By: Zac Byrd, Hailey Farrow, and CostQuest’s Consulting Services Team on behalf of CostQuest Associates
In the dynamic realm of telecommunications, deploying broadband infrastructure entails strategic foresight, gathering copious amounts of information, and meticulous network cost modeling. Amidst this complex ecosystem, the formulation of precise network cost models serves as a linchpin for successful broadband deployment projects, especially when it comes time to get boots on the ground to build the network.
In a landscape where each decision carries implications, cost models provide the foundational framework necessary to make informed choices, allocate resources effectively, and mitigate potential risks. This article describes CostQuest’s Cost Model Methodology, the advantages of building cost models before broadband deployment, and how cost models can often be the differentiator between moving a project forward versus setting it back.
CostQuest’s Network Cost Model Methodology
CostQuest’s cost model results stand as more than just estimates; they epitomize the outcome of the most intricate network modeling approach in the United States. They reflect a profound understanding of network architecture, economics, and engineering principles, spanning across Fiber-to-the-Premises (FTTP), Fixed Wireless, and 5G technologies.
Since 1999, CostQuest Associates has been a steady partner to a diverse spectrum of broadband entities, lending its expertise to the intricate domain of network cost modeling.
CostQuest’s cost models have been used to support the FCC’s USF distribution for programs such as A-CAM, Enhanced A-CAM, Connect America Fund (CAF), CAF II, and the Rural Digital Opportunity Fund (RDOF). The NTIA and state broadband entities also rely on CostQuest’s cost models as an integral component to coordinate funding for the Broadband Equity, Access, and Deployment (BEAD) program.
In a recent Community Q&A session, CostQuest’s CEO and President Jim Stegeman outlined CostQuest’s innovative approach to Fiber to the Premises (FTTP) network modeling at a high level. In this session, Jim described, “This methodology is rooted in engineering principles and kicks off at each customer’s point of connection, before advancing upwards to what is known as the ‘drop terminal.’ The journey continues to the next junction called the ‘splitter,’ and from there, CostQuest employs minimum spanning road tree algorithms to identify all relevant points in the ‘splitter neighborhood.’ This algorithmic approach serves to minimize both total costs and deployment footage.
Once this meticulous process is applied across the hundred million nationwide points, a comprehensive network path is established from each customer point to its respective serving nodes. CostQuest collaborates closely with client engineers, incorporating their cost and material-price data. CostQuest also considers more unique factors, such as the distance between location clusters, terrain, soil type, existing infrastructure assets (obsolete and useable), etc. By pooling client-specific and regional information with insights gathered across other clients, CostQuest leverages this information to develop highly reliable and cost-efficient models.”
CostQuest’s Network Cost Model Approach – A step-by-step look
Various components are needed to calculate network costs, such as demand, labor costs, terrain, equipment capacities and prices, geography, and demographics. Described below is a more in-depth look at each of the steps CostQuest takes to gather this information and model network cost.
CostQuest’s Cost Model Approach Overview
Step One: Total investment calculation
The initial step in building a cost model for a broadband network involves calculating the total investment, where price x quantity = investment. This total sum comprises of labor, equipment, and incidental costs needed to build the network.
To gauge the network investment, variables like equipment quantities, amount of labor (installation, planning, engineering, cost of labor, etc.), cost of labor, price of equipment, and the respective unit costs incurred during network deployment are considered. Additionally, attributes that affect network cost, such as environmental factors, geography, local demographics, and roads, are integrated into the model to determine the quantity of materials via efficient equipment locations relative to service locations and the amount of construction labor to further refine the quantity estimates.
These quantities are then multiplied by their corresponding unit prices for material and labor to obtain the total investment. To determine the economic viability of the investment, this investment figure is translated into an ongoing operational cost to account for expenses and capitalization. Revenue streams are then compared against these costs to assess the financial returns and determine if there is a need for external subsidies.
Step Two: Optimizing equipment placement
CostQuest’s models employ algorithms that identify the most desirable design clusters of service locations to place equipment in efficient locations to maximize the amount of end users served and minimize the amount of equipment used. For fiber networks, equipment such as drop terminals and splitters must be efficiently placed to maximize coverage. The Minimum Spanning Road Tree (MSRT) algorithm is employed to route cables efficiently along road networks, ensuring optimal connectivity between customers and the network infrastructure. In scenarios with wireless networks, tower locations are calculated for optimal coverage, and every piece of equipment is tailored to meet current and anticipated demand levels.
Step Three: Capacity-based equipment sizing
Investments in broadband networks are inherently “lumpy” due to the need for equipment serving multiple customers. Therefore, a granular familiarity of demand along specific routes in service areas is necessary to effectively size equipment. In addition, understanding the total demand within given service areas helps determine the quantity of optical equipment in carrier serving offices. Based on the identified demand and forecasted utilization rates, equipment is sized optimally to ensure cost-effective deployment and operational efficiency.
Step Four: Geographical and terrain considerations
A nuanced proficiency of geographical and terrain features in the targeted service area is paramount for accurate cost models. Factors such as the presence of rocky soil, bodies of water, or steep slopes could necessitate adjustments in deployment strategies and cost estimates. Comparative analysis against terrain maps helps budget for additional costs associated with challenging terrains.
When it comes to wireline networks, the cable sizes, and distances, along with equipment sizes and distance, will be multiplied by the unit prices for material and labor costs to calculate the total investment.
For wireline networks, cable distances and sizes are calculated alongside material and labor costs for each unique geographical constraint. In the context of wireless networks, the total unit count of towers, radio equipment, and other requisite components are assessed similarly against unit prices to finalize the investment calculation.
Geographical & Terrain Factors for Broadband Infrastructure
Step Five: Maintaining a network
Whether a carrier opts for wireline or wireless technologies, the key to success lies in achieving a favorable return on investment (ROI). This success can be calculated through various financial metrics, such as total cost or earnings before interest, taxes, depreciation, and amortization (EBITDA). Beyond the material and labor expenses of building the network, carriers face an array of ongoing expenditures like debt cost, income taxes, and equity returns for capital consumed by deployment.
Additional expenses like maintenance and replacements are inherent to the industry and constitute substantial cost components. Additionally, property taxes must be accounted for and paid to the respective jurisdiction where the network operates. Other costs, such as customer support and corporate common costs, also contribute to the overall cost of providing service.
During the planning stage, estimating these ongoing expenses as a percentage of the initial investment is essential. This percentage is derived from historical expense data compared to the capital invested, providing a vital metric for the sustainability and profitability of the network over time.
Step Six: ROI Metrics
ROI calculations depend on total expenditure and revenue. While the revenue formula appears straightforward, multiplying units in service by unit service prices, determining ‘units in service’ is more complex than it seems. Revenue is influenced by market dynamics, such as competition and regional demographics.
Once revenue is established, EBITDA provides a snapshot of return against variable or short-term costs. While it is a useful metric, EBITDA does lack consideration for long-term costs like financial costs, income taxes, and capital depreciation.
Step Seven: Assess network cost-revenue balance
Constructing a network involves substantial upfront and ongoing costs, often financed through loans or investor capital. Over time, the carriers pay back this borrowed money through a combination of servicing their debts with lenders and paying dividends to investors. The financial sustainability of your network is evaluated by comparing these expenditures against generated revenue. Long-term cost metrics must include asset depreciation and Weighted Average Cost of Capital (WACC), a discount rate incorporating both debt servicing and equity returns. Capital-related expenses are calculated as a percentage of the investment that considers the depreciation over time, WACC, and income taxes.
Step Eight: Utilize federal funding for network costs
Profitability is not universal across all regions. While urban areas often yield healthy returns, the opposite can be said about deploying in rural areas. This gap is often bridged using federal subsidies. Historically, these subsidies were aimed at ensuring affordable voice services; it has now pivoted to broadband services in recent years. If your network serves a high-cost region, tapping into these funds can balance out the cost-revenue ratio and ensure financial feasibility.
By adhering to these steps, broadband providers can navigate the complex financial landscape involved in network deployment, maintaining not only operational effectiveness but also long-term success.
Advantages and risks related to network cost modeling
Network cost models provide a comprehensive understanding of the financial aspects involved in building and maintaining a broadband network. Cost models also serve as a crucial tool for regulatory compliance and can aid in securing funding or partnerships by instilling confidence in stakeholders regarding the project’s financial sustainability.
The advantages of precise network models:
- Informed Decision Making: Cost models serve as a tool in making informed decisions by providing accurate information pertaining to technology, deployment strategies, and related factors. Thereby reducing the chances of underestimating costs and potential project complications.
- Budget Planning: Precise cost estimates enable organizations to optimize budget allocations, enhancing their capacity for effective financial planning and resource management. In contrast, unexpected expenditure poses a risk of budget overruns, jeopardizing the completion of the project.
- Realistic Pricing: Detailed cost projections equip organizations with the capability to provide competitive pricing to customers while ensuring their profitability margins. Unrealistic pricing may lead to customer dissatisfaction or financial losses.
- Risk Assessment: Accurate cost models facilitate the identification and evaluation of potential projected-related risks. This enables proactive risk mitigation strategies and minimizes project delays.
- Resource Allocation: Cost knowledge aids in the efficient allocation of resources, including materials, human resources, equipment, and time (ensuring optimal utilization).
Risks of not having precise network cost models:
- Fiscal Overflows: Without precise cost models, projects become vulnerable to unforeseen expenditures, resulting in budget surpluses and placing financial burdens on organizations.
- Project Delays: Inadequate cost estimation may lead to postponements due to insufficient resources or unexpected financial constraints.
- Quality Compromises: Insufficient cost estimations can lead to budget constraints that force compromises on equipment and materials quality, negatively impacting broadband network reliability and longevity.
- Unforeseen Challenges: Without comprehensive cost models, unexpected challenges during deployment can lead to ill-prepared solutions, causing further delays and expenses.
- Loss of Credibility: Underestimating costs poses a substantial risk to an organization’s reputation and reliability, potentially resulting in diminished confidence.
- Unsuccessful Endeavors: In instances of profound misjudgments of cost estimations, the project’s fiscal viability may be compromised to such an extent that it becomes unsustainable, ultimately resulting in the project’s failure.
To tie it all together, the intricate landscape of broadband network deployment is fraught with both opportunities and challenges. This is why network cost modeling serves as a navigational compass through this complex terrain and safeguards against financial missteps that can undermine a project’s success.
From optimizing equipment placement using advanced algorithms to leveraging federal funding mechanisms, CostQuest’s Cost Model Methodology provides a granular, holistic framework beyond simple cost estimation. It’s about ensuring the technological agility, financial viability, and long-term resilience of broadband networks. Investing in a thorough cost model is more than just an option; it’s a major ingredient in the recipe for success.