Tariff rebalancing: International experience

Transcription

1 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 Tariff rebalancing: International experience Dr Tim Kelly, ITU Workshop on international settlement reform and the costing and pricing of telecom services, Hanoi, December 2000

2 Agenda!Supply and demand The functions of the tariff Pricing strategies!approaches to pricing Demand-based Cost-based Market-driven!Tariff structures!tariff rebalancing

3 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

4 Demand is a function of price Teledensity and monthly residential telephone rental (US$) Monthly subscription charge (US$) $ 15 $ 10 $ 5 Paying more. Demand not met. Paying more. Demand met. Paying less. Demand not met. Price / Demand Supply Paying less. Demand met. $ Main lines per 100 inhabitants Source: ITU World Telecommunication Development Report, 1998: Universal Access

5 Pricing strategies, selected countries Teledensity and monthly residential telephone rental (US$) Monthly subscription charge (US$) $ 15 $ 10 $ 5 Cambodia India Viet Nam Barbados Supply Australia Thailand Lao $ Source: ITU World Telecommunication Development Report, 1998 Price / Demand Main lines per 100 inhabitants

6 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)

7 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

8 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

9 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

10 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.

11 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

12 Social Typical evolution in connection charge Costbased! 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

13 Source: ITU World Telecommunication Indicators Database. Connection charges, in US$, 1999 Philippines Malaysia Lao P.D.R. Thailand Indonesia Cambodia Sri Lanka Viet Nam China Residential Business Business charges are the same as residential charges, unless shown

14 Typical evolution in monthly subscription charge Social Costbased!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

15 Source: ITU World Telecommunication Indicators Database. Monthly subscriber charge, in US$, 1999 Lao P.D.R. Thailand Sri Lanka Indonesia China Viet Nam Residential Business Business charges are the same as residential charges, unless shown Malaysia Cambodia Philippines

16 Source: ITU World Telecommunication Indicators Database. Philippines 0.7 Ratio of connection charges to subscriber charge (business) Malaysia 1.4 Cambodia 9.2 Indonesia Lao P.D.R. Thailand Viet Nam 39.7 Sri Lanka 47.3 China 56.7

17 Typical evolution in local call charges Social Costbased! 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

18 Source: ITU World Telecommunication Indicators Database. Cost of a 3 minute local call, in US$ Philippines Lao P.D.R Indonesia China Malaysia Cambodia Sri Lanka Thailand 0.08 Viet Nam 0.09

19 Typical evolution in long distance prices Social Costbased!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

20 Long distance market share % share of long distance calls 35% 30% 25% 20% 15% NCCs (Japan) Clear (NZ) Optus (Aust.) As competitors gain market share... 10% 5% 0% Long distance prices Index, 1993= Japan New Zealand Australia 90 Long distance prices come down Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

21 Rebalancing in action (1): Iceland Telecom, price of 3 minute, peak-rate call, includ. tax Local Medium Long distance Jan- 88 Jul- 88 Source: Iceland Telecom, OECD. Jul- 89 Nov- 90 Oct- 91 Feb- 92 Sep- 93 Jun- 94 Aug- 95 Dec Nov Nov- 97

22 Rebalancing in action (2): SwissCom, price per minute of local call and call to US 74 Sw iss call prices. US cents per minute Source: ITU. Call to USA 43 Local call

23 Rebalancing in action (3): Average trends in 39 major economies, in US$ minutes, local calls 3 mins Int'l call to US Monthly line rental Source: ITU World Telecommunication Indicators Database.

24 Source: ITU World Telecommunication Indicators Database. Rebalancing in action (4): Trends in Thailand, in US$ mins, local calls Monthly line rental 3 mins Int'l call to US

25 Rebalancing in action (5): Trends in price per minute of an international call to USA Average retail price of one minute call to USA. US$ $2.00 $1.50 $1.00 Mark-up Source: ITU adapted from FCC and national data (34 countries). Forecast $0.50 $0.00 Settlem ent

26 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