5. Commercial Viability of the Operation
5.1  General
5.2  Cost Structure of Commercial Operation
5.3  Incremental Costs
5.4  National versus Regional/Rural Operation
5.5  Matching Revenues with Costs: a Basic Feasibility Model
5.6  Rural Income Levels
5.7  Revenue and Penetration Potential
5.8  Combining Revenues and Costs
5.9  Application of the Feasibility Model: General Country Examples
5.10  Comparing the Model Against Specific Case Examples
5.11  Experience with Payphones
5.12  Other Forms of Revenue Enhancement

Chapter 5, at the heart of the report, outlines the fundamentals of rural telecommunications viability. The demand and supply issues, the strategic options for commercial supply, and how the policy and regulatory environment can help or hinder development are discussed. A consideration of the opportunities and strategies for increasing revenue generation on rural networks, is included. Focus is placed on the vital role of the private sector in achieving full potential.

Furthermore, this chapter introduces a commercial feasibility model and tests it against specific country examples in order to develop a useful conceptual tool for planning service provision. The commercial supply of telecommunications service should be carefully balanced with user willingness to pay. Affordable telephone penetration levels can be estimated from a knowledge of a community’s economy, its total income and the per-line cost of providing service.

Three main variables influence each other and determine commercial viability:

• operating and capital cost
• number of lines/ subscribers
• demand and affordability

Generally, both the capital cost and operating cost decrease with increasing number of lines. But, in rural areas particularly, an increase in the number of lines leads at the same time to a rapid decrease of revenues since the demand and affordability is more limited.

There is a need to determine as exactly as possible at which point the average revenue per line starts to decrease substantially due to affordability (elasticity) effects. This allows the operator to achieve optimal performance by exploiting a decrease of capital cost and O&M to the maximum while also catching the potential revenues without oversupplying.

For example: if the potential demand exists for 9 lines in a village of a certain size, but only 5 lines are supplied, the service provider is neither using the potential further drop of the capital cost (using a more tailored, efficient technology) nor catching the revenue which can be generated with 4 additional lines. Thus, knowing the revenue potential in a community/region can make the difference between a loss-making or commercial viable operation.