Module 7: Analysing ICT Pricing and Affordability Dr Tim Kelly, Lead ICT Policy Specialist, infoDev/World Bank Tuesday 10 March 2009

Module 7: Analysing ICT Pricing and Affordability

Dr Tim Kelly, Lead ICT Policy Specialist, infoDev/World BankTuesday 10 March 2009

2

Agenda

1.Basic pricing principles

a)Value-based pricing

b)Cost-based pricing

c)Flat-rate, metered and hybrid pricing

d)Promotions and price innovations

2.International pricing comparisons

a)OECD tariff comparison baskets

b)Application of tariff comparisons to Egypt

3.Affordability

a)Universal service principles

b)Policy measure for enhancing affordability

c)Price regulation

4.Case Study: Broadband pricing

5.Group work exercise: Introducing WiMAX in Egypt

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1. Basic pricing principles

The functions of pricing

•To forge a link between supply and demand•To attract customers and gain market share•To generate revenues and cover costs of

providing service•To convey information to customers

concerning the service•To provide a platform for competition•To segment customer base through price

differentation

4

Demand as a function of price

$ -

$ 5

$ 10

$ 15

0 10 20 30 40 50 60

Main lines per 100 inhabitants

Mo

nth

ly s

ub

scri

pti

on

ch

arg

e (U

S$)

Supply

Price / Demand

Paying more. Demand not met.

Paying more. Demand met.

Paying less. Demand met.Paying less. Demand not met.

Note: Each dot is one country. Source: ITU “World Telecommunication Development Report”

Teledensity and monthly residential telephone rental (US$)

Barbados

Australia

Thailand

India

5


Approaches to pricing

•Demand-based pricing–Pricing according to what the customer is able to pay–May be required by politicians (under state ownership of PTO)

•Cost-based pricing–Pricing according to what the service costs to supply–May be required by regulators (regulated environment)

•Market-based pricing–Pricing in order to compete with other suppliers in the

marketplace–May be required by shareholders (competitive market)

6


Reasons for cost-based pricing

•To cover the full costs of providing the service

•To recognise cross-subsidies between services and between users

–to eliminate them–or, to make them explicit, e.g., for Universal Service

•To prepare for competition

•To prevent abuses of competitive position

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Approaches to costing

•Fully-allocated pricing models (e.g., historical cost model)

– total costs for providing service (including historical, depreciated investment costs) divided by the volume of service provided (e.g., minutes of use, number of subscribers)

•Incremental pricing models (e.g., Long Run Incremental Costs, or LRIC)

–marginal cost of providing an additional unit of service (e.g., next minute of traffic, next subscriber)

•1001 different flavours of the above

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Traditional pricing structures

•Cross-subsidies to network access–Connection charges cover only a fraction of costs–Low-cost monthly rental

•Cross-subsidies to local loop–High-cost international and long-distance charges–Free, unmetered or low cost local calls

•Geographical and social averaging of costs–Uniform charges for connection & rental–“One price fits all”

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Market-oriented pricing structures

•Cost-oriented–Connection charges reflect real underlying costs–Monthly rental includes only a small element of usage (if

any)

•Reflecting technology trends–Moving towards distance-independent tariffs–Biggest price custs in international call charges

•Market driven–Tariff options for different user groups–Discounts, “buckets of calls”, promotions, special offers etc

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Rebalancing in action (1)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Jan-88

Jul-88

Jul-89

Nov-90

Oct-91

Feb-92

Sep-93

Jun-94

Aug-95

Dec-96

01-Nov-97

11-Nov-97

Local

Medium

Long distance

Iceland Telecom, price of 3 minute, peak-rate call, includ. tax

Source: Iceland Telecom, OECD.

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Rebalancing in action (2)

020

406080

100120140

160180

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Fixed

Usage

Total

Index 1990 = 100, OECD average

Long-term trends in residential phone charges, OECD1990 - 2006

Source: OECD Communications Outlook, 2007

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2. International price comparisons

Why carry out tariff comparisons?

•For consumers–To compare prices between operators–To make rational choices (e.g., post-paid vs pre-paid)

•For regulators–To assess the effectiveness of competition in the local market–To assess whether prices are genuinely cost-oriented–As a basis for possible price regulation

•For operators–To assess level of competitiveness vis-à-vis other operators–To plan for effective market entry strategies–To identify best practice and future price trends

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Alternative price comparison models•Individual tariff components

–E.g. Comparing price of an SMS message between countries

•Simple tariff baskets–E.g. Comparing cost of 100 minutes of mobile usage, split between

peak/off-peak, on-net/off-net, post-paid/pre-paid etc

•Complex tariff comparison baskets–E.g. OECD price comparison baskets, compiled by Teligen. Data since

1990–Separate baskets for Business (SoHo, SME), Residential (low, medium

and high usage), Mobile (low, medium and high usage) and Broadband

•Unit prices–E.g., Price per Mbit/s per month on broadband networks of different

speed

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0

50

100

150

200

250

300

350

Japa

n

Mex

ico

Czech

Rep

ublic

Greec

e

Turke

y

Spain

Slovak R

epub

lic

Austra

lia

Franc

eIta

ly

Hungar

y

Korea

New Zea

land

Poland

Irelan

d

OECD

Austri

a

United S

tate

s

Portu

gal

Canada

Belgium

United K

ingdom

Switzer

land

Icela

nd

Germ

any

Nether

lands

Luxe

mbo

urg

Norway

Finlan

d

Sweden

Denmar

k

USD PPP

Fixed Usage Messages

OECD low-user mobile basket, Aug 2006, in PPP

OECD low-user mobile basket comprises 25 outgoing calls per month (in pre-determined ratio of on-net/off-net, peak/off-peak, calls to mobile/fixed etc) plus 30 SMS. This shows annual charge.

Source: OECD Communications Outlook, 2007

15

0

50

100

150

200

250

300

350

Japa

n

Mex

ico

Czech

Rep

ublic

Greec

e

Turke

y

Spain

Slovak R

epub

lic

Austra

lia

Franc

eIta

ly

Hungar

y

Korea

New Zea

land

Poland

Irelan

d

OECD

Austri

a

United S

tate

s

Portu

gal

Canada

Belgium

United K

ingdom

Switzer

land

Icela

nd

Germ

any

Nether

lands

Luxe

mbo

urg

Norway

Finlan

d

Sweden

Denmar

k

USD PPP

Fixed Usage Messages

Where does Egypt fit?

OECD low-user mobile basket comprises 25 outgoing calls per month (in pre-determined ratio of on-net/off-net, peak/off-peak, calls to mobile/fixed etc) plus 30 SMS

Source: OECD Communications Outlook, 2007 and ITU/UNCTAD World Information Society Report 2007


Egypt: US$69.24

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3. Affordability

Universal service principles•Availability: Universal availability of service across country at

a geographically averaged tariff –Indicators: Teledensity, Mobile density, mobile coverage (by

geography and by population), % households passed by broadband etc

•Accessibility: Service is accessible on a non-discriminatory basis to all segments of society, regardless of race, gender, disability etc

–Policy measures: provision of public call boxes, provision of radio relay service for deaf/blind, service in schools, hospitals, libraries etc

•Affordability: Basic service is affordable by all segments of society

–Indicators: Tariffs, tariff baskets (in PPPs, as percentage of average income), cost of ownership etc

–Policy measures: Universal service funds, vouchers/discounts for special groups (e.g., elderly, unemployed), availability of pre-paid service (with micro recharge), subsidized handsets etc

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3. Affordability

Regional price comparisons, mobile low-user basket, 2006 (monthly)

Source: ITU World Telecommunication Indicators Database.

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3. Affordability

Price regulation•Direct control

–Approval of price changes by government (for instance, via ownership of incumbent operator)

–Politics, rather than the market, dictate choices

•Rate of return regulation–Limits profits to a “reasonable” level–But, tends to be slow, inefficient and subjective

•Price cap regulation (CPI-X)–Typically a service providers’ price increases are capped at X

per cent less than inflation, where X is expected productivity improvement

–Can be adapted to specific tariff components to allow for tariff rebalancing

•Competition as a price regulator–Regulator leaves retail prices to market but may intervene in

wholesale prices (e.g, interconnection

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3. Affordability

Price-cap regulation in the UK

•1984: CPI-3%. Line rentals, local & long distance calls; individual cap of CPI + 2% on line rentals until 1997.

•1989: CPI - 4.5%. Line rentals, local & long-distance.

•1991: CPI - 6.25%. Basket extended to include international calls.

•1997-2001: CPI - 0%. Line rentals for small business. Low usage small business service packages must be as good as for residential segment.

•2002 onwards, move from ex-ante to ex-post regulation (no specific price-cap)

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4. Broadband pricing case study

Broadband pricing: issues to consider

•Type of broadband–Fixed/mobile, –cable/DSL/FTTH etc

•What does the subscription cover?–Unlimited / fixed hours per month / pay as you go–Bit-cap? (ie limit on the amount of data that can be downloaded)–Speed of service (theoretical/average speed, upload/download)

•Bundling–Equipment bundled with service (e.g., DSL modem, set-top box,

wifi router)–Broadband internet bundled with other services (e.g., TV, phone)

•Degree of competition–Intermodal competition (e.g., cable versus DSL)–Intramodal competition, unbundling local loop

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4. Broadband characteristics

0.0

1.0

2.0

3.0

4.0

5.0

2004 2005 2006 2007

0

20

40

60

80

100

120

140

160

Mean speed (in Mbit/s, left axis)

Median price per Mbit/s (In US$, right axis)

Mean speed, in Mbit/s Median price per Mbit/s, in US$ per month

•Performance/price ratio doubling every 12-18 months

• Always-on • Distance neutral• Both fixed and mobile• More than 600 million

subscribers and heading towards ubiquity• A platform for many other applications (eg e-

commerce, video-on-demand, e-gaming, etc)• Still in the early stages of its growth cycle• A new driver of long-term economic growth?

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4. Broadband price trends

Growth of Flat-rate Pricing in Broadband

133145

166 171 177

0

50

100

150

200

2004 2005 2006 2007 2008 (e)

Nu

mb

er

of

co

un

trie

s

Data TimeBoth Flat-rate

75%68%

81% 85%88%

Source: ITU. (e): estimated.

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4. Broadband inequalities

•Price comparisons–By entry-level price–By average/best price–Unit price (e.g, per 100 kbit/s

per month)–As % of GNI per capita

•Evidence of the digital divide–Average price in low income

economies is more than 10x higher than in high income countries

–Average price in Africa is up to 300x higher than best practice unit price (in Japan and Korea)

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4. International comparisons

Broadband prices in terms of 100 kbit/s per month, 2006

Egypt ranks 73rd cheapest out of 167 economies with fixed broadband service

100kbit/s per month, typical costs

Morocco US$ 2.18

UAE US$ 4.64

Egypt US$ 6.07

South Africa US$12.24

Tunisia US$14.66

Algeria US$86.64

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5. Group Work: WiMAX in EgyptSetting a price strategy for WiMAX

market entry in Egypt: Issues to consider

•What/who are you competing against?–Mobile voice–Fixed broadband–Mobile broadband

•What/where is the target market?–Urban or rural?–Data users? Smartphones? PCs with WiMAX cards?–Fixed, mobile or portable?

•What type of price structure?–Fixed-rate or metered?–Bit-capped?–Price discrimination (e.g., for fixed or mobile service, type of user device)

•Pricing strategy–Will you run an initial pricing discount and then raise prices?–Will you initially offer WiMAX as a premium service and later reduce

prices

Documents

Module 7: Analysing ICT Pricing and Affordability Dr Tim Kelly, Lead ICT Policy Specialist, infoDev/World Bank Tuesday 10 March 2009