Pricing strategies for an incumbent operator: Part 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 at Dr Tim Kelly, ITU Workshop on Trends in Regional Telecom Prices in Asia-Pacific Bangkok, Sept 2000

Pricing strategies for fixed-line tariffs Agenda Supply and demand The functions of the tariff Pricing strategies Approaches to pricing Demand-based Cost-based Market-driven Tariff structures Tariff 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 $ Main lines per 100 inhabitants Monthly subscription charge (US$) Supply Price / Demand Paying more. Demand not met. Paying more. Demand met. Paying less. Demand met. Paying less. Demand not met. Source: ITU World Telecommunication Development Report, 1998: Universal Access Demand is a function of price Teledensity and monthly residential telephone rental (US$)

$ - $ 5 $ 10 $ Thailand Barbados Australia India Main lines per 100 inhabitants Monthly subscription charge (US$) Source: ITU World Telecommunication Development Report, 1998 Pricing strategies, selected countries Teledensity and monthly residential telephone rental (US$) Price / Demand Supply

Pricing strategies for fixed-line tariffs Approaches to pricing Demand-based pricing Pricing according to what the customer is able to pay May be required by politicians (monopoly environment) Cost-based pricing Pricing according to what the service costs to supply May be required by regulators (regulated environment) Market-based pricing Pricing in order to compete with other suppliers in the marketplace May be required by shareholders (competitive market)

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 competition To prevent abuses of competitive position

Pricing strategies for fixed-line tariffs Approaches to costing Fully-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 structures Cross-subsidies to network access Connection charges cover only a fraction of costs Low-cost monthly rental Cross-subsidies to local loop High-cost international and long-distance charges Free, unmetered or low cost local calls Geographical and social averaging of costs Uniform charges for connection & rental One price fits all

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 structure Ratio 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 subscription Trend 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 call Trend is towards diminishing ratio

Pricing strategies for fixed-line tariffs Typical evolution in connection charge Connection charge kept well below cost But waiting list grows as operator unable to keep up with demand Greater 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 falls In a competitive market, set price relative to competitors Social Cost- based

Pricing strategies for fixed-line tariffs China Viet Nam Sri Lanka Cambodia Indonesia Thailand Lao P.D.R. Malaysia Philippines Residential Business Connection 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 cost Monthly fee includes free local calls plus rental of handset plus services Unbundling of monthly subscription handset rental; local calls extra services, e.g., Directory inquiry Split between residential and business subscriptions Progressive rise towards costs Social Cost- based

Pricing strategies for fixed-line tariffs Philippines Cambodia Malaysia Viet Nam China Indonesia Sri Lanka Thailand Lao P.D.R. Residential Business Monthly 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 China Sri Lanka Viet Nam Thailand Lao P.D.R. Indonesia Cambodia Malaysia Philippines Ratio of connection charges to 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 metered Size of pulse unit shortens Size of local call zone shrinks Social Cost- based

Pricing strategies for fixed-line tariffs Viet Nam Thailand Sri Lanka Cambodia Malaysia China Indonesia Lao P.D.R. Philippines 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 prices Highly distance sensitive charges. Long distance call >100 times cost of local call Introduction of off-peak rates Reduction in number of bands Reduction of distance and duration elements Long-distance call <3 times cost of local call Social Cost- based

As competitors gain market share... Long distance prices come down... Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

Jan- 88 Jul- 88 Jul- 89 Nov- 90 Oct- 91 Feb- 92 Sep- 93 Jun- 94 Aug- 95 Dec Nov 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

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 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

Pricing strategies for fixed-line tariffs Conclusions Introduction of competition requires fresh approach to tariff strategy Under monopoly, social-pricing or demand-based pricing was possible Under competition, pricing which is not cost-oriented will be rapidly undermined Market-driven pricing means understanding customer requirements Tariff rebalancing should be gradual, but the best time to start was yesterday