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Chapter 2

Internet access – basic

Introduction

2.1 This chapter covers "basic" Internet access, ie access to the Internet by consumers who have no requirement for "high speed" access. Mainly this will mean PSTN dial-up access, as this is usually the cheapest option. However, there are circumstances where other access mechanisms may be cheaper. In countries where unmetered PSTN dial-up access is not available, broadband access may be a cost effective alternative for consumers with high usage. In this chapter a range of access mechanisms are considered (ie PSTN and ISDN dial-up, DSL and cable modem) and the results then focus on the cheapest available options. Price comparisons for consumers requiring greater access speed, and the "always on" facility, provided by DSL and cable modem, are presented in Chapter 3.

2.2 In January 2002 Oftel published an Effective competition review for dial-up narrow band Internet access which concluded that the retail market for dial-up access was effectively competitive. Past benchmarking studies formed part of the data input to this review. This study forms part of the ongoing monitoring of the market for dial-up Internet access.

2.3 The results provide an update of the results presented in the June 2002 report (based on prices as at February 2002). This study is the sixth in a series that started with a study carried out by Teligen for Oftel published in May 2000 (based on prices as at February 2000).

2.4 The selection of service providers for inclusion in this report has been reviewed and some changes have been made to ensure that the tariffs included are representative. These changes may impact on the apparent price trends reported.

2.5 This chapter follows broadly the same format as the previous reports and shows:

• a summary of developments in the UK market over the last 6 months;
• a summary of the methodology used;
• results for business and residential consumers showing:

• price indices for a range of baskets;
• price movements over the last 6 months;
• charts of the spread of offers by country;

• sensitivity analysis;
• detailed results; and
• conclusions.

2.6 Detailed results for the packages modelled are shown in Annex B.

Market developments

2.7 Results from Oftel’s latest consumer research (conducted in August 2002) show 42% of homes are connected to the Internet, compared to 46% in February 2002 (this decrease is due to sample changes and greater inclusion of deprived areas where Internet penetration is lower than average). Table 2.1 shows that:

• the percentage of unmetered subscriptions has remained stable over this period; and
• the average number of usage hours has remained stable for unmetered use and has decreased for subscriptions and calls only.

Table 2.1: Residential Internet market developments from February 2002 to August 2002

2.8 The results also show that around 67% of small and medium sized businesses are connected to the Internet, compared with 59% in February 2002. Table 2.2 shows that:

• most small and medium businesses use dial-up (PSTN or ISDN) to connect to the Internet;
• medium sized businesses are more likely to subscribe to an unmetered service; and
• the number of businesses using an unmetered package is increasing.

Table 2.2: Business Internet market developments from February 2002 to August 2002

Methodology

2.9 The methodology remains as in the June 2002 report and details are not repeated here.

Results for residential baskets

Price index for residential off-peak services

2.10 The price index (based on the average of the two cheapest packages from different service providers in each country) is presented in Table 2.3 for residential off-peak baskets.

Table 2.3: Comparison of Residential off peak package prices

*Figures for Ohio are not directly comparable with those in the June 2002 report

2.11 From Table 2.3 it can be seen that:

• UK prices are the cheapest out of all countries included in the study for unmetered off-peak access;
• UK prices for limited Internet usage are significantly cheaper than the US, slightly cheaper than in France and slightly more expensive than in Germany and Sweden; and
• UK prices for limited Internet use compares more favourably with the other European countries studied for the higher usage levels.

2.12 In several countries, cable modem or DSL services appear as the cheapest package for some baskets. In Sweden, there are no dial-up unmetered packages and in France and Germany service availability is limited. In these countries prices for the unmetered basket are based on DSL/cable modem offers. In Germany broadband packages start to become cost effective (ie cheaper than dial-up) after 40 hours, in Sweden after 30 hours and in France 20 hours of usage per month.

2.13 The results present a positive picture for the UK. There has been some movement in the UK’s relative position:

• for limited Internet use the UK’s relative position has deteriorated by 1-2% compared to France, Germany, Sweden and Ohio;
• for unmetered services the UK is still the cheapest country though its position has deteriorated slightly against the other countries (the apparent improvement against Ohio is due to improved modelling of Ohio fixed line data).

Price trend

2.14 A summary of price changes since February 2002 is provided in Table 2.4. In some cases the apparent price change may reflect the inclusion of tariffs for additional service providers. The average price change shown is the mean of the percentage changes across each of the original 5 baskets.

Table 2.4: Percentage change in price levels for residential off-peak baskets February 2002 - August 2002

2.15 From Table 2.4 it is seen that:

• prices in the UK are lower for most baskets, particularly Basket 1 (this is partially due to the revised list of service providers included);
• overall prices for limited usage have fallen in France, Germany, the UK and California, remained the same in Sweden and have risen in Ohio by 1%; and
• prices for unmetered Internet access has decreased in all countries and most significantly in France and Germany.

2.16 Price changes need to be considered together with price levels. The following chart (Figure 2.1) shows price changes for limited use baskets relative to UK prices as at February 2000. Over the period February 2000 to August 2002 there has been a convergence of prices across most of the countries benchmarked.

2.17 Since August 2001 the results have been based on a new methodology (ie including broadband products). For August 2001 a comparison of PSTN only and the new methodology have been included to ensure a consistent comparison can be made throughout the period.

Figure 2.1: Price trends by country from February 2000 to August 2002 for residential off-peak limited use baskets

Price spread

2.18 The spread of prices was also considered. To make this meaningful, only dial-up packages have been included (otherwise the spread for the low usage baskets would be very wide, as broadband offers are not appropriate for these usage levels). The charts in Figure 2.2 show the price for the cheapest package offered by each operator as a percentage above the cheapest price across all countries, for each basket. Amongst other things, the price spread provides an indication of the level of choice for customers at, or around, the best deal. Figure 2.2 shows that the spread of prices varies by basket. The spread of unmetered prices is not presented due to the relatively small number of dial-up packages currently on offer, ie available only in the UK and US.

2.19 The price spread for low usage baskets is particularly large for the UK and the US. In these countries there are some service providers who offer only unmetered/partly unmetered packages and these are not cost-effective at low levels of usage. For higher usage the spread is generally narrower, with the highest spreads seen in the UK and France and the lowest in Sweden, Germany and the US.

Figure 2.2: Price Spread Charts for Residential Off-Peak Baskets (dial-up only)

Baskets are shown in order of usage level

Price index for residential peak services

2.20 The price index (based on the average of the two cheapest packages from different service providers in each country) is presented in Table 2.5 for residential peak baskets.

Table 2.5: Comparison of residential peak package prices

2.21 From Table 2.5 it is seen that:

• overall, UK prices for limited peak use are cheaper than all other countries studied, although Germany is cheaper for the lowest use basket; and
• for unmetered peak access, UK prices are also the cheapest of all countries studied.

2.22 As for the off-peak baskets, in several countries cable modem or DSL services appear as the cheapest package for some baskets. In Sweden there are no dial-up unmetered packages and in France and Germany service availability is limited. In these countries prices for the unmetered basket are based on DSL/cable modem offers. In Germany broadband packages start to become cost effective after 40 hours, in Sweden after 30 hours and in France 20 hours of usage per month.

2.23 The results present a positive picture for the UK. The UK still offers the cheapest services and the gap between the UK and the other countries has increased for both limited use and unmetered services. Previously, for unmetered services, the indices in other countries were 9-34% higher than the UK, while in this report they are 20-37% higher.

Price trend

2.24 A summary of price changes since the February 2002 results is provided in Table 2.6. In some cases the apparent price change may reflect the inclusion of tariffs for additional service providers. The average price change shown is the mean of the percentage changes across each of the original 4 baskets.

Table 2.6 Percentage change in price levels for residential peak baskets February 2002 – August 2002

*Ohio price changes reflect the improved modelling of fixed line data for both periods

2.25 From Table 2.6 it is seen that:

• overall there has been a slight increase in the price of limited use baskets in Sweden and Ohio;
• prices for limited use baskets have fallen slightly in France and California and more significantly in Germany and the UK; and
• prices for unmetered dial-up access have fallen slightly in the US and Sweden, and more significantly in France, Germany and the UK.

2.26 Price changes need to be considered together with price levels. The following chart (Figure 2.3) shows price changes for limited use baskets relative to UK prices as at August 2000.

2.27 Since August 2001 the results have been based on a new methodology (ie including broadband products). For August 2001 a comparison of PSTN only and the new methodology have been included to ensure some comparison can be made throughout the period. The spread of prices is much narrower when broadband services are included. 

Figure 2.3: Price trends by country from February 2000 to August 2002 for residential peak limited use baskets

Price spread

2.28 The spread of prices was also considered. To make this meaningful, only dial-up packages have been included (otherwise there would be a very wide spread for the low usage baskets, as this would include broadband offers not appropriate to these usage levels). The charts in Figure 2.4 show the price for the cheapest package offered by each service provider as a percentage above the cheapest price across all countries, for each basket.

2.29 The price spread is particularly large for the UK. In the UK there are some service providers who offer only unmetered/partly unmetered packages, which are not cost-effective at low levels of usage, and others that offer only pay as you go, which are not cost effective at high levels of usage.

Figure 2.4: Price Spread Charts for Residential Peak Baskets (dial-up only)

Results for business baskets

2.30 The analysis for the business baskets is based on packages that are specifically targeted to businesses. There are, however, some packages targeted at the residential market that will also be used by small businesses (some residential packages explicitly prohibit business use while others do not). The dividing line between a business and a residential package is not always clear, and the results presented may not represent the prices actually paid by a business. In general, a business will expect to pay more for Internet access than residential consumers as they receive additional value and services in their packages, this includes email addresses or web space. Smaller businesses may not require these additional services and residential packages may be sufficient for their needs.

2.31 The price index (based on the average of the two cheapest packages from different service providers in each country) is presented in Table 2.7 for business baskets.

Table 2.7: Comparison of Business package prices

2.32 From Table 2.7 it is seen that:

• UK prices for limited usage are cheaper than the US and Sweden, similar to France and more expensive than Germany. This is an improvement from the last benchmarking report where the UK was the most expensive country; and
• for unmetered access the UK’s position has improved since the last benchmarking report and the UK is now cheaper than France, Sweden and Ohio and slightly more expensive than California and Germany.

2.33 In several countries, cable modem or DSL services appear to be the cheapest package for some baskets. In France, Germany and Sweden there are no dial-up unmetered packages, and prices for the unmetered basket are based on DSL/cable modem offers. In Germany and Sweden, cable modem or DSL packages start to become cost effective at 40 hours usage per month.

2.34 The main changes in the UK’s relative position are a result of the following points:

• additional service providers have been included for France, Sweden and the UK and the inclusion of these additional tariffs impacts on the results; and
• improved modelling of fixed line data has increased the costs for Ohio.

Price trend

2.35 A summary of price changes since February 2002 is provided in Table 2.8. In some cases the apparent price change may reflect the inclusion of tariffs for additional service providers. The average price change shown is the mean of the percentage changes across each of the original 5 baskets.

Table 2.8: Percentage change in price levels for business baskets February 2002 – August 2002

2.36 From Table 2.8 it is seen that:

• prices are significantly lower in the UK for all limited use baskets. In part this reflects the inclusion of additional service providers' tariffs;
• overall, prices for limited use baskets have fallen in France and Germany (the fall is significant in Germany reflecting price falls from one service provider), have increased in California and there is little change in Sweden and Ohio; and
• unmetered basket prices have remained fairly static in Germany, Sweden and Ohio, have dropped in the UK and France (due to additional service providers being included) and have risen in California.

2.37 However, price changes need to be considered together with price levels. Figure 2.5 shows price changes for the limited usage baskets relative to UK prices as at February 2000.

2.38 Since August 2001 the results have been based on a new methodology (ie including broadband products). For August 2001 a comparison of PSTN only and the new methodology have been included to ensure some comparison can be made throughout the period. The spread of prices is wider when broadband services are also included. 

Figure 2.5: Price trends by country from February 2000 to August 2002 for business limited use baskets

Price spread

2.39 The charts in Figure 2.6 show the price for the cheapest package offered by each service provider as a percentage of the cheapest price across all countries, for each basket (including PSTN and ISDN only). There are relatively few packages designed specifically for business in some countries, which limits the usefulness of the comparison. 

Figure 2.6: Price Spread Charts for business baskets (dial-up only)

Sensitivity analysis

2.40 In order to ensure that the results are robust, a number of alternative assumptions have been examined. The following sensitivities have been considered:

• removing the fixed PSTN charges from the overall price;
• removing cable modem/DSL packages; and
• additionally removing packages with limited availability (cable only offers in the UK).

2.41 Results showing the effects for residential users of each sensitivity are presented in Tables 2.9 and 2.10 for off-peak and peak usage respectively. The results consider the effect on the average index across all limited use baskets and on the index for unmetered use.

Table 2.9: Results of sensitivity tests for residential off-peak baskets

Table 2.10: Results of sensitivity tests for residential peak baskets

2.42 For both peak and off-peak use the UK’s position improves when fixed PSTN charges are ignored. This effect is much higher for the unmetered baskets. This is due to lower PSTN charges in Germany and Sweden. Excluding broadband services increases prices in all countries, except Ohio, as broadband offers are included in the cheapest two services. This results in an deterioration in the relative position of the UK compared to all countries, except Sweden, as the UK has a relatively cheap, low bandwidth cable modem offer available. Excluding cable only offers (as well as excluding broadband services) has a further impact on the UK, due to low cost dial-up services from cable companies.

2.43 Table 2.11 presents the same sensitivity analysis for business customers:

Table 2.11: Results of sensitivity tests for business baskets