Economics of Backhaul
There are three primary physical media used worldwide for access, backhaul
and connectivity: copper, fiber and microwave. Copper is typically leased from
a service provider on a monthly basis, whereas microwave is typically purchased
as a one-time capital expenditure. Fiber is used as a means to deliver high
capacity leased services but is often owned in circumstances when the capacity
requirements warrant the investment.
Copper
Copper is the traditional media for voice and data-capable T1/E1 and DS3 lines
and is the most prevalent form of access, backhaul and point-to-point connectivity
in North America.
T1/E1 circuits provide 1.544/2.048 Mbps in each direction, with typical prices
ranging from US$150 to US$750 per month, depending upon location, and with
a set-up charge averaging US$625 per T1. The North American average price per
T1 is US$337 per month (2008).
The major shortcoming of T1/E1 lines is that their prices increase linearly
with capacity, so there are no price efficiencies associated with multiple
T1/E1 lines. The price per megabit per second of throughput is the same at
1 Mbps as it is at 10 Mbps. Leased line price can be a function of distance,
as well. As a result of these two dependencies – capacity and distance -- this
approach to backhaul quickly becomes cost-prohibitive.
Fiber
Fiber offers far higher capacities than copper and is the primary means by
which leased synchronous digital services and Ethernet services are delivered.
Organizations with high capacity demands —such as large enterprises and mobile
operators— often install their own dedicated fiber rather than incurring ongoing
lease expense.
The typical OC-3 leased fiber capacity of 155 Mbps provides a good point of
comparison against a purchased microwave system. Typical lease rates for fiber
OC-3 are US$4,000 to US$7,500 per month, with a North American average of US$5,536
per month and set-up charges averaging US$7,300 per OC-3 (2008). Of course,
this price assumes fiber is available, which is the case only for an estimated
13% of U.S. office buildings (2008) housing twenty or more employees.
Organizations that choose to own, rather than lease fiber must pay for its
installation. Consequently, the cost of owning fiber ranges from US$40,000
to more than US$250,000 per mile, depending upon geography, soil characteristics
and whether it's buried or overhead.
Microwave
Microwave spans the capacity regime of copper, as well as the lower end of
the fiber capacity regime and is unique in its ability to be cost-effective
at either end of this spectrum. The costs for a microwave installation are
divided between capital costs associated with the microwave radios, ancillary
equipment and installation and on modest recurring costs, as follows:
- Microwave radio equipment costs can range from less than US$5,000 per link
for simple bridging applications to $50,000 or more for ultra-high capacity,
redundant installations;
- Antennas, cables and power costs range from US$3,000 to US$9,000 per link
depending upon antenna size, radio configuration, tower height and other
site characteristics;
- The installation costs for radios and ancillary equipment and cabling typically
range from US$3,000 to US$8,000, with tower installations generally costing
more than rooftop installations;
- In the case of licensed links, there is a one-time cost for the license
and frequency coordination, which typically ranges from US$1,500 to US$3,000
for a ten-year license;
- An annual (recurring) cost of maintenance can be estimated conservatively
at 5% of the equipment cost and includes both spares and an annual site visit;
- Depending upon the installation locations, there may be a monthly cost
to lease space for the antennas, ranging from zero in the case of systems
deployed on-premises to about US$700 per month for larger antennas at the
most expensive third-party tower sites.
Copper vs. Microwave
The economic benefit of using microwave is easy to see when compared directly
to the costs of leased T1/E1 or DS3 lines. Using the average U.S. prices of
T1 and DS3 circuits, the payback period of microwave is counted in months,
with payback periods for point-to-point connections (i.e. backhaul) being shorter
than payback periods for access only:
- Microwave payback vs. 4xT1/E1: 4 to 11 months
- Microwave payback vs. 12xT1/E1: 4 to 8 months
- Microwave payback vs. 1xDS3: 3 to 8 months
- Microwave payback vs. 1xOC-3: 3 to 7 months
The graph below highlights the comparison between microwave and a leased DS3
line, based on typical microwave cost assumptions for an owned rooftop deployment
with no antenna lease cost. The DS3 price is based on the U.S. average of US$3,675
per month (2008). Both T1/E1 and DS3 prices increase linearly with
capacity with point-to-point connections at least doubling in cost as compared
to the access case and, in some cases, taking months to provision.
Source: Exalt, CCMI, published rates
More recently, Ethernet-over-copper (EoC) services —such as Mid-Band Ethernet— have
become available for capacities up to about 10 Mbps in each direction, at distances
of up to ~1.5 miles from the central office. These services can’t accommodate
TDM-based voice, but offer lower prices per Mbps than the T1/E1 option.
A 10 Mbps Ethernet-over-copper link is typically priced from US$950 to US$1,100
per month (2008) with higher prices for guaranteed 99.999% availability. Distance
constraints and other commercial factors make this service available only in
a limited number of locations.
The microwave payback period of ~9 months for a 10 Mbps access connection
is comparable to the four T1 (6 Mbps) connection. Payback period drops for
higher capacities, if available, and for longer-than-average distances. Note
that the point-to-point leased line connection scenario does not apply to Ethernet
services.
Fiber vs. Microwave
Fiber is just as likely to be used as copper for higher capacity leased services
such as OC-3 connections. The poor economics of leasing apply in each case.
As compared to leasing, the cost of owning fiber varies dramatically
based upon link distance and population density. The primary cost element of
owned fiber is digging the trenches in which the fiber is to be placed and
the cost of this activity is, of course, dependent upon distance. Such trenching
may or may not be possible depending upon location. Other costs include rights
of way and the transmission equipment itself.
Because of high installation expenses, fiber is a significantly more expensive
CapEx option than microwave up to capacities of ~2 Gbps or more. The exact
breakeven point between fiber and microwave for a given deployment scenario
can be calculated based upon a diverse set of inputs.
Summary
Over a period of many years, more often than not, it makes better financial
sense to buy than to rent. This is as true for communications transmission
equipment as it is for houses and automobiles. In the case of microwave, this
case is made over the course of months, as well, with typical microwave payback
periods of less than a year for all but the lowest throughput requirements
and shortest distances.
In addition to the economic benefits of ownership, organizations that purchase
microwave equipment gain the security, stability and freedom associated with
full control over their own network.
And when it comes to purchasing fiber, no one doubts that for the highest
capacity transmission requirements, it’s the way to go. But for the majority
of applications —10s or 100s of megabits per second — microwave is simply more
cost effective — and far faster to deploy.
If you would like a customized economic comparison between microwave and any
other option you may be considering, please contact
Exalt.