Contents

Summary

Chapter 1 Introduction
Chapter 2 Fixed line (PSTN and ISDN) Services
Chapter 3 Services for Low Users / Special Groups

Annexes are only available in pdf format - please click here to download

Annex A Exchange rates and VAT rates
Annex B Detailed results for PSTN baskets

Summary

Scope

S.1 This report is an International Benchmarking study of fixed line services (both PSTN and ISDN), in France, Germany, Italy, Sweden, the United Kingdom and the US states of Ohio and California.

S.2 This study is a follow up to the study published by Oftel in June 2002 (which was based on February 2002 prices), for fixed line services. Additional analysis of the prices paid by consumers eligible for special schemes aimed at low users / disadvantaged groups is also included for the first time in this report. The analysis and drafting of this report has been carried out by Oftel. Consultants HI Europe and Analysys have collected the tariff data used in this report.

S.3 Points that should be borne in mind in interpreting the results are detailed in paragraphs 1.8 - 1.11 of this report. This report is not intended in any way to be a buyer's guide to services in the UK.

S.4 The results presented are based on a snapshot of prices as at February 2003.

Results for PSTN and ISDN services

PSTN

S.5 Tables 1 and 2 below show the results for the PSTN price index (expressed relative to the UK price index) for residential and business consumers respectively.

S.6 These results show that, based on the sample of service providers/operators selected:

• UK prices for residential PSTN services generally compare favourably with prices elsewhere;
• UK residential prices are cheaper than in France, Germany and Ohio for all baskets, while in California results vary by basket; and
• overall, UK prices for business PSTN services are just above average: UK prices are 3-5% higher than in France and Germany, significantly more expensive than in Sweden but between 4-12% cheaper than those in the US.

Table 1 Price index for residential PSTN services

Note: the average is a simple unweighted average across all baskets in the table.

Table 2 Price index for business PSTN services

Note: the average is a simple unweighted average across all baskets in the table.

S.7 Analysis of the price trend shows that between February 2002 and February 2003:

• prices for residential consumers in the UK have fallen by around 6%, while elsewhere prices have fallen by between 0-8%; and
• prices for business consumers in the UK have fallen by about 4%, while elsewhere prices have fallen by up to 6%.

ISDN

S.8 Comparisons have also been made of prices for ISDN services offered by the incumbent operators.

S.9 The results show that for residential use, UK ISDN prices are on average lower than prices in France and Ohio (which are around 8-19% higher), similar to prices in California and higher relative to Germany and Sweden (which are around 5-14% cheaper). For business consumers, UK ISDN prices are higher than the other countries considered, with Sweden over 45% cheaper.

Results for special schemes

S.10 This study has also considered comparisons of "special" tariffs provided by incumbent operators, whose purpose is to ensure that basic telephony services are affordable for disadvantaged groups. The results show that, for the countries compared:

• only the UK has a "low user" scheme available to those with low telecoms usage - in the other countries eligibility is restricted to those with low incomes / those benefiting from social welfare programmes;
• UK prices for eligible users compare well to those in other European countries, especially for zero/very low usage - however, prices in the US are lower; and
• the level of discount (compared to the standard tariff), is greater in the UK than in the other European countries for zero/very low usage, but the discount in the UK reduces more rapidly with increasing usage than in other countries. The level of discount available in the US is higher than in the European countries studied.

Chapter 1

Introduction

1.1 Oftel’s aim is to provide the best possible deal for telecommunications customers in terms of quality, choice and value for money through effective competition and adequately protecting consumers. International comparisons of telecoms services are one way of assessing the achievement of this aim.

1.2 Oftel carries out regular reviews of the major telecoms 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.

1.3 This study focuses on comparing the cost for representative users for fixed line services in each country using a "basket" methodology. Oftel has carried out its own benchmarking work (as opposed to using alternative published sources) to ensure that the methodology is rigorous and robust and that it addresses the following issues:

• usage baskets need to reflect a range of patterns of use representative of different groups of consumers; and
• consumers have a potentially wide range of choices for their telecoms services:
• consumers have a choice of competing operators all of whom will offer different packages; and
• each operator may offer a variety of different packages and discount schemes targeted at different segments of the market.

1.4 The following countries are included in the analysis:

• France;
• Germany;
• Sweden;
• UK; and
• the US states of Ohio and California.

1.5 This study is a follow up to the study published by Oftel in June 2002,which was based on tariff data valid as at February 2002. This study is the fourth in a series that started with a study carried out by Teligen for Oftel and published in May 2000. A list of the "tariffs valid at" date and date of publication of previous studies is given in table 1.1.

Table 1.1: List of previous studies

Reports can be found at: www.oftel.gov.uk/publications/research/index.htm

1.6 The analysis and drafting of this report have been carried out by Oftel.

1.7 Data has been collected from the vast range of tariff packages available to residential and small/medium sized businesses for major operators and service providers in each country as at February 2003. Data collection has been carried out for Oftel by consultants HI Europe and Analysys.

Points to bear in mind

1.8 There are a huge range of operators and service providers offering services to consumers and it is not possible to cover all packages on offer. In addition, it is not possible to fully capture all aspects of innovative tariff products. While it is believed that the sample chosen is fully representative and covers the range of offers available by country, the possibility that consumers have access to additional offers outside the range calculated for the sample used in this report cannot be excluded.

1.9 The objective of this report is to provide a comparison between countries for a range of consumer usage profiles. A range of profiles is chosen to be illustrative of the most frequent types of customer calling patterns, but is not comprehensive. Prices are based on a snap shot as at 19^th February 2003. Although providing a sound overall picture, the comparison of companies within a country should not be taken as necessarily being representative for an individual consumer.

1.10 The analysis is based on a basket methodology, which allows prices to be compared across different operators in different countries. It is not, however, intended to be a buyer’s guide to services as:

• it provides only a snapshot of the price levels for a continually changing set of price packages; and
• the residential or business consumer will have to access more specific usage information in order to determine the best option for that person or business.

1.11 There are separate industry funded initiatives and reports which seek to help UK consumers be better informed purchasers of telecommunications services (examples are; fixed and mobile quality of service indicators - www.cpi.org.uk/www.oftel.gov.uk; advice to consumers on using a mobile abroad - www.oftel.gov.uk; and information for small businesses about using telecoms and the internet - www.TelecomsAdvice.org.uk). Oftel has also recently produced a range of consumer guides and has introduced a seal of approval, called the Oftel PASS, for websites that compare the prices of different suppliers and provide impartial and accurate information - http://www.oftel.co.uk/publications/consumer/2002/pass0902.htm. This report is not part of that body of work as it seeks to compare positions between, not within, countries and it is not, therefore, intended in any way to be a buyer's guide to services in the UK.

Outline of the report

1.12 Chapter 2 presents the results for both PSTN and ISDN services. Further details of the results are given in the Annexes.

1.13 Chapter 3 presents an additional analysis considering the "special schemes" offered by incumbent operators to low users / disadvantaged groups. This includes both quantitative comparisons of the prices paid by eligible low users and a qualitative comparison of the eligibility criteria.

Chapter 2

Fixed line (PSTN and ISDN) Services

General Introduction

2.1 This chapter covers basic fixed line telephony ("PSTN") services, which continue to provide the main source of telephony for the majority of consumers. ISDN services are also considered. The comparisons in this chapter exclude "special schemes", with specific eligibility criteria, which are considered in Chapter 3.

2.2 Oftel is currently carrying out a review of competition in fixed narrowband services (as part of the retail market review) and the output of this study forms one of the inputs to the forthcoming consultation and statement. This study also forms part of the ongoing monitoring of the market for fixed line services, and the resulting time series will be used in subsequent reviews.

2.3 A comparison of PSTN and ISDN prices formed part of the international benchmarking study carried out by Oftel and published in June 2002, based on February 2002 tariffs. The results in this chapter provide an update of the results in the June 2002 study and enable the price trend from February 2002 to February 2003 to be analysed.

2.4 This chapter contains:

• a brief overview of the methodology used;
• for residential and business consumers separately:
• the main results comprising a price index of the cost of PSTN services for a range of customer profiles;
• price trends;
• charts which show the price spread of offers for each benchmarked country;
• the results for a number of sensitivities which test the robustness of the results;
• detailed results by operator;
• results for ISDN services; and
• conclusions.

Methodology for PSTN benchmarking

PSTN usage baskets

2.5 The analysis contained in this chapter is based on a basket methodology. The details of the usage baskets used are given in the June 2002 report and are not repeated here.

2.6 A total of 9 baskets are used for residential consumers. These cover a range of usage levels and calling patterns.

2.7 A total of 6 baskets are used for business consumers, covering 2 different levels of usage (for "small" and "medium" businesses) and 3 different calling patterns.

2.8 A number of the baskets include an element of Internet usage and hence there is a degree of overlap between the services benchmarked in this chapter and the analysis reported in an accompanying report on Internet access. In this chapter it is assumed that consumers access the Internet using a "subscription free" ISP service and pay standard local call charges. This may not always be the cheapest option. However, given that Internet usage is only one component of the overall basket, it is not expected that this simplification has a big impact on the results.

Methodology for PSTN Price Analysis

2.9 The basket methodology involves combining the usage baskets with tariff data to provide a set of prices. The approach used is the same as that described in the June 2002 report.

Choice of packages and discounts included

2.10 The analysis takes into account tariff schemes and discount options for a range of operators per country (this excludes "special schemes" with specific eligibility criteria - these are considered in Chapter 3). Some operators offer a wide range of different tariff schemes that can be combined with a number of discount options. Incumbent operators in particular appear to offer a large number of tariff schemes and/or discount options. Taking all possible combinations of tariffs plus discount options into account is not feasible and is unlikely to be a productive use of available resources. The focus is on including the main tariff packages plus a selection of discounts that are expected to have the greatest impact on the usage profiles used.

2.11 In the US, consumers generally purchase different elements of their overall service from different providers. For example, the line itself and local calls will typically be provided by the local incumbent operator, while long distance and international calls are provided by one of a number of long distance operators. Overall "packages" have been constructed by combining the individual elements. Taking all possible combinations of the different elements is not feasible. The focus is on modelling those combinations which are expected to be most cost effective for the profiles modelled. However, increasingly "all in one" packages are being offered by both local and long distance operators, and these are also included in the model.

Treatment of discounts

2.12 The following types of discount schemes have been included:

• inclusive call allowances and call value;
• volume discounts where the level of discount depends on the volume of calls or the level of spend for particular call types; and
• discounts on calls to a specified number of telephone numbers.

2.13 More complicated types of discount scheme (eg discounts which depend on the duration of the call) have not been modelled.

Results for residential baskets

Price index

2.14 The price index for residential PSTN services is presented in Table 2.1. As in the June 2002 study, this has been constructed by taking the average of the cheapest package offered by the incumbent (in the US AT&T is taken as the incumbent for long distance calls) and the cheapest of the packages offered by other operators. This reflects the fact that the incumbent generally continues to have a large market share. Detailed results showing the cost of each basket for each tariff package modelled are shown in Annex B.

Table 2.1 Price index for residential PSTN services

Note: the average is a simple unweighted average across all baskets in the table.

2.15 From table 2.1 it is seen that:

• UK prices for residential PSTN services generally compare favourably with prices elsewhere. Only in Sweden are prices lower (only by 2%); and
• UK residential prices are cheaper than in France and Germany for all baskets, while for California and Sweden the results vary by basket.

Price trend

2.16 The results in table 2.1 indicate that the UK’s relative position has improved since the June 2002 report, based on February 2002 prices. The percentage changes in price between February 2002 and February 2003 are shown in table 2.2. Price changes are presented in real terms. Changes in Purchasing Power Parity (PPP) exchange rates have some impact on the results.

Table 2.2 Percentage change in price levels for residential consumers between February 02 and February 03.

Note: the average is a simple unweighted average across all baskets in the table.

2.17 From table 2.2 it is seen that:

• prices in the UK have fallen by 6% on average; and
• only in France have prices fallen faster (by 8%).

2.18 It should be noted the results in the US include a range of taxes and surcharges that are charged to telecom users. These have been more accurately reflected in this report, compared to previous reports, resulting in a worsening of the US relative position.

2.19 Price trends need to be considered in the context of price levels. Figure 2.1 shows the price changes for residential PSTN services relative to UK prices as at February 2000. This illustrates a declining trend for most countries, with little change in relative country positions over the period studied. Price trends in individual countries can also be compared and in the period February 2000 to February 2003 prices in the UK and the US fell faster than in other countries.

Figure 2.1: Price trends by country from February 2000 to February 2003

Price spread

2.20 "Price spread" charts are shown in figure 2.2. The charts show the price for the cheapest package offered by each operator as a percentage above the cheapest price across all operators in all countries, for each basket. These charts illustrate the relative spread of prices by country, as well as allowing relative price levels to be compared.

2.21 The price spread seen varies by basket and by country. In general, the price spread in Sweden is less than the spread seen in other countries. The largest price spread is seen in Ohio and California. This is due to the inclusion of "all in one packages": these tend to be flat rate packages, which are expensive for low usage baskets.

Figure 2.2: Price spread charts

Results for business baskets

Price index

2.22 The price index for business PSTN services is presented in Table 2.3. As in the June 2002 study this has been constructed by taking the average of the cheapest package offered by the incumbent (in the US AT&T is taken as the incumbent for long distance calls) and the cheapest of the packages offered by other operators. This reflects the fact that the incumbent generally continues to have a large market share. Detailed results showing the cost of each basket for each tariff package modelled are shown in Annex B.

Table 2.3 Price index for business PSTN services

Note: the average is a simple unweighted average across all baskets in the table.

2.23 From table 2.3 it is seen that:

• overall, UK prices are just above average;
• prices in Sweden and Germany are lower than the UK for all baskets;
• prices in France and California vary by basket, but on average the UK is slightly cheaper than California and slightly more expensive than France; and
• prices in Ohio are generally higher than elsewhere.

2.24 Prices in the US are higher than might be expected. As was noted in the June 2002 study, "case by case" discounts are often available in the US. It is not feasible to take these into account in the price comparisons, and hence the US prices may be overstated.

Price trend

2.25 The results in table 2.3 indicate that the UK’s relative position has improved slightly since the June 2002 study, based on February 2002 prices. The percentage changes in price between February 2002 and February 2003 are shown in table 2.4. Price changes are presented in real terms. Changes in PPP exchange rates have some impact on the results.

Table 2.4 Percentage change in price levels for business consumers between February 02 and February 03.

Note: the average is a simple unweighted average across all baskets in the table.

2.26 From table 2.4 it is seen that:

• prices in the UK have fallen 4% on average; and
• the price falls seen in the UK are similar to the falls seen in France and Sweden, (between 5-6%).

2.27 Improved modelling of relevant taxes and surcharges in the US has had some impact on the US relative position (see paragraph 2.18).

2.28 Price trends need to be considered in the context of price levels. Figure 2.3 shows the price changes for business PSTN services relative to UK prices as at February 2000. This illustrates a general declining trend for all countries, with little change in relative country positions over the period studied. Price trends in individual countries can also be compared and over the period February 2000 to February 2003 prices in the Germany and Ohio fell the fastest and the UK was in line with the other countries included in the benchmark.

Figure 2.3: Price trends by country from February 2000 to February 2003

Price spread

2.29 ‘Price spread’ charts are shown in figure 2.4. The charts show the price for the cheapest package offered by each operator as a percentage above the cheapest price across all operators, for each basket. These charts illustrate the relative spread of prices by country, as well as allowing relative price levels to be compared.

2.30 The price spread seen varies by basket and country. In general it is seen that:

• the price spread in the UK and Germany are somewhat greater than those seen elsewhere; and
• the price spread in Sweden and the US is generally smaller than in the other countries.

Figure 2.4: Price spread charts

Sensitivity analysis

2.31 In order to ensure that the results are robust, a number of sensitivities have been considered:

• in the main analysis, prices are modelled assuming an average call duration. A sensitivity has been run in which a distribution of call lengths around the average has been considered (this allows more detailed modelling of factors such as differences in the time step for billing, minimum call charges etc);
• the mapping of tariffs onto the distance bands used in the baskets requires assumptions to be made regarding size of call zones. This is particularly true for the US. An alternative set of assumptions (in which a greater proportion of calls are assumed to be long distance) has been tested to see the impact on the results; and
• a difficulty arises in modelling the cost of calls made to mobile numbers in the US. In the US the calling party pays only a local call charge, while the called party also pays a charge to receive the call. As in the June 2002 study, an amount (20c per min) has been added to the cost of making the call, to capture the additional "called party" charges. To test the importance of this assumption, the model has been run with calls to mobile removed from the baskets.

2.32 The results of these sensitivities are shown in table 2.5 for residential consumers and table 2.6 for business consumers.

Table 2.5: Results of sensitivity tests for residential consumers

Table 2.6: Results of sensitivity tests for business consumers