The following is a Guest Post submitted by Roland Renner.
UBB for Internet Access – The Need for Cost Analysis, Technology Considerations and Service Definitions
The first reaction of many people to the idea of usage based billing is intuitively positive. People should pay for what they use. This seems perfectly fair and reasonable. Specific implementations, however, require cost analysis, and a hard look at technology choices and service definitions. Only then is it possible to determine if a UBB scheme will help to use resources effectively.
Network services like power and telecoms are provisioned for peak usage. Customers who require service at the peak times are therefore responsible for the highest cost. It is usage at the system peak that is the key cost driver of capacity requirements, not just usage alone. Specific applications of usage based billing, however, do not necessarily reflect the underlying cost drivers.
Another key factor to consider is the time horizon and the technology environment. Are we dealing with the short term or over several years when we need to consider replacement of current plant? Are we dealing in a technologically stable environment or one of rapid change?
Consider the City of Ottawa water utility that explained that a price increase was needed because consumers had responded so well to their UBB implementation that the decline in water usage had reduced their revenues. For water utilities, most costs are typically capital costs, fixed for a period of many years. The variable operating costs are comparatively small so the reduction in water use did not have a big impact on the cost of providing the service. In the longer term, five, ten or twenty years, the UBB plan will reduce or delay the need for additional capacity but this has no impact on the immediate revenue result.
Moving back to the telecom world, long distance calls used to be priced by distance, length of the call, time of day and day of week – classic UBB. Now it is sold in blocks of all you want anywhere in Canada, and sometimes the US as well, for $20 per month. Why did pricing for long distance services change away from UBB? The technology changed. The cost of a long distance call is now very small and it is no longer distance sensitive.
Competitive resellers introduced these new long distance service packages, not the incumbents. In a semi-competitive market, the incumbents were able to hold on to their traditional pricing models long after the underlying technology and cost justification had ceased to exist and only gradually moved their pricing into line with the service definitions first adopted by new entrant resellers. While UBB is appropriate where it reflects the underlying technology and cost structures and helps to use resources effectively, changes in technology can upset pricing practices that had been effective for many years.
In video distribution (cable & satellite services) the customer has paid according to the number of channels that can be accessed, starting with a basic package and then adding additional groups of channels and single selections. This service model is now being challenged by Internet video distribution. For many people, it is already more convenient and more cost effective to watch their favourite programs over the net. Losing these cable subscribers will have an increasing impact on cable revenues.
Some households that once subscribed to a landline phone with long distance package, cable service, Internet access and a mobile phone will now want only Internet access and a mobile phone or two. The potential revenue difference is immediately apparent under existing pricing, especially when margins in the mobile sector are being squeezed from newly licensed competition.
The customers watching Internet video are using more GB per month. Most residential subscribers probably still use only 5 GB to10 GB in a month if they don’t download much video. Pricing plans often allowed for much higher maximum downloads such as 60 GB per month. Families downloading lots of video will now use that amount, it’s no longer a rare exception. New UBB plans have maximums of 20 GB with additional charges for extra usage. Use more, pay more. Sounds reasonable at first. Based on the considerations above, however, the following questions are also reasonable:
If usage measured in GB per month is so important, why are traditional cable television services still offered on the basis of the number of channels to which a subscriber has access? Why is the cable subscriber not billed according to the GB consumed monthly?
What are the underlying cost drivers and where and when in the network is the congestion or peak caused by Internet video users? Does the UBB pricing model reflect the cost drivers? Why no off-peak discounts?
Are there technology options that, over the medium and longer term, can eliminate or reduce congestion in the last mile delivery to households? Is fibre to the home (FTTH) becoming increasingly viable? What about other delivery technologies?
Is this UBB application designed instead to slow down adoption of the new service model and protect the existing revenue base? Is protecting the traditional revenue base consistent with timely development of new services?
How should services be re-defined in light of emerging technologies and cost structures? Can other organizations, private sector, co-ops or public sector, effectively provision next generation local distribution plant competing with cable and telephone companies? Does this require changes to interconnection policies?
What is being done elsewhere in the world and what are the consequences of falling behind?About the Author Roland Renner is a consultant with thirty years experience in the telecommunications and broadcasting industries. He began his career working on costing methodology in telecommunications with Bell Canada at the beginning of the transition towards a more competitive environment. He has also held senior positions with Telesat Canada and has been a consultant for PricewaterhouseCoopers Consulting (PwC Consulting), and Nordicity Group. He lives in Ottawa where he is actively involved in sports administration for Rugby and still plays the occasional game in the over 40’s division.