Specification of retail costs for a Reasonably Efficient Operator

Transcription

1 WIK-Consult Report Study for the Danish Business Authority Specification of retail costs for a Reasonably Efficient Operator DRAFT - redacted Authors: Peter Kroon Stephan Jay WIK-Consult GmbH Rhöndorfer Str Bad Honnef Germany Bad Honnef, 20 August 2014

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3 Retail cost assessment for DBA I Contents 1 Executive Summary 1 2 Introduction 5 3 Brief introduction to retail cost categories in the Danish margin squeeze test and available information Currently applied retail costs in the Danish margin squeeze tests Overview responses Danish operators in 2014 to DBA data request on retail costs 9 4 Results European benchmark Benchmark approach Overview of benchmarked country approaches Differentiation of retail costs according to business strategy in benchmark countries Collected absolute cost levels of EU countries 13 5 Analysis of collected retail costs and recommendations High level comparison; current retail costs applied by DBA versus provided retail costs from Danish operators in Detailed analysis Analysis of and recommendations for one-off retail costs Marketing contributions Sales staff and Sales commission CPE costs Distribution of CPE Customer activation costs Order related costs Analysis of and recommendations for recurring retail costs Customer care / retention Billing Bad debt Non-single customer specific cost Summary and impact of recommended retail cost levels 33 6 Summary of recommendations and further conclusions Recommended retail cost levels 40

4 II Retail cost assessment for DBA 6.2 Retail costs differentiation based on retail product Retail cost differentiation based on business strategy Closing remarks 42 Annex I Questionnaire 44 Annex II Detailed responses questionnaire 53

5 Retail cost assessment for DBA III List of tables Table 1: Current and recommended one off retail costs current structure 1 Table 2: Current and recommended one off retail costs aggregated structure 2 Table 3: Current and recommended recurring retail costs 2 Table 4: Overall monthly retail costs - current and recommended 3 Table 5: Definition of retail cost categories by the DBA 6 Table 6: One off retail costs currently applied by the DBA 8 Table 7: Recurring retail costs currently applied by the DBA 8 Table 8: Latest one off retail costs collected from Danish operators in Table 9: Latest recurring retail costs collected from Danish operators in Table 10: Overview participating NRA s 10 Table 11: EU country overview with key findings 11 Table 12: Collected absolute values from EU benchmark 14 Table 13: One off retail costs collected from Danish operators in Table 14: Recurring retail costs collected from Danish operators in Table 15: Indicative total retail costs based on data from Danish operators in Table 16: Comparison total retail costs: current versus input Danish operators in Table 17: Retail costs - currently applied and recommended levels- current structure 34 Table 18: Retail costs - currently applied and recommended levels- aggregated structure 36 Table 19: Recommended one off retail cost levels current structure 40 Table 20: Recommended one off retail costs aggregated structure 41 Table 21: Recommended recurring retail cost levels 41 Table 22: Incremental retail costs per product cluster in the Netherlands 60 Table 23: Non single customer specific costs split up in Spain 62

6 IV Retail cost assessment for DBA List of figures Figure 1: Total retail costs double play: recommended level versus input Danish operators 4 Figure 2: Input Danish operators in 2014 on marketing contributions 20 Figure 3: Input Danish operators in 2014 on sales staff / sales commission 22 Figure 4: Input Danish operators in 2014 on CPE costs 23 Figure 5: Input Danish operators in 2014 on CPE distribution costs 25 Figure 6: Input Danish operators in 2014 on customer activation costs 26 Figure 7: Input Danish operators in 2014 on order related costs 27 Figure 8: Input Danish operators in 2014 on customer care/retention 28 Figure 9: Input Danish operators 2014 billing costs 30 Figure 10: Input Danish operators 2014 bad debt costs 31 Figure 11: Input Danish operators 2014 non single customer specific costs 32 Figure 12: Figure 13: Figure 14: Figure 15: Total retail costs single play: recommended level versus input Danish operators 37 Total retail costs double play: recommended level versus input Danish operators 37 Total retail costs double play with TV: recommended level versus input Danish operators 38 Total retail costs triple play: recommended level versus input Danish operators 39

7 Retail costs assessment for DBA 1 1 Executive Summary The Danish Business Authority (DBA) has tasked WIK-Consult to analyse the retail cost collected from the Danish operators and to perform a European benchmark. This has led to recommendations on the levels of specific retail cost categories as defined by DBA. Confidential information is highlighted. For the intended public consultation there is a redacted version of this report. DBA has currently set specific values for 10 different retail cost categories for single and double play offers. These levels result in total retail costs for single play between 73 DKK per month per customer for ADSL and 99 DKK for VDSL. For double play offers the current total retail costs are 87 DKK per month per customer for ADSL and 118 DKK for VDSL. The DBA also intends to differentiate not only between two product offers (single play and double play) but between four different product offers. Therefore, WIK has recommended detailed values for the 10 different retail cost categories for the four product offers single play, double play (broadband with voice), double play (broadband with TV but without voice) and triple play (broadband, voice and TV). In addition, an aggregation of the one off retail costs has been recommended. See underneath an overview of the current and recommended levels. Table 1: Current and recommended one off retail costs current structure Currently applied - one off retail costs Recommended - one off retail costs- current structure monthly values (DKK) single play double play single play double play double play - TV (new) triple play (new) Marketing contributions 3,43 3,43 XXX 10,0 XXX 18,0 Sales personnel salary/sales commission 5,72 8,59 XXX 7,50 XXX 15,00 Customer premise equipment ADSL Customer premise equipment VDSL 8,01 8,01 16,03 16,03 XXX XXX XXX XXX Distribution of customer premise equipment 1,14 1,14 XXX XXX XXX XXX Customer activation 1,14 1,72 1,14 XXX XXX XXX Order related costs 2,29 3,43 XXX XXX XXX XXX

8 2 Retail cost assessment for DBA Table 2: Current and recommended one off retail costs aggregated structure Currently applied - one off retail costs monthly values (DKK) single play double play monthly values (DKK) Recommended - one off retail costs - aggregated structure single play double play double play with tv triple play Marketing contributions 3,43 3,43 Marketing and Sales 15,50 17,50 31,50 33,00 Sales personnel salary/sales commission 5,72 8,59 Customer premise equipment ADSL 8,01 8,01 Customer setup and activation (incl CPE and system costs) 17,04 19,20 27,75 30,35 Customer premise equipment VDSL 16,03 16,03 Distribution of customer premise equipment 1,14 1,14 Customer activation 1,14 1,72 Order related costs 2,29 3,43 Table 3: Current and recommended recurring retail costs Current values - recurring retail costs Recommended - recurring retail costs monthly values (DKK) single play double play single play double play double play with tv triple play Customer care / retention 20,00 27,50 17,60 22,00 44,00 47,00 Billing 8,33 8,33 1,25 2,50 5,00 6,25 Bad debt 1% 1% Non-single customer specific costs 10% 15% The following table shows overall monthly retail cost at the level currently applied in the test and the level recommended following analysis of the new data.

9 Retail costs assessment for DBA 3 Table 4: Overall monthly retail costs - current and recommended Current values - recurring retail costs Recommended values - recurring retail costs monthly values (DKK) single play double play single play double play double play - TV (new) triple play (new) Total ADSL 72,58 87,26 Total VDSL 80,60 95,27 83,89 97,44 157,00 176,73 In short, the recommended levels result in slightly higher retail costs to be used when testing single play and double play offers for VDSL and a somewhat bigger difference compared to current ADSL values. For the new product offers double play with TV and triple play, the estimated totals lay considerable higher than the current highest levels for double play VDSL (+63% and 86% respectively). The input from the Danish operators showed large variation when comparing individual retail cost components on one hand but also overall retail cost levels on the other. In some cases the large deviations between operator data are very likely due to different cost allocation methods and/or interpretation of the itemized cost categories. Accordingly, parameter setting on the basis of the collected data is not simply straightforward. Sometimes we suggest to use averages, sometimes we suggest to use a single value and at other times an adjusted single value is suggested. Even though there were large differences the collected data did show that the retail costs differ between single play, double play with VoIP, double play with TV and triple play. While some detailed categories might be the same, the overall total retail costs vary between the different product offers. This could be seen as a validation of the DBA s efforts to differentiate retail costs between different types of product offers. As illustration, see below graph for double play offers where the total retail costs vary between XXX and XXX DKK per month per customer based on the operators input. The recommended level lies between TDC s and Telia s input.

10 4 Retail cost assessment for DBA Figure 1: Total retail costs double play: recommended level versus input Danish operators Confidential information However, in the EU benchmark, there is not one regulator who also applies a retail cost differentiation based on the retail product sold in terms of single play, double play etc. What does seem to be more common is a differentiation of retail costs between residential and business services (Austria, Italy and the Netherlands). Furthermore, the cost variance in individual cost categories also seems to indicate that it is not straightforward for operators to deliver such granular retail cost data in a homogenous manner. Given that some regulators work with a significantly higher aggregation level (e.g. a single mark-up factor on cost / revenues to determine the overall retail cost) it is not entirely clear that a detailed definition of individual items is superior to a more aggregated manner of deriving retail cost inputs for margin squeeze tests. Lastly, differentiation of retail costs based on business strategy (in the sense of sales channels or a no frills versus premium positioning) is not common among respondents in the EU benchmark. However, Italy does differentiate retail costs when products are purely sold via online distribution channels. Only in this case, AGCOM applies the lower retail costs of online channels both for its product by product test as for the portfolio tests. When products are sold via a mixture of distribution channels, it applies the higher standard retail costs for the margin squeeze tests.

11 Retail costs assessment for DBA 5 2 Introduction The Danish regulator for telecommunications, the Danish Business Authority (DBA), is reviewing its margin squeeze model for analysing margin squeezes in markets 4 and 5. In this context the retail costs applied in the tests are reviewed as well and in this context DBA tasked WIK-Consult with the following: Analyse the retail cost data collected from the Danish operators; Perform a European benchmark on the level of retail costs applied in the margin squeeze tests for broadband markets; Compare the Danish values with the benchmark; Recommend a level for the Danish retail costs as part of DBA s margin squeeze test review; and The main questions to be addressed are: What is the correct level of retail cost to be applied in margin squeeze tests for market 4 and 5? Do retail costs differ depending on the retail product sold (e.g. single play versus double play and triple play broadband packages)? Do regulatory authorities adapt retail costs in their margins squeeze tests depending on the business strategy regarding sales channels of the considered operator (i.e., Premium versus No Frills positioning). This report has the following structure: - Chapter 3 contains the available retail cost data for the Danish market; - Chapter 4 presents the results from the European benchmark; - Chapter 5 analyses the Danish and EU benchmark information and resulting recommended levels for the retail costs; and - Chapter 6 concludes with a summary and other findings.

12 6 Retail cost assessment for DBA 3 Brief introduction to retail cost categories in the Danish margin squeeze test and available information DBA has already defined retail cost categories and applied differentiated parameters for single (broadband only) and double play (broadband & voice) retail products. DBA has already been gathering retail cost information in previous years. This resulted in the currently applied levels of retail costs for the margin squeeze tests in Denmark (see Section 3.1). DBA now intends to enable the differentiation of a total of four product categories and has asked operators to supply data. For 2014, DBA therefore initiated another round of data collection, which resulted in the figures presented in Section Currently applied retail costs in the Danish margin squeeze tests The current retail costs categories are split in recurring and one off retail costs and further defined by the DBA as follows: Table 5: Definition of retail cost categories by the DBA Used categories by DBA Customer care / retention Definition used by DBA Costs related to retaining existing customers. This includes for instance salaries to customer service personnel and website costs Billing Costs related to the usage of the billing platform and related department for producing the retail invoices Recurring Bad debt Non-single customer specific costs Costs related to retail customers not paying their invoice or paying their invoice later (% of the invoiced amounts incl. 25% VAT, which is lost). Overhead costs for the REO that cannot be allocated to a specific customer. This includes for instance costs related to IT-personnel who maintain customer related tasks such as setup of systems for billing and sales reporting, costs related to product management, business development and market analyses, central costs related to advertising and marketing that is not intended for new customers, administrative costs, rent and other general costs (% of invoiced amounts excl. VAT) Marketing contributions Sale events or campaigns that focus on acquiring new customers. Sales personnel salary/sales commission Salaries, sales commission and bonuses. One-off Customer premise equipment ADSL Customer premise equipment VDSL Distribution of customer premise equipment Customer activation Order related costs Wholesale price for equipment (including router), that is sent to the customer (ADSL). Wholesale price for equipment (including router), that is sent to the customer (VDSL). Costs associated with shipping of the CPE. Costs related to setup and activation of the customer in the REO s internal systems. Costs stemming from call centre support and other relevant departments in relation to installation and setup of the broadband connection.

13 Retail costs assessment for DBA 7 The retail costs in this report are expressed as recurring monthly amounts per customer in Danish Krone (DKK). The one-off retail costs are one-time costs at the beginning of the customer lifetime, which are transferred in this report (and in the margin squeeze calculations) into monthly amounts. The transferral of one-off retail costs into monthly amounts is done by spreading these costs over the applied customer lifetime in Denmark (48 months) while considering the weighted average costs of capital (WACC) of the competitor s retail business. The DBA currently applies a WACC of 4,7%. The one off amounts are put on a per month scale per customer by multiplying them with the capital cost factor, which is defined by the following formula: The two tables underneath show the currently applied one-off and recurring retail costs respectively in DKK. The DBA is using differentiated levels of retail costs between single play broadband offers and double play broadband offers with voice. Bad debt and non-single customer specific costs are set as a % of the retail value of the respective broadband offer. In order to estimate absolute amounts in the tables, average yearly retail prices in the Danish broadband market have been used. Excluding VAT of 25% in Denmark, this is 2400 DKK for single play offers and 2677 DKK for double play offers. When comparing the level of one-off retail costs for single play versus double play broadband offers, the difference is a 50% addition on the following three cost categories: - Sales personnel salary and sales commission; - Customer activation; and - Order related costs It is noted that the main difference in the current recurring retail cost between single and double play broadband offers stem from significant higher (+37,5%) customer care / retention costs for double play. The current total retail costs for single play vary between roughly 73 (ADSL) and 99 (VDSL) and for double play between 87 (ADSL) and 118 (VDSL) DKK per month per customer.

14 8 Retail cost assessment for DBA Table 6: One off retail costs currently applied by the DBA Currently applied one off retail costs by the DBA Used categories by DBA Current one off value used for single play (DKK) Current one off value used for double play (DKK) Current monthly value used for single play (DKK) Current monthly value used for double play (DKK) Marketing contributions 150 3,43 3,43 Sales personnel salary/sales commission ,72 8,59 Customer premise equipment ADSL ,01 8,01 Customer premise equipment VDSL ,03 16,03 Distribution of customer premise equipment 50 1,14 1,14 Customer activation ,14 1,72 Order related costs ,29 3,43 Total monthly amount - one off ADSL 21,75 26,33 Total monthly amount - one off VDSL 48,08 57,23 Table 7: Recurring retail costs currently applied by the DBA Currently applied recurring retail costs by the DBA Used categories by DBA Current annual value used for single play (DKK) Current annual value used for double play (DKK) Current monthly value used for single play (DKK) Current monthly value used for double play (DKK) Customer care / retention ,00 27,50 Billing 100 8,33 8,33 Bad debt 1,0% 2,50 2,79 Non-single customer specific costs 10,0% 20,00 22,31 Total monthly amount - recurring 50,83 60,93

15 Retail costs assessment for DBA Overview responses Danish operators in 2014 to DBA data request on retail costs In summer 2014, DBA performed another round of data collection and asked for a further specification of the retail costs; not only for single play and double play, but also for triple play broadband offers. In addition TDC A/S (TDC) provided also data for double play with TV separate from normal double play (broadband + VoIP). DBA received data for the year 2012/2013 from incumbent TDC and its subsidiary Fullrate and 2013 data from alternative operator Telia. The 2012 TDC data for double and triple play still contained their cable brand Yousee, whereas this is split for Telenor could not provide any information. The data provided by TDC/Fullrate has been audited, data from Telia was not. All data provided was in DKK. The following tables contain the collected data from the Danish operators in yearly amounts for the recurring costs and one time amounts for the one off costs. Table 8: Latest one off retail costs collected from Danish operators in 2014 Confidential information Table 9: Latest recurring retail costs collected from Danish operators in 2014 Confidential information In chapter 5, the one-time and yearly amounts are transferred into annualised monthly amounts in order to compare them with the currently used values by DBA and values found in the benchmark. It is already apparent that the reported overall and itemized retail cost varies significantly between the three operators.

16 10 Retail cost assessment for DBA 4 Results European benchmark 4.1 Benchmark approach The benchmark was based on a questionnaire (see Annex I) sent to nine national regulatory authorities (NRA s) in Europe. In order to encourage the responses, the questionnaire was made as compact as possible and feedback of the results was promised. The questionnaire was structured in such a way that it allowed comparison with the Danish retail cost categories and their definitions, input of quantitative data and in case of confidentiality issues a qualitative assessment of the current Danish level of retail costs. The questionnaire has been sent in the second half of April 2014 to nine European regulatory authorities. From end April until beginning of June 2014 the responses were collected, verified by additional interviews and desk research and analysed. The underneath table shows which NRA s have participated with this research. Table 10: Overview participating NRA s Question NRA Right contact naire send out Response Austria v v v Germany v v v Greece v v no response Ireland v v v Italy v v v Netherlands v v v Norway v v no MST Spain v v v Sweden v v no MST Out of the 9 benchmarked countries, only the Greek regulator at the end did not provide input. Furthermore, the regulators from Norway and Sweden are not applying margin squeeze tests for the broadband market, however did provide input regarding their intentions for the near future. The remaining 6 regulators provided their input, which is summarised in 4.2 and 4.3. Only one regulator (Germany, Bundesnetzagentur) was able to respond with absolute cost values item by item. The Austrian regulator, RTR provided an absolute cost value for the total retail cost but could not disclose individual items. Two other regulators (Ita-

17 Retail costs assessment for DBA 11 ly, Netherlands) simplify the retail cost determination by applying a single mark-up factor on all other cost to derive the retail cost. The remaining two regulators (Ireland and Spain) did neither provided absolute nor relative values. 4.2 Overview of benchmarked country approaches The results from the European benchmark are summarised in below table describing the key elements of the respective countries. In Annex II the underlying detailed descriptions per benchmark country can be found for more background information. Table 11: EU country overview with key findings Degree of cost category aggregation compared to the 10 DBA items 7 items of which 5 correspond to DBA items. Actual values provided Methodological comments Business strategy feedback Austria IP connection and additional services are included. Only total cost provided for retail cost (recurring and one-off shown as annualized monthly cost). Only 3.50 per month for residential users (excluding 2,212 for the CPE). Detailed cost provided regarding network cost to test bitstream vs LLU charge. Only 2play product test. Differentiation between residential and business users. No differentiation. EEO approach for LLU. SEO for VULA Germany Same recurring retail cost categories as DBA, however simplified one off costs (only 2 aggregated categories: customer acquisition and cancellation costs). Itemized values provided. Total cost around 3,75 per month. No differentiation CPE + distribution costs are indirectly included in customer acquisition costs

18 12 Retail cost assessment for DBA Ireland Most items correspond with DBA. Difference is that each item has a one off and recurring element. Also CPE costs is aggregated and additional element is Product marketing and Development. No values or qualitative assessment of DBA current level provided. Use 25% extra mark-up on retail costs for sales, product development, help desk and order handling to reflect the additional common cost for a starting alternative operator. Slightly different approach for legacy Bitstream and NGA: - SEO approach outside LEAs, inside combi of SEO/EEO. - Specific EEO for Advertising, Billing and Product Mgt. as altnets have efficiencies due to international size No differentiation on channel strategy and service offering, however operating inside or outside LEA could be seen as business strategy and this is treated different based on SEO or combined SEO/EEO approach. Italy No cost value for each individual category but jointly considered recurring and one off retail costs. Not all DBA items are considered in the aggregated calculation. Missing are: - Non single customer specific costs - CPE + distribution - Customer activation - Order related cost Markup on own network costs + wholesale costs : - In the DCF approach for the portfolio test 25% for residential services and - In the period by period test for the individual products 10% when looking at incremental costs only. Qualitative statement: total value much lower than DBA value. No differentiation based on different service level. However differentiated retail costs based on distribution channel. Where products are sold only via online channels, the lower retail costs are considered. Both in the product by product test as in the portfolio test. Nether erlands Similar cost categories, however many shared retail cost categories excluded due to incremental approach. Considered retail costs are mainly external (outsourced) costs related to one product: - Sales costs - TV content - advertisement CPE costs are not included Specific values confidential, aggregated level only. 3% mark-up for retail costs related to broadband services related to the wholesale price: Markup could be higher if integral retail costs approach. For legacy business voice (ISDN) the set markup is 13,5% Incremental approach; only retail costs directly related to a specific product. Excludes large portions of shared retail costs like billing, helpdesk etc. Approach in line with very detailed Margin Squeeze test at product level. No input on business strategy. EEO approach

19 Retail costs assessment for DBA 13 in retail costs but included separately in the margin squeeze test. Spain 18 items, nearly all of which correspond to DBA items. Missing category is order related costs, however there are 4 separate categories for different CPE types. No values and no qualitative assessment of DBA s current level provided. No differentiation 4.3 Differentiation of retail costs according to business strategy in benchmark countries All of the responding regulators except Italy denied differentiating retail costs based on business strategy related to different approaches on distribution channels and service offering (no frills versus premium positioning). Italy remarked that when products are purely sold via online distribution channels, it applies the lower retail costs of online channels both for its product by product test as for the portfolio tests. In case products are sold via a mixture of distribution channels, it applies the higher standard retail costs for the margin squeeze tests. It is more common among EU regulators to differentiate retail cost levels for residential and business services; half of the respondents (Austria, Italy and the Netherlands) are doing so. Another variant is used in Ireland, where Comreg uses different levels of (retail) costs for NGA services compared to legacy Bitstream; where the competition is active in so called larger exchange areas (LAEs) a combination of SEO and EEO approach is used leading to lower retail costs. When competition is also active outside these LEAs, SEO is used to model the costs of the alternative operator in the margin squeeze test leading to higher (retail) costs. 4.4 Collected absolute cost levels of EU countries As shown from the overview table in 4.2; only four countries provided absolute figures or percentages: Germany, Austria, Italy and the Netherlands. However, the input varied from providing most of its retail cost categories (Germany), to specifying only a couple or only aggregated totals (Austria, Italy and the Netherlands). Spain and Ireland considered all information on the retail costs as confidential and the Netherlands considered the detailed retail cost levels as confidential.

20 14 Retail cost assessment for DBA Following table displays the collected absolute values in the benchmark. The input was provided as (annualised) monthly amounts per customer in or as % of the retail value. For direct comparison with the Danish values and the current levels used by DBA, these amounts have been translated directly into DKK. Table 12: Collected absolute values from EU benchmark Benchmark - one off retail costs (DKK/month/cust) Austria Germany Italy Marketing contribution 14,16 Sales staff/ Sales commission End-user placed equipment 16,48 Distribution of CPE Activation of end-user Order related cost other, not shown seperately by DBA 1,64 Estimated TOTAL - one off Benchmark - recurring retail costs (DKK/month/cust) Austria Germany Italy Customer service 9,31 Billing 0,67 Loss on creditors 4,92 Non-single customer specific cost 7,15% Estimated TOTAL - recurring 26,1 Benchmark - total retail costs (DKK) Austria Germany Italy One off cost Recurring cost Estimated TOTAL - retail cost 25% Explanatory notes: - marketing contributions in Germany include the CPE costs as well; - billing costs in Germany are purely based on electronic invoicing costs of the incumbent. - bad debt in Germany is 1,9% of retail value including VAT; - Non-single customer specific cost in Germany is calculated as a 7,15% mark-up based on underlying total costs (wholesale + own network); - in Italy, the 25% mark-up related to underlying wholesale costs + own network costs to be applied in its DCF portfolio test; and - the collected figure for the Netherlands (3% of the underlying wholesale costs as mark up for the retail costs for residential broadband services) is left out as the underlying incremental approach is not comparable with the approach in the

21 Retail costs assessment for DBA 15 other countries and Denmark. Dutch regulator ACM only considers those retail costs linked to one specific product. As soon as retail costs are shared among two or more products they are considered non incremental and excluded.

22 16 Retail cost assessment for DBA 5 Analysis of collected retail costs and recommendations In this chapter first the current level of retail costs used by DBA is compared at high level to the latest retail cost data provided by the Danish operators in order to understand the positioning of the Danish operators. Thereafter a more detailed analysis per retail cost category is done where all available data is compared. This includes the benchmark, but also information derived from questions and answers to the Danish operators related to their provided data and additional information provided by the DBA. In order to compare, all collected data was transferred into DKK and one off charges were annualised to monthly amounts per customer. For the transfer between amounts and DKK an exchange rate of 7,45 DKK per was used as advised by the DBA. For the transferral of one time amounts to annualised monthly amounts a customer life time (48 months) and a WACC of 4,7% are used. These are the same values currently used by the DBA in their margin squeeze tests. 5.1 High level comparison; current retail costs applied by DBA versus provided retail costs from Danish operators in 2014 As described above, the first step was to calculate the annualised monthly amount of the one off costs provided by the Danish operators. Secondly, the yearly recurring retail costs were transferred into monthly amounts by dividing them by 12 months. Input from Fullrate on bad debt and non-single customer specific costs was expressed as % of the retail value. In order to calculate an absolute amount, an average monthly retail value of 223 DKK excluding VAT for a double play broadband offer and 25% VAT have been used. Below tables displays the total level of one-off and recurring retail costs based on the provided data of the Danish providers. Table 13: One off retail costs collected from Danish operators in 2014 Confidential information

23 Retail costs assessment for DBA 17 Table 14: Recurring retail costs collected from Danish operators in 2014 Confidential information As a second step the total monthly retail costs of each Danish operator, who provided input, were calculated as shown in underneath table. These totals are indicative as they assume that only the provided retail costs levels of the respective operator would have been used. Table 15: Indicative total retail costs based on data from Danish operators in 2014 Confidential information Thirdly, these indicative totals per Danish operator were compared with the currently applied total retail costs by DBA in their margin squeeze tests (as described in paragraph 3.1). The last eight grey rows express the difference as % of the current used figures.

24 18 Retail cost assessment for DBA Table 16: Comparison total retail costs: current versus input Danish operators in 2014 Confidential information At high level, based on the provided data from the Danish operators, the following can be concluded: - Input values are quite different between operators, both regarding single items and total retail costs. - For single play broadband offers, only TDC has provided input on retail costs. TDC s input suggest a retail cost level which is between XXX% and XXX% below the currently used level by DBA depending on whether ADSL or VDSL based single play offers. - For double play offers (with VoIP), TDC s cost level is also under DBA current applied level, however less than for Single play. - Fullrate s retail cost level for double play offers with VoIP is the lowest and using their input would reduce the currently applied retail cost level by DBA up to XXX%. - Telia s input for double play (with VoIP) however suggest that the applied retail cost level by DBA should increase with almost the opposite figures (between XXX% and XXX%). - The new category double play with TV seems justified as TDC s retail costs for this product category are up to XXX% higher than the current ADSL based double play offer with VoIP. - However TDC s subsidiary YouSee retail costs are up to XXX% lower than the current VDSL levels. This might be related to the cable infrastructure used.

25 Retail costs assessment for DBA 19 - The new category Triple play also seems justified as the retail costs are significantly higher compared to the double play category (up to +XXX% for TDC and up to +XXX% for Telia). 5.2 Detailed analysis The detailed analysis is done per retail cost category. Per retail cost category the following aspects are analysed: - currently used level by DBA compared with values collected from the benchmark; - based on TDC s input for all product categories and Telia s input for double play and triple play, it is analysed whether a differentiated cost level is appropriate; - as the most complete data set exists for the double play offer (TDC, Fullrate, Telia input) a recommended level is first set for double play; - thereafter a recommended level is set for single play, double play with TV and triple play. At the end of each retail cost category, there are additional questions formulated for the Danish operators to clarify certain issues. These are marked in grey boxes Analysis of and recommendations for one-off retail costs Marketing contributions Currently, the DBA applies a cost level of 3,43 DKK per month per customer. From the benchmark the only collected value is 14,16 DKK per month per customer from Germany. However it is noted that the German value includes CPE costs, hence a comparable value would be lower. To make the German value comparable we have made an assumption on the cost of CPE including distribution (35 ). Based on the previously described annualisation method, a monthly amount of roughly 6 DKK could be deducted for CPE. Hence an amount around 8 DKK results for Germany, which is still more than twice the current cost level. The marketing contribution costs from the Danish operators vary with the product offering as displayed in the following figure.

26 20 Retail cost assessment for DBA Figure 2: Input Danish operators in 2014 on marketing contributions Confidential information Both TDC s (in dark blue) and Telia s data (in magenta) show that the cost level varies for the different product offers. However it is noted that for Telia and TDC the cost level jumps when adding TV services in the bundle (increase between 80% and 210%). Furthermore, it is noted that for TDC and YouSee the cost levels of double play with TV are quite close to triple play and even quite close to each other. However for Telia the triple play level is significantly higher (XXX) compared to the level of TDC s and YouSee s bundles with TV. TDC s current level for double play was in 2012 XXX, but has decreased significantly for 2013 (-XXX%). This is related to a reduction of marketing costs and increasing sales volumes, which has been ongoing since In 2012 these costs decreased already with XXX% and from TDC s annual 2013 report a further 27% decrease in marketing costs was reported. However for triple play offers and especially double play bundles with TV, TDC s marketing contributions have increased in 2013, which seems conflicting. Partial explanation might be that marketing contributions are proportionally more allocated to TV containing product bundles. The higher Telia cost level for double play might be explained by a more aggressive marketing approach, it could also be the main effect of having a smaller customer base to spread its marketing costs over. This seems to be partly confirmed by TDC s Fullrate value for double play (XXX DKK per month per customer), which is quite higher than TDC s value despite assumed scale advantages for Fullrate as subsidiary from TDC.

27 Retail costs assessment for DBA 21 Therefore a higher level seems to be in line with modelling a reasonable efficient operator. Therefore the marketing contribution costs for double play have been set at 10 considering the above values and the comparable benchmark value of 8. For triple play, the cost levels of TDC and YouSee are in the same range but significantly lower than Telia s level. However, it is not clear what the effect of the underlying cable network in this context is and TDC s value reflects the scale effects. Once again, we propose to set the value for triple play as a mark-up on double play. We use a mark-up of 80 %, which is in the lower end of the range (see first paragraph). Hence, the level for triple play is set at 18 DKK. For setting the level for single play and double play with TV we propose to use the cost relation between TDC s product offers and apply this on the set levels; - TDC s single play is XXX% lower than its double play level, so proposed level for single play is XXX DKK. - TDC s double play with TV is only slightly lower than its triple play level, so proposed level for double play with TV is XXX DKK Sales staff and Sales commission DBA s current value is the same for single and double play offers: 8,6 DKK per month per customer. The benchmark does not provide a specific number for sales staff and commission. TDC s (in blue) and Telia s (in magenta) marketing contribution costs vary strongly with the product offering as displayed in the following figure. For these retail costs, the variation is even stronger for TDC compared to Telia; TDC s triple play sales staff/commission costs more than double compared to double play sales staff/commission. The same applies for TDC s subsidiary YouSee. Remarkably is that Telia s absolute cost level for triple play offers is the lowest, well below TDC, Fullrate and YouSee. In addition, Fullrate has the lowest cost level of XXX for double play due to the reliance on internet as sales channel.

28 22 Retail cost assessment for DBA Figure 3: Input Danish operators in 2014 on sales staff / sales commission Confidential information The strong increase of these costs based on product offer can be partly explained as commission is likely related to retail revenue, which will increase as there are more products in the bundle. However, this would imply that for TDC, the double play offer with TV should then be twice as expensive as the basic double play offer with VoIP, which is unlikely. Furthermore, the other component, sales salaries, will not vary that much over the product offerings as it is most likely the same sales force. Another aspect might be the complexity and higher diversity of bundles containing TV services, which requires the sales staff to spend more time and efforts in explaining these. The TV containing product offers for TDC, YouSee and Telia are in the same range except for the triple play offer of YouSee. Based on the available data, it seems correct to use a differentiated cost level for the product offers. For double and triple play, we propose to use an average between Telia and TDC which is rounded down to consider the impact of the increased use of online sales channels. This leads to 7,5 DKK per month per customer for double play and 15 for triple play. For single play, there is no comparable value except for TDC s value of XXX DKK, which seems reasonable compared to TDC s and Telia s double play levels. For double play with TV, in line with TDC s cost levels over the different product categories, a slightly lower level is set compared to triple play; XXX DKK per customer per month. In addition, it is observed that the level of the sales staff/commission costs per product category seem to be related to the marketing contributions described in the previous paragraph; where marketing contributions are relatively high, the sales staff costs are

29 Retail costs assessment for DBA 23 low and the other way around. Only exception again here is the high level of sales staff commission from YouSee despite their comparable level of marketing contributions CPE costs Current DBA level is 8 DKK per month per customer for ADSL CPE and 16 DKK for VDSL CPE irrespective of use in a single play or double play offer. From the benchmark, only Austria indicated an absolute cost level of 16,5 DKK for an ADSL modem, however this seems to be including distribution costs, so comparable level is quite higher considering modem type. Below figure shows that TDC s CPE costs are equal for all of its offers, which is partly explained as all of TDC s customers use the same home gateway, however TV customers in general require an additional set top box. Figure 4: Input Danish operators in 2014 on CPE costs Confidential information

30 24 Retail cost assessment for DBA Telia s triple play customers have the same CPE cost as for double play but Telia seems to factor in additional costs (for the TV set top box) as the costs for triple play are higher than for double play. YouSee has slightly higher CE costs but this is likely because of the cable infrastructure and also a similar level for its double play with TV and its triple play offers. Especially with equipment prices, there should be a strong scale advantage for TDC, which would explain the higher costs (+XXX%) for the Telia double play CPE. Fullrate s CPE costs for double play is the lowest, which can be explained as it uses less expensive equipment (Zyxel) than TDC s and Telia s premium product. YouSee s CPE is cable related so must be slightly different than the CPE used by TDC and Telia. It is not clear if the Danish operators use different CPE for ADSL and VDSL and have indicated an average cost level or that they only use one type of modem. We therefore ask the operator to specify if they use different modems and how this relates to the given input on CPE costs levels. Based on the current input, we can only recommend an uniform level. Telia s CPE costs for double play seem reasonable considering scale advantages for TDC, also considering the higher benchmark value from Austria, hence the recommended level for double play is XXX DKK. Assuming the same CPE is also used for single play, the same cost level is recommended for the Single Play scenario. For triple play a higher cost level for the CPE seems justified because of the additional set top box for TV, however Telia s mark-up seems too high as the set top box in general is roughly 50% less expensive than the combined modem/router. The recommendation for the moment is to add a 50% mark-up on the CPE costs for double play for the TV set top box for double play with TV and triple play. However, as there is no data from the Danish operators to support this amount, we recommend to address this issue. Question 1: Which modem/router types are used (ADSL/VDSL/Cable), what are the difference in costs and how is this translated into provided cost levels for CPE? Question 2: Which additional CPE is used for the provision of TV services and what are the related additional costs?

31 Retail costs assessment for DBA Distribution of CPE Current DBA level for distribution costs of CPE in the margin squeeze test is a uniform 1,14 DKK per month per customer for single and double play offers. From the benchmark there are no specific values for the CPE distribution costs. As shown in below figure, TDC including its subsidiaries were not able to provide individual values for this cost category as they were not able to specifically allocate the costs to this item. Figure 5: Input Danish operators in 2014 on CPE distribution costs Confidential information Competitor Telia has provided costs between XXX DKK for double play and XXX DKK for triple play. The difference of XXX DKK is most likely due to the extra set top box for TV, which seems reasonable. Fullrate s CPE distribution costs seem to be in line with Telia s level considering scale advantages for Fullrate as they belong to TDC. Therefore, it is proposed to set the CPE distribution costs for single and double play at XXX DKK per month per customer and for double play with TV and triple play at XXX. For single play the same level as double play is recommended as it concerns shipping the same CPE. Same reasoning applies for using the same level for double play with TV and triple play.

32 26 Retail cost assessment for DBA Customer activation costs Current differentiated DBA cost levels are 1,14 DKK per month per customer for single play and 1,72 for double play offers. This differentiated price seems reasonable as it considers the activation of multiple services. There are no benchmark values available. As can be observed in below figure, there is limited data available on this category; Telia has provided values for double and triple play. Fullrate provided a XXX cost level and TDC could not provide this specific cost. Figure 6: Input Danish operators in 2014 on customer activation costs Confidential information Telia s different levels for double and triple play confirm that there are separate activations for the broadband, voice and TV services hence the additional costs for triple play compared to double play. Based on the REO approach and the available information, we propose to use Telia s level for double and triple play. Due to the absence of any information on single play, we suggest to maintain the current level of 1,14 DKK.

33 Retail costs assessment for DBA Order related costs Current DBA level is 2,3 DKK per month per customer for single play and 3,4 DKK for double play. From the benchmark no specific values were collected. Underneath figure displays that TDC s order related cost vary per product offer but do not increase linear as seen before with some other categories. Figure 7: Input Danish operators in 2014 on order related costs Confidential information Comparing the differences between the different product offers of TDC, it seems that order related costs for adding voice service amount to XXX DKK and adding TV service amounts to XXX DKK extra costs per customer per month. For Telia adding TV service also adds XXX DKK per month per customer (being the difference between their costs of double and triple play offers). It is noted that for TDC the order related costs in 2013 compared to 2012 have gone only slightly up for single and double play, however significantly up for double play with TV and almost doubled for triple play. TDC s order related cost levels for double play are more than XXX times as large as Telia s cost level. And even Fullrate s cost level is higher than Telia s. For triple play Telia s costs are also the lowest and TDC s costs the highest.

34 28 Retail cost assessment for DBA For this category, it is proposed to use an average between the available data. So Telia, Fullrate and TDC for double play, TDC and YouSee for double play with TV and Telia, TDC and YouSee for triple play. This leads to respectively XXX, XXX and XXX DKK per month per customer. For single play, the only available input is from TDC (XXX DKK), as this is in line with the calculated values, we propose to use TDC s figure Analysis of and recommendations for recurring retail costs The graphs related the recurring retail costs have a different background colour to set them apart from the graphs on the one-off retails costs Customer care / retention The current levels used by DBA are 20 DKK for single play broadband and 27,50 DKK for double play offers per customer per month. This is well above the only collected value from the EU benchmark from Germany; 9,31 DKK per month per customer. It is not clear why the German value is so much lower. Below graph displays the input of the Danish operators in 2014 on their cost levels per product offer for customer care and retention. Figure 8: Input Danish operators in 2014 on customer care/retention Confidential information

35 Retail costs assessment for DBA 29 TDC s costs for customer care vary significantly per product offering. Apparently, the offerings with TV service require more customer care and/or retention efforts. The cost level for double play with TV roughly doubles in comparison with double play with VoIP. The same relation is observed in Telia s costs although the absolute cost level of Telia lies roughly XXX% above the cost level of TDC which is most likely due to the economies of scale of TDC. TDC s customer care/retention costs for single play offers is 20% lower than for double play offer. When relating the customer care costs for double play with TV with triple play there is only a slight increase of around 7% as observed for TDC and YouSee. Fullrate s lower cost may be explained by their no frills positioning and consequent dependence on internet based customer care. Fullrate has the lowest cost level for customer care/retention, at roughly XXX% of TDC s level and only XXX% of Telia s level. However, it does not seem reasonable to use this lower figure due to the different approach of Telia and Telenor in the Danish market and DBA s intention of modelling a Reasonably Efficient Operator. Considering the above, the level of customer care/retention costs for double play offers is set at 22 DKK per month per customer. The values for the other product categories are set in relation to the double play value using the identified relations between the product categories in the operator s data: - Single play level is 20% lower than the double play level, so 17,6 - Double play with TV is 200% of the double play level, so 44 - Triple play is 7% higher than double play with TV, so Billing The current DBA level is an undifferentiated 8,33 DKK per month per customer for single and double play offers. From the European benchmark, a German value of 0,67 DKK per month per customer was collected. The German regulator based this figure on electronic invoicing practice only. The input from TDC, Fullrate, YouSee and Telia can be seen in following figure.

36 30 Retail cost assessment for DBA Figure 9: Input Danish operators 2014 billing costs Confidential information The billing costs for TDC are doubling when going from single play offers to double play and again doubling when TV services are included. Telia s absolute cost levels are quite higher than TDC s level but shows a similar pattern that the triple play cost level is twice as high as the double play cost level. TDC s billing costs include the printing, postage, payment and IT activities. In Fullrate, billing is fully automated and the only costs are wages of its IT department used for monitoring the process, which explains the value of XXX for double play. Therefore, Fullrate s figure is closer to the German benchmark value of 0,67, which is also based on electronic invoicing only. However, this does not seem to be the regular approach in Denmark considering TDC s and Telia s figures, but it is recognized that electronic invoicing will be used more frequently in the near future with accompanying lower billing costs. The additional billing costs for TV services for Telia are explained by different billing requirement for the different TV packages, Video on Demand and other functionalities like multi room usage and hard disk recorder. Telia has recently made investments in its billing platform in order to be able to invoice the above describe line items Interesting to note from the benchmark is that the Irish regulator Comreg uses SEO as overall modelling approach in its NGA margin squeeze tests, however uses EEO for billing costs as the competitors are part of international companies and are perceived to have similar scale advantages as the SMP operator. A similar situation could be argued

37 Retail costs assessment for DBA 31 in Denmark where competitors Telenor and Telia are subsidiaries of SMP operators in neighbouring countries. Considering the above, the level of billing costs for double play offers is set at 2,5 DKK per month per customer. The values for the other product categories are set in relation to the double play value using the identified relation between Telia s and TDC s values: - Single play level is 50% of the double play level, so 1,25 - Double play with TV is 200% of the double play level, so 5 - Triple play is 250% of the double play level, so 6, Bad debt Currently DBA uses 1% of the retail value including VAT for single and double play offers. From the benchmark, a value of 1,9% of the retail value including VAT is received from the German regulator. The costs for bad debt are also increasing with the number of services in the bundle, therefore, in general, bad debt is expressed as % of the retail price of the offering. Figure 10: Input Danish operators 2014 bad debt costs Confidential information Fullrate uses XXX% of the retail value including VAT. For double play Telia and TDC have provide absolute numbers (XXX and XXX respectively). These amounts can be

38 32 Retail cost assessment for DBA expressed as % of the average retail value when related to the average for a Danish double play offer (223 DKK +25% VAT). Resulting value for Telia is then XXX% and for TDC XXX% for bad debt. For this category, we have considered the inputs of all three parties for double play (TDC, Fullrate and Telia) as bad debt does not seem to be depending on the company s positioning in the market. The resulting 1% for double play is used for all product offers Non-single customer specific cost The currently used overhead by DBA is 10% of the invoiced amount excl. VAT, this translates into 20 DKK for single play and 23 for double play. In the benchmark, only Germany provided a figure of 7,15%, however on a costbase being the total wholesale costs + network costs. In order to make the benchmark value roughly comparable, we estimated the total wholesale costs + own network costs as 75% of the average German retail price for double play without VAT (34,95 ). This results in an absolute value of 14 DKK per month per customer. As can be observed in below graph, the German value is quite low compared to the input of the Danish operators. Figure 11: Input Danish operators 2014 non single customer specific costs Confidential information

39 Retail costs assessment for DBA 33 TDC s cost level for this category is differentiated by product offer, but the relation seems quite linear so a % mark-up is suspected. When relating the amounts for double play to the average Danish retail values (223 DKK excluding VAT for double play) a percentage results of XXX%. Fullrate and YouSee have provided values for double play (+TV) and triple play which are XXX of the current level. Fullrate has provided a % of the retail value excluding VAT; XXX% in 2013, which is a significant decrease from XXX% in Telia has a significantly higher cost level for double play and an almost XXX level compared to TDC for triple play. When expressing these cost levels as % of the average retail value for double play, a percentage of XXX% results as mark-up. This value seems very high compared to TDC/Fullrate and the German benchmark value. In setting the level for this retail cost category, the inputs from TDC, Telia and Fullrate have been considered, which resulted in an upward correction to 15% of the currently applied mark-up of 10%. When comparing 2011, 2012 and 2013 TDC data, it is furthermore observed that TDC s non single customer specific costs have gone slightly down for single and double play in the years but significantly up for double play with TV and triple play. Telia also has a high absolute level of overhead costs for triple play offers. Question 3: It seems that overhead costs are increasing in general and especially the allocation to triple play offers. Can the industry confirm this and explain the underlying reasons? 5.3 Summary and impact of recommended retail cost levels Based on the recommended cost levels for the one off and recurring retail costs, following overviews are made. The left tables show the levels of retail costs, currently applied by DBA in their margin squeeze tests and the tables on the right display the recommended levels based on the input from Danish operators in Based on average retail prices in the Danish market, absolute amounts are calculated where percentage values are set for bad debt and non single customer specific costs. The calculated totals are therefore estimations in order to see the impact of the recommended cost levels in the margin squeeze test.

40 34 Retail cost assessment for DBA Table 17: Retail costs - currently applied and recommended levels- current structure Currently applied - one off retail costs Recommended - one off retail costs- current structure monthly values (DKK) single play double play single play double play double play - TV (new) triple play (new) Marketing contributions 3,43 3,43 XXX 10,0 XXX 18,0 Sales personnel salary/sales commission 5,72 8,59 XXX 7,50 XXX 15,00 Customer premise equipment ADSL Customer premise equipment VDSL 8,01 8,01 16,03 16,03 XXX XXX XXX XXX Distribution of customer premise equipment 1,14 1,14 XXX XXX XXX XXX Customer activation 1,14 1,72 1,14 XXX XXX XXX Order related costs 2,29 3,43 XXX XXX XXX XXX Total - adsl 21,75 26,33 32,54 36,70 59,25 63,35 Total - vdsl 29,76 34,34 Current values - recurring retail costs Recommended values - recurring retail costs monthly values (DKK) single play double play single play double play double play - TV (new) triple play (new) Customer care / retention 20,00 27,50 17,60 22,0 44,0 47,0 Billing 8,33 8,33 1,25 2,50 5,00 6,25 Bad debt 2,50 2,79 2,50 2,79 3,75 4,63 Non-single customer specific costs 20,00 22,31 30,00 33,45 45,00 55,50 Total (estimated) 50,83 60,93 51,35 60,74 97,75 113,38 Total ADSL 72,58 87,26 Total VDSL 80,60 95,27 83,89 97,44 157,00 176,73 The following can be observed: - For single play and double play offers the recommendations result in total retail costs which are slightly above the current VDSL single play offer. - For the new product category double play with TV, the estimated total retail costs are significantly above the double play (+50%), hence justifying this new category.

41 Retail costs assessment for DBA 35 - The triple play category is new as well and shows also a significantly higher total level compared to double play with VoIP and with TV, hence also seems justified. However, it is proposed to use a more aggregated structure for the one off retail cost categories. This is based on a combination of observations: - As described in the detailed analysis, there is a strong relation between the detailed categories, which are now aggregated into one category and; - The Danish operators have reported challenges from time to time with the allocation of costs to the specifically defined DBA categories, which might lead to subjective cost allocation which in turn reduces the value of comparing the detailed values of the different operators and; - From the international benchmark it appeared that for certain categories it is common to club them together. In addition, the aggregated values for the one off retail costs have the advantage in the consultation that they can be used without disclosing confidential information from the operators on the provided detailed categories. This results in the following table.

42 36 Retail cost assessment for DBA Table 18: Retail costs - currently applied and recommended levels- aggregated structure Currently applied - one off retail costs We have also compared the recommended retail cost levels with the input provided by the Danish operators. Based on each operator s input, total retail costs for each product offer were calculated based purely on their respective input and consequently commonthly values (DKK) single play double play monthly values (DKK) Recommended - one off retail costs - aggregated structure single play double play double play with tv triple play Marketing contributions 3,43 3,43 Marketing and Sales 15,50 17,50 31,50 33,00 Sales personnel salary/sales commission 5,72 8,59 Customer premise equipment ADSL 8,01 8,01 Customer setup and activation (incl CPE and system costs) 17,04 19,20 27,75 30,35 Customer premise equipment VDSL 16,03 16,03 Distribution of customer premise equipment 1,14 1,14 Customer activation 1,14 1,72 Order related costs 2,29 3,43 Total - adsl 21,75 26,33 Total - vdsl 29,76 34,34 32,74 36,90 58,70 62,80 Current values - recurring retail costs Recommended - recurring retail costs monthly values (DKK) single play double play single play double play double play with tv triple play Customer care / retention 20,00 27,50 17,60 22,00 44,00 47,00 Billing 8,33 8,33 1,25 2,50 5,00 6,25 Bad debt 2,50 2,79 1,00% Non-single customer specific costs 20,00 22,31 15,0% Total (estimated) 50,83 60,93 51,35 60,74 97,75 113,38 Total ADSL 72,58 87,26 Total VDSL 80,60 95,27 83,89 97,44 157,00 176,73

43 Retail costs assessment for DBA 37 pared with the total retail costs calculated based on our recommendations per product offer. Figure 12: Total retail costs single play: recommended level versus input Danish operators Confidential information For single play offers, the estimated total lays around the higher current VDSL level for single play offers but well above the current ADSL level of retail costs. Only TDC provided data related to single play. The higher level is explained as the single play level was set in line with levels for double play (with and without TV) and triple play. Figure 13: Total retail costs double play: recommended level versus input Danish operators Confidential information

44 38 Retail cost assessment for DBA For double play offers the recommended levels result in estimated retail costs which are positioned between the latest input data from TDC s and Telia. Furthermore, the recommended level results in a slightly higher retail costs compared to current applied levels for VDSL double play offers but significantly higher retail costs for currently applied double play ADSL offers. Figure 14: Total retail costs double play with TV: recommended level versus input Danish operators Confidential information The total estimated retail costs for double play with TV offers lie above the provided input from TDC and well above TDC s subsidiary YouSee. This is a consequence of first setting the levels for double and triple play and then aligning the remaining level for double play with TV in the absence of input from alternative operators in Denmark. The recommended levels are roughly double the levels currently used for ADSL double play.

45 Retail costs assessment for DBA 39 Figure 15: Total retail costs triple play: recommended level versus input Danish operators Confidential information For triple play the recommended levels leads to an estimated total retail costs which is not in the middle of TDC and Telia, but more towards the lower TDC value.

46 40 Retail cost assessment for DBA 6 Summary of recommendations and further conclusions The following sections answer the main questions for this project: What is the correct level of retail cost to be applied in margin squeeze tests for market 4 and 5? Do retail costs differ depending on the retail product sold (e.g. single play versus double play and triple play broadband packages)? Do regulatory authorities adapt retail costs in their margins squeeze tests depending on the business strategy regarding sales channels of the considered operator (i.e., Premium versus No Frills positioning). 6.1 Recommended retail cost levels Below tables represents the recommended cost levels for the retail costs to be applied in margin squeeze tests for market 4 and 5 in Denmark. Underlying analysis is described in chapter 5. For the one off costs, first there is an overview in the current structure and an overview in proposed aggregated structure, which should be nonconfidential. Table 19: Recommended one off retail cost levels current structure Recommended - one off retail costs - current structure monthly values (DKK) single play double play double play with tv triple play Marketing and Sales XXX 10,00 XXX 18,00 Sales personnel salary/sales commission XXX 7,50 XXX 15,00 Customer premise equipment XXX XXX XXX XXX Distribution of customer premise equipment XXX XXX XXX XXX Customer activation 1,14 XXX XXX XXX Order related costs XXX XXX XXX XXX

47 Retail costs assessment for DBA 41 Table 20: monthly values (DKK) Recommended one off retail costs aggregated structure Recommended - one off retail costs - aggregated structure single play double play double play with tv triple play Marketing and Sales 15,50 17,50 31,50 33,00 Customer setup and activation (incl CPE and system costs) 17,04 19,20 27,75 30,35 Table 21: Recommended recurring retail cost levels Recommended values - recurring retail costs monthly values (DKK) single play double play double play - TV (new) triple play (new) Customer care / retention 17,60 22,00 44,00 47,00 Billing 1,25 2,50 5,00 6,25 Bad debt 2,50 2,79 3,75 4,63 Non-single customer specific costs 30,00 33,45 45,00 55, Retail costs differentiation based on retail product The second question regarding retail cost differentiation based on product offer can be confirmed based on the input from the Danish operators in In their input data the retail costs really differ between single play, double play with VoIP, double play with TV and triple play. For some categories the costs are the same, but overall the product

48 42 Retail cost assessment for DBA categories the total retail cost level varies between 86 and 178 DKK per month per customer.. However, in the EU benchmark, there is not one regulator who also applies a retail cost differentiation based on the retail product sold in terms of single play, double play etc. What does seem to more common is a differentiation of retail costs between residential and business services (Austria, Italy and the Netherlands). 6.3 Retail cost differentiation based on business strategy In regards to the third question, all of the responding regulators except Italy denied differentiating retail costs based on business strategy related to different approaches on distribution channels and service offering (no frills versus premium positioning). Italy remarked that when products are purely sold via online distribution channels, it applies the lower retail costs of online channels both for its product by product test and for the portfolio tests. In case products are sold via a mixture of distribution channels, it applies the higher standard retail costs for the margin squeeze tests. It is more common among EU regulators to differentiate retail cost levels for residential and business services; half of the respondents (Austria, Italy and the Netherlands) are doing so. Another variant is used in Ireland, where Comreg has proposed to use different levels of (retail) costs for NGA services depending on whether the competition is active in or outside so called Larger Exchange Areas (LEAs), which are defined as areas with LLU available and/or cable infrastructure. When competition is active inside the LEAs a combination of SEO and EEO is used and when competition is also active outside these LEAs, SEO is used to model the costs of the alternative operator in the margin squeeze test leading to higher (retail) costs. 6.4 Closing remarks Retail costs in general are considered confidential by operators. During this project, the confidential character also prevented some regulators to participate in the survey or input was given only at a aggregated high level. This made it sometimes difficult to compare the detailed data received from the Danish operators with benchmark values. Despite of this, the response from most regulators was positive and they were all interested as retail costs form a significant part of the downstream costs and therefore influence the outcome of applied margin squeeze tests. Also in general, other regulators seem to use a much more aggregated approach with less detailed retail cost categories as DBA. It is not clear whether this is a deliberated

49 Retail costs assessment for DBA 43 choice and/or that detailed data is lacking in those countries or that they have not started specifying itemized retail costs. In this context, it is worthwhile for DBA to keep an eye on Irish regulator Comreg, who has confirmed that it has internal data on the various retail costs but has not finalised a formal approach yet. Especially while Comreg has developed a specific margin squeeze approach for NGA based retail services, including how to deal with the retail costs applied in the test. The retail cost levels received by the Danish operators varied strongly: item by item and on an overall level. Based on DBA s overall REO approach, there is a logical orientation on the data from alternative operators. In some cases the large deviations between operator data are very likely due to different cost allocation methods and/ or interpretation of the itemized cost categories. Accordingly, parameter setting on the basis of the collected data is not simply straightforward. Sometimes we suggest to use averages, sometimes we suggest to use a single value and at other times an adjusted single value is suggested. It may be worthwhile for the DBA and the stakeholders to consider moving towards a more aggregated retail cost data collection such as proposed for the one off retail costs. At the other end of retail cost determination methodologies is the approach used in Italy where a single mark-up value on all other cost is used to derive retail costs. 1 The DBA could still require that operators include all the individual items when determining their retail cost to other cost (or revenue) ratio, so the definitions would remain. From our point of view, it is not entirely clear that the differentiated, itemized approach is superior to a more aggregated approach. Question 4: What is the opinion of the industry on the current aggregation level of retail costs, on the proposed aggregated one off retail costs and do you have any further proposals for improvement? 1 This approach is also used in Luxembourg.

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