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Fixed-Line Pricing Strategy Fixed-Line Pricing Strategy forfor

Basic Telephone Residential Basic Telephone Residential ServiceService

Presented by: John ThompsonPresented by: John Thompson

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Telephone – Right or privilegeTelephone – Right or privilege

Basic Principle

Voice telecommunications are an essential privilege to modern society and its critical role is to promote social inclusion and ultimately, social cohesion.

EU Directive 2002/22/EC of the European Parliament and of the Council of 7th March 2002 on universal service and users’ rights relating to electronic communications networks and services). HttTwo key elements to the realization of these rights and privileges are:

the mechanism for determining eligibility (the right assistance gets to the right people) and, the funding required to finance the schemes and benefits that form the substance of this assistance. europa.eu.int/

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Telephone – Right or privilegeTelephone – Right or privilege

Subject of Market Forces

The market forces use price as the lever to achieve equilibrium between demand and supply

the “right” price - what consumers are willing to pay for what they perceive is a satisfactory “service value proposition” by the supplier.

My Overall Objective

to moderate the rights and privileges of the public with the economic challenges of the market to arrive at a place where social sensitivity meets economic expedience. .eu.int/

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Linking Access Costs as Linking Access Costs as Universal Service Obligation Universal Service Obligation Access DeficitThe shortfall of revenues earned over costs(capital and operating) incurred in providing access service. Universal Service ObligationProvision of essential telecom services to members of society unable to bear the full economic cost of such services – Australian Telecom Authority :inNet Universal Service Costs = avoidable costs – Revenues foregoneWhere:Revenues forgone = USO Programs operating and capital costs + Cost of Capital – Revenues earned on the services providedAnd:Avoidable costs = inefficient costs that otherwise, would not be incurred. Dr Kim Jackson, Analysis and Policy – Social Policy Group. The Telecommunications USO.

Parliament of Australia, Parliamentary Library http://www.aph.gov.au/library t/

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Linking Access Costs as Linking Access Costs as Universal Service Obligation Universal Service Obligation In the UK, an additional component to the USO equation is: Externalities - The future benefits that will accrue to operators due to the build out of networks: Existing customers gain by having additional contacts available on the networkOperators gain by having additional customers who may become profitable in futureThe economic growth generated by increased access to telecommunications will generate additional traffic and revenues for operators in future. Robert Hall “New Priorities for Universal service”

http://www.sunriseconsultants.com/priority.html

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Linking Access Costs as Linking Access Costs as Universal Service Obligation Universal Service Obligation Synthesis of Access Deficit with USO

USO simply cannot be seen as a subsidy for network build out but must also concern itself with on going maintenance and operating costs.

Incongruence between the access deficit and USO may be that the access deficit applies to the entire access network, whether it is deployed in profitable or non-profitable areas.

While USO is deemed applicable or, justifiable only to access in seemingly unprofitable areas, the access subsidy applies across the board to all subscribers.

Should access subsidy only apply to specific situations and hence specific subscribers thereby bringing into conformance with USO standards?

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Linking Access Costs as Linking Access Costs as Universal Service Obligation Universal Service Obligation

Synthesis of Access Deficit with USO

Devise a process to claw back this subsidy from ineligible subscribers using an explicit charge, levied based on:

income group, geographic location and USO eligibility.

This process not only establishes equity between the rich and poor but places full costs on those who are most able to bear them. Thus ending, for these subscribers, what was an unwarranted or indefensible State subsidy?

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The Case for an The Case for an Alternate Pricing Strategy Alternate Pricing Strategy

Need to revive and sustain the business viability of the fixed line network and its products and services.a plausible value proposition (affordable price and reliable quality) will consider it a substitute satisfaction for the values of other choices(though disimilar)astute pricing of fixed line services can render them an attractive alternative to mobile services.Currently, mobile prices are motivated by competition between mobile providers, does not consider the pricing initiatives of the fixed line as a threat.Introduction of the Next Generation Networks (NGN) for fixed lines poses several opportunities for increasing the suite of fixed line service offerings with many mobile-like services, (e.g.. virtual roaming, instant messaging, virtual private networking etc.For NGN services, a flat rate charging policy-allowing subscribers the use of a suite of services whenever they choose, can be a winning value proposition.

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Pricing & Payment Philosophy Pricing & Payment Philosophy

Tariff Structure for Flat Rate

The mean historical usage of subscribers (taken over the last twelve months) will then be sorted into groups representing various mean usage ranges.

The usage data is processed periodically to compute a mean usage range for each subscriber.

The mean usage volume will be used as the criterion for assigning subscribers to tariff classes.

Tariff Class Mean Usage

Class A 1 – 500 mines

Class B 501 –1200

Class C 1201- 2000

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Pricing & Payment Philosophy Pricing & Payment Philosophy

Tariff Structure for Flat Rate

On going observation of subscribers’mean usage pattern to determine if it falls into their general tariff class or whether they be placed into a higher or lower usage-volume tariff class.

These observations will provide information for reclassification of such subscribers, to groups with usage ranges that statistically represent these emerging usage patterns.

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Modeling the MethodModeling the Method

The Access and Core Networks are converted to component costs.These component costs are allocated to the weighted average of basic telephone calls (inter and intra exchange calls and international calls usage of the domestic network). The costs of retailing and other are also allocated to the basic services. An average service cost per minute based on the weighted average of routing and traffic volumes is computed.The total per minute cost of 62 cents is applied to a Class 1 usage of 500 minutes per month or, 6000 minutes per annum. A total Class1 full cost of $3743.00 is used as the base for applying the allowances according to : Income group, geographic location and USO eligibility. (See, Examples 1 andThe net cost after allowances represents the cost recoverable by a monthly flat rate charge.

The overall impact of the allowance on the access cost is represented in Tables 1,2, and 3 and the net cost of the overall USO funding is shown in Example 3

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Costing of Access Network forCosting of Access Network forResidential Telephone Residential Telephone

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Costing of Core Network forCosting of Core Network forResidential NetworkResidential Network

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Costing of Retail & Other Costs for Costing of Retail & Other Costs for Residential TelephoneResidential Telephone

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Drivers of Costs for Drivers of Costs for Residential TelephoneResidential Telephone

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Drivers of Costs forDrivers of Costs forResidential TelephoneResidential Telephone

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Drivers of Costs for Drivers of Costs for Residential TelephoneResidential Telephone

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Cost per Minute for Access, Core, Retail & Cost per Minute for Access, Core, Retail & Other – Residential TelephoneOther – Residential Telephone

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Using the Full Economic Cost of Using the Full Economic Cost of Class 1 SubscribersClass 1 Subscribers

Example 1. Low income, rural., USO eligible subscriber Full cost of avg month Class 1 grade abc POTS year 2005 = $3743 Less: USO eligible15% = $561 Rural 14% = $524 Income group 12% = $449 Balance payable year 2005 = $2209 Payable prepaid @ $184.00 monthly

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Using the Full Economic Cost of Using the Full Economic Cost of Class 1 SubscribersClass 1 Subscribers

Example 2. High income , rural, non - eligible USO subscriber Full cost of avg month Class 1 grade abc POTS year 2005 = $3743 Less: USO eligible = $0 Rural = $524 Income group = $0 Balance payable year 2005 = $3219 Payable prepaid @ $268.00 monthly

Each grade will carry a contribution to the subscriber, that when added to his payable amount will alleviate the full cost of his residential telephone service.

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Overview of Impact on Access Costs Overview of Impact on Access Costs

Income group

Number of subscribers

% Subscribers

% Allowance

Weighted Average

Upper 50,000 .15 0 0

Upper middle

75,000 .20 .03 .06

Lower middle

100,000 .25 .07 .0175

Lower 150,000 .40 .12 .048

Total 375,000 1.00   .1255

Table 1

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Overview of Impact on Access CostsOverview of Impact on Access Costs

GeographicArea

Number of subscribers

% Subscribers

% Allowance Weighted Average

Urban 75,000 .20 Nil  

Sub Urban 200,000 .53 Nil  

Rural 100,000 .25 .14 .035

Total 375,000 1.0   .035

Table 2

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Universal Assistance

Number of subscribers

% Subscribers

% Allowance

Weighted Average

USO 150,000 .4 .15 .06

Non-USO 225,000 .6 Nil  

Total 375,000 1.0   .06

Overview of Impact on Access CostsOverview of Impact on Access Costs

Table 3

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Overview of Impact on Overview of Impact on Access Costs Access Costs SummarySummary

Example 3. Total Access Cost (Capital and Opex) =52.4M Less: Total Income group All’wce (52.4M x .1255) = $6.6M Total Geographic All’wce ($52.4M x .035) =$1.83M USO eligible ($52.4M x .06) ` = $3.1M ----------- $11.53M Net Access Recoverable by Tariffs = $40.87M Notes: 1)All allowances are recoverable through the USO Fund, contributed to by all service

providers and network operators. 2)To include network externalities in the computation would require their quantification. The externalities also, accrue over a period of time and will need to be spread over that period of their realization.

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Prepaid Method of Payment forPrepaid Method of Payment forResidential TelephoneResidential Telephone

A variety of options exist for purchasing prepaid usage.

A flat rate per month, which allows unlimited intra and inter exchange /access areas calling, is preferred,

A prepaid card or credit card will supply the means of payment for monthly fixed line service.

This flat rate will account for both access and usage.

Another medium could be a “scratch card” to be purchased at various retail outlets around the country.

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The privilege of unlimited calling allowed to each The privilege of unlimited calling allowed to each subscriber needs to be contingently guardedsubscriber needs to be contingently guarded

There are two aspects where unlimited calling must be checked: 1. Where changing circumstances bring about a shift in a subscriber ‘s

usage pattern (family crisis or, emergency) resulting in an upward movement in minutes per month. The unlimited calling makes this usage shift seamless and convenient to the subscriber.

2. Where abuse is made of the service (e.g. pensioners phone being abused by unsuspected relatives): • unlimited calling privilege puts no ceiling on the value of calls from

any phone.• As a guard against excessive calling outside of a subscriber’s

assigned usage range, a bad debt contingency allowance can be included as a recoverable cost in the service costing.

• A three percent (3%)of annual revenues provision can be included to offset usage abuse.

• In the event the excess usage does not warrant use of the provision, it can be ploughed back as a reduction to the subsequent revenue requirement from the residential service.

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Channels of PrepaymentChannels of Prepayment

Over-the-counter purchase,

On line purchase,

Purchase via telephone,

Cash stop/ ATM purchase using debit card etc.

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Conditions & Conditions & Terms of PrepaymentTerms of Prepayment

The purchase is dialled into the prepaid fixed line platform and service is activated for the residential line.

Emphasis must be placed on subscribers being able to purchase usage and update the prepaid platform as conveniently and severally as possible.

As many possible purchase channels should be open as current technology can allow. This way, subscribers have no disadvantage in accessing usage of their service.

Service installation must be paid in advance of the technician coming to install the CPE. Service usage must be prepaid from the date the CPE is installed and the service line connected to the PSTN.

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Advantages of Prepaid Fixed Line ServiceAdvantages of Prepaid Fixed Line Service

The following are just some of the benefits to be derived from prepaid fixed line service:

Elimination of billing mediation, billing system and bill printing costs.

Elimination of credit control administration costs

Conversion from post paid to prepaid bears only the incremental costs of acquiring a prepaid platform, most prepaid infrastructure already developed from mobile operations and is easily.

Value proposition between the company and the subscriber is enhanced as the equity between service usage and payment for service are more closely met.

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Advantages of Prepaid Fixed line ServiceAdvantages of Prepaid Fixed line Service

The revenue assurance prospect is enhanced through the consistent predictability of a flat rate that derives required revenues from a computation, which targets a projected revenue requirement containing a commensurate rate of profit.This approach is readily administered through existing price cap methodology. The tendency towards cross-subsidisation is reduced as the revenue requirement, with a high degree of certainty, can easily be set to approximate the full or incremental costs of both access and usage.

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ConclusionConclusion

What I have attempted to address in a levelled manner is the introduction of a new value proposition for the residential basic telephone service. I have taken the access deficit, as borne by most incumbent telephone operators, and shown it from the perspective of Universal Service Obligation. The access deficit is the USO cost of providing subsidised basic telephone, its only disqualification being, that is it represents an across the board subsidy to both the poor and the well-off in society. Confining the Access deficit to only the needy and geographically displaced then aligns it with the philosophy of Universality.

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ConclusionConclusion

I have attempted to demonstrate at an overview level, a mechanism for realigning the way costs can be recovered, through a pricing method that will introduce more equity among the population. The general idea of means tests, under the categories of income, geography and USO eligibility, are used to eliminate imbalance wherever it may exist.While unlimited calling is allowed, the flat rate is designed to cover the full cost of a suscriber’s average usage as it progresses over time. Use of explicit allowances to grant USO based benefits converts the existing access deficit, thereby reducing it to a balance that can be included in the flat rate pricing.This approach still seeks to maintain a strong relationship between full costing and cost -based pricing.

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Closing Statement Closing Statement

My intent is to stimulate thought about new and more effective value propositions that maintain the economic mandate required for market liberalisation, while sensibly and judiciously correcting the revenue imbalances that have been borne by incumbents.   These imbalances exist in spite of the economic reality that warrants these imbalance be removed or, allowed only for those citizens who fall under the umbrella of Universality.   There are some subordinating issues still to be addressed but I trust that this paper has at least made a fair cry for some new attitudes and actions towards access costs, universal funding needs and the pricing mechanisms required to forge a path forward.

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Thank you!