Fixed-Line Pricing Strategy

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Fixed-Line Pricing Strategy for Basic Telephone
Residential Service
Presented by John Thompson
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Telephone Right or privilege

• Basic Principle
• Voice telecommunications are an essential
  privilege to modern society and its critical role
  is to promote social inclusion and ultimately,
  social cohesion.
• EU Directive 2002/22/EC of the European
  Parliament and of the Council of 7th March 2002
  on universal service and users rights relating
  to electronic communications networks and
  services). Htt
• Two key elements to the realization of these
  rights and privileges are
• the mechanism for determining eligibility (the
  right assistance gets to the right people) and,
• the funding required to finance the schemes and
  benefits that form the substance of this
  assistance. europa.eu.int/

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Telephone Right or privilege

• Subject of Market Forces
• The market forces use price as the lever to
  achieve equilibrium between demand and supply
• the right price - what consumers are willing
  to pay for what they perceive is a satisfactory
  service value proposition by the supplier.
• My Overall Objective
• to moderate the rights and privileges of the
  public with the economic challenges of the market
  to arrive at a place where social sensitivity
  meets economic expedience. .eu.int/

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Linking Access Costs as Universal Service
Obligation
Access Deficit The shortfall of revenues earned
over costs(capital and operating) incurred in
providing access service. Universal Service
Obligation Provision of essential telecom
services to members of society unable to bear the
full economic cost of such services Australian
Telecom Authority in Net Universal Service Costs
avoidable costs Revenues foregone Where Reven
ues forgone USO Programs operating and capital
costs Cost of Capital Revenues earned on the
services provided And Avoidable costs
inefficient costs that otherwise, would not be
incurred.   Dr Kim Jackson, Analysis and Policy
Social Policy Group. The Telecommunications USO.
Parliament of Australia, Parliamentary Library
http//www.aph.gov.au/library t/
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Linking Access Costs as Universal Service
Obligation

• In the UK, an additional component to the USO
  equation is
•  
• Externalities - The future benefits that will
  accrue to operators due to the build out of
  networks
• Existing customers gain by having additional
  contacts available on the network
• Operators gain by having additional customers who
  may become profitable in future
• The economic growth generated by increased access
  to telecommunications will generate additional
  traffic and revenues for operators in future.
• Robert Hall New Priorities for Universal
  service

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Linking Access Costs as Universal Service
Obligation

• Synthesis of Access Deficit with USO
• USO simply cannot be seen as a subsidy for
  network build out but must also concern itself
  with on going maintenance and operating costs.
• Incongruence between the access deficit and USO
  may be that the access deficit applies to the
  entire access network, whether it is deployed in
  profitable or non-profitable areas.
• While USO is deemed applicable or, justifiable
  only to access in seemingly unprofitable areas,
  the access subsidy applies across the board to
  all subscribers.
• Should access subsidy only apply to specific
  situations and hence specific subscribers thereby
  bringing into conformance with USO standards?

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Linking Access Costs as Universal Service
Obligation

• Synthesis of Access Deficit with USO
• Devise a process to claw back this subsidy from
  ineligible subscribers using an explicit charge,
  levied based on
• income group,
• geographic location and
• USO eligibility.
• This process not only establishes equity between
  the rich and poor but places full costs on those
  who are most able to bear them. Thus ending, for
  these subscribers, what was an unwarranted or
  indefensible State subsidy?

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The Case for an Alternate Pricing Strategy

• Need to revive and sustain the business viability
  of the fixed line network and its products and
  services.
• a plausible value proposition (affordable price
  and reliable quality) will consider it a
  substitute satisfaction for the values of other
  choices(though disimilar)
• astute pricing of fixed line services can render
  them an attractive alternative to mobile
  services.
• Currently, mobile prices are motivated by
  competition between mobile providers, does not
  consider the pricing initiatives of the fixed
  line as a threat.
• Introduction of the Next Generation Networks
  (NGN) for fixed lines poses several opportunities
  for increasing the suite of fixed line service
  offerings with many mobile-like services, (e.g..
  virtual roaming, instant messaging, virtual
  private networking etc.
• For NGN services, a flat rate charging
  policy-allowing subscribers the use of a suite of
  services whenever they choose, can be a winning
  value proposition.

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Pricing Payment Philosophy

• Tariff Structure for Flat Rate
• The mean historical usage of subscribers (taken
  over the last twelve months) will then be sorted
  into groups representing various mean usage
  ranges.
• The usage data is processed periodically to
  compute a mean usage range for each subscriber.
• The mean usage volume will be used as the
  criterion for assigning subscribers to tariff
  classes.

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Pricing Payment Philosophy

• Tariff Structure for Flat Rate
• On going observation of subscribersmean usage
  pattern to determine if it falls into their
  general tariff class or whether they be placed
  into a higher or lower usage-volume tariff class.
  
• These observations will provide information for
  reclassification of such subscribers, to groups
  with usage ranges that statistically represent
  these emerging usage patterns.

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Modeling the Method

• The Access and Core Networks are converted to
  component costs.
• These component costs are allocated to the
  weighted average of basic telephone calls (inter
  and intra exchange calls and international calls
  usage of the domestic network).
• The costs of retailing and other are also
  allocated to the basic services.
• An average service cost per minute based on the
  weighted average of routing and traffic volumes
  is computed.
• The total per minute cost of 62 cents is applied
  to a Class 1 usage of 500 minutes per month or,
  6000 minutes per annum.
• A total Class1 full cost of 3743.00 is used as
  the base for applying the allowances according to
  Income group, geographic location and USO
  eligibility. (See, Examples 1 and
• The net cost after allowances represents the cost
  recoverable by a monthly flat rate charge.
• The overall impact of the allowance on the access
  cost is represented in Tables 1,2, and 3 and the
  net cost of the overall USO funding is shown in
  Example 3

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Costing of Access Network for Residential
Telephone
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Costing of Core Network for Residential Network
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Costing of Retail Other Costs for
Residential Telephone
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Drivers of Costs for Residential Telephone
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Drivers of Costs for Residential Telephone
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Drivers of Costs for Residential Telephone
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Cost per Minute for Access, Core, Retail Other
Residential Telephone
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Using the Full Economic Cost of Class 1
Subscribers
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Using the Full Economic Cost of Class 1
Subscribers
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Overview of Impact on Access Costs
Table 1
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Overview of Impact on Access Costs
Table 2
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Overview of Impact on Access Costs
Table 3
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Overview of Impact on Access Costs Summary
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Prepaid Method of Payment for Residential
Telephone

• A variety of options exist for purchasing prepaid
  usage.
• A flat rate per month, which allows unlimited
  intra and inter exchange /access areas calling,
  is preferred,
• A prepaid card or credit card will supply the
  means of payment for monthly fixed line service.
• This flat rate will account for both access and
  usage.
• Another medium could be a scratch card to be
  purchased at various retail outlets around the
  country.

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The privilege of unlimited calling allowed to
each subscriber needs to be contingently guarded

• There are two aspects where unlimited calling
  must be checked
•  
• Where changing circumstances bring about a shift
  in a subscriber s usage pattern (family crisis
  or, emergency) resulting in an upward movement in
  minutes per month. The unlimited calling makes
  this usage shift seamless and convenient to the
  subscriber.
• Where abuse is made of the service (e.g.
  pensioners phone being abused by unsuspected
  relatives)
• unlimited calling privilege puts no ceiling on
  the value of calls from any phone.
• As a guard against excessive calling outside of a
  subscribers assigned usage range, a bad debt
  contingency allowance can be included as a
  recoverable cost in the service costing.
• A three percent (3)of annual revenues provision
  can be included to offset usage abuse.
• In the event the excess usage does not warrant
  use of the provision, it can be ploughed back as
  a reduction to the subsequent revenue requirement
  from the residential service.

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Channels of Prepayment

• Over-the-counter purchase,
• On line purchase,
• Purchase via telephone,
• Cash stop/ ATM purchase using debit card etc.

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Conditions Terms of Prepayment

• The purchase is dialled into the prepaid fixed
  line platform and service is activated for the
  residential line.
• Emphasis must be placed on subscribers being able
  to purchase usage and update the prepaid platform
  as conveniently and severally as possible.
• As many possible purchase channels should be open
  as current technology can allow. This way,
  subscribers have no disadvantage in accessing
  usage of their service.
• Service installation must be paid in advance of
  the technician coming to install the CPE. Service
  usage must be prepaid from the date the CPE is
  installed and the service line connected to the
  PSTN.

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Advantages of Prepaid Fixed Line Service

• The following are just some of the benefits to be
  derived from prepaid fixed line service
• Elimination of billing mediation, billing system
  and bill printing costs.
• Elimination of credit control administration
  costs
• Conversion from post paid to prepaid bears only
  the incremental costs of acquiring a prepaid
  platform, most prepaid infrastructure already
  developed from mobile operations and is easily.
• Value proposition between the company and the
  subscriber is enhanced as the equity between
  service usage and payment for service are more
  closely met.

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Advantages of Prepaid Fixed line Service

• The revenue assurance prospect is enhanced
  through the consistent predictability of a flat
  rate that derives required revenues from a
  computation, which targets a projected revenue
  requirement containing a commensurate rate of
  profit.
• This approach is readily administered through
  existing price cap methodology.
• The tendency towards cross-subsidisation is
  reduced as the revenue requirement, with a high
  degree of certainty, can easily be set to
  approximate the full or incremental costs of both
  access and usage.

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Conclusion

• What I have attempted to address in a levelled
  manner is the introduction of a new value
  proposition for the residential basic telephone
  service.
• I have taken the access deficit, as borne by most
  incumbent telephone operators, and shown it from
  the perspective of Universal Service Obligation.
• The access deficit is the USO cost of providing
  subsidised basic telephone, its only
  disqualification being, that is it represents an
  across the board subsidy to both the poor and the
  well-off in society. Confining the Access deficit
  to only the needy and geographically displaced
  then aligns it with the philosophy of
  Universality.

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Conclusion

• I have attempted to demonstrate at an overview
  level, a mechanism for realigning the way costs
  can be recovered, through a pricing method that
  will introduce more equity among the population.
• The general idea of means tests, under the
  categories of income, geography and USO
  eligibility, are used to eliminate imbalance
  wherever it may exist.
• While unlimited calling is allowed, the flat rate
  is designed to cover the full cost of a
  suscribers average usage as it progresses over
  time.
• Use of explicit allowances to grant USO based
  benefits converts the existing access deficit,
  thereby reducing it to a balance that can be
  included in the flat rate pricing.
• This approach still seeks to maintain a strong
  relationship between full costing and cost -based
  pricing.

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Closing Statement
My intent is to stimulate thought about new
and more effective value propositions that
maintain the economic mandate required for market
liberalisation, while sensibly and judiciously
correcting the revenue imbalances that have been
borne by incumbents.   These imbalances exist
in spite of the economic reality that warrants
these imbalance be removed or, allowed only
for those citizens who fall under the umbrella
of Universality.   There are some
subordinating issues still to be addressed but I
trust that this paper has at least made a fair
cry for some new attitudes and actions towards
access costs, universal funding needs and the
pricing mechanisms required to forge a path
forward.
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Thank you!