Module 7: Analysing ICT Pricing and Affordability Dr Tim Kelly, Lead ICT Policy Specialist, infoDev/World Bank Tuesday 10 March 2009

2 Agenda 1.Basic pricing principles a)Value-based pricing b)Cost-based pricing c)Flat-rate, metered and hybrid pricing d)Promotions and price innovations 2.International pricing comparisons a)OECD tariff comparison baskets b)Application of tariff comparisons to Egypt 3.Affordability a)Universal service principles b)Policy measure for enhancing affordability c)Price regulation 4.Case Study: Broadband pricing 5.Group work exercise: Introducing WiMAX in Egypt

3 1. Basic pricing principles The functions of pricing To forge a link between supply and demand To attract customers and gain market share To generate revenues and cover costs of providing service To convey information to customers concerning the service To provide a platform for competition To segment customer base through price differentation

4 Demand as a function of price $ - $ 5 $ 10 $ Main lines per 100 inhabitants Monthly subscription charge (US$) Supply Price / Demand Paying more. Demand not met. Paying more. Demand met. Paying less. Demand met. Paying less. Demand not met. Note: Each dot is one country. Source: ITU “ World Telecommunication Development Report ” Teledensity and monthly residential telephone rental (US$) Barbados Australia Thailand India

5 1. Basic pricing principles Approaches to pricing Demand-based pricing –Pricing according to what the customer is able to pay –May be required by politicians (under state ownership of PTO) 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)

6 1. Basic pricing principles 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 –or, to make them explicit, e.g., for Universal Service To prepare for competition To prevent abuses of competitive position

7 1. Basic pricing principles Approaches to costing Fully-allocated pricing models (e.g., historical 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., Long Run Incremental Costs, or LRIC) –marginal cost of providing an additional unit of service (e.g., next minute of traffic, next subscriber) 1001 different flavours of the above

8 1. Basic pricing principles 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”

9 1. Basic pricing principles Market-oriented pricing structures Cost-oriented –Connection charges reflect real underlying costs –Monthly rental includes only a small element of usage (if any) Reflecting technology trends –Moving towards distance-independent tariffs –Biggest price custs in international call charges Market driven –Tariff options for different user groups –Discounts, “buckets of calls”, promotions, special offers etc

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

11 Rebalancing in action (2) Fixed Usage Total Index 1990 = 100, OECD average Long-term trends in residential phone charges, OECD Source: OECD Communications Outlook, 2007

12 2. International price comparisons Why carry out tariff comparisons? For consumers –To compare prices between operators –To make rational choices (e.g., post-paid vs pre-paid) For regulators –To assess the effectiveness of competition in the local market –To assess whether prices are genuinely cost-oriented –As a basis for possible price regulation For operators –To assess level of competitiveness vis-à-vis other operators –To plan for effective market entry strategies –To identify best practice and future price trends

13 2. International price comparisons Alternative price comparison models Individual tariff components –E.g. Comparing price of an SMS message between countries Simple tariff baskets –E.g. Comparing cost of 100 minutes of mobile usage, split between peak/off-peak, on-net/off-net, post-paid/pre-paid etc Complex tariff comparison baskets –E.g. OECD price comparison baskets, compiled by Teligen. Data since 1990 –Separate baskets for Business (SoHo, SME), Residential (low, medium and high usage), Mobile (low, medium and high usage) and Broadband Unit prices –E.g., Price per Mbit/s per month on broadband networks of different speed

14 2. International price comparisons OECD low-user mobile basket, Aug 2006, in PPP OECD low-user mobile basket comprises 25 outgoing calls per month (in pre-determined ratio of on-net/off-net, peak/off-peak, calls to mobile/fixed etc) plus 30 SMS. This shows annual charge. Source: OECD Communications Outlook, 2007

15 Where does Egypt fit? OECD low-user mobile basket comprises 25 outgoing calls per month (in pre-determined ratio of on-net/off-net, peak/off-peak, calls to mobile/fixed etc) plus 30 SMS Source: OECD Communications Outlook, 2007 and ITU/UNCTAD World Information Society Report International price comparisons Egypt: US$69.24

16 3. Affordability Universal service principles Availability: Universal availability of service across country at a geographically averaged tariff –Indicators: Teledensity, Mobile density, mobile coverage (by geography and by population), % households passed by broadband etc Accessibility: Service is accessible on a non-discriminatory basis to all segments of society, regardless of race, gender, disability etc –Policy measures: provision of public call boxes, provision of radio relay service for deaf/blind, service in schools, hospitals, libraries etc Affordability: Basic service is affordable by all segments of society –Indicators: Tariffs, tariff baskets (in PPPs, as percentage of average income), cost of ownership etc –Policy measures: Universal service funds, vouchers/discounts for special groups (e.g., elderly, unemployed), availability of pre-paid service (with micro recharge), subsidized handsets etc

17 3. Affordability Regional price comparisons, mobile low-user basket, 2006 (monthly) Source: ITU World Telecommunication Indicators Database.

18 3. Affordability Price regulation Direct control –Approval of price changes by government (for instance, via ownership of incumbent operator) –Politics, rather than the market, dictate choices Rate of return regulation –Limits profits to a “reasonable” level –But, tends to be slow, inefficient and subjective Price cap regulation (CPI-X) –Typically a service providers’ price increases are capped at X per cent less than inflation, where X is expected productivity improvement –Can be adapted to specific tariff components to allow for tariff rebalancing Competition as a price regulator –Regulator leaves retail prices to market but may intervene in wholesale prices (e.g, interconnection

19 3. Affordability Price-cap regulation in the UK 1984: CPI-3%. Line rentals, local & long distance calls; individual cap of CPI + 2% on line rentals until : CPI - 4.5%. Line rentals, local & long-distance. 1991: CPI %. Basket extended to include international calls : CPI - 0%. Line rentals for small business. Low usage small business service packages must be as good as for residential segment onwards, move from ex-ante to ex-post regulation (no specific price-cap)

20 4. Broadband pricing case study Broadband pricing: issues to consider Type of broadband –Fixed/mobile, –cable/DSL/FTTH etc What does the subscription cover? –Unlimited / fixed hours per month / pay as you go –Bit-cap? (ie limit on the amount of data that can be downloaded) –Speed of service (theoretical/average speed, upload/download) Bundling –Equipment bundled with service (e.g., DSL modem, set-top box, wifi router) –Broadband internet bundled with other services (e.g., TV, phone) Degree of competition –Intermodal competition (e.g., cable versus DSL) –Intramodal competition, unbundling local loop

21 4. Broadband characteristics Performance/price ratio doubling every months Always-on Distance neutral Both fixed and mobile More than 600 million subscribers and heading towards ubiquity A platform for many other applications (eg e- commerce, video-on-demand, e-gaming, etc) Still in the early stages of its growth cycle A new driver of long-term economic growth?

22 4. Broadband price trends

23 4. Broadband inequalities Price comparisons –By entry-level price –By average/best price –Unit price (e.g, per 100 kbit/s per month) –As % of GNI per capita Evidence of the digital divide –Average price in low income economies is more than 10x higher than in high income countries –Average price in Africa is up to 300x higher than best practice unit price (in Japan and Korea)

24 4. International comparisons Broadband prices in terms of 100 kbit/s per month, 2006 Egypt ranks 73 rd cheapest out of 167 economies with fixed broadband service 100kbit/s per month, typical costs MoroccoUS$ 2.18 UAEUS$ 4.64 EgyptUS$ 6.07 South AfricaUS$12.24 TunisiaUS$14.66 AlgeriaUS$86.64

25 5. Group Work: WiMAX in Egypt Setting a price strategy for WiMAX market entry in Egypt: Issues to consider What/who are you competing against? –Mobile voice –Fixed broadband –Mobile broadband What/where is the target market? –Urban or rural? –Data users? Smartphones? PCs with WiMAX cards? –Fixed, mobile or portable? What type of price structure? –Fixed-rate or metered? –Bit-capped? –Price discrimination (e.g., for fixed or mobile service, type of user device) Pricing strategy –Will you run an initial pricing discount and then raise prices? –Will you initially offer WiMAX as a premium service and later reduce prices