December 2000

Contents

Executive summary

Chapter 1     Introduction

Chapter 2     Dial-up Internet access services

Chapter 3     Mobile services

Annex A        Exchange rates and VAT rates

Annex B     Internet usage baskets

Annex C     Detailed results for Internet access baskets

Annex D     Mobile usage baskets

Annex E     Detailed results for mobile baskets

Executive summary

Scope

S.1 This report is an International Benchmarking study of:

• mobile services; and
• dial-up PSTN Internet access

in France, Germany, Italy (mobile only) Sweden, United Kingdom and the US states of Ohio and California (Internet only).

S.2 This study is a follow up, for these two services, to the study carried out by Teligen for Oftel, published in May 2000 (the "May 2000 study"). The analysis and drafting of this report have been carried out by Oftel. The models developed by Oftel used to generate the results contained in the report have been audited by an independent consultant, Analysys Ltd, who confirm the following:

• the models are logically sound (ie they correctly implement the methodology described in this report); and
• the tariff data has been checked and has been correctly entered and interpreted.

S.3 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 August 2000. Data collection has been carried out for Oftel by consultants Tarifica Ltd.

S.4 For each service, a number of different user profiles (or ‘baskets’) are used, to reflect a wide range of consumer usage patterns. The prices of the baskets are calculated for each of the tariff packages identified. While the usage baskets are mainly similar to the usage baskets published in the May 2000 study, some updating of the baskets has been considered necessary.

S.5 In order to compare prices across countries, a price index has been constructed based on the average of the lowest priced packages offered by two different operators in each country. This forms the basis for drawing conclusions regarding price levels.

S.6 Other key aspects which have been considered are:

• a comparison of the spread of prices available (a wide spread may imply that consumers need to be careful in their choice of operator, or that there are important non-price factors which are not picked up in the analysis); and
• the change in prices between February 2000 and August 2000.

Points to bear in mind

S.7 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 and 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.

S.8 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 snapshot as at 25 August 2000. 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.

S.9 There are separate industry funded initiatives and reports which seek to help UK consumers be better informed purchasers of telecommunications services (such as individual enquiry based price comparisons (www.phonebills.org.uk), fixed and mobile quality of service indicators (www.cpi.org.uk) and information for small businesses about using telecoms and the Internet (www.TelecomsAdvice.org.uk). This report is not part of that body of work as it seeks to compare position between, not within, countries and it is not, therefore, intended in any way to be a buyer’s guide.

Results for Internet access

S.10 Tables 1, 2 and 3 show the results for the dial-up PSTN Internet price index (expressed relative to the UK price level) for residential off-peak and peak usage and business Internet users respectively.

S.11 These results indicate that based on the sample of ISP/operators selected:

• overall the UK has the lowest prices of the countries considered for residential off-peak and peak access;
• the UK is cheapest for all original residential off-peak baskets (only Ohio is cheaper for residential off-peak always-on access but not significantly so);
• the UK is cheaper than each of the European countries and California for all residential peak baskets (Ohio is slightly cheaper for all baskets except for very low usage);
• for limited business usage, UK prices are on average more expensive than the US and Sweden, about the same as France and cheaper than Germany. Only Sweden is cheaper for the lowest usage basket but the UK is the most expensive for the 20 and 30 hours baskets; and
• only the US is cheaper than the UK for ‘always-on’ business access.

Table 1 Comparison of residential off peak dial-up PSTN Internet access prices

Aug 2000 prices
Note: the average is a simple average of basket results

Table 2 Comparison of residential peak dial-up PSTN Internet access prices

Aug 2000 prices
Note: the average is a simple average of basket results

Table 3 Comparison of business dial-up PSTN Internet access prices

Aug 2000 prices
Note: the average is a simple average of basket results

S.12 There have been significant price reductions in the UK since the May 2000 study, particularly for residential consumers. This is likely to be due largely to the introduction of ‘free’ Internet access (ie no costs other than normal PSTN subscription) as well as unmetered tariffs. For always-on access, the UK is broadly comparable with the US (Ohio) for residential consumers.

S.13 For business, the UK is more expensive than the US, but is cheaper than its major European competitors for ‘always-on’ dial-up access. At the high volumes of usage assumed (150 hours per month) for always-on access, some businesses may be using services other than dial-up PSTN to obtain Internet access. Such substitution between services by businesses in the different countries is outside the scope of this benchmarking study.

Results for mobile services

S.14 Table 4 shows the results for the mobile price index (expressed relative to the UK price level). This analysis has been based on:

• considering the cheapest packages available irrespective of whether they are pre or postpaid services; and
• inclusion of the cost of the mobile handset which is assumed to be written off over 18 months (note: a 3 year write off period was assumed in the May 2000 study).

Note: only services from mobiles are considered; no account is taken of calls to mobiles.

S.15 The results show:

• generally UK prices compare favourably to prices elsewhere;
• on average, prices in Germany are around 10 per cent cheaper, prices in Sweden are about the same and prices in France and Italy are significantly higher than in the UK;
• the UK has the second lowest prices for five out of the 10 usage baskets.

Table 4 Best of pre or post pay – cost of mobile service including SMS, voice mail and handset

Aug 2000 prices

Note: the average is a simple average of all basket results.
Q1 = usage quintile 1 etc; day = mainly daytime; comb = calls spread fairly evenly over day, evening and weekend.

SMS = Short Messaging Service

S.16 The results (particularly for low usage baskets) are found to be relatively sensitive to the question of the handset cost and hence to the assumption regarding the average handset replacement period. In the May 2000 report a replacement period of three years was used. However, it is now considered that 18 months is more realistic. If the previous assumption is used, then the results suggest that prices in the UK are, on average, cheaper than in all the other countries. It is intended to consider the question of handset replacement time in greater depth in the next update of this report.

S.17 The results also depend on a number of other assumptions. Several sensitivities are considered, the results of which tend to improve the UK’s relative position. The overall conclusion is that UK prices are very close to being on a par with the best of the countries considered.

S.18 A detailed analysis of the price trend compared to the results in the May 2000 study has proved difficult to carry out as there have been a number of changes to the methodology between the two dates. Hence it is not possible to comment definitively on the price trends in each country. It is expected that the results presented in this report will form the starting point for a price trend that will be evaluated in subsequent reports.

S.19 Consideration of the spread of prices indicates that in the UK the range of prices is similar to that seen elsewhere. Price spreads in the UK are generally lower for August 2000 prices than they were in February 2000. This trend is also generally seen in the other countries studied.

S.20 The results in Table 4 include a portion of the handset costs as a way of ensuring that differing approaches to subsidising the cost of the handset between countries is properly captured. While including the cost of the handset is felt to be appropriate, results can be run without including this cost. This generally improves the UK position (only for Italy does the price gap narrow). Examining post and prepay markets separately indicates that the UK prices are particularly low for prepaid packages but are about average for postpaid packages. The UK’s overall favourable position is secured by a combination of low priced prepaid packages for low usage consumers and favourably priced postpaid packages suitable for high usage.

Conclusion

S.21 The results of this benchmarking study indicate that, relative to consumers in other countries:

• UK residential consumers benefit from low prices for Internet access (both peak and off peak);
• UK mobile consumers benefit from relatively low prices; and
• UK business consumers benefit from the availability of unmetered packages for high/unlimited use, though they face prices which are relatively high for limited usage Internet baskets.

S.22 The results from this study will form part of the data input to the market reviews for the Internet access and mobile markets which are currently underway.

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. International comparisons of telecoms services are one way of assessing the achievement of this aim.

1.2 Oftel is currently carrying out major reviews of the dial-up Internet and mobile markets to determine the appropriate level of regulation for the future. The results in this report will form part of the data input for these reviews.

1.3 This study focuses on comparing the cost for representative users for Internet access and mobile services in each country. A ‘basket’ methodology is used to provide cost comparisons in several countries.

1.4 The objective of this study is to provide a cross country comparison, rather than to compare individual telecommunications providers. However, in order to compare prices between countries, it is necessary to analyse the prices of individual services from a range of providers within each country. While the results may relate to specific services or providers, these should be seen as representative of the country, rather than being viewed as a consumers’ guide.

1.5 The tariff packages and usage profiles used in this report reflect residential and small to medium business use. Large businesses have not been included in the analysis.

1.6 There are two subsequent chapters:

• Dial-up PSTN Internet access services (Chapter 2)
• Mobile services (Chapter 3).

1.7 Each Chapter provides:

• A description of the usage baskets and an outline of the methodology used;
• An overview of the results including an analysis of the price levels, price trends and price spread in the countries covered; and
• A set of graphs showing the results for the individual usage profiles.

1.8 Further details of the methodology and a more detailed set of results are set out in the annexes to the report.

1.9 The following countries are included in the analysis:

• France;
• Germany;
• Italy (mobile only);
• Sweden;
• UK; and
• US States of Ohio and California (Internet only).

1.10 This study is a follow-up, for these two services, to the study carried out by Teligen for Oftel, published in May 2000 (the "May 2000 study"). The May 2000 study also considered price comparisons for PSTN services and Oftel expects to produce an update of the PSTN price comparisons, along with a further update for mobile services and Internet access, in Spring 2001. DSL prices were compared in International Benchmarking of DSL Services a report for Oftel by Analysys. Oftel is currently in the process of updating this study which will also include an examination of cable modem prices.

Chapter 2

Dial-up Internet access services

General Introduction

2.1 This chapter covers PSTN dial-up Internet access which remains the most popular and readily available method for accessing the Internet. Results from Oftel’s latest consumer research show that 28 per cent of homes are now connected to the Internet and that almost all of them use PSTN dial-up access. Similarly, of the 44 per cent of small and medium-sized businesses connected to the Internet, around two-thirds continue to use PSTN dial-up. Consequently, Oftel believes that comparing PSTN dial-up access prices is currently the most appropriate means of benchmarking Internet access costs, certainly for residential consumers.

2.2 Oftel is, however, continuing to monitor other access mechanisms. ISDN prices were compared in the May 2000 study. DSL prices were compared in International Benchmarking of DSL Services, a report for Oftel by Analysys. Oftel is currently in the process of updating the latter study which will also include an examination of cable modem prices. A summary of leased line price comparisons was included in the consultation document National leased lines: Effective competition review and policy options.

2.3 This chapter follows broadly the same format as the previous benchmarking study and shows:

• Price indices for a range of residential and business baskets;
• Price changes between February and August 2000; and
• Charts which show the price spread of offers by country.

2.4 In addition this chapter considers a number of sensitivities and presents detailed results by operator before drawing conclusions.

2.5 Oftel is currently carrying out an effective competition review of the dial-up Internet access market. This study will form an important part of that review.

Scope

2.6 The results provide an update of the results presented in the May 2000 report International Benchmarking Study of Telecommunication Services, prepared by Teligen for Oftel. As this study can be considered the second in a series, it is possible to consider the price trend based on comparing the results.

2.7 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 Internet 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 use more specific usage information in order to determine the best option for that person or business.

The objective is to illustrate the scale and level of prices available to consumers in different countries.

2.8 The analysis covers four European countries and two US states (California and Ohio) and covers 37 operators and 102 packages. Prices in New York are also shown in the detailed results but, for consistency with the May 2000 study, these are excluded from the summary analysis. Internet service providers (ISPs) which were included in the May 2000 study are considered together with some additional ones. PSTN access is assumed to be with the incumbent operator in each country although cable access is also considered in the UK.

2.9 Prices are considered for both residential and business consumers separately, although some packages may be available to both.

Description of Internet usage baskets

2.10 Full details of the usage baskets are set out in Annex B. The baskets used are similar to those used in the May 2000 study, most of which were broadly similar to those used by the OECD. In addition to those baskets considered last time three extra baskets are included to take account of the increased availability of unmetered tariff packages. For consistency, the original baskets are labelled as previously. The additional baskets referring to unmetered or ‘always-on’ access are labelled ‘A/o’. The key features of the baskets are summarised in Tables 2.1a and 2.1b.

Table 2.1a Internet basket definitions – residential customers

Table 2.1b Internet basket definitions – business customers

2.11 Other than the addition of new baskets, the main difference between the usage baskets used in this report and those used in the previous report, is the splitting of off-peak usage into two equal segments of weekday and evening use. Previously off-peak usage was priced using only the cheapest of the two periods. While it is important to have consistency in the baskets used over time to enable meaningful comparisons to be made, this change provides a more realistic user profile. In any case, the differences do not significantly affect the results.

Methodology for dial-up Internet access price analysis

2.12 The basket methodology involves combining the usage baskets with tariff data to provide a set of prices. The detailed methodology is set out in Annex B. The most obvious development compared to the May 2000 study is the comparison of prices for ‘always-on’ or unmetered access. This reflects the increased availability of packages offering such access during the year.

2.13 As before, the focus of this report is on the price of ISP packages together with PSTN charges. There remains a great deal of diversity in the content of the packages. However, given the widespread availability of services such as additional e-mail addresses and web-sites, the value of these additional services may be questionable. At least for residential users, the added value may be minimal. As prices continue to decline, competition may begin to focus on service. However, in the meantime an analysis of price is considered sufficient.

The cost elements of Internet access

2.14 When using the Internet the following charge elements may apply:

• Fixed ISP charge (initial and/or per month);
• ISP usage charge (per hour or minute);
• Fixed PSTN charge (where a dedicated telephone line is used);
• PSTN usage charge (per minute, for access to ISP); and
• Advertising and other content making the use of Internet less efficient.

Some ISPs may also impose certain conditions on usage, for example, a requirement to subscribe to additional services such as voice telephony.

2.15 Generally, the best (cheapest) packages in this survey have been the packages where only one (or in some cases two) of these cost elements are applied. For higher levels of usage, packages which do not include a usage element (either ISP or PSTN) are likely to be cheaper. For lower levels of use, packages which exclude a fixed element will often be among the cheapest.

2.16 In the calculations the incumbent’s local call charges are used for PSTN access, except where specific call charges are dictated by the choice of ISP package (eg with some cable companies' ISP). This also applies to the fixed charges, where applicable.

Treatment of fixed costs

2.17 In comparing the costs of Internet access, fixed PSTN costs (ie connection and line rental) need to be carefully considered. Only a minority (around one-fifth) of residential consumers, for example, have an additional line solely for Internet access. The remainder prefer to dial-up using the existing line used to provide traditional voice telephony services. In such cases, PSTN connection and line rental costs will be paid anyway. Hence comparisons of the cost of Internet access should exclude fixed PSTN costs.

2.18 On the other hand, Internet use continues to grow rapidly. Around a third of all fixed call volumes are now Internet calls. Among Internet users this figure could be over half. This figure will grow as the availability and take-up of unmetered packages grows. Hence, Internet access is already the main service for many users. In such cases it is probably appropriate to consider fixed costs.

2.19 The approach taken includes full PSTN costs for the higher Internet usage baskets, ie those baskets with 20 hours per month or more usage. Evidence from Oftel’s residential omnibus survey suggests that around 40 per cent of households fall into this bracket. No reliable figures are currently available for business, but a similar rule is applied.

Treatment of additional costs

2.20 A recent trend for ISPs has been to provide free or cheaper Internet access in return for commitment to take other services. For example, ntl’s indirect offer requires customers to make £10 worth of non-Internet calls per month on ntl’s network. Other offers are broadly similar. While this appears to be a relatively small burden, it is perhaps worth noting that the median BT bill is currently around £17.50. With line rental making up over half this figure, this means that over 50 per cent of BT’s customers make no more than £8 or £9 worth of calls a month. In addition, until carrier pre-selection is fully implemented, it is likely that only some customers will remember to redirect calls with the alternative carrier in all cases. So, in practice, many customers would not normally make sufficient calls to cover the additional cost. For this reason additional costs are included in the model.

Treatment of off-peak rates

2.21 As noted in paragraph 2.13, the comparisons in this study assume that off-peak usage is spread evenly between weekend and weekday evenings. This is different from the May 2000 study which based off-peak charges on the cheapest rate available. It is thus instructive to examine the effect of this methodological change.

Choice of packages to include

2.22 There are a large number of ISPs in each country giving rise to an even larger number of packages. It is not possible to consider them all, but while there is continuing tariff innovation, there are perhaps only a few basic price models. The main types are listed below:

• fully unmetered;
• partially unmetered (for example, free off-peak calls);
• subscription and usage charge;
• free subscription but usage charge; and
• bundled with other services (cable TV, telephony).

2.23 Generally, each of these package types will be available from major operators. Hence, it is sufficient to concentrate on the major players in each country to gain a reliable guide to price differentials.

2.24 Residential and business packages are considered separately. This is a different approach to that taken by the OECD which considers differences in peak and off-peak prices only. The OECD methodology is likely to exclude packages designed specifically for business users.

2.25 Data collected for this study, however, show a decline in the number of business only ISP packages. In some cases this may reflect a shift in marketing strategies to concentrate more heavily on broadband services. The number of businesses using non-PSTN access in the UK also continues to grow. Latest Oftel research shows that over one-third of all UK small businesses use ISDN, DSL or leased line technology to access the Internet. No directly comparable figures for the other countries in the study are available, although recent data from the Swedish regulator suggests a similar breakdown. ISDN penetration in Germany is also known to be significantly higher than elsewhere in Europe. The comparisons presented here, therefore, provide only a partial comparison of Internet access costs for business.

2.26 In addition, some smaller businesses may actually use dial-up packages designed primarily for residential consumers. Recent Oftel research shows, for example, more than 10 per cent of small businesses were using Freeserve, who do not offer packages aimed at business. For consistency with the May 2000 study, results are presented separately for residential and business consumers, but Oftel notes that many of the packages considered only in the residential basket will actually be used by business customers.

Presentation of Results

2.27 Detailed results showing the cost of each basket for each tariff package are shown in Annex C. In this section of the report we focus on:

• the results of a price index constructed by averaging over the two cheapest deals available (from two different ISPs) in each country for each of the original baskets; (note, however, that only the cheapest ‘always-on’ package is considered due to relatively small number of packages available);
• a discussion of price changes since the previous comparison;
• charts showing the spread of prices available in each country (based on the cheapest offer for each operator); and
• tables showing the cheapest offer available from each operator.

2.28 An overall comparison is derived by taking the mean of the indices for each basket. This method implicitly assumes that prices for low users are an equally important consideration when making an overall comparison. The growth in unmetered access, however, might suggest that more weight be given to higher usage baskets. This could be achieved, for example, by averaging over price levels.

2.29 Figures from Oftel market research, show that, on average, households spend around six to seven hours per week online. So for the moment, at least, it seems appropriate to consider all types of usage equally. This approach is also consistent with the May 2000 study. However, the inclusion of the always on basket does increase the importance of heavier use baskets in the overall comparison.

2.30 To aid comparison with the results of the May 2000 report, an average is also calculated over the original baskets.

2.31 It should be noted that the results of this study are not directly comparable to the results published by the OECD. The main reason for this is that the OECD used basic packages from the incumbent’s ISP, while this study has taken the best price available from any major ISP in each country.

2.32 All prices are presented in British Pounds (£), using Purchasing Power Parities as provided by the OECD for August 2000. All residential baskets include VAT/tax, while the business baskets exclude VAT/tax. See Annex A for details of the exchange rates and VAT rates used.

Results for residential baskets

Off-peak

2.33 The results for residential off-peak baskets are set out in Table 2.2.

Table 2.2 Comparison of Residential off peak package prices

2.34 From Table 2.2 we see that:

• UK prices are cheapest overall;
• UK prices are cheapest for each of the original baskets (only always-on access in Ohio is cheaper but not significantly so);
• UK prices are significantly cheaper than the US for the lower usage baskets but the difference is reduced for higher users, particularly in Ohio; and
• UK prices are significantly cheaper than Europe for all baskets.

2.35 A summary of price changes since the May 2000 study is provided in Table 2.3. Note that always-on packages were not considered in the May 2000 report. The average price change shown is the mean of the percentage changes across each of the original five baskets.

Table 2.3 Percentage change in price levels for residential off-peak baskets Feb-Aug 2000