Pricing strategies for an Pricing strategies for an incumbent operator:incumbent operator:

Part A: Fixed linePart A: Fixed line

The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its Membership. Dr Kelly can be contacted by e-mail at Tim.Kelly@itu.int

Dr Tim Kelly, ITU“Workshop on Trends in Regional Telecom Prices in Asia-Pacific” Bangkok,

11-15 Sept 2000

Pricing strategies for fixed-line tariffs

AgendaSupply and demand

The functions of the tariffPricing strategies

Approaches to pricingDemand-basedCost-basedMarket-driven

Tariff structuresTariff rebalancing

Pricing strategies for fixed-line tariffs

The functions of pricing

To forge a link between supply and demand

To generate revenues and cover costs of providing service

To convey information to customers concerning the service

To provide a platform for competition

$ -

$ 5

$ 10

$ 15

0 10 20 30 40 50 60

Main lines per 100 inhabitants

Mo

nth

ly s

ub

scri

pti

on

ch

arg

e (U

S$)

Supply

Price / Demand

Paying more. Demand not met.

Paying more. Demand met.

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

Source: ITU “World Telecommunication Development Report, 1998: Universal Access”

Demand is a function of priceTeledensity and monthly residential telephone rental (US$)

$ -

$ 5

$ 10

$ 15

0 10 20 30 40 50 60

Thailand

Barbados

Australia

India

Main lines per 100 inhabitants

Mo

nth

ly s

ub

scri

pti

on

ch

arg

e (U

S$)

Source: ITU “World Telecommunication Development Report, 1998”

Pricing strategies, selected countriesTeledensity and monthly residential telephone rental (US$)

Price / Demand

Supply

Pricing strategies for fixed-line tariffs

Approaches to pricingDemand-based pricing

Pricing according to what the customer is able to payMay be required by politicians (monopoly environment)

Cost-based pricingPricing according to what the service costs to supplyMay be required by regulators (regulated environment)

Market-based pricingPricing in order to compete with other suppliers in the

marketplaceMay be required by shareholders (competitive market)

Pricing strategies for fixed-line tariffs

Reasons for cost-based pricing

To cover the full costs of providing the service

To recognise cross-subsidies between services and between users to eliminate them to make them explicit, e.g., for Universal Service

To prepare for competitionTo prevent abuses of competitive position

Pricing strategies for fixed-line tariffs

Approaches to costingFully-allocated pricing models (e.g., TAS

cost model) total costs for providing service (including historical,

depreciated investment costs) divided by the volume of service provided (e.g., minutes of use, number of subscribers)

Incremental pricing models (e.g., LRIC)marginal cost of providing an additional unit of service

(e.g., next minute of traffic, next subscriber)

1001 different flavours of the above

Pricing strategies for fixed-line tariffs

Traditional pricing structuresCross-subsidies to network access

Connection charges cover only a fraction of costsLow-cost monthly rental

Cross-subsidies to local loopHigh-cost international and long-distance chargesFree, unmetered or low cost local calls

Geographical and social averaging of costsUniform charges for connection & rental“One price fits all”

Pricing strategies for fixed-line tariffs

Market-oriented pricing structures

Cost-oriented Connection charges reflect real underlying costs Monthly rental includes only a small element of

usage

Reflecting technology trends moving towards distance-independent tariffs biggest price cuts in international call charges

Market-driven Tariff options for different user groups Discounts, special offers, promotional prices ….

Pricing strategies for fixed-line tariffs

Key indicators of tariff structureRatio between level of fixed and usage

charges in average bill In OECD model, 33/67 for residential and 20/80 business

Ratio between connection charge and monthly subscriptionTrend is towards first rising then diminishing ratio

Ratio between local call price and most expensive long-distance call In Thailand it is 18:1; in Iceland it is 1:1

Ratio between peak and off-peak callTrend is towards diminishing ratio

Pricing strategies for fixed-line tariffs

Typical evolution in connection charge

Connection charge kept well below costBut waiting list grows as operator unable to

keep up with demandGreater differentiation

Higher connection charges for business than residential Give subscribers change to make refundable deposit on

future line Allow subcontractors to do wiring and installation

Connection price more closely match costs Connection charge cut as waiting list fallsIn a competitive market, set price relative to

competitors

Social

Cost-based

Pricing strategies for fixed-line tariffs

0 50 100 150 200 250

China

Viet Nam

Sri Lanka

Cambodia

Indonesia

Thailand

Lao P.D.R.

Malaysia

PhilippinesResidential

Business

Connection charges, in US$, 1999Connection charges, in US$, 1999

Business charges are the same as residential charges, unless shown

Source: ITU World Telecommunication Indicators Database.

Pricing strategies for fixed-line tariffs

Typical evolution in monthly subscription charge

Monthly fee kept well below costMonthly fee includes free local calls plus

rental of handset plus servicesUnbundling of monthly subscription

handset rental; local callsextra services, e.g., Directory inquiry

Split between residential and business subscriptions

Progressive rise towards costs

Social

Cost-based

Pricing strategies for fixed-line tariffs

0 2 4 6 8 10 12 14 16

Philippines

Cambodia

Malaysia

Viet Nam

China

Indonesia

Sri Lanka

Thailand

Lao P.D.R.

Residential

Business

Monthly subscriber charge, in US$, 1999Monthly subscriber charge, in US$, 1999

Business charges are the same as residential charges, unless shown

Source: ITU World Telecommunication Indicators Database.

Pricing strategies for fixed-line tariffs

56.7

47.3

39.7

33.5

30.0

25.8

9.2

1.4

0.7

China

Sri Lanka

Viet Nam

Thailand

Lao P.D.R.

Indonesia

Cambodia

Malaysia

Philippines

Ratio of connection charges to Ratio of connection charges to subscriber charge (business)subscriber charge (business)

Source: ITU World Telecommunication Indicators Database.

Pricing strategies for fixed-line tariffs

Typical evolution in local call charges

“Free” local call charges included in monthly subscription

Limited number of free calls included in subscription, others charged

Local calls timed and meteredSize of pulse unit shortensSize of local call zone shrinks

Social

Cost-based

Pricing strategies for fixed-line tariffs

0.09

0.08

0.03

0.03

0.02

0.01

0.01

0.00

0.00

Viet Nam

Thailand

Sri Lanka

Cambodia

Malaysia

China

Indonesia

Lao P.D.R.

Philippines

Cost of a 3 minute local call, in US$Cost of a 3 minute local call, in US$

Source: ITU World Telecommunication Indicators Database.

Pricing strategies for fixed-line tariffs

Typical evolution in long distance pricesHighly distance sensitive charges.

Long distance call >100 times cost of local call

Introduction of off-peak ratesReduction in number of bandsReduction of distance and duration

elementsLong-distance call <3 times cost of

local call

Social

Cost-based

Long distance market share% share of long distance calls

0%

5%

10%

15%

20%

25%

30%

35%

1991 1992 1993 1994 1995 1996

NCCs (Japan) Clear (NZ) Optus (Aust.)

Long distance pricesIndex, 1993=100

75

80

85

90

95

100

1993 1994 1995 1996

JapanNew ZealandAustralia

As competitors gain market share ...

Long distance prices come

down ...Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Jan-88

Jul-88

Jul-89

Nov-90

Oct-91

Feb-92

Sep-93

Jun-94

Aug-95

Dec-96

01-Nov-97

11-Nov-97

Local

Medium

Long distance

Rebalancing in action (1): Iceland Telecom, price of 3 minute, peak-rate call, includ. tax

Source: Iceland Telecom, OECD.

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

7

28

43

5858

74

444455

95 96 97 98 99 00

Swiss call prices. US cents per minute.

Source: ITU.

Call to USA

Local call

0

2

4

6

8

10

12

1990 1991 1992 1993 1994 1995 1996 1997

300 minutes, local calls

3 mins Int'l call to US

Monthly line rental

Source: ITU World Telecommunication Indicators Database.

Rebalancing in action (3): Average trends in 39 major economies, in US$

Rebalancing in action (4): Trends in Thailand, in US$

Source: ITU World Telecommunication Indicators Database.

0

2

4

6

8

10

12

14

1993 1994 1995 1996 1997 1998 1999

300 mins, local calls

Monthly line rental

3 mins Int'l call to US

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

$0.00

$0.50

$1.00

$1.50

$2.00

90 92 94 96 98 00 02 04

Average retail price of one minute call to USA. US$

Mark-up

Settlement

Source: ITU adapted from FCC and national data (34 countries).

Forecast

Pricing strategies for fixed-line tariffs

ConclusionsIntroduction of competition requires fresh approach

to tariff strategyUnder monopoly, social-pricing or demand-based

pricing was possibleUnder competition, pricing which is not cost-

oriented will be rapidly underminedMarket-driven pricing means understanding

customer requirementsTariff rebalancing should be gradual, but the best

time to start was yesterday