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Pricing strategies for an incumbent operator: Part A: Fixed line

Pricing strategies for an incumbent operator: Part A: Fixed line. Dr Tim Kelly, ITU “Workshop on Trends in Regional Telecom Prices in Asia-Pacific” Bangkok, 11-15 Sept 2000.

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Pricing strategies for an incumbent operator: Part A: Fixed line

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  1. Pricing strategies for an incumbent operator:Part A: Fixed line Dr Tim Kelly, ITU “Workshop on Trends in Regional Telecom Prices in Asia-Pacific” Bangkok, 11-15 Sept 2000 The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its Membership. Dr Kelly can be contacted by e-mail at Tim.Kelly@itu.int

  2. Agenda • Supply and demand • The functions of the tariff • Pricing strategies • Approaches to pricing • Demand-based • Cost-based • Market-driven • Tariff structures • Tariff rebalancing

  3. The functions of pricing • To forge a link between supply and demand • To generate revenues and cover costs of providing service • To convey information to customers concerning the service • To provide a platform for competition

  4. Demand is a function of price Teledensity and monthly residential telephone rental (US$) $ 15 Paying more. Demand met. $ 10 Supply Monthly subscription charge (US$) Paying more. Demand not met. $ 5 Paying less. Demand met. Paying less. Demand not met. Price / Demand $ - 0 10 20 30 40 50 60 Main lines per 100 inhabitants Source: ITU “World Telecommunication Development Report, 1998: Universal Access”

  5. Pricing strategies, selected countries Teledensity and monthly residential telephone rental (US$) $ 15 Barbados Supply $ 10 Monthly subscription charge (US$) Australia India $ 5 Price / Demand Thailand $ - 0 10 20 30 40 50 60 Main lines per 100 inhabitants Source: ITU “World Telecommunication Development Report, 1998”

  6. Approaches to pricing • Demand-based pricing • Pricing according to what the customer is able to pay • May be required by politicians (monopoly environment) • 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)

  7. 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 • to make them explicit, e.g., for Universal Service • To prepare for competition • To prevent abuses of competitive position

  8. Approaches to costing • Fully-allocated pricing models (e.g., TAS 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., LRIC) • marginal cost of providing an additional unit of service (e.g., next minute of traffic, next subscriber) • 1001 different flavours of the above

  9. 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”

  10. Market-oriented pricing structures • Cost-oriented • Connection charges reflect real underlying costs • Monthly rental includes only a small element of usage • Reflecting technology trends • moving towards distance-independent tariffs • biggest price cuts in international call charges • Market-driven • Tariff options for different user groups • Discounts, special offers, promotional prices ….

  11. Key indicators of tariff structure • Ratio between level of fixed and usage charges in average bill • In OECD model, 33/67 for residential and 20/80 business • Ratio between connection charge and monthly subscription • Trend is towards first rising then diminishing ratio • Ratio between local call price and most expensive long-distance call • In Thailand it is 18:1; in Iceland it is 1:1 • Ratio between peak and off-peak call • Trend is towards diminishing ratio

  12. Typical evolution in connection charge • Connection charge kept well below cost • But waiting list grows as operator unable to keep up with demand • Greater differentiation • Higher connection charges for business than residential • Give subscribers change to make refundable deposit on future line • Allow subcontractors to do wiring and installation • Connection price more closely match costs • Connection charge cut as waiting list falls • In a competitive market, set price relative to competitors Social Cost-based

  13. Connection charges, in US$, 1999 Philippines Residential Malaysia Business Lao P.D.R. Thailand Business charges are the same as residential Indonesia charges, unless shown Cambodia Sri Lanka Viet Nam China 0 50 100 150 200 250 Source: ITU World Telecommunication Indicators Database.

  14. Typical evolution in monthly subscription charge • Monthly fee kept well below cost • Monthly fee includes free local calls plus rental of handset plus services • Unbundling of monthly subscription • handset rental; • local calls • extra services, e.g., Directory inquiry • Split between residential and business subscriptions • Progressive rise towards costs Social Cost-based

  15. Monthly subscriber charge, in US$, 1999 Lao P.D.R. Residential Thailand Business Sri Lanka Indonesia Business charges are the same as residential China charges, unless shown Viet Nam Malaysia Cambodia Philippines 0 2 4 6 8 10 12 14 16 Source: ITU World Telecommunication Indicators Database.

  16. Ratio of connection charges to subscriber charge (business) Philippines 0.7 Malaysia 1.4 Cambodia 9.2 Indonesia 25.8 Lao P.D.R. 30.0 Thailand 33.5 Viet Nam 39.7 Sri Lanka 47.3 China 56.7 Source: ITU World Telecommunication Indicators Database.

  17. Typical evolution in local call charges • “Free” local call charges included in monthly subscription • Limited number of free calls included in subscription, others charged • Local calls timed and metered • Size of pulse unit shortens • Size of local call zone shrinks Social Cost-based

  18. Cost of a 3 minute local call, in US$ Philippines 0.00 Lao P.D.R. 0.00 Indonesia 0.01 China 0.01 Malaysia 0.02 Cambodia 0.03 Sri Lanka 0.03 Thailand 0.08 Viet Nam 0.09 Source: ITU World Telecommunication Indicators Database.

  19. Typical evolution in long distance prices • Highly distance sensitive charges. Long distance call >100 times cost of local call • Introduction of off-peak rates • Reduction in number of bands • Reduction of distance and duration elements • Long-distance call <3 times cost of local call Social Cost-based

  20. As competitors gain market share ... Long distance prices come down ... Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

  21. Rebalancing in action (1): Iceland Telecom, price of 3 minute, peak-rate call, includ. tax 1.6 1.4 Local 1.2 Medium 1 Long distance 0.8 0.6 0.4 0.2 0 Jan- Jul- Jul- Nov- Oct- Feb- Sep- Jun- Aug- Dec- 01- 11- 88 88 89 90 91 92 93 94 95 96 Nov- Nov- 97 97 Source: Iceland Telecom, OECD.

  22. Rebalancing in action (2): SwissCom, price per minute of local call and call to US

  23. Rebalancing in action (3): Average trends in 39 major economies, in US$ 12 10 8 6 4 300 minutes, local calls 3 mins Int'l call to US 2 Monthly line rental 0 1990 1991 1992 1993 1994 1995 1996 1997 Source: ITU World Telecommunication Indicators Database.

  24. Rebalancing in action (4): Trends in Thailand, in US$ 300 mins, local calls 14 Monthly line rental 12 3 mins Int'l call to US 10 8 6 4 2 0 1993 1994 1995 1996 1997 1998 1999 Source: ITU World Telecommunication Indicators Database.

  25. Rebalancing in action (5): Trends in price per minute of an international call to USA

  26. Conclusions • Introduction of competition requires fresh approach to tariff strategy • Under monopoly, social-pricing or demand-based pricing was possible • Under competition, pricing which is not cost-oriented will be rapidly undermined • Market-driven pricing means understanding customer requirements • Tariff rebalancing should be gradual, but the best time to start was yesterday

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