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Benefits Analysis Study
Atkins Management Consultants
Raleigh House
Langstone Business Village
Langstone Park
Newport
NP18 2LG
South Wales
Tel: (01633) 415500
Fax: (01633) 411211
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CONTENTS HEADING
EXECUTIVE SUMMARY .............................................................................................................. 1PART A....................................................................................................................................... 10
1 METHODOLOGY.............................................................................................................. 10
1.1 INTRODUCTION.................................................................................................... 10
1.2 OVERVIEW OF METHODOLOGY FOR MEASURING NET BENEFITS................ 10
2 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES ....................................... 16
2.1 INTRODUCTION.................................................................................................... 16
2.2 BROADBAND AVAILABILITY................................................................................. 17
2.3 TAKE UP ................................................................................................................ 21
2.4 PENETRATION RATES ......................................................................................... 26
3 FORECASTS OF AVAILABILITY AND UPTAKE OF BROADBAND IN WALES ........... 28
3.1 INTRODUCTION.................................................................................................... 28
3.2 AVAILABILITY ........................................................................................................ 28
3.3 TAKE UP ................................................................................................................ 32
3.4 PENETRATION RATES ......................................................................................... 36
4 NET BENEFITS OF BROADBAND.................................................................................. 38
4.1 INTRODUCTION.................................................................................................... 38
4.2 PRIVATE SECTOR BENEFITS.............................................................................. 38
4.3 PUBLIC BENEFITS ................................................................................................ 40
4.4 COSTS ................................................................................................................... 41
4.5 NET BENEFITS...................................................................................................... 42
4.6 CONCLUSION........................................................................................................ 44
PART B....................................................................................................................................... 45
5 OVERVIEW OF METHODOLOGY.................................................................................... 45
5.1 INTRODUCTION.................................................................................................... 45
5.2 SUMMARY OF NET BENEFIT METHODOLOGY.................................................. 45
5.3 ESTIMATION OF THE COUNTERFACTUAL......................................................... 46
6 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES ....................................... 48
6.1 INTRODUCTION.................................................................................................... 48
6.2 ESTABLISHING THE COUNTERFACTUAL........................................................... 48
7 NET BENEFITS OF THE BBW PROGRAMME................................................................ 53
7.1 INTRODUCTION.................................................................................................... 53
7.2 PRIVATE SECTOR BENEFITS.............................................................................. 53
7.3 PUBLIC BENEFITS ................................................................................................ 54
7.4 NET BENEFITS...................................................................................................... 55
7.5 NET BENEFIT OF PROGRAMME.......................................................................... 57
APPENDIX 1 SUMMARY OF THE BBW PROGRAMME.......................................................... 60
A1.1 BACKGROUND TO THE PROGRAMME........................................................... 60
A1.2 BROADBAND ENVIRONMENT BEFORE THE PROGRAMME WASLAUNCHED........................................................................................................ 61
A1.3 ACTIONS TAKEN FORWARD FOLLOWING BROADBAND WALESPROGRAMME LAUNCH.................................................................................... 61
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A1.4 BROADBAND WALES PROGRAMME 2005- 07................................................ 64
A1.5 THE FUTURE..................................................................................................... 70
APPENDIX 2 CASE STUDIES .................................................................................................. 72
A2.1 INTRODUCTION, APPROACH AND KEY FINDINGS ....................................... 72
A2.2 CASE STUDY A: ECONOMIC DEVELOPMENT.............................................. 77A2.3 CASE STUDY B: TRANSPORT ....................................................................... 80
A2.4 CASE STUDY C. ENVIRONMENT AND PLANNING....................................... 84
A2.5 CASE STUDY D. COUNTRYSIDE ................................................................... 87
A2.6 CASE STUDY E: TRAINING ............................................................................ 90
A2.7 CASE STUDY F: EDUCATION......................................................................... 92
A2.8 CASE STUDY G: COMMUNITIES..................................................................... 95
A2.9 CASE STUDY H. HOUSING ............................................................................ 97
A2.10 CASE STUDY I. LOCAL GOVERNMENT ...................................................... 100
A2.11 CASE STUDY J. PUBLIC SERVICES............................................................ 104
A2.12 CASE STUDY K: CULTURE........................................................................... 107A2.13 CASE STUDY L: HEALTH AND SOCIAL CARE ............................................ 110
APPENDIX 3 BROADBAND COSTS .................................................................................... 113
A3.1 INTRODUCTION .............................................................................................. 113
A3.2 HISTORICAL COSTS....................................................................................... 113
A3.3 FORECAST COSTS......................................................................................... 119
A3.4 SUMMARY OF COSTS.................................................................................... 125
APPENDIX 4 IMPACTS OF BROADBAND ON ECONOMIC PERFORMANCE ................... 126
A4.1 INTRODUCTION .............................................................................................. 126
A4.2 REVIEW OF LITERATURE .............................................................................. 126
A4.3 IMPACT OF BROADBAND ON WELSH ECONOMIC PERFORMANCE ......... 135APPENDIX 5 BREAKDOWN OF NET BENEFIT ESTIMATES.............................................. 137
APPENDIX 6 TABLE OF ACRONYMS.................................................................................. 139
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EXECUTIVE SUMMARY
1. The Broadband Wales Programme commissioned Atkins to quantify the benefits arisingfrom the adoption of broadband in Wales and the benefits attributable to the Broadband
Wales Programme (BBW Programme). In this report, we describe our analysis and
findings.
2. Our report and this Executive Summary are structured into two main parts. In the first part,
we look at the benefits of broadband to the Welsh economy, building on our forecasts of
availability and take-up. In the second part, we look at the benefits attributable to the
Broadband Wales Programme. HM Treasury guidance on appraisal and evaluation in
central government, as set out in The Green Book, has informed our analysis.
Overview of Net Benefits of Broadband to the Welsh Economy
3. We estimate the net benefit of broadband on the Welsh economy over the period 2000 to
2015 to be 1,387 million. This number should be treated with some caution as it is
necessarily based on a number of assumptions and forecasts. Nonetheless, we believe it
provides a reasonable order of magnitude indication of the likely benefits. Moreover, given
the underlying level of uncertainty and in order to avoid over-stating the benefits, we have
chosen to emphasise the benefit estimate derived from using low case assumptions. In
particular, 1,387 million is our estimate of the lower boundof benefits.
4. Figure 1 shows the profile of our estimated net benefits over time. Net benefits are initially
low, reflecting the initially low level of broadband take-up. Indeed, in 2002, we estimatenet benefits to be negative, as costs are greater than benefits. However, net benefits
rapidly increase from 2003 onwards, as the take up of broadband became (and we
forecast to become) increasingly widespread in Wales.
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Figure 1
Lower bound estimate of the net benefit of broadband in Wales, m discounted,
2000-2015
Source: Atkins estimates.
5. The private sector receives the majority of the benefits, as shown in Table 1. We estimate
private sector benefits of broadband in Wales at 1,135m over the fifteen year period,
which is over three times the public benefits of 314m over the same period.
Table 1
Composition of the Lower Bound Estimate of Net Benefits, discounted, 2000-2015
Value (m)
Private sector benefits 1,135
Public benefits 314
Total costs 62
Net benefit 1,387
Source: Atkins estimates,
Sensitivity of Net Benefits
6. Our estimates of the benefits of broadband are, of course, sensitive to the underlying
assumptions and forecasts on which they are based. Therefore, in addition to our lower
bound estimate described above, we produced a number of other estimates based on
-20
-
20
40
60
80
100
120
140
160
180
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
NetBenefits(m,
discounted)
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individually plausible, but more optimistic assumptions. As a result, we estimated an
extreme upper bound to net benefits over 2000 to 2015 of 28,375 million.
7. This upper bound estimate incorporates a number of different assumptions compared to
the lower bound estimate. In particular, we assume for the higher bound estimate a higher
level of forecast take-up and consumers who are less responsive to price changes (that is,
a steeper shape to the demand curve).
Availability and Take Up of Broadband in Wales
8. Current availability in Wales of broadband services with speeds up to 2Mbps downstream
(i.e. first generation) is comparable to that in other UK countries and regions, at around
99% of sites. This is a result of the high level of availability of Asymmetric Digital
Subscriber Line (ADSL).
9. Up until 2004, broadband penetration rates (defined as the number of broadband
connections per 100 inhabitants) in Wales lagged behind that in each of the G7 countries.
However, during 2004 and the first half of 2005, the penetration rate in Wales increased
relatively quickly, outstripping the rates in both Italy and Germany, as well as the OECD
average. By the second quarter of 2005, the penetration in Wales had almost caught up to
that in France. See Figure 2.
Figure 2
Comparison of Broadband Penetration Rates, 2001 - 2005
Source: OECD and Atkins estimates.
10. We estimate that the penetration rate in Wales (and the UK) continued to grow quickly
over the remainder of 2005. To account for uncertainty in the future level of adoption of
0
5
10
15
20
25
2001-Q4
2002-Q1
2002-Q2
2002-Q3
2002-Q4
2003-Q1
2003-Q2
2003-Q3
2003-Q4
2004-Q1
2004-Q2
2004-Q3
2004-Q4
2005-Q1
2005-Q2
Broadbandpenetrationrate
Canada Japan United States United Kingdom France OECD Germany Italy Wales
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broadband, our central, high and low cases contain different assumptions regarding the
take up of broadband, as shown in Figure 3.
Figure 3
Historical and forecast broadband connections in Wales, 2000-2015
Source: Atkins estimates.
Availability and Adoption of Faster Broadband Services in Wales
11. Although current availability of first generation broadband in Wales is comparable to other
UK countries and regions, Wales is lagging behind most other UK countries and regions in
the availability of faster broadband services (e.g. providing speeds of 4-8Mbps to users).
In turn, the UK also currently lags behind many other industrialised countries in the
availability of these faster broadband services.
12. Wales faces an additional challenge in the deployment of faster broadband services. Todate, the relatively high level of availability in Wales is a result of the deployment of ADSL.
However, the speed of ADSL (and associated future technologies) diminishes with the
length of line connecting a user to their local exchange. In Wales, it is likely the case
(given the lower population density) that the average line length is longer and so the Welsh
population can expect, on average, slower services via ADSL than in the UK as a whole.
13. Our central, high and low case estimates for the number of broadband connections in
Wales include different assumptions regarding the levels of availability of different future
broadband technologies.
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Numberofconnections
Central Hgh Low
ForecastActual
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Our Methodology for Calculating Net Benefits of Broadband
14. The methodology underlying our calculation of the net benefit of broadband in Wales is
based on the following equation:
Net benefit = private sector benefits + public benefits costs
15. Private sector benefitsare those that accrue directly to householdsand businesses from
their use of broadband services. We measure private sector benefits by estimating the
consumer surplusfrom broadband services in Wales. Consumer surplus is the difference
between the amount each consumer would be willing to pay for their broadband service
and the amount they actually pay. To estimate consumer surplus, we construct demand
curves for broadband based on own price elasticity of demand data and assumptions
regarding the form of demand curve. We do not measure producer surplus (i.e. the
benefit that accrues to suppliers of broadband services) as ownership of these companies
is largely outside of Wales.
16. We define public benefitsas those that accrue either to the public sector or to third parties
indirectly. We provide a partial quantification of public benefits through case studies
across twelve policy areas. Some of these resulted in the identification and quantification
of public benefits, and we include these in our measure of total benefits.
17. We deduct public sector costs from benefits to obtain an estimate ofnetbenefits. There is
no need to deduct private sector infrastructure costs to obtain a measure of net benefits of
Broadband in Wales, because the consumer surplus approach provides a measure of
benefits which is already net of such costs.
18. Our methodology provides a practicable means of quantifying the net benefit of broadband
in Wales. However, it does have weaknesses, notably: (1) there is uncertainty over key
components of our approach to estimating consumer surplus, resulting in a wide range of
values for the estimated benefit of broadband; (2) by adopting a case study approach to
estimating public benefits, we do not measure all public benefits; (3) the benefits identified
may not be wholly attributable to broadband as at least some of the benefit could be
secured via dial-up connections rather than by broadband although we believe this will
be decreasingly the case; and (4) because of data gaps, we have frequently had to rely on
the exercise of our judgement in producing estimates and forecasts.
Overview of Net Benefits of the Broadband Wales Programme
19. We estimate the net benefit of the Broadband Wales Programme over the period 2000 to
2015 to be 357 million. This number is necessarily based on assumptions and forecasts
and accordingly should be treated with caution. However, given the uncertainty underlying
the assumptions, we present our lower bound estimate, of 357 million, to minimise the
risk of over-stating benefits.
20. The annual profile of our estimate of the net benefits of the Programme is shown in Figure
4. In the early years, we estimate the net benefit of the Programme to be negative, as a
result of the costs of the Programme and the relatively low level of take up of broadband in
Wales. As take up started (and we forecast to continue) to increase, we estimate a sharprise in the net benefits of the Programme.
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Figure 4
Net Benefits of Broadband Wales Programme, discounted, 2000-2015
Source: Atkins estimate
21. We calculate the net benefit of the Programme as the difference between: (1) the net
benefit of broadband including the Programme; and (2) the net benefit of broadband
excluding the Programme (which is our baseline). The key components of this calculation
are shown in Table 2.
Table 2
Present Value (PV) of Net Benefits, 2000 - 2015
Value
(m)
Baseline 1,378
Actual and forecast 1,734
Net Benefit of Programme 357
Source: Atkins estimates. Note: Values subject to rounding errors.
Sensitivity of Net Benefits
22. Our estimates of net benefits are, of course, sensitive to the assumptions we have made.
Therefore, in addition to the lower bound estimate described above, we produced several
other estimates based on more optimistic assumptions regarding the take-up of broadband
and the price responsiveness of demand. We estimated an extreme upper bound to net
benefits of the Programme over the period 2000 to 2015 of 11,682m.
-20
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-
10
20
30
40
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Netbenefit(md
iscounted)
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23. The assumptions underlying the upper bound estimate differ from those of the lower bound
in several respects. In particular, for the upper bound, we assume a different form of
demand curve (with a lower elasticity of demand) and a lower baseline (based on different
levels of broadband availability and take up).
Baseline Take Up of Broadband
24. We estimated that, if the Programme had not been established, there would have been 7.5
broadband connections per 100 inhabitants in Wales as at June 2005, compared to our
estimate of actual penetration of 12.7 connections per 100 inhabitants. This (central case)
estimate of counterfactual take up is presented in Figure 5.
25. Our baseline estimates are based on forecasts made prior to the establishment of the
Programme and exclude the influence of the Programme on take up and availability. To
isolate the effect of the Programme, we adjust these forecasts to control for the effect of
other changes in the market.
Figure 5
Counterfactual take up, 2000-2015
Source: Atkins estimate
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Millions
BroadbandConnections
Actual (central) Counterfactual (central)
ForecastActual
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Our Methodology for Calculating the Net Benefits of the Programme
26. Under our methodology, the net benefits of broadband are calculated as:
Net benefit = private sector benefits + public benefits ( costs)1
27. We then calculate the net benefit of the Programme as the difference between: (1) a
baseline of net benefits in which we assume the Programme was not established; and (2)
the net benefits of broadband in Wales given the existence of the Programme.
28. This approach has the merit of being practicable. However, the approach does suffer from
weaknesses. In particular, the benefits we identify may not be wholly attributable to
broadband, as at least part of the benefits could be secured via dial-up (although we
believe this will be decreasingly the case). Moreover, we have been required to exercise
our (subjective) judgment in producing our estimates. This is particularly the case for the
counterfactual where we have estimated levels of availability and take up of broadband in
order to estimate net benefits for a state of the world we created. Moreover, to
accommodate the extent of uncertainty over key parameters in our method for estimating
benefits, we adopt a range of assumptions which result in a wide range of estimated net
benefits.
Case Studies of Broadband Benefits and Literature Review on Economic
Performance
29. As part of this study, we undertook case studies in key Welsh Assembly policy areas. By
case studies, we mean short reviews of particular mechanisms or causal chains by which
broadband can impact policy goals in Wales, and of the quantitative benefit whichbroadband has delivered or has the potential to deliver. The case studies are designed to
illustrate how broadband can impact policy goals and to prompt discussion with each
policy area and other stakeholders regarding the value of broadband and the BBW
Programme. The case study estimates have been included, where relevant, in our overall
estimate of the net benefit.
30. As part of this study, we also reviewed the literature dealing with the impact of Information
Communication Technologies (ICT) and broadband on economic performance. Key
findings from this review are that investment in ICT can empirically be shown to improve
macroeconomic indicators and that various attempts have been made to measure these
effects. The magnitude of the effects is shown not to be universal; for example,productivity improvements in the US attributed to ICT investment have been higher than
the productivity improvements attributed to ICT investment in Europe. It is also apparent
that an economys structure affects the outcome of ICT investment.
31. There is much less literature available regarding the specific impacts of broadband
(compared to the ICT literature). However, some relevant studies (and findings) have still
been made and it is possible to quantify some of the benefits of broadband. However, it
can be contended that the benefits only become tangible once broadband adoption has
1Note: we only deduct costs when we measure net benefit inclusiveof the Programme. Under
the baseline, the Programme is assumed not to have been established and, therefore, there
are no costs to deduct.
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passed a certain level. More generally, widespread availability of broadband is a sine non
quaof a modern economy as is widely being recognised in many developing countries.
32. The material for these parts of the study can be found in the Appendices of this Report
Report Structure
33. The remainder of the report is structured as follows:
34. Part A deals with our estimate of the net benefit of broadband to the Welsh economy.
In Section 1, we describe the methodology adopted to estimate the net benefit of
broadband to the Welsh economy.
In Section 2, we present a summary of historical information on the availability and
take up of broadband services in Wales.
In Section 3, we present our forecasts of availability and take up of broadband to 2015. In Section 4, we draw together the assessment of the net benefits of broadband to the
Welsh economy.
35. Part B deals with our estimate of the net benefit of the Broadband Wales Programme.
In Section 5 we provide an overview of the methodology we adopted to estimate the
net benefits of the Programme.
In Section 6, we describe our estimates and forecasts of availability and take up of
broadband in Wales had the Programme not existed, which we use in our estimate of
baseline net benefits.
In Section 7, we bring the components of the calculation together to estimate theProgrammes net benefits.
36. Appendices provide an overview of the Broadband Wales Programme; the case studies
illustrating the benefits in particular policy areas; the estimated and forecast costs of
broadband infrastructure; our review of the economic literature about the impact of
broadband on economic performance; and a breakdown of the constituents of our lower
bound estimates of the net benefits of broadband and the Broadband Wales Programme to
the Welsh economy.
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PART A
1 METHODOLOGY
1.1 INTRODUCTION
1.1.1 In this Section, we describe the methodology we have adopted to estimate the net
benefits of broadband to the Welsh economy from 2000-2015. In devising our
methodology, we have sought to design an approach which is practicable,
transparent, repeatable by our client, and justified by economic theory and practice.
1.1.2 We describe the key elements in our approach below, identifying its strengths and
weaknesses.
1.2 OVERVIEW OF METHODOLOGY FOR MEASURING NET BENEFITS
1.2.1 We calculate net benefits as follows:
Net benefits = Total benefits Costs
1.2.2 The total benefits of broadband include both private sector and public benefits.
Accordingly, we calculate total benefits as the sum of private sector and public
benefits, that is:
Total benefits = private sector benefits + public benefits
1.2.3 Private sector benefitsare those that accrue directly to householdsand businesses
from their use of broadband services. For households, the direct benefits might
include the ability to access internet retail outlets that have products for sale at
prices lower than in high-street outlets or the time savings for individuals able to
work from home because of broadband access (hence avoiding a commute). For
businesses, these direct benefits might include the benefits arising from faster
communications and the exchange of data with other suppliers. It is these types of
direct benefits to the private sector that the broadband user will have considered
when making their decision as to whether to acquire broadband.
1.2.4 Public benefitsare those benefits from broadband services that either accrue to the
public sector, or to third parties indirectly (i.e. in the latter case, the broadband user
will not typically have considered this benefit when making their purchasing
decision). An example a public sector benefit might include efficiencies in
procurement enabled by broadband. An example of indirect public benefit includes
a reduction in pollution as home workers (enabled by broadband) avoid their
commute to work.
1.2.5 Below we summarise our method for estimating each of the listed constituents of the
net benefit calculation and provide an assessment of the strengths and weaknessesof the approach.
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Private Sector (Direct) Benefits
1.2.6 In cost benefit analysis, the gross benefit to a consumer (which can be either a
household or business) of a good or service is equal to the amount that they are
willing to pay for that good or service. The net benefitto the consumer of a good or
service, also known as the consumers surplus, is equal to the difference between
the price that the consumer is willing to pay for that good or service and the price
they actually pay. These concepts are illustrated in the demand curve for an
individual consumer, depicted in Figure 1.1.
1.2.7 The two diagrams in Figure 1.1 illustrate the price a consumer is willing to pay for
incremental units of a good. That is, at a price of r1, the consumer is just indifferent
between consuming one unit of the good and consuming none. The price r1 can be
thought of as the value the consumer derives from consuming that good (i.e. the
gross benefit). As the price declines, the more units of the good the consumer will
purchase, i.e. at r2 the consumer will purchase a second unit of the good and derivea gross benefit from the incremental unit equal to r2. In the left hand diagram of
Figure 1.1, the gross benefit to the consumer of consuming three units is shown by
the area shaded in dark blue. The right hand diagram of Figure 1.1 shows the net
benefit of consuming three units with a uniform market price (of between r3 and r4).
The net benefit is simply the gross benefit of the three units minus the cost to the
consumer of purchasing the good.
Figure 1.1
Illustration of a Consumers Gross and Net Benefit
Quantity
Price
1 2 3 4 5 6
r1
r2
r3
r4r5
r6
Gross benefit
Quantity
Price
1 2 3 4 5 6
r1
r2
r3
r4r5
r6
Net benefit
Price
Quantity
Price
1 2 3 4 5 6
r1
r2
r3
r4r5
r6
Gross benefit
Quantity
Price
1 2 3 4 5 6
r1
r2
r3
r4r5
r6
Net benefit
Price
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1.2.8 Figure 1.1 illustrated the concept of gross and net benefit to one consumer of a
good or service. The demand curves for all such consumers can, in theory, be
aggregated to produce a demand curve for all consumers of that good or service
(the market demand curve). The area under the market demand curve provides a
measure of the gross benefit to all consumers from the consumption of the good or
service. One way to measure the benefit to the consumers of a good or service is,
therefore, to estimate the market demand curve.
1.2.9 We measure the private sector benefit of broadband by estimating consumer
surplus (or the net benefit). This requires us to estimate the market demand curve
for broadband in Wales. There are several ways to estimate demand curves,
including econometric estimation and the conduct of willingness to pay surveys. In
practice, as we now describe, we adopt a simple approach, influenced by our
criteria of repeatability and practicability.
1.2.10 To estimate the demand curve for broadband in Wales, we use existing estimates
of the own price elasticity of demand2 (from the US) combined with assumptions
regarding the shape of the demand curve. In particular, own price elasticity of
demand provides information as to the slope of the demand curve at a given point
(or across a small arc), when price and quantity are known. However, to estimate
consumer surplus, we need the shape of the demand curve across its length.
1.2.11 For the purposes of estimating the consumer surplus of broadband in the US,
Crandall and Jackson (2001) assumed a linear demand curve.3 However, a linear
demand curve can be argued to overstate benefits - the assumption of linearity mayoverstate consumer surplus at the high end. That is, because the assumption of a
constant slope implies the elasticity decreases [in absolute terms] as the demand
curve shifts outwards, the large consumer surplus estimated could be viewed as a
mathematical artefact.4 To address this potential overstatement, Crandall, Hahn
and Tardiff (2003) adopted an alternative, and more conservative, method based on
a demand curve with a constant elasticity and a choke price (i.e. a price above
which demand is zero).
1.2.12 We adopt the following two alternative assumptions regarding the shape of the
demand curve for broadband: (1) linear demand; 5 and (2) constant elasticity
2Price elasticity of demand indicates the responsiveness of demand to a change in price and is
calculated as the percentage change in quantity divided by the percentage change in price.3
Crandall and Jackson (2001) The $500 Billion Opportunity: The Potential Economic Benefit of
Widespread Diffusion of Broadband Internet Access, Criterion Economics.4
Crandall, Hahn and Tardiff (2003) The Benefits of Broadband and the Effect of Regulation in
Broadband: Should We Regulate High Speed Internet Access, Crandall and Alleman (eds), Dec 2002.5
Given a linear demand curve q(p) = a bp (where q is quantity, p is price and a and b are parameters),
consumer surplus = q1 * (a/b - p1) * 0.5. The parameters can be calculated as follows: b = - * (q1/p1)
(where = own price elasticity of demand) and a = q + bp.
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demand. 6 We adopt a choke price that is three times the prevailing price of
broadband services for our consumer surplus estimates based on a constant
elasticity of demand. This assumption is consistent with Crandall, Hahn and Tardiff.
This multiple means that, if the prevailing price of broadband services to households
is 20/month, no households would buy the service if the price increased to above60/month. We believe this is a conservative assumption.
1.2.13 Under the consumer surplus approach, we assume that the demand curves shift
outwards over time. In the case of linear demand, we assume the slope of the
demand curve remains the same, while, in the case of the constant elasticity of
demand curve, we assume the slope changes, but the own price elasticity of
demand remains unchanged. The amount by which the demand curves shift
outwards depends on the take-up and price of broadband services. In other words,
we fit our demand curves to known (or forecast) price and quantity combinations at
given points in time. Our estimates of historical and forecast take-up are presented
in Sections 2 and 3 respectively. We forecast prices as a margin over costs.Appendix 3 presents our derivation of the costs of broadband services (including the
deployment and take up of new services, such as Fixed Wireless Access and higher
speed Digital Subscriber Line services).
1.2.14 It should be noted that we do not include direct benefits that accrue to providers
of broadband services (i.e. producer surplus) in our estimates of private sector
benefits of broadband in Wales, as their ownership resides largely outside of Wales.
1.2.15 The above approach to estimating private sector benefits provides headline
figures for direct benefits to domestic and business broadband users, but does not
illustrate the types of benefits that can be realised and the mechanisms by whichthey are realised. Therefore, in addition to the above, we provide a number of case
studies to illustrate the type of private sector benefits that can be realised. These
case studies are illustrative and, in the case of private sector benefits, are not added
to our measure of total benefits.
Public Benefits
1.2.16 As stated above, we use the term public benefits to include benefits accruing to
two constituents:
directly (or indirectly) to the public sector; and indirectly to third parties.7
1.2.17 There are numerous public sector benefits arising from the use of broadband.
Our approach to assessing these benefits is based on case studies of specific policy
6Constant elasticity of demand curves have the following general functional form: q(p) = Ap
, where A is a
parameter. Consumer surplus is given by the integral of this function evaluated between the prevailing
price (n) and choke price (m), i.e. consumer surplus = A/(+1) * (m(+1)
-n(+1)
). For a given price and
quantity on the curve, A = q1p1-
.7
Indirect benefits do not necessarily accrue wholly to the buyer of broadband services and are not,
therefore, typically taken into account in their purchase decisions. In economic parlance, there is an
externality.
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areas. Some of these resulted in the identification of public benefits, with the
remainder accruing to the private sector. Where we have been able to identify and
quantify a public sector benefit, we include this in our measure of total benefits.
Costs
1.2.18 Outlined above is the approach we adopted to estimate the constituents of total
benefits (i.e. private sector and public benefits). In order to calculate net benefits we
need to consider what costs should be deducted from total benefits.
1.2.19 The consumer surplus approach to measuring private sector benefits provides a
direct measure of benefits that is netof the costs to consumers of purchasing the
service. There is no need to deduct private sector infrastructure costs to obtain a
measure of net benefits, because the consumer surplus approach provides a
measure of benefits which is already net of such costs.
1.2.20 In looking at the public benefits of broadband, we have focused on those
provided through the BBW Programme. Therefore we deduct the costs of the BBW
Programme to come to an estimate of the net benefits. In several cases, there are
likely to be some further implementation costs required to realise the public benefits,
but the timing and size of these costs is highly uncertain. To allow for the impact of
these further costs in our Present Value (PV) calculation and to get to a net benefit
estimate, we take a conservative assumption to profiling the extent to which the total
potential level of benefits is achieved over time; and take into account the fact that
we have identified only some of the whole suite of potential public sector benefits.
Strengths and Weaknesses of the Methodology
1.2.21 Below we summarise the key strengths and weaknesses of our approach to
estimating the net benefits of broadband to the Welsh economy.
Strengths
The approach to measuring net benefits, outlined above, is practicable. In particular,
there is sufficient data available to enable us to produce estimates of both realised (i.e.
historical) net benefits and potential (i.e. future) net benefits. For estimating future net
benefits, it is necessary to make assumptions. However, given the data availability,
we also need to make certain assumptions in estimating realised benefits and costs.We make all our assumptions and their bases transparent.
The consumer surplus approach is the preferred theoretical measure of benefits.
The relative simplicity of the approach means that it is repeatable, enabling our client
to repeat the method and update the results in future, without significant additional
outlay of resources.
The case studies provide illustrations both of some of the mechanisms by which
private sector and public benefits can be realised; and the indicative order of
magnitude of the analysed benefits.
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Weaknesses
In relation to our estimation of consumer surplus: (1) in the absence of Welsh specific
data, we use estimates from the US of own price elasticities to inform the construction
of demand curves. The demand for broadband in the US may well have different
drivers and properties than demand for broadband in Wales. In the absence of
certainty, we use a range of estimates for the elasticity of demand; (2) we do not know
and, therefore, assume the shape of the demand for broadband in Wales. Whilst the
assumptions we adopted are commonly cited, it is unlikely that (and would be
coincidental if) our estimated demand curves coincided with actual demand curves.
Again, we use alternative assumptions regarding the form of demand curve, and
these result in a range of estimates within which the true value is likely to reside.
In relation to our estimation of public benefits through the use of case studies: (1) we
do not measure all public benefits. It should be noted that the resulting estimates are,
therefore, conservative; and (2) there are data and evidence gaps standing in the way
of robust estimation. Given these gaps, we have adopted a pragmatic, indicativeapproach to our estimations, using our judgement where necessary.
The benefits estimated may not be wholly attributable to broadband. In particular, it
could be argued that some of the benefits broadband users realise could also be
realised if they used dial-up connections. However, we believe it is increasingly the
case that services enabled by an internet connection will only be accessible via
broadband services and, therefore, that the amount of broadband benefits that could
also be realised via a dial-up connection will diminish.
The complementary nature of broadband, other ICT equipment and user applications
make it difficult to separately identify benefits due to broadband and those due to ICT,
either independent of broadband, or of ICT in complement with broadband.
1.2.22 In summary, we have developed a practicable approach that results in estimates
of the likely magnitude of the benefits of broadband in Wales. However, given the
uncertainties inherent in the data and our approach, the estimates should be treated
with caution.
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2 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES
2.1 INTRODUCTION
2.1.1 In this Section, we present a summary of historical information on the availability
and uptake of broadband services in Wales. As well as providing relevant context to
our study, we use historical broadband availability and take up data to estimate
realised benefits of broadband in Wales.
2.1.2 Our analysis concerns the following categories of broadband:
Digital Subscriber Line (DSL) broadband. There are several types of DSL broadband,
with a common feature that they are delivered over BTs local loop (connecting BTs
local exchange to sites), following the installation of a Digital Subscriber Local AccessMultiplexer (DSLAM) at the local exchange.
Currently, the most prevalent form of DSL in Wales is Asymmetric DSL (ADSL), which
provides downstream speeds (i.e. to the user) that are greater than the upstream
speeds (i.e. from the user).
Until recently, 2Mbps was the maximum downstream speed in Wales available through
ADSL. However, during 2005/06, some faster services became available (e.g. DSL
Max, which offers up to 8 Mbps, and through Local Loop Unbundling, see below for
more details).
Local Loop Unbundling (LLU). Local Loop Unbundling occurs when a party other than
BT installs a DSLAM within a local exchange and offers DSL services to customers.For the purposes of our historical estimates, we disaggregated LLU from DSL, as LLUs
offered higher connection speeds prior to the roll-out of DSL Max. For example, the
service offerings of active LLUs in Wales include speeds of up to 8Mbps; and
Cable Modem. Broadband services can be delivered via cable networks, originally
installed for delivery of TV services. Cable broadband offerings in Wales, via ntl,
provide downstream speeds of up to 3Mbps (although constrained to 2Mbps when
acquired with phone and services), however these speeds are being upgraded to 10
Mbps.
2.1.3 We do not review historical data on availability or take up of either satellite or
wireless broadband in detail. This is because the levels of either availability and/or
take-up are low and robust data is not readily available. For example, in the case of
satellite, although 99% of households and businesses in Wales have been able to
access satellite broadband services since 2002, the Broadband Wales Observatory
(BBWO) estimate take up to be less than 1% of the broadband market. In the case
of wireless, BBWO estimate availability to be less than 1% of all households and
businesses.8
8Broadband Benchmark: Quarterly Report (Q1) 2005 Issue 2.1, BBWO.
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2.2 BROADBAND AVAILABILITY
2.2.1 In this sub-section, we review the evolution of the availability of broadband in Wales
to date. As well as being of interest in their own right, these data inform our
estimate of total costs used to produce our assessment of the net benefits of
broadband. We consider availability by each of the categories of broadband listed
above.
ADSL Broadband
2.2.2 BT has 439 exchanges in Wales, of which 404 had been enabled for ADSL as at the
end of January 2006. That is 92% of exchanges were enabled and, as a result,
some 99% of all sites within Wales could access ADSL.9
2.2.3 As at end January 2006, 35 exchanges in Wales, deemed economically unviable
by BT, were yet to be enabled.10 The majority of unviable exchanges are located in
Powys, Gwynedd and Pembrokeshire. The Broadband Wales Programmes
Regional Innovative Broadband Support (RIBS) is intended to provide availability of
first generation broadband for those areas of Wales currently unable to access
broadband.
2.2.4 BT has recently rolled out nationwide across the UK to ADSL enabled exchanges, a
new service, which extends ADSL to its technical limits (up to 8Mbps, dependent on
a sites proximity to its exchange). Prior to the nationwide roll-out, BT had trialled
this service at some sites in Cardiff and the Vale of Glamorgan.
Symmetric DSL Broadband
2.2.5 During 2005, BT enabled nineteen exchanges in Wales to provide sites with
Symmetric DSL broadband (SDSL), as part of wider roll-out of SDSL across the
UK. 11 As the name suggests, SDSL provides equivalence of upstream and
downstream speeds.
2.2.6 BBWO estimate some 21% of sites in Wales currently have access to SDSL
broadband services as a result of the enablement of the nineteen exchanges. This
compares with some 42% across the UK.12 However, in September 2005, BT
Wholesale announced it was to halt the roll-out of SDSL, due to a significant lack of
demand (having failed to stimulate demand for SDSL following price reductions inthe previous month).
9Pg 13, UK Broadband Status Report: A Report for the Department of Trade and Industry, January 2006,
Ovum.10
Pg 14, ibid. 35 exchanges in Wales have been deemed unviable by BT due to the fact that each
exchange services the needs of less than 300 homes and businesses.11
BT delivers on commitment to broaden availability of symmetrical broadband services, BT press release,
31 Jan 2005.12
ibid.
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Local Loop Unbundlers
2.2.7 Bulldog and Updata are two Local Loop Unbundlers active in Wales. During 2005,
Bulldog upgraded nine exchanges in areas around Cardiff and Wrexham and is
offering services up to 8Mbps in these areas. Updata operates in Pembrokeshire.
2.2.8 Bulldogs nine enabled exchanges give it access to nearly 12% of all sites in
Wales.13 It enabled two exchanges in Cardiff on February 2005, one in Wrexham in
April 2005 and the remainder in Cardiff in June 2005.
Cable-modem
2.2.9 ntl owns and operates a cable network that is available at some 350,000 sites in
South Wales.14 Taken across the whole of Wales, ntls cable network makes
broadband via cable modem available to around 25% of all sites in Wales. ntls
website reports that the company started offering 128kbps and 512kbps internet
connections in 2001.
Satellite and Wireless Broadband
2.2.10 Whilst stated previously that there is limited availability and take-up of wireless
and satellite broadband across Wales, a non-exhaustive list of active providers in
Wales includes: MLL Telecom; Wbnet; England Communications; Surf Telecom;
Gaia Technologies; Avonline; Excelerate Technical; Glamorgan Telecom Ltd; AVC
Broadband Ltd; and Pinnacle Telecom.
Regional and International comparisons
2.2.11 In this sub-section we compare the availability of broadband services in Wales
both to the UK as a whole and to other countries.
2.2.12 In Figure 2.1, we provide a breakdown of broadband household coverage by UK
region and technology type as at the fourth quarter of 2005. The data in this Figure
show Wales to now have a similar level of availability of DSL compared to Scotland
and regions within England. However, Wales has the lowest level of availability of
cable across all the regions shown. According to the data shown in Figure 2.1,
Wales had no Fixed Wireless Access (FWA) technologies, as at the fourth quarter of
2005. However, we note that there are at least two wireless providers in Wales
(Wbnet and England Communications).
13Pg 9, Benchmark, Quarterly Update, July September 2005, Issue 2.0, BBWO. Pg 15 ofBroadband
Benchmark: Quarterly Update (Q2), Issue 1.1, BBWO, 2005, details the exchanges enabled by Bulldog
and the date of enablement.14
Pg 20, Broadband Benchmark, Quarterly Report (Q1) 2005 Issue 2.1.
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Figure 2.1
Proportion of households covered by technology and region, Q4 2005
Source: UK Broadband StatusSummary, March 2006, Ovum.
2.2.13 Wales (with 11%) also lags behind England (37%) and Scotland (29%), but not
Northern Ireland, in the availability of services from LLU operators, as shown in
Table 2.1.
Table 2.1
UK LLU Coverage, Sept 2005
Country Number of LLU Operators Domestic LLU Availability
England 5 37%
Northern Ireland 0 0%
Scotland 2 29%Wales 1 11%
Source: Pg 11, Benchmark, Quarterly Update, July September 2005, Issue 2.0, BBWO.
2.2.14 It is also notable that Wales had just one retail LLU operator as at September
2005 compared to five in England. The lack of competing providers of broadband
may place Wales at a disadvantage, compounding the lower level of availability of
cable networks in Wales relative to England.
2.2.15 Availability of SDSL in Wales is some 21% which lags behind the average for the
UK as a whole (of 42%).
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Wales Scotland East
Midlands
East of
England
London North Eas t North West Northern
Ireland
South East South West W est
Midlands
Yorks &
Humbs
DSL Cable FWA
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2.2.16 Wales also has a relatively low level of availability of higher bandwidth services
(downstream), as shown in Table 2.2, compared to other countries and regions in
the UK.
Table 2.2Coverage of households by minimum downstream speed, UK Regions, Q1 2006
0.5 1 2 4 8 16 24
East Midlands 99% 96% 93% 86% 56% 4% 1%
East of England 100% 96% 93% 86% 54% 4% 1%
London 100% 96% 93% 88% 71% 24% 7%
North East 100% 96% 93% 86% 55% 4% 1%
North West 100% 96% 93% 87% 60% 6% 2%
Northern Ireland 100% 96% 93% 84% 42% 0% 0%
Scotland 100% 96% 93% 85% 46% 3% 1%
South East 99% 96% 93% 84% 47% 6% 2%
South West 99% 96% 93% 83% 38% 3% 1%
Wales 98% 95% 92% 81% 33% 0% 0%
West Midlands 100% 96% 93% 87% 61% 6% 2%
York. & Humb. 100% 96% 93% 86% 52% 5% 2%
National 100% 96% 93% 86% 53% 7% 2%
Source: Exhibit 3.4, Sophisticated Broadband Services, Analysys, May 2006.
Note: 100% entries are less than 100% due to rounding.
2.2.17 In relation to upstream speeds from households, Wales ranked lowest of all the
UK regions across 0.5Mbps, 1Mbps and 2Mbps speeds.
2.2.18 As shown in the above, although Wales now compares to the UK as a whole in
terms of availability of DSL, the comparison is less favourable with regard to the
availability of broadband via LLUs, cable networks and also of higher bandwidth
services.
2.2.19 Wales, and the UK as a whole, compare reasonably well to other countries in
terms of availability of lower speed broadband services to households (ie up to
2Mbps downstream). This has been achieved, primarily, through BTs deployment
of ADSL. However, the UKs (and Waless) relative position in the availability of
higher speed broadband services, i.e. at 4Mbps and 8Mbps, is weaker.
2.2.20 At the end of the first quarter of 2006, 86% of the UK population had availability
of 4Mbps (downstream) broadband services and 53% had availability of 8Mbps
services. Waless availability of 4Mbps services was 81% and of 8Mbps services
was just 33%. At the end of the third quarter of 2005, across all G7 countries andalso South Korea, Australia, Ireland and Sweden, the UKs level availability of
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4Mbps and 8Mbps services to households were the lowest (with the exception of the
availability in Germany of 8Mbps). However, following the launch of BTs new ADSL
service, as at the first quarter of 2006, the UKs availability of 4Mbps downstream
speeds to households now only lags behind South Korea and Japan, while
Germany, Italy and Ireland now lag behind the UK in the availability of 8Mbpsdownstream speeds to households.
2.2.21 The roll-out of various new services will enable the UK, and to a lesser extent
Wales, to narrow the gap in the availability of higher bandwidth services over the
next few months. Nonetheless, Wales (and the UK as a whole) will still lag behind
the leading broadband countries, such as South Korea, Japan and Sweden. As
noted by Analysys, these countries have benefited from several factors absent in
the UK, including financial support from government for network investment,
favourable demographics, and cultures of high-technology adoption.15
2.3 TAKE UP
2.3.1 The purpose of this sub-section is to review the data on take up of broadband
services in Wales. These data are used in our calculation of private sector benefits
arising from broadband to date. We start by reviewing data for the UK as a whole,
before presenting available data, and producing some estimates, for Wales.
UK data
2.3.2 Figure 2.2 provides an estimate of the level of UK broadband connections from
2000 to November 2005. We estimate that the rapid pace of take-up in broadband
has resulted in some 9.4 million broadband connections in the UK by November2005. The diagram shows that, over the period 2000 2005, there has also been a
general, though not universal, increase in the rate of take-up, i.e. for most periods,
the level of take up is increasing by an increasing amount.
2.3.3 Figure 2.2 also shows some data points for the level of cable modem broadband
connections and DSL broadband connections. These data show that, initially, the
majority of broadband connections in the UK were via cable modem. However, from
December 2003 onwards, the numbers of DSL connections exceed cable modem
connections, with the growth rate in DSL connections substantially greater than the
growth rate in cable modem connections. This is confirmed by the data presented
in Table 2.3.
15Pg 21, ibid.
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Figure 2.2
UK Broadband connections 2000-Nov 2005
Source: Ofcom Communications Reports, various; BBWO Broadband Benchmark Report Q1 2005; National
Statistics Internet Connectivity data, BT press releases; Atkins estimates.
2.3.4 Table 2.3 presents a breakdown of broadband take up for the UK for selected
months from December 2003. In December 2003, some 1.8 million broadband
connections were DSL, compared to 1.4 million via cable modem. By June 2005,
there were more than twice as many DSL compared to cable modem connections
(5.7 million compared to 2.2 million).
Table 2.3
UK Broadband take-up
Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05
BT retail 829,000 967,000 1,102,000 1,283,000 1,491,000 1,752,000 1,940,000
BT wholesale 924,000 1,248,000 1,585,000 2,011,000 2,616,000 3,180,000 3,658,000
Other DSL: LLU
& Kingston 18,000 21,000 29,000 38,000 53,000 71,000 105,000
xDSL subtotal 1,771,000 2,236,000 2,716,000 3,332,000 4,160,000 5,003,000 5,703,000
Cable 1,366,000 1,495,000 1,625,000 1,781,000 1,950,000 2,119,000 2,247,000
Satellite and
FWA 9,000 9,000 9,000 9,000 9,000 9,000 9,000
Total 3,146,000 3,740,000 4,350,000 5,122,000 6,119,000 7,131,000 7,959,000
Source: Ofcom Communication Market reports and updates, various
0
1
2
3
4
5
6
7
8
9
10
2000
Feb-01
Apr-01
Jun-01
Aug-01
Oct-0
1
Dec-01
Feb-02
Apr-02
Jun-02
Aug-02
Oct-02
Dec-02
Feb-03
Apr-03
Jun-03
Aug-03
Oct-0
3
Dec-03
Feb-04
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Millio
ns
Numberofbroadbandconnections
Total Broadband Cable modem Total DSL (exc. LLU)
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Wales data
2.3.5 Below, we present the data we have sourced for Wales, by category of broadband,
and then we present our estimates of broadband take up required to produce our
estimate of private sector benefits.
ADSL
2.3.6 Table 2.4 presents data on ADSL take up for the UK and Wales, from a variety of
sources. As it is from a variety of sources, care must be taken in drawing
comparison. Nonetheless, the data in Table 2.4 show that whilst take up in Wales
lagged behind the UK as a whole, Wales soon started to catch up. Indeed as at
December 2004, the ratio of take up in Wales to the UK was greater than the ratio of
the populations of the countries.16 During 2005, however, the ratio started to decline
(though not consistently in the data shown).
Table 2.4
ADSL Take-up in Wales, BBWO & BT
UK Wales Wales:UK ratio
Nov-02 500,000 4,000 0.80%
Jan-04 2,000,000 50,000 2.50%
Sep-04 3,000,000 140,000 4.67%
Dec-04 4,000,000 208,000(*) 5.20%
Mar-05 5,000,000 245,000 4.90%
Jun-05 5,600,000 250,000(*) 4.46%
Sep-05 6,200,000 302,000 4.87%
(*) denotes BT value for ADSL take up in Wales.
Source: BT press releases (of 4/4/05, 11/7/05 and 10/11/05); BBWO Benchmark Reports
2.3.7 Table 2.5 provides a breakdown of ADSL take up by Local Authority in Wales.
16In 2002, the population of the UK was 59.2 million, of which Wales comprised 2.9 million, i.e. a ratio of
approximately 5%.
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Table 2.5
ADSL Connections in Wales by Local Authority
Availability by
site(*)
Connections Take up
(as % of availability)
Blaenau Gwent 100% 5,000 14.50%
Bridgend 100% 11,000 20.90%
Caerphilly 100% 15,000 18.80%
Cardiff 100% 18,000 14.70%
Carmarthenshire 76% 9,000 15.80%
Ceredigion 67% 5,000 17.20%
Conwy 96% 9,000 18.30%
Denbighshire 89% 9,000 19.00%
Flintshire 96% 13,000 21.40%
Gwynedd 63% 6,000 14.00%
Isle of Anglesey 62% 4,000 14.50%
Merthyr Tydfil 100% 4,000 15.00%
Monmouthshire 93% 9,000 23.10%
Neath Port Talbot 94% 8,000 12.60%
Newport 100% 9,000 13.50%
Pembrokeshire 83% 9,000 16.80%
Powys 64% 8,000 14.50%
Rhondda, Cynon, Taff 100% 17,000 16.50%
Swansea 96% 12,000 14.70%
The Vale of Glamorgan 100% 11,000 16.90%
Torfaen 100% 7,000 16.50%
Wrexham 93% 10,000 17.90%
WALES 91% 208,000 16.30%
Source: BT press releases (of 4/4/05). (*) These figures are rounded, i.e. even where availability is shown as
100%, there may be black spots where some sites cannot receive ADSL services.
Cable modem
2.3.8 The data we have for cable modem broadband connections within South Wales are
estimates produced by the BBWO, specifically:17
17BBWO Broadband Benchmark Reports.
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100,000 connections in the first quarter of 2005; and
115,000 connections in the third quarter of 2005 (based on the rate of growth in cable
modem connection in the UK over the same period see Table 2.3).
2.3.9 In addition to the above, a survey by ORC International conducted for the Welsh AssemblyGovernment, found that 63% of Welsh residents had access to the Internet at home in the
fourth quarter of 2005. Moreover, 39% of residents claimed to have Broadband access at
home (although 40% of these did not know their speed of connection and 11% stated their
connection speed was slower than 512Kbps).18
Historical broadband take-up estimates for Wales
2.3.10 Below we present our estimates of historical take up of broadband in Wales that
we use in our estimate of private sector benefits.
2.3.11 We estimate total connection numbers for broadband on a monthly basis, bycalculating monthly compound growth rates between known data points for each of
the main current broadband categories (as detailed above).19,20 Where there is no
Welsh specific data from which to calculate these growth rates, we apply growth
rates from the UK broadband market as a proxy. In addition, we assume that the
number of ADSL connections as at December 2005, was such that 55% of
households with an internet connection used broadband. In the case of LLU
connections, for which we have no data relating to Wales, we estimate a number of
connections in Wales based on the ratio of LLU connections to BTs DSL
connections in the UK.
2.3.12 We separately estimate the number of non-domestic sites with broadbandconnections, by applying survey evidence on the proportion of businesses using
broadband to the number of non-domestic sites in Wales. Specifically, we assume
that by December 2005 the number of businesses in Wales with a broadband
connection was the same as in the UK as a whole as at May 2005 (which according
to Ofcom was 50% of businesses).
2.3.13 Figure 2.3 plots the resulting estimates of take-up of broadband in Wales, by non-
domestic and domestic (and small, home office) users.
18Broadband Wales Resident Survey: Wave three (Quarter 4 2005), January 2006, ORC International.
19We estimate data on a monthly basis as the rapid take-up of broadband technologies means that taking
a longer interval (e.g. quarterly, or annual) will result in a less accurate estimate of direct benefits.20
The exceptions are that we assume that the 208,000 DSL connections in Wales detailed in Table 2.4
relate to March 2005 (the month preceding BTs press release which contained this figure), rather than
December 2004, and we do not include the September 2005 figure for Wales DSL connections.
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Figure 2.3
Estimate of Broadband Take Up in Wales
Source: Atkins estimates
2.4 PENETRATION RATES
2.4.1 In Figure 2.4 we chart penetration rates in each of the G7 countries, the OECD and
also in Wales from 2001 to the second quarter of 2005. Up until 2004, broadband
penetration rates in Wales lagged behind that in each of the G7 countries. However,
during 2004 and the first half of 2005, the penetration rate in Wales increased
relatively quickly, outstripping the rates in both Italy and Germany, as well as the
OECD average. By the second quarter of 2005, the penetration in Wales had
almost caught up to that in France. We estimate that the penetration rate in Wales
continued to grow quickly over the remainder of 2005.
2.4.2 In Figure 2.5 below, we show for a range of countries (including Wales) thecomposition of the penetration rate by broadband technology as at June 2005.
-
100,000
200,000
300,000
400,000
500,000
600,000
Jun-0
0
Aug-0
0
Oct-0
0
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Dec-03
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Apr-04
Jun-04
Aug-0
4
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mberofbroadbandconnections
Non-domestic Domestic
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Figure 2.4
Comparison of Broadband Penetration Rates, 2001 - 2005
Source: OECD and Atkins estimates.
Figure 2.5
Comparison of Broadband Penetration Rates by Technology, Q2 2005
Source: OECD and Atkins estimates.
0
5
10
15
20
25
2001-Q4
2002-Q1
2002-Q2
2002-Q3
2002-Q4
2003-Q1
2003-Q2
2003-Q3
2003-Q4
2004-Q1
2004-Q2
2004-Q3
2004-Q4
2005-Q1
2005-Q2
Broadbandpenetrationrate
Canada Japan United States United Kingdom France OECD Germany I taly Wales
0
5
10
15
20
25
30
Korea
Nethe
rlands
Denmark
Icelan
d
Switzerlan
d
Canada
Finlan
d
Belgium
Norway
Sweden
Japan
UnitedStates
UnitedKing
dom
France
Wales
Austria
Luxembourg
Australia
Germany
Italy
Portugal
Spain
NewZe
aland
Hungary
Irelan
d
Polan
d
CzechR
epublic
Slovak
Republic
Turkey
Mexico
Greece
Broadbandpenetrationrate
DSL Cable Other
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3 FORECASTS OF AVAILABILITY AND UPTAKE OFBROADBAND IN WALES
3.1 INTRODUCTION
3.1.1 In this Section, we forecast the availability, take up and penetration rates of
broadband in Wales to 2015. We use these forecasts in our estimation of the future
benefits of broadband in Wales.
3.1.2 Given the inevitable uncertainty in producing forecasts, we adopt a range of
possible outcomes, by considering three scenarios for broadband availability and
take up: (1) a high case; (2) a central case; and (3) a low case. Nonetheless,
forecasting is a necessarily uncertain exercise and the resulting forecasts of
availability and take up, as well as the estimates of benefits they inform, should betreated with caution.
3.2 AVAILABILITY
3.2.1 In this sub-section, we consider the likely evolution of the availability of broadband in
Wales to 2015. We focus our attention on the development of existing and currently
emergent technologies. In particular, the development of:
higher speed xDSL services, e.g. ADSL2+ and Very high speed DSL (VDSL);
higher speed broadband via existing cable networks;
Fibre To The Building (FTTB); and
Fixed Wireless Access technology (of which WiMax is an emerging example).
xDSL
3.2.2 As described above, ADSL services are already widely available in Wales and as a
result of the Broadband Wales Programmes RIBS project, first generation
broadband will be available at all exchanges in Wales. DSL is likely to remain the
most cost effective means of providing broadband to a majority of the Welsh
population over the horizon of our forecast.
3.2.3 As noted above, BT implemented the UK nationwide roll-out of its up to 8Mbps
service in April 2006. It should be noted, however, that not all users will receive an
8Mbps service, and users in Wales are likely to receive slower average speeds as
we now explain. The speed of connection that a user achieves under ADSL
depends on the length of the local loop connecting their site to an exchange. In the
case of ADSL, the maximum downstream speed is around 8Mbps. This speed is
available for line lengths of just over 2km. Once the 2km point is reached, the
maximum speed of ADSL starts to reduce, to around 5Mbps at 3.5km and around
2.5Mbps at around 4km.
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3.2.4 The maximum speed that users of ADSL can access, therefore, depends on the
length of line connecting them to the local exchange. It has been suggested that
some 80% of lines in the UK are less than 3km long.
3.2.5 We do not possess sufficient data to estimate with accuracy the number of sites that
would be served at what speed by ADSL in Wales. However, Wales population
density is much lower than for the UK as a whole21 and, across Wales, the average
line length connecting a site to an exchange is likely to be greater than the UK
average. As a result, we would expect that average ADSL (and ADSL2+) speeds to
be lower in Wales than the UK.
3.2.6 The next stage in the deployment of xDSL technologies in Wales is likely to be the
implementation of ADSL2+ at local exchanges. ADSL2+ is capable of delivering
downstream speeds of 25Mbps over relatively short distances (i.e. up to around
1km). On line lengths of 3km and above, ADSL2+ delivers the same speeds as
ADSL.
3.2.7 Some LLUs are already offering 24Mbps services in and around London whilst
several LLUs have announced plans to enable exchanges for ADSL2+. Typically,
these plans do not include detailed lists of exchanges to be enabled, but an
intention to, say, unbundle the top 500 or 1000 exchanges.
3.2.8 In the absence of detailed plans for the enablement of exchanges, we adopt three
scenarios for the enablement of exchanges for ADSL2+ in Wales:
Central case:we assume that the rate at which ADSL2+ becomes available in Wales,
is the same as occurred with ADSL; although the speed of connection is dependent onthe line length from the local exchange to the site, i.e. sites more than 3km away from
an exchange will not benefit from ADSL2+ if BTs up to 8Mbps service is available to
them;
High case:we assume that the rate at which ADSL2+ becomes available in Wales is
determined solely by the prioritisation of exchanges by the number of (domestic) sites
they serve. (As noted, such a prioritisation of exchanges for ADSL enablement would
have resulted in greater availability in Wales earlier); and
Low case: We take as our low case, the difference between central and optimistic
cases deducted from the central case, i.e. the low case provides symmetry with the
high case.
3.2.9 In all these cases, we assume the roll-out of ADSL2+ in Wales starts in 2007. We
also assume that ADSL2+ is only available at 50% of sites. That is, whilst we
assume that all ADSL enabled exchanges are also, eventually, enabled for ADSL2+,
on average, across all exchanges, only 50% of sites will receive a speed higher than
with ADSL and that fewer people will receive higher bandwidth services in Wales
compared to the UK as a whole. We believe this is a plausible assumption.
21There are 244 people per km
2in the UK as a whole compared to 141 people per km
2in Wales.
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Cable Modem
3.2.10 As noted above, ntls cable network in South Wales covers some 23% of all sites
in Wales. In 2000, ntl was offering broadband speeds of 128kbps and 512kbps over
its network. In more recent years, ntl has made available broadband at 3Mbps
(although this reduced to 2Mbps when acquired as part of a triple play package, i.e.
television, broadband and telephony). In the last few months, ntl has started to offer
a 10Mbps service, which it previously announced would be rolled out across its
networks by end-2006.22 Most recently, news emerged that ntl is to conduct trials
of a 100Mbps services from March 2006.23
3.2.11 With regard to future availability, we assume ntl makes:
10Mbps broadband services available in Wales over the course of 2006; and
>10Mbps broadband services available in Wales from 2007.
3.2.12 Although, we envisage the speed of broadband services via cable networks to
increase, we do not envisage a large expansion in the size of ntls network in the
time period of this study. This is in large part a consequence of the relatively large
cost of installing new cables (especially to existing sites, where the cost of
reinstatement are significant). However, as we note below, fibre networks are likely
to be one of the key infrastructures, over the longer term, for the delivery of
bandwidths greater than that available via xDSL technologies delivered over BTs
copper local loop.
Fixed Wireless Access (FWA)
3.2.13 Whilst DSL services may provide the most cost effective means of providing
broadband to the majority of the Welsh population, a greater proportion of Welsh
consumers will be unable to access xDSL services at higher bandwidths than UK
consumers, because of a greater proportion of sites in Wales being further away
from their local exchange than in the UK as a whole.
3.2.14 As demand for higher bandwidth services increases, prospective consumers not
served by xDSL services at higher speeds will look for alternative technologies to
meet their bandwidth needs. FWA is one of the technologies that could provide a
cost effective means of delivering higher bandwidth services to sites distant from
local exchanges.
3.2.15 Above, we assumed that some 50% of sites in Wales would be too remote from
their exchanges to receive a quicker broadband service under ADSL2+. The sites
not served provide a potential market for FWA technologies. However, there is
uncertainty as to both the extent of demand for higher bandwidth service up to 2015
and the scope of coverage of other higher bandwidth service in Wales. There is,
therefore, also uncertainty as to the future level of availability and economic viability
of FWA.
22ntl unveils strategy for next generation broadband, ntl press release, 8/8/05.
23ntl to trial 100Mbps broadband services, www.broadbandzilla.co.uk, 11/2/06, sourced on 14/2/06.
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Figure 3.1
Forecast of broadband availability at sites in Wales, 2006-2015 (central case)
Source: Atkins estimates.
3.3 TAKE UP
3.3.1 Below we describe our forecast of broadband take up in Wales for the period 2006
to 2015. In short, our approach involved two main stages. First, we forecast an
aggregate level of demand, considering domestic and non-domestic demand
separately. The method we adopted for these forecasts was to: (1) forecast the
potential market size; and then (2) apply an adoption curve to the potential market
size. Second, we allocated the resulting aggregate forecast of broadband demand
by applying various adoption curves to each of the individual technologies discussed
above. As with our forecasts of availability, we forecast high, central and low cases
in order to illustrate a range of possible outcomes.
Aggregate Broadband demand
3.3.2 As noted above, we separately forecast domestic and non-domestic demand.
Domestic Broadband Take-Up
3.3.3 Our forecast of household take-up of broadband depends on:
the size of the potential market, which is the number of on-line households in Wales;
and
a broadband technology adoption curve.
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Jan-06
May-06
Sep-06
Jan-07
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Sep-08
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ions
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umberofsiteswithbroadbandaccess
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3.3.4 The potential market is the number of households with an internet connection. We
forecast the number of on-line households in two stages:
First, we forecast the number of households in Wales with a PC. According to
research conducted by ORC for the Welsh Assembly Government, 71% of Welsh
households had a home PC in the fourth quarter of 2005. We take this as the starting
point of our forecast. We expect that the number of households in Wales without a
PC will continue to reduce over time. Therefore we apply an annual reduction to the
number of households without PCs. For our central case forecast we assume a 5%
per annum reduction, for our high case we assume a 7.5% per annum reduction and
for our low case, a 2.5% per annum reduction.
Second, we forecast the number of PC households with an internet connection. As at
the fourth quarter of 2005, according to ORC, some 63% of households in Wales had
an internet connection. This provides the starting point for our forecast. We expect
the number of households with a PC but no internet connection to reduce over time.
For the purposes of these forecasts, we assume in our central case that the numberof households without an internet connection reduces by 50% per annum, in our high
case by 75% per annum, and in our low case by 25% per annum.
3.3.5 Having estimated the size of the potential market (i.e. the number of on-line
households), we then estimate the share attributable to broadband, which we do by
applying an adoption curve to our estimate of the potential market size. That is,
we use an adoption curve which describes the market share as a percentage of the
total market.
3.3.6 We use as our adoption curve a Gompertz curve, which takes the following
functional form:kt
beLey = .24 This equation generates an S-shaped adoptioncurve (often applied to the adoption of new technologies), with the precise shape of
the curve dependent on the parameters adopted. For our central case, we adopt
values for parameters b and k from existing studies, specifically, b = 4.52 and k = -
0.25.25 For our high case and low cases we assume that k equals -0.35 and -0.15,
respectively.
24y is the market share at time t, L is the limit to which the equation tends (in this case L=100% market
share), t is the time period and b and k are parameters.25
Criterion Economics, The Effects of Ubiquitous Broadband Adoption On Investment, Jobs and the US
economy, September 2003 and Technology Futures Inc, Residential Broadband Forecasts, 2002.
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