Broadband business plans : mostly fiction and bamboozle !!

Presentation1
So why is the financial and investment community leery of business plans presented by broadband operators especially when it comes to broadband data ? To start with the Operator tries to bamboozle the financiers with tech speak “ Guys we have an all-IP architecture, spectral efficiency OFDMA , bandwidth flexibility backboned on metro ethernet ( Yawn ) . Since the financers feel uncomfortable ( if not downright ignorant ) with the aforementioned techno blast they try to baffle the Operator with sublime finance speak “ Guys , as equity investors we are looking for a business case that generates positive free cash flow from wireless and mobile broadband operations by year 5, and a business valuation based on EBITDA positive operation by year 2 and a 5x EBITDA and 2x revenue multiplier valuation” ( Yawn).

After thoroughly confusing each other with their subject matter expertise both parties scramble to find some common ground : Clarion call “ lets BRIDGE THE DIGITAL DIVIDE : meaning connect the poor sods in rural areas who don’t even have water or electricity. Atleast thinking about the poor while we gorge on caviar sushi makes us feel human and that can’t be bad nutrionally or spiritually that is !! As we all know the investment model for broadband wired and wireless installations must consider all aspects of design, deployment, and integration from the core through the systems architecture, service edge, access network and device. While the initial spend on deployment will have a large focus on capital components associated with procuring the necessary equipment throughout the network and systems architecture, as the broadband network service is introduced and subscriber adoption and usage rates grow, the ongoing operating expenses will consume a growing share of the total cost of ownership.

There are a lot of uncertainties connected to the forecasts.Since the broadband forecasts are developed thru qualitative and quantitative information,statistical modelling and also subjective input to the modelling, it is difficult to express the uncertainty by a pure statistical model. However, it is important to analyse the impact of the broadband forecasting uncertainty.The long-term forecasts are mainly used as input for rollout decisions of different broadband technologies and for establishing new network platforms. Techno-economic assessments are used to calculate net present value, internal rate of return and pay back period for the various projects. A relevant method for evaluating forecast uncertainty is to apply a risk analysis.

Typically the Operators grossly overestimate the market demand and thumb suck the number of new subscribers they will get in year 1 : guys we are targeting 5 % of the total available market without the foggiest clue what the real demand is. While statistical analysis and models are the tools of trade , the sane forecaster has to stand back and take a broader view. If a forecast seems implausible, this is generally because it is implausible. If a forecast results in an extremely high ROI, it is likely that the forecast underpinning the business plan is unrealistic. A very profitable industry attracts more competitors, leading to a loss in market share and increased price competition. This would change the firm’s demand and revenue forecast.

A well researched and clearly structured methodology which is based on accepted economic theory and market models instills confidence in decision makers, investors and lenders. While forecasting subscribers and revenues for mobile broadband and specific applications is key to analyze the top line of any business case, translating these forecasts into traffic and bandwidth forecasts is required in order to effectively plan the network and analyze the impact on the bottom line. The moment you get the top line wrong then the whole excel spreadsheet is worthless.

To create accurate market-demand projections for broadband services and assess the availability of alternative technical infrastructures requires testing existing projections against different points of reference, adding context and detail where necessary. Where projections do not exist, we need to create them from scratch with management input. That entails conducting a macro-economic analyses to input to the overall expected level of spend on broadband data ; benchmarking with usage in comparable countries assists with the development of models of how that spend might be broken down by service type, and over time more advanced markets (such as Japan and South Korea) are analysed to assess how mobile data consumption might be expected to evolve over time.

It good to review brokers reports, market research and press articles relevant to the candidate market with care ; we must undertake interviews with relevant experts and panels in order to establish a consumption model for mobile data – where the consumer is likely to be, and what they are likely to be doing when they consume mobile data. To assess opportunities to achieve growth through the introduction of mobile broadband services, we must gather quantitative information and high-level financial information to develop a short business case along the following imperatives :

• Study the competitive landscape, the regulatory background and the alternative technologies available to develop a business model and a strategic positioning reflecting the brand, the skills and the ambition of the operator

• Develop a number of strategic scenarios, consistent with the operator’s strategy, and propose models to assess the likely financial impact of pursuing each option

• Include the evaluation of opportunities such a diversification through organic or inorganic growth, and review of the synergies with the existing operator’s activities and network

• Construct market demand projections for a comprehensive set of different content types .The output of this stage is a detailed spreadsheet model including projections of spend and usage for each different content type

• Once usage projections have been created, consider the ‘optimum’ technical support infrastructure for each service type. The result is a summary of the optimal technological choices in a given market, given the expected user profile

• Include the optimisation of returns and the minimisation of risks, as well as the identification and development of strategies for non-conventional revenue streams

Operators planning investment into broadband installations need to be certain that their front-end strategy and planning efforts consider the end-to-end proposition of the network, systems, and service to truly reap the cost benefits and the revenue potential of broadband wired and wireless services. And then and only then you might get lucky with the investment banking community. Long-term broadband technology forecasting is not a very easy subject. Experience has shown that it is nearly impossible to make long-term forecasts without understanding the evolution of new broadband technologies and new broadband network platforms. Knowledge of broadband technologies regarding possibilities and limitations is important for the forecasting.

In order to make good long-term broadband forecasts,techno-economic analysis of the relevant broadband technologies has to be performed.Each technology generates investments and operations and maintenance costs for the rollout, which is dependent on the characteristics of the various access areas in the countries. The techno-economic calculations evaluate the “economic value”, i.e. expressed by net present value or pay back period of rollout of different broadband technologies.The assessments are carried out for rollout on a national level and on specific areas like urban, suburban, rural and especially the rest market to examine the potential of the different broadband technologies. Therefore, the techno-economic analysis is crucial for technology rollout strategies and for broadband forecasts.

Sadiq Malik ( Telco Strategist )

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