Specification of retail costs for a Reasonably Efficient ... · PDF filefor a Reasonably...

WIK-Consult Report

Study for the Danish Business Authority

Specification of retail costs for a Reasonably Efficient

Operator

DRAFT - redacted

Authors:

Peter Kroon

Stephan Jay

WIK-Consult GmbH

Rhöndorfer Str. 68

53604 Bad Honnef

Germany

Bad Honnef, 20 August 2014

Retail cost assessment for DBA I

Contents

1 Executive Summary 1

2 Introduction 5

3 Brief introduction to retail cost categories in the Danish margin squeeze test and

available information 6

3.1 Currently applied retail costs in the Danish margin squeeze tests 6

3.2 Overview responses Danish operators in 2014 to DBA data request on retail costs 9

4 Results European benchmark 10

4.1 Benchmark approach 10

4.2 Overview of benchmarked country approaches 11

4.3 Differentiation of retail costs according to business strategy in benchmark countries 13

4.4 Collected absolute cost levels of EU countries 13

5 Analysis of collected retail costs and recommendations 16

5.1 High level comparison; current retail costs applied by DBA versus provided retail costs

from Danish operators in 2014 16

5.2 Detailed analysis 19

5.2.1 Analysis of and recommendations for one-off retail costs 19

5.2.1.1 Marketing contributions 19

5.2.1.2 Sales staff and Sales commission 21

5.2.1.3 CPE costs 23

5.2.1.4 Distribution of CPE 25

5.2.1.5 Customer activation costs 26

5.2.1.6 Order related costs 27

5.2.2 Analysis of and recommendations for recurring retail costs 28

5.2.2.1 Customer care / retention 28

5.2.2.2 Billing 29

5.2.2.3 Bad debt 31

5.2.2.4 Non-single customer specific cost 32

5.3 Summary and impact of recommended retail cost levels 33

6 Summary of recommendations and further conclusions 40

6.1 Recommended retail cost levels 40

II Retail cost assessment for DBA

6.2 Retail costs differentiation based on retail product 41

6.3 Retail cost differentiation based on business strategy 42

6.4 Closing remarks 42

Annex I – Questionnaire 44

Annex II – Detailed responses questionnaire 53

Retail cost assessment for DBA III

List of tables

Table 1: Current and recommended one off retail costs – current structure 1

Table 2: Current and recommended one off retail costs – aggregated structure 2

Table 3: Current and recommended recurring retail costs 2

Table 4: Overall monthly retail costs - current and recommended 3

Table 5: Definition of retail cost categories by the DBA 6

Table 6: One off retail costs currently applied by the DBA 8

Table 7: Recurring retail costs currently applied by the DBA 8

Table 8: Latest one off retail costs collected from Danish operators in 2014 9

Table 9: Latest recurring retail costs collected from Danish operators in 2014 9

Table 10: Overview participating NRA’s 10

Table 11: EU country overview with key findings 11

Table 12: Collected absolute values from EU benchmark 14

Table 13: One off retail costs collected from Danish operators in 2014 16

Table 14: Recurring retail costs collected from Danish operators in 2014 17

Table 15: Indicative total retail costs based on data from Danish operators in 2014 17

Table 16: Comparison total retail costs: current versus input Danish operators in 2014 18

Table 17: Retail costs - currently applied and recommended levels- current structure 34

Table 18: Retail costs - currently applied and recommended levels- aggregated structure

36

Table 19: Recommended one off retail cost levels – current structure 40

Table 20: Recommended one off retail costs – aggregated structure 41

Table 21: Recommended recurring retail cost levels 41

Table 22: Incremental retail costs per product cluster in the Netherlands 60

Table 23: Non single customer specific costs split up in Spain 62

IV Retail cost assessment for DBA

List of figures

Figure 1: Total retail costs double play: recommended level versus input Danish

operators 4

Figure 2: Input Danish operators in 2014 on marketing contributions 20

Figure 3: Input Danish operators in 2014 on sales staff / sales commission 22

Figure 4: Input Danish operators in 2014 on CPE costs 23

Figure 5: Input Danish operators in 2014 on CPE distribution costs 25

Figure 6: Input Danish operators in 2014 on customer activation costs 26

Figure 7: Input Danish operators in 2014 on order related costs 27

Figure 8: Input Danish operators in 2014 on customer care/retention 28

Figure 9: Input Danish operators 2014 – billing costs 30

Figure 10: Input Danish operators 2014 – bad debt costs 31

Figure 11: Input Danish operators 2014 – non single customer specific costs 32

Figure 12: Total retail costs single play: recommended level versus input Danish

operators 37


operators 37

Figure 14: Total retail costs double play with TV: recommended level versus input Danish

operators 38

Figure 15: Total retail costs triple play: recommended level versus input Danish operators

39

Retail costs assessment for DBA 1

1 Executive Summary

The Danish Business Authority (DBA) has tasked WIK-Consult to analyse the retail cost

collected from the Danish operators and to perform a European benchmark. This has

led to recommendations on the levels of specific retail cost categories as defined by

DBA. Confidential information is highlighted. For the intended public consultation there

is a redacted version of this report.

DBA has currently set specific values for 10 different retail cost categories for single and

double play offers. These levels result in total retail costs for single play between 73

DKK per month per customer for ADSL and 99 DKK for VDSL. For double play offers

the current total retail costs are 87 DKK per month per customer for ADSL and 118 DKK

for VDSL.

The DBA also intends to differentiate not only between two product offers (single play

and double play) but between four different product offers. Therefore, WIK has recom-

mended detailed values for the 10 different retail cost categories for the four product

offers single play, double play (broadband with voice), double play (broadband with TV

but without voice) and triple play (broadband, voice and TV).

In addition, an aggregation of the one off retail costs has been recommended. See un-

derneath an overview of the current and recommended levels.

Table 1: Current and recommended one off retail costs – current structure

monthly values (DKK) single play double play single play double playdouble play -

TV (new)triple play (new)

Marketing contributions 3,43 3,43 XXX 10,0 XXX 18,0

Sales personnel

salary/sales commission5,72 8,59 XXX 7,50 XXX 15,00

Customer premise

equipment ADSL8,01 8,01

Customer premise

equipment VDSL16,03 16,03

Distribution of customer

premise equipment1,14 1,14 XXX XXX XXX XXX

Customer activation 1,14 1,72 1,14 XXX XXX XXX

Order related costs 2,29 3,43 XXX XXX XXX XXX

Recommended - one off retail costs- current structureCurrently applied - one off retail costs

XXX XXX XXX XXX

2 Retail cost assessment for DBA

Table 2: Current and recommended one off retail costs – aggregated structure

Table 3: Current and recommended recurring retail costs

The following table shows overall monthly retail cost at the level currently applied in the

test and the level recommended following analysis of the new data.

monthly values (DKK) single play double playmonthly values

(DKK)single play double play

double play

with tvtriple play

Marketing contributions 3,43 3,43 Marketing and Sales 15,50 17,50 31,50 33,00

Sales personnel

salary/sales commission5,72 8,59

Customer premise


Customer setup and

activation (incl CPE

and system costs)

17,04 19,20 27,75 30,35

Customer premise



premise equipment1,14 1,14

Customer activation 1,14 1,72

Order related costs 2,29 3,43

Currently applied - one off retail costsRecommended - one off retail costs -

aggregated structure

monthly values (DKK) single play double play single play double playdouble play

with tvtriple play

Customer care /

retention20,00 27,50 17,60 22,00 44,00 47,00

Billing 8,33 8,33 1,25 2,50 5,00 6,25

Bad debt

Non-single customer

specific costs15%

Recommended - recurring retail costs

1%1%

10%

Current values - recurring retail costs


Table 4: Overall monthly retail costs - current and recommended

In short, the recommended levels result in slightly higher retail costs to be used when

testing single play and double play offers for VDSL and a somewhat bigger difference

compared to current ADSL values. For the new product offers double play with TV and

triple play, the estimated totals lay considerable higher than the current highest levels

for double play VDSL (+63% and 86% respectively).

The input from the Danish operators showed large variation when comparing individual

retail cost components on one hand but also overall retail cost levels on the other. In

some cases the large deviations between operator data are very likely due to different

cost allocation methods and/or interpretation of the itemized cost categories. According-

ly, parameter setting on the basis of the collected data is not simply straightforward.

Sometimes we suggest to use averages, sometimes we suggest to use a single value

and at other times an adjusted single value is suggested.

Even though there were large differences the collected data did show that the retail

costs differ between single play, double play with VoIP, double play with TV and triple

play. While some detailed categories might be the same, the overall total retail costs

vary between the different product offers. This could be seen as a validation of the

DBA’s efforts to differentiate retail costs between different types of product offers. As

illustration, see below graph for double play offers where the total retail costs vary be-

tween XXX and XXX DKK per month per customer based on the operators input. The

recommended level lies between TDC’s and Telia’s input.



Total ADSL 72,58 87,26

Total VDSL 80,60 95,27

83,89 97,44 157,00 176,73

Current values - recurring retail costs Recommended values - recurring retail costs



operators

Confidential information

However, in the EU benchmark, there is not one regulator who also applies a retail cost

differentiation based on the retail product sold in terms of single play, double play etc.

What does seem to be more common is a differentiation of retail costs between residen-

tial and business services (Austria, Italy and the Netherlands). Furthermore, the cost

variance in individual cost categories also seems to indicate that it is not straightforward

for operators to deliver such granular retail cost data in a homogenous manner. Given

that some regulators work with a significantly higher aggregation level (e.g. a single

mark-up factor on cost / revenues to determine the overall retail cost) it is not entirely

clear that a detailed definition of individual items is superior to a more aggregated man-

ner of deriving retail cost inputs for margin squeeze tests.

Lastly, differentiation of retail costs based on business strategy (in the sense of sales

channels or a “no frills” versus “premium” positioning) is not common among respond-

ents in the EU benchmark. However, Italy does differentiate retail costs when products

are purely sold via online distribution channels. Only in this case, AGCOM applies the

lower retail costs of online channels both for its product by product test as for the portfo-

lio tests. When products are sold via a mixture of distribution channels, it applies the

higher standard retail costs for the margin squeeze tests.


2 Introduction

The Danish regulator for telecommunications, the Danish Business Authority (DBA), is

reviewing its margin squeeze model for analysing margin squeezes in markets 4 and 5.

In this context the retail costs applied in the tests are reviewed as well and in this con-

text DBA tasked WIK-Consult with the following:

Analyse the retail cost data collected from the Danish operators;

Perform a European benchmark on the level of retail costs applied in the margin

squeeze tests for broadband markets;

Compare the Danish values with the benchmark;

Recommend a level for the Danish retail costs as part of DBA’s margin squeeze

test review; and

The main questions to be addressed are:

What is the correct level of retail cost to be applied in margin squeeze tests for

market 4 and 5?

Do retail costs differ depending on the retail product sold (e.g. single play versus

double play and triple play broadband packages)?

Do regulatory authorities adapt retail costs in their margins squeeze tests de-

pending on the business strategy regarding sales channels of the considered

operator (i.e., “Premium” versus “No Frills” positioning).

This report has the following structure:

- Chapter 3 contains the available retail cost data for the Danish market;

- Chapter 4 presents the results from the European benchmark;

- Chapter 5 analyses the Danish and EU benchmark information and resulting

recommended levels for the retail costs; and

- Chapter 6 concludes with a summary and other findings.


3 Brief introduction to retail cost categories in the Danish margin

squeeze test and available information

DBA has already defined retail cost categories and applied differentiated parameters for

single (broadband only) and double play (broadband & voice) retail products. DBA has

already been gathering retail cost information in previous years. This resulted in the

currently applied levels of retail costs for the margin squeeze tests in Denmark (see

Section 3.1).

DBA now intends to enable the differentiation of a total of four product categories and

has asked operators to supply data. For 2014, DBA therefore initiated another round of

data collection, which resulted in the figures presented in Section 3.2.

3.1 Currently applied retail costs in the Danish margin squeeze tests

The current retail costs categories are split in recurring and one off retail costs and fur-

ther defined by the DBA as follows:

Table 5: Definition of retail cost categories by the DBA

Used categories by DBA Definition used by DBA

Customer care / retention Costs related to retaining existing customers. This includes for instance

salaries to customer service personnel and website costs

Billing Costs related to the usage of the billing platform and related department for

producing the retail invoices

Bad debt Costs related to retail customers not paying their invoice or paying their invoice

later (% of the invoiced amounts incl. 25% VAT, which is lost).

Non-single customer specific costs Overhead costs for the REO that cannot be allocated to a specific customer.

This includes for instance costs related to IT-personnel who maintain customer

related tasks such as setup of systems for billing and sales reporting, costs

related to product management, business development and market analyses,

central costs related to advertising and marketing that is not intended for new

customers, administrative costs, rent and other general costs (% of invoiced

amounts excl. VAT)

Marketing contributions Sale events or campaigns that focus on acquiring new customers.

Sales personnel salary/sales commission Salaries, sales commission and bonuses.

Customer premise equipment ADSLWholesale price for equipment (including router), that is sent to the customer

(ADSL).

Customer premise equipment VDSLWholesale price for equipment (including router), that is sent to the customer

(VDSL).

Distribution of customer premise

equipmentCosts associated with shipping of the CPE.

Customer activationCosts related to setup and activation of the customer in the REO’s internal

systems.

Order related costsCosts stemming from call centre support and other relevant departments in

relation to installation and setup of the broadband connection.

Recurring

One-off


The retail costs in this report are expressed as recurring monthly amounts per customer

in Danish Krone (DKK). The one-off retail costs are one-time costs at the beginning of

the customer lifetime, which are transferred in this report (and in the margin squeeze

calculations) into monthly amounts.

The transferral of one-off retail costs into monthly amounts is done by spreading these

costs over the applied customer lifetime in Denmark (48 months) while considering the

weighted average costs of capital (WACC) of the competitor’s retail business. The DBA

currently applies a WACC of 4,7%. The one off amounts are put on a „per month“ scale

per customer by multiplying them with the capital cost factor, which is defined by the

following formula:

The two tables underneath show the currently applied one-off and recurring retail costs

respectively in DKK. The DBA is using differentiated levels of retail costs between sin-

gle play broadband offers and double play broadband offers with voice.

Bad debt and non-single customer specific costs are set as a % of the retail value of the

respective broadband offer. In order to estimate absolute amounts in the tables, aver-

age yearly retail prices in the Danish broadband market have been used. Excluding

VAT of 25% in Denmark, this is 2400 DKK for single play offers and 2677 DKK for dou-

ble play offers.

When comparing the level of one-off retail costs for single play versus double play

broadband offers, the difference is a 50% addition on the following three cost catego-

ries:

- Sales personnel salary and sales commission;

- Customer activation; and

- Order related costs

It is noted that the main difference in the current recurring retail cost between single and

double play broadband offers stem from significant higher (+37,5%) customer care /

retention costs for double play.

The current total retail costs for single play vary between roughly 73 (ADSL) and 99

(VDSL) and for double play between 87 (ADSL) and 118 (VDSL) DKK per month per

customer.


Table 6: One off retail costs currently applied by the DBA

Table 7: Recurring retail costs currently applied by the DBA

Used categories by DBACurrent one off

value used for

single play (DKK)

Current one off

value used for

double play

(DKK)

Current monthly

value used for

single play

(DKK)

Current monthly

value used for

double play

(DKK)

Marketing contributions 3,43 3,43

Sales personnel salary/sales commission 250 375 5,72 8,59

Customer premise equipment ADSL 350 350 8,01 8,01

Customer premise equipment VDSL 700 700 16,03 16,03


equipment1,14 1,14

Customer activation 50 75 1,14 1,72

Order related costs 100 150 2,29 3,43

Total monthly amount - one off ADSL 21,75 26,33

Total monthly amount - one off VDSL 48,08 57,23

Currently applied one off retail costs by the DBA

50

150

Used categories by DBACurrent annual

value used for

single play (DKK)

Current annual

value used for

double play

(DKK)

Current monthly

value used for

single play

(DKK)

Current monthly

value used for

double play

(DKK)

Customer care / retention 240 330 20,00 27,50

Billing 8,33 8,33

Bad debt 2,50 2,79

Non-single customer specific costs 20,00 22,31

Total monthly amount - recurring 50,83 60,93

Currently applied recurring retail costs by the DBA

100

1,0%

10,0%


3.2 Overview responses Danish operators in 2014 to DBA data request on

retail costs

In summer 2014, DBA performed another round of data collection and asked for a fur-

ther specification of the retail costs; not only for single play and double play, but also for

triple play broadband offers. In addition TDC A/S (TDC) provided also data for double

play with TV separate from ‘normal’ double play (broadband + VoIP).

DBA received data for the year 2012/2013 from incumbent TDC and its subsidiary

Fullrate and 2013 data from alternative operator Telia. The 2012 TDC data for double

and triple play still contained their cable brand Yousee, whereas this is split for 2013.

Telenor could not provide any information.

The data provided by TDC/Fullrate has been audited, data from Telia was not. All data

provided was in DKK. The following tables contain the collected data from the Danish

operators in yearly amounts for the recurring costs and one time amounts for the one off

costs.

Table 8: Latest one off retail costs collected from Danish operators in 2014


Table 9: Latest recurring retail costs collected from Danish operators in 2014


In chapter 5, the one-time and yearly amounts are transferred into annualised monthly

amounts in order to compare them with the currently used values by DBA and values

found in the benchmark. It is already apparent that the reported overall and itemized

retail cost varies significantly between the three operators.


4 Results European benchmark

4.1 Benchmark approach

The benchmark was based on a questionnaire (see Annex I) sent to nine national regu-

latory authorities (NRA’s) in Europe. In order to encourage the responses, the question-

naire was made as compact as possible and feedback of the results was promised.

The questionnaire was structured in such a way that it allowed comparison with the

Danish retail cost categories and their definitions, input of quantitative data and in case

of confidentiality issues a qualitative assessment of the current Danish level of retail

costs.

The questionnaire has been sent in the second half of April 2014 to nine European reg-

ulatory authorities. From end April until beginning of June 2014 the responses were

collected, verified by additional interviews and desk research and analysed. The under-

neath table shows which NRA’s have participated with this research.

Table 10: Overview participating NRA’s

Out of the 9 benchmarked countries, only the Greek regulator at the end did not provide

input. Furthermore, the regulators from Norway and Sweden are not applying margin

squeeze tests for the broadband market, however did provide input regarding their in-

tentions for the near future.

The remaining 6 regulators provided their input, which is summarised in 4.2 and 4.3.

Only one regulator (Germany, Bundesnetzagentur) was able to respond with absolute

cost values item by item. The Austrian regulator, RTR provided an absolute cost value

for the total retail cost but could not disclose individual items. Two other regulators (Ita-

NRA

Right

contact

Question

naire

send out Response

Austria v v v

Germany v v v

Greece v v no response

Ireland v v v

Italy v v v

Netherlands v v v

Norway v v no MST

Spain v v v

Sweden v v no MST


ly, Netherlands) simplify the retail cost determination by applying a single mark-up fac-

tor on all other cost to derive the retail cost. The remaining two regulators (Ireland and

Spain) did neither provided absolute nor relative values.

4.2 Overview of benchmarked country approaches

The results from the European benchmark are summarised in below table describing

the key elements of the respective countries. In Annex II the underlying detailed de-

scriptions per benchmark country can be found for more background information.

Table 11: EU country overview with key findings

Degree of cost category aggregation compared to the 10 DBA items

Actual values provided Methodological comments

Business strategy feedback

Austria 7 items of which 5 corre-spond to DBA items. IP connection and additional services are included.

Only total cost provid-ed for retail cost (re-curring and one-off shown as annualized monthly cost). Only 3.50€ per month for residential users (ex-cluding 2,212€ for the CPE). Detailed cost provided regarding network cost to test bitstream vs LLU charge.

Only 2play product test. Differentiation between residential and business users.

No differentia-tion. EEO approach for LLU. SEO for VULA

Ger-many

Same recurring retail cost categories as DBA, however simplified one off costs (only 2 aggregated categories: customer acquisition and cancellation costs). CPE + distribution costs are indirectly included in cus-tomer acquisition costs

Itemized values pro-vided. Total cost around 3,75€ per month.

No differentiation


Ireland Most items correspond with DBA. Difference is that each item has a one off and re-curring element. Also CPE costs is aggregated and additional element is Product marketing and De-velopment.

No values or qualita-tive assessment of DBA current level provided. Use 25% extra mark-up on retail costs for sales, product devel-opment, help desk and order handling to re-flect the additional common cost for a starting alternative operator.

Slightly different approach for legacy Bitstream and NGA: - SEO approach

outside LEAs, inside combi of SEO/EEO.

- Specific EEO

for Advertising, Billing and Product Mgt. as altnets have efficiencies due to interna-tional size

No differentiation on channel strat-egy and service offering, howev-er… …operating inside or outside LEA could be seen as business strategy and this is treated different based on SEO or com-bined SEO/EEO approach.

Italy No cost value for each indi-vidual category but jointly considered recurring and one off retail costs. Not all DBA items are con-sidered in the aggregated calculation. Missing are: - Non single customer

specific costs - CPE + distribution - Customer activation - Order related cost

Markup on own net-work costs + wholesale costs : - In the DCF ap-

proach for the portfolio test 25% for residential ser-vices and

- In the period by period test for the individual prod-ucts 10% when looking at incre-mental costs only.

Qualitative statement: total value ‘much low-er’ than DBA value.

No differentiation based on differ-ent service level. However differ-entiated retail costs based on distribution channel. Where products are sold only via online channels, the lower retail costs are considered. Both in the prod-uct by product test as in the portfolio test.

Netherer-lands

Similar cost categories, however many shared retail cost categories excluded due to incremental ap-proach. Considered retail costs are mainly external (out-sourced) costs related to one product:

- Sales costs - TV content - advertisement

CPE costs are not included

Specific values confi-dential, aggregated level only. 3% mark-up for retail costs related to broad-band services related to the wholesale price: Markup could be high-er if integral retail costs approach. For legacy business voice (ISDN) the set markup is 13,5%

Incremental ap-proach; only retail costs directly relat-ed to a specific product. Excludes large portions of shared retail costs like billing, helpdesk etc. Approach in line with very detailed Margin Squeeze test at product level.

No input on busi-ness strategy. EEO approach


in retail costs but included separately in the margin squeeze test.

Spain 18 items, nearly all of which correspond to DBA items. Missing category is order related costs, however there are 4 separate categories for different CPE types.

No values and no qual-itative assessment of DBA’s current level provided.

No differentiation

4.3 Differentiation of retail costs according to business strategy in

benchmark countries

All of the responding regulators except Italy denied differentiating retail costs based on

business strategy related to different approaches on distribution channels and service

offering (no frills versus premium positioning).

Italy remarked that when products are purely sold via online distribution channels, it

applies the lower retail costs of online channels both for its product by product test as

for the portfolio tests. In case products are sold via a mixture of distribution channels, it

applies the higher standard retail costs for the margin squeeze tests.

It is more common among EU regulators to differentiate retail cost levels for residential

and business services; half of the respondents (Austria, Italy and the Netherlands) are

doing so. Another variant is used in Ireland, where Comreg uses different levels of (re-

tail) costs for NGA services compared to legacy Bitstream; where the competition is

active in so called larger exchange areas (LAEs) a combination of SEO and EEO ap-

proach is used leading to lower retail costs. When competition is also active outside

these LEAs, SEO is used to model the costs of the alternative operator in the margin

squeeze test leading to higher (retail) costs.

4.4 Collected absolute cost levels of EU countries

As shown from the overview table in 4.2; only four countries provided absolute figures

or percentages: Germany, Austria, Italy and the Netherlands. However, the input varied

from providing most of its retail cost categories (Germany), to specifying only a couple

or only aggregated totals (Austria, Italy and the Netherlands).

Spain and Ireland considered all information on the retail costs as confidential and the

Netherlands considered the detailed retail cost levels as confidential.


Following table displays the collected absolute values in the benchmark. The input was

provided as (annualised) monthly amounts per customer in € or as % of the retail value.

For direct comparison with the Danish values and the current levels used by DBA, these

amounts have been translated directly into DKK.

Table 12: Collected absolute values from EU benchmark

Explanatory notes:

- marketing contributions in Germany include the CPE costs as well;

- billing costs in Germany are purely based on electronic invoicing costs of the in-

cumbent.

- bad debt in Germany is 1,9% of retail value including VAT;

- Non-single customer specific cost in Germany is calculated as a 7,15% mark-up

based on underlying total costs (wholesale + own network);

- in Italy, the 25% mark-up related to underlying wholesale costs + own network

costs to be applied in its DCF portfolio test; and

- the collected figure for the Netherlands (3% of the underlying wholesale costs as

mark up for the retail costs for residential broadband services) is left out as the

underlying incremental approach is not comparable with the approach in the

Benchmark - one off retail costs (DKK/month/cust) Austria Germany Italy

Marketing contribution 14,16

Sales staff/ Sales commission

End-user placed equipment 16,48

Distribution of CPE

Activation of end-user

Order related cost

other, not shown seperately by DBA 1,64

Estimated TOTAL - one off

Benchmark - recurring retail costs (DKK/month/cust) Austria Germany Italy

Customer service 9,31

Billing 0,67

Loss on creditors 4,92

Non-single customer specific cost 7,15%

Estimated TOTAL - recurring 26,1

Benchmark - total retail costs (DKK) Austria Germany Italy

One off cost

Recurring cost

Estimated TOTAL - retail cost 25%


other countries and Denmark. Dutch regulator ACM only considers those retail

costs linked to one specific product. As soon as retail costs are shared among

two or more products they are considered non incremental and excluded.


5 Analysis of collected retail costs and recommendations

In this chapter first the current level of retail costs used by DBA is compared at high

level to the latest retail cost data provided by the Danish operators in order to under-

stand the positioning of the Danish operators.

Thereafter a more detailed analysis per retail cost category is done where all available

data is compared. This includes the benchmark, but also information derived from ques-

tions and answers to the Danish operators related to their provided data and additional

information provided by the DBA.

In order to compare, all collected data was transferred into DKK and one off charges

were annualised to monthly amounts per customer. For the transfer between € amounts

and DKK an exchange rate of 7,45 DKK per € was used as advised by the DBA. For the

transferral of one time amounts to annualised monthly amounts a customer life time (48

months) and a WACC of 4,7% are used. These are the same values currently used by

the DBA in their margin squeeze tests.

5.1 High level comparison; current retail costs applied by DBA versus

provided retail costs from Danish operators in 2014

As described above, the first step was to calculate the annualised monthly amount of

the one off costs provided by the Danish operators. Secondly, the yearly recurring retail

costs were transferred into monthly amounts by dividing them by 12 months.

Input from Fullrate on bad debt and non-single customer specific costs was expressed

as % of the retail value. In order to calculate an absolute amount, an average monthly

retail value of 223 DKK excluding VAT for a double play broadband offer and 25% VAT

have been used.

Below tables displays the total level of one-off and recurring retail costs based on the

provided data of the Danish providers.

Table 13: One off retail costs collected from Danish operators in 2014



Table 14: Recurring retail costs collected from Danish operators in 2014


As a second step the total monthly retail costs of each Danish operator, who provided

input, were calculated as shown in underneath table. These totals are indicative as they

assume that only the provided retail costs levels of the respective operator would have

been used.

Table 15: Indicative total retail costs based on data from Danish operators in

2014


Thirdly, these indicative totals per Danish operator were compared with the currently

applied total retail costs by DBA in their margin squeeze tests (as described in para-

graph 3.1). The last eight grey rows express the difference as % of the current used

figures.


Table 16: Comparison total retail costs: current versus input Danish operators

in 2014


At high level, based on the provided data from the Danish operators, the following can

be concluded:

- Input values are quite different between operators, both regarding single items

and total retail costs.

- For single play broadband offers, only TDC has provided input on retail costs.

TDC’s input suggest a retail cost level which is between XXX% and XXX% be-

low the currently used level by DBA depending on whether ADSL or VDSL

based single play offers.

- For double play offers (with VoIP), TDC’s cost level is also under DBA current

applied level, however less than for Single play.

- Fullrate’s retail cost level for double play offers with VoIP is the lowest and using

their input would reduce the currently applied retail cost level by DBA up to

XXX%.

- Telia’s input for double play (with VoIP) however suggest that the applied retail

cost level by DBA should increase with almost the opposite figures (between

XXX% and XXX%).

- The new category ‘double play with TV’ seems justified as TDC’s retail costs for

this product category are up to XXX% higher than the current ADSL based dou-

ble play offer with VoIP.

- However TDC’s subsidiary YouSee retail costs are up to XXX% lower than the

current VDSL levels. This might be related to the cable infrastructure used.


- The new category ‘Triple play’ also seems justified as the retail costs are signifi-

cantly higher compared to the double play category (up to +XXX% for TDC and

up to +XXX% for Telia).

5.2 Detailed analysis

The detailed analysis is done per retail cost category. Per retail cost category the follow-

ing aspects are analysed:

- currently used level by DBA compared with values collected from the bench-

mark;

- based on TDC’s input for all product categories and Telia’s input for double play

and triple play, it is analysed whether a differentiated cost level is appropriate;

- as the most complete data set exists for the double play offer (TDC, Fullrate, Te-

lia input) a recommended level is first set for double play;

- thereafter a recommended level is set for single play, double play with TV and

triple play.

At the end of each retail cost category, there are additional questions formulated for the

Danish operators to clarify certain issues. These are marked in grey boxes.

5.2.1 Analysis of and recommendations for one-off retail costs

5.2.1.1 Marketing contributions

Currently, the DBA applies a cost level of 3,43 DKK per month per customer. From the

benchmark the only collected value is 14,16 DKK per month per customer from Germa-

ny. However it is noted that the German value includes CPE costs, hence a comparable

value would be lower. To make the German value comparable we have made an as-

sumption on the cost of CPE including distribution (35€). Based on the previously de-

scribed annualisation method, a monthly amount of roughly 6 DKK could be deducted

for CPE. Hence an amount around 8 DKK results for Germany, which is still more than

twice the current cost level.

The marketing contribution costs from the Danish operators vary with the product offer-

ing as displayed in the following figure.


Figure 2: Input Danish operators in 2014 on marketing contributions


Both TDC’s (in dark blue) and Telia’s data (in magenta) show that the cost level varies

for the different product offers. However it is noted that for Telia and TDC the cost level

jumps when adding TV services in the bundle (increase between 80% and 210%). Fur-

thermore, it is noted that for TDC and YouSee the cost levels of double play with TV are

quite close to triple play and even quite close to each other. However for Telia the triple

play level is significantly higher (XXX) compared to the level of TDC’s and YouSee’s

bundles with TV.

TDC’s current level for double play was in 2012 XXX, but has decreased significantly for

2013 (-XXX%). This is related to a reduction of marketing costs and increasing sales

volumes, which has been ongoing since 2011. In 2012 these costs decreased already

with XXX% and from TDC’s annual 2013 report a further 27% decrease in marketing

costs was reported. However for triple play offers and especially double play bundles

with TV, TDC’s marketing contributions have increased in 2013, which seems conflict-

ing. Partial explanation might be that marketing contributions are proportionally more

allocated to TV containing product bundles.

The higher Telia cost level for double play might be explained by a more aggressive

marketing approach, it could also be the main effect of having a smaller customer base

to spread its marketing costs over. This seems to be partly confirmed by TDC’s Fullrate

value for double play (XXX DKK per month per customer), which is quite higher than

TDC’s value despite assumed scale advantages for Fullrate as subsidiary from TDC.


Therefore a higher level seems to be in line with modelling a reasonable efficient opera-

tor. Therefore the marketing contribution costs for double play have been set at 10 con-

sidering the above values and the comparable benchmark value of 8.

For triple play, the cost levels of TDC and YouSee are in the same range but significant-

ly lower than Telia’s level. However, it is not clear what the effect of the underlying cable

network in this context is and TDC’s value reflects the scale effects. Once again, we

propose to set the value for triple play as a mark-up on double play. We use a mark-up

of 80 %, which is in the lower end of the range (see first paragraph). Hence, the level

for triple play is set at 18 DKK.

For setting the level for single play and double play with TV we propose to use the cost

relation between TDC’s product offers and apply this on the set levels;

- TDC’s single play is XXX% lower than its double play level, so proposed level

for single play is XXX DKK.

- TDC’s double play with TV is only slightly lower than its triple play level, so pro-

posed level for double play with TV is XXX DKK.

5.2.1.2 Sales staff and Sales commission

DBA’s current value is the same for single and double play offers: 8,6 DKK per month

per customer. The benchmark does not provide a specific number for sales staff and

commission.

TDC’s (in blue) and Telia’s (in magenta) marketing contribution costs vary strongly with

the product offering as displayed in the following figure. For these retail costs, the varia-

tion is even stronger for TDC compared to Telia; TDC’s triple play sales

staff/commission costs more than double compared to double play sales

staff/commission. The same applies for TDC’s subsidiary YouSee.

Remarkably is that Telia’s absolute cost level for triple play offers is the lowest, well

below TDC, Fullrate and YouSee. In addition, Fullrate has the lowest cost level of XXX

for double play due to the reliance on internet as sales channel.


Figure 3: Input Danish operators in 2014 on sales staff / sales commission


The strong increase of these costs based on product offer can be partly explained as

commission is likely related to retail revenue, which will increase as there are more

products in the bundle. However, this would imply that for TDC, the double play offer

with TV should then be twice as expensive as the basic double play offer with VoIP,

which is unlikely. Furthermore, the other component, sales salaries, will not vary that

much over the product offerings as it is most likely the same sales force.

Another aspect might be the complexity and higher diversity of bundles containing TV

services, which requires the sales staff to spend more time and efforts in explaining

these. The TV containing product offers for TDC, YouSee and Telia are in the same

range except for the triple play offer of YouSee.

Based on the available data, it seems correct to use a differentiated cost level for the

product offers. For double and triple play, we propose to use an average between Telia

and TDC which is rounded down to consider the impact of the increased use of online

sales channels. This leads to 7,5 DKK per month per customer for double play and 15

for triple play.

For single play, there is no comparable value except for TDC’s value of XXX DKK,

which seems reasonable compared to TDC’s and Telia’s double play levels.

For double play with TV, in line with TDC’s cost levels over the different product catego-

ries, a slightly lower level is set compared to triple play; XXX DKK per customer per

month.

In addition, it is observed that the level of the sales staff/commission costs per product

category seem to be related to the marketing contributions described in the previous

paragraph; where marketing contributions are relatively high, the sales staff costs are


low and the other way around. Only exception again here is the high level of sales staff

commission from YouSee despite their comparable level of marketing contributions.

5.2.1.3 CPE costs

Current DBA level is 8 DKK per month per customer for ADSL CPE and 16 DKK for

VDSL CPE irrespective of use in a single play or double play offer. From the bench-

mark, only Austria indicated an absolute cost level of 16,5 DKK for an ADSL modem,

however this seems to be including distribution costs, so comparable level is quite high-

er considering modem type.

Below figure shows that TDC’s CPE costs are equal for all of its offers, which is partly

explained as all of TDC’s customers use the same home gateway, however TV cus-

tomers in general require an additional set top box.

Figure 4: Input Danish operators in 2014 on CPE costs



Telia’s triple play customers have the same CPE cost as for double play but Telia

seems to factor in additional costs (for the TV set top box) as the costs for triple play are

higher than for double play. YouSee has slightly higher CE costs but this is likely be-

cause of the cable infrastructure and also a similar level for its double play with TV and

its triple play offers.

Especially with equipment prices, there should be a strong scale advantage for TDC,

which would explain the higher costs (+XXX%) for the Telia double play CPE. Fullrate’s

CPE costs for double play is the lowest, which can be explained as it uses less expen-

sive equipment (Zyxel) than TDC’s and Telia’s premium product. YouSee’s CPE is ca-

ble related so must be slightly different than the CPE used by TDC and Telia.

It is not clear if the Danish operators use different CPE for ADSL and VDSL and have

indicated an average cost level or that they only use one type of modem. We therefore

ask the operator to specify if they use different modems and how this relates to the giv-

en input on CPE costs levels. Based on the current input, we can only recommend an

uniform level.

Telia’s CPE costs for double play seem reasonable considering scale advantages for

TDC, also considering the higher benchmark value from Austria, hence the recom-

mended level for double play is XXX DKK. Assuming the same CPE is also used for

single play, the same cost level is recommended for the Single Play scenario.

For triple play a higher cost level for the CPE seems justified because of the additional

set top box for TV, however Telia’s mark-up seems too high as the set top box in gen-

eral is roughly 50% less expensive than the combined modem/router. The recommen-

dation for the moment is to add a 50% mark-up on the CPE costs for double play for the

TV set top box for double play with TV and triple play. However, as there is no data

from the Danish operators to support this amount, we recommend to address this issue.

Question 1: Which modem/router types are used (ADSL/VDSL/Cable), what are the

difference in costs and how is this translated into provided cost levels for CPE?

Question 2: Which additional CPE is used for the provision of TV services and what are

the related additional costs?


5.2.1.4 Distribution of CPE

Current DBA level for distribution costs of CPE in the margin squeeze test is a uniform

1,14 DKK per month per customer for single and double play offers. From the bench-

mark there are no specific values for the CPE distribution costs.

As shown in below figure, TDC including its subsidiaries were not able to provide indi-

vidual values for this cost category as they were not able to specifically allocate the

costs to this item.

Figure 5: Input Danish operators in 2014 on CPE distribution costs


Competitor Telia has provided costs between XXX DKK for double play and XXX DKK

for triple play. The difference of XXX DKK is most likely due to the extra set top box for

TV, which seems reasonable.

Fullrate’s CPE distribution costs seem to be in line with Telia’s level considering scale

advantages for Fullrate as they belong to TDC. Therefore, it is proposed to set the CPE

distribution costs for single and double play at XXX DKK per month per customer and

for double play with TV and triple play at XXX. For single play the same level as double

play is recommended as it concerns shipping the same CPE. Same reasoning applies

for using the same level for double play with TV and triple play.


5.2.1.5 Customer activation costs

Current differentiated DBA cost levels are 1,14 DKK per month per customer for single

play and 1,72 for double play offers. This differentiated price seems reasonable as it

considers the activation of multiple services. There are no benchmark values available.

As can be observed in below figure, there is limited data available on this category; Te-

lia has provided values for double and triple play. Fullrate provided a XXX cost level and

TDC could not provide this specific cost.

Figure 6: Input Danish operators in 2014 on customer activation costs


Telia’s different levels for double and triple play confirm that there are separate activa-

tions for the broadband, voice and TV services hence the additional costs for triple play

compared to double play.

Based on the REO approach and the available information, we propose to use Telia’s

level for double and triple play. Due to the absence of any information on single play,

we suggest to maintain the current level of 1,14 DKK.


5.2.1.6 Order related costs

Current DBA level is 2,3 DKK per month per customer for single play and 3,4 DKK for

double play. From the benchmark no specific values were collected.

Underneath figure displays that TDC’s order related cost vary per product offer but do

not increase linear as seen before with some other categories.

Figure 7: Input Danish operators in 2014 on order related costs


Comparing the differences between the different product offers of TDC, it seems that

order related costs for adding voice service amount to XXX DKK and adding TV service

amounts to XXX DKK extra costs per customer per month. For Telia adding TV service

also adds XXX DKK per month per customer (being the difference between their costs

of double and triple play offers).

It is noted that for TDC the order related costs in 2013 compared to 2012 have gone

only slightly up for single and double play, however significantly up for double play with

TV and almost doubled for triple play.

TDC’s order related cost levels for double play are more than XXX times as large as

Telia’s cost level. And even Fullrate’s cost level is higher than Telia’s. For triple play

Telia’s costs are also the lowest and TDC’s costs the highest.


For this category, it is proposed to use an average between the available data. So Telia,

Fullrate and TDC for double play, TDC and YouSee for double play with TV and Telia,

TDC and YouSee for triple play. This leads to respectively XXX, XXX and XXX DKK per

month per customer. For single play, the only available input is from TDC (XXX DKK),

as this is in line with the calculated values, we propose to use TDC’s figure.

5.2.2 Analysis of and recommendations for recurring retail costs

The graphs related the recurring retail costs have a different background colour to set

them apart from the graphs on the one-off retails costs.

5.2.2.1 Customer care / retention

The current levels used by DBA are 20 DKK for single play broadband and 27,50 DKK

for double play offers per customer per month. This is well above the only collected val-

ue from the EU benchmark from Germany; 9,31 DKK per month per customer. It is not

clear why the German value is so much lower.

Below graph displays the input of the Danish operators in 2014 on their cost levels per

product offer for customer care and retention.

Figure 8: Input Danish operators in 2014 on customer care/retention



TDC’s costs for customer care vary significantly per product offering. Apparently, the

offerings with TV service require more customer care and/or retention efforts. The cost

level for double play with TV roughly doubles in comparison with double play with VoIP.

The same relation is observed in Telia’s costs although the absolute cost level of Telia

lies roughly XXX% above the cost level of TDC which is most likely due to the econo-

mies of scale of TDC. TDC’s customer care/retention costs for single play offers is 20%

lower than for double play offer.

When relating the customer care costs for double play with TV with triple play there is

only a slight increase of around 7% as observed for TDC and YouSee.

Fullrate’s lower cost may be explained by their ‘no frills’ positioning and consequent

dependence on internet based customer care. Fullrate has the lowest cost level for cus-

tomer care/retention, at roughly XXX% of TDC’s level and only XXX% of Telia’s level.

However, it does not seem reasonable to use this lower figure due to the different ap-

proach of Telia and Telenor in the Danish market and DBA’s intention of modelling a

Reasonably Efficient Operator.

Considering the above, the level of customer care/retention costs for double play offers

is set at 22 DKK per month per customer. The values for the other product categories

are set in relation to the double play value using the identified relations between the

product categories in the operator’s data:

- Single play level is 20% lower than the double play level, so 17,6

- Double play with TV is 200% of the double play level, so 44

- Triple play is 7% higher than double play with TV, so 47.

5.2.2.2 Billing

The current DBA level is an undifferentiated 8,33 DKK per month per customer for sin-

gle and double play offers. From the European benchmark, a German value of 0,67

DKK per month per customer was collected. The German regulator based this figure on

electronic invoicing practice only.

The input from TDC, Fullrate, YouSee and Telia can be seen in following figure.


Figure 9: Input Danish operators 2014 – billing costs


The billing costs for TDC are doubling when going from single play offers to double play

and again doubling when TV services are included. Telia’s absolute cost levels are

quite higher than TDC’s level but shows a similar pattern that the triple play cost level is

twice as high as the double play cost level.

TDC’s billing costs include the printing, postage, payment and IT activities. In Fullrate,

billing is fully automated and the only costs are wages of its IT department used for

monitoring the process, which explains the value of XXX for double play. Therefore,

Fullrate’s figure is closer to the German benchmark value of 0,67, which is also based

on electronic invoicing only. However, this does not seem to be the regular approach in

Denmark considering TDC’s and Telia’s figures, but it is recognized that electronic in-

voicing will be used more frequently in the near future with accompanying lower billing

costs.

The additional billing costs for TV services for Telia are explained by different billing

requirement for the different TV packages, Video on Demand and other functionalities

like multi room usage and hard disk recorder. Telia has recently made investments in its

billing platform in order to be able to invoice the above describe line items

Interesting to note from the benchmark is that the Irish regulator Comreg uses SEO as

overall modelling approach in its NGA margin squeeze tests, however uses EEO for

billing costs as the competitors are part of international companies and are perceived to

have similar scale advantages as the SMP operator. A similar situation could be argued


in Denmark where competitors Telenor and Telia are subsidiaries of SMP operators in

neighbouring countries.

Considering the above, the level of billing costs for double play offers is set at 2,5 DKK

per month per customer. The values for the other product categories are set in relation

to the double play value using the identified relation between Telia’s and TDC’s values:

- Single play level is 50% of the double play level, so 1,25

- Double play with TV is 200% of the double play level, so 5

- Triple play is 250% of the double play level, so 6,25.

5.2.2.3 Bad debt

Currently DBA uses 1% of the retail value including VAT for single and double play of-

fers. From the benchmark, a value of 1,9% of the retail value including VAT is received

from the German regulator.

The costs for bad debt are also increasing with the number of services in the bundle,

therefore, in general, bad debt is expressed as % of the retail price of the offering.

Figure 10: Input Danish operators 2014 – bad debt costs


Fullrate uses XXX% of the retail value including VAT. For double play Telia and TDC

have provide absolute numbers (XXX and XXX respectively). These amounts can be


expressed as % of the average retail value when related to the average for a Danish

double play offer (223 DKK +25% VAT). Resulting value for Telia is then XXX% and for

TDC XXX% for bad debt.

For this category, we have considered the inputs of all three parties for double play

(TDC, Fullrate and Telia) as bad debt does not seem to be depending on the company’s

positioning in the market. The resulting 1% for double play is used for all product offers.

5.2.2.4 Non-single customer specific cost

The currently used overhead by DBA is 10% of the invoiced amount excl. VAT, this

translates into 20 DKK for single play and 23 for double play. In the benchmark, only

Germany provided a figure of 7,15%, however on a costbase being the total wholesale

costs + network costs. In order to make the benchmark value roughly comparable, we

estimated the total wholesale costs + own network costs as 75% of the average Ger-

man retail price for double play without VAT (34,95 €). This results in an absolute value

of 14 DKK per month per customer. As can be observed in below graph, the German

value is quite low compared to the input of the Danish operators.

Figure 11: Input Danish operators 2014 – non single customer specific costs



TDC’s cost level for this category is differentiated by product offer, but the relation

seems quite linear so a % mark-up is suspected. When relating the amounts for double

play to the average Danish retail values (223 DKK excluding VAT for double play) a

percentage results of XXX%.

Fullrate and YouSee have provided values for double play (+TV) and triple play which

are XXX of the current level. Fullrate has provided a % of the retail value excluding

VAT; XXX% in 2013, which is a significant decrease from XXX% in 2012.

Telia has a significantly higher cost level for double play and an almost XXX level com-

pared to TDC for triple play. When expressing these cost levels as % of the average

retail value for double play, a percentage of XXX% results as mark-up. This value

seems very high compared to TDC/Fullrate and the German benchmark value.

In setting the level for this retail cost category, the inputs from TDC, Telia and Fullrate

have been considered, which resulted in an upward correction to 15% of the currently

applied mark-up of 10%.

When comparing 2011, 2012 and 2013 TDC data, it is furthermore observed that TDC’s

non single customer specific costs have gone slightly down for single and double play in

the years but significantly up for double play with TV and triple play. Telia also has a

high absolute level of overhead costs for triple play offers.

Question 3: It seems that overhead costs are increasing in general and especially the

allocation to triple play offers. Can the industry confirm this and explain the underlying

reasons?

5.3 Summary and impact of recommended retail cost levels

Based on the recommended cost levels for the one off and recurring retail costs, follow-

ing overviews are made. The left tables show the levels of retail costs, currently applied

by DBA in their margin squeeze tests and the tables on the right display the recom-

mended levels based on the input from Danish operators in 2014.

Based on average retail prices in the Danish market, absolute amounts are calculated

where percentage values are set for bad debt and non single customer specific costs.

The calculated totals are therefore estimations in order to see the impact of the recom-

mended cost levels in the margin squeeze test.


Table 17: Retail costs - currently applied and recommended levels- current

structure

The following can be observed:

- For single play and double play offers the recommendations result in total retail

costs which are slightly above the current VDSL single play offer.

- For the new product category double play with TV, the estimated total retail

costs are significantly above the double play (+50%), hence justifying this new

category.



Marketing contributions 3,43 3,43 XXX 10,0 XXX 18,0

Sales personnel

salary/sales commission5,72 8,59 XXX 7,50 XXX 15,00

Customer premise


Customer premise



premise equipment1,14 1,14 XXX XXX XXX XXX

Customer activation 1,14 1,72 1,14 XXX XXX XXX

Order related costs 2,29 3,43 XXX XXX XXX XXX

Total - adsl 21,75 26,33 32,54 36,70 59,25 63,35

Total - vdsl 29,76 34,34



Customer care /

retention20,00 27,50 17,60 22,0 44,0 47,0

Billing 8,33 8,33 1,25 2,50 5,00 6,25

Bad debt 2,50 2,79 2,50 2,79 3,75 4,63

Non-single customer

specific costs20,00 22,31 30,00 33,45 45,00 55,50

Total (estimated) 50,83 60,93 51,35 60,74 97,75 113,38



Current values - recurring retail costs Recommended values - recurring retail costs

83,89 97,44 157,00 176,73

Recommended - one off retail costs- current structureCurrently applied - one off retail costs

XXX XXX XXX XXX


- The triple play category is new as well and shows also a significantly higher to-

tal level compared to double play with VoIP and with TV, hence also seems jus-

tified.

However, it is proposed to use a more aggregated structure for the one off retail cost

categories. This is based on a combination of observations:

- As described in the detailed analysis, there is a strong relation between the de-

tailed categories, which are now aggregated into one category and;

- The Danish operators have reported challenges from time to time with the allo-

cation of costs to the specifically defined DBA categories, which might lead to

subjective cost allocation which in turn reduces the value of comparing the de-

tailed values of the different operators and;

- From the international benchmark it appeared that for certain categories it is

common to club them together.

In addition, the aggregated values for the one off retail costs have the advantage in the

consultation that they can be used without disclosing confidential information from the

operators on the provided detailed categories.

This results in the following table.


Table 18: Retail costs - currently applied and recommended levels- aggregated

structure

We have also compared the recommended retail cost levels with the input provided by

the Danish operators. Based on each operator’s input, total retail costs for each product

offer were calculated based purely on their respective input and consequently com-

monthly values (DKK) single play double playmonthly values


double play

with tvtriple play

Marketing contributions 3,43 3,43 Marketing and Sales 15,50 17,50 31,50 33,00

Sales personnel

salary/sales commission5,72 8,59

Customer premise


Customer setup and


and system costs)

17,04 19,20 27,75 30,35

Customer premise



premise equipment1,14 1,14

Customer activation 1,14 1,72

Order related costs 2,29 3,43

Total - adsl 21,75 26,33

Total - vdsl 29,76 34,34

monthly values (DKK) single play double play single play double playdouble play

with tvtriple play

Customer care /

retention20,00 27,50 17,60 22,00 44,00 47,00

Billing 8,33 8,33 1,25 2,50 5,00 6,25

Bad debt 2,50 2,79

Non-single customer

specific costs20,00 22,31

Total (estimated) 50,83 60,93 51,35 60,74 97,75 113,38



Currently applied - one off retail costs

Current values - recurring retail costs

Recommended - one off retail costs -


32,74 36,90 58,70 62,80

15,0%

Recommended - recurring retail costs

83,89 97,44 157,00 176,73

1,00%


pared with the total retail costs calculated based on our recommendations per product

offer.

Figure 12: Total retail costs single play: recommended level versus input Danish

operators


For single play offers, the estimated total lays around the higher current VDSL level for

single play offers but well above the current ADSL level of retail costs. Only TDC pro-

vided data related to single play. The higher level is explained as the single play level

was set in line with levels for double play (with and without TV) and triple play.


operators



For double play offers the recommended levels result in estimated retail costs which are

positioned between the latest input data from TDC’s and Telia. Furthermore, the rec-

ommended level results in a slightly higher retail costs compared to current applied lev-

els for VDSL double play offers but significantly higher retail costs for currently applied

double play ADSL offers.

Figure 14: Total retail costs double play with TV: recommended level versus input

Danish operators


The total estimated retail costs for double play with TV offers lie above the provided

input from TDC and well above TDC’s subsidiary YouSee. This is a consequence of first

setting the levels for double and triple play and then aligning the remaining level for

double play with TV in the absence of input from alternative operators in Denmark.

The recommended levels are roughly double the levels currently used for ADSL double

play.


Figure 15: Total retail costs triple play: recommended level versus input Danish op-

erators


For triple play the recommended levels leads to an estimated total retail costs which is

not in the middle of TDC and Telia, but more towards the lower TDC value.


6 Summary of recommendations and further conclusions

The following sections answer the main questions for this project:

What is the correct level of retail cost to be applied in margin squeeze tests for

market 4 and 5?

Do retail costs differ depending on the retail product sold (e.g. single play versus

double play and triple play broadband packages)?

Do regulatory authorities adapt retail costs in their margins squeeze tests de-

pending on the business strategy regarding sales channels of the considered

operator (i.e., “Premium” versus “No Frills” positioning).

6.1 Recommended retail cost levels

Below tables represents the recommended cost levels for the retail costs to be applied

in margin squeeze tests for market 4 and 5 in Denmark. Underlying analysis is de-

scribed in chapter 5. For the one off costs, first there is an overview in the current struc-

ture and an overview in proposed aggregated structure, which should be non-

confidential.

Table 19: Recommended one off retail cost levels – current structure

monthly values (DKK) single play double playdouble play with

tvtriple play

Marketing and Sales XXX 10,00 XXX 18,00

Sales personnel salary/sales

commissionXXX 7,50 XXX 15,00

Customer premise equipment XXX XXX XXX XXX


equipmentXXX XXX XXX XXX

Customer activation 1,14 XXX XXX XXX

Order related costs XXX XXX XXX XXX

Recommended - one off retail costs - current structure


Table 20: Recommended one off retail costs – aggregated structure

Table 21: Recommended recurring retail cost levels

6.2 Retail costs differentiation based on retail product

The second question regarding retail cost differentiation based on product offer can be

confirmed based on the input from the Danish operators in 2014. In their input data the

retail costs really differ between single play, double play with VoIP, double play with TV

and triple play. For some categories the costs are the same, but overall the product

monthly values


double play

with tvtriple play

Marketing and Sales 15,50 17,50 31,50 33,00

Customer setup and


and system costs)

17,04 19,20 27,75 30,35

Recommended - one off retail costs -


monthly values (DKK) single play double playdouble play -


Customer care /

retention17,60 22,00 44,00 47,00

Billing 1,25 2,50 5,00 6,25

Bad debt 2,50 2,79 3,75 4,63

Non-single customer

specific costs30,00 33,45 45,00 55,50

Recommended values - recurring retail costs


categories the total retail cost level varies between 86 and 178 DKK per month per cus-

tomer..

However, in the EU benchmark, there is not one regulator who also applies a retail cost

differentiation based on the retail product sold in terms of single play, double play etc.

What does seem to more common is a differentiation of retail costs between residential

and business services (Austria, Italy and the Netherlands).

6.3 Retail cost differentiation based on business strategy

In regards to the third question, all of the responding regulators except Italy denied dif-

ferentiating retail costs based on business strategy related to different approaches on

distribution channels and service offering (no frills versus premium positioning).

Italy remarked that when products are purely sold via online distribution channels, it

applies the lower retail costs of online channels both for its product by product test and

for the portfolio tests. In case products are sold via a mixture of distribution channels, it

applies the higher standard retail costs for the margin squeeze tests.

It is more common among EU regulators to differentiate retail cost levels for residential

and business services; half of the respondents (Austria, Italy and the Netherlands) are

doing so. Another variant is used in Ireland, where Comreg has proposed to use differ-

ent levels of (retail) costs for NGA services depending on whether the competition is

active in or outside so called “Larger Exchange Areas” (LEAs), which are defined as

areas with LLU available and/or cable infrastructure. When competition is active inside

the LEAs a combination of SEO and EEO is used and when competition is also active

outside these LEAs, SEO is used to model the costs of the alternative operator in the

margin squeeze test leading to higher (retail) costs.

6.4 Closing remarks

Retail costs in general are considered confidential by operators. During this project, the

confidential character also prevented some regulators to participate in the survey or

input was given only at a aggregated high level. This made it sometimes difficult to

compare the detailed data received from the Danish operators with benchmark values.

Despite of this, the response from most regulators was positive and they were all inter-

ested as retail costs form a significant part of the downstream costs and therefore influ-

ence the outcome of applied margin squeeze tests.

Also in general, other regulators seem to use a much more aggregated approach with

less detailed retail cost categories as DBA. It is not clear whether this is a deliberated


choice and/or that detailed data is lacking in those countries or that they have not start-

ed specifying itemized retail costs. In this context, it is worthwhile for DBA to keep an

eye on Irish regulator Comreg, who has confirmed that it has internal data on the vari-

ous retail costs but has not finalised a formal approach yet. Especially while Comreg

has developed a specific margin squeeze approach for NGA based retail services, in-

cluding how to deal with the retail costs applied in the test.

The retail cost levels received by the Danish operators varied strongly: item by item and

on an overall level. Based on DBA’s overall REO approach, there is a logical orientation

on the data from alternative operators.

In some cases the large deviations between operator data are very likely due to differ-

ent cost allocation methods and/ or interpretation of the itemized cost categories. Ac-

cordingly, parameter setting on the basis of the collected data is not simply straightfor-

ward. Sometimes we suggest to use averages, sometimes we suggest to use a single

value and at other times an adjusted single value is suggested.

It may be worthwhile for the DBA and the stakeholders to consider moving towards a

more aggregated retail cost data collection such as proposed for the one off retail costs.

At the other end of retail cost determination methodologies is the approach used in Italy

where a single mark-up value on all other cost is used to derive retail costs.1 The DBA

could still require that operators include all the individual items when determining their

retail cost to other cost (or revenue) ratio, so the definitions would remain. From our

point of view, it is not entirely clear that the differentiated, itemized approach is superior

to a more aggregated approach.

Question 4: What is the opinion of the industry on the current aggregation level of retail

costs, on the proposed aggregated one off retail costs and do you have any further

proposals for improvement ?

1 This approach is also used in Luxembourg.


Annex I – Questionnaire


Annex II – Detailed responses questionnaire

Austria - RTR

Currently the Austrian regulator RTR is only applying margin squeeze tests on business

broadband services of incumbent (A1 Telekom Austria) as they only have significant

market power in the field of business broadband access. However, in the past RTR has

applied margin squeeze tests as well on residential broadband services (ADSL) and

hence also has information available on the retail costs related to these services.

Following retail costs are considered by RTR in their margin squeeze tests.

customer care (service and call center)

marketing

billing and bad debt

sales

international connectivity

additional services (web-space, e-mail addresses etc.)

overhead cost at retail level

CPE cost

There is no distinction in one off versus recurring retail costs and RTR does not differ-

entiate the retail costs based on single/double/triple play, but on residential and busi-

ness services. Despite the different approach, of the 7 categories used by RTR, 5 fit

nicely in DBA’s current categories. RTR puts Billing and Bad Debt together and there

are 2 DBA categories that are not explicitly considered:

- Customer activation

- Order related costs

Based on the description of RTR ‘customer care category’ this seem to cover the call

centre costs which DBA has partly under ‘order related costs’. The category ‘customer

activation costs’ due to systems setup seems to be under RTR’s ‘overhead category’.

In addition to the 7 categories, RTR also adds International connectivity and additional

services to derive a total monthly retail cost. To compare the Austrian value to the Dan-

ish ones, an average value for the related monthly annualised costs need to be deduct-

ed.

The individual values per cost category are confidential but the overall level is indicated

to be around 3,5 € per customer per month for residential services and 10,5 € for busi-

ness services, excluding CPE which is valued at 2,212€ per month.


In respect to differentiating retail costs based on business strategies such as channel

strategy or service level, RTR linked the different business strategies to alternative op-

erators remarking that REO is not an option in Austria as the tests are based on EEO.

In addition, RTR noted furthermore that the use of REO versus EEO is related to the

identified competition problem (efficient price level or protection entrant) and that REO

differentiated by business strategy actually implies protecting specific entrant business

strategies.

Germany - BnetzA

The German regulator BnetzA is also splitting retail costs into recurring and one-off

costs. For the recurring retail costs BnetzA is actually using exactly the same categories

as DBA:

Customer Care – 1,25 € per customer per month

Billing – 0,09€ per customer per month

Bad Debt - 1,9% of the retail price including VAT (0,66€)

Common cost - 7.15% of total costs including wholesale costs.

In respect to billing cost; these are the costs for an electronic invoice only and a value

received from the incumbent in Germany. Originally a cost of 0,56 € was applied based

on traditional invoicing. However the currently applied costs as based on online invoic-

ing only from Deutsche Telekom.

The bad debt amount is based on the average price for a double play broadband pack-

age Call & Surf Comfort from Deutsche Telekom (34,95€ incl. VAT). This package is

one of the most important product bundles (flagship product) in the German retail mar-

ket.

Common Cost percentage used is a mark-up on all other cost related to local loop, split-

ter/DSLAM, traffic etc. This % was set in a formal decision regarding costs of the termi-

nating line segment.

For one off retail costs, BnetzA uses only two categories instead of 6 categories by DBA

(see below). To derive the monthly annualized figures, a customer life time of 50,21

months and a WACC of 6,58% has been used. Until now, CPE costs are not explicitly

included in the retail costs, however are indirectly included under customer acquisition

costs.

Customer acquisition (indirectly including CPE costs) – 1,90 € per month per

customer

Order cancellation – 0,22 € per month per customer


In comparison with DBA’s categories, marketing contributions, sales commission and

CPE related costs seem to be included under ‘customer acquisition’, however ‘customer

activation’ and ‘order related costs’ seem to be missing. In order to compare the Ger-

man total with the Danish values, we have increased the German one off total with the

current Danish values for customer activation and order related costs (0,21 and 0,42 €

per month per customer).

Ireland - Comreg

The Irish telecom regulator ComReg could not provide details on the retail cost values

due to commercial sensitivity. They have discussed indicative values with certain opera-

tors but have never published these values.

ComReg is using a Discounted Cash Flow model for their margin squeeze tests for cur-

rent generation Bitstream services in and outside the Local Exchange Areas (LEAs).

The DCF model includes one-off start-up costs of an alternative operator including capi-

tal costs and a terminal value. In addition, the following costs are further inflated with a

25% mark-up to reflect the likely additional common costs for an entrant in the broad-

band market (Sales, Product development, Held Desk and Order Handling). All identi-

fied retail cost categories can be adjusted for scale and scope. Furthermore, a customer

lifetime of 42 months is used in the model in the context of the WBA market.

ComReg distinguished the following retail cost categories:

Sales costs

Marketing / Advertising

Product Management & development

Accommodation

Help Desk

Billing

Modems

Order handling

Corporate overhead

Servers & co-location

IP connectivity (peering)

Backhaul

Wholesale connections

The categories correspond nicely with the ones from DBA. Additional element is ‘Prod-

uct management & development’. Furthermore, the network related costs of servers,

co-location, IP peering and Backhaul are included as well under retail costs.


More detail information is derived from chapter 7 of ComReg’s formal publication

http://www.comreg.ie/_fileupload/publications/ComReg1390.pdf):

Sales costs: These are the one-off start-up costs and ongoing customer acquisition

costs faced by a new entrant to attain new residential and business customers. These

costs are further inflated by a mark-up of 25% to take into account the likely higher

costs of a new entrant.

Marketing / Advertising: These are the one-off and ongoing costs including campaign

costs and are divided into initial set-up costs and promotions.

Product management & development: These are the one-off start-up costs and ongo-

ing costs associated with the product management & development function of a new

entrant. These costs take into account new product developments over an ongoing

product refreshment cycle. These costs are further inflated by a mark-up of 25% to take

into account the likely higher costs of a new entrant.

Accommodation: These are the one-off start-up costs and ongoing costs associated

with the Accommodation of a new entrant.

Help Desk: These are the one-off start-up costs and ongoing costs associated with the

Help Desk function of a new entrant. These costs reflect a higher cost during the initial

two years after start-up and followed by a lower ongoing cost per subscriber. All Help

Desk costs are further inflated by a mark-up of 25% to take into account the likely high-

er costs of a new entrant (see paragraph 7.11).

Billing: These are the one-off start-up costs and ongoing costs per subscriber associ-

ated with the Billing function of a new entrant. Billing costs also include a credit man-

agement cost which is based on a percentage of revenue.

Modems: This category takes into account the actual unit cost based on manufacturers’

offer to Eircom. The cost included in the model takes into account delivery costs. In ad-

dition, the model includes respective take-up assumptions of customers requiring new

modems over the DCF time period.

Order Handling: These are the one-off start-up costs and ongoing costs associated

with the Order Handling function by a new entrant. These costs are further inflated by a

mark-up of 25% to take into account the likely costs of a new entrant.

Corporate overhead: These are the one-off and ongoing costs corporate overhead

costs.

http://www.comreg.ie/_fileupload/publications/ComReg1390.pdf


Servers and collocation: These are the total servers and collocation costs faced by a

new entrant. Initial start-up costs and ongoing costs are taken into account.

Internet connectivity (peering charges); This is the cost of internet connectivity faced

by a new entrant. The unit cost of internet connectivity is consistent with the unit cost

used in the NGA model in the NGA Decision. This cost is a common cost to all the

standalone broadband products offered by a new entrant and is calculated based on an

average bandwidth requirement. This is based on the forecast total number of subscrib-

ers of the new entrant. This total number of subscribers is then allocated to equivalent

Eircom retail products based on the actual mix of Eircom retail customers on those

products to determine the average bandwidth requirement.

Backhaul charges: This is the cost of backhaul faced by a new entrant based on avail-

able wholesale offers from Eircom. This cost would be a common cost to all the

standalone broadband products offered by a new entrant.

Wholesale connection: These are the wholesale connection charges for new custom-

ers of the new entrant and reflect the prices published in the BARO.

Different approach on retail costs for legacy and NGA broadband services

In respect to NGA margin squeezes, ComReg has published its final decision in

http://www.comreg.ie/_fileupload/publications/ComReg1311.pdf (pages 227-241 for the

retail costs).

ComReg views SEO as a suitable approach outside the LEAs (competition by smaller

altnets) and a combined SEO and EEO approach for inside the LEAs. Inside the LEAs

there are larger altnets present with an international presence who can take advantage

of their (international) economies of scale and scope.

Specifically for some retail costs (Advertising, Billing and Product Management) it views

the EEO approach as suitable. ComReg believes that these retail costs are most sus-

ceptible to scale/scope advantages in the context of bundle offers and that in Ireland

there are operators with international presence who can take advantage of economies

of scale and scope between their operations in Ireland and other countries in which they

operate. This is in line with their NGA approach.

In addition, ComReg decided on the level of following retail costs for NGA:

Helpdesk cost: the level of should be based on SEO costs based on the current

level for legacy Bitstream services. Alternative operators in Ireland have the abil-

http://www.comreg.ie/_fileupload/publications/ComReg1311.pdf


ity to gain scale/scope efficiencies which would result in lower unit costs. How-

ever during NGA roll it should be observed what the impact is on the helpdesk.

IP connectivity costs: level should be based on the incumbent’s IP connectivity

costs (this includes interconnection costs for altnets from their IP core to the in-

cumbent’s backhaul network).

Modem costs: a period of 5 years is an appropriate lifetime. This is more than

the average customer life time, but the modem can be re-used. In addition, the

costs for a technician visit should be written of over 20 years as the activated

connection will be re-used in case of migration to other operators. However, due

to possible technology changes, ComReg continues the observation of the mo-

dem life time.

In respect to multicast costs, ComReg decided begin 2013 that it was too early to de-

cide as the incumbent did not launched IPTV services yet. ComReg’s preliminary view

was that multicast platform costs and marketing costs could be considered as retail

costs. As of October 2013 Eircom has launched IPTV, however no update of ComReg’s

position.

Italy - Agcom

For both tests, the retail-mark-up is applied to both Initially, the retail mark-ups were set by

AGCOM and then put into consultation. Based on the responses from the industry, the mark-ups

were adjusted. AGCOM did not have a specific description on how the mark-ups were defined

initially or what made them adjust them afterwards.

Italy’s regulator Agcom has provided us with aggregated totals and mapped their ap-

plied cost categories on the ones used in Denmark.

The total retail costs (including one off and recurring costs) are calculated as a % of

both wholesale costs and own network costs. AGCOM performs two different test, respectively:

1) A period-by-period test where only incremental costs are included. For this test, a retail mark-

up of 10% is used; and

2) A DCF test where all costs are included and a retail mark-up of 25% is used for residential

services and 20% for business services.

For the purpose of calculating a comparable value to the Danish value, the residential

value of 25% has been used. The network costs of the alternative operator are estimat-

ed to be around 3€ per month per customer (IP core network). For the wholesale costs


of residential broadband 13,94 2 is considered. This leads to 4,2 € total retail costs per

month per customer.

Agcom is using similar retail cost categories as in Denmark, however less. The follow-

ing DBA items are missing:

- Non single customer specific costs (recurring)

- CPE + distribution (one off)

- Customer activation (one off)

- Order related cost (one off)

Without giving absolute figures, Agcom commented that their level of retail costs was

much lower than the retail costs considered by Agcom. This could be partly explained

by the above listed missing categories. Especially the recurring non-single customer

specific (overhead) could represent a significant number. In order to compare the esti-

mated Italian total, estimations of the missing cost categories have been added.

No differentiation based on different service level, however Agcom does consider differ-

ent retail costs for different distribution channels (e.g. online sales has lower sales

comissions).

Netherlands - ACM

The regulator in the Netherlands is the Authority for Consumer and Market (ACM), pre-

viously known as OPTA. Due to confidentiality, ACM could only comment on the overall

aggregated level of retail costs used in their margin squeeze tests.

Market analyses by telecom regulator OPTA (predecessor of ACM) in the Netherlands

resulted in a non discrimination obligation for many wholesale services of incumbant

KPN. Part of this obligation is the behaviour rule not to margin squeeze (non

discrimination rule 5). This rule is applicable for each individual product offer and based

on the underlying incremental costs and resulted in a very detailed margin squeeze test.

In line with this incremental approach, ACM allowed incumbent KPN to consider only

those retail costs which are directly related to one specific product offering.

In this approach shared retail costs are therefore not included. For example, billing

costs are excluded as the same people are used for multiple products and billing is

done in batches hence not attributable to a single product offering.

2 Commission Decision of ( May 2014 concerning Case IT/2014/1587: Wholesale

broadband access in Italy - VULA, NGA Bitstream and ancillary

services price, for market 5 for for FttC based WBA 13,94€ monthly.


All other ‘out of pocket’ retail costs like provided equipment (modem and installation

therefor) are excluded in retail mark ups, but are included in the margin squeeze test.

This resulted in a uniform retail mark-up on the wholesale costs of 1% for fixed telepho-

ny services and rental lines and data connectivity and 3% for broadband.

Table 22: Incremental retail costs per product cluster in the Netherlands

Product clusters Identified incremental retail

costs

as markup on the wholesale price

Voice (incl. resold voice by KPN Corporate Services) 1%

Broadband 3%

Rental lines + Data connectivity 1%

As markup on the retail price

Data Services by KPN Corporate Services 4%

All of the absolute figures are redacted in the KPN cost accounting publication of 2009,

but from the text it seems that the retail to wholesale markup is mainly based on :

- External distribution costs for one specific product (compensation paid to

resellers)

- External call center costs when specific actions for one product offering

- Payments to third parties for specific TV content

- Resell costs for voice reselling by KPN subsidiary Corporate Solutions (CS)

which sells predominantly business services

- Advertisements specific for one product offering (however after deducting a

certain % for the brand as this is considered shared cost again).

For data solutions sold by KPN’s subsidiary CS, a seperate retail markup has been

established as the retail costs of CS are considered and not KPN. This retail markup is

therefor related to the retail price of CS. Only manpower involved in one single product

offering are considerd as incremental costs and hence included in the calculation.


In 2011, OPTA issued a complimentary decision on tarif regulation for fixed net voice for

business markets. See https://www.acm.nl/nl/publicaties/publicatie/10295/Aanvullend-

ontwerpbesluit-op-marktanalyse-vaste-telefonie-2011/ (dutch only). In this decision, OPTA

established that KPN still has SMP on the retail markets for fixed multiple voice calling

(ISDN1/2/15/20/30 excluding Voice over Broadband) due to their history despite having

wholesale services available. For this reason the previously incremental approach

towards retail costs was replaced by the approach that the integral retailcosts of KPN

need to be covered. This resulted first in a temporary retail markup of 18,6% based on

2008 data, which was corrected afterwards to 11,2% and per February 2013 has been

increased again to 13,5% based on 2011 data.

For all other retail markets fixed telephony markets and business connectivity the

previously lower retail markup of 1% of the wholesale rate still applies. Same for the

market for broadband access, 3%. OPTA defended this approach with the argument

that the incremental apporach is in line with the very detailed, product specific ND 5

margin squeeze test. Furthermore, OPTA stated that market parties can not expect both

applying a detailed , product specific ND 5 test and using integral retail cost markup.

Norway - NPT

The regulator in Norway, NPT is in the process of developing the margin squeeze mod-

els for market 4 and 5 including elements such as the retail costs. It has however not

yet started to discuss the relevant principles or the margin squeeze model in market 4

and 5 yet so could not provide much input. However NPT indicated that the margin

squeeze test would be developed for fibre only. Per January 2014, incumbent Telenor

has been designated as SMP in Norway and obligation to allow access and not to mar-

gin squeeze are the two available tools. Tests for copper based services are not

deemed necessary as there is a price cap regulation for Unbundled Local Loop whole-

sale services based on historic costs and Bitstream is available as well.

There is also price regulation in place for the wholesales service Wholesale Line Rental

and as part of that for the retail costs. However NPT stated that these retail costs most

likely will not be indicative for the retail costs related to the selling of broadband based

packages.

NPT has, on the other hand, developed a margin squeeze model in previous market 15

(access and call origination on mobile networks, which is still regulated in Norway), but

this model and principles may not be directly applicable for market 4 and 5.

In any case, the following set up is done for retail costs in the tests for market 15:

- Retail costs split in fixed and variable

https://www.acm.nl/nl/publicaties/publicatie/10295/Aanvullend-ontwerpbesluit-op-marktanalyse-vaste-telefonie-2011/

https://www.acm.nl/nl/publicaties/publicatie/10295/Aanvullend-ontwerpbesluit-op-marktanalyse-vaste-telefonie-2011/


- No differentiation based on single/double/triple offering or business positioning

Spain - CNMC

The Spanish regulator CNMC considered all data as confidential, however could com-

ment on the used retail cost categories (see below). Furthermore, CNMC does not con-

sider business strategy while defining the level of the retail costs.

CNMC is applying more recurring categories than DBA especially the category ‘non

single customer specific costs’ is expanded into 6 categories (labelled with ‘4’ in second

column).

Table 23: Non single customer specific costs split up in Spain

Non – single customer specific costs split up in: reference to DBA retail cost cate-

gories

Product development costs 4

Sales cost 4

Marketing & advertising 4

Taxes 4

Costs of other added services 4

Monthly payment for rental of equipment associated with the new service

4

In respect to the one-off retail costs, CNMC uses similar categories except that ‘Order

related cost’ is missing and that for the CPE they have 4 different categories instead of

one based on the different CPE used:

- modem router

- TV decoder

- Modem USB

- Handset

The CPE costs themselves are also confidential.


CNMC does not consider different retail costs based on different business strategy /

market segmentation.

Sweden - PTS

The Swedish telecom regulator does not have an economic replicability test or margin

squeeze test, however has started a consultation recently on the proposed approach

including a proposed mark-up to cover retail costs.

The modelled alternative operator would be a EEO, and the test will only be used for

Fibre not copper in line with the latest EU recommendations. Furthermore, the test is

proposed to be done on an average user, for just the flagship products.

In regards to the retail costs a mark-up between 20 and 25% related to the wholesale

price plus network costs is proposed. This mark-up would be the same for fibre prod-

ucts and copper based products. PTS did his own benchmark among telecom regula-

tors of the UK, Ireland and Italy (Ofcom, ComReg and Agcom) and observed these

common aspects.

Subscriber Acquisition Costs are not part of the retail mark-up, since it can be calculat-

ed and uniquely addressed to a customer. In these costs are for example the one-off

cost for CPE and initial discounts to attract the customer. These costs will be annual-

ized over the average customer life time.

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