A Trial of the Cost Benefit Analysis of Nationwide Ultra-high Speed Telecommunications Network Infrastructure (Fiber-to-the-Home) Development in Japan

Abstract

Fiber-to-the-Home (FTTH) is a technology that enables broadband Internet access through the installation of optical fiber cable between the carrier's central office and the subscribers' premises. It has emerged as the fastest growing broadband access technology in Japan today. Telecommunications carriers are aggressively investing in optical fiber infrastructure mainly in urban areas. The rapid growth, however, is causing concern over the divide between the densely populated areas with access to FTTH network and rural areas without, and it is now one of Japan's leading telecommunications policy issues. At present, the quantitative impact of FTTH has not been fully analyzed. It is difficult to evaluate the benefits of FTTH from real data because the market conditions of FTTH are still rapidly changing. The objective of this study is thus the analysis of the benefit of FTTH and the examination of the economic rationale of the initiative of nationwide FTTH deployment. Stated Preference (SP) method is applied to collect the data of consumers' preference. Utility function for FTTH is estimated by the choice probability model and the marginal willingness to pay (WTP) for the availability of applications, such as digital terrestrial broadcasting, IP telephony and other public services, is computed. Then the consumer surplus of FTTH is estimated from the estimation results and, finally, the gross benefit of FTTH is compared with the cost that is calculated in the previous study. As a result of the estimation, the gross annual benefit of FTTH ranges from 4,031.6 billion yen (both TV channels and IP telephony service available over FTTH) to 2,457.2 billion yen (TV channels unavailable, only IP telephony available). From the cost benefit analysis in a 20-year time frame, decision variables, such as Net Present Value (NPV), Cost Benefit Ratio (CBR) and Economic Internal Rate of Return (EIRR), seem to be sufficient to support the investment; especially when TV programs are available. However, the assumption of the typical cost benefit analysis, especially the long time frame, is not always realistic in the rapidly changing ICT market. Therefore, we examined the period in which the accumulative benefits need to outweigh the accumulative costs. As a result, it may take 8 to 11 years to balance out the benefits and the costs. To shorten the period, it should be considered to raise the penetration rate and to reduce the development cost. Also, the marginal WTP is calculated in each of five areas with different geographical settings. The respondents in mountain and rural areas indicate higher WTP for the availability of TV channels over FTTH. Therefore, it is considered that the transmission of TV channels over FTTH may play important roles for raising the penetration rate and expanding the consumer benefit of FTTH. The significance of this paper is the proposal of the practical method of exercising the cost benefit analysis of FTTH and its implementation. This study also proposes a means to evaluate the benefits of a rapidly growing telecommunications service in relation to the availability of applications for it. Finally, this paper postulates several broad assumptions required to attain these results.JEL classification: D12, R11