benefits of broadband and the broadband wales

8/14/2019 Benefits of Broadband and the Broadband Wales

1/142

Benefits of Broadbandand the Broadband WalesProgramme to the WelshEconomy

Benefits Analysis Study

Atkins Management Consultants

Raleigh House

Langstone Business Village

Langstone Park

Newport

NP18 2LG

South Wales

Tel: (01633) 415500

Fax: (01633) 411211


2/142

Benefits of Broadband and the BBW Programme to the Welsh EconomyBroadband Wales Programme

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


3/142


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


4/142


BBW English Final Version v2.doc07/09/2006

1

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.


5/142



2

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)


6/142



3

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


7/142



4

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


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


8/142



5

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.


9/142



6

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

-10

-

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Netbenefit(md

iscounted)


10/142



7

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


11/142



8

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.


12/142



9

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.


13/142



10

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.


14/142



11

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


15/142



12

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.


16/142



13

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.


17/142



14

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.


18/142



15

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.


19/142



16

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.


20/142



17

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.


21/142



18

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.


22/142



19

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


23/142



20

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


24/142



21

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.


25/142



22

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)


26/142



23

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%.


27/142



24

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.


28/142



25

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.


29/142



26

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

Dec-00

Feb-01

Apr-01

Jun-01

Aug-01

Oct-01

Dec-01

Feb-02

Apr-02

Jun-0

2

Aug-0

2

Oct-02

Dec-02

Feb-03

Apr-03

Jun-0

3

Aug-03

Oct-03

Dec-03

Feb-04

Apr-04

Jun-04

Aug-0

4

Oct-0

4

Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Nu

mberofbroadbandconnections

Non-domestic Domestic


30/142



27

Figure 2.4

Comparison of Broadband Penetration Rates, 2001 - 2005


Figure 2.5

Comparison of Broadband Penetration Rates by Technology, Q2 2005


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


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


DSL Cable Other


31/142



28

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.


32/142



29

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.


33/142



30

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.


34/142


35/142



32

Figure 3.1

Forecast of broadband availability at sites in Wales, 2006-2015 (central case)


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

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15

May-15

Sep-15

Mill

ions

N

umberofsiteswithbroadbandaccess

ADSL ADSL2+ Cable FWA Fibre


36/142



33

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.


37/142


benefits of broadband and the broadband wales

Documents