WIK-Consult  Report
Study for the Danish Business Authority
Specification of retail costs
for a Reasonably Efficient
Operator
redacted
Authors:
Peter Kroon
Stephan Jay
WIK-Consult GmbH
Rhöndorfer Str. 68
53604 Bad Honnef
Germany
Bad Honnef, 5 November 2014
I
Retail cost assessment for DBA
Contents
1 Executive Summary
1
2 Introduction
5
3 Brief introduction to retail cost categories in the Danish margin squeeze test and
available information
7
3.1 Currently applied retail costs in the Danish margin squeeze tests
7
3.2 Overview responses Danish operators in 2014 to DBA data request on retail costs
4 Results European benchmark
10
11
4.1 Benchmark approach
11
4.2 Overview of benchmarked country approaches
12
4.3 Differentiation of retail costs according to business strategy in benchmark countries
14
4.4 Collected absolute cost levels of EU countries
14
5 Analysis of collected retail costs and recommendations
17
5.1 High level comparison; current retail costs applied by DBA versus provided retail costs
from Danish operators in 2014
5.2 Detailed analysis
5.2.1 Analysis of and recommendations for one-off retail costs
17
20
20
5.2.1.1 Marketing contributions
20
5.2.1.2 Sales staff and Sales commission
22
5.2.1.3 CPE costs
24
5.2.1.4 Distribution of CPE
27
5.2.1.5 Customer activation costs
28
5.2.1.6 Order related costs
29
5.2.2 Analysis of and recommendations for recurring retail costs
30
5.2.2.1 Customer care / retention
30
5.2.2.2 Billing
32
5.2.2.3 Bad debt
33
5.2.2.4 Non-single customer specific cost
34
5.3 Summary and impact of recommended retail cost levels
6 Summary of recommendations and further conclusions
6.1 Recommended retail cost levels
37
44
44
II
Retail cost assessment for DBA
6.2 Retail costs differentiation based on retail product
45
6.3 Retail cost differentiation based on business strategy
46
6.4 Closing remarks
46
Annex I – Questionnaire
49
Annex II – Detailed responses questionnaire
58
Retail cost assessment for DBA
III
List of tables
Table 1:
Current and recommended one off retail costs – current structure
1
Table 2:
Current and recommended one off retail costs – aggregated structure
2
Table 3:
Current and recommended recurring retail costs
2
Table 4:
Overall monthly retail costs - current and recommended
3
Table 5:
Definition of retail cost categories by the DBA
7
Table 6:
One off retail costs currently applied by the DBA
9
Table 7:
Recurring retail costs currently applied by the DBA
9
Table 8:
Latest one off retail costs collected from Danish operators in 2014
10
Table 9:
Latest recurring retail costs collected from Danish operators in 2014
10
Table 10:
Overview participating NRA’s
11
Table 11:
EU country overview with key findings
12
Table 12:
Collected absolute values from EU benchmark
15
Table 13:
One off retail costs collected from Danish operators in 2014
17
Table 14:
Recurring retail costs collected from Danish operators in 2014
18
Table 15:
Indicative total retail costs based on data from Danish operators in 2014
18
Table 16:
Comparison total retail costs: current versus input Danish operators in 2014 19
Table 17:
Retail costs - currently applied and recommended levels- current structure 38
Table 18:
Retail costs - currently applied and recommended levels- aggregated structure
40
Table 19:
Recommended one off retail cost levels – current structure
44
Table 20:
Recommended one off retail costs – aggregated structure
45
Table 21:
Recommended recurring retail cost levels
45
Table 22:
Incremental retail costs per product cluster in the Netherlands
65
Table 23:
Non single customer specific costs split up in Spain
67
IV
Retail cost assessment for DBA
List of figures
Figure 1:
Total retail costs double play: recommended level versus input Danish
operators
4
Figure 2:
Input Danish operators in 2014 on marketing contributions
21
Figure 3:
Input Danish operators in 2014 on sales staff / sales commission
23
Figure 4:
Input Danish operators in 2014 on CPE costs
24
Figure 5:
Input Danish operators in 2014 on CPE distribution costs
27
Figure 6:
Input Danish operators in 2014 on customer activation costs
28
Figure 7:
Input Danish operators in 2014 on order related costs
29
Figure 8:
Input Danish operators in 2014 on customer care/retention
31
Figure 9:
Input Danish operators 2014 – billing costs
32
Figure 10:
Input Danish operators 2014 – bad debt costs
34
Figure 11:
Input Danish operators 2014 – non single customer specific costs
35
Figure 12:
Total retail costs single play: recommended level versus input Danish
operators
Figure 13:
Total retail costs double play: recommended level versus input Danish
operators
Figure 14:
41
Total retail costs double play with TV: recommended level versus input Danish
operators
Figure 15:
41
42
Total retail costs triple play: recommended level versus input Danish operators
43
1
Retail costs assessment for DBA
1
Executive Summary
The Danish Business Authority (DBA) has tasked WIK-Consult to analyse the retail cost
collected from the Danish operators and to perform a European benchmark. This has
led to recommendations on the levels of specific retail cost categories as defined by
DBA. Confidential information is highlighted. For the intended public consultation there
is a redacted version of this report.
DBA has currently set specific values for 10 different retail cost categories for single and
double play offers. These levels result in total retail costs for single play between 73
DKK per month per customer for ADSL and 99 DKK for VDSL. For double play offers
the current total retail costs are 87 DKK per month per customer for ADSL and 118 DKK
for VDSL.
The DBA also intends to differentiate not only between two product offers (single play
and double play) but between four different product offers. Therefore, WIK has recommended detailed values for the 10 different retail cost categories for the four product
offers single play, double play (broadband with voice), double play (broadband with TV
but without voice) and triple play (broadband, voice and TV).
In addition, an aggregation of the one off retail costs has been recommended. See underneath an overview of the current and recommended levels.
Table 1:
Current and recommended one off retail costs – current structure
Currently applied - one off retail costs
Recommended - one off retail costs- current structure
single play
double play
single play
double play
double play TV (new)
triple play (new)
Marketing contributions
3,43
3,43
XXX
10,0
XXX
18,0
Sales personnel
salary/sales commission
5,72
8,59
XXX
7,50
XXX
15,00
Customer premise
equipment ADSL
8,01
8,01
XXX
XXX
XXX
XXX
Customer premise
equipment VDSL
16,03
16,03
Distribution of customer
premise equipment
1,14
1,14
XXX
XXX
XXX
XXX
Customer activation
1,14
1,72
1,14
XXX
XXX
XXX
Order related costs
2,29
3,43
XXX
XXX
XXX
XXX
monthly values (DKK)
2
Retail cost assessment for DBA
Table 2:
Current and recommended one off retail costs – aggregated structure
Recommended - one off retail costs aggregated structure
Currently applied - one off retail costs
single play
double play
monthly values
(Euro)
Marketing contributions
3,43
3,43
Marketing and Sales
15,50
17,50
31,50
33,00
Sales personnel
salary/sales commission
5,72
8,59
Customer premise
equipment ADSL
8,01
8,01
Customer setup and
activation (incl CPE
and system costs)
15,94
18,10
30,10
32,70
Customer premise
equipment VDSL
16,03
16,03
Distribution of customer
premise equipment
1,14
1,14
Customer activation
1,14
1,72
Order related costs
2,29
3,43
monthly values (Euro)
Table 3:
double play
triple play
with tv
Current and recommended recurring retail costs
Current values - recurring retail costs
monthly values (DKK)
single play double play
Recommended - recurring retail costs
single play double play
double play
triple play
with tv
single play
double play
Customer care /
retention
20,00
27,50
17,60
22,00
44,00
47,00
Billing
8,33
8,33
1,25
2,50
5,00
6,25
Bad debt
1%
1%
Non-single customer
specific costs
10%
15%
The following table shows overall monthly retail cost at the level currently applied in the
test and the level recommended following analysis of the new data.
3
Retail costs assessment for DBA
Table 4:
Overall monthly retail costs - current and recommended
Current values - recurring retail costs
monthly values (DKK)
Total ADSL
single play
72,58
Recommended values - recurring retail costs
double play
single play
80,60
double play TV (new)
triple play (new)
159,35
179,08
87,26
82,79
Total VDSL
double play
96,34
95,27
In short, the recommended levels result in slightly higher retail costs for single play and
double play offers for VDSL and a somewhat bigger difference compared to current
ADSL values. For the new product offers double play with TV and triple play, the estimated totals lay considerable higher than the current highest levels for double play
VDSL (+63% and 86% respectively).
The input from the Danish operators showed large variation when comparing individual
retail cost components on one hand but also overall retail cost levels on the other. In
some cases the large deviations between operator data are very likely due to different
cost allocation methods and/or interpretation of the itemized cost categories. Accordingly, parameter setting on the basis of the collected data is not simply straightforward.
Sometimes we suggest to use averages, sometimes we suggest to use a single value
and at other times an adjusted single value is suggested.
Even though there were large differences the collected data did show that the retail
costs differ between single play, double play with VoIP, double play with TV and triple
play. While some detailed categories might be the same, the overall total retail costs
vary between the different product offers. This could be seen as a validation of the
DBA’s efforts to differentiate retail costs between different types of product offers. As
illustration, see below graph for double play offers where the total retail costs vary between XXX and XXX DKK per month per customer based on the operators input. The
recommended level lies between TDC’s and Telia’s input.
4
Figure 1:
Retail cost assessment for DBA
Total retail costs double play: recommended level versus input Danish
operators
Confidential information
However, in the EU benchmark, there is not one regulator who also applies a retail cost
differentiation based on the retail product sold in terms of single play, double play etc.
What does seem to be more common is a differentiation of retail costs between residential and business services (Austria, Italy and the Netherlands). Furthermore, the cost
variance in individual cost categories also seems to indicate that it is not straightforward
for operators to deliver such granular retail cost data in a homogenous manner. Given
that some regulators work with a significantly higher aggregation level (e.g. a single
mark-up factor on cost / revenues to determine the overall retail cost) it is not entirely
clear that a detailed definition of individual items is superior to a more aggregated manner of deriving retail cost inputs for margin squeeze tests.
Lastly, differentiation of retail costs based on business strategy (in the sense of sales
channels or a “no frills” versus “premium” positioning1) is not common among respondents in the EU benchmark. However, Italy does differentiate retail costs when products
are purely sold via online distribution channels. Only in this case, AGCOM applies the
lower retail costs of online channels both for its product by product test as for the portfolio tests. When products are sold via a mixture of distribution channels, it applies the
higher standard retail costs for the margin squeeze tests.
1 Operators, with a business strategy, in terms of sales channel, to minimize distribution and sales costs by
mainly using the internet. The opposite is called ‘premium’ operators, which mainly focus on providing
high quality customer support based on a more traditional distribution channel possibly in combination
with the use of internet.
Retail costs assessment for DBA
2
5
Introduction
The Danish regulator for telecommunications, the Danish Business Authority (DBA), is
reviewing its margin squeeze model for analysing margin squeezes in markets 4 and 5.
In this context the retail costs applied in the tests are reviewed as well and in this context DBA tasked WIK-Consult with the following:




Analyse the retail cost data collected from the Danish operators;
Perform a European benchmark on the level of retail costs applied in the margin
squeeze tests for broadband markets;
Compare the Danish values with the benchmark;
Recommend a level for the Danish retail costs as part of DBA’s margin squeeze
test review; and
The main questions to be addressed are:



What is the correct level of retail cost to be applied in margin squeeze tests for
market 4 and 5?
Do retail costs differ depending on the retail product sold (e.g. single play versus
double play and triple play broadband packages)?
Do regulatory authorities adapt retail costs in their margins squeeze tests depending on the business strategy regarding sales channels of the considered
operator (i.e., “Premium” versus “No Frills” positioning2).
This report has the following structure:
-
Chapter 3 contains the available retail cost data for the Danish market;
Chapter 4 presents the results from the European benchmark;
Chapter 5 analyses the Danish and EU benchmark information and resulting
recommended levels for the retail costs; and
Chapter 6 concludes with a summary and other findings.
The draft report and four additional questions were consulted with the industry. The
comments on the draft report as well as the answers on the questions have been evaluated on their merit and incorporated accordingly in the final report.
2 Operators, with a business strategy, in terms of sales channel, to minimize distribution and sales costs by
mainly using the internet. The opposite is called ‘premium’ operators, which mainly focus on providing
high quality customer support based on a more traditional distribution channel possibly in combination
with the use of internet.
6
Retail cost assessment for DBA
Retail costs assessment for DBA
3
7
Brief introduction to retail cost categories in the Danish margin
squeeze test and available information
DBA has already defined retail cost categories and applied differentiated parameters for
single (broadband only) and double play (broadband & voice) retail products. DBA has
already been gathering retail cost information in previous years. This resulted in the
currently applied levels of retail costs for the margin squeeze tests in Denmark (see
Section 3.1).
DBA now intends to enable the differentiation of a total of four product categories and
has asked operators to supply data. For 2014, DBA therefore initiated another round of
data collection, which resulted in the figures presented in Section 3.2.
3.1
Currently applied retail costs in the Danish margin squeeze tests
The current retail costs categories are split in recurring and one off retail costs and further defined by the DBA as follows:
Table 5:
Definition of retail cost categories by the DBA
Used categories by DBA
Definition used by DBA
Customer care / retention
Costs related to retaining existing customers. This includes for instance
salaries to customer service personnel and website costs
Billing
Costs related to the usage of the billing platform and related department for
producing the retail invoices
Bad debt
Costs related to retail customers not paying their invoice or paying their invoice
later (% of the invoiced amounts incl. 25% VAT, which is lost).
Non-single customer specific costs
Overhead costs for the REO that cannot be allocated to a specific customer.
This includes for instance costs related to IT-personnel who maintain customer
related tasks such as setup of systems for billing and sales reporting, costs
related to product management, business development and market analyses,
central costs related to advertising and marketing that is not intended for new
customers, administrative costs, rent and other general costs (% of invoiced
amounts excl. VAT)
Marketing contributions
Sale events or campaigns that focus on acquiring new customers.
Recurring
Sales personnel salary/sales commission Salaries, sales commission and bonuses.
Customer premise equipment ADSL
One-off
Customer premise equipment VDSL
Distribution of customer premise
equipment
Customer activation
Order related costs
Wholesale price for equipment (including router), that is sent to the customer
(ADSL).
Wholesale price for equipment (including router), that is sent to the customer
(VDSL).
Costs associated with shipping of the CPE.
Costs related to setup and activation of the customer in the REO’s internal
systems.
Costs stemming from call centre support and other relevant departments in
relation to installation and setup of the broadband connection.
8
Retail cost assessment for DBA
The retail costs in this report are expressed as recurring monthly amounts per customer
in Danish Krone (DKK). The one-off retail costs are one-time costs at the beginning of
the customer lifetime, which are transferred in this report (and in the margin squeeze
calculations) into monthly amounts.
The transferral of one-off retail costs into monthly amounts is done by spreading these
costs over the applied customer lifetime in Denmark (48 months) while considering the
weighted average costs of capital (WACC) of the competitor’s retail business. The DBA
currently applies a WACC of 4,7%. The one off amounts are put on a „per month“ scale
per customer by multiplying them with the capital cost factor, which is defined by the
following formula3:
The two tables underneath show the currently applied one-off and recurring retail costs
respectively in DKK. The DBA is using differentiated levels of retail costs between single play broadband offers and double play broadband offers with voice.
Bad debt and non-single customer specific costs are set as a % of the retail value of the
respective broadband offer. In order to estimate absolute amounts in the tables, average yearly retail prices in the Danish broadband market have been used. Excluding
VAT of 25% in Denmark, this is 2400 DKK for single play offers and 2677 DKK for double play offers.
When comparing the level of one-off retail costs for single play versus double play
broadband offers, the difference is a 50% addition on the following three cost categories:
-
Sales personnel salary and sales commission;
-
Customer activation; and
-
Order related costs
It is noted that the main difference in the current recurring retail cost between single and
double play broadband offers stem from significant higher (+37,5%) customer care /
retention costs for double play.
3 As an alternative, linear annualisation could be used. This would reduce the recommended retail costs by
approximately 9%.
9
Retail costs assessment for DBA
The current total retail costs for single play vary between roughly 73 (ADSL) and 99
(VDSL) and for double play between 87 (ADSL) and 118 (VDSL) DKK per month per
customer.
Table 6:
One off retail costs currently applied by the DBA
Currently applied one off retail costs by the DBA
Used categories by DBA
Current one off
value used for
single play (DKK)
Marketing contributions
Current one off
value used for
double play
(DKK)
Current monthly
value used for
single play
(DKK)
Current monthly
value used for
double play
(DKK)
3,43
3,43
150
Sales personnel salary/sales commission
250
375
5,72
8,59
Customer premise equipment ADSL
350
350
8,01
8,01
Customer premise equipment VDSL
700
700
16,03
16,03
1,14
1,14
Distribution of customer premise
equipment
50
Customer activation
50
75
1,14
1,72
Order related costs
100
150
2,29
3,43
Total monthly amount - one off ADSL
21,75
26,33
Total monthly amount - one off VDSL
29,76
34,34
Table 7:
Recurring retail costs currently applied by the DBA
Currently applied recurring retail costs by the DBA
Used categories by DBA
Customer care / retention
Current annual
value used for
single play (DKK)
Current annual
value used for
double play
(DKK)
Current monthly
value used for
single play
(DKK)
Current monthly
value used for
double play
(DKK)
240
330
20,00
27,50
Billing
100
8,33
8,33
Bad debt
1,0%
2,50
2,79
Non-single customer specific costs
10,0%
20,00
22,31
50,83
60,93
Total monthly amount - recurring
10
3.2
Retail cost assessment for DBA
Overview responses Danish operators in 2014 to DBA data request on
retail costs
In summer 2014, DBA performed another round of data collection and asked for a further specification of the retail costs; not only for single play and double play, but also for
triple play broadband offers. In addition TDC A/S (TDC) provided also data for double
play with TV separate from ‘normal’ double play (broadband + VoIP).
DBA received data for the year 2012/2013 from incumbent TDC and its subsidiary
Fullrate and 2013 data from alternative operator Telia. The 2012 TDC data for double
and triple play still contained their cable brand Yousee, whereas this is split for 2013.
Telenor could not provide any information.
The data provided by TDC/Fullrate has been audited. The Telia data is audited as well
as they are part of the TeliaSonera Group official accounts, which are audited. All data
provided was in DKK. The following tables contain the collected data from the Danish
operators in yearly amounts for the recurring costs and one time amounts for the one off
costs.
Table 8:
Latest one off retail costs collected from Danish operators in 2014
Confidential information
Table 9:
Latest recurring retail costs collected from Danish operators in 2014
Confidential information
In chapter 5, the one-time and yearly amounts are transferred into annualised monthly
amounts in order to compare them with the currently used values by DBA and values
found in the benchmark. It is already apparent that the reported overall and itemized
retail cost varies significantly between the three operators.
Retail costs assessment for DBA
4
4.1
11
Results European benchmark
Benchmark approach
The benchmark was based on a questionnaire (see Annex I) sent to nine national regulatory authorities (NRA’s) in Europe. In order to encourage the responses, the questionnaire was made as compact as possible and feedback of the results was promised.
The questionnaire was structured in such a way that it allowed comparison with the
Danish retail cost categories and their definitions, input of quantitative data and in case
of confidentiality issues a qualitative assessment of the current Danish level of retail
costs.
The questionnaire has been sent in the second half of April 2014 to nine European regulatory authorities. From end April until beginning of June 2014 the responses were
collected, verified by additional interviews and desk research and analysed. The underneath table shows which NRA’s have participated with this research.
Table 10: Overview participating NRA’s
Right
NRA
contact
Austria
v
Germany
v
Greece
v
Ireland
v
Italy
v
Netherlands v
Norway
v
Spain
v
Sweden
v
Question
naire
send out
v
v
v
v
v
v
v
v
v
Response
v
v
no response
v
v
v
no MST
v
no MST
Out of the 9 benchmarked countries, only the Greek regulator at the end did not provide
input. Furthermore, the regulators from Norway and Sweden are not applying margin
squeeze tests for the broadband market, however did provide input regarding their intentions for the near future.
The remaining 6 regulators provided their input, which is summarised in 4.2 and 4.3.
Only one regulator (Germany, Bundesnetzagentur) was able to respond with absolute
cost values item by item. The Austrian regulator, RTR provided an absolute cost value
for the total retail cost but could not disclose individual items. Two other regulators (Ita-
12
Retail cost assessment for DBA
ly, Netherlands) simplify the retail cost determination by applying a single mark-up factor on all other cost to derive the retail cost. The remaining two regulators (Ireland and
Spain) did neither provided absolute nor relative values.
4.2
Overview of benchmarked country approaches
The results from the European benchmark are summarised in below table describing
the key elements of the respective countries. In Annex II the underlying detailed descriptions per benchmark country can be found for more background information.
Table 11: EU country overview with key findings
Austria
Degree of cost category
aggregation compared to
the 10 DBA items
7 items of which 5 correspond to DBA items.
IP connection and additional
services are included.
Germany
Same recurring retail cost
categories as DBA, however
simplified one off costs (only
2 aggregated categories:
customer acquisition and
cancellation costs).
CPE + distribution costs are
indirectly included in customer acquisition costs
Actual values provided
Methodological
comments
Business strategy
feedback
Only total cost provided for retail cost (recurring and one-off
shown as annualized
monthly cost). Only
3.50€ per month for
residential users (excluding 2,212€ for the
CPE).
Detailed cost provided
regarding network cost
to test bitstream vs
LLU charge.
Only 2play product
test.
No differentiation.
Differentiation
between residential
and business users.
EEO approach for
LLU. SEO for VULA
Itemized values provided. Total cost
around 3,75€ per
month.
No differentiation
13
Retail costs assessment for DBA
Ireland
Most items correspond with
DBA. Difference is that each
item has a one off and recurring element.
Also CPE costs is aggregated
and additional element is
Product marketing and Development.
Italy
No cost value for each individual category but jointly
considered recurring and
one off retail costs.
Not all DBA items are considered in the aggregated
calculation. Missing are:
- Non single customer
specific costs
- CPE + distribution
- Customer activation
- Order related cost
No values or qualitative assessment of DBA
current level provided.
Slightly different
approach for legacy
Bitstream and NGA:
Use 25% extra mark-up
on retail costs for
sales, product development, help desk and
order handling to reflect the additional
common cost for a
starting alternative
operator.
-
-
SEO approach
outside LEAs,
inside combi of
SEO/EEO.
Specific EEO
for Advertising,
Billing and
Product Mgt.
as altnets have
efficiencies
due to international size
Markup on own network costs + wholesale
costs :
- In the DCF approach for the
portfolio test 25%
for residential services and
- In the period by
period test for the
individual products 10% when
looking at incremental costs only.
Similar cost categories,
however many shared retail
cost categories excluded
due to incremental approach.
Considered retail costs are
mainly external (outsourced) costs related to
one product:
- Sales costs
- TV content
- advertisement
CPE costs are not included
Specific values confidential, aggregated
level only.
3% mark-up for retail
costs related to broadband services related
to the wholesale price:
Markup could be higher if integral retail
costs approach. For
legacy business voice
(ISDN) the set markup
is 13,5%
…operating inside
or outside LEA
could be seen as
business strategy
and this is treated
different based
on SEO or combined SEO/EEO
approach.
No differentiation
based on different service level.
However differentiated retail
costs based on
distribution
channel. Where
products are sold
only via online
channels, the
lower retail costs
are considered.
Both in the product by product
test as in the
portfolio test.
Qualitative statement:
total value ‘much lower’ than DBA value.
Nether
erlands
No differentiation
on channel strategy and service
offering, however…
Incremental approach; only retail
costs directly related to a specific
product. Excludes
large portions of
shared retail costs
like billing,
helpdesk etc.
Approach in line
with very detailed
Margin Squeeze
test at product
level.
No input on business strategy.
EEO approach
14
Retail cost assessment for DBA
in retail costs but included
separately in the margin
squeeze test.
Spain
18 items, nearly all of which
correspond to DBA items.
Missing category is order
related costs, however there
are 4 separate categories for
different CPE types.
4.3
No values and no qualitative assessment of
DBA’s current level
provided.
No differentiation
Differentiation of retail costs according to business strategy in
benchmark countries
All of the responding regulators except Italy denied differentiating retail costs based on
business strategy related to different approaches on distribution channels and service
offering (no frills versus premium positioning).
Italy remarked that when products are purely sold via online distribution channels, it
applies the lower retail costs of online channels both for its product by product test as
for the portfolio tests. In case products are sold via a mixture of distribution channels, it
applies the higher standard retail costs for the margin squeeze tests.
It is more common among EU regulators to differentiate retail cost levels for residential
and business services; half of the respondents (Austria, Italy and the Netherlands) are
doing so. Another variant is used in Ireland, where Comreg uses different levels of (retail) costs for NGA services compared to legacy Bitstream; where the competition is
active in so called larger exchange areas (LAEs) a combination of SEO and EEO approach is used leading to lower retail costs. When competition is also active outside
these LEAs, SEO is used to model the costs of the alternative operator in the margin
squeeze test leading to higher (retail) costs.
4.4
Collected absolute cost levels of EU countries
As shown from the overview table in 4.2, only four countries provided absolute figures
or percentages: Germany, Austria, Italy and the Netherlands. However, the input varied
from providing most of its retail cost categories (Germany), to specifying only a couple
or only aggregated totals (Austria, Italy and the Netherlands).
Spain and Ireland considered all information on the retail costs as confidential and the
Netherlands considered the detailed retail cost levels as confidential.
15
Retail costs assessment for DBA
Following table displays the collected absolute values in the benchmark. The input was
provided as (annualised) monthly amounts per customer in € or as % of the retail value.
For direct comparison with the Danish values and the current levels used by DBA, these
amounts have been translated directly into DKK.
Table 12: Collected absolute values from EU benchmark
Benchmark - one off retail costs (DKK/month/cust) Austria
Germany
Italy
Marketing contribution
14,16
Sales staff/ Sales commission
End-user placed equipment
16,48
Distribution of CPE
Activation of end-user
Order related cost
other, not shown seperately by DBA
1,64
Estimated TOTAL - one off
Benchmark - recurring retail costs (DKK/month/cust) Austria
Germany
Italy
Customer service
9,31
Billing
0,67
Loss on creditors
4,92
Non-single customer specific cost
7,15%
Estimated TOTAL - recurring
26,1
Benchmark - total retail costs (DKK)
One off cost
Recurring cost
Estimated TOTAL - retail cost
Austria
Germany
Italy
25%
Explanatory notes:
-
marketing contributions in Germany include the CPE costs as well;
billing costs in Germany are purely based on electronic invoicing costs of the incumbent.
bad debt in Germany is 1,9% of retail value including VAT;
Non-single customer specific cost in Germany is calculated as a 7,15% mark-up
based on underlying total costs (wholesale + own network);
in Italy, the 25% mark-up related to underlying wholesale costs + own network
costs to be applied in its DCF portfolio test; and
the collected figure for the Netherlands (3% of the underlying wholesale costs as
mark up for the retail costs for residential broadband services) is left out as the
underlying incremental approach is not comparable with the approach in the
16
Retail cost assessment for DBA
other countries and Denmark. Dutch regulator ACM only considers those retail
costs linked to one specific product. As soon as retail costs are shared among
two or more products they are considered non incremental and excluded.
Retail costs assessment for DBA
5
17
Analysis of collected retail costs and recommendations
In this chapter first the current level of retail costs used by DBA is compared at high
level to the latest retail cost data provided by the Danish operators in order to understand the positioning of the Danish operators.
Thereafter a more detailed analysis per retail cost category is done where all available
data is compared. This includes the benchmark, but also information derived from questions and answers to the Danish operators related to their provided data and additional
information provided by the DBA.
In order to compare, all collected data was transferred into DKK and one off charges
were annualised to monthly amounts per customer. For the transfer between € amounts
and DKK an exchange rate of 7,45 DKK per € was used as advised by the DBA. For the
transferral of one time amounts to annualised monthly amounts a customer life time (48
months) and a WACC of 4,7% are used. These are the same values currently used by
the DBA in their margin squeeze tests.
5.1
High level comparison; current retail costs applied by DBA versus
provided retail costs from Danish operators in 2014
As described above, the first step was to calculate the annualised monthly amount of
the one off costs provided by the Danish operators. Secondly, the yearly recurring retail
costs were transferred into monthly amounts by dividing them by 12 months.
Input from Fullrate on bad debt and non-single customer specific costs was expressed
as % of the retail value. In order to calculate an absolute amount, an average monthly
retail value of 223 DKK excluding VAT for a double play broadband offer and 25% VAT
have been used.
Below tables displays the total level of one-off and recurring retail costs based on the
provided data of the Danish providers.
Table 13:
One off retail costs collected from Danish operators in 2014
Confidential information
18
Table 14:
Retail cost assessment for DBA
Recurring retail costs collected from Danish operators in 2014
Confidential information
As a second step the total monthly retail costs of each Danish operator, who provided
input, were calculated as shown in underneath table. These totals are indicative as they
assume that only the provided retail costs levels of the respective operator would have
been used.
Table 15:
Indicative total retail costs based on data from Danish operators in
2014
Confidential information
Thirdly, these indicative totals per Danish operator were compared with the currently
applied total retail costs by DBA in their margin squeeze tests (as described in paragraph 3.1). The last eight grey rows express the difference as % of the current used
figures.
Retail costs assessment for DBA
Table 16:
19
Comparison total retail costs: current versus input Danish operators
in 2014
Confidential information
At high level, based on the provided data from the Danish operators, the following can
be concluded:
-
-
-
-
-
Input values are quite different between operators, both regarding single items
and total retail costs.
For single play broadband offers, only TDC has provided input on retail costs.
TDC’s input suggest a retail cost level which is between XXX% and XXX% below the currently used level by DBA depending on whether ADSL or VDSL
based single play offers.
For double play offers (with VoIP), TDC’s cost level is also under DBA current
applied level, however less than for Single play.
Fullrate’s retail cost level for double play offers with VoIP is the lowest and using
their input would reduce the currently applied retail cost level by DBA up to
XXX%.
Telia’s input for double play (with VoIP) however suggest that the applied retail
cost level by DBA should increase with almost the opposite figures (between
XXX% and XXX%).
The new category ‘double play with TV’ seems justified as TDC’s retail costs for
this product category are up to 51% higher than the current ADSL based double
play offer with VoIP.
However TDC’s subsidiary YouSee retail costs are up to XXX% lower than the
current VDSL levels. This might be related to the cable infrastructure used.
20
Retail cost assessment for DBA
-
5.2
The new category ‘Triple play’ also seems justified as the retail costs are significantly higher compared to the double play category (up to XXX% for TDC and
up to XXX% for Telia).
Detailed analysis
The detailed analysis is done per retail cost category. Per retail cost category the following aspects are analysed:
-
currently used level by DBA compared with values collected from the benchmark;
based on TDC’s input for all product categories and Telia’s input for double play
and triple play, it is analysed whether a differentiated cost level is appropriate;
as the most complete data set exists for the double play offer (TDC, Fullrate, Telia input) a recommended level is first set for double play;
thereafter a recommended level is set for single play, double play with TV and
triple play.
At the end of each retail cost category, there are additional questions formulated for the
Danish operators to clarify certain issues. These are marked in grey boxes.
5.2.1 Analysis of and recommendations for one-off retail costs
5.2.1.1 Marketing contributions
Currently, the DBA applies a cost level of 3,43 DKK per month per customer. From the
benchmark the only collected value is 14,16 DKK per month per customer from Germany. However it is noted that the German value includes CPE costs, hence a comparable
value would be lower. To make the German value comparable we have made an assumption on the cost of CPE including distribution (35€). Based on the previously described annualisation method, a monthly amount of roughly 6 DKK could be deducted
for CPE. Hence an amount around 8 DKK results for Germany, which is still more than
twice the current cost level.
The marketing contribution costs from the Danish operators vary with the product offering as displayed in the following figure.
Retail costs assessment for DBA
Figure 2:
21
Input Danish operators in 2014 on marketing contributions
Confidential information
Both TDC’s (in dark blue) and Telia’s data (in magenta) show that the cost level varies
for the different product offers. However it is noted that for Telia and TDC the cost level
jumps when adding TV services in the bundle (increase between 80% and 210%). Furthermore, it is noted that for TDC and YouSee the cost levels of double play with TV are
quite close to triple play and even quite close to each other. However for Telia the triple
play level is significantly higher (XXX) compared to the level of TDC’s and YouSee’s
bundles with TV.
TDC’s current level for double play was in 2012 XXX, but has decreased significantly for
2013 (-XXX%). This is related to a reduction of marketing costs and increasing sales
volumes, which has been ongoing since 2011. In 2012 these costs decreased already
with XXX% and from TDC’s annual 2013 report a further 27% decrease in marketing
costs was reported. However for triple play offers and especially double play bundles
with TV, TDC’s marketing contributions have increased in 2013, which seems conflicting. Partial explanation might be that marketing contributions are proportionally more
allocated to TV containing product bundles.
The higher Telia cost level for double play might be explained by a more aggressive
marketing approach, it could also be the main effect of having a smaller customer base
to spread its marketing costs over. This seems to be partly confirmed by TDC’s Fullrate
value for double play (XXX DKK per month per customer), which is quite higher than
TDC’s value despite assumed scale advantages for Fullrate as subsidiary from TDC.
22
Retail cost assessment for DBA
Therefore a higher level seems to be in line with modelling a reasonable efficient operator. Therefore the marketing contribution costs for double play have been set at 10 considering the above values and the comparable benchmark value of 8.
For triple play, the cost levels of TDC and YouSee are in the same range but significantly lower than Telia’s level. However, it is not clear what the effect of the underlying cable
network in this context is and TDC’s value reflects the scale effects. Once again, we
propose to set the value for triple play as a mark-up on double play. We use a mark-up
of 80 %, which is in the lower end of the range (see first paragraph). Hence, the level for
triple play is set at 18 DKK.
For setting the level for single play and double play with TV we propose to use the cost
relation between TDC’s product offers and apply this on the set levels;
-
TDC’s single play is XXX% lower than its double play level, so proposed level
for single play is XXX DKK.
TDC’s double play with TV is only slightly lower than its triple play level, so proposed level for double play with TV is XXX DKK.
5.2.1.2 Sales staff and Sales commission
DBA’s current values are 5,7 DKK for single play and 8,6 DKK for double play offers per
month per customer. The benchmark does not provide a specific number for sales staff
and commission.
TDC’s (in blue) and Telia’s (in magenta) marketing contribution costs vary strongly with
the product offering as displayed in the following figure. For these retail costs, the variation is even stronger for TDC compared to Telia; TDC’s triple play sales
staff/commission costs more than double compared to double play sales
staff/commission. The same applies for TDC’s subsidiary YouSee.
Remarkably is that Telia’s absolute cost level for triple play offers is the lowest, well
below TDC, Fullrate and YouSee. In addition, Fullrate has the lowest cost level of XXX
for double play due to the reliance on internet as sales channel.
Retail costs assessment for DBA
Figure 3:
23
Input Danish operators in 2014 on sales staff / sales commission
Confidential information
The strong increase of these costs based on product offer can be partly explained as
commission is likely related to retail revenue, which will increase as there are more
products in the bundle. However, this would imply that for TDC, the double play offer
with TV should then be twice as expensive as the basic double play offer with VoIP,
which is unlikely. Furthermore, the other component, sales salaries, will not vary that
much over the product offerings as it is most likely the same sales force.
Another aspect might be the complexity and higher diversity of bundles containing TV
services, which requires the sales staff to spend more time and efforts in explaining
these. The TV containing product offers for TDC, YouSee and Telia are in the same
range except for the triple play offer of YouSee.
Based on the available data, it seems correct to use a differentiated cost level for the
product offers. For double and triple play, we propose to use an average between Telia
and TDC which is rounded down to consider the impact of the increased use of online
sales channels. This leads to 7,5 DKK per month per customer for double play and 15
for triple play.
For single play, there is no comparable value except for TDC’s value of XXX DKK,
which seems reasonable compared to TDC’s and Telia’s double play levels.
24
Retail cost assessment for DBA
For double play with TV, in line with TDC’s cost levels over the different product categories, a slightly lower level is set compared to triple play; XXX DKK per customer per
month.
In addition, it is observed that the level of the sales staff/commission costs per product
category seem to be related to the marketing contributions described in the previous
paragraph; where marketing contributions are relatively high, the sales staff costs are
low and the other way around. Only exception again here is the high level of sales staff
commission from YouSee despite their comparable level of marketing contributions.
5.2.1.3 CPE costs
Current DBA level is 8 DKK per month per customer for ADSL CPE and 16 DKK for
VDSL CPE irrespective of use in a single play or double play offer. From the benchmark, only Austria indicated an absolute cost level of 16,5 DKK for an ADSL modem,
however this seems to be including distribution costs, so comparable level is quite higher considering modem type.
Below figure shows that TDC’s CPE costs are equal for all of its offers, which is partly
explained as all of TDC’s customers use the same home gateway, however TV customers in general require an additional set top box.
Figure 4:
Input Danish operators in 2014 on CPE costs
Confidential information
Retail costs assessment for DBA
25
Telia’s triple play customers receive the same CPE as its double play customers. Telia
seems to factor in additional costs for the TV set top box as the costs for triple play are
higher than for double play. YouSee has slightly higher CPE costs but this is likely because of the cable infrastructure and also a similar level for its double play with TV and
its triple play offers.
Especially with equipment prices, there should be a strong scale advantage for TDC,
which would explain the higher costs (+XXX%) for the Telia double play CPE. Fullrate’s
CPE costs for double play is the lowest, which can be explained as it uses less expensive equipment (Zyxel) than TDC’s and Telia’s premium product. YouSee’s CPE is cable related so must be slightly different than the CPE used by TDC and Telia.
Based on the collected data from the Danish operators it was not clear whether they
use different CPE for ADSL and VDSL and have indicated an average cost level or that
they only use one type of modem. While consulting on the draft report, following questions were therefore asked.
Question 1: Which modem/router types are used (ADSL/VDSL/Cable), what are the
difference in costs and how is this translated into provided cost levels for CPE?
Question 2: Which additional CPE is used for the provision of TV services and what are
the related additional costs?
Following information was provided as response on the first question:


TDC is using so called ‘Home boxes’ from Sagemcom for both ADSL and VDSL
products, for which the new price is XXX DKK. It’s cable-tv brand YouSee uses
a cable modem from Netgear which costs around the same level or slightly
higher. Furthermore, the cost level for Fullrate is based on a weighted average
of cheaper ADSL- and VDSL routers from Zyxel (XXX DKK). TDC also noted
that it uses refurbished CPE in varying degree seemingly depending on the age
and therefore availability of the equipment.
Telia confirmed using the same modem for ADSL and VDSL customers with a
new cost of XXX DKK or XXX DKK depending on the calculation manner (respectively latest price versus average historic prices).
Based on the provided information, we conclude that it is more common to use the
same modem for ADSL and VDSL customers. Only exception is Fullrate, which uses a
weighted average of ADSL and VDSL modem costs. We note that forwardly looking
more VDSL modems are expected to be used also by Fullrate. In addition, using one
type of modem has cost advantages with purchasing, logistics and maintenance.
26
Retail cost assessment for DBA
Therefore, a uniform cost level seems reasonable to be used for CPE retail costs. As it
is not clear in which instances refurbished CPE are used, we presume that new customers receive a new CPE and that only in cases of equipment failure refurbished
equipment becomes relevant. Therefore, based on presumed scale advantages of TDC,
Telia’s lowest purchase price of XXX DKK price seems reasonable to be used for double and single play packages, which would translate to XXX DKK per month per customer.
The proposed level seems reasonable considering scale advantages for TDC and the
higher benchmark value from Austria. Furthermore, it is assumed that the same CPE is
also used for single play, hence the same cost level is recommended for the Single Play
scenario.
Following information was provided as response on the second question:
In respect to double play with TV and triple play packages an additional set top box
(STB) is needed. In the draft report, we had proposed an additional 5 DKK per month
per customer. In this respect the following comments were received:





TDC uses a Cisco set-top box (STB) which includes a hard disk (HD) and Personal Video Recorder (PVR) for around XXX DKK, however remarked that
cheaper models are available when HD and PVR are not required.
YouSee cable offers do not need additional CPE for the provisioning of TV services.
Fullrate uses a refurbished Tatung STB for XXX DKK, however it is not clear
whether this type contains HD and PVR functions. Considering the price and the
no-frills positioning we have to assume not.
TDC notes that CPE is refurbished in varying degree, depending on age and
most likely availability of new replacement equipment.
Telia provides a STB to all its customers using TV services. The new price of
their STB varies between XXX and XXX DKK respectively without and with HD
and PVR functionality.
Based on the responses, we conclude that a STB is required for an alternative operator,
which operations are based on wholesale services of TDC. The price variation for a
STB is large, from XXX DKK for the refurbished version of Fullrate, most likely without
HD and PVR, to XXX for a similar version of Telia to XXX and XXX for the full function
STB of TDC and Telia.
As it is not clear which share of new customers use a STB with HD and or PVR functions, we recommend a conservative estimation of the STB costs without HD and PVR
functions. However, at a new price of Telia (XXX DKK) as TDC has not given the price
Retail costs assessment for DBA
27
of its basic model and refurbishing does not seem to be standard practice across the
different companies. Therefore, the assumed 5 DKK markup on the CPE costs is too
low and will be increased to XXX DKK per month per customer. When the take up in the
future of HD and PVR functionalities become more common in the sector, we recommend to review the markup for the STB accordingly.
Therefore, for triple play a higher cost level for the CPE seems justified because of the
additional set top box for TV. Based on the above information, a mark-up of XXX DKK
per month per customer is recommended resulting in XXX DKK total CPE costs for
double play with TV and triple play.
5.2.1.4 Distribution of CPE
Current DBA level for distribution costs of CPE in the margin squeeze test is a uniform
1,14 DKK per month per customer for single and double play offers. From the benchmark there are no specific values for the CPE distribution costs.
As shown in below figure, TDC including its subsidiaries were not able to provide individual values for this cost category as they were not able to specifically allocate the
costs to this item.
Figure 5:
Input Danish operators in 2014 on CPE distribution costs
Confidential information
28
Retail cost assessment for DBA
Competitor Telia has provided costs between XXX DKK for double play and XXX DKK
for triple play. The difference of XXX DKK is most likely due to the extra set top box for
TV, which seems reasonable.
Fullrate’s CPE distribution costs seem to be in line with Telia’s level considering scale
advantages for Fullrate as they belong to TDC. Therefore, it is proposed to set the CPE
distribution costs for single and double play at XXX DKK per month per customer and
for double play with TV and triple play at XXX. For single play the same level as double
play is recommended as it concerns shipping the same CPE. Same reasoning applies
for using the same level for double play with TV and triple play.
5.2.1.5 Customer activation costs
Current differentiated DBA cost levels are 1,14 DKK per month per customer for single
play and 1,72 for double play offers. This differentiated price seems reasonable as it
considers the activation of multiple services. There are no benchmark values available.
As can be observed in below figure, there is limited data available on this category; Telia has provided values for double and triple play. Fullrate provided a XXX cost level and
TDC could not provide this specific cost.
Figure 6:
Input Danish operators in 2014 on customer activation costs
Confidential information
Retail costs assessment for DBA
29
Telia’s different levels for double and triple play confirm that there are separate activations for the broadband, voice and TV services hence the additional costs for triple play
compared to double play.
Based on the REO approach and the available information, we propose to use Telia’s
level for double and triple play. Due to the absence of any information on single play,
we suggest to maintain the current level of 1,14 DKK.
5.2.1.6 Order related costs
Current DBA level is 2,3 DKK per month per customer for single play and 3,4 DKK for
double play. From the benchmark no specific values were collected.
Underneath figure displays that TDC’s order related cost vary per product offer but do
not increase linear as seen before with some other categories.
Figure 7:
Input Danish operators in 2014 on order related costs
Confidential information
Comparing the differences between the different product offers of TDC, it seems that
order related costs for adding voice service amount to XXX DKK and adding TV service
amounts to XXX DKK extra costs per customer per month. For Telia adding TV service
also adds XXX DKK per month per customer (being the difference between their costs
of double and triple play offers).
30
Retail cost assessment for DBA
It is noted that for TDC the order related costs in 2013 compared to 2012 have gone
only slightly up for single and double play, however significantly up for double play with
TV and almost doubled for triple play.
TDC’s order related cost levels for double play are more than XXX times as large as
Telia’s cost level. And even Fullrate’s cost level is higher than Telia’s. For triple play
Telia’s costs are also the lowest and TDC’s costs the highest.
For this category, it is proposed to use an average between the available data. So Telia,
Fullrate and TDC for double play, TDC and YouSee for double play with TV and Telia,
TDC and YouSee for triple play. This leads to respectively XXX, XXX and XXX DKK per
month per customer. For single play, the only available input is from TDC (XXX DKK),
as this is in line with the calculated values, we propose to use TDC’s figure.
5.2.2 Analysis of and recommendations for recurring retail costs
The graphs related the recurring retail costs have a different background colour to set
them apart from the graphs on the one-off retails costs.
5.2.2.1 Customer care / retention
The current levels used by DBA are 20 DKK for single play broadband and 27,50 DKK
for double play offers per customer per month. This is well above the only collected value from the EU benchmark from Germany; 9,31 DKK per month per customer. It is not
clear why the German value is so much lower.
Below graph displays the input of the Danish operators in 2014 on their cost levels per
product offer for customer care and retention.
Retail costs assessment for DBA
Figure 8:
31
Input Danish operators in 2014 on customer care/retention
Confidential information
TDC’s costs for customer care vary significantly per product offering. Apparently, the
offerings with TV service require more customer care and/or retention efforts. The cost
level for double play with TV roughly doubles in comparison with double play with VoIP.
The same relation is observed in Telia’s costs although the absolute cost level of Telia
lies roughly XXX% above the cost level of TDC which is most likely due to the economies of scale of TDC. TDC’s customer care/retention costs for single play offers is 20%
lower than for double play offer.
When relating the customer care costs for double play with TV with triple play there is
only a slight increase of around 7% as observed for TDC and YouSee.
Fullrate’s lower cost may be explained by their ‘no frills’ positioning and consequent
dependence on internet based customer care. Fullrate has the lowest cost level for customer care/retention, at roughly XXX% of TDC’s level and only XXX% of Telia’s level.
However, it does not seem reasonable to use this lower figure due to the different approach of Telia and Telenor in the Danish market and DBA’s intention of modelling a
Reasonably Efficient Operator.
Considering the above, the level of customer care/retention costs for double play offers
is set at 22 DKK per month per customer. The values for the other product categories
are set in relation to the double play value using the identified relations between the
product categories in the operator’s data:
-
Single play level is 20% lower than the double play level, so 17,6
32
Retail cost assessment for DBA
-
Double play with TV is 200% of the double play level, so 44
Triple play is 7% higher than double play with TV, so 47.
5.2.2.2 Billing
The current DBA level is an undifferentiated 8,33 DKK per month per customer for single and double play offers. From the European benchmark, a German value of 0,67
DKK per month per customer was collected. The German regulator based this figure on
electronic invoicing practice only.
The input from TDC, Fullrate, YouSee and Telia can be seen in following figure.
Figure 9:
Input Danish operators 2014 – billing costs
Confidential information
The billing costs for TDC are doubling when going from single play offers to double play
and again doubling when TV services are included. Telia’s absolute cost levels are
quite higher than TDC’s level but shows a similar pattern that the triple play cost level is
twice as high as the double play cost level.
TDC’s billing costs include the printing, postage, payment and IT activities. In Fullrate,
billing is fully automated and the only costs are wages of its IT department used for
monitoring the process, which explains the value of XXX for double play. Therefore,
Fullrate’s figure is closer to the German benchmark value of 0,67, which is also based
on electronic invoicing only. However, this does not seem to be the regular approach in
Retail costs assessment for DBA
33
Denmark considering TDC’s and Telia’s figures, but it is recognized that electronic invoicing will be used more frequently in the near future with accompanying lower billing
costs.
The additional billing costs for TV services for Telia are explained by different billing
requirement for the different TV packages, Video on Demand and other functionalities
like multi room usage and hard disk recorder. Telia has recently made investments in its
billing platform in order to be able to invoice the above describe line items
Interesting to note from the benchmark is that the Irish regulator Comreg uses SEO as
overall modelling approach in its NGA margin squeeze tests, however uses EEO for
billing costs as the competitors are part of international companies and are perceived to
have similar scale advantages as the SMP operator. A similar situation could be argued
in Denmark where competitors Telenor and Telia are subsidiaries of SMP operators in
neighbouring countries.
Considering the above, the level of billing costs for double play offers is set at 2,5 DKK
per month per customer. The values for the other product categories are set in relation
to the double play value using the identified relation between Telia’s and TDC’s values:
-
Single play level is 50% of the double play level, so 1,25
Double play with TV is 200% of the double play level, so 5
Triple play is 250% of the double play level, so 6,25.
5.2.2.3 Bad debt
Currently DBA uses 1% of the retail value including VAT for single and double play offers. From the benchmark, a value of 1,9% of the retail value including VAT is received
from the German regulator.
The costs for bad debt are also increasing with the number of services in the bundle,
therefore, in general, bad debt is expressed as % of the retail price of the offering.
34
Figure 10:
Retail cost assessment for DBA
Input Danish operators 2014 – bad debt costs
Confidential information
Fullrate uses XXX% of the retail value including VAT. For double play Telia and TDC
have provide absolute numbers (XXX and XXX respectively). These amounts can be
expressed as % of the average retail value when related to the average for a Danish
double play offer (223 DKK +25% VAT). Resulting value for Telia is then XXX% and for
TDC XXX% for bad debt.
For this category, we have considered the inputs of all three parties for double play
(TDC, Fullrate and Telia) as bad debt does not seem to be depending on the company’s
positioning in the market. The resulting 1% for double play is used for all product offers.
5.2.2.4 Non-single customer specific cost
The currently used overhead by DBA is 10% of the invoiced amount excl. VAT, this
translates into 20 DKK for single play and 23 for double play. In the benchmark, only
Germany provided a figure of 7,15%, however on a cost base being the total wholesale
costs + network costs. In order to make the benchmark value roughly comparable, we
estimated the total wholesale costs + own network costs as 75% of the average German retail price for double play without VAT (34,95 €). This results in an absolute value
of 14 DKK per month per customer. As can be observed in below graph, the German
value is quite low compared to the input of the Danish operators.
Retail costs assessment for DBA
Figure 11:
35
Input Danish operators 2014 – non single customer specific costs
Confidential information
TDC’s cost level for this category is differentiated by product offer, but the relation
seems quite linear so a % mark-up is suspected. When relating the amounts for double
play to the average Danish retail values (223 DKK excluding VAT for double play) a
percentage results of XXX%.
Fullrate and YouSee have provided values for double play (+TV) and triple play which
are in the same range of the current level. Fullrate has provided a % of the retail value
excluding VAT; XXX% in 2013, which is a significant decrease from XXX% in 2012.
Telia has a significantly higher cost level for double play and an almost XXX level compared to TDC for triple play. When expressing these cost levels as % of the average
retail value for double play, a percentage of XXX% results as mark-up. This value
seems very high compared to TDC/Fullrate and the German benchmark value.
In setting the level for this retail cost category, the inputs from TDC, Telia and Fullrate
have been considered, which resulted in an upward correction to 15% of the currently
applied mark-up of 10%.
When looking at the developments in the years 2011, 2012 and 2013 for TDC, it was
observed that from 2012 onwards NSCS costs for single and double play have decreased between XXX and XXX% and double play with TV and triple play have increased between XXX% and XXX%.
36
Retail cost assessment for DBA
In addition, Telia also has a high absolute level of overhead costs for triple play offers,
which lead us to ask the following question in the consultation:
Question 3: It seems that overhead costs are increasing in general and especially the
allocation to triple play offers. Can the industry confirm this and explain the underlying
reasons?
Following responses were provided:




TDC noted that overhead costs and non-single customer specific cost are not
equivalent. Furthermore that it added product specific costs in the non-single
customer specific costs like commercial management, branding and CPE costs.
Furthermore, it notes that real overhead costs (general administration, facilities
etc.) make up less than 50% of the TDC reported amount for non-single customer specific costs.
TDC does not understand the claimed increase in overhead costs as its real
overhead costs have decreased between XXX and XXX% for the various bundles over the last 2 years. For Fullrate, TDC noted a similar trend as the 2014
figures are expected to decline compared to 2013. Furthermore, the non-single
customer specific costs for TDC have changed between -XXX% and +XXX%
from 2011 – 2013 for the various bundles.
Telia explained that IT costs in general for a REO are significantly higher than
for an established incumbent who historically built up its IT, CRM and BSS systems and therefore depreciated these investments over a longer period of time.
Furthermore, Telia explained that also the increasing complexity of wholesale
and retail products further drive up the IT costs and in particular for the more
complex triple play products. Therefore, it argues that an amount of XXX DKK
per month for double play is more realistic (compared to the proposed 34) and
for triple play this is even higher (XXX DKK versus proposed 57 DKK).
Lastly, Telia recommends to change the structure of non-single customer specific costs from a percentage of the retail revenue to an absolute amount as IT
investments remain the same independent of changes in retail revenue.
Based on the provided information, it was clarified to TDC that this question was asked
in the context of non-single customer specific (NSCS) costs (section 5.2.2.4) hence
when stating ‘overhead’ in the question, it was meant to be ‘non single customer specific costs’ including real overhead and other costs. Furthermore, the background of the
question was explained by showing the development from 2012 to 2013 TDC data.
Retail costs assessment for DBA
37
Telia’s remarks on higher IT costs for a REO in general and their remark on growing
complexity of wholesale services are acknowledged. As a large portion of IT system
costs is likely to be fixed, NSCS costs per customer for a REO are higher due to the
REO’s smaller customer base compared to the incumbent. Telia’s remark in regards to
growing complexity of retail products also apply to the incumbent’s systems, which
might explain the increase in the TDC figures from 2012 to 2013 as more customers are
opting for the complex triple play packages.
Regarding Telia’s further remark on the ‘realistic’ (higher) levels for double and triple
play, no additional evidence was provided. However, the significant increase from 10%
to 15% is already acknowledging the higher level of IT costs for a REO.
Telia’s suggestion on changing the structure of the NSCS costs from a % to an absolute
amount seems reasonable, however this would require a more thorough review as other
elements like product management of the NSCS costs might be related to retail revenue. And even if IT costs were taken as a separate category, IT costs might have a variable component as increased number of orders might require increased IT capacity
and hence costs.
Following the comments from the industry, we still find it appropriate to recommend an
upward correction of the non-single customer specific costs from 10 to 15%.
5.3
Summary and impact of recommended retail cost levels
Based on the recommended cost levels for the one off and recurring retail costs, following overviews are made. The left tables show the levels of retail costs, currently applied
by DBA in their margin squeeze tests and the tables on the right display the recommended levels based on the input from Danish operators in 2014.
Based on average retail prices in the Danish market, absolute amounts are calculated
where percentage values are set for bad debt and non-single customer specific costs.
The calculated totals are therefore estimations in order to see the impact of the recommended cost levels in the margin squeeze test.
38
Retail cost assessment for DBA
Table 17:
Retail costs - currently applied and recommended levels- current
structure
Currently applied - one off retail costs
Recommended - one off retail costs- current structure
single play
double play
single play
double play
double play TV (new)
triple play (new)
Marketing contributions
3,43
3,43
XXX
10,0
XXX
18,0
Sales personnel
salary/sales commission
5,72
8,59
XXX
7,50
XXX
15,00
Customer premise
equipment ADSL
8,01
8,01
XXX
XXX
XXX
XXX
Customer premise
equipment VDSL
16,03
16,03
Distribution of customer
premise equipment
1,14
1,14
XXX
XXX
XXX
XXX
Customer activation
1,14
1,72
1,14
XXX
XXX
XXX
Order related costs
2,29
3,43
XXX
XXX
XXX
XXX
monthly values (DKK)
Total - adsl
21,75
26,33
Total - vdsl
29,76
34,34
31,44
Current values - recurring retail costs
35,60
61,60
65,70
Recommended values - recurring retail costs
single play
double play
single play
double play
double play TV (new)
triple play (new)
Customer care /
retention
20,00
27,50
17,60
22,0
44,0
47,0
Billing
8,33
8,33
1,25
2,50
5,00
6,25
Bad debt
2,50
2,79
2,50
2,79
3,75
4,63
Non-single customer
specific costs
20,00
22,31
30,00
33,45
45,00
55,50
monthly values (DKK)
Total (estimated)
50,83
60,93
Total ADSL
72,58
87,26
Total VDSL
80,60
95,27
51,35
60,74
97,75
113,38
82,79
96,34
159,35
179,08
The following can be observed:
-
For single play and double play offers the recommendations result in total retail
costs which are slightly above the current VDSL single play offer.
For the new product category double play with TV, the estimated total retail
costs are significantly above the double play (+50%), hence justifying this new
category.
Retail costs assessment for DBA
-
39
The triple play category is new as well and shows also a significantly higher total level compared to double play with VoIP and with TV, hence also seems justified.
However, it is proposed to use a more aggregated structure for the one off retail cost
categories. This is based on a combination of observations:
-
-
As described in the detailed analysis, there is a strong relation between the detailed categories, which are now aggregated into one category and;
The Danish operators have reported challenges from time to time with the allocation of costs to the specifically defined DBA categories, which might lead to
subjective cost allocation which in turn reduces the value of comparing the detailed values of the different operators and;
From the international benchmark it appeared that for certain categories it is
common to club them together.
In addition, the aggregated values for the one off retail costs have the advantage in the
consultation that they can be used without disclosing confidential information from the
operators on the provided detailed categories.
This results in the following table.
40
Retail cost assessment for DBA
Table 18:
Retail costs - currently applied and recommended levels- aggregated
structure
Recommended - one off retail costs aggregated structure
Currently applied - one off retail costs
single play
double play
monthly values
(Euro)
Marketing contributions
3,43
3,43
Marketing and Sales
15,50
17,50
31,50
33,00
Sales personnel
salary/sales commission
5,72
8,59
Customer premise
equipment ADSL
8,01
8,01
Customer setup and
activation (incl CPE
and system costs)
15,94
18,10
30,10
32,70
Customer premise
equipment VDSL
16,03
16,03
Distribution of customer
premise equipment
1,14
1,14
Customer activation
1,14
1,72
Order related costs
2,29
3,43
monthly values (Euro)
Total - adsl
21,75
26,33
Total - vdsl
29,76
34,34
single play double play
31,44
Current values - recurring retail costs
monthly values (Euro)
double play
triple play
with tv
35,60
61,60
65,70
Recommended - recurring retail costs
single play double play
double play
triple play
with tv
single play
double play
Customer care /
retention
20,00
27,50
17,60
22,00
44,00
47,00
Billing
8,33
8,33
1,25
2,50
5,00
6,25
Bad debt (% of revenues
incl. VAT)
1%
1%
Non-single customer
specific costs (% of
revenues excl. VAT)
10%
15%
Total (estimated)
50,83
60,93
Total ADSL
72,58
87,26
Total VDSL
80,60
51,35
60,74
97,75
113,38
82,79
96,34
159,35
179,08
95,27
We have also compared the recommended retail cost levels with the input provided by
the Danish operators. Based on each operator’s input, total retail costs for each product
offer were calculated based purely on their respective input and consequently com-
Retail costs assessment for DBA
41
pared with the total retail costs calculated based on our recommendations per product
offer.
Figure 12:
Total retail costs single play: recommended level versus input Danish
operators
Confidential information
For single play offers, the estimated total lays around the higher current VDSL level for
single play offers but well above the current ADSL level of retail costs. Only TDC provided data related to single play. The higher level is explained as the single play level
was set in line with levels for double play (with and without TV) and triple play.
Figure 13:
Total retail costs double play: recommended level versus input Danish
operators
Confidential information
42
Retail cost assessment for DBA
For double play offers the recommended levels result in estimated retail costs which are
positioned between the latest input data from TDC’s and Telia. Furthermore, the recommended level results in a slightly higher retail costs compared to current applied levels for VDSL double play offers but significantly higher retail costs for currently applied
double play ADSL offers.
Figure 14:
Total retail costs double play with TV: recommended level versus input
Danish operators
Confidential information
The total estimated retail costs for double play with TV offers lie above the provided
input from TDC and well above TDC’s subsidiary YouSee. This is a consequence of first
setting the levels for double and triple play and then aligning the remaining level for
double play with TV in the absence of input from alternative operators in Denmark.
The recommended levels are roughly double the levels currently used for ADSL double
play.
Retail costs assessment for DBA
Figure 15:
43
Total retail costs triple play: recommended level versus input Danish operators
Confidential information
For triple play the recommended levels leads to an estimated total retail costs which is
not in the middle of TDC and Telia, but more towards the lower TDC value.
44
6
Retail cost assessment for DBA
Summary of recommendations and further conclusions
The following sections answer the main questions for this project:



6.1
What is the correct level of retail cost to be applied in margin squeeze tests for
market 4 and 5?
Do retail costs differ depending on the retail product sold (e.g. single play versus
double play and triple play broadband packages)?
Do regulatory authorities adapt retail costs in their margins squeeze tests depending on the business strategy regarding sales channels of the considered
operator (i.e., “Premium” versus “No Frills” positioning).
Recommended retail cost levels
Below tables represents the recommended cost levels for the retail costs to be applied
in margin squeeze tests for market 4 and 5 in Denmark. Underlying analysis is described in chapter 5. For the one off costs, first there is an overview in the current structure and an overview in proposed aggregated structure, which should be nonconfidential.
Recommended one off retail cost levels – current structure
Table 19:
Recommended - one off retail costs - current structure
single play
double play
double play with
tv
triple play
Marketing and Sales
XXX
10,00
XXX
18,00
Sales personnel salary/sales
commission
XXX
7,50
XXX
15,00
Customer premise equipment
XXX
XXX
XXX
XXX
Distribution of customer premise
equipment
XXX
XXX
XXX
XXX
Customer activation
1,14
XXX
XXX
XXX
Order related costs
XXX
XXX
XXX
XXX
monthly values (DKK)
45
Retail costs assessment for DBA
Table 20:
Recommended one off retail costs – aggregated structure
Recommended - one off retail costs- aggregated structure
single play
double play
double play TV (new)
triple play (new)
Marketing and Sales
15,50
17,50
31,50
33,00
Customer setup and
activation (incl CPE and
system costs)
15,94
18,10
30,10
32,70
monthly values (DKK)
Table 21:
Recommended recurring retail cost levels
Recommended values - recurring retail costs
single play
double play
double play TV (new)
triple play (new)
Customer care /
retention
17,60
22,00
44,00
47,00
Billing
1,25
2,50
5,00
6,25
Bad debt
2,50
2,79
3,75
4,63
Non-single customer
specific costs
30,00
33,45
45,00
55,50
monthly values (DKK)
6.2
Retail costs differentiation based on retail product
The second question regarding retail cost differentiation based on product offer can be
confirmed based on the input from the Danish operators in 2014. In their input data the
retail costs really differ between single play, double play with VoIP, double play with TV
and triple play. For some categories the costs are the same, but overall the product
categories the total retail cost level varies between 86 and 178 DKK per month per customer.
46
Retail cost assessment for DBA
However, in the EU benchmark, there is not one regulator who also applies a retail cost
differentiation based on the retail product sold in terms of single play, double play etc.
What does seem to more common is a differentiation of retail costs between residential
and business services (Austria, Italy and the Netherlands).
6.3
Retail cost differentiation based on business strategy
In regards to the third question, all of the responding regulators except Italy denied differentiating retail costs based on business strategy related to different approaches on
distribution channels and service offering (no frills versus premium positioning).
Italy remarked that when products are purely sold via online distribution channels, it
applies the lower retail costs of online channels both for its product by product test and
for the portfolio tests. In case products are sold via a mixture of distribution channels, it
applies the higher standard retail costs for the margin squeeze tests.
It is more common among EU regulators to differentiate retail cost levels for residential
and business services; half of the respondents (Austria, Italy and the Netherlands) are
doing so. Another variant is used in Ireland, where Comreg has proposed to use different levels of (retail) costs for NGA services depending on whether the competition is
active in or outside so called “Larger Exchange Areas” (LEAs), which are defined as
areas with LLU available and/or cable infrastructure. When competition is active inside
the LEAs a combination of SEO and EEO is used and when competition is also active
outside these LEAs, SEO is used to model the costs of the alternative operator in the
margin squeeze test leading to higher (retail) costs.
Margin squeeze tests are in general done for the possible combinations of wholesale
and retail services in order not to favor a certain business model of a REO. If tests
would be designed per distribution channel, this would imply that certain services are
only sold via certain distribution channels hence influence the REO’s decisions on its
business model. In addition, the use of distribution channels might differ between the
SMP operator and the alternative operators. Therefore, we are of the opinion that the
REO retail costs should not be distinguished per distribution channel.
6.4
Closing remarks
Retail costs in general are considered confidential by operators. During this project, the
confidential character also prevented some regulators to participate in the survey or
input was given only at a aggregated high level. This made it sometimes difficult to
compare the detailed data received from the Danish operators with benchmark values.
Retail costs assessment for DBA
47
Despite of this, the response from most regulators was positive and they were all interested as retail costs form a significant part of the downstream costs and therefore influence the outcome of applied margin squeeze tests.
Also in general, other regulators seem to use a much more aggregated approach with
less detailed retail cost categories as DBA. It is not clear whether this is a deliberated
choice and/or that detailed data is lacking in those countries or that they have not started specifying itemized retail costs. In this context, it is worthwhile for DBA to keep an
eye on Irish regulator Comreg, who has confirmed that it has internal data on the various retail costs but has not finalised a formal approach yet. Especially while Comreg
has developed a specific margin squeeze approach for NGA based retail services, including how to deal with the retail costs applied in the test.
The retail cost levels received by the Danish operators varied strongly: item by item and
on an overall level. Based on DBA’s overall REO approach, there is a logical orientation
on the data from alternative operators.
In some cases the large deviations between operator data are very likely due to different cost allocation methods and/ or interpretation of the itemized cost categories. Accordingly, parameter setting on the basis of the collected data is not simply straightforward. Sometimes we suggest to use averages, sometimes we suggest to use a single
value and at other times an adjusted single value is suggested.
It may be worthwhile for the DBA and the stakeholders to consider moving towards a
more aggregated retail cost data collection such as proposed for the one off retail costs.
At the other end of retail cost determination methodologies is the approach used in Italy
where a single mark-up value on all other cost is used to derive retail costs.4 DBA could
still require that operators include all the individual items when determining their retail
cost to other cost (or revenue) ratio, so the definitions would remain. From our point of
view, it is not entirely clear that the differentiated, itemized approach is superior to a
more aggregated approach.
Therefore following question was asked in the consultation:
Question 4: What is the opinion of the industry on the current aggregation level of retail
costs, on the proposed aggregated one off retail costs and do you have any further proposals for improvement ?
Following responses were provided:
 TDC remarked that the proposed aggregation level of existing categories does
not fit well with TDC’s perception of how costs should be categorized and allocated. TDC noted that it has mapped the cost categories distinguished in its own
4 This approach is also used in Luxembourg.
48
Retail cost assessment for DBA


ABC model to the existing DBA retail cost categories. TDC believes that this
mapping makes TDC’s own costs and REO costs non comparable.
Lastly, TDC remarked that the proposed further aggregation from the 10 to 6 retail cost categories does not make much of a difference in terms of transparency
of assumed REO costs.
Telia supports the proposed further aggregation as disaggregated retail costs
are more difficult to compare between operator and can lead to a false sense of
precision. Cherry-picking of high/low cost items is another risk with disaggregated numbers.
As DBA has already consulted the industry on the individual retail cost categories and
their definitions, we concluded that TDC was able to map their internal retail cost categories with the defined DBA retail costs categories and hence should not have a difficulty of aggregating further as this means a simplification of the already done mapping.
Based on the absence of convincing arguments from TDC, we therefore maintain our
recommendation for further aggregation of the REO retail costs to make the data between operators more comparable and easier to produce.
Retail costs assessment for DBA
Annex I – Questionnaire
49
50
Retail cost assessment for DBA
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51
52
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53
54
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55
56
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57
58
Retail cost assessment for DBA
Annex II – Detailed responses questionnaire
Austria - RTR
Currently the Austrian regulator RTR is only applying margin squeeze tests on business
broadband services of incumbent (A1 Telekom Austria) as they only have significant
market power in the field of business broadband access. However, in the past RTR has
applied margin squeeze tests as well on residential broadband services (ADSL) and
hence also has information available on the retail costs related to these services.
Following retail costs are considered by RTR in their margin squeeze tests.








customer care (service and call center)
marketing
billing and bad debt
sales
international connectivity
additional services (web-space, e-mail addresses etc.)
overhead cost at retail level
CPE cost
There is no distinction in one off versus recurring retail costs and RTR does not differentiate the retail costs based on single/double/triple play, but on residential and business services. Despite the different approach, of the 7 categories used by RTR, 5 fit
nicely in DBA’s current categories. RTR puts Billing and Bad Debt together and there
are 2 DBA categories that are not explicitly considered:
-
Customer activation
Order related costs
Based on the description of RTR ‘customer care category’ this seem to cover the call
centre costs which DBA has partly under ‘order related costs’. The category ‘customer
activation costs’ due to systems setup seems to be under RTR’s ‘overhead category’.
In addition to the 7 categories, RTR also adds International connectivity and additional
services to derive a total monthly retail cost. To compare the Austrian value to the Danish ones, an average value for the related monthly annualised costs need to be deducted.
The individual values per cost category are confidential but the overall level is indicated
to be around 3,5 € per customer per month for residential services and 10,5 € for business services, excluding CPE which is valued at 2,212€ per month.
Retail costs assessment for DBA
59
In respect to differentiating retail costs based on business strategies such as channel
strategy or service level, RTR linked the different business strategies to alternative operators remarking that REO is not an option in Austria as the tests are based on EEO.
In addition, RTR noted furthermore that the use of REO versus EEO is related to the
identified competition problem (efficient price level or protection entrant) and that REO
differentiated by business strategy actually implies protecting specific entrant business
strategies.
Germany - BnetzA
The German regulator BnetzA is also splitting retail costs into recurring and one-off
costs. For the recurring retail costs BnetzA is actually using exactly the same categories
as DBA:




Customer Care – 1,25 € per customer per month
Billing – 0,09€ per customer per month
Bad Debt - 1,9% of the retail price including VAT (0,66€)
Common cost - 7.15% of total costs including wholesale costs.
In respect to billing cost; these are the costs for an electronic invoice only and a value
received from the incumbent in Germany. Originally a cost of 0,56 € was applied based
on traditional invoicing. However the currently applied costs as based on online invoicing only from Deutsche Telekom.
The bad debt amount is based on the average price for a double play broadband package Call & Surf Comfort from Deutsche Telekom (34,95€ incl. VAT). This package is
one of the most important product bundles (flagship product) in the German retail market.
Common Cost percentage used is a mark-up on all other cost related to local loop, splitter/DSLAM, traffic etc. This % was set in a formal decision regarding costs of the terminating line segment.
For one off retail costs, BnetzA uses only two categories instead of 6 categories by DBA
(see below). To derive the monthly annualized figures, a customer life time of 50,21
months and a WACC of 6,58% has been used. Until now, CPE costs are not explicitly
included in the retail costs, however are indirectly included under customer acquisition
costs.


Customer acquisition (indirectly including CPE costs) – 1,90 € per month per
customer
Order cancellation – 0,22 € per month per customer
60
Retail cost assessment for DBA
In comparison with DBA’s categories, marketing contributions, sales commission and
CPE related costs seem to be included under ‘customer acquisition’, however ‘customer
activation’ and ‘order related costs’ seem to be missing. In order to compare the German total with the Danish values, we have increased the German one off total with the
current Danish values for customer activation and order related costs (0,21 and 0,42 €
per month per customer).
Ireland - Comreg
The Irish telecom regulator ComReg could not provide details on the retail cost values
due to commercial sensitivity. They have discussed indicative values with certain operators but have never published these values.
ComReg is using a Discounted Cash Flow model for their margin squeeze tests for current generation Bitstream services in and outside the Local Exchange Areas (LEAs).
The DCF model includes one-off start-up costs of an alternative operator including capital costs and a terminal value. In addition, the following costs are further inflated with a
25% mark-up to reflect the likely additional common costs for an entrant in the broadband market (Sales, Product development, Held Desk and Order Handling). All identified retail cost categories can be adjusted for scale and scope. Furthermore, a customer
lifetime of 42 months is used in the model in the context of the WBA market.
ComReg distinguished the following retail cost categories:













Sales costs
Marketing / Advertising
Product Management & development
Accommodation
Help Desk
Billing
Modems
Order handling
Corporate overhead
Servers & co-location
IP connectivity (peering)
Backhaul
Wholesale connections
The categories correspond nicely with the ones from DBA. Additional element is ‘Product management & development’. Furthermore, the network related costs of servers,
co-location, IP peering and Backhaul are included as well under retail costs.
Retail costs assessment for DBA
61
More detail information is derived from chapter 7 of ComReg’s formal publication
http://www.comreg.ie/_fileupload/publications/ComReg1390.pdf):
Sales costs: These are the one-off start-up costs and ongoing customer acquisition
costs faced by a new entrant to attain new residential and business customers. These
costs are further inflated by a mark-up of 25% to take into account the likely higher
costs of a new entrant.
Marketing / Advertising: These are the one-off and ongoing costs including campaign
costs and are divided into initial set-up costs and promotions.
Product management & development: These are the one-off start-up costs and ongoing costs associated with the product management & development function of a new
entrant. These costs take into account new product developments over an ongoing
product refreshment cycle. These costs are further inflated by a mark-up of 25% to take
into account the likely higher costs of a new entrant.
Accommodation: These are the one-off start-up costs and ongoing costs associated
with the Accommodation of a new entrant.
Help Desk: These are the one-off start-up costs and ongoing costs associated with the
Help Desk function of a new entrant. These costs reflect a higher cost during the initial
two years after start-up and followed by a lower ongoing cost per subscriber. All Help
Desk costs are further inflated by a mark-up of 25% to take into account the likely higher costs of a new entrant (see paragraph 7.11).
Billing: These are the one-off start-up costs and ongoing costs per subscriber associated with the Billing function of a new entrant. Billing costs also include a credit management cost which is based on a percentage of revenue.
Modems: This category takes into account the actual unit cost based on manufacturers’
offer to Eircom. The cost included in the model takes into account delivery costs. In addition, the model includes respective take-up assumptions of customers requiring new
modems over the DCF time period.
Order Handling: These are the one-off start-up costs and ongoing costs associated
with the Order Handling function by a new entrant. These costs are further inflated by a
mark-up of 25% to take into account the likely costs of a new entrant.
Corporate overhead: These are the one-off and ongoing costs corporate overhead
costs.
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Retail cost assessment for DBA
Servers and collocation: These are the total servers and collocation costs faced by a
new entrant. Initial start-up costs and ongoing costs are taken into account.
Internet connectivity (peering charges); This is the cost of internet connectivity faced
by a new entrant. The unit cost of internet connectivity is consistent with the unit cost
used in the NGA model in the NGA Decision. This cost is a common cost to all the
standalone broadband products offered by a new entrant and is calculated based on an
average bandwidth requirement. This is based on the forecast total number of subscribers of the new entrant. This total number of subscribers is then allocated to equivalent
Eircom retail products based on the actual mix of Eircom retail customers on those
products to determine the average bandwidth requirement.
Backhaul charges: This is the cost of backhaul faced by a new entrant based on available wholesale offers from Eircom. This cost would be a common cost to all the
standalone broadband products offered by a new entrant.
Wholesale connection: These are the wholesale connection charges for new customers of the new entrant and reflect the prices published in the BARO.
Different approach on retail costs for legacy and NGA broadband services
In respect to NGA margin squeezes, ComReg has published its final decision in
http://www.comreg.ie/_fileupload/publications/ComReg1311.pdf (pages 227-241 for the
retail costs).
ComReg views SEO as a suitable approach outside the LEAs (competition by smaller
altnets) and a combined SEO and EEO approach for inside the LEAs. Inside the LEAs
there are larger altnets present with an international presence who can take advantage
of their (international) economies of scale and scope.
Specifically for some retail costs (Advertising, Billing and Product Management) it views
the EEO approach as suitable. ComReg believes that these retail costs are most susceptible to scale/scope advantages in the context of bundle offers and that in Ireland
there are operators with international presence who can take advantage of economies
of scale and scope between their operations in Ireland and other countries in which they
operate. This is in line with their NGA approach.
In addition, ComReg decided on the level of following retail costs for NGA:

Helpdesk cost: the level of should be based on SEO costs based on the current
level for legacy Bitstream services. Alternative operators in Ireland have the abil-
Retail costs assessment for DBA


63
ity to gain scale/scope efficiencies which would result in lower unit costs. However during NGA roll it should be observed what the impact is on the helpdesk.
IP connectivity costs: level should be based on the incumbent’s IP connectivity
costs (this includes interconnection costs for altnets from their IP core to the incumbent’s backhaul network).
Modem costs: a period of 5 years is an appropriate lifetime. This is more than
the average customer life time, but the modem can be re-used. In addition, the
costs for a technician visit should be written of over 20 years as the activated
connection will be re-used in case of migration to other operators. However, due
to possible technology changes, ComReg continues the observation of the modem life time.
In respect to multicast costs, ComReg decided begin 2013 that it was too early to decide as the incumbent did not launched IPTV services yet. ComReg’s preliminary view
was that multicast platform costs and marketing costs could be considered as retail
costs. As of October 2013 Eircom has launched IPTV, however no update of ComReg’s
position.
Italy - Agcom
For both tests, the retail-mark-up is applied to both Initially, the retail mark-ups were set by
AGCOM and then put into consultation. Based on the responses from the industry, the mark-ups
were adjusted. AGCOM did not have a specific description on how the mark-ups were defined
initially or what made them adjust them afterwards.
Italy’s regulator Agcom has provided us with aggregated totals and mapped their applied cost categories on the ones used in Denmark.
The total retail costs (including one off and recurring costs) are calculated as a % of
both wholesale costs and own network costs. AGCOM performs two different test, respectively:
1) A period-by-period test where only incremental costs are included. For this test, a retail markup of 10% is used; and
2) A DCF test where all costs are included and a retail mark-up of 25% is used for residential
services and 20% for business services.
For the purpose of calculating a comparable value to the Danish value, the residential
value of 25% has been used. The network costs of the alternative operator are estimated to be around 3€ per month per customer (IP core network). For the wholesale costs
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Retail cost assessment for DBA
of residential broadband 13,94 5 is considered. This leads to 4,2 € total retail costs per
month per customer.
Agcom is using similar retail cost categories as in Denmark, however less. The following DBA items are missing:
-
Non single customer specific costs (recurring)
CPE + distribution (one off)
Customer activation (one off)
Order related cost (one off)
Without giving absolute figures, Agcom commented that their level of retail costs was
much lower than the retail costs considered by Agcom. This could be partly explained
by the above listed missing categories. Especially the recurring non-single customer
specific (overhead) could represent a significant number. In order to compare the estimated Italian total, estimations of the missing cost categories have been added.
No differentiation based on different service level, however Agcom does consider different retail costs for different distribution channels (e.g. online sales has lower sales
comissions).
Netherlands - ACM
The regulator in the Netherlands is the Authority for Consumer and Market (ACM), previously known as OPTA. Due to confidentiality, ACM could only comment on the overall
aggregated level of retail costs used in their margin squeeze tests.
Market analyses by telecom regulator OPTA (predecessor of ACM) in the Netherlands
resulted in a non discrimination obligation for many wholesale services of incumbant
KPN. Part of this obligation is the behaviour rule not to margin squeeze (non
discrimination rule 5). This rule is applicable for each individual product offer and based
on the underlying incremental costs and resulted in a very detailed margin squeeze test.
In line with this incremental approach, ACM allowed incumbent KPN to consider only
those retail costs which are directly related to one specific product offering.
In this approach shared retail costs are therefore not included. For example, billing
costs are excluded as the same people are used for multiple products and billing is
done in batches hence not attributable to a single product offering.
5 Commission Decision of ( May 2014 concerning Case IT/2014/1587: Wholesale
broadband access in Italy - VULA, NGA Bitstream and ancillary
services price, for market 5 for for FttC based WBA 13,94€ monthly.
Retail costs assessment for DBA
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All other ‘out of pocket’ retail costs like provided equipment (modem and installation
therefor) are excluded in retail mark ups, but are included in the margin squeeze test.
This resulted in a uniform retail mark-up on the wholesale costs of 1% for fixed telephony services and rental lines and data connectivity and 3% for broadband.
Table 22: Incremental retail costs per product cluster in the Netherlands
Product clusters
Identified incremental retail
costs
as markup on the wholesale price
Voice (incl. resold voice by KPN Corporate Services)
1%
Broadband
3%
Rental lines + Data connectivity
1%
As markup on the retail price
Data Services by KPN Corporate Services
4%
All of the absolute figures are redacted in the KPN cost accounting publication of 2009,
but from the text it seems that the retail to wholesale markup is mainly based on :
-
External distribution costs for one specific product (compensation paid to
resellers)
External call center costs when specific actions for one product offering
Payments to third parties for specific TV content
Resell costs for voice reselling by KPN subsidiary Corporate Solutions (CS)
which sells predominantly business services
Advertisements specific for one product offering (however after deducting a
certain % for the brand as this is considered shared cost again).
For data solutions sold by KPN’s subsidiary CS, a seperate retail markup has been
established as the retail costs of CS are considered and not KPN. This retail markup is
therefor related to the retail price of CS. Only manpower involved in one single product
offering are considerd as incremental costs and hence included in the calculation.
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Retail cost assessment for DBA
In 2011, OPTA issued a complimentary decision on tarif regulation for fixed net voice for
business
markets.
See
https://www.acm.nl/nl/publicaties/publicatie/10295/Aanvullendontwerpbesluit-op-marktanalyse-vaste-telefonie-2011/ (dutch only). In this decision, OPTA
established that KPN still has SMP on the retail markets for fixed multiple voice calling
(ISDN1/2/15/20/30 excluding Voice over Broadband) due to their history despite having
wholesale services available. For this reason the previously incremental approach
towards retail costs was replaced by the approach that the integral retailcosts of KPN
need to be covered. This resulted first in a temporary retail markup of 18,6% based on
2008 data, which was corrected afterwards to 11,2% and per February 2013 has been
increased again to 13,5% based on 2011 data.
For all other retail markets fixed telephony markets and business connectivity the
previously lower retail markup of 1% of the wholesale rate still applies. Same for the
market for broadband access, 3%. OPTA defended this approach with the argument
that the incremental apporach is in line with the very detailed, product specific ND 5
margin squeeze test. Furthermore, OPTA stated that market parties can not expect both
applying a detailed , product specific ND 5 test and using integral retail cost markup.
Norway - NPT
The regulator in Norway, NPT is in the process of developing the margin squeeze models for market 4 and 5 including elements such as the retail costs. It has however not
yet started to discuss the relevant principles or the margin squeeze model in market 4
and 5 yet so could not provide much input. However NPT indicated that the margin
squeeze test would be developed for fibre only. Per January 2014, incumbent Telenor
has been designated as SMP in Norway and obligation to allow access and not to margin squeeze are the two available tools. Tests for copper based services are not
deemed necessary as there is a price cap regulation for Unbundled Local Loop wholesale services based on historic costs and Bitstream is available as well.
There is also price regulation in place for the wholesales service Wholesale Line Rental
and as part of that for the retail costs. However NPT stated that these retail costs most
likely will not be indicative for the retail costs related to the selling of broadband based
packages.
NPT has, on the other hand, developed a margin squeeze model in previous market 15
(access and call origination on mobile networks, which is still regulated in Norway), but
this model and principles may not be directly applicable for market 4 and 5.
In any case, the following set up is done for retail costs in the tests for market 15:
-
Retail costs split in fixed and variable
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Retail costs assessment for DBA
-
No differentiation based on single/double/triple offering or business positioning
Spain - CNMC
The Spanish regulator CNMC considered all data as confidential, however could comment on the used retail cost categories (see below). Furthermore, CNMC does not consider business strategy while defining the level of the retail costs.
CNMC is applying more recurring categories than DBA especially the category ‘non
single customer specific costs’ is expanded into 6 categories (labelled with ‘4’ in second
column).
Table 23: Non single customer specific costs split up in Spain
Non – single customer specific costs split up in:
reference to DBA
retail cost categories
Product development costs
4
Sales cost
4
Marketing & advertising
4
Taxes
4
Costs of other added services
4
Monthly payment for rental of equipment associated with the
new service
4
In respect to the one-off retail costs, CNMC uses similar categories except that ‘Order
related cost’ is missing and that for the CPE they have 4 different categories instead of
one based on the different CPE used:
-
modem router
TV decoder
Modem USB
Handset
The CPE costs themselves are also confidential.
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Retail cost assessment for DBA
CNMC does not consider different retail costs based on different business strategy /
market segmentation.
Sweden - PTS
The Swedish telecom regulator does not have an economic replicability test or margin
squeeze test, however has started a consultation recently on the proposed approach
including a proposed mark-up to cover retail costs.
The modelled alternative operator would be a EEO, and the test will only be used for
Fibre not copper in line with the latest EU recommendations. Furthermore, the test is
proposed to be done on an average user, for just the flagship products.
In regards to the retail costs a mark-up between 20 and 25% related to the wholesale
price plus network costs is proposed. This mark-up would be the same for fibre products and copper based products. PTS did his own benchmark among telecom regulators of the UK, Ireland and Italy (Ofcom, ComReg and Agcom) and observed these
common aspects.
Subscriber Acquisition Costs are not part of the retail mark-up, since it can be calculated and uniquely addressed to a customer. In these costs are for example the one-off
cost for CPE and initial discounts to attract the customer. These costs will be annualized over the average customer life time.