telephony
6.5.1 The price sensitivity of residential customers
In addition to the characteristics discussed above, the price sensitivity of residential customers should be taken into account when assessing whether traditional fixed telephony, mobile telephony and the different categories of IP- based telephony should be viewed as equivalent. Price sensitivity can be discussed in terms of own-price elasticity and cross-price elasticity. According to the SSNIP test, cross-price elasticity, i.e. how demand for product A is affected by a small but non-transitory price increase for product B, is used as an indication of whether the product is a substitute or a complement.
Chapter 5 concluded that users to an increasing extent choose to make calls using mobile telephones and that there is a certain degree of call substitution between fixed and mobile telephony. The diagram below shows the changes in the price and volume of calls made for mobile and fixed telephony between 2002 and 2005.
0 50 100 150 200 250 300 350 400 450 500 30 jun 2001 31 dec 2001 30 jun 2002 31 dec 2002 30 jun 2003 31 dec 2003 30 jun 2004 31 dec 2004 30 jun 2005 31 dec 2005 Ge n o m s ni tt li gt a n ta l m in/ m å n 0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00 K o s tna d/ m
in Volym fasta samtalsminuter/mån Volym mobila samtalsminuter/mån Genomsnittlig kostnad/minut fast Genomsnittlig kostnad/minut mobil
Figure 6:1. Fixed and mobile telephony over time as regards the volume of call minutes per month and the average cost per minute. The cost is calculated on the basis of the
operators’ revenue. Source: The Swedish Telecommunications Market 2005, PTS-ER-2006:23.
Price elasticity was negative for the entire period. For most of the period, price elasticity was higher than -1, indicating that customers are not particularly price sensitive. This negative cross-price elasticity indicates that products should not be viewed as substitutes but as complementary. It is interesting to relate this result to the fact that customers, according to PTS’s Survey of Individuals, stated that price is an important factor when considering whether or not to cancel their fixed subscription and only use the mobile telephone. If this trend continues, the volume of mobile calls will continue to increase with the price cuts effected by operators during the second half of 2005 and 2006.
However, the diagram does not reflect the effect of other factors on the demand of residential customers for mobile and fixed telephony during the time period in question. For markets changing as a consequence of technical developments, it is not only customers’ sensitivity to price changes that determines the size of the demand. The change in customers’ perceptions of products over time must also be considered. Besides technical changes, this time factor can, for example, encompass customer adaptation to new products and quality aspects, but it cannot be captured in a simple calculation of cross-price elasticity. A well-
designed econometric model needs to be developed that can adequately take into account the factors of significance in respect of the demand of residential
customers for the different types of telephony and how these interrelate with each other.
Despite that which has just been stated, an intuitive line of argument is provided below about the sensitivity of residential customers to the issue of price changes
for the different types of telephony. Demand may be assumed to be interrelated regardless of whether the type of telephony is a substitute or complement, i.e. it may be assumed that there is a relationship affecting the demand for one type of telephony so that it is, at least in part, dependent on the demand for a second and/or third type. This reasoning is intuitive insofar as it is not supported by calculations, but is based on the changes in price and quantity shown in Chapter 5 and the data presented in PTS’s Survey of Individuals.80
The price of access to traditional fixed telephony, which has remained relatively constant in recent years, should not have had any significant influence on the influx of residential customers demanding access to mobile telephony and IP- based telephony. The penetration of access to mobile telephony is in principle as high today as the penetration of access to traditional fixed telephony. With the high penetration of mobile subscriptions, a change in the subscription price for fixed telephony should probably not have any significant impact on the demand of residential customers for mobile subscriptions.
In light of the relatively constant price of access to traditional fixed telephony, notwithstanding the existence of mobile telephony and IP-based telephony, PTS makes the assessment that the competitive pressure exerted by these alternative types of telephony is not strong enough to be able to influence the pricing of this access product. This may also be taken as an indication that the different access products, if they are viewed in isolation, do not constitute substitutes.
According to PTS’s Survey of Individuals, 4 per cent of the Swedish population aged between 16 and 75 only use mobile telephony, 37 per cent could envisage themselves doing so, but only if the price of mobile telephony approached that of fixed telephony, while 46 per cent could not envisage cancelling fixed telephony services. There are consequently three different groups with different sensitivity to the changes in the relative pricing of traditional fixed telephony and mobile telephony. The proportion who could envisage substituting fixed telephony has increased slightly from 33 per cent to 37 per cent over the past year. However, the Survey of Individuals shows that there are other reasons besides price for why residential customers would not consider only using mobile telephony; for example inadequate coverage and the risk of radiation.
Rather than being sensitive to the price of access, residential customers are sensitive to changes in the relative price of call services. However, the sensitivity of residential customers to the relative differences and changes in price between fixed traditional telephony and IP-based telephony for call services is probably not sufficient to represent a critical factor at the present moment in time that would result in a marked degree of substitution between these two types of telephony. Hitherto, factors such as quality and getting accustomed to a product are likely to be of greater importance than price. However, as has been previously discussed, it is not improbable that this development in time may result in traditional fixed telephony being substituted by a combination of mobile and IP-based telephony.
6.5.2 Cost of necessary terminals
The need for any new terminals and their associated costs must be taken into consideration when assessing the possibility of end users choosing IP-based telephony and mobile telephony over traditional fixed telephony. PTS previously assessed that the market for access to the public telephone network for residential customers included both PSTN and ISDN. An end user who changes from PSTN to ISDN must exchange the household's analogue telephone equipment for digital ISDN telephones, which would entail a certain amount of investment. Similarly, PTS previously assessed that both analogue and digital exchange connections are included in the market for access to the public telephone network for non- residential users, even if there are costs and investments associated with the change in products. In this case, it has consequently been assessed that the cost of terminals will not influence the definition of the product market.
The terminal equipment that is required to enable residential customers to access IP-based telephony varies. In some cases, a special broadband modem or decoder is needed to connect analogue telephones to a broadband connection. The cost of this type of equipment is often low and in some cases equipment is included with the operator’s offer. Another alternative is for end users to use, for example, a headset or handset that is connected to a personal computer. This type of
equipment is relatively inexpensive. The assessment should not include the cost of personal computers, as end users with access to broadband also usually have access to personal computers. End users without a personal computer are more likely to consider the possibility of using a separate decoder to connect the telephone instead of investing in a new personal computer. A new terminal may also be required when an end user is considering changing from fixed to mobile telephony. However, in light of the penetration of mobile telephony amounting to 99.5 per cent, it is likely that end users who are considering substituting fixed telephony with mobile telephony already have access to a mobile telephone. Due to the above-mentioned factors, PTS assesses that the cost of any terminals will not influence whether access to IP-based or mobile telephony should be viewed as a substitute for traditional fixed telephony. This assessment only applies as long as the residential customer’s costs are considered to be limited.
6.5.3 Quality aspects (QoS)
Chapter 3 concluded that several of the European regulatory authorities attached much weight to the quality aspects of the decision to include or exclude different types of IP-based telephony services in the relevant markets. As previously
mentioned, residential customers can choose between IP-based telephony services that are either offered by providers who control the packet-switched network or by providers who have no control over the network through it being supplied by another provider. In those cases where the provider does not control the network, for example IP-based telephony in Category D, there may also be a distinction between whether it is only the customer’s access connection that is supplied by another provider or the entire network infrastructure.
Assuming that the customer’s equipment is correctly configured, providers who control the network infrastructure can prioritise the transmission of telephony traffic before other traffic. This control also gives the provider more
opportunities to take care of any problems that may arise in the network. It is too early to assess whether this control will be critical to the provision of IP-based telephony services at a quality demanded by customers. The importance of controlling quality will depend on the quality of the broadband access lines and networks as well as the extent to which peering and transit between networks will constitute a bottleneck.
The agreed accessibility for a PSTN subscription is not particularly high in relation to the accessibility that most customers experience that they receive. This may mean that customers have a higher expectation of the accessibility of a PSTN subscription than that promised in practice by the operators. From an end user perspective, the quality that is experienced, and not that which is promised, should be an important factor for whether or not residential customers view the different categories of IP-based telephony as interchangeable with traditional fixed telephony services. From a substitution perspective, it is essential to get an
impression of whether residential customers in practice experience differences in quality between the different categories of IP-based and traditional fixed
telephony, but no such studies have been accommodated in this project. Prior to the next generation’s market review, PTS should carry out an investigation into how residential customers perceive the differences in quality between the different types of telephony service in practice and how this may influence their decision to use one or the other type of telephony service.