perspective TRANSPARENT BROADBAND3 executive summary 5 Unfavourable market dynamics 7 Challenge of monetising core connectivity 8 Limited role of download speed in increasing ARPU 11 Potential of usage-based pricing 15 Core principles and potential challenges of usage-based pricing 18 Further guidelines to implementation 20 Conclusion 21 authors 22 CONTENTS
perspective TRANSPARENT BROADBAND4Our research shows thattransparent usage-based pricingcan often provide importantbenefits for the consumerby creating value-for-moneythrough more effective pricingsegmentation.
perspective TRANSPARENT BROADBAND5Throughout most of the world download caps areoften used as punitive measures to keep check onexcessive downloads. However, in the UK, operatorssuch as BT and PlusNet have successfully deployedusage-based pricing by marketing packages withtiered download caps. In this perspective ValuePartners argues that there may be positiveconclusions to draw from introducing aspects ofthis alternative approach to usage-based pricing.Within the context of an industry under pressureit has never been more important for operatorsto find sustainable ways of maintaining revenueand striking a balance between a focuson core connectivity and content. As the demandfor content and data has revolutionised theconsumer’s relationship with the internet,operators need to adjust to consumer needs andexpectations accordingly.Our research shows that transparent usage-basedpricing can often provide important benefits forthe consumer by creating value-for-money throughmore effective pricing segmentation. Packages thatare priced according to data usage can be designedto reduce costs for the light-usage consumerand improve profitability of the high-usageconsumer. Usage-based pricing may provide thepotential to help the operator address a broadermarket and scale revenue in line with growthin content consumption.executive summary
perspective TRANSPARENT BROADBAND6Monthly ARPU* (€) of internet-only broadband packagesby country and forecastCAGR 2008-2012 (%)-0,4%-2,3%-1,9%-3,4%Note: * Not considering additional connectivity bundles (e.g. calls, TV).Source: Screen Digest Sep ‘11, Value Partners analysis.201525102008 2009 2010 2011 2012 2013e 2014e 2015eItalySpain UKPortugal
perspective TRANSPARENT BROADBAND7Unfavourablemarket dynamicsFixed broadband connectivityis an increasingly challengingmarket in the more developedregions as the householdbroadband penetration ratereaches its saturation pointand ARPU declines slowly andsteadily.Fixed broadband connectivity is anincreasingly challenging market inthe more developed regions as thehousehold broadband penetration ratereaches its saturation point and ARPUdeclines slowly and steadily.In Europe as a whole broadbandpenetration per household is decelerat-ing as it approaches 80%1while ARPUhas declined by a year-on-year averageof 3% between 2008 and 2012, fallingto just over €152per householdper month.1Eurostat: EU 27: Households -Level of Internet access, 20112Screen Digest: Western Europe:Broadband, narrowband & PChouseholds (annual & forecast),2011
perspective TRANSPARENT BROADBAND8The value of the typical broadbandproposition is driven by core connectiv-ity, content and bundling, and ValueAdded Services (VAS). The value ofconnectivity is usually determined bybandwidth (speed), usage restrictions,and occasionally by Quality of Service(latency, up-time, SLAs, etc.).In the days of AOL’s pre-eminence inthe 1990s, the ISP was responsible formost consumer-facing innovations andcontrolled almost all aspects of theinternet experience for the user, includ-ing the channels (Netscape browser,chatrooms, etc.) and the content itself(news articles, games, etc.).However, with an internet that hasmatured in terms of infrastructure,functionality, and availability of content,the role of the ISP-only operator hasdiminished considerably. Now most op-erators focus on content convergenceand only tend to monetise contentthrough bundled television with high-value, low-margin cable, satellite, orIPTV subscriptions. Gone are the days ofthe ISP web portal.Now that more than a third of all UKhouseholds buy their telephony, TV,and broadband from a single opera-tor, it is clear that, in the UK at least,triple-play packaging on its own nolonger creates significant differentiationbetween providers. There is evidencethat the triple-play packages improvecustomer retention and reduce churn.However some operators have becomedistracted by the allure of TV bundlingat the cost of concentrating on the coreinternet offering itself.With high-speed internet and the emer-gence of the next generation of set-topboxes, operators are now able to deliverstreamed television content throughIPTV where previously only cable andsatellite players could compete. BT, forexample, at the cost of £738m recentlyacquired the rights to broadcast 38 UKfootball matches with the aim of creat-ing at least two of its own sports chan-nels, leaving Sky with the rights to theremaining 116 matches. Sports rightsaside, however, traditional TV contentproviders or aggregators such as Sky orVirgin in the UK still maintain a competi-tive advantage in terms of their exper-tise in producing and commissioningpopular content - for operators this hasnever been their core activity.In mature markets operators are there-fore left with a fundamental businessmodel conundrum. Content acquisitionon this scale is an expensive and riskystrategy that few other operators wouldbe willing or able to emulate.Challengeof monetising coreconnectivity
perspective TRANSPARENT BROADBAND9Our research of global broadbandmarkets shows that almost all havevalue primarily driven by contentand services, not speed.In Italy, Spain, and the UK, pricesof broadband packages are mainlydriven by services and content,whereas in other European countrieslike Germany and France and moreadvanced Asian markets, alternativeinfrastructure has differentiatedbetween low and high speed offersbut ARPU is still mostly drivenby premium content. Unlike elsewherein the world, in the US prices tendto be driven by download speedhowever there is still a premium forbundled services.Access speed has becomerapidly commoditised,therefore it makes senseto develop valuedifferentiation on the basisof other factors suchas usage-based pricing.The rationale for this general marketbehaviour is two-fold: firstly, by provid-ing telephony and television content,operators can charge more for theoverall package and increase ARPU –although this has an uncertain impacton underlying profitability.Secondly, throughout the historyof the internet, access speed itself hasbecome rapidly commoditisedand therefore it makes sense to developvalue differentiation on the basisof other factors such as usage-basedpricing.
perspective TRANSPARENT BROADBAND10€/month€/monthMBpsMBps202040405050606001030Internet only Internet + calls Internet + TV Internet + Calls + TVDB010002020404060608080100100Broadband packages available in Germany and Franceby price (€ / month) and download speed (Mbps)AABBCCCCCCCAAABBDD30GermanyA B C DFranceA B C D ESource: Company websites, Value Partners analysis.3 main speed categories(<10 Mbps, 16Mbps and 50Mbps)Crowded market with manyplayers offering very similarpackages at similar pricesCCCCCB AAAAEEEEADDBB
perspective TRANSPARENT BROADBAND11In most markets analysed as part of thisresearch it is apparent that broadbandspeed itself rarely drives ARPU. Insteadcontent services typically differentiateproducts with some markets such as theUK also using download caps.Due to a dependence on content serv-ices many operators are now runningout of realistic ways to strategicallydifferentiate: buying content at thescale of BT in the UK is ambitious and isuncertain to lead to success. Consumersalso do not easily appreciate the scaleand cost of infrastructure investmentrequired by the operators.Limited roleof download speedin increasing ARPUIn Germany, premium content and bun-dled connectivity are important driversof ARPU whereas in France downloadspeeds are polarised between ADSLand fibre services with most servicesbeing at least triple playIn Italy premium price is driven not byspeed but by services and content whilein Spain services and download speeddrive ARPUUnlike elsewhere in the world, in theUS, ARPU is mostly driven by downloadspeedHowever in the UK higher ARPU is sup-ported by a combination of introducingdownload caps, differentiating by speedand providing content services
perspective TRANSPARENT BROADBAND12€/month€/monthMBpsMBps4040606070708080202030305050Internet only Internet + calls Internet + TV Internet + Calls + TV002020404060608080100100Broadband packages available in Italy and Spainby price (€ / month) and download speed (Mbps)AAAAADDDDDDDCCDItalySpainSource: Company websites, Value Partners analysis.Typically, triple play commands a20% price premium over dual playBundled connectivity and pre-mium contents appear the mainARPU drivers in Spanish marketEBBBB BBBEA AAAAEAAABBCCDDECCCBA
perspective TRANSPARENT BROADBAND13€/monthMBps4060708090210160203050Internet only Internet + calls Internet + TV Internet + Calls + TV0 20 40 60 80 300100Broadband packages available in the USby price (€ / month) and download speed (Mbps)CCCCUnited StatesSource: Company websites, Value Partners analysis.Generally slow speeds comparedto other countriesBBBBAAAAA B CAAABBB
perspective TRANSPARENT BROADBAND14€/monthMBps40607080203050Internet + Calls + TV0 20 40 60 80 100Broadband packages available in the UKby price (€ / month) and download speed (Mbps)United KingdomSource: Company websites, Value Partners analysis.Service bundling (i.e. call,video) has proved a successfulapproach to ARPU...BT and its main competitors are focused mainlyon <40 Mbps BB segment, higher speeds beinghistorically the preserve of Virgin Media...in particular premium video contentwhich has allowed Virgin Mediaand Sky to command superior pricesPlusnet has allowed BT to servethe lower end of the market withoutaffecting its positioningBroadband speeds in excess of 25Mbps are only available within a dualplay packageBBBBDDDAAA AAA B C D EInternet only Internet + calls Internet + TV Internet + Calls + TVCCCEEEE
perspective TRANSPARENT BROADBAND15Consumers intuitively understandthe principle of paying for goods andservices according to how much theyuse and operators are keen to mon-etise high-value content such as IPTV.Operators now need to pay attentionto monetising the data and contentdelivery mechanism itself.At present, download caps are pre-dominantly used negatively in order torestrict very high usage, i.e. in the USor in Germany, or are only enforced asambiguous and often obscure “fair use”policies.Arguments for supporting such veryhigh usage caps typically include im-proving collective network performanceand preventing so-called “cable cut-ting”, or OTT television substitution, inwhich the broadband internet connec-tion can substitute for cable or satelliteTV. Both of these responses neglectthe possibility of usage based pric-ing as an effective way to differentiatestrategically whilst also improving pricesatisfaction. It is common for playersto apply an implicit “fair-usage” policythat limits very high usage without theconsumer being fully aware of the smallprint. In effect usage-based restric-tions are often already in place but lacktransparency and are typically used onlyas punitive mechanisms to degrade theconsumer’s experience.In the UK download caps are used posi-tively to improve the consumer offeringand promote strategic differentiationUnlike in the US and Europe, UK opera-tors have successfully deployed usage-based pricing for a number of years andthey continue to use this strategy to dif-ferentiate between their own packagesand those of other operators. In particu-lar Sky, BT, and PlusNet (BT’s sub-brandbased in Yorkshire) use download capsas a way of generating “unlimited”premium packages for customers whorequire extra data for consumption ofon-demand TV or other data-intensiveactivities.PlusNet at the time of print had down-load caps on all its broadband pack-ages, with BT employing usage-basedpricing on four out of seven packages,and Sky with only one. TalkTalk stoppedenforcing usage caps in 2012 whileVirgin Media has never placed explicitrestrictions on downloads.Potentialof usage-basedpricing
perspective TRANSPARENT BROADBAND16Unlimited and capped packages by UK operatorNote: *250GB data allowance or according to “fair use policy”; **average excluding Virgin Media and TalkTalk.Source: Company websites, Value Partners analysis.1356••42••46•3147373044322334**7 5 7 4213 7 4 3 27TOTAL100%0%Low-cap average (€/m)Mid-cap average (€/m)Unlimited* cap average (€/m)# of packagescomparable packagesCappedOn average Sky, BT and Plusnet charge a premium of €18 for unlimited downloads.Unlimited*14151010AVERAGE45**27**
perspective TRANSPARENT BROADBAND17Rationale for building new packageswith download capsMost global operators either enforce ade facto download cap through “fair-usage” restrictions on “unlimited” pack-ages or have introduced more transpar-ent pricing models as in the UK.There could be numerous positiveoutcomes for the consumer if operatorsfollowed the UK’s lead by introducingmore effective customer segmentation.Firstly the operator would be able toattract a greater number of light usageconsumers by lowering the price of coreconnectivity and by doing so operatorsmay be able to temporarily buck thetrend of slowing broadband penetra-tion. While there will always be custom-ers who require mobile broadband foraccess on the move or in remote areas,there are also those who choose mobilebroadband dongles at home for theirrelative cost effectiveness and flexibility.Secondly, introducing new entry-levelpackages may reinforce the perceptionof value for the existing “unlimited”packages and improve ARPU stabilityby deliberately devaluing the more cost-sensitive packages.With greater market share there is thepotential for promoting paid-for con-tent or bundled packages and monetis-ing pay-as-you-go data consumption.Many consumers also often recognisean “insurance premium”3for “unlimited”packages in order to secure peaceof mind that they will not be penalisedfor going over the data threshold.This means that it may be easierto upsell the consumer onto high valuepackages that provide greater down-load capacity.In the UK players such as PlusNetand BT employ the usage cap as a wayof improving customer segmentation.Our analysis shows that on average Sky,BT, and PlusNet charge a premium of€18 for unlimited downloads suggestingthat these operators attempt to capital-ise from broad customer segmentation.PlusNet, for example, is usually posi-tioned to appeal to the more cost-awarewith its cheapest package at €23 p/m,however its high-value package at €44is also competitive with the top offer-ings by its competitors.3As explored by Andrew Odlyzkoin “Know your limits”, May 2012
perspective TRANSPARENT BROADBAND18• Recognise that many operatorsalready have ambiguous usagecaps and bandwidth managementpolicies in place that potentiallydegrade Quality of Service (QOS)and may diminish value perception;• Improve customer segmentationto make broadband more accessibleto a greater market;• Assert that “those who use the least,pay the least” such that light usersdon’t subsidise the heavy users;• Introduce greater transparencyin implementing usage-based pack-ages combined with developingeffective tools to help the consumermanage and track their data usage;Core principles andpotential challenges ofusage-based pricingAs with all consumercommunication, simplicityis crucial. Effective com-munication and educationabout the positive trade-offfor consumers will forman important part of makingthe strategy a success.• Concentrate on QOS and promotebroadband connectivity as a versa-tile, rich content delivery platform.• Manage potential conflict of interestbetween selling media packages thatrequire data and selling data pack-ages themselves
perspective TRANSPARENT BROADBAND19As with all consumer communicationsimplicity is crucial. Effective communi-cation and education about the positivetrade-off for consumers will form animportant part of making the strategy asuccess.Throughout the communication proc-ess the consumer should be made fullyaware that usage-based pricing is apositive development with fairness andimproved Quality of Service the priority.Depending on the exact configurationof the pricing schemes some custom-ers are likely to save while heavier userswould be expected to pay accordingto consumption or upgrade to highercapacity “unlimited” packages.Careful positioning is required to ensurethat new usage-based packages do notdirectly cannibalise existing “unlimited”broadband value propositions.In the short term some cannibalisationmay occur despite best efforts.However in the medium-term there isthe possibility of capturing the growingopportunity provided by content andassociated VAS.
perspective TRANSPARENT BROADBAND203“’You’re capped!’ Understandingthe effects of bandwidth capson broadband use in the home”,Georgia Institute of TechnologyIn addition to clear communication, theoperator should develop effective toolsto help the user manage data consump-tion and upgrade their backend tobe able to support a billing platformcapable of tracking data usage on a per-customer basis. According to a studyby the Georgia Institute of Technology4operators should also bear the followingthree points in mind when consideringimplementing usage-based pricing tiers:Invisible balancesMany respondents to the focus groupsfelt that it was sometimes difficultto understand and track data usagethroughout the month since some pro-viders have limited or hard-to-use toolsthat require users to login and have verylittle detail or insight into usage trends.Some services also fail to explain prop-erly why internet connectivity has beencut, e.g. in South Africa where interna-tional traffic has different rules fromaccess to local website content.Further guidelinesto implementationMysterious processesSome consumers have difficulty in iden-tifying data-intensive applications andcan consequently find it confusing whentrying to limit download usage.As well as the challenge of understand-ing which programs use internet serviceson the home computer, many respond-ents experienced some misunderstand-ings of the relative size of content, i.e.the number of videos they could watchbefore going over the download thresh-old implying that “data” is often seen astoo abstract to quantify accurately.“Participants did not appear to under-stand that YouTube or streamed audioused up significantly more bandwidthrelative to web pages [as there wasno wait in content delivery].”Multiple usersUnlike mobile phones, internet connec-tions are used by multiple users andacross different platforms such as PCs,laptops, smartphones, tablets ande-readers, which could cause difficultiesin tracking usage accurately. This is notan insurmountable problem and couldbe overcome with the use of bandwidthallocation software by the person payingthe operator bill. However there may besome privacy concerns about the trackinginvolved with this and about who hasaccess to potentially sensitive information.“Some parents loved the idea ofbeing able to both limit and moni-tor their children’s internet usage...and distribute the bandwidth likean allowance, helping their childrenmanage their time, or using it as adisciplinary tool.”
perspective TRANSPARENT BROADBAND21In this perspective Value Partnersargues that there are some positivereasons for adopting a more robust ap-proach to usage-based pricing. Withoutdoubt operators are under pressure andrun the risk of long-term, irreversibledecline without significant adaptation.Therefore in this challenging climate allsensible strategies should be objectivelyevaluated according to their merits andrisks.As with any business model evolutionthere are potential downsides for theoperator but, as a long-term strategy,employing usage-based pricing may bea constructive way of capitalising on theforecasted growth of internet data andcontent consumption.Adopting usage-based pricing is justone way of achieving sustainability,but some sort of major business modelreadjustment may be crucial to securecontinued investment in the telecom-munications infrastructure that is sofundamental for worldwide economicdevelopment.conclusion
perspective TRANSPARENT BROADBAND22AUTHORSadam hadleyAssociate, London Officeadam.firstname.lastname@example.org lanzavecchiaDirector, London Officeenrico.email@example.com labiancaBusiness Analyst, London Officemarco.firstname.lastname@example.org