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.
1

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 eircoms 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.

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

Migration Voice Services

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?
- need actual prices in the draft decision (precedent: LLU, LS)

Is 6 months notice of final prices required, 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

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.

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

EU 2010/572
Where ex ante price regulation is applied, wholesale bitstream Plus access prices should be derived by means of cost-orientation. NRAs could use other appropriate price control methodologies including, e.g. retail-minus, where there are sufficient competitive constraints on the downstream retail arm of the SMP operator. 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 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, and only if such schemes do not have discriminatory or exclusionary effect.

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 retail price 2. D1/06 (as amended, e.g.

Retail minus ceiling

Wholesale Cost Floor

08/102) rules applied to calculate ceiling for bitstream

Traffic DSLAM @ MDF LS Faults LS Rental

3. Rules from 10/108 draft

10/108 WBA Floor

decision applied to calculate cost floor

4. Eircom sets wholesale

WLR 18.02

price at a level above floor and below ceiling

LLU NGB
7

WLR NGB

D1/06 Price Control: Table 1

08/12

10/05

ComReg 10/108: WBA

Model under review;

may change before final decision

Port price for Bitstream

based on LS Includes LS rental, faults

Large complex model behind these figures. Outputs heavily dependent on volume forecasts Per Mbps costs depend on throughput (based on recent trend in observed usage)
9

Retail / Wholesale Relationships

Already set for LLU, 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

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

Migration Voice Services Next Steps

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

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, Mobile (3G/LTE)? Mix of FTTC, FTTH planned is known, 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 +/- 10 Take up varies from 10% to 90% Unit cost per customer is between 100 and 1100

13

Preferred Approach for setting Wholesale Prices for NGA

Insufficient time for root and branch review (of DCF/retail, LLU copper loops etc.) 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, 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. Wholesale prices will not move automatically when eircom retail prices move, as happens for e.g. 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

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

Migration Voice Services Next steps

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; % 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- 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

Cost stacks for Stand alone bitstream Plus: Key Changes for NGA (boxes not to scale)
Different Modem cost; % 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 12.41 SLU 10.53

Needs some more work: but cost/take-up uncertain

SA - NGB
17

SA- FTTC NGA

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

Migration Voice Services Next Steps

Commercial Pricing Principles

Iris Henseler-Unger (BNetzA): The problem is that (German) consumers do not want to pay more for new infrastructure (BEREC Inauguration, 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- Bitstream Plus

19

Price Structure: Complexity and Level

Already set for LLU, SLU (can tweak if required
Can work out using WBA model (retail minus and cost floor limits, adjusted); flex for VULA, WL

Fixed Target Prices: set by CWTP; 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

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

Migration Voice Services Next Steps

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

Scale and Risk EU 2010/572

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

23

Scale and Risk -1

EU Recommendation may constrain options Strictly cost oriented prices may reflect risk and scale economies: Specific costs per cabinet, per MDF etc. 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

One-off and Recurring Charges

WBA cost floor model: 3 year average charge 5.22 per month 0.77 LS recurring element ~ 0.50 Faults element* ~ 1.00 Co-location rental etc.* ~ 3.00 is for capex recovery: this is actually a one-off cost* Alternative 1: ~2.22 recurring, plus NPV of 3 pm over life

But capex is not incurred for each customer individually Investment is lumpy: differs per cabinet/MDF; part fixed, part scale dependent Alternative 2: ~1.22 recurring, plus NPV of 4 pm over life

Upfront charges might be scalable? * eircom estimates

25

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

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

Migration Voice Services Next Steps

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

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

Migration Voice Services Next Steps

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

30

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

Migration Voice Services Next Steps