Friday, April 13, 2012

700 MHz Wireless Spectrum Sharing with Public Safety

The following is a High Level Discussion on Network Build-out Cost and Financing Options.

These are meant as discussion points.

The question: how could the Utilities play in the Public Safety Broadband initiatives?
Using the design, build, operate and maintain (DBOM) model of constructing the Public Safety Broadband Network (PSBN) will follow traditional models of wireless communication development. There are a host of contractors who currently deploy, nationally, varying degrees of 3G and 4G platforms today. The important aspect of how these networks are built and funded has traditionally been based on a revenue-generating model such as AT&T and Verizon. The business model itself impacts the primary difference at the conception of the network design. Thus the design considerations for the PSBN will follow a different path, which itself is primarily not a revenue based business model, but can be modified to have revenue generation as part of the design.
There are two primary business models associated with self-funded deployments for large-scale telecommunication networks; a subscriber based and a leased contract base.  Both of these constructs will impact the design and build phase differently.
The subscriber-based solution will require immediate subscriptions to help fund the initial design. Given that this is the latest generation of wireless we should expect complications in that the OEM (Original Equipment Manufacturers) have not had time to fully development user devices to communicate with the network through a large amount of available handsets. There will be a small amount of user devices available, but nothing to the scale that will be needed to self-fund the entire DBOM scenario.
Another area of concern with the subscriber-based model is that the model itself has been proven to lack justification and assurance that it truly pays for itself. It is well know in the Telco industry that the largest players are having difficulty funding their own deployments using this model. The ARPU (Average Rate Per User) modeling of revenue generation continues to decline with the onset of more cost effective technologies as well as consolidation of technology platforms, i.e. move towards all IP and the convergence of 2G, 3G into 4G. One has to remember that these commercial networks have more than 80 Million subscribers each (AT&T and Verizon); thus if they themselves are having an issue it would be unwise to believe that a few thousand handsets for First Responders within a given State would suffice.
The alternative modeling to a self-funded solution could derive from long-term leased contracts that are better suited for just such an implementation. Such a model is conceived through the use of Public Private Partnerships (PPP or P3) in that all parties involved have similar requirements for the technology; may have infrastructure or processes that can benefit the network; have long-standing expenditures already for communications (primarily in the capital and operational expenses associated with already installed solutions); and have an open standing to generating revenue.
Executing such a model will ultimately require the PSBN to be built at the State level. The State is most likely better prepared to construct, control and maintain their portion of the PSBN all while closely maintaining the varying Public Safety entities requirements within the State; to include Power Utilities. In essence we are not building anything new. The only thing that is unexplored is the PPP model funding the initiative.
 What would the network build look like? What should the expected costs be? As it pertains to any large-scale complex program we truly won’t know that answer until a detailed cost estimate of the scope of work can be administered. As it stands, any of the States that have already submitted waivers to access the PSBN frequencies have most likely completed such preliminary estimates. Although the figures are not concrete, by any means, we could expect that the cost structure of the build outs will incorporate two essential elements; cost of the services (construction and integration) would be roughly 80% of the entire capital budget for the entire solution. The remaining 20% will be allocated to materials and equipment (both OEM, tower, tools, etc.).
As an example: the cost of a highly populated region for 113 existing tower solution; with fiber already provided; and a single Core (LTE controller); such a solution would typically be in the ballpark of about $40 Million. That equates to roughly $350 K per tower, where as $30-$32 Million for deployment and construction related services (including design) and roughly $8-$10 Million in equipment and materials.
Similarly, a rural 201 new site solution could be expected to be in the ballpark of $80 Million. That equates to roughly $400 K per tower, where as $60-$64 Million for deployment and construction related services (including design) and roughly $12-$16 Million for equipment and materials.
There is a vast host of variable cost impacts associated with these builds, so these numbers should be taken with a grain of salt. But, in conceptualizing a State budget for a Centralized model of a P3 this provides you with enough insight to start aligning potential investors as well as required allocations from the entities within the State that will require the broadband service. It is imperative that these figures be updated to reflect true cost of the capital program to build the solution and subsequently should include the Operation Expenditures (OpEx) required to run it.
As a note: typically the OpEx portion of running a network equates to roughly 10% of the total Capital Program to build it.  
Having a rough estimate of what the network solution could eventually cost, it is now the time to look at the available resources within the P3 to help DBOM the solution for the State. Following a standardized process of procurement and design considerations that the FirstNet Board would have created. It will be essential to understand what entities could be involved, such as Power Utilities for example. There are many other entities that are similar but Utilities makes the point.
For any given Utility it is relative to point out that roughly 20-25% of its total installed assets, i.e. cabling, towers, trucks, etc., has to do with IT and Telecommunication solutions. That means that if a Utility provider such as AEP, which has an installed asset base of roughly $50 Billion (reference latest Investor Reports) and covers 11 States they typically have spent, on average, as much as $10 Billion on all their combined IT and Telecommunication needs.  That could mean that they would spend annually about 10% of that total $10 Billion, or $1 Billion a year in CapEx and Opex necessities to build and maintain technology solutions just to keep their business in operations. What if they could now offset that $1 Billion annually to a fraction of that cost by joining forces with a Statewide centralized P3 partnership?
In joining a PPP that is designed to DBOM a Statewide LTE broadband network could ultimately save the Utility a lot of capital at the same time alleviating risk to a player who has its best intentions at heart all while investing in the same solution for added revenue. Simultaneously the Statewide centralized network operator that is created under the PPP would benefit from offsetting deployment and infrastructure costs as well as implementing a large possible investor by joining forces with a Power Utility that already has the footprint and the know-how in building such complex solutions.
These solutions are at the cusp of reality and should be expected from any of the Public Safety entities within the State, or Nationally. All of the State, or National, Public Safety entities have similar demands, infrastructures and requirements; most importantly they all have a common demand for the latest broadband technology.   
In conclusion, it’s imperative to understand that the PSBN is itself a carrier class network that has the technical capabilities similar to the commercial carriers. But in this context has a limited pool of potential users. It is crucial that the right construct of a model to self-fund the program be instituted. Although there are many ways to fund such an endeavor there is only one way that meets all the requirements of a solid business case that can compliment all who take part in its implementation – that is the Public Private Partnership model funded with long-term contracts from fixed users.
1.     Financial Approach: Funding
a.     Introduce and define possible funding scenarios
                                               i.     Federally subsidized
                                             ii.     State subsidized
                                            iii.     Public Private Partnerships
b.     Public Private Partnership Model
                                               i.     Centralized Special Purpose Vehicle (CSPV)
1.     Design
2.     Build
3.     Operate
4.     Maintain
                                             ii.     Recurring Revenue or Self-Funding Requirement
                                            iii.     Clients/State Public Safety Entities to access Broadband Service
1.     Client Requirements/demands
1.     Police
2.     Fire
3.     DHS
4.     DOD
5.     Utilities
1.     Power
2.     Water
6.     Transportation
1.     Mass Transit
2.     Rail
3.     Highways/Bridges
2.     Service Level Agreements
3.     Contractual Obligations
4.     Long-term SLA Contracts
5.     Subscriber Based Comparison
                                            iv.     Private Investment
1.     Investment Startegy
2.     Investment Needs
3.     Investment controls
                                              v.     Centralized SPV Board Control
1.     Investors
1.     Private
2.     State
3.     Public
                                            vi.     Revenue Model
1.     State Entity entitlements
2.     Asset and Infrastructure Offsets
3.     Revenue sharing model
4.     No Commercial Service


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