Wireline Telecommunications Network Cost Trends
Aug 02, 2017
Contributor: Robert McKnight
CostQuest Assoicates (CQA) has extensive experience in the development of forward-looking telecommunications costs for a multitude of purposes. Our clients include regulators as well as carriers, and our network cost models have been successfully used for Unbundled Network Element (UNE) proceedings, Universal Service (voice) proceedings, Connect America (broadband) purposes, and for property tax valuations. This experience provides our staff with unique opportunities to analyze the trends in costs over time. Developing cost trends for a wireline telecommunications network requires not only experience in the subject matter but also the data needed to evaluate changes in costs over time.
A wireline network essentially consists of cable, structure (poles, conduit, trenching), electronics, buildings and land. And, each of these components requires both material investments and labor investments. Over time some of these components may increase in costs while others decline in costs. Equally as important as the raw change in costs is the change in productivity/efficiency and the change in the types of services provided over that network that affect the cost per unit of service delivered. For example, the replacement of copper with fiber, the improved productivity of microtrenching for buried cable placement, the conversion of Time Division Multiplexing (TDM) to IP-based technologies, and the introduction of fixed wireless technology in areas where Fiber-to-the-Premises (FTTP) is uneconomical must be factored in when one considers the overall cost trends of providing wireline services. Additionally, the mix of services provided by the network are changing resulting in changes in the makeup of the network and changes in the cost of that network. In the past, wireline telecommunications networks focused on providing Plain Old Telephone Service (POTS) ubiquitously over the entire franchised area. Today, penetration rates for voice services are declining and high-speed IP-based broadband build costs are the major drivers of investment. CQA sees evidence of the overall decline in the costs of building a new wireline network when reviewing several years of its Replacement Cost New (RCN) calculations for property tax valuations. Many states assess telecommunications property value by first determining the “replacement cost new” of the network. This value represents the investment necessary to build a functionally equivalent new network using the latest available technologies. This replacement network includes the current material and labor costs using the latest technologies available at the time the analysis is developed. An analysis of the property tax trends (i.e., the RCN values) over time reflects changes in raw material and labor costs, changes in the demand and mix of services provided, and changes in technology resulting in improved efficiencies as new technologies are developed and deployed (e.g., fixed wireless).
Below is an overview of changes in the total cost over the past five years for a typical replacement wireline network. Total costs incorporate all network costs including loop costs (from the ONT to the ethernet switch/router), transport costs to capture interoffice routing, IP-based switching costs, land, buildings and other miscellaneous investments. Keep in mind that this chart shows the decline in RCN values from a base year of 2013, not the change from booked costs. If one were to compare the RCNs to booked costs, the differences would be much greater.
This overall change in costs over time gives one a perspective of the expected trend in future RCNs and provides insight into whether a carrier would benefit by using CQA’s RCN models and processes in the production of a more accurate valuation for property tax appraisal purposes. But, as noted above, the wireline network is made up of many components -- electronics, structure, and cable – and all require both material investments and labor investments. So, while an overall trend in replacement costs is useful in planning for certain analyses such as property taxes, just understanding the overall trend in costs may not be appropriate for other uses.
Other trends that are of value in planning/analysis include trends in labor costs, trends in electronics on a per unit basis (e.g., per Mb of data), copper vs. fiber cost trends, etc. With CQA’s vast data repository of costs at a very granular level as well as available public data, tailor-made trend analyses specific to a client’s needs can be produced.
For more information, contact: Mike Wilson.