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1. perspective MAY 2013
TRANSPARENT
BROADBAND
THE POTENTIAL
BENEFITS OF
USAGE-BASED
PRICING
Enrico Lanzavecchia, Adam Hadley, Marco Labianca

2. Transparent broadband:
The potential benefits
of usage-based pricing
Published by
Value Partners Management Consulting Ltd,
16 Smith Square, 7th floor,
Kings Building, London SW1P 3JJ, UK
May 2013
Written by:
Enrico Lanzavecchia, Adam Hadley,
Marco Labianca
Edited by:
Cristina Goddi
If you would like an electronic copy
please write to:
cristina.goddi@valuepartners.com
For more information on the issues
raised in the report please contact:
adam.hadley@ valuepartners.com
marco.labianca@valuepartners.com
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Copyright © Value Partners
Management Consulting Limited
All rights reserved

3. 3
CONTENTS
executive summary
Unfavourable market dynamics
5
7
Challenge of monetising core connectivity
8
Limited role of download speed in increasing ARPU
11
Potential of usage-based pricing
15
Core principles and potential challenges
of usage-based pricing
18
Further guidelines to implementation
20
Conclusion
21
authors
perspective TRANSPARENT BROADBAND
22

4. 4
Our research shows that
transparent usage-based pricing
can often provide important
benefits for the consumer
by creating value-for-money
through more effective pricing
segmentation.
perspective TRANSPARENT BROADBAND

5. 5
executive summary
Throughout most of the world download caps are
often used as punitive measures to keep check on
excessive downloads. However, in the UK, operators
such as BT and PlusNet have successfully deployed
usage-based pricing by marketing packages with
tiered download caps. In this perspective Value
Partners argues that there may be positive
conclusions to draw from introducing aspects of
this alternative approach to usage-based pricing.
Within the context of an industry under pressure
it has never been more important for operators
to find sustainable ways of maintaining revenue
and striking a balance between a focus
on core connectivity and content. As the demand
for content and data has revolutionised the
consumer’s relationship with the internet,
operators need to adjust to consumer needs and
expectations accordingly.
Our research shows that transparent usage-based
pricing can often provide important benefits for
the consumer by creating value-for-money through
more effective pricing segmentation. Packages that
are priced according to data usage can be designed
to reduce costs for the light-usage consumer
and improve profitability of the high-usage
consumer. Usage-based pricing may provide the
potential to help the operator address a broader
market and scale revenue in line with growth
in content consumption.
perspective TRANSPARENT BROADBAND

6. 6
Monthly ARPU* (€) of internet-only broadband packages
by country and forecast
25
-0,4%
20
-2,3%
-1,9%
15
-3,4%
10
2008
2009
2010
2011
Spain
2012
Portugal
Note: * Not considering additional connectivity bundles (e.g. calls, TV).
Source: Screen Digest Sep ‘11, Value Partners analysis.
perspective TRANSPARENT BROADBAND
2013e
Italy
2014e
UK
2015e
CAGR 2008-2012 (%)

7. 7
Unfavourable
market dynamics
1
Eurostat: EU 27: Households Level of Internet access, 2011
Screen Digest: Western Europe:
Broadband, narrowband & PC
households (annual & forecast),
2011
2
Fixed broadband connectivity is an
increasingly challenging market in
the more developed regions as the
household broadband penetration rate
reaches its saturation point and ARPU
declines slowly and steadily.
In Europe as a whole broadband
penetration per household is decelerating as it approaches 80%1 while ARPU
has declined by a year-on-year average
of 3% between 2008 and 2012, falling
to just over €152 per household
per month.
Fixed broadband connectivity
is an increasingly challenging
market in the more developed
regions as the household
broadband penetration rate
reaches its saturation point
and ARPU declines slowly and
steadily.
perspective TRANSPARENT BROADBAND

8. 8
Challenge
of monetising core
connectivity
The value of the typical broadband
proposition is driven by core connectivity, content and bundling, and Value
Added Services (VAS). The value of
connectivity is usually determined by
bandwidth (speed), usage restrictions,
and occasionally by Quality of Service
(latency, up-time, SLAs, etc.).
In the days of AOL’s pre-eminence in
the 1990s, the ISP was responsible for
most consumer-facing innovations and
controlled almost all aspects of the
internet experience for the user, including the channels (Netscape browser,
chatrooms, etc.) and the content itself
(news articles, games, etc.).
However, with an internet that has
matured in terms of infrastructure,
functionality, and availability of content,
the role of the ISP-only operator has
diminished considerably. Now most operators focus on content convergence
and only tend to monetise content
through bundled television with highvalue, low-margin cable, satellite, or
IPTV subscriptions. Gone are the days of
the ISP web portal.
Now that more than a third of all UK
households buy their telephony, TV,
and broadband from a single operator, it is clear that, in the UK at least,
triple-play packaging on its own no
longer creates significant differentiation
between providers. There is evidence
that the triple-play packages improve
customer retention and reduce churn.
However some operators have become
distracted by the allure of TV bundling
at the cost of concentrating on the core
internet offering itself.
With high-speed internet and the emergence of the next generation of set-top
boxes, operators are now able to deliver
streamed television content through
IPTV where previously only cable and
satellite players could compete. BT, for
example, at the cost of £738m recently
acquired the rights to broadcast 38 UK
football matches with the aim of creating at least two of its own sports channels, leaving Sky with the rights to the
remaining 116 matches. Sports rights
aside, however, traditional TV content
providers or aggregators such as Sky or
Virgin in the UK still maintain a competitive advantage in terms of their expertise in producing and commissioning
popular content - for operators this has
never been their core activity.
In mature markets operators are therefore left with a fundamental business
model conundrum. Content acquisition
on this scale is an expensive and risky
strategy that few other operators would
be willing or able to emulate.
perspective TRANSPARENT BROADBAND

9. 9
Our research of global broadband
markets shows that almost all have
value primarily driven by content
and services, not speed.
In Italy, Spain, and the UK, prices
of broadband packages are mainly
driven by services and content,
whereas in other European countries
like Germany and France and more
advanced Asian markets, alternative
infrastructure has differentiated
between low and high speed offers
but ARPU is still mostly driven
by premium content. Unlike elsewhere
in the world, in the US prices tend
to be driven by download speed
however there is still a premium for
bundled services.
Access speed has become
rapidly commoditised,
therefore it makes sense
to develop value
differentiation on the basis
of other factors such
as usage-based pricing.
perspective TRANSPARENT BROADBAND
The rationale for this general market
behaviour is two-fold: firstly, by providing telephony and television content,
operators can charge more for the
overall package and increase ARPU –
although this has an uncertain impact
on underlying profitability.
Secondly, throughout the history
of the internet, access speed itself has
become rapidly commoditised
and therefore it makes sense to develop
value differentiation on the basis
of other factors such as usage-based
pricing.

10. 10
Broadband packages available in Germany and France
by price (€ / month) and download speed (Mbps)
Germany
C
50
€ / month
60
C
C
C
B
D
B
40
30
C
A
A
20
B
B
D
A
A
B
D
A
3 main speed categories
(<10 Mbps, 16Mbps and 50Mbps)
10
MBps
0
0
20
A
B
40
C
60
80
100
D
60
50
€ / month
France
40
C
A
C
C
30
A
E
C
E
A
E
D
B
B
B
20
C
A
C
C
Crowded market with many
players offering very similar
packages at similar prices
D
A
E
10
MBps
0
0
A
20
B
C
40
D
perspective TRANSPARENT BROADBAND
80
100
E
Internet only
Source: Company websites, Value Partners analysis.
60
Internet + calls
Internet + TV
Internet + Calls + TV

11. 11
Limited role
of download speed
in increasing ARPU
In most markets analysed as part of this
research it is apparent that broadband
speed itself rarely drives ARPU. Instead
content services typically differentiate
products with some markets such as the
UK also using download caps.
In Germany, premium content and bundled connectivity are important drivers
of ARPU whereas in France download
speeds are polarised between ADSL
and fibre services with most services
being at least triple play
Due to a dependence on content services many operators are now running
out of realistic ways to strategically
differentiate: buying content at the
scale of BT in the UK is ambitious and is
uncertain to lead to success. Consumers
also do not easily appreciate the scale
and cost of infrastructure investment
required by the operators.
In Italy premium price is driven not by
speed but by services and content while
in Spain services and download speed
drive ARPU
Unlike elsewhere in the world, in the
US, ARPU is mostly driven by download
speed
However in the UK higher ARPU is supported by a combination of introducing
download caps, differentiating by speed
and providing content services
perspective TRANSPARENT BROADBAND

12. 12
Broadband packages available in Italy and Spain
by price (€ / month) and download speed (Mbps)
Italy
70
Typically, triple play commands a
20% price premium over dual play
€ / month
80
A
D
60
A
A
50
D
A
D
D
A
40
30
20
A
E
B
A
E
B
C
A
A
E
D
D
C
B
MBps
0
20
A
B
40
C
D
60
80
100
E
80
70
€ / month
Spain
C
B
60
C
B
50
B
40
30
B
B
A
C
D
A
D
Bundled connectivity and premium contents appear the main
ARPU drivers in Spanish market
A
MBps
20
0
A
20
B
C
40
60
80
100
D
Internet only
Source: Company websites, Value Partners analysis.
perspective TRANSPARENT BROADBAND
Internet + calls
Internet + TV
Internet + Calls + TV

13. 13
Broadband packages available in the US
by price (€ / month) and download speed (Mbps)
United States
€ / month
210
C
B
160
90
B
A
B
A
C
80
A
70
C
B
60
A
B
B
A
50
Generally slow speeds compared
to other countries
A
40
B
30
A
C
MBps
20
0
A
20
B
40
60
80
100
300
C
Internet only
Source: Company websites, Value Partners analysis.
perspective TRANSPARENT BROADBAND
Internet + calls
Internet + TV
Internet + Calls + TV

14. 14
Broadband packages available in the UK
by price (€ / month) and download speed (Mbps)
United Kingdom
€ / month
80
Service bundling (i.e. call,
video) has proved a successful
approach to ARPU...
E
...in particular premium video content
which has allowed Virgin Media
and Sky to command superior prices
C
70
60
C
BT and its main competitors are focused mainly
on <40 Mbps BB segment, higher speeds being
historically the preserve of Virgin Media
A
E
50
D
D
B
A
40
A
30
B
E
B
A
Broadband speeds in excess of 25
Mbps are only available within a dual
play package
A
D C
E
Plusnet has allowed BT to serve
the lower end of the market without
affecting its positioning
B
MBps
20
0
A
20
B
C
40
D
Internet only
80
100
E
Internet + calls
Source: Company websites, Value Partners analysis.
perspective TRANSPARENT BROADBAND
60
Internet + TV
Internet + Calls + TV
Internet + Calls + TV

15. 15
Potential
of usage-based
pricing
Consumers intuitively understand
the principle of paying for goods and
services according to how much they
use and operators are keen to monetise high-value content such as IPTV.
Operators now need to pay attention
to monetising the data and content
delivery mechanism itself.
At present, download caps are predominantly used negatively in order to
restrict very high usage, i.e. in the US
or in Germany, or are only enforced as
ambiguous and often obscure “fair use”
policies.
Arguments for supporting such very
high usage caps typically include improving collective network performance
and preventing so-called “cable cutting”, or OTT television substitution, in
which the broadband internet connection can substitute for cable or satellite
TV. Both of these responses neglect
the possibility of usage based pricing as an effective way to differentiate
strategically whilst also improving price
satisfaction. It is common for players
to apply an implicit “fair-usage” policy
that limits very high usage without the
consumer being fully aware of the small
print. In effect usage-based restrictions are often already in place but lack
transparency and are typically used only
as punitive mechanisms to degrade the
consumer’s experience.
perspective TRANSPARENT BROADBAND
In the UK download caps are used positively to improve the consumer offering
and promote strategic differentiation
Unlike in the US and Europe, UK operators have successfully deployed usagebased pricing for a number of years and
they continue to use this strategy to differentiate between their own packages
and those of other operators. In particular Sky, BT, and PlusNet (BT’s sub-brand
based in Yorkshire) use download caps
as a way of generating “unlimited”
premium packages for customers who
require extra data for consumption of
on-demand TV or other data-intensive
activities.
PlusNet at the time of print had download caps on all its broadband packages, with BT employing usage-based
pricing on four out of seven packages,
and Sky with only one. TalkTalk stopped
enforcing usage caps in 2012 while
Virgin Media has never placed explicit
restrictions on downloads.

16. 16
Unlimited and capped packages by UK operator
# of packages
13
7
5
7
10
42
100%
13
7
4
3
10
27
4
15
1
0%
Unlimited*
TOTAL
Capped
comparable packages
Low-cap average (€/m)
•
•
31
30
23
27**
Mid-cap average (€/m)
•
•
•
37
32
34**
56
42
46
47
44
45**
Unlimited* cap average (€/m)
AVERAGE
On average Sky, BT and Plusnet charge a premium of €18 for unlimited downloads.
Note: *250GB data allowance or according to “fair use policy”; **average excluding Virgin Media and TalkTalk.
Source: Company websites, Value Partners analysis.
perspective TRANSPARENT BROADBAND

17. 17
As explored by Andrew Odlyzko
in “Know your limits”, May 2012
3
Rationale for building new packages
with download caps
Most global operators either enforce a
de facto download cap through “fairusage” restrictions on “unlimited” packages or have introduced more transparent pricing models as in the UK.
There could be numerous positive
outcomes for the consumer if operators
followed the UK’s lead by introducing
more effective customer segmentation.
Firstly the operator would be able to
attract a greater number of light usage
consumers by lowering the price of core
connectivity and by doing so operators
may be able to temporarily buck the
trend of slowing broadband penetration. While there will always be customers who require mobile broadband for
access on the move or in remote areas,
there are also those who choose mobile
broadband dongles at home for their
relative cost effectiveness and flexibility.
Secondly, introducing new entry-level
packages may reinforce the perception
of value for the existing “unlimited”
packages and improve ARPU stability
by deliberately devaluing the more costsensitive packages.
perspective TRANSPARENT BROADBAND
With greater market share there is the
potential for promoting paid-for content or bundled packages and monetising pay-as-you-go data consumption.
Many consumers also often recognise
an “insurance premium”3 for “unlimited”
packages in order to secure peace
of mind that they will not be penalised
for going over the data threshold.
This means that it may be easier
to upsell the consumer onto high value
packages that provide greater download capacity.
In the UK players such as PlusNet
and BT employ the usage cap as a way
of improving customer segmentation.
Our analysis shows that on average Sky,
BT, and PlusNet charge a premium of
€18 for unlimited downloads suggesting
that these operators attempt to capitalise from broad customer segmentation.
PlusNet, for example, is usually positioned to appeal to the more cost-aware
with its cheapest package at €23 p/m,
however its high-value package at €44
is also competitive with the top offerings by its competitors.

18. 18
Core principles and
potential challenges of
usage-based pricing
• Recognise that many operators
already have ambiguous usage
caps and bandwidth management
policies in place that potentially
degrade Quality of Service (QOS)
and may diminish value perception;
• Improve customer segmentation
to make broadband more accessible
to a greater market;
• Assert that “those who use the least,
pay the least” such that light users
don’t subsidise the heavy users;
• Introduce greater transparency
in implementing usage-based packages combined with developing
effective tools to help the consumer
manage and track their data usage;
As with all consumer
communication, simplicity
is crucial. Effective communication and education
about the positive trade-off
for consumers will form
an important part of making
the strategy a success.
perspective TRANSPARENT BROADBAND
• Concentrate on QOS and promote
broadband connectivity as a versatile, rich content delivery platform.
• Manage potential conflict of interest
between selling media packages that
require data and selling data packages themselves

19. 19
As with all consumer communication
simplicity is crucial. Effective communication and education about the positive
trade-off for consumers will form an
important part of making the strategy a
success.
Throughout the communication process the consumer should be made fully
aware that usage-based pricing is a
positive development with fairness and
improved Quality of Service the priority.
Depending on the exact configuration
of the pricing schemes some customers are likely to save while heavier users
would be expected to pay according
to consumption or upgrade to higher
capacity “unlimited” packages.
perspective TRANSPARENT BROADBAND
Careful positioning is required to ensure
that new usage-based packages do not
directly cannibalise existing “unlimited”
broadband value propositions.
In the short term some cannibalisation
may occur despite best efforts.
However in the medium-term there is
the possibility of capturing the growing
opportunity provided by content and
associated VAS.

20. 20
Further guidelines
to implementation
“’You’re capped!’ Understanding
the effects of bandwidth caps
on broadband use in the home”,
Georgia Institute of Technology
3
In addition to clear communication, the
operator should develop effective tools
to help the user manage data consumption and upgrade their backend to
be able to support a billing platform
capable of tracking data usage on a percustomer basis. According to a study
by the Georgia Institute of Technology4
operators should also bear the following
three points in mind when considering
implementing usage-based pricing tiers:
Invisible balances
Many respondents to the focus groups
felt that it was sometimes difficult
to understand and track data usage
throughout the month since some providers have limited or hard-to-use tools
that require users to login and have very
little detail or insight into usage trends.
Some services also fail to explain properly why internet connectivity has been
cut, e.g. in South Africa where international traffic has different rules from
access to local website content.
Mysterious processes
Some consumers have difficulty in identifying data-intensive applications and
can consequently find it confusing when
trying to limit download usage.
As well as the challenge of understanding which programs use internet services
on the home computer, many respondents experienced some misunderstandings of the relative size of content, i.e.
the number of videos they could watch
before going over the download threshold implying that “data” is often seen as
too abstract to quantify accurately.
“Participants did not appear to understand that YouTube or streamed audio
used up significantly more bandwidth
relative to web pages [as there was
no wait in content delivery].”
Multiple users
Unlike mobile phones, internet connections are used by multiple users and
across different platforms such as PCs,
laptops, smartphones, tablets and
e-readers, which could cause difficulties
in tracking usage accurately. This is not
an insurmountable problem and could
be overcome with the use of bandwidth
allocation software by the person paying
the operator bill. However there may be
some privacy concerns about the tracking
involved with this and about who has
access to potentially sensitive information.
“Some parents loved the idea of
being able to both limit and monitor their children’s internet usage...
and distribute the bandwidth like
an allowance, helping their children
manage their time, or using it as a
disciplinary tool.”
perspective TRANSPARENT BROADBAND

21. 21
conclusion
In this perspective Value Partners
argues that there are some positive
reasons for adopting a more robust approach to usage-based pricing. Without
doubt operators are under pressure and
run the risk of long-term, irreversible
decline without significant adaptation.
Therefore in this challenging climate all
sensible strategies should be objectively
evaluated according to their merits and
risks.
As with any business model evolution
there are potential downsides for the
operator but, as a long-term strategy,
employing usage-based pricing may be
a constructive way of capitalising on the
forecasted growth of internet data and
content consumption.
Adopting usage-based pricing is just
one way of achieving sustainability,
but some sort of major business model
readjustment may be crucial to secure
continued investment in the telecommunications infrastructure that is so
fundamental for worldwide economic
development.
perspective TRANSPARENT BROADBAND

22. 22
AUTHORS
enrico lanzavecchia
Director, London Office
enrico.lanzavecchia@valuepartners.com
adam hadley
Associate, London Office
adam.hadley@valuepartners.com
marco labianca
Business Analyst, London Office
marco.labianca@valuepartners.com
perspective TRANSPARENT BROADBAND

23. 23
About
Value Partners
Value Partners is a global management consulting firm that works
with multinational corporations
and high-potential entrepreneurial
businesses to identify and pursue
value enhancement initiatives across
innovation, international expansion,
and operational effectiveness.
Founded in Milan in 1993, Value Partners’ rapid growth testifies to the
value it has created for clients over
time. Today it draws on 25 partners
and 280 professionals from 23 nations, working out of offices in Milan,
London, Istanbul, São Paulo, Buenos
Aires, Beijing, Shanghai, Hong Kong
and Singapore.
In 2007 Value Partners acquired
Spectrum Strategy Consultants – a
leading UK company specialized in
publishing, broadcasting, entertainment, IPTV and mobile – thus further
strengthening its international presence. Today Value Partners is a leading advisor in the telecom, media
and technology sectors worldwide.
For more information on the issues
raised in this note please contact
the authors.
Find all the contact details on
valuepartners.com
Milan
London
Istanbul
São Paulo
Buenos Aires
Beijing
Shanghai
Hong Kong
Singapore
Value Partners has built a portfolio
of more than 350 international
clients from the original 10 in 1993
with a worldwide revenue mix.
Value Partners combines methodological approaches and analytical
frameworks with hands-on attitude
and practical industry experience
developed in an executive capacity
within each sector: telecommunications, new media, financial services,
energy, manufacturing and hi-tech.
Copyright © Value Partners
Management Consulting Limited
All rights reserved
perspective TRANSPARENT BROADBAND