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Chapter 3

Internet access – broadband

Introduction

3.1 This chapter covers Digital Subscriber Line (DSL) and cable modem services (referred to collectively as "broadband" services). These services provide high-speed telecom services to consumers over the local loop/cable network. These services are relatively new but are becoming increasingly important in providing consumers with access to a range of services, such as fast Internet access and video on demand. This chapter focuses on comparing the cost for different types of users of broadband services providing Internet access. Further information on broadband markets is presented in chapters 4, 5 and 6 of this report.

3.2 Oftel carries out regular reviews of the major telecom markets to determine the appropriate level of regulation for the future. Regular benchmarking exercises allow a time trend to be developed, which provides greater information than a single snap shot. The results in this report will form part of the data input for future reviews.

3.3 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 fifth in a series, which started with a study carried out by Analysys for Oftel and published in April 2000 (based on prices as at February 2000).

3.4 A full update of prices has been carried out based on tariffs as at August 2002. In the last benchmarking report a partial update was completed for April 2002 to take into account BT's wholesale DSL price cuts. Results for the UK from April 2002 have been included in this report in tracking price developments.

3.5 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.

3.6 Since services differ in the amount of bandwidth (both downstream to the consumer and upstream from the consumer) that is available, price comparisons presented are viewed in the context of the bandwidth provided.

3.7 Results are presented for two market segments: residential and business. For the business market, results are further split into low, medium and high bandwidth services. However, it is noted that there is not necessarily a clear dividing line between residential and business services. A significant number of home workers and small businesses may well find an entry-level service, aimed primarily at residential consumers, adequate for their needs.

3.8 This chapter covers:

• a summary of the main changes in the broadband market over the last 6 months;
• a summary of the methodology used;
• results for a range of residential and business baskets, showing:

• price indices and detailed results;
• price movements over the period August 2001 to August 2002;
• charts which show the spread of offers by country;

• sensitivity analysis;
• comparison of relative prices of dial-up and broadband internet access; and
• conclusions.

3.9 Detailed results are shown in Annex C to this report.

Market developments

3.10 The total number of broadband lines (DSL plus cable modem) in the UK was estimated to be around 838,000 (corresponding to approximately 1.4 lines per 100 population) as at August 2002. However this has risen 1,135,000 at the beginning of November 2002. This compares to only 179,000 (0.30 lines per 100 population) as at the end of August 2001.

3.11 As of November 2002, 66% of people lived in areas where exchanges had been upgraded. However, because of the technical limitations of ADSL approximately 5% of people in each exchange area cannot get the service. This means that ADSL is currently available to approximately 63% of UK households. Cable modem services were available to approximately 45% of households.

Summary of price developments from February 2002 to August 2002

3.12 In April 2002, BT made significant cuts to the price of their wholesale DSL services. For example IPStream 500, which is used to provide DSL services to residential customers, was reduced from £30 a month to £14.75, a reduction of over 50% and this has filtered through to retail prices. These price cuts were taken into account in the last benchmark and developments in the UK from April 2002 and August 2002 are taken into account in this report.

3.13 The previous report commented on France Telecom's proposed cuts to the price of their wholesale DSL products. The ART has now approved revised prices and these came into effect in October 2002. Any impact of these wholesale price changes on retail prices will not be taken into account in the retail price results reported in this chapter. Further information on France Telecom's wholesale DSL price cuts is given in chapter 5.

Methodology

3.14 The methodology is as used in the June 2002 study and the details are not repeated here. The methodology takes into account any one-off charges for connection or modem purchase and it is assumed these costs will be written off over three years. The following definition of "broadband" has been chosen:

3.15 This definition does not include basic broadband services with 128 kbit/s capacity which are available in the UK and some other countries. The availability of services with downstream capacity equal to 128kbit/s is increasing, and consideration will be given in subsequent reports to presenting separate price benchmark results for these services. The effect of using a higher threshold for downstream capacity is considered as part of the sensitivities and yields little change in the results.

3.16 The uptake figures that Oftel collects for the UK includes data on the take-up of 128 kbit/s broadband services. Take-up of 128kbit/s services may also be included in the data collected in the other countries. These services are therefore taken into account in chapter 4, which looks at take-up in the benchmarked countries. It has not been possible to break down the take-up figures so as to show the basic 128 kbit/s services separately.

3.17 Table 3.1 provides a summary of the comparisons undertaken. Usage per month in GigaByte (GB) was estimated for businesses in June 2002 study by analysing the pricing structure for some German service providers who offered both a flat rate and volume based tariffs. A similar analysis has been carried out based on August 2002 tariffs and the results are consistent with the values used last time, so these have not been changed. For residential consumers, usage in GB per month was estimated at 1.2GB per month as shown in table 3.1. This is based on the average of the maximum GB allowed with certain broadband services in Germany. The effect of varying the usage rates is considered as part of the sensitivities.

Table 3.1: Summary of the comparisons undertaken

Note: GM = geometric mean (this is defined as: square root (downstream bandwidth x upstream bandwidth))

3.18 As in the June 2002 study, price comparisons are presented for both DSL and cable modem services taken together, and for DSL services only. Cable modem services are expected to provide a close substitute for DSL services, especially for residential consumers.

3.19 Price comparisons are presented alongside comparisons of bandwidth. Care needs to be taken in interpreting the results – there are a number of factors which will affect the actual speed experienced by the user when using the service and it has not been possible to take these into account. In particular the "contention ratio" (the ratio of the potential maximum demand to the actual bandwidth) will be an important contributor to the speed obtained in practice. However, this information is not readily available other than in the UK.

3.20 Additional assumptions need to be made to model the prices of particular services. The main assumptions made are as follows:

• for certain German services, DSL is only available over an ISDN (rather than PSTN) line. In these cases the additional cost of an ISDN line, compared to a PSTN line, is included in the DSL price. Where DSL is available over both PSTN and ISDN, the service over PSTN has been modelled;
• in Sweden, a "group" tariff may be available at a lower price than the price for an individual household. To obtain the cheaper tariff, several households within a limited area need to be connected and, householders need to enter into a separate "collaborative" agreement with the DSL provider. The prices for individual households have been used for the main analysis;
• for cable modem services, the price may be lower for customers who subscribe to other services (TV or telecoms) with the cable operator. The cheaper price available to cable customers has been used; and
• services have been designated residential or business based on the market sector that the operator/service provider appears to be targeting. However, while certain "residential" services specifically prohibit business use, others allow it. The distinction between residential and low-end business use is, therefore, not clear-cut.

3.21 Some of these assumptions are varied as part of the sensitivity analysis.

Results for residential users

Price index

3.22 Table 3.2 below shows the results for the price level, price index and (downstream) bandwidth provided for residential services. All these measures are constructed using the average of the two lowest priced residential offers from different operators/service providers included in this study, in each country (it is not possible to include all service providers and this study may not represent the cheapest deals available in every case). Results are presented both with, and without, cable modem offers included.

Table 3.2: Results for price level, price index and (downstream) bandwidth for residential broadband services

3.23 From Table 3.2 it is seen that as at August 2002:

• when cable modems are included:

• prices in the UK are similar to the US and Germany, cheaper than in France and only in Sweden are prices cheaper; and

• the capacity offered is comparable in France, Sweden, Germany and the UK, but the US services offer higher capacity; and

• when cable modem services are excluded (ie a comparison of DSL services only):

• UK prices are cheaper than France, similar to Germany and slightly more expensive than Sweden and the US (only by £2-£4 per month); and

• the capacity offered is comparable in France, Sweden and the UK, but higher in Germany and lower in the US.

3.24 Looking at the more detailed results underlying Table 3.2, it is seen that:

• in the UK, cable modem services from NTL and Telewest are cheaper than any DSL service (from service provider's included in the study). In Sweden and France two cable modem services also make up the cheapest services;

• in Germany and the US the index of cheapest services is made up of one cable modem and one DSL service; and

• the cheapest DSL services in the US have lower capacity than in Europe - however the US services are symmetric, while the European services are generally asymmetric.

3.25 When cable modems are included, UK prices have not changed since April 2002, however, prices in Germany decreased leading to a deterioration in the UK’s relative position. When results for DSL services only are considered, the UK’s overall ranking has not changed, although there is an improvement in its position relative to Sweden and the US, with these countries now only 6-11% cheaper compared to 13-24% in April 2002 (due to price increases in these countries).

3.26 The two cheapest DSL services in the US provide a downstream speed of 256kbit/s and 200kbit/s, whereas the UK services have downstream speeds of 512kbit/s. Comparing UK and US DSL services that both have a minimum downstream speed of 512kbit/s, the UK is cheaper than the US as at August 2002. The US does not offer services at 512kbit/s, and setting the minimum speed at 512kbit/s, the average speed of the cheapest two US DSL services is 725 kbit/s.

3.27 The results can also be presented by considering a chart which lists the cheapest offers of the operators/service providers considered in this study (arranged in price order), with downstream bandwidth superimposed. See Figure 3.1 below (note UK operators/service providers are highlighted using darker coloured bars).

Figure 3.1: Residential DSL and cable modem services in ascending order of price, with "speed" of service (downstream bandwidth) shown separately.

Note: cable modem services have (CM) after the service provider's name. UK services are shown in bold.

3.28 From Figure 3.1 it is seen that:

• the UK DSL services are about average in price, UK cable modem services appear to be mid to low priced and have a fairly typical bandwidth for residential services;
• the Swedish services are all at the cheap end of the chart, with typical bandwidth for residential services;
• cable modem services in the US appear to be mid priced with high bandwidth; and
• the US, France and Germany appear to have some offers available spread throughout the price range; the cheapest US DSL services all have relatively low capacity (although they are symmetric).

Price trend

3.29 A summary of price changes since February 2002 is provided in Table 3.3. Price changes from the period April 2002 to August 2002 are also shown for the UK. This table shows:

• including cable modems, the cheapest broadband prices in the UK have fallen by 3% from February to August 2002 - 2% of this fall occurred in the period April 2002 to August 2002. This additional fall is the result of the reduction in connection fee for one of the cable modem services;
• DSL prices in the UK dropped by 27% from February 2002 to August 2002, - only 6% of this fall has occurred since April 2002;
• prices for broadband services including cable modems dropped in all countries, and fell significantly in France; and
• DSL prices increased in Sweden, fell in Germany and remained about the same in France and the US.

Table 3.3: Percentage change in price levels between February 2002 and August 2002 (UK: April 2002 – August 2002 also shown) – residential services

Price and bandwidth spread

3.30 Charts showing the spread of prices and bandwidths are shown in Figures 3.2 and 3.3 respectively. The price spread chart (Figure 3.2) shows the price for the cheapest package offered by each service provider as a percentage increase over the cheapest price across all countries. The bandwidth spread chart (Figure 3.3) shows the range of bandwidths on offer (based on the lowest and highest bandwidth offered by each service provider).

Figure 3.2: Price spread chart (August 2002)

Figure 3.3: Bandwidth spread chart

3.31 Figures 3.2 and 3.3 show:

• the range of prices in France, Sweden and the UK are narrower than in other countries;
• the range of bandwidth on offer in Sweden, the UK and France is relatively limited; and
• the US offers the widest range of bandwidth, though the range in Germany is also wider than in the other European countries.

3.32 Since February 2002, there has been a change in the UK price spread. In the last benchmarking report the price spread was approximately 30-160%. Due to the wholesale DSL price cuts in April, DSL prices are now more comparable with cable modem services decreasing this price spread to 30-70%.

3.33 Price developments (including cable modem and excluding cable modem) over the research period October 2000 until August 2002 are depicted in figures 3.4 and 3.5. These figure show:

• when cable modems are included prices in all countries dropped between October 2000 and August 2001 and have remained relatively stable since, except in France where prices have dropped significantly since April 2002;
• DSL only prices dropped significantly in France and the US between October 2000 and August 2001 and have remained stable since. Prices in Germany and Sweden have remained relatively low and prices in the UK have been relatively high until the recent price cuts in February 2002 and April 2002; and
• broadband prices in all countries appear to be converging.

Figure 3.4: Broadband (including cable modem) price developments since October 2000

Figure 3.5: DSL only price developments since October 2000

Results for business users

Price index

3.34 Table 3.4 below shows the results for the price level, price index and bandwidth provided for business services. All these measures are constructed using the average of the two lowest priced business offers (from different operators/service providers considered in this study) in each country.

Table 3.4: Results for price level, price index and bandwidth for business broadband services (cable modem services included)

Note: DS = downstream, GM = geometric mean

3.35 From Table 3.4 it is seen that as at August 2002:

• for the most basic services available to business (ie where the business has a minimum bandwidth requirement of 129 kbit/s):
• prices in the UK are cheaper than any other country;
• prices in Germany and the US are 19-38% more expensive than the UK; and
• prices in France and Sweden are significantly more expensive than in all other countries.
• for business services where a minimum geometric mean (ie square root downstream bandwidth x upstream bandwidth) bandwidth of 500kbit/s is required:

• prices in the US are very much lower than elsewhere; and
• prices in France, Germany and Sweden are 20-44% more expensive than in the UK.

• for business services where a minimum geometric mean bandwidth of 1000kbit/s is required:

• services are only available in Germany, Sweden and the US; and
• prices in Germany are much more expensive than Sweden or the US.

3.36 The results can also be run excluding cable modems. Fewer cable modem services are available to business than residential and generally the cheapest DSL services are cheaper than the cheapest cable modem services. The only country in which a cable modem service features in the index is Germany – excluding cable modem services, therefore, has a negative effect on relative prices in Germany.

3.37 In both Germany and the US, a range of symmetric services are offered, while in the UK, France and Sweden all services are asymmetric.

3.38 Since the last benchmarking report, the UK is still the cheapest country for a basic service at August 2002, although prices in the UK have increased slightly since April 2002 (due to a package changing to being marketed for residential, rather than business, use).

3.39 When there is a minimum bandwidth of 500 kbit/s, the UK’s relative position has improved since April 2002, and the UK is now the second cheapest after the US. The position of Sweden has deteriorated since April 2002. This is explained by the inclusion of an additional service provider (previously results for Sweden were based on tariffs for a single service provider - the inclusion of an additional service provider's tariffs makes the treatment of Sweden consistent with that in other countries).

3.40 The results can also be presented by considering a number of charts which list the cheapest offers of the operators/service providers considered in this study (arranged in price order), with the relevant measure of bandwidth superimposed. See Figures 3.6 to 3.8 below (note UK operators/service providers are highlighted using darker coloured bars).

Figure 3.6: Business DSL and cable modem services in ascending order of price, with "speed" of service (downstream bandwidth) shown separately – minimum bandwidth 129kbit/s (downstream).

Note: cable modem services have (CM) after the service provider’s name. UK services are shown in bold.

Figure 3.7: Business DSL and cable modem services in ascending order of price, with "speed" of service (geometric mean bandwidth) shown separately – minimum bandwidth 500kbit/s (GM).

Note: cable modem services have (CM) after the service provider’s name. UK services are shown in bold.

Figure 3.8: Business DSL and cable modem services in ascending order of price, with "speed" of service (geometric mean bandwidth) shown separately – minimum bandwidth 1000kbit/s (GM).

Note: cable modem services have (CM) after the service provider’s name.

Price trend

3.41 A summary of price changes since February 2002 is provided in Table 3.5. In some cases the apparent price change may reflect the inclusion of tariffs for additional service providers. This table also includes the UK price change for the period April 2002 to August 2002 for the UK. This shows:

• for the most basic services available to business (ie where the business has a minimum bandwidth requirement of 129kbit/s):
• overall from February 2002 to August 2002 prices in the UK decreased significantly due to wholesale DSL price cuts. From April 2002 to August 2002 prices in the UK increased by 4%;
• from February 2002 to August 2002 prices in France and Germany also decreased significantly. In France this was due to the inclusion of an additional service provider and in Germany due to price cuts of the two cheapest services;
• in Sweden, results presented in this report are not comparable with those in the previous report (where prices from one service provider only were included) and the price trend is not shown. Sweden's position in this report is less good than previously reported; and
• there was little change in the US.

• for business services where a minimum geometric mean bandwidth of 500kbit/s is required:

• overall from February 2002 to August 2002 prices in the UK decreased significantly due to the wholesale DSL price cuts - from April 2002 prices in the UK decreased by 2%;
• there has been little change in France, Germany and the US; and
• above comments for Sweden also apply here; and

• for business services where a minimum geometric mean bandwidth of 1000kbit/s is required:

• prices have fallen in Germany and the US and remained relatively static in Sweden (only one of the service providers in Sweden offers services with this bandwidth).

Table 3.5: Percentage change in price levels between February 2002 and August 2002 (UK: April 2002 – August 2002 also shown)– business services.

Price and bandwidth spread

3.42 Charts showing the spread of prices and bandwidths are shown in Figures 3.9 and 3.10 respectively. The price spread charts (Figure 3.9) show the price for the cheapest package offered by each service provider as a percentage increase over the cheapest price across all countries for each business type. The bandwidth spread chart (Figure 3.10) shows the range of bandwidths on offer (based on the lowest and highest downstream bandwidth offered by each service provider).

Figure 3.9: Price spread charts

Figure 3.10: Bandwidth spread chart

3.43 Figures 3.9 and 3.10 show that:

• for the most basic services available to business (ie where the business has a minimum bandwidth requirement of 129kbit/s), the price spread is similar in all countries (though for Sweden only two service providers are included);
• for business services where a minimum bandwidth of 500kbit/s (geometric mean) is required, Germany, Sweden and the US have a wider spread of prices than in the UK and France;
• for business services where a minimum bandwidth of 1000kbit/s (geometric mean) is required, only the US, Sweden and Germany offer services. Prices in Germany are both higher and more widely spread; and
• taking all services on offer, the range of capacities on offer in Germany and in the US was much wider than elsewhere. The range is similar in the UK and Sweden while in France it is narrower.

3.44 Price developments over the research period October 2000 until August 2002 are depicted in figures 3.11 and 3.12. Figure 3.12 appears to indicate greater convergence in prices over time, although this is less apparent in figure 3.11.

Figure 3.11: Broadband price developments since October 2000

Results for Sweden for August 2002 not comparable with earlier results.

Figure 3.12: Broadband price developments since October 2000

Results for Sweden for August 2002 not comparable with earlier results.

Sensitivity analysis

3.45 There are a number of assumptions that have been made which potentially affect the results. These include:

• the definition of "broadband";
• the usage rate included for tariffs which depend on volume; and
• the treatment of some country specific issues:
• the treatment of ISDN costs in Germany;
• the treatment of "group" tariffs in Sweden;
• the treatment of costs for non-cable subscribers; and
• availability of "residential" services to business customers.

3.46 To test the robustness of the results, a sensitivity analysis has been carried out. The sensitivities for which detailed results are presented are as follows:

i. Change the definition of "broadband", so that the downstream capacity must be at least 500kbit/s;
ii. Double and half the usage rate;
iii. Exclude the additional ISDN costs in Germany and include the cheaper "group" tariffs in Sweden (residential only).

3.47 The impact of additional costs for non-cable customers and business use of residential tariffs is commented on.

3.48 The results of the sensitivity analysis for residential and business customers is shown in Tables 3.6 and 3.7. Detailed results for business are shown only for "low capacity" business services - the impact on consumers requiring higher bandwidth is commented on.

Table 3.6: Sensitivity analysis for price index for residential DSL and cable modem services

Table 3.7: Sensitivity analysis for price index for business DSL and cable modem services ("low" capacity basket)

3.49 The results of the sensitivity analysis for residential services shows:

• changing the definition of broadband to include only services with > 500kbit/s downstream capacity has no effect on the UK, France and Sweden results but increases the prices in the US and Germany (ie one of the two cheapest services in both countries has a relatively low capacity);
• increasing and halving the usage level has no effect on the results; and
• changing the treatment of some German and Swedish tariffs improves their relative positions.

3.50 For business use ("low" capacity basket), the results of the sensitivity analysis show:

• changing the definition of broadband to include only services with > 500kbit/s downstream capacity, has an effect on the German results as one of the cheapest services is a symmetric service below 500 kbit/s;
• doubling and halving the usage rate has no impact on the results;
• taking out the incremental cost of ISDN access in Germany improves the German prices, but does not alter the country ranking.

3.51 Results have also been run for the other business baskets. These show that:

• changing the definition of broadband has no impact in these cases (as these baskets already have higher capacity thresholds); and
• changing the usage rates has no impact on the results.

3.52 The results of the sensitivity analysis illustrate that changes in assumptions can have an impact on the result for an individual country, but do not alter the overall conclusion regarding the UK's relative position.

3.53 A couple of other areas have also been considered:

• costs for non-cable customers; and
• business use of residential services.

3.54 Full information on the price of cable modem services to non-cable customers has not been collected, and it is not possible to test in detail the effects of including these additional costs. Most (but not all) cable operators appear to charge some additional amount to customers who are not taking other telephony or TV services. As cable modem services feature in the index for all countries for residential services, including these costs would raise prices in all countries.

3.55 A "business" service has been defined as a service that is clearly targeted at the business market. Some businesses may be able to use services that are targeted at residential use. The existence of "home workers" also blurs the distinction between residential and business use. In the UK, prices for the most basic business DSL services are similar to the prices for residential DSL, hence there is little scope for business to reduce costs by using "residential" packages. In other countries the differential is bigger and it is possible that business costs can be reduced in this way.

Comparison of dial-up and broadband prices

3.56 Comparisons can be made of the cost of always on "broadband" services compared to unmetered dial-up for residential and business consumers in each country.

3.57 For residential consumers, Table 3.8 compares the cost of broadband to the cost of "unmetered" dial-up access (based on the average of the two cheapest deals in both cases). Where unmetered dial-up access is not available, the cost used is for 150 hours access (definition as used by OECD). In these cases the cost of dial up exceeds the cost of broadband. Clearly the precise ratio depends on the usage rate assumed.

Table 3.8: Comparison of broadband and dial up cost per annum for residential users

3.58 The equivalent table for business consumers is shown in Table 3.9 (using the "low" capacity basket).

Table 3.9: Comparison of broadband and dial up costs per annum for business users

3.59 The figures in tables 3.8 and 3.9 highlight the fact that for consumers in France, Germany and Sweden where dial-up unmetered Internet access is not widely available, broadband is likely to be a cost effective alternative for high usage customers. The usage rate used (150 hours per month) is high, and in practice the difference in price is likely to be lower. However, even with a usage of 60 hours a month, the cost of dial up exceeds that of broadband in all countries, except business services in France where the price of dial-up exceeds that of broadband at 110 hours.

3.60 The availability of unmetered dial-up Internet access may influence the rate of take up of broadband services, discussed in the following chapters.

Conclusions

3.61 For residential broadband services, there has been little change in the relative position of countries since February 2002, however, prices in all countries have dropped in varying amounts. When DSL only prices are compared, the UK's position improved significantly between February 2002 and April 2002 (as reported in the June 2002 report) but there has been little further change in the relative positions between April 2002 and August 2002. DSL prices have started to converge and are now relatively similar (between £25 -£29 per month) in all countries except France.

3.62 For business services, the UK’s relative position at August 2002 varies according to the capacity requirements of the end user. For a "low" capacity broadband service, UK prices fell between February to April 2002 and UK services have remained the cheapest from April to August 2002. For a "mid" capacity service, the UK is now the second cheapest country (previously Sweden was cheaper). Neither France nor the UK offers as wide a range of capacities as in the other countries.

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