A System Dynamics Model for
Pricing Converged Telco Services
CPRSouth 2016Zanzibar, TZ
Presenter: J. Walubengo, Sept 2016
Co-Authors Prof. T. Waema, Prof. D. Williams
[email protected], [email protected]
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Background(a)
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Pricing of Telco (Internet Access) services remains
high despite the landing of the submarine cables,
liberalization.(Waema et. al .2010)
Internet Price “NOT Affordable” based on the fact
that monthly internet rates i.e. cost of 1Mbs of
Internet Access per month is 35% of Average
incomes (ITU, 2015); It is 15%, 32%, 41% for
Ghana, Ethiopia & Senegal respectively
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Background(b)
Fixed Broadband Prices, %GNI
ITU, 2014
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Problem Definition
• How can you tell if an operator is overcharging
their Internet based services?
• How do you establish the appropriate or
optimal price for a given economy?
• It was easier for older voice-based
communication where cost of providing
services was easy to establish (cost+
approaches)
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Problem Definition
• From a regulatory policy perspective, the
pricing of Telco services has tended to focus
on the wholesale pricing that incumbent
operators would charge prospective retailers
to connect to their networks.
• The aim of the regulator has been to find a
mechanism for estimating the cost of services
for purposes of setting interconnection prices.
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Problem Definition
• Telecommunication market has in recent years
shifted away from incumbent market structures
• Regulators have to find new and appropriate
ways for estimating optimal pricing for
contemporary Telco(internet) services
• Furthermore, these Internet Service have new
properties with commercial implications: -MultiSided Market and Multi-platform aspects.
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Problem Defn (Bauer 2014)
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Symbiotic & Dynamic Relationships
(Fransman 2009)
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CONSUMERS
Relationship
Relationship
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3
Relat.
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3
2
NETWORK
OPERATORS
Relat.
PLATFORM,
CONTENT &
APPLICATIONS
PROVIDERS
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Relationship
Relationship
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1
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NETWORKED
ELEMENT
PROVIDERS
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Problem Definition
• Old regulatory tools have been revised to
match the new converged environment such
as Long Run Incremental Cost by (Casier et al.,
2009), Profitability Methodology by
(Frederiksen 2011)
• However, revised regulatory tools still
inadequate to address new internet based
telco services because they are centered on
cost-based approaches (Bauer, 2014)
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Proposed Solution
• Given the multi-sided, multi-platform nature of
Internet based services a new regulatory
framework is proposed.
• It considers a macro level approach by targeting
& maximizing selected regulatory indicators over
the long term
– Market Penetration
– Quality of Service (QoS)
– ROI, Sustainable Profit(Revenue)
• Based on the modified works of Dutta 2001,
Rouskas 2009
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Telco Operations –
System Dynamic View (Dutta 2001)
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Conceptual Framework
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Proposed Solution
• Acknowledges that the regulatory objective is
to maximize both the consumer surplus and
the telecomm provider surplus by ensuring
fair competition and universal access
(ITU,2010),
• The pricing problem is therefore redefined
into one of optimization.
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Proposed Solution
• We seek the optimal price possible, subject to
meeting regulatory objectives and parameters as
given below:
– Maximize Market Penetration:- regulatory universal
access obligation that aims to reach widest possible
number of users.
– Maximize Operational Income:-regulatory obligation
that ensures operators can sustain operations while
making reasonable returns to attract investments.
– Maximize Quality of Service:-regulatory obligation to
ensure an acceptable network quality(performance) in
order to protect users rights to reliable services.
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Proposed Solution
• Assumes that the best or optimal price is one
that delivers the best outcome on selected
regulatory targets.
• E.g. For given price X, what would be the
regulatory outcome within 10 years?
• Regulatory outcome based on the following:
– % Market Penetration
– % QoS
– Operational Income (+ve/-ve)
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Proposed Solution
• Solution models and simulates a typical Telco operation.
• Allows Regulator to simulate various parameter instances,
such as :
– Given Price X at given, time, T, what would be its impact in
the market in terms of Market Penetration, QoS and ROI
after 10years?
• Regulator Re-execute model with target optimization values
(i.e max User/Operator Surplus).
• Optimization module searches for best price within the given
search space of Service Levels & Competition Level
• The derived (optimized) price is one that delivers on the
above regulatory outcome
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Generic-Moderate Competition & Service Levels
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Findings
• Regulatory Authorities must explore new tools for price
interventions.
• A System Dynamics Pricing model is presented and simulated to
show how the optimal price for converged telco services can be
determined.
• The Optimal Price is determined to be the one that maximizes the
regulatory output –rather than one that only maximizes operator
surplus (cost-based).
• The pricing model proposes a Price search-space constrained within
regulatory indicators of Market Penetration, QoS and Operator
Profit.
• The model demonstrates the dynamic tensions between conflicting
objectives of market penetration, QoS & Profit with Price as the
moderating variable.
• Tool can be fine-tuned for specific economies and operations.
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References
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Bauer, J.M. (2014), “Platforms, systems competition, and innovation: Reassessing
the foundations of communications policy”, Telecommunications Policy, Vol. 38 No.
8-9, pp. 662–673.
Casier, K., Verbrugge, S., Ooteghem, J.V., Colle, D., Pickavet, M. and Demeester, P.
(2009), “Using cost based price calculations in a converged network”, info,Vol. 11
No. 3, pp. 6–18.
Dutta, A. (2001), “Business planning for network services: A systems thinking
approach”, Information Systems Research, Vol. 12 No. 3, pp. 260–283.
Frederiksen, J. (2011), “Broadband access, regulatory issues and profitability
analyses”, info, Vol. 13 No. 5, pp. 19–28.
Sterman, (2000) Business Dynamics: Systems Thinking and Modeling for a Complex
World, McGraw-Hill/Irwin,
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Ends
• Q&A
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