1. TRANSPARENTBROADBANDTHE POTENTIALBENEFITS OFUSAGE-BASEDPRICINGperspective MAY 2013Enrico Lanzavecchia, Adam Hadley, Marco Labianca

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Transparent broadband:The potential benefitsof usage-based pricingPublished byValue Partners Management Consulting Ltd,16 Smith Square, 7th floor,Kings Building, London SW1P 3JJ, UKMay 2013Written by:Enrico Lanzavecchia, Adam Hadley,Marco LabiancaEdited by:Cristina GoddiIf you would like an electronic copyplease write to:cristina.goddi@valuepartners.comFor more information on the issuesraised in the report please contact:adam.hadley@ valuepartners.commarco.labianca@valuepartners.comIf you would like to subscribeor to be removed from our mailing listplease write to:subscription@valuepartners.comvaluepartners.comCopyright Value PartnersManagement Consulting LimitedAll rights reserved 3. perspective TRANSPARENT BROADBAND3 executive summary 5 Unfavourable market dynamics 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 21authors 22CONTENTS 4. perspective TRANSPARENT BROADBAND4Our research shows thattransparent usage-based pricingcan often provide importantbenefits for the consumerby creating value-for-moneythrough more effective pricingsegmentation. 5. perspective TRANSPARENT BROADBAND5Throughout most of the world download caps areoften used as punitive measures to keep check onexcessive downloads. However, in the UK, operatorssuch as BT and PlusNet have successfully deployedusage-based pricing by marketing packages withtiered download caps. In this perspective ValuePartners argues that there may be positiveconclusions to draw from introducing aspects ofthis alternative approach to usage-based pricing.Within the context of an industry under pressureit has never been more important for operatorsto find sustainable ways of maintaining revenueand striking a balance between a focuson core connectivity and content. As the demandfor content and data has revolutionised theconsumers relationship with the internet,operators need to adjust to consumer needs andexpectations accordingly.Our research shows that transparent usage-basedpricing can often provide important benefits forthe consumer by creating value-for-money throughmore effective pricing segmentation. Packages thatare priced according to data usage can be designedto reduce costs for the light-usage consumerand improve profitability of the high-usageconsumer. Usage-based pricing may provide thepotential to help the operator address a broadermarket and scale revenue in line with growthin content consumption.executive summary 6. perspective TRANSPARENT BROADBAND6Monthly ARPU* () of internet-only broadband packagesby country and forecastCAGR 2008-2012 (%)-0,4%-2,3%-1,9%-3,4%Note: * Not considering additional connectivity bundles (e.g. calls, TV).Source: Screen Digest Sep 11, Value Partners analysis.201525102008 2009 2010 2011 2012 2013e 2014e 2015eItalySpain UKPortugal 7. perspective TRANSPARENT BROADBAND7Unfavourablemarket dynamicsFixed broadband connectivityis an increasingly challengingmarket in the more developedregions as the householdbroadband penetration ratereaches its saturation pointand ARPU declines slowly andsteadily.Fixed broadband connectivity is anincreasingly challenging market inthe more developed regions as thehousehold broadband penetration ratereaches its saturation point and ARPUdeclines slowly and steadily.In Europe as a whole broadbandpenetration per household is decelerat-ing as it approaches 80%1while ARPUhas declined by a year-on-year averageof 3% between 2008 and 2012, fallingto just over 152per householdper month.1Eurostat: EU 27: Households -Level of Internet access, 20112Screen Digest: Western Europe:Broadband, narrowband & PChouseholds (annual & forecast),2011 8. perspective TRANSPARENT BROADBAND8The value of the typical broadbandproposition is driven by core connectiv-ity, content and bundling, and ValueAdded Services (VAS). The value ofconnectivity is usually determined bybandwidth (speed), usage restrictions,and occasionally by Quality of Service(latency, up-time, SLAs, etc.).In the days of AOLs pre-eminence inthe 1990s, the ISP was responsible formost consumer-facing innovations andcontrolled almost all aspects of theinternet experience for the user, includ-ing the channels (Netscape browser,chatrooms, etc.) and the content itself(news articles, games, etc.).However, with an internet that hasmatured in terms of infrastructure,functionality, and availability of content,the role of the ISP-only operator hasdiminished considerably. Now most op-erators focus on content convergenceand only tend to monetise contentthrough bundled television with high-value, low-margin cable, satellite, orIPTV subscriptions. Gone are the days ofthe ISP web portal.Now that more than a third of all UKhouseholds buy their telephony, TV,and broadband from a single opera-tor, it is clear that, in the UK at least,triple-play packaging on its own nolonger creates significant differentiationbetween providers. There is evidencethat the triple-play packages improvecustomer retention and reduce churn.However some operators have becomedistracted by the allure of TV bundlingat the cost of concentrating on the coreinternet offering itself.With high-speed internet and the emer-gence of the next generation of set-topboxes, operators are now able to deliverstreamed television content throughIPTV where previously only cable andsatellite players could compete. BT, forexample, at the cost of 738m recentlyacquired the rights to broadcast 38 UKfootball matches with the aim of creat-ing at least two of its own sports chan-nels, leaving Sky with the rights to theremaining 116 matches. Sports rightsaside, however, traditional TV contentproviders or aggregators such as Sky orVirgin in the UK still maintain a competi-tive advantage in terms of their exper-tise in producing and commissioningpopular content - for operators this hasnever been their core activity.In mature markets operators are there-fore left with a fundamental businessmodel conundrum. Content acquisitionon this scale is an expensive and riskystrategy that few other operators wouldbe willing or able to emulate.Challengeof monetising coreconnectivity 9. perspective TRANSPARENT BROADBAND9Our research of global broadbandmarkets shows that almost all havevalue primarily driven by contentand services, not speed.In Italy, Spain, and the UK, pricesof broadband packages are mainlydriven by services and content,whereas in other European countrieslike Germany and France and moreadvanced Asian markets, alternativeinfrastructure has differentiatedbetween low and high speed offersbut ARPU is still mostly drivenby premium content. Unlike elsewherein the world, in the US prices tendto be driven by download speedhowever there is still a premium forbundled services.Access speed has becomerapidly commoditised,therefore it makes senseto develop valuedifferentiation on the basisof other factors suchas usage-based pricing.The rationale for this general marketbehaviour is two-fold: firstly, by provid-ing telephony and television content,operators can charge more for theoverall package and increase ARPU although this has an uncertain impacton underlying profitability.Secondly, throughout the historyof the internet, access speed itself hasbecome rapidly commoditisedand therefore it makes sense to developvalue differentiation on the basisof other factors such as usage-basedpricing. 10. perspective TRANSPARENT BROADBAND10/month/monthMBpsMBps202040405050606001030Internet only Internet + calls Internet + TV Internet + Calls + TVDB010002020404060608080100100Broadband packages available in Germany and Franceby price ( / month) and download speed (Mbps)AABBCCCCCCCAAABBDD30GermanyA B C DFranceA B C D ESource: Company websites, Value Partners analysis.3 main speed categories(