nga pricing industry workshop presentation

NGA Pricing Principles

24th October 2011

Agenda

1. Price Control Methodologies - Cost plus vs. retail minus vs. avoidance of

margin squeeze

2. Uncertainty

– Cost

– Take-Up

3. Cost Stack Comparison: NGA versus current offers

4. Commercial Pricing Principles

– Target: retail prices end customers can pay

– All Operators must be able to compete

5. The NGA product set - VUA vs. Bitstream Plus

– replicating the economics of physical unbundling

– Scale v Risk Sharing

– Price Structures: one-off v recurring charges

6. Migration

7. Voice Services

8. Next steps

1

Workshop Guidelines

• Discussion of Pricing approach presented by eircom

• Feedback taken after each slide

• All feedback will be recorded for later evaluation

• Aim to ensure price structures are developed which meet Wholesale • Aim to ensure price structures are developed which meet Wholesale

Customer needs while being consistent with regulatory obligations

• Improve eircom’s and customers understanding of pricing issues to allow

constructive inputs to ComReg before consultation launch, and to allow

informed responses to it

• Open to further dialogue of whatever form: bilateral, industry forum,

workshop etc.

2

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up



– Target: retail prices customers can pay

– All service providers must be able to compete





6. Migration

7. Voice Services

3

NGA Pricing: Timeline

• ComReg intend to issue a consultation and draft decision in the next couple of

months –with a target decision about three months later

• If we determine only principles first, actual prices later: not enough time for planning?

- need actual prices in the draft decision (precedent: LLU, LS)

• Is 6 months notice of final prices required, before launch?

• What if prices in final decision are in line with prices already indicated earlier?

4

Industry Workshop 24th October

ComReg Consultation and Draft Direction

(not including prices?)

Final Decision (including possible

adjustment of 6 month notice?)

• What if prices in final decision are in line with prices already indicated earlier?

Price Control Methodology

1. Cost Plus

– EU Commission NGA-Recommendation on 20th September 2010

recommends that NRA impose cost oriented prices: meaning

wholesale prices set using cost data for inputs utilised (typically

by efficient Operator)

2. Retail Minus

– Retail price free to move

– Wholesale price set by subtracting retail costs from retail price

– Retail costs can be EEO or SEO

3. Avoiding Margin Squeeze

– Ensure space between retail and Bitstream Plus

– Ensure space between EEO Bitstream Plus and SEO unbundled

5

EU 2010/572

• Where ex ante price regulation is applied, wholesale bitstream Plus access prices

should be derived by means of cost-orientation. NRAs could use other

appropriate price control methodologies including, e.g. retail-minus, where there

are sufficient competitive constraints on the downstream retail arm of the SMP

operator. NRAs should set different prices for different bitstream Plus products to

the extent that such price differences can be justified by the underlying costs of

service provision so as to enable all operators to benefit from sustained price

differentiation at both wholesale and retail levels.

• 26. NRAs should also assess pricing schemes proposed by the SMP operator to • 26. NRAs should also assess pricing schemes proposed by the SMP operator to

diversify the risk of investment. NRAs should agree to such schemes only where

they are satisfied that the SMP operator has provided all relevant information

related to the investment, and only if such schemes do not have discriminatory or

exclusionary effect.

6

Price Control Methodology: Bitstream in Ireland

Modem

IP Connectivity

Billing

Marketing

D1/06 :DCF Model

SEO

Retail minus ceiling

Retail PriceHow it works today

1. Eircom sets retail price

2. D1/06 (as amended, e.g.

08/102) rules applied to

calculate ceiling for

bitstream

10/108WBA Floor

WLR€18.02

DSLAM @MDF

LS Faults

LLU NGB

ceiling

LS Rental

WLR NGB

Wholesale Cost Floor

7

Traffic

bitstream

3. Rules from 10/108 draft

decision applied to

calculate cost floor

4. Eircom sets wholesale

price at a level above floor

and below ceiling

D1/06 Price Control: Table 1

08/12

8

10/05

ComReg 10/108: WBA

Model under review;

may change before final decision

9

Port price for Bitstreambased on LS

Includes LS rental, faults

Large complex model behind these figures.

Outputs heavily dependent on volume forecasts

Per Mbps costs depend on throughput (based on recent

trend in observed usage)

Retail / Wholesale Relationships

Unbundled Access

Virtual Unbundling

Bitstream Plus

White Label Retail

Already set for

LLU, SLU(can

“tweak” if required

Fixed Target Prices: set by CWTP;

Competitor offers

Can work out using WBA

model (retail minus and cost floor

limits, adjusted)

10

Access (LLU/SLU/UF)

Unbundling PlusWhite Label Retail

8Mb DSL Port

Total Cost

Total Revenue

24Mb ADSL2+

Port

FTTH Port

Usage capacity

FTTC VDSL Port

Retail Product: entry

Retail Product: : standard

Retail Product: top

Unlikely to be one-to-one match

Retail products may be “technology independent”

Weighted Portfolio tests required

eircom Retail or Industry Retail ARPU

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next Steps

11

Uncertainty: total cost

• Total cost depends largely on coverage: premises passed

• Total costs are not yet well understood

– Benchmarks possible, but both FTTH and FTTC are relatively

new – not a lot of cost data yet

– Pilot in Ireland helps inform incremental costs: but also indicated – Pilot in Ireland helps inform incremental costs: but also indicated

opportunities for improvement which will change costs

– Incremental costs for 2011/2 budgeted: but this includes a mix of

total cost for phase 1, and some preparation for phase 2

– Expected incremental total cost known within a range: say plus

or minus 20%

12

Uncertainty: Take-up

• Take –up of NGA services

depends on a range of factors

– Ultimate broadband

penetration?

– FTTX share of

penetration versus

LLU, Cable, Mobile

(3G/LTE)?400

600

800

1000

1200Cost 100

Cost 90

Cost 110

Unit cost 1100

Un

it c

ost

100

– Mix of FTTC, FTTH

planned is known, but

take-up may differ

13

0

200

10% 20% 30% 40% 50% 60% 70% 80% 90%

Un

it c

ost

• If cost per premises passed is €100 +/- 10

• Take up varies from 10% to 90%

• Unit cost per customer is between €100 and €1100

Preferred Approach for setting Wholesale Prices for NGA

• Insufficient time for root and branch review (of DCF/retail, LLU copper loops etc.)

but we understand ComReg will require a review of underlying cost detail for

FTTC/FTTH: unpredictable volumes render unit cost unreliable

• Retail Minus bias rather than cost plus

– Wholesale price set with reference to target retail price, minus retail costs

– Multiple retail products based on small set of wholesale products: model

may use average retail ARPU as inputmay use average retail ARPU as input

– Likely that ComReg will insist on prior approval for initial wholesale prices

and any future changes (i.e. Wholesale prices will not move automatically

when eircom retail prices move, as happens for e.g. WLR)

– need to ensure no margin squeeze against sub-loop/LLU

• Margin tests (between wholesale layers) will need indicative cost floors

– Need to focus initial effort on differences from current generation

– No strict match between wholesale/retail products

14

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next steps

15

Cost stacks for bitstream Plus:

BMB versus NGA (boxes not to scale)

Free Modem

IP Connectivity

Billing

Marketing

D1/06 DCF Model


Modem

IPConnectivity

revised throughput assumptions?

Billing

Marketing

Modem ChargeDifferent Modem cost;

% tech install

WLR€18.02

DSLAM @MDF

LS Faults


LS Rental

WLR NGB

WLR€18.02

DSLAM @Cabinet

LS Faults

LS Rental

Needs some more work: but cost/take-up

uncertain

WLR NGA


16

TrafficTraffic

MDF- Cab link

Cost stacks for Stand alone bitstream Plus:

Key Changes for NGA (boxes not to scale)

Modem

IP Connectivity

Billing

Marketing

D1/06 DCF Model


Modem

IPConnectivity revised throughput

assumptions

Different Modem cost; % tech install

Billing

Marketing

SEO=>EEO ?

DSLAM @MDF


LLU Faults

LLU €12.41

SA - NGB

SLU Faults

SLU €10.53

assumptions

SA- FTTC NGA


17

Traffic

MDF- Cab link

VDSLAM at cabinet Needs some more work: but cost/take-up

uncertain

Traffic

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next Steps

18

Commercial Pricing Principles

– Iris Henseler-Unger (BNetzA): The problem is that (German)

consumers do not want to pay more for new infrastructure (BEREC

Inauguration, October 2011)

– Target: retail prices end customers can pay

- Consumers now expect regular speed upgrades at constant or

even falling prices

- Evidence from past experience in Ireland- Evidence from past experience in Ireland

- Evidence from other countries

- Conclusion: little if any scope for retail price increases

- Opportunity: migrate contracted end users to new technology

at constant terms (including price)


- No margin squeeze retail –wholesale

- No margin squeeze unbundled –VUA- Bitstream Plus

19

Price Structure: Complexity and Level

Unbundled Virtual Bitstream

Already set for

LLU, SLU(can

“tweak” if required

Fixed Target Prices: set by CWTP;

Competitor offers

Can work out using WBA

model (retail minus and cost floor

limits, adjusted); flex for VULA, WL

20

High �� Complexity �� Low

Price Level

Unbundled Access

(LLU/SLU/UF)

Virtual Unbundling

Bitstream Plus

White Label Retail

MDF-National handover

The significant

difference

between VUA and

Bitstream Plus is

the additional cost

element

associated with

national backhaul

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next Steps

21

Price Structures:

replicating the economics of unbundling

• Unbundling has fixed costs per MDF

• LLU recurring charges lower than

Bitstream Plus

• Breakeven possible in larger sites

• VUA price structure should replicate cost

profile of unbundling

LLU

bitstream

22

profile of unbundling

• Need to revisit principle of capex recovery

in recurring charges?

• VUA price structure should reflect MDF handover (Cabinet handover would have a

different structure)

• Assumption: VUA will be viable at similar locations as LLU : 100-200 MDFs

• Question: option of high upfront charge and lower recurring for Bitstream Plus?

Scale and Risk – EU 2010/572

• Art 26. NRAs should also assess pricing schemes proposed by the SMP

Operator to diversify the risk of investment. NRAs should agree to such

schemes only where they are satisfied that the SMP Operator has

provided all relevant information related to the investment, and only if

such schemes do not have discriminatory or exclusionary effect.

• Annex 1: Additional mechanisms serving to allocate the investment risk

between investors and access seekers and to foster market penetration

could also be used, such as long-term access pricing or volume

discounts.

• Annex 1: Long term and Volume discounts (for NGA specific

investments) only to the extent that these schemes reflect reduction of

risk

23

Scale and Risk -1

• EU Recommendation may constrain options

• Strictly cost oriented prices may reflect risk and scale economies:

– Specific costs per cabinet, per MDF etc.

– Recovering capex in prices at time of payment reduces risk: – Recovering capex in prices at time of payment reduces risk:

matches cash profile of income and expenditure

– Need to understand how scale drives costs – especially at

cabinet level

24

One-off and Recurring Charges

• WBA cost floor model: 3 year average charge €5.22 per month

– €0.77 LS recurring element

– ~ €0.50 Faults element*

– ~ €1.00 Co-location rental etc.*

– ~ €3.00 is for capex recovery: this is actually a one-off cost*

– Alternative 1: ~€2.22 recurring, plus NPV of €3 pm over life– Alternative 1: ~€2.22 recurring, plus NPV of €3 pm over life

• But capex is not incurred for each customer individually

– Investment is lumpy: differs per cabinet/MDF; part fixed, part scale

dependent

– Alternative 2: ~€1.22 recurring, plus NPV of €4 pm over life

• Upfront charges might be scalable?

* eircom estimates

25

Price Structure Complexity

Unbundled Access

(LLU/SLU/UF)

Virtual Unbundling

Bitstream Plus

White Label Retail

Medium Complexity

Complex

• Network element•Site element

Very Complex

• survey•Install•Equipment•Maintenance

If eircom chose the technology (FTTC or FTTH) should

prices differ or be the same?

26

Simple

• No or waived connection•Fixed Monthly charge with use included•Excess above high limits

Fairly Simple

•1 or two part charge•Can be more like Bitstream Plus or retail: depends on services required

Complexity

• 2 or 3 part charging•Port charges•Usage charges•BECS•IP connectivity

•QOS?•Multicast?

•Site element•Sunk costs concept•Low cost per additional customer

•QOS•Multicast

•Maintenance•Colo•Power

•Significant network /fixed costs•Large sunk cost•Cost for extra sites•Very Low monthly cost for additional customer

High �� Complexity �� Low

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next Steps

27

Migration Charges

• In principle, cost-oriented migration charges apply

• Three classes of migration

– Individual

– Bulk migration by Operator

– Mass cutover at NGA deployment: requires coordination at

MDF, cabinet and maybe premisesMDF, cabinet and maybe premises

• Cost oriented charge for activity involved

• Price structures and levels to encourage efficiency – and perhaps early

adoption

28

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next Steps

29

Voice Services

• Both FTTH and FTTC sold without POTS and with POTS

• Price structures must reflect this

• Two options:

– Bitstream Plus/VUA price excluding access, pay LS+WLR or – Bitstream Plus/VUA price excluding access, pay LS+WLR or

Sub-loop separately

– Treat voice as a service over the Broadband connection. Price

floor based on Modern Equivalent Asset, Efficient Operator (i.e.

Independent of eircom actual delivery mechanism: many

precedents for this).

30

Agenda


margin squeeze

2. Uncertainty

– Cost

– Take-Up









6. Migration

7. Voice Services

8. Next Steps

31

nga pricing industry workshop presentation

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