Yangon, Myanmar, 28-29 November 2013

Broadband price regulation

Matthew O’RourkePartner, Incyte Consulting

mor@incyteconsulting.com

ITU Regional Workshop on Bridging the Standardization Gap

(Yangon, Myanmar, 28-29 November 2013)

In summary…

If you are thinking of regulating the retail prices of broadband services…please don’t

If broadband prices are too high, or penetration too low, fix the upstream problems first

If you must regulate retail prices, limit intervention to entry-level pricing only

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High costs lead to high prices

Penetration is a reflection of many factors, including price and quality

Price and quality are greatly influenced by upstream costs

E.g. international connectivity and national distribution

Operators’ pricing has to cover their costs plus a reasonable ROCE

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Look upstream…

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Take a holistic view of the broadband value chain

Identify and fix any competition problems that may exist in relevant upstream markets

…and also look more broadly

There may also be other policy initiates that can help reduce costs and thus prices

telecoms taxes import dutieslicence fees and other leviesIXPs

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A word of caution

Retail price regulation can be tempting

Everyone wants lower prices

But price intervention in broadband markets risks retarding the long-term development of those markets

Riskier than narrowband

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Why is intervention so problematic?

Broadband markets are not yet mature Demand is still uncertain and fragile

Distorting price signals can make actual demand even more opaque

This can deter essential investment

Narrowband era regulatory methodologies are not suitable to broadband environment

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Maturity of broadband markets

When considering maturity, distinguish between:

physical connections (i.e. penetration)

utilisation and application of the bandwidth of those physical connections

It would be premature to regard the latter as mature until its potential is more fully utilised

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Regulation must fit a market’s position on the innovation diffusion

curve

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Next generation broadband

A relatively recent innovation in most economies

Occupies a separate—and subsequent—diffusion curve to the first generation of broadband services

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The risks of premature intervention

Price regulation in any new market can harm long-term development

Demand is embryonic and needs to be fostered

Innovation may be distorted by regulatory signals

Experimentation with price models may be constrained

The market might work differently to other markets

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Narrowband solutions to broadband problems

Risk of viewing broadband markets and pricing through prism of the narrowband regulatory frameworks

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Narrowband markets Voice-centric Sunk investment costs Simple supply chainKnown demand profiles

Broadband markets Not service specificConsiderable new investment in infrastructure requiredUnclear / evolving customer demand and expectations

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Changing imperatives of price regulation

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Narrowband-era retail price regulation methodologies are ill-suited

Rate of returnRequires an understanding of the risks associated with the undertaking and the returns commensurate with such risks

Price capsRequire a price driver that is related to prospective levels of efficiency relative to the price levels in the economy generally

BenchmarksNot easy at the best of times, and especially where the retail services are broadband

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The least worst option

Any price intervention should: maximise scope for competition to develop and

minimise the distortion of demand

This can be achieved by applying the retail price control only to entry-level broadband services

Leaving all other retail prices unregulated

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A focus on entry-level pricing

This would: ensure an acceptable minimum broadband service is affordable

encourage competition among the higher speed services

achieve policy objectives relating to affordability and adoption with minimal distortion to competition or the development of the market

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Examples of any entry level focus

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LebanonNew entry-level plan

required by Government decreeLowered cost of entry

level product by up to 70%Helped increase

penetration by 9% points to 61% in first 12 months

UruguayState-owned ANTEL offers a prepaid entry-level plan512 kbit/s and 1 GB of data per 30-day period Free of charge to ANTEL’s fixed telephone line customers (i.e. only pay for a fixed line)Government aiming for 80% penetration by 2015.

Examples in a USO context

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Finland26 US providers 1 Mbps service to every

permanent residence/business at “a reasonable price”Agreed to be between

€30 - €40 per monthAvoided a price capAllows price variations

to reflect cost differences

IrelandNational Broadband Scheme MNO awarded a contract to supply a 1.6 Mbps service for €19.99 per month in specified parts of the country where broadband availability is insufficient

Entry-level fixed broadband prices

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Entry-level mobile handset-based broadband prices

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Entry-level mobile computer-based broadband prices

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