Broadband data-052013-digiversion


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Broadband data-052013-digiversion

  1. 1. perspective MAY 2013 TRANSPARENT BROADBAND THE POTENTIAL BENEFITS OF USAGE-BASED PRICING Enrico Lanzavecchia, Adam Hadley, Marco Labianca
  2. 2. Transparent broadband: The potential benefits of usage-based pricing Published by Value Partners Management Consulting Ltd, 16 Smith Square, 7th floor, Kings Building, London SW1P 3JJ, UK May 2013 Written by: Enrico Lanzavecchia, Adam Hadley, Marco Labianca Edited by: Cristina Goddi If you would like an electronic copy please write to: For more information on the issues raised in the report please contact: adam.hadley@ If you would like to subscribe or to be removed from our mailing list please write to: Copyright © Value Partners Management Consulting Limited All rights reserved
  3. 3. 3 CONTENTS executive summary Unfavourable market dynamics 5 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 perspective TRANSPARENT BROADBAND 22
  4. 4. 4 Our research shows that transparent usage-based pricing can often provide important benefits for the consumer by creating value-for-money through more effective pricing segmentation. perspective TRANSPARENT BROADBAND
  5. 5. 5 executive summary Throughout most of the world download caps are often used as punitive measures to keep check on excessive downloads. However, in the UK, operators such as BT and PlusNet have successfully deployed usage-based pricing by marketing packages with tiered download caps. In this perspective Value Partners argues that there may be positive conclusions to draw from introducing aspects of this alternative approach to usage-based pricing. Within the context of an industry under pressure it has never been more important for operators to find sustainable ways of maintaining revenue and striking a balance between a focus on core connectivity and content. As the demand for content and data has revolutionised the consumer’s relationship with the internet, operators need to adjust to consumer needs and expectations accordingly. Our research shows that transparent usage-based pricing can often provide important benefits for the consumer by creating value-for-money through more effective pricing segmentation. Packages that are priced according to data usage can be designed to reduce costs for the light-usage consumer and improve profitability of the high-usage consumer. Usage-based pricing may provide the potential to help the operator address a broader market and scale revenue in line with growth in content consumption. perspective TRANSPARENT BROADBAND
  6. 6. 6 Monthly ARPU* (€) of internet-only broadband packages by country and forecast 25 -0,4% 20 -2,3% -1,9% 15 -3,4% 10 2008 2009 2010 2011 Spain 2012 Portugal Note: * Not considering additional connectivity bundles (e.g. calls, TV). Source: Screen Digest Sep ‘11, Value Partners analysis. perspective TRANSPARENT BROADBAND 2013e Italy 2014e UK 2015e CAGR 2008-2012 (%)
  7. 7. 7 Unfavourable market dynamics 1 Eurostat: EU 27: Households Level of Internet access, 2011 Screen Digest: Western Europe: Broadband, narrowband & PC households (annual & forecast), 2011 2 Fixed broadband connectivity is an increasingly challenging market in the more developed regions as the household broadband penetration rate reaches its saturation point and ARPU declines slowly and steadily. In Europe as a whole broadband penetration per household is decelerating as it approaches 80%1 while ARPU has declined by a year-on-year average of 3% between 2008 and 2012, falling to just over €152 per household per month. Fixed broadband connectivity is an increasingly challenging market in the more developed regions as the household broadband penetration rate reaches its saturation point and ARPU declines slowly and steadily. perspective TRANSPARENT BROADBAND
  8. 8. 8 Challenge of monetising core connectivity The value of the typical broadband proposition is driven by core connectivity, content and bundling, and Value Added Services (VAS). The value of connectivity is usually determined by bandwidth (speed), usage restrictions, and occasionally by Quality of Service (latency, up-time, SLAs, etc.). In the days of AOL’s pre-eminence in the 1990s, the ISP was responsible for most consumer-facing innovations and controlled almost all aspects of the internet experience for the user, including the channels (Netscape browser, chatrooms, etc.) and the content itself (news articles, games, etc.). However, with an internet that has matured in terms of infrastructure, functionality, and availability of content, the role of the ISP-only operator has diminished considerably. Now most operators focus on content convergence and only tend to monetise content through bundled television with highvalue, low-margin cable, satellite, or IPTV subscriptions. Gone are the days of the ISP web portal. Now that more than a third of all UK households buy their telephony, TV, and broadband from a single operator, it is clear that, in the UK at least, triple-play packaging on its own no longer creates significant differentiation between providers. There is evidence that the triple-play packages improve customer retention and reduce churn. However some operators have become distracted by the allure of TV bundling at the cost of concentrating on the core internet offering itself. With high-speed internet and the emergence of the next generation of set-top boxes, operators are now able to deliver streamed television content through IPTV where previously only cable and satellite players could compete. BT, for example, at the cost of £738m recently acquired the rights to broadcast 38 UK football matches with the aim of creating at least two of its own sports channels, leaving Sky with the rights to the remaining 116 matches. Sports rights aside, however, traditional TV content providers or aggregators such as Sky or Virgin in the UK still maintain a competitive advantage in terms of their expertise in producing and commissioning popular content - for operators this has never been their core activity. In mature markets operators are therefore left with a fundamental business model conundrum. Content acquisition on this scale is an expensive and risky strategy that few other operators would be willing or able to emulate. perspective TRANSPARENT BROADBAND
  9. 9. 9 Our research of global broadband markets shows that almost all have value primarily driven by content and services, not speed. In Italy, Spain, and the UK, prices of broadband packages are mainly driven by services and content, whereas in other European countries like Germany and France and more advanced Asian markets, alternative infrastructure has differentiated between low and high speed offers but ARPU is still mostly driven by premium content. Unlike elsewhere in the world, in the US prices tend to be driven by download speed however there is still a premium for bundled services. Access speed has become rapidly commoditised, therefore it makes sense to develop value differentiation on the basis of other factors such as usage-based pricing. perspective TRANSPARENT BROADBAND The rationale for this general market behaviour is two-fold: firstly, by providing telephony and television content, operators can charge more for the overall package and increase ARPU – although this has an uncertain impact on underlying profitability. Secondly, throughout the history of the internet, access speed itself has become rapidly commoditised and therefore it makes sense to develop value differentiation on the basis of other factors such as usage-based pricing.
  10. 10. 10 Broadband packages available in Germany and France by price (€ / month) and download speed (Mbps) Germany C 50 € / month 60 C C C B D B 40 30 C A A 20 B B D A A B D A 3 main speed categories (<10 Mbps, 16Mbps and 50Mbps) 10 MBps 0 0 20 A B 40 C 60 80 100 D 60 50 € / month France 40 C A C C 30 A E C E A E D B B B 20 C A C C Crowded market with many players offering very similar packages at similar prices D A E 10 MBps 0 0 A 20 B C 40 D perspective TRANSPARENT BROADBAND 80 100 E Internet only Source: Company websites, Value Partners analysis. 60 Internet + calls Internet + TV Internet + Calls + TV
  11. 11. 11 Limited role of download speed in increasing ARPU In most markets analysed as part of this research it is apparent that broadband speed itself rarely drives ARPU. Instead content services typically differentiate products with some markets such as the UK also using download caps. In Germany, premium content and bundled connectivity are important drivers of ARPU whereas in France download speeds are polarised between ADSL and fibre services with most services being at least triple play Due to a dependence on content services many operators are now running out of realistic ways to strategically differentiate: buying content at the scale of BT in the UK is ambitious and is uncertain to lead to success. Consumers also do not easily appreciate the scale and cost of infrastructure investment required by the operators. In Italy premium price is driven not by speed but by services and content while in Spain services and download speed drive ARPU Unlike elsewhere in the world, in the US, ARPU is mostly driven by download speed However in the UK higher ARPU is supported by a combination of introducing download caps, differentiating by speed and providing content services perspective TRANSPARENT BROADBAND
  12. 12. 12 Broadband packages available in Italy and Spain by price (€ / month) and download speed (Mbps) Italy 70 Typically, triple play commands a 20% price premium over dual play € / month 80 A D 60 A A 50 D A D D A 40 30 20 A E B A E B C A A E D D C B MBps 0 20 A B 40 C D 60 80 100 E 80 70 € / month Spain C B 60 C B 50 B 40 30 B B A C D A D Bundled connectivity and premium contents appear the main ARPU drivers in Spanish market A MBps 20 0 A 20 B C 40 60 80 100 D Internet only Source: Company websites, Value Partners analysis. perspective TRANSPARENT BROADBAND Internet + calls Internet + TV Internet + Calls + TV
  13. 13. 13 Broadband packages available in the US by price (€ / month) and download speed (Mbps) United States € / month 210 C B 160 90 B A B A C 80 A 70 C B 60 A B B A 50 Generally slow speeds compared to other countries A 40 B 30 A C MBps 20 0 A 20 B 40 60 80 100 300 C Internet only Source: Company websites, Value Partners analysis. perspective TRANSPARENT BROADBAND Internet + calls Internet + TV Internet + Calls + TV
  14. 14. 14 Broadband packages available in the UK by price (€ / month) and download speed (Mbps) United Kingdom € / month 80 Service bundling (i.e. call, video) has proved a successful approach to ARPU... E particular premium video content which has allowed Virgin Media and Sky to command superior prices C 70 60 C BT and its main competitors are focused mainly on <40 Mbps BB segment, higher speeds being historically the preserve of Virgin Media A E 50 D D B A 40 A 30 B E B A Broadband speeds in excess of 25 Mbps are only available within a dual play package A D C E Plusnet has allowed BT to serve the lower end of the market without affecting its positioning B MBps 20 0 A 20 B C 40 D Internet only 80 100 E Internet + calls Source: Company websites, Value Partners analysis. perspective TRANSPARENT BROADBAND 60 Internet + TV Internet + Calls + TV Internet + Calls + TV
  15. 15. 15 Potential of usage-based pricing Consumers intuitively understand the principle of paying for goods and services according to how much they use and operators are keen to monetise high-value content such as IPTV. Operators now need to pay attention to monetising the data and content delivery mechanism itself. At present, download caps are predominantly used negatively in order to restrict very high usage, i.e. in the US or in Germany, or are only enforced as ambiguous and often obscure “fair use” policies. Arguments for supporting such very high usage caps typically include improving collective network performance and preventing so-called “cable cutting”, or OTT television substitution, in which the broadband internet connection can substitute for cable or satellite TV. Both of these responses neglect the possibility of usage based pricing as an effective way to differentiate strategically whilst also improving price satisfaction. It is common for players to apply an implicit “fair-usage” policy that limits very high usage without the consumer being fully aware of the small print. In effect usage-based restrictions are often already in place but lack transparency and are typically used only as punitive mechanisms to degrade the consumer’s experience. perspective TRANSPARENT BROADBAND In the UK download caps are used positively to improve the consumer offering and promote strategic differentiation Unlike in the US and Europe, UK operators have successfully deployed usagebased pricing for a number of years and they continue to use this strategy to differentiate between their own packages and those of other operators. In particular Sky, BT, and PlusNet (BT’s sub-brand based in Yorkshire) use download caps as a way of generating “unlimited” premium packages for customers who require extra data for consumption of on-demand TV or other data-intensive activities. PlusNet at the time of print had download caps on all its broadband packages, with BT employing usage-based pricing on four out of seven packages, and Sky with only one. TalkTalk stopped enforcing usage caps in 2012 while Virgin Media has never placed explicit restrictions on downloads.
  16. 16. 16 Unlimited and capped packages by UK operator # of packages 13 7 5 7 10 42 100% 13 7 4 3 10 27 4 15 1 0% Unlimited* TOTAL Capped comparable packages Low-cap average (€/m) • • 31 30 23 27** Mid-cap average (€/m) • • • 37 32 34** 56 42 46 47 44 45** Unlimited* cap average (€/m) AVERAGE On average Sky, BT and Plusnet charge a premium of €18 for unlimited downloads. Note: *250GB data allowance or according to “fair use policy”; **average excluding Virgin Media and TalkTalk. Source: Company websites, Value Partners analysis. perspective TRANSPARENT BROADBAND
  17. 17. 17 As explored by Andrew Odlyzko in “Know your limits”, May 2012 3 Rationale for building new packages with download caps Most global operators either enforce a de facto download cap through “fairusage” restrictions on “unlimited” packages or have introduced more transparent pricing models as in the UK. There could be numerous positive outcomes for the consumer if operators followed the UK’s lead by introducing more effective customer segmentation. Firstly the operator would be able to attract a greater number of light usage consumers by lowering the price of core connectivity and by doing so operators may be able to temporarily buck the trend of slowing broadband penetration. While there will always be customers who require mobile broadband for access on the move or in remote areas, there are also those who choose mobile broadband dongles at home for their relative cost effectiveness and flexibility. Secondly, introducing new entry-level packages may reinforce the perception of value for the existing “unlimited” packages and improve ARPU stability by deliberately devaluing the more costsensitive packages. perspective TRANSPARENT BROADBAND With greater market share there is the potential for promoting paid-for content or bundled packages and monetising pay-as-you-go data consumption. Many consumers also often recognise an “insurance premium”3 for “unlimited” packages in order to secure peace of mind that they will not be penalised for going over the data threshold. This means that it may be easier to upsell the consumer onto high value packages that provide greater download capacity. In the UK players such as PlusNet and BT employ the usage cap as a way of improving customer segmentation. Our analysis shows that on average Sky, BT, and PlusNet charge a premium of €18 for unlimited downloads suggesting that these operators attempt to capitalise from broad customer segmentation. PlusNet, for example, is usually positioned to appeal to the more cost-aware with its cheapest package at €23 p/m, however its high-value package at €44 is also competitive with the top offerings by its competitors.
  18. 18. 18 Core principles and potential challenges of usage-based pricing • Recognise that many operators already have ambiguous usage caps and bandwidth management policies in place that potentially degrade Quality of Service (QOS) and may diminish value perception; • Improve customer segmentation to make broadband more accessible to a greater market; • Assert that “those who use the least, pay the least” such that light users don’t subsidise the heavy users; • Introduce greater transparency in implementing usage-based packages combined with developing effective tools to help the consumer manage and track their data usage; As with all consumer communication, simplicity is crucial. Effective communication and education about the positive trade-off for consumers will form an important part of making the strategy a success. perspective TRANSPARENT BROADBAND • Concentrate on QOS and promote broadband connectivity as a versatile, rich content delivery platform. • Manage potential conflict of interest between selling media packages that require data and selling data packages themselves
  19. 19. 19 As with all consumer communication simplicity is crucial. Effective communication and education about the positive trade-off for consumers will form an important part of making the strategy a success. Throughout the communication process the consumer should be made fully aware that usage-based pricing is a positive development with fairness and improved Quality of Service the priority. Depending on the exact configuration of the pricing schemes some customers are likely to save while heavier users would be expected to pay according to consumption or upgrade to higher capacity “unlimited” packages. perspective TRANSPARENT BROADBAND Careful positioning is required to ensure that new usage-based packages do not directly cannibalise existing “unlimited” broadband value propositions. In the short term some cannibalisation may occur despite best efforts. However in the medium-term there is the possibility of capturing the growing opportunity provided by content and associated VAS.
  20. 20. 20 Further guidelines to implementation “’You’re capped!’ Understanding the effects of bandwidth caps on broadband use in the home”, Georgia Institute of Technology 3 In addition to clear communication, the operator should develop effective tools to help the user manage data consumption and upgrade their backend to be able to support a billing platform capable of tracking data usage on a percustomer basis. According to a study by the Georgia Institute of Technology4 operators should also bear the following three points in mind when considering implementing usage-based pricing tiers: Invisible balances Many respondents to the focus groups felt that it was sometimes difficult to understand and track data usage throughout the month since some providers have limited or hard-to-use tools that require users to login and have very little detail or insight into usage trends. Some services also fail to explain properly why internet connectivity has been cut, e.g. in South Africa where international traffic has different rules from access to local website content. Mysterious processes Some consumers have difficulty in identifying data-intensive applications and can consequently find it confusing when trying to limit download usage. As well as the challenge of understanding which programs use internet services on the home computer, many respondents experienced some misunderstandings of the relative size of content, i.e. the number of videos they could watch before going over the download threshold implying that “data” is often seen as too abstract to quantify accurately. “Participants did not appear to understand that YouTube or streamed audio used up significantly more bandwidth relative to web pages [as there was no wait in content delivery].” Multiple users Unlike mobile phones, internet connections are used by multiple users and across different platforms such as PCs, laptops, smartphones, tablets and e-readers, which could cause difficulties in tracking usage accurately. This is not an insurmountable problem and could be overcome with the use of bandwidth allocation software by the person paying the operator bill. However there may be some privacy concerns about the tracking involved with this and about who has access to potentially sensitive information. “Some parents loved the idea of being able to both limit and monitor their children’s internet usage... and distribute the bandwidth like an allowance, helping their children manage their time, or using it as a disciplinary tool.” perspective TRANSPARENT BROADBAND
  21. 21. 21 conclusion In this perspective Value Partners argues that there are some positive reasons for adopting a more robust approach to usage-based pricing. Without doubt operators are under pressure and run the risk of long-term, irreversible decline without significant adaptation. Therefore in this challenging climate all sensible strategies should be objectively evaluated according to their merits and risks. As with any business model evolution there are potential downsides for the operator but, as a long-term strategy, employing usage-based pricing may be a constructive way of capitalising on the forecasted growth of internet data and content consumption. Adopting usage-based pricing is just one way of achieving sustainability, but some sort of major business model readjustment may be crucial to secure continued investment in the telecommunications infrastructure that is so fundamental for worldwide economic development. perspective TRANSPARENT BROADBAND
  22. 22. 22 AUTHORS enrico lanzavecchia Director, London Office adam hadley Associate, London Office marco labianca Business Analyst, London Office perspective TRANSPARENT BROADBAND
  23. 23. 23 About Value Partners Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. Founded in Milan in 1993, Value Partners’ rapid growth testifies to the value it has created for clients over time. Today it draws on 25 partners and 280 professionals from 23 nations, working out of offices in Milan, London, Istanbul, São Paulo, Buenos Aires, Beijing, Shanghai, Hong Kong and Singapore. In 2007 Value Partners acquired Spectrum Strategy Consultants – a leading UK company specialized in publishing, broadcasting, entertainment, IPTV and mobile – thus further strengthening its international presence. Today Value Partners is a leading advisor in the telecom, media and technology sectors worldwide. For more information on the issues raised in this note please contact the authors. Find all the contact details on Milan London Istanbul São Paulo Buenos Aires Beijing Shanghai Hong Kong Singapore Value Partners has built a portfolio of more than 350 international clients from the original 10 in 1993 with a worldwide revenue mix. Value Partners combines methodological approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunications, new media, financial services, energy, manufacturing and hi-tech. Copyright © Value Partners Management Consulting Limited All rights reserved perspective TRANSPARENT BROADBAND