Broadband Consumers Demand more of Everything

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European telecoms regulators have focused for some time on price regulation as a way of promoting consumer welfare. New research by FTI Consulting highlights the importance of a regulatory approach that also stimulates investment, innovation and service-based competition for the benefit of consumers.

With reform of the EU Telecoms Regulatory Framework as one of the key elements of the Digital Single Market (DSM) initiative, this is the right time for the EU to be considering a forward-looking approach that takes more explicit account of consumers’ perceptions of the relationship between price and quality of service.

The telecoms sector is now an integral part of a much broader Internet ecosystem that includes a wide range of enabling technologies, service providers, content rights owners and ‘over the top’ players. Many of the actors in this ecosystem have very different revenue and investment models to those of
the network owner/operators.

Telecoms network operators provide essential enabling technology for the broader Internet ecosystem and therefore face high consumer expectations of the quality and availability of fixed and mobile broadband access services. However, as we noted in our March 2015 report ‘The trends driving consolidation in TMT and the role of regulation’, there is a perception amongst investors that the EU telecoms sector is falling behind global competition.

Whilst the European Commission and the national regulatory authorities recognise the importance of promoting efficient investment, they must also protect the consumer against excessive pricing and other threats. As we noted in our March report, it is this focus on price, compounded by broader regulatory uncertainty, which is blamed for undermining investment incentives.

Pricing is also a key area of concern raised by sector consolidation. In most European markets there is strong competition between retail service providers, however there are concerns about the sustainability of this competition. In recent years there here have been several major fixed/mobile and mobile/mobile consolidations, for example in Austria, Spain, Ireland and the UK. Regulatory and competition authorities have focused attention on the potential effect of these mergers on price competition, and the remedies applied have reflected these concerns.

Against this background, and following the publication of the DSM, FTI Consulting conducted research with consumers across five EU countries to assess perceptions about service quality and pricing. Our results inform the debate about the relative importance of price to consumer welfare. In particular, our findings suggest that:

• Overall customer satisfaction with broadband services is high across the board. Indeed there is some evidence that consumers now value their broadband services sufficiently that they may accept higher prices, particularly if higher prices were clearly associated with higher service quality.

• Consumers are prepared to consider alternative pricing models, although they remain wary of variable pricing models.

• Implicitly, customers recognise the multi-sided markets that have become integral to the internet ecosystem; the value of access to consumers is generating new revenue streams for service providers, although not necessarily for network operators.

High levels of customer satisfaction
Our survey revealed very high levels of overall satisfaction with fixed broadband services, with high values for both price and quality of service measures (graph 1). The most satisfied consumers are in the UK, where more than 9 in 10 are satisfied with the reliability, speed and value for money of their broadband. Satisfaction levels in Germany, France and Sweden are similarly high. The picture in Estonia is more varied; 93% of consumers rate service reliability favourably, however satisfaction levels for value for money (80%) and particularly for speed (77%) are somewhat lower than the other countries in our survey.

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Whilst satisfaction with mobile broadband connections used outside of the home does not reach quite the same heights, on the whole mobile customer net satisfaction levels are also high across the five countries surveyed (graph 2). Again, UK consumers appear to be distinctive in their satisfaction with mobile broadband services, with just Estonians rating the reliability of their broadband services higher, at 83%.

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A consistent trend across all countries and both fixed and mobile services is for satisfaction with bandwidth to lag slightly behind satisfaction with value for money and reliability. It is arguable that this will continue to be the case as new bandwidth – hungry applications, particularly around video content, drive demand for ever-faster connections. The consistent picture of customers being marginally happier with the price that they’re paying than with the service they are getting suggests that there may be room for network operators to increase prices if this can be clearly associated with an increase in service quality, and particularly bandwidth.

Breaking down our results geographically between city, suburban and rural dwellers, is instructive (graph 3). Whilst net satisfaction levels remain high across both fixed and mobile networks, rural consumers are notably less satisfied particularly in respect of the speed/bandwidth metric. This is particularly interesting when comparing the countries, with the UK 10% more satisfied with their speed/bandwidth at home (82%) than those in Germany (73%), France (72%) and Estonia (72%).

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When rating their mobile broadband connections used outside of their home (graph 4), consumers continued to show high levels of satisfaction, albeit less than when compared to their connection at home. There appears to be favourable sentiment amongst city dwelling consumers towards their broadband value outside of their home, however this drops in each country amongst consumers in suburban and rural locations. Sweden is the exception however, with suburban consumers claiming 85% satisfaction, compared to the 80% of those living in the city. Those in rural locations in Germany (72%) and Sweden (71%) appear to be the least satisfied. Clearly there is still work to do, and money to invest, in order to deliver the highest quality networks across all geographies.

Of course, the cost of investing in network infrastructure in rural areas is higher on a per customer basis than in cities and suburban areas. Radio network sharing and more efficient spectrum usage will provide supply-side benefits to the quality of mobile services available to rural customers.

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However the simple conclusion on the demand-side may be that prices may have to rise if the quality of service experienced by city-dwelling customers is to be enjoyed in rural areas as well.

Significant use of mobile broadband as an alternative broadband connection at home may have important policy implications. It is apparent from our findings that whilst copper, fibre and coaxial cable connectivity remain the dominant broadband access option for consumers at home, a significant number of consumers across all five countries use mobile broadband technologies as an alternative means of streaming online content at home (graph 5).

It is noticeable that generally, and in Sweden and Estonia in particular, significant numbers of consumers use mobile broadband as a supplement to, or a substitute for, fixed broadband connectivity, in particular those in rural locations where 1 in 3 use a 3G or 4G connection at home.

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If mobile broadband services are considered to be a viable substitute for, and potential constraint on the pricing of, fixed broadband services, this has some potentially interesting implications for regulators’ market dominance assessments. And with 5G on the horizon, network operators need to have sufficient incentive to make the necessary investments and this might be undermined by aggressive price regulation of the fixed broadband portfolio.

 

 

 

 

Time to think again about alternative pricing models?
We also explored consumer preferences regarding existing and alternative pricing models. The preference for fixed pricing models, either capped or unlimited in terms of usage, was clear across consumers from all five of the surveyed countries, ranging from 46% in France to 62% in the UK (graph 6). There remains a general antipathy towards variable pricing models,even if these provide a lower fixed price point with only 8% in Estonia, and 15% in Germany and Sweden favouring this option.

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We also asked consumers about their reactions to a range of alternative pricing models that might allow them to enjoy lower prices in exchange for changes to their broadband access experience (graph 7). These proposals were designed to allow operators to achieve better returns on their network investment at current headline pricing levels.

The first proposal offered consumers the opportunity to enjoy lower prices in exchange for watching video advertisements, similar to the model which remains prevalent in television markets. Nearly a quarter (23%) in the UK and 30% in France supported this concept.

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A second proposal offered consumers the option of avoiding using their broadband service during peak periods (4pm to 10pm) to save costs; which just less than 10% of consumersin Germany, Sweden and Estonia deemed favourable. A third option offered consumers a differential pricing model whereby services requiring high traffic prioritisation such as video streaming attracted a premium price point when used, compared to charges incurred when using less network intensive services such as general web browsing. This proposal was supported by between 10% (France) and 15% (UK and Germany) of consumers surveyed.

An analysis of the age profile of respondents in the UK and France, which were the two most receptive markets, highlights that more than half of respondents under the age of 50 were prepared to consider alternative pricing models, with advertising-based models particularly strongly supported. This trend reflects increasing consumer understanding and acceptance of the multi-sided market nature of the broader internet ecosystem, whereby Internet-based services are subsidised by other sources of revenues such as advertising.

Whilst it is true that many consumers were not supportive of the alternative models proposed, there would appear to be sufficient interest to merit further consideration of alternative models for those customers who would be prepared to modify their usage.

Conclusion
Our respondents are more content about the pricing and quality of their fixed and mobile services than many commentators would have us believe. However there are gaps and inconsistencies in quality of service that remain to be filled.

The consistent message from consumers is that they value their broadband services, but they want to see further improvements in quality of service – in particular bandwidth. Our results suggest that price rises would not be considered unreasonable, if they were clearly associated with continued improvement in services. Some consumers are also more willing to consider alternative pricing models and changes to the way in which they consume and pay for broadband services. Implicitly consumers have recognised the multi-sided market that has developed in the ecosystem. Now is the time forthe regulatory community to catch up with consumers and look beyond price when developing regulatory and competition policies.

Research Methodology
This research was conducted by FTI Consulting’s Strategy Consulting & Research team in London from 19th to 23rd June 2015, involving n=2,543 respondents across
the UK, France, Germany, Sweden & Estonia reflective of the general population and broken down as follows: UK (n=521), Germany (n=505), France (n=509),
Sweden (n=504) & Estonia (n=504).

All research was conducted online by FTI Consulting. Further information on the results and methodology can be obtained by emailing dan.healy@fticonsulting.com.

Please note that the standard convention for rounding has been applied and consequently some totals do not add up to 100%.

Neil Clements is a Managing Director in our Economic & Financial Consulting Practice at FTI Consulting UK.

Dan Healy is  Managing Director of Strategy Consulting & Research EMEA at FTI Consulting UK.

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