This paper is for telecoms operators and regulators who are trying to understand how business models for telecommunications have evolved and what this means for them today. It draws on the author’s forty years of experience in Australia and applies it to the specific case of the Cook Islands.
A close friend of mine made some very flattering remarks about this paper:
“It’s the first time I’ve read an article with such a holistic and succinct overview of the evolution of telecommunications and the impact of global digitisation on telecoms operating companies providing transport and delivery infrastructures”. Richard Wiatr is a former senior executive and telecoms engineer who has spent 40 years in the industry.
Some operators are currently looking to regulators to fix the loss of revenues from the move into the digital era. This paper puts the issue into perspective and suggests what they should be doing.
In a world first, the Solomon Submarine Cable has been offering volume-based wholesale pricing over its international and domestic submarine cable systems for some months.
Wholesale customers have a choice. They can have either conventional capacity pricing or volume pricing. Instead of charging for bits per second (throughput or bandwidth), volume pricing charges for bytes (traffic). It is simple – just a fixed price per month plus x cents per Gigabyte (GB). The Entry level version of volume pricing on the domestic (SIDN) and international (CS2) cables has no monthly recurring fee. The Basic volume pricing plan has a lower charge per GB with a fixed monthly charge.
Volume pricing will be a game changer for the Solomon Islands and leads the world.
FAQ 1: “How is the pricing different?”
Answer: Traditional bandwidth pricing assumes scarcity. It divides up the fixed bandwidth of an international transmission pipe in defined fractions. Each buyer is guaranteed a throughput speed (Mbps, megabits per second). The larger the purchased capacity, the lower the cost per Mbps. But the buyer has to forecast the number of its users, the speeds it provides them and what excess usage it is prepared to pay for if demand exceeds purchased capacity. This form of pricing will continue to be offered by SCC.
With volume pricing the wholesale customer is not charged for bandwidth used but for the volume of traffic. Speed is not rationed. This is possible because capacity on the submarine cable systems deployed with the generous assistance of the Australian Government is abundant. When the Solomon Islands relied on satellites, international capacity was under 3 Gigabits per second. On the new Coral Sea submarine cable to Sydney the potential capacity is 20,000 Gigabits per second.
FAQ 2: “Why would a wholesale customer opt into volume pricing?”
Answer: Volume pricing lowers entry barriers because there is no need to commit to any level of capacity. In fact, capacity and speed will be unconstrained. There is no congestion on the international link. With volume pricing, every byte is profitable. You pay only for what you use. It is simple as you do not have to forecast the number of users and the speeds they want. The only constraints on speed will be in the access networks and customer devices.
FAQ 3: “What happens when you have to connect with other cables?”
Answer: A cable operator providing international connectivity over several international cables can still offer volume pricing over several segments even if it has to transit another cable operator offering only capacity pricing. A cable operator is the natural aggregator for its wholesale customers and so has better control of capacity purchases on other cables.
FAQ 4: “Will volume pricing make submarine cables more competitive with satellites?”
Answer: In many situations, like the Pacific islands, you need both. But with the new submarine cables and their abundant capacity, submarine cables have a significant cost advantage in providing international connectivity which is best exploited using volume pricing, as indicated above.
FAQ 5: “What does it mean for end users?”
Answer: Any network is only as good as its weakest link. International connectivity used to be the bottleneck but with abundant capacity and volume pricing, speed is not constrained in the international link. To get the increased capability to end users, fixed and mobile access networks need to be upgraded so that users can move from to 2G to 4/5G mobile handsets and expect to enjoy great broadband.
For more on this innovation, see the 5 minute video at https://deridder.com.au/ptc21/
In both Australia and the Cook Islands the impact of infrastructure competition on mandated geographically uniform pricing is being (or proposed to be) addressed with a levy. The different approaches to measuring costs and setting the levy are contrasted.
The paper proposes that a universal service levy has to be coupled with consistent access pricing to have efficient competition consistent with universal service policy. Interconnection between networks is free in the Cook Islands but the pricing of resold wholesale services should be consistent with the aims of the levy; to ensure universal service and efficient competition.
This the preprint http://deridder.com.au/wp-content/uploads/2021/09/Universal-service-and-competition-.pdf
The final paper appears in the AJTDE Volume 9, Issue 3 at https://doi.org/10.18080/jtde.v9n3.437
This 2008 paper is being re-posted as it may be referred to in future articles and papers.
Wholesale pricing should be simple. NBN pricing is not, and it is getting more complex. But Bob James and I have proposed how to get things back on track and reset the sector for success – measured by broadband being fast and affordable for consumers, at least slightly profitable for retailers and losing as little as possible for the NBN.
A slightly shorter version of this opinion piece was published in Communications Day on 9th April
NBN – Time to take the gloves off