tariff rebalancing: international experience the views expressed in this paper are those of the...
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Tariff rebalancing:Tariff rebalancing:International experienceInternational experience
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 e-mail at [email protected]
Dr Tim Kelly, ITU“Workshop on international settlement reform and the
costing and pricing of telecom services”, Hanoi,
11-13 December 2000
Tariff rebalancing: International experience
AgendaSupply and demand
The functions of the tariffPricing strategies
Approaches to pricingDemand-basedCost-basedMarket-driven
Tariff structuresTariff rebalancing
Tariff rebalancing: International experience
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
$ 15
0 10 20 30 40 50 60
Main lines per 100 inhabitants
Mo
nth
ly s
ub
scri
pti
on
ch
arg
e (U
S$)
Supply
Price / Demand
Paying more. Demand not met.
Paying more. Demand met.
Paying less. Demand met.Paying less. Demand not met.
Source: ITU “World Telecommunication Development Report, 1998: Universal Access”
Demand is a function of priceTeledensity and monthly residential telephone rental (US$)
$ -
$ 5
$ 10
$ 15
0 10 20 30 40 50 60
Thailand
Barbados
Australia
India
Main lines per 100 inhabitants
Mo
nth
ly s
ub
scri
pti
on
ch
arg
e (U
S$)
Source: ITU “World Telecommunication Development Report, 1998”
Pricing strategies, selected countriesTeledensity and monthly residential telephone rental (US$)
Price / Demand
Supply
Lao
Cambodia
Viet Nam
Tariff rebalancing: International experience
Approaches to pricingDemand-based pricing
Pricing according to what the customer is able to payMay be required by politicians (monopoly environment)
Cost-based pricingPricing according to what the service costs to supplyMay be required by regulators (regulated environment)
Market-based pricingPricing in order to compete with other suppliers in the
marketplaceMay be required by shareholders (competitive market)
Tariff rebalancing: International experience
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 competitionTo prevent abuses of competitive position
Tariff rebalancing: International experience
Approaches to costingFully-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
Tariff rebalancing: International experience
Traditional pricing structuresCross-subsidies to network access
Connection charges cover only a fraction of costsLow-cost monthly rental
Cross-subsidies to local loopHigh-cost international and long-distance chargesFree, unmetered or low cost local calls
Geographical and social averaging of costsUniform charges for connection & rental“One price fits all”
Tariff rebalancing: International experience
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 ….
Tariff rebalancing: International experience
Key indicators of tariff structureRatio 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 subscriptionTrend 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 callTrend is towards diminishing ratio
Tariff rebalancing: International experience
Typical evolution in connection charge
Connection charge kept well below costBut waiting list grows as operator unable to
keep up with demandGreater 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 fallsIn a competitive market, set price relative to
competitors
Social
Cost-based
Tariff rebalancing: International experience
0 50 100 150 200 250
China
Viet Nam
Sri Lanka
Cambodia
Indonesia
Thailand
Lao P.D.R.
Malaysia
PhilippinesResidential
Business
Connection charges, in US$, 1999Connection charges, in US$, 1999
Business charges are the same as residential charges, unless shown
Source: ITU World Telecommunication Indicators Database.
Tariff rebalancing: International experience
Typical evolution in monthly subscription charge
Monthly fee kept well below costMonthly fee includes free local calls plus
rental of handset plus servicesUnbundling of monthly subscription
handset rental; local callsextra services, e.g., Directory inquiry
Split between residential and business subscriptions
Progressive rise towards costs
Social
Cost-based
Tariff rebalancing: International experience
0 2 4 6 8 10 12 14 16
Philippines
Cambodia
Malaysia
Viet Nam
China
Indonesia
Sri Lanka
Thailand
Lao P.D.R.
Residential
Business
Monthly subscriber charge, in US$, 1999Monthly subscriber charge, in US$, 1999
Business charges are the same as residential charges, unless shown
Source: ITU World Telecommunication Indicators Database.
Tariff rebalancing: International experience
56.7
47.3
39.7
33.5
30.0
25.8
9.2
1.4
0.7
China
Sri Lanka
Viet Nam
Thailand
Lao P.D.R.
Indonesia
Cambodia
Malaysia
Philippines
Ratio of connection charges to Ratio of connection charges to subscriber charge (business)subscriber charge (business)
Source: ITU World Telecommunication Indicators Database.
Tariff rebalancing: International experience
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 meteredSize of pulse unit shortensSize of local call zone shrinks
Social
Cost-based
Tariff rebalancing: International experience
0.09
0.08
0.03
0.03
0.02
0.01
0.01
0.00
0.00
Viet Nam
Thailand
Sri Lanka
Cambodia
Malaysia
China
Indonesia
Lao P.D.R.
Philippines
Cost of a 3 minute local call, in US$Cost of a 3 minute local call, in US$
Source: ITU World Telecommunication Indicators Database.
Tariff rebalancing: International experience
Typical evolution in long distance pricesHighly distance sensitive charges.
Long distance call >100 times cost of local call
Introduction of off-peak ratesReduction in number of bandsReduction of distance and duration
elementsLong-distance call <3 times cost of
local call
Social
Cost-based
Long distance market share% share of long distance calls
0%
5%
10%
15%
20%
25%
30%
35%
1991 1992 1993 1994 1995 1996
NCCs (Japan) Clear (NZ) Optus (Aust.)
Long distance pricesIndex, 1993=100
75
80
85
90
95
100
1993 1994 1995 1996
JapanNew ZealandAustralia
As competitors gain market share ...
Long distance prices come
down ...Source: ITU Asia-Pacific Telecommunication Indicators, 1997.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Jan-88
Jul-88
Jul-89
Nov-90
Oct-91
Feb-92
Sep-93
Jun-94
Aug-95
Dec-96
01-Nov-97
11-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
7
28
43
5858
74
444455
95 96 97 98 99 00
Swiss call prices. US cents per minute.
Source: ITU.
Call to USA
Local call
0
2
4
6
8
10
12
1990 1991 1992 1993 1994 1995 1996 1997
300 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.
0
2
4
6
8
10
12
14
1993 1994 1995 1996 1997 1998 1999
300 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
$0.00
$0.50
$1.00
$1.50
$2.00
90 92 94 96 98 00 02 04
Average retail price of one minute call to USA. US$
Mark-up
Settlement
Source: ITU adapted from FCC and national data (34 countries).
Forecast
Tariff rebalancing: International experience
ConclusionsIntroduction of competition requires fresh approach
to tariff strategyUnder monopoly, social-pricing or demand-based
pricing was possibleUnder competition, pricing which is not cost-
oriented will be rapidly underminedMarket-driven pricing means understanding
customer requirementsTariff rebalancing should be gradual, but the best
time to start was yesterday