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 – – – – – 6. 7. 8.
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Target: retail prices end customers can pay All Operators must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges

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

Migration Voice Services Next steps

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 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.

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Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. 7. avoidance of margin squeeze 2. The NGA product set .Agenda 1. Commercial Pricing Principles – – – – – 6.VUA vs. Price Control Methodologies . retail minus vs. Uncertainty – – Cost Take-Up 3. Bitstream Plus Migration Voice Services 3 .Cost plus vs. Cost Stack Comparison: NGA versus current offers 4.

need actual prices in the draft decision (precedent: LLU. before launch? • What if prices in final decision are in line with prices already indicated earlier? Final Decision (including possible adjustment of 6 month notice?) Industry Workshop 24th October ComReg Consultation and Draft Direction (not including prices?) 4 .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? . LS) • Is 6 months notice of final prices required.

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 .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.

g. 6 . where there are sufficient competitive constraints on the downstream retail arm of the SMP operator. NRAs should also assess pricing schemes proposed by the SMP operator to diversify the risk of investment. NRAs could use other appropriate price control methodologies including.EU 2010/572 • Where ex ante price regulation is applied. wholesale bitstream Plus access prices should be derived by means of cost-orientation. 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 agree to such schemes only where they are satisfied that the SMP operator has provided all relevant information related to the investment. retail-minus. and only if such schemes do not have discriminatory or exclusionary effect. e.

Price Control Methodology: Bitstream in Ireland Retail Price Modem How it works today D1/06 : DCF Model SEO Billing Marketing IP Connectivity 1. Eircom sets wholesale WLR €18.g. Rules from 10/108 draft 10/108 WBA Floor decision applied to calculate cost floor 4. D1/06 (as amended.02 price at a level above floor and below ceiling LLU NGB 7 WLR NGB . e. Retail minus ceiling Wholesale Cost Floor 08/102) rules applied to calculate ceiling for bitstream Traffic DSLAM @ MDF LS Faults LS Rental 3. Eircom sets retail price 2.

D1/06 Price Control: Table 1 08/12 10/05 8 .

Outputs heavily dependent on volume forecasts Per Mbps costs depend on throughput (based on recent trend in observed usage) 9 . may change before final decision Port price for Bitstream based on LS Includes LS rental.ComReg 10/108: WBA Model under review. faults Large complex model behind these figures.

SLU (can “tweak” if required Can work out using WBA model (retail minus and cost floor limits. adjusted) Fixed Target Prices: set by CWTP. Competit or offers Unbundled Access (LLU/SLU/UF) Virtual Unbundling Bitstream Plus White Label Retail 8Mb DSL Port 24Mb ADSL2+ Port FTTC VDSL Port FTTH Port Usage capacity Total Cost Total Revenue 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 10 .Retail / Wholesale Relationships Already set for LLU.

retail minus vs. avoidance of margin squeeze 2. 7.VUA vs. Uncertainty – – Cost Take-Up 3. Commercial Pricing Principles – – – – – 6. 11 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. Price Control Methodologies . Bitstream Plus Migration Voice Services Next Steps . Cost Stack Comparison: NGA versus current offers 4. The NGA product set .Cost plus vs.Agenda 1. 8.

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 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 .

FTTH planned is known.10 • Take up varies from 10% to 90% • Unit cost per customer is between €100 and €1100 13 .Uncertainty: Take-up 1200 Cost 100 Unit cost 1100 1000 Cost 90 Cost 110 • Take –up of NGA services depends on a range of factors – – Ultimate broadband penetration? FTTX share of penetration versus LLU. Cable. but take-up may differ 800 600 400 Unit cost 100 – 200 0 10% 20% 30% 40% 50% 60% 70% 80% 90% • If cost per premises passed is €100 +/. Mobile (3G/LTE)? Mix of FTTC.

g.Preferred Approach for setting Wholesale Prices for NGA • Insufficient time for root and branch review (of DCF/retail. minus retail costs Multiple retail products based on small set of wholesale products: model may use average retail ARPU as input Likely that ComReg will insist on prior approval for initial wholesale prices and any future changes (i.e. LLU copper loops etc. as happens for e. Wholesale prices will not move automatically when eircom retail prices move.) 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. WLR) need to ensure no margin squeeze against sub-loop/LLU – • Margin tests (between wholesale layers) will need indicative cost floors – – 14 Need to focus initial effort on differences from current generation No strict match between wholesale/retail products .

Cost Stack Comparison: NGA versus current offers 4.Agenda 1. Commercial Pricing Principles – – – – – 6. The NGA product set . Price Control Methodologies . retail minus vs. Uncertainty – – Cost Take-Up 3. 15 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. Bitstream Plus Migration Voice Services Next steps .VUA vs. 8. avoidance of margin squeeze 2. 7.Cost plus vs.

Cost stacks for bitstream Plus: BMB versus NGA (boxes not to scale) Modem Charge Modem Free Modem Billing D1/06 DCF Model Different Modem cost.Cab link LS Faults LS Rental Needs some more work: but cost/take-up uncertain WLR €18.02 WLR €18.02 WLR NGB 16 WLR NGA . % tech install Billing Marketing IP Connectivity Retail minus ceiling Marketing IP Connectivity revised throughput assumptions? Traffic DSLAM @ MDF LS Faults LS Rental Traffic Wholesale Cost Floor DSLAM @ Cabinet MDF.

% tech install Modem Billing D1/06 DCF Model Modem Billing SEO=>EEO ? Marketing IP Connectivity Retail minus ceiling Wholesale Cost Floor Traffic VDSLAM at cabinet Marketing IP Connectivity revised throughput assumptions Traffic DSLAM @ MDF LLU Faults MDF.Cab link SLU Faults LLU €12.NGB 17 SA.41 SLU €10.53 Needs some more work: but cost/take-up uncertain SA .Cost stacks for Stand alone bitstream Plus: Key Changes for NGA (boxes not to scale) Different Modem cost.FTTC NGA .

Commercial Pricing Principles – – – – – 6. Bitstream Plus Migration Voice Services Next Steps . retail minus vs. 18 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. 7. Price Control Methodologies . Uncertainty – – Cost Take-Up 3.Agenda 1. avoidance of margin squeeze 2. Cost Stack Comparison: NGA versus current offers 4.VUA vs.Cost plus vs. 8. The NGA product set .

Bitstream Plus 19 . 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 other countries Conclusion: little if any scope for retail price increases Opportunity: migrate contracted end users to new technology at constant terms (including price) – – All service providers must be able to compete No margin squeeze retail –wholesale No margin squeeze unbundled –VUA.Commercial Pricing Principles – Iris Henseler-Unger (BNetzA): The problem is that (German) consumers do not want to pay more for new infrastructure (BEREC Inauguration.

SLU (can “tweak” if required Can work out using WBA model (retail minus and cost floor limits. WL Fixed Target Prices: set by CWTP.Price Structure: Complexity and Level Already set for LLU. flex for VULA. adjusted). Competit or offers Unbundled Access (LLU/SLU/UF) Virtual Unbundling Bitstream Plus White Label Retail High Price Level Complexity MDF-National handover Low The significant difference between VUA and Bitstream Plus is the additional cost element associated with national backhaul 20 .

8. Uncertainty – – Cost Take-Up 3. The NGA product set .Agenda 1.Cost plus vs.VUA vs. Cost Stack Comparison: NGA versus current offers 4. Price Control Methodologies . retail minus vs. 7. Commercial Pricing Principles – – – – – 6. Bitstream Plus Migration Voice Services Next Steps . avoidance of margin squeeze 2. 21 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5.

Price Structures: replicating the economics of unbundling • Unbundling has fixed costs per MDF LLU bitstream • LLU recurring charges lower than Bitstream Plus • Breakeven possible in larger sites • VUA price structure should replicate cost 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? 22 .

• Annex 1: Additional mechanisms serving to allocate the investment risk between investors and access seekers and to foster market penetration could also be used.Scale and Risk – EU 2010/572 • Art 26. • Annex 1: Long term and Volume discounts (for NGA specific investments) only to the extent that these schemes reflect reduction of risk 23 . and only if such schemes do not have discriminatory or exclusionary effect. 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. such as long-term access pricing or volume discounts.

per MDF etc.Scale and Risk -1 • EU Recommendation may constrain options • Strictly cost oriented prices may reflect risk and scale economies: – – Specific costs per cabinet. 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 .

22 recurring.22 recurring.One-off and Recurring Charges • WBA cost floor model: 3 year average charge €5.50 Faults element* ~ €1.00 is for capex recovery: this is actually a one-off cost* Alternative 1: ~€2. part scale dependent Alternative 2: ~€1.* ~ €3. plus NPV of €4 pm over life • Upfront charges might be scalable? * eircom estimates 25 .77 LS recurring element ~ €0. part fixed.22 per month – – – – – €0.00 Co-location rental etc. plus NPV of €3 pm over life • But capex is not incurred for each customer individually – – Investment is lumpy: differs per cabinet/MDF.

Price Structure Complexity Unbundled Access (LLU/SLU/UF) Virtual Unbundling Bitstream Plus White Label Retail Very Complex • survey •Install •Equipment •Maintenance •Colo •Power •Significant network /fixed costs •Large sunk cost •Cost for extra sites •Very Low monthly cost for additional customer Complex • Network element •Site element •Sunk costs concept •Low cost per additional customer •QOS •Multicast Medium Complexity If eircom chose the technology (FTTC or FTTH) should prices differ or be the same? Fairly Simple • 2 or 3 part charging •Port charges •Usage charges •BECS •IP connectivity •QOS? •Multicast? •1 or two part charge •Can be more like Bitstream Plus or retail: depends on services required Simple • No or waived connection •Fixed Monthly charge with use included •Excess above high limits High 26 Complexity Low .

8. Commercial Pricing Principles – – – – – 6. 7. Cost Stack Comparison: NGA versus current offers 4. Price Control Methodologies . avoidance of margin squeeze 2. 27 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. retail minus vs. The NGA product set . Bitstream Plus Migration Voice Services Next Steps .Agenda 1. Uncertainty – – Cost Take-Up 3.VUA vs.Cost plus vs.

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 premises • Cost oriented charge for activity involved • Price structures and levels to encourage efficiency – and perhaps early adoption 28 .

VUA vs. avoidance of margin squeeze 2. 8.Agenda 1. retail minus vs. Cost Stack Comparison: NGA versus current offers 4.Cost plus vs. Uncertainty – – Cost Take-Up 3. 29 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. Commercial Pricing Principles – – – – – 6. The NGA product set . Bitstream Plus Migration Voice Services Next Steps . 7. Price Control Methodologies .

Independent of eircom actual delivery mechanism: many precedents for this). Efficient Operator (i.e.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. Price floor based on Modern Equivalent Asset. pay LS+WLR or Sub-loop separately Treat voice as a service over the Broadband connection. – 30 .

Bitstream Plus Migration Voice Services Next Steps . Price Control Methodologies . Uncertainty – – Cost Take-Up 3. Cost Stack Comparison: NGA versus current offers 4.VUA vs. The NGA product set . 31 Target: retail prices customers can pay All service providers must be able to compete replicating the economics of physical unbundling Scale v Risk Sharing Price Structures: one-off v recurring charges 5. retail minus vs. Commercial Pricing Principles – – – – – 6. avoidance of margin squeeze 2. 8. 7.Cost plus vs.Agenda 1.

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