How Broadband pricing really works...

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Jughead

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#26941 7-Oct-2008 23:24

I wanted to start a discussion on broadband pricing...In particular broadband pricing and wholesale pricing.

Ive heard a lot of crowing from Voda and ocron recently about how they 'lead the market' in broadband pricing. I wanted to share with you how they do that.

Basically Telecom lives (and dies) by an equivalency obligation. What this means is that not matter what price they set their retail broadband at they need to take a set amount off that (the margin is agreed upon by T/com and the commerce commission) and offer that as a whole sale product to voda, orcon, telstra etc etc.

When the wholesale customer gets that broadband product at wholesale they can then set their own retail price. A good tactic for the likes of voda would be to find the telecom retail price...find out what they pay wholesale and set their own retail price in the middle.

They get to undercut T/com and still make a margin.

Now here is the fun part...voda start to gain market share by undercutting the incumbant so after awhile telecom has to lower their retail price to compete...and here is the clincher... telecom then has to lower their wholesale price as well!

It works out great for the likes of voda because they get to undercut telecom AND keep the same margin they had.

Oh but wait there's more, this concept of equivalency not only applies to price it also applies to promotions and give aways. past a certain cost of sale point Telecom has to pass on promo's to its competitors, that's why all the players offer a free modem and free connection for instance.

Oh but voda don't stop there!

I read earlier this year that when voda launched into wholesale landlines/broadband they actuality started with a 'loss leading' offer. What that means is that they sold the package below the telecom wholesale price and were losing money for every customer they signed up. It's not something you can do for long but its a great way to get market share....

Oh and because their offer was so cheap they pulled a whole heap of customers away from Telecom and Telecom had to lower their price. What other industry could you sell a product for below its cost and then make your competitor pay for it!

So really Telecom only has a few tools it can use to set it self apart from it's competitors and price is not one of them. They only really have their customer service and the premium services.

You know I could say more on the rights and wrongs of this but I'll let the discussion start...

PS
before we get started, I am no lawyer so forgive me If I miss the details but I think I got the basics about right..

Any views expressed here are my own and do not necessarily represent the views of my employer Telecom NZ

NonprayingMantis

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#169813 8-Oct-2008 10:44

Yeah you go the basics right (at least, as far as I understand them), except I don’t remember the last time that Telecom reduced the retail price of their standard plan* in response to voda (or anyone else) dropping their price.

I think it is ironic that the very thing many people complain about Telecom causing (expensive broadband) is something that seems to me to be basically caused by the government setting wholesale prices the way they do (in recent times at least).
Before you commence with your flaming let me explain. By forcing Telecom to set their wholesale price using a ‘retail minus’ mechanism, it acts as an incentive for Telecom as a whole to maintain high price points.
(as you say, why would Telecom drop their retail price knowing that they have to pass on equal savings to their wholesale customers, cancelling out any gain they might make. It makes much more sense from their point of view to keep prices high and even though you lose retail market share, as long as the customers go to a wholesale connection you make more money in wholesale)

If the wholesale price was regulated to be ‘cost plus’ rather than ‘retail minus’, then it would transfer the profit making to retail rather than wholesale. Telecom retail could compete on price more effectively, making other ISPs also compete more effectively and so NZ wins overall.

(*Also, I understand that the wholesale price is set at the basic plan level (around $28 IIRC). This means that these arguments only apply to the low end users where margin is very tight i.e. on a 30 or 40 dollar plan. Where plans are, say, $60+ then the wholesale cost is still the same ($28) so it is up to the individual ISP to set pricing at whatever they feel is appropriate. This means that the recent plan changes by Telecom will not affect the wholesale price.)

sbiddle

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#169815 8-Oct-2008 10:54

Jughead:

Now here is the fun part...voda start to gain market share by undercutting the incumbant so after awhile telecom has to lower their retail price to compete...and here is the clincher... telecom then has to lower their wholesale price as well!

I'm not taking a side here but I do find it interesting that you (and many others) have applauded both VF and other carriers for doing this and yet if Telecom tried to sell a product at a loss they would have other telcos complaining and probably find themselves sitting in court facing a commerce commission inquiry. Is this really fair?

VFNZPaulBrislen

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#169817 8-Oct-2008 11:02

Can I also point out that Telecom's wholesale price isn't based on one retail product less a margin but the average across the suite of broadband offers, less a margin. I believe this is based on the dollars divided by the number of products on offer rather than weighted for the most popular plans, but I'm not 100% on this.

So Telecom can keep on expensive plan on the books at all times, thus lifting the average all the while selling a plan that is most popular and yet below the "wholesale" price it offers that same plan to the competitors.

In effect, Telecom is selling a retail product for less than it offers that product by wholesale.

As I understand it.

Cheers

Paul (not posting as an official Vodafone comment, just adding to the understanding of how it all works).

Paul Brislen
Head of Corporate Communications
Vodafone

http://forum.vodafone.co.nz

JoeBloggs

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#169835 8-Oct-2008 12:24

Jughead

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#169841 8-Oct-2008 12:40

Telecom has grabbed the NZ public by the short and curlys and squeezed since they first purchased our telephone lines. They were and still are the main reason our telco industry is in the state it is. Most people here know this and have no sympathy. As Paul says, they possibly maintain a high pricing plan now just to continue to screw the public over.

Looking at thier current plans they range from 29 dollars up to 97 dollars for thier new business plan. If they were trying the push up the average with a higher plan I would expect to see a much higher plan sitting on the shelf...

As for this 'get what they deserve' attitude I wonder if people have throught through the consequences of that.... If New Zealands biggest tax payer, largest investor and employer of 6000+ people were to fail who would benfit? I put it to you that it wont be joe customer...It's likely to be a few very rich people far from our shores.

The likes of Voda and Telstra have done very well into fooling us that they are the little guy taking on the big nasty corporate when in reality they are both many times bigger than Telecom.

In fact I think Voda has used this stratgey in every market they have gone into and from memory the only place that wasnt fooled was Japan, I'm guessing they are slighty more nationalistic over there.

Any views expressed here are my own and do not necessarily represent the views of my employer Telecom NZ

JoeBloggs

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#169908 8-Oct-2008 16:27

I don't think you need to worry about poor Telecom. They made, what, $3 billion last year? They most certainly need to improve in many places but this complacency has been fostered by a monopoly that's slowly crumbling around them.

Also since when did Vodafone NZ and Telstra NZ become bigger than Telecom NZ? (I assume you weren't referring to their respective international organisations because that would be stupid as they are run independently).

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Jughead

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#169940 8-Oct-2008 18:03

indepdant you say? I'm yet to see a Vodafone New Zealand balance sheet...

Any views expressed here are my own and do not necessarily represent the views of my employer Telecom NZ

JoeBloggs

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#169951 8-Oct-2008 18:44

For the record, Vodafone at least, is independent. The Voda Corp has a large shareholder stake, though this makes no difference to their respective local economic decisions or scenarios such as this.

To be honest, if Vodafone were given Telecom's carte blanche free reign of our telecomunications industry a couple decades ago, they would have done the same thing (if they even had a presence in NZ). However it wasn't Vodafone, but Telecom - that means I'm allowed to be mad at them.

NonprayingMantis

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#169975 8-Oct-2008 20:42

PaulBrislen: Can I also point out that Telecom's wholesale price isn't based on one retail product less a margin but the average across the suite of broadband offers, less a margin. I believe this is based on the dollars divided by the number of products on offer rather than weighted for the most popular plans, but I'm not 100% on this.

So Telecom can keep on expensive plan on the books at all times, thus lifting the average all the while selling a plan that is most popular and yet below the "wholesale" price it offers that same plan to the competitors.

In effect, Telecom is selling a retail product for less than it offers that product by wholesale.

As I understand it.

Cheers

Paul (not posting as an official Vodafone comment, just adding to the understanding of how it all works).

no that is incorrect.
To add to my post before, the wholesale price is around $28 per connection and that is regardless of the plan datacap or bandwidth. It is certianly not an 'average' (or it would obviously be much higher since their cheapest plan is $29.95, and Go, their most popular plan by far is $39.95)

The ISP pays it's $28 for BUBA, and then chooses exactly how much data and bandwidth the customer gets (of course they pay someone (not Telecom wholesale) for the data they use too, but that is seperate)

So when any ISP, including Telecom Retail, signs someone up to a $30 plan (and probably a $40 on too) they make no, or very little, money per month on that customer for their broadband (don't forget there are many other costs than simply wholesale price). The way they make a profit is by a) upselling to a higher datacap, and/or b) bundling calling products too.

NonprayingMantis

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#169977 8-Oct-2008 20:48

JoeBloggs: I don't think you need to worry about poor Telecom. They made, what, $3 billion last year? They most certainly need to improve in many places but this complacency has been fostered by a monopoly that's slowly crumbling around them.

Also since when did Vodafone NZ and Telstra NZ become bigger than Telecom NZ? (I assume you weren't referring to their respective international organisations because that would be stupid as they are run independently).

what makes you think theyare run independently? I'd appreciate a link ro something because I always understood they had the benefits of vodafone group's backing i.e. bulk buying of handsets; offering essentially the same product range as voda worldwide; sharing a lot of advertising, and so on.

nzbnw

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#169979 8-Oct-2008 20:52

I'm with the OP, and with operational separation I think it's time this was revisited.

It's also worth noting very few (if any) Wholesale customers resell WBS, they all go for UBS and supply their own bandwidth. Hardly fair now is it?

WBS with operational separation, IMHO if it hasn’t already should be dropped, as retail and wholesale should not be communicating with this regard to best encourage competition, otherwise Telecom Retail and reliant on WBS (although retail versions of the plans).

nzbnw

EDIT: Some of you (and it's just not people on GZ, but New Zealanders in general) need to come back down to earth, Telecom is by New Zealand standards a large company, but by International standards, not that big at all. Telstra I believe is about 4-5 times larger (perhaps more) than Telecom. Imagine Vodafone now. Kiwi's like to back the underdog, but the underdog in the International sense is Telecom, although not domestically.

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JoeBloggs

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#170123 9-Oct-2008 12:43

I'm sorry Mantis, not everything is freely available on Google. You'll just have to take my word - or not.

You're correct in that VF NZ is offered certain special deals because of their overseas counterparts but this is very rare. Occasionally VF NZ will purchase handsets from another international VF as well but this is brokered in a fair way (no mates rates). If they want to purchase 10,000 units of Nokia 6121's, they pay for the shipment themselves. If anything, having the large Voda Corp breathing down their necks is a hindrance. For instance, the new MusicStation service seriously cuts into their Live music sales but VF NZ was strongly urged to partake in the worldwide launch. They were offered logo's and advertising rights to certain pictures but that's nowhere NEAR a fair tradeoff in lost profits.

If you think Telecom isn't offered even better deals you're also mistaken.

NonprayingMantis

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#170320 10-Oct-2008 00:22

JoeBloggs: I'm sorry Mantis, not everything is freely available on Google. You'll just have to take my word - or not.

You're correct in that VF NZ is offered certain special deals because of their overseas counterparts but this is very rare. Occasionally VF NZ will purchase handsets from another international VF as well but this is brokered in a fair way (no mates rates). If they want to purchase 10,000 units of Nokia 6121's, they pay for the shipment themselves. If anything, having the large Voda Corp breathing down their necks is a hindrance. For instance, the new MusicStation service seriously cuts into their Live music sales but VF NZ was strongly urged to partake in the worldwide launch. They were offered logo's and advertising rights to certain pictures but that's nowhere NEAR a fair tradeoff in lost profits.

If you think Telecom isn't offered even better deals you're also mistaken.

so when Vodafone NZ negotiate with, say, Nokia, to buy 10,000 Handsets of a certain model, the negotiation is done totally independantly from Vodafone Group? Group have no say in what handsets voda can (or cannot) purchase, and the price is negotiated totally seperate from the price that other Voda's around the world pay?

That seems a ridiculous way to run their business. Surely it would make far more sense from Voda's POV to leverage their bulk buy capabilities of the wider group and save money (economies of scale and all that). i.e. negotiate at a group level with Nokia for larger quantities, and then the various subsidiaries get them cheaper.

anyway, this seems to be drifting substantially off topic. Maybe I'll start another thread tomorrow.

Back to broadband pricing...

JoeBloggs

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#170416 10-Oct-2008 14:10

In a perfect market this would make sense but we're in the real world. When a handset sells well in Europe, it may flop here. As I said though, occasionally Voda UK/Aus will make a bulk purchase with a pre-purchase agreement presumption that Voda NZ will purchase X portion. This is on a per-order basis however. Of course, a wise operations manager would know when Voda UK made a purchase of 50,000 N95's and capitalise by asking Nokia for a decreased rate on OUR purchase because the production batch is already underway (the same could be said of Telecom if they had GSM handsets for sale). All quite exciting but remember when dealing on a global scale one cock-up can cost tens of millions - and jobs.

As you say, back on Topic: Telecom is evil