Lecture#12 Economic indexes of the networks The Bonch-Bruevich Saint-Petersburg State University of Telecommunications Series of lectures “Telecommunication.

Lecture#12

Economic indexes of the networks

The Bonch-Bruevich Saint-Petersburg State University of Telecommunications

Series of lectures “Telecommunication networks”

Instructor: Prof. Nikolay Sokolov, e-mail: [email protected]

Background

Cost-effectiveness of a telecommunications network can be estimated from two points of view. Firstly, information exchange is of appreciable benefit when producing any goods or services. From this point of view, it is very hard to estimate efficiency of the telecommunications network by units adopted in economics. It is considered that in countries of EU, one dollar of investments increases growth of social product by 2.0 – 2.5 dollars. In the USA this index is even higher: from 4.0 to 8.0 dollars. One of the possible approaches for obtaining of such estimates is based on information volume mentioned in the second lecture. Secondly, the cost-effectiveness of telecommunication network is estimated from the optimality of its construction, maintenance, and development points of view. In this lecture exactly that approach to the analysis of cost-effectiveness related to telecommunication networks is discussed.

Jipp curve (1)Jipp curve is a term for a graph plotting the number (density) of telephones against wealth as measured by the Gross Domestic Product (GDP) per capita. The Jipp curve shows across countries that teledensity increases with an increase in wealth or economic development (positive correlation), especially beyond a certain income. In other words, a country's telephone penetration is proportional to its population's buying power. The relationship is sometimes also termed Jipp Law or Jipp's Law.The Jipp curve has been called "probably the most familiar diagram in the economics of telecommunications". The curve is named after A. Jipp, who was one of the first researchers to publish about the relationship in 1963.The number of telephones was traditionally measured by the number of landlines, but more recently, mobile phones have been used for the graphs as well. It has even been argued that the Jipp curve (or rather its measures) should be adjusted for countries where mobile phones are more common that landlines, namely for developing countries in Africa.

Jipp curve (2)

Jipp curve (3)

Metcalfe’s Law

Main trends

The following processes play an important role in the development of modern telecommunications system:•Conversion to so-called "customer economics";•Convergence of telecommunications networks;•Integration in telecommunications;•Consolidation in telecommunications;•Changing of transmission and switching technologies;•Market of the new services;•Increasing role of the content-oriented services.

Classifications of clients (1)

20%

20%

20%

20%

20%

Income share Portion of clients

Х1%

Х2%

Х3%

Х4%

Х5%

a) Ranking of clients by the level of income b) Ranking of clients by the time of the service using

Portion of clients

Time

100%

Innovators

Early adopters

Early majority

Late majority

Laggards

Classifications of clients (2)

Source: Telcordia Technologies

Users’ expenses on telecommunications services

User expenses on telecommunication services

Total user income

DMIN DMAX

Share from total income

Absolute value

Tree of solutions

A

B

C

D

E

FG

H X

Y

PAB

PAC

In practice, risk can be analysed with the help of the solution tree an example of which is shown on the figure. It represents graph of tree topology. Solution tree allows calculate if not all, then at least general totality of variants describing possible scenarios of telecommunications network development.

Triple-play service based on the current networks

TS

PC

TV with Set-top-box

Access Network Core Network Service NodesCall Center

Video Server

Intrenet

PSTN

CATV

Customer Premises Network

Triple-play service based on the NGN technology

TS

PC

TV with Set-top-box

Customer Premises Network Access Network Core Network Service Nodes

Juran’s spiral

1 23

4

567

89

1

2 3

4

5

89

14

13

12

11

10

13

14

12

11

10

1 – market research; 2 – working out of design statement; 3 – designing and constructing; 4 – composition of technical requirements; 5 – technology elaboration and production preparation; 6 – supply of materials and machinery; 7 – making of tools, accessories and controlling and measuring apparatus; 8 - production; 9 – production process control; 10 – control of finished product; 11 – checkout of product performance characteristics; 12 - sale; 13 – exploitation and maintenance; 14 (1) – market research

NGN as economical solution Increase of communication Operator’s revenues is possible by solving of two important problems. Firstly, independently or with assistance of services Providers, it is expedient to take over another niche, implicitly related to telecommunications business. The cases in point are information services which, in the long run will provide increase of Operators’ revenues. Secondly, revenues increase can be achieved when minimizing expenses. In this instance the matter concerns optimal ways of infocommunication system development and perfecting of maintenance processes. Efficiency of these processes determines, to a great extent, the level of Operational expenses on the system management. NGN concept – from the economic point of view can be considered as fulfilment of new requirements of potential clients at the expense of comparatively slight increase of CAPEX with essential decrease of OPEX.

Main indexes (1) GNI per capita – Gross national income (GNI) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI per capita is gross national income divided by mid-year population. GDP per capita – Gross domestic product (GDP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output. GDP per capita is gross domestic product divided by mid-year population. Growth is calculated from constant price GDP data in local currency.Capital expenditures (CAPEX) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. CAPEX are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. Operating expenses (OPEX) are non-capital expenses incurred by a company in normal operations: salaries and wages, insurance costs, floor space rental, electricity, computer maintenance contracts, software maintenance contracts, and so on. In brief, almost all routine expenditures a company makes are operating expenses, except for a few special non-operating expenses (such as costs of financing a loan, or one-time costs for closing a plant), and except for capital costs.

Main indexes (2) Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used•to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.•to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.•as an alternate measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.•cash flow can be used to evaluate the 'quality' of Income generated by accrual accounting. When Net Income is composed of large non-cash items it is considered low quality.•to evaluate the risks within a financial product. E.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Main indexes (3) Net present value (NPV) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,

Main indexes (4)

,

1t

t

R

i

where•t – the time of the cash flow•i – the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)•Rt – the net cash flow (the amount of cash, inflow minus outflow) at time t. For educational purposes, R0 is commonly placed to the left of the sum to emphasize its role as (minus) the investment.The result of this formula if multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay will be the present value but in case where the cash flows are not equal in amount then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV purpose.

Net present value (NPV)

Network modernization(Investment process)

CFin(t) CFout(t)

This index allows finding the correlation between investments and future income. Cash Flow on the input ( )inCF t is directed towards network modernization, which can be considered an investment project. As a result, output flow ( )outCF t is generated.

Examples of sensitivity analysis

x

NPV

x0xMIN xMAX

y

NPV

y0yMIN yMAX

Example of NPV (1) NPV(t)

t

Network creation

Network implementation

mod

erni

zati

on

Payback period

Example of NPV (2)

Source: ITU

Polygon of competitiveness

S1

S2

w11w12

w12

w21

w13

w23

w14

w24

Simple definitions

Average revenue per user (1)

Average revenue per user (sometimes average revenue per unit) usually abbreviated to ARPU is a measure used primarily by consumer communications and networking companies, defined as the total revenue divided by the number of subscribers.This term is used by companies that offer subscription services to clients for example, telephone carriers, Internet service providers, and hosts. It is a measure of the revenue generated by one customer phone, PC, etc., per unit time, typically per year or month. In mobile telephony, ARPU includes not only the revenues billed to the customer each month for usage, but also the revenue generated from incoming calls, payable within the regulatory interconnection regime.This provides the company a granular view at a per user or unit basis and allows it to track revenue sources and growth.

Average revenue per user (2)

Impact of the new technology (1)

Source: http://www.telegeography.com

Impact of the new technology (2)

Impact of the new technology (3)

Value added services

New economic model

Source: Telcordia Technologies

Instructor: Prof. Nikolay Sokolov, e-mail: [email protected]

Questions?

Economic indexes of the networks