Module 7: Analysing ICT Pricing and Affordability

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

2. Agenda • Basic pricing principles • Value-based pricing • Cost-based pricing • Flat-rate, metered and hybrid pricing • Promotions and price innovations • International pricing comparisons • OECD tariff comparison baskets • Application of tariff comparisons to Egypt • Affordability • Universal service principles • Policy measure for enhancing affordability • Price regulation • Case Study: Broadband pricing • Group work exercise: Introducing WiMAX in Egypt

3. 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. Barbados Australia India Thailand Teledensity and monthly residential telephone rental (US$) Demand as a function of price $ 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 Note: Each dot is one country. Source: ITU “World Telecommunication Development Report”

5. 1. Basic pricing principles 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. 1. Basic pricing principles 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

7. 1. Basic pricing principles 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

8. 1. Basic pricing principles 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”

9. 1. Basic pricing principles 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

10. 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.

11. Rebalancing in action (2) Long-term trends in residential phone charges, OECD 1990 - 2006 Index 1990 = 100, OECD average 180 160 140 120 100 80 Fixed 60 Usage 40 Total 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: OECD Communications Outlook, 2007

12. 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

13. 2. International price comparisons 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

14. 2. International price comparisons 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. 2. International price comparisons Where does Egypt fit? Egypt: US$69.24 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

16. 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

17. 3. Affordability Regional price comparisons, mobile low-user basket, 2006 (monthly) Source: ITU World Telecommunication Indicators Database.

18. 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

19. 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)

20. 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

21. 4. Broadband characteristics • 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?

22. 4. Broadband price trends

23. 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)

24. 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

25. 5. Group Work: WiMAX in Egypt Setting 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