1. perspective MAY 2013TRANSPARENT BROADBAND THE POTENTIAL BENEFITS OF USAGE-BASED PRICING Enrico Lanzavecchia, Adam Hadley, Marco Labianca

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: cristina.goddi@valuepartners.com For more information on the issues raised in the report please contact: adam.hadley@ valuepartners.com marco.labianca@valuepartners.com If you would like to subscribe or to be removed from our mailing list please write to: subscription@valuepartners.com valuepartners.com Copyright Value Partners Management Consulting Limited All rights reserved 3. 3CONTENTS executive summary Unfavourable market dynamics 57 Challenge of monetising core connectivity8 Limited role of download speed in increasing ARPU 11 Potential of usage-based pricing15 Core principles and potential challenges of usage-based pricing18 Further guidelines to implementation 20 Conclusion21 authorsperspective TRANSPARENT BROADBAND22 4. 4Our 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. 5executive summaryThroughout 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 consumers 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. 6Monthly ARPU* () of internet-only broadband packages by country and forecast25 -0,4%20 -2,3%-1,9%15-3,4%10 2008200920102011Spain2012PortugalNote: * Not considering additional connectivity bundles (e.g. calls, TV). Source: Screen Digest Sep 11, Value Partners analysis.perspective TRANSPARENT BROADBAND2013eItaly2014eUK2015eCAGR 2008-2012 (%) 7. 7Unfavourable market dynamics1 Eurostat: EU 27: Households Level of Internet access, 2011Screen Digest: Western Europe: Broadband, narrowband & PC households (annual & forecast), 20112Fixed 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. 8Challenge 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 AOLs 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. 9Our 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 BROADBANDThe 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. 10Broadband packages available in Germany and France by price ( / month) and download speed (Mbps)GermanyC50 / month60C C CBD B4030 CA A20BB D A A B DA3 main speed categories (