34, "Heel Gelderland digitaal bereikbaar". Gelderland, Netherlands: Provincie Gelderland.


Akamai. (2012 Q2). The state of the internet. Akamai.

Bruil, M. (2012, Oct 03). (M. v. Kortenhof, Interviewer)

Fransman, M. (2010). The New ICT Ecosystem: Implications for Policy and Regulation. Cambridge Cambridge University Press, Chapter 2. pp. 21-33.

FTTH platform Nederland. (2012). Glasmonitor. FttH Platform Nederland.

Katz, R., & Suter, S. (2009). ESTIMATING THE ECONOMIC IMPACT OF THE BROADBAND. Columbia Institute for Tele-Information.

Kroes, N. (2011, 10 19). Blog of Neelie KROES. Retrieved 10 19, 2012, from Blogs of the European Commission: http://blogs.ec.europa.eu

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OPTA. (2012, 05 21). Morgen wordt vandaag bedacht. Retrieved 10 19, 2012, from OPTA: http://www.opta.nl/nl/wat-doet-opta/morgen-wordt-vandaag-bedacht/

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Provincie Gelderland. (2011, June 29). STATENNOTITIE. Breedband (beantwoording motie 34, 'Heel Gelderland digitaal bereikbaar'). Gelderland.

Provincie Gelderland. (2011, Augustus 30). STATENNOTITIE. Aanpak Gelderse revolverende middelen. Arnhem, Gelderland.

Provincie Gelderland. (2012, Januari 20). Persbericht. PROVINCIE GELDERLAND START VIER PROJECTEN MET BREEDBAND. Arnhem, Gelderland, Nederland.

Provincie Gelderland. (2012, Februari 8). STATENNOTITIE. Breedband. Arnhem, Gelderland, Nederland.

Provincie Gelderland. (2012, Februari 8). Verslag Commissie Mobiliteit, Innovatie en Economie. Arnhem, Gelderland, Nederland.

Provincie Overijssel. (2010). Breedbandnetwerk in Overijssel. Statenvoorstel nr. PS/2010/1031.

Provincie Overijssel. (2010). Statenvoorstel nr. PS/2010/1031. Zwolle: Provincie Overijssel.

Rohman, I. K. (2012). Does Broadband Speed Really Matter for Driving Economic Growth? SSRN.

Sadowski, B. N. (2009). Providing Incentives for Private Investment in Municipal Broadband Networks: Evidence from the Netherlands. Telecommunications Policy, 33, 582-595.

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Appendices

Appendix I: Interview with Martijn Bruil

Appendix II The use of Social Media 4. To what extent has your use of the social media contributed to the feasibility of your strategy plan (Maximum of 20 points!).

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