Margin Squeeze

After Talk Talk's complaint to OFCOM I tried to get my head round the costs via a spreadsheet

Any corrections or suggestions welcome - I only looked at the 40M products to start with. I gave up trying to find the upstream on Sky and TT fibre and Sky's line rental upfront offer is beyond comprehension.

It does show Plusnet and (to a lesser extent) BT Retail working on skinny margins, so I guess TT want to see these retail prices forced up.

I'll have you know 29p is a lot of money to a Yorkshireman.

Is price always the deciding factor in choosing an ISP. I think not. I would not join Talk Talk even it was free

In reply to a post by shalom2005:

Is price always the deciding factor in choosing an ISP. I think not. I would not join Talk Talk even it was free

For a lot of users, yes it is. They fall for the "we are cheapest" line from them and believe their claims about quality. Remember, this is the company which claimed that they had "bought all the BT exchanges" before being caught out lying.

In reply to a post by shalom2005:

Is price always the deciding factor in choosing an ISP. I think not. I would not join Talk Talk even it was free

Would you join BT or Plusnet if they offered you Carrier-Grade NAT?

Must've missed the announcement where TalkTalk as a company rather than some random customer service / tech support / sales person claimed that, do you have a link to it?

the argument seems a farce.

It seems talktalk are saying they have some divine right to undercut BT, if they cant then BT have broken some rule somewhere?
Talktalk of course also did heavy loss leading when they started offering adsl, if I remember right they were the one's who effectively trashed the adsl market.
Any market where a reseller is able to undercut the wholesaler shows something is wrong (usually either the wholesale having large margins on their own retail product, or the reseller loss leading). to me it seems natural BT are able to sell for less than talktalk as its BTs infrastructure.

Of course if ofcom decide that talktalk are in the right even tho sky in the same position are doing fine, BT could respond by dropping BT wholesale prices a bit to increase BT retail margins and then talktalk are still no better off.

It seems to me talktalk lack innovation, they only can sell by been the cheapest. It woudl be a mistake by ofcom to rule in their favour because it would be to stifle BT's business case for FTTx in favour to satisfy a company that is just piggybacking of BT and trashing the market.

In reply to a post by Chrysalis:

<Snip>

It seems to me you completely miss the point. On the one hand you want more regulation in some ways while in others you think that BT should be able to sell at a retail loss, taking advantage of their vertical integration to ensure overall profit.

TalkTalk aren't complaining about not being able to undercut BT, Ofcom wouldn't care less about that, they are claiming that it's impossible for a 'reasonably efficient operator' to make a profit charging the prices that BT Retail are for FTTC/P.

Have a read of previous margin squeeze cases for background.

TalkTalk weren't loss leading, they took advantage of MPF LLU and offered a heavily restricted and throttled broadband package. The actual cost increment given the same hardware was supplying both phone and broadband wasn't actually that high.

It did start a race to the bottom however that bottom, given the unlimited broadband services we have available and the prices that we have them available for, doesn't seem to be all that bad. It's a commodity now not something nerds have in their bedrooms and spend all their money on. Hardly a bad thing?

BT Wholesale/Openreach are not supposed to favour anyone (BT Retail or other) because they enjoy a unique position in that they own and operate the exchange facilities where the equipment has to be hosted and have to be paid to provide the copper//fibre link to the customer premises as far as I understand it.

Sky are doing ok because they make the bulk of their money from their satellite TV service and they also own a well respected business ISP, easynet so they can take a bit of a hit on the broadband side of things.

TalkTalk's only business is the provision of telecoms so am not really surprised to hear they are kicking up a stink.

If you think BT Retail is championing the consumer think about this.

I'm in an area where FTTP is being rolled out, now I have 0 need for a 330 Meg internet connection but I'd quite like an FTTC connection of up to 76 Meg and there are some good deals on these but alas I cant take advantage because BT has decided in this area its FTTP or ADSL only and I've not yet been able to get a price for FTTP when it comes out of the trial phase as the ISPs I have spoken to have told me they will be creating different pricing plans for FTTP as its likely BT will be charging a lot more for it.

Is that really fair?

I'm in an area where FTTP is being rolled out, now I have 0 need for a 330 Meg internet connection but I'd quite like an FTTC connection of up to 76 Meg

I am led to believe that in areas where its FTTP only, then you can still take 40/80/110 download products, this is certainly the case in Deddington in Oxon, which is to be the UK's 1st 'FOX' fibre only exchange, so can't see why CP's can't offer these products if FTTP is all you can get.

I do wonder if, in some part, the reticence of CP's to embrace FTTP/FTTPoD is causing a slow down in its roll out. Without orders on the books, Openreach will happily drag its heels.

the last time this got applied ignition it led to the aweful adsl max pricing where one price was used for everyone, now on FTTC we have burst speed price differentials and a lousy isp struggling which I like to see.

Yes BT are very likely cross subsidising but my reply is whats the big deal?

If you say they werent loss leading how were they supplying broadband for under wholesale cost? What talktalk want is to lower the standards again by been the cheapest and not then having to do things like up service quality to sell connections. I am surprised you are in favour of this.

We also need to consider BT could shrink back their FTTx work if ofcom changes change the business case. Actually I think its a bit sly of talktalk to wait until BT have already spent loads of cash before making the complaint.

I agree I did complain about min contract durations believing them to be abusive, but I have just got on with it now and accepted the situation which is what talktalk should be doing, BT eg. have also invested in TV rights to aid their goal of been a triple play provider, which sky also is (as you mentioned) as wella s virgin media. Why havent talktalk gone the same route? other isp's who are just telecom based have either failed (O2) or are innovating in other ways.

Edited by Chrysalis (Fri 03-May-13 19:40:36)

I am no fan of BT, but the main problem of this country has been the over emphasis on competition. We are not in the same position as the year 2000, talktalk now have a very large customer base built up.

The seperation of BT wholesale and openreach eg. has only harmed the consumer, the only winners of that are the isp's who piggyback of BT's infrastructure.

Your situation wont be affected by this complaint.

I hope the complaint is either rejected or the action taken is to leave openreach and BT retail prices alone (to annoy talktalk) but drop BT wholesale pricing so the margin shifts from BTw to BT retail thus passing the margin squeeze test.

Edited by Chrysalis (Fri 03-May-13 19:18:35)

In reply to a post by Zarjaz:

so can't see why CP's can't offer these products if FTTP is all you can get.

Plusnet supply 2 products to precisely this market, at the 40/10 and 80/20 speed levels to match their FTTC packages, with prices and GB allowances to match too.

Unfortunately, they're only listed as trial products available to existing customers, but they aren't restricting the number of people they're accepting into the trial.

Yes (to the obvious question), people have joined Plusnet with ADSL with the express need to jump straight onto the FTTP trial.

Good to know, thanks.

In reply to a post by Ignitionnet:

given the unlimited broadband services we have available and the prices that we have them available for, doesn't seem to be all that bad.

That is certainly a good thing - value for money makes the internet widespread, almost ubiquitous - probably as it should be.

The downside is that the government will use this factor heavily in deciding whether we have the "best" broadband in 2015.

It's a commodity now not something nerds have in their bedrooms and spend all their money on. Hardly a bad thing?

There is one bad thing... with such low prices, it is hard to justify (to investors) upgrading the nation to full fibre. Hell, it is hard to justify upgrading to FTTC! And hard to justify anything at all for the remote areas.

The bad thing for the nerds though is that they, of course, all want full fibre, and rant incessantly without much regard for the fact that most of the country doesn't want to pay for it.

They also won't believe the government when they pronounce that, ta-da, we *do* have the best broadband after all.

Hmmmm...

except unlimited wont be so cheap if talktalk get their own way, because plusnet and BT prices may go up. Or it may reintroduce dare i say it traffic management because suddenly all these capacity upgrades plusnet have been doing will no longer be viable with a margin squeeze test enforcement.

Or that doesnt matter because LLU competition is more important?

my (crude) analysis suggests that Talk Talk have the best margin and the lowest cost to the consumer, which hardly sounds like grounds for dissatisfaction.

On the other hand the ability to write a letter and have a competitor tied in knots for some months might be attractive.

In reply to a post by Chrysalis:

The seperation of BT wholesale and openreach eg. has only harmed the consumer, the only winners of that are the isp's who piggyback of BT's infrastructure.

The majority of DSL customers are on LLU services made possible through that separation. I've a suspicion they'd disagree with you.

In reply to a post by Chrysalis:

except unlimited wont be so cheap if talktalk get their own way, because plusnet and BT prices may go up. Or it may reintroduce dare i say it traffic management because suddenly all these capacity upgrades plusnet have been doing will no longer be viable with a margin squeeze test enforcement.

Or that doesnt matter because LLU competition is more important?

*Sigh*

The point is that if it comes to it those capacity upgrades aren't viable anyway. That is exactly the point.

In reply to a post by Chrysalis:

the last time this got applied ignition it led to the aweful adsl max pricing where one price was used for everyone, now on FTTC we have burst speed price differentials and a lousy isp struggling which I like to see.

Okay.....

In reply to a post by Chrysalis:

Yes BT are very likely cross subsidising but my reply is whats the big deal?

It's against the Competition Act.

In reply to a post by Chrysalis:

If you say they werent loss leading how were they supplying broadband for under wholesale cost? What talktalk want is to lower the standards again by been the cheapest and not then having to do things like up service quality to sell connections. I am surprised you are in favour of this.

They weren't selling for under wholesale cost. MPF LLU has no wholesale cost for the broadband element.

In reply to a post by Chrysalis:

We also need to consider BT could shrink back their FTTx work if ofcom changes change the business case. Actually I think its a bit sly of talktalk to wait until BT have already spent loads of cash before making the complaint.

The business case for FTTC is based on revenue into Openreach, this discussion isn't about revenue into Openreach.

In reply to a post by Chrysalis:

I agree I did complain about min contract durations believing them to be abusive, but I have just got on with it now and accepted the situation which is what talktalk should be doing, BT eg. have also invested in TV rights to aid their goal of been a triple play provider, which sky also is (as you mentioned) as wella s virgin media. Why havent talktalk gone the same route? other isp's who are just telecom based have either failed (O2) or are innovating in other ways.

Err https://sales.talktalk.co.uk/product/tv ?

Yarwell

Your costs are all based on the standard. It is my belief that BT Wholesale can offer discounts for volume and does so.

These can be quite significant and may affect the calculations for BTRetail. BT's last quarter accounts say over 1m BTRetail FTTC and 1.25m in total so Retail have more than 4 times as many as the rest put together. A volume discount for 1m customers may decrease the price significantly.

Still if all your costs are correct it is 'amusing' to see the CP with the highest margin claiming a margin squeeze!

I can see another reason for this:
I wonder if the next set of results will see the number of TalkTalk customers falling which could hurt their finances as they must still be paying for the LLU investments.

Yet they now have to pay OR for FTTC connection reducing their margin by £7.40 according to your costs for each FTTC customer. If they get too many people wanting 'FTTC or we move CP' that could hurt their pockets.

on the triple play, shows how good their advertising is when I wasnt aware of it

cross subsidy is rife in all lines of business. it may be illegal under that act (I take your word for it). Also sky margins on their broadband are likely as thin as BT's but I expect they cross subsidising as well except with sky its harder to prove as they dont have to reveal their backhaul costs.

Increased Bt/plusnet prices, consumer loses, reintroduced traffic shaping consumer loses. BTw made cheaper, possible consumer win as it helps zen, aaisp etc. without touching infinity/plusnet pricing. No action, in my view win for consumer also. The current BT product line up is probably BTs best for a decade.

So what do you think the likely outcome of this investigation is? Maybe you think something will happen I havent considered.

also am curious how free broadband isnt a loss leader.

Edited by Chrysalis (Fri 03-May-13 23:02:27)

Random? Don't think so.

When I worked at Zen the number of calls we got through from customers who had Talk Talk on the phone claiming they'd bought us out was astonishing.

I talked to a few people in other ISPs and they were seeing similar.

Then there was the line take over debacle, oh and the erroneous bulk migrations...

In reply to a post by Chrysalis:

cross subsidy is rife in all lines of business. it may be illegal under that act (I take your word for it). Also sky margins on their broadband are likely as thin as BT's but I expect they cross subsidising as well except with sky its harder to prove as they dont have to reveal their backhaul costs.

Sky aren't vertically integrated for broadband, only TV, and due to this are regulated to an extent via the rate card and requirement to run an open access platform.

In reply to a post by Chrysalis:

So what do you think the likely outcome of this investigation is? Maybe you think something will happen I havent considered.

also am curious how free broadband isnt a loss leader.

On the first one no idea, on the next point as I mentioned there is no 'line rental' for MPF LLU broadband, just the line. The actual incremental cost of the broadband part of the product, capped at 40GB and heavily traffic managed, was relatively minor. They took a gamble that the charge for the line rental and calls would cover those costs via cross subsidy and were right.

Interesting and very, very bad indeed.

Thanks for the information.

In reply to a post by kitcat:

Your costs are all based on the standard. It is my belief that BT Wholesale can offer discounts for volume and does so.

Yet they now have to pay OR for FTTC connection reducing their margin by £7.40 according to your costs for each FTTC customer. If they get too many people wanting 'FTTC or we move CP' that could hurt their pockets.

On the first point you may be right, and equally Openreach may also have volume discounts.

FTTC doesn't reduce the TT margin because they charge a tenner a month extra for it (£8.33 ex VAT). Their own strategy presentations show it as a positive thing, though at the time they weren't anticipating BT Retail pricing so low or with such a small differential to ADSL.

BT Retail's FTTC differential is only £5/month over ADSL and that includes an extra 30 GB/month of usage. As this is less than the cost to TT of procuring FTTC you can see the problem.

http://www.thinkbroadband.com/news/5831-new-low-pric...

BT shaves £3/month off the retail price of entry level of Infinity, undercutting Plusnet

spreadsheet updated

Obviously can't be taken account of on that spreadsheet very easily but you also have BT spending nearly 300 million on sports rights per year and providing them, free of charge, to their customers.

There's certainly some bruising regulatory arguments to be had in the next months.

still leaves Talk Talk looking like they have a bigger margin but can't make the sales though ?

Sales appear to have improved for Sky/TalkTalk on FTTC, issue is lack of promotion of their products in a lot of cases I suspect.

The fall out from the TalkTalk/Tiscali issue may be clouding many peoples thoughts, and the 'hatred' of Sky not helping too, look at reaction of o2/be customers.

spreadsheet seems over complex.

BTw price for 80/20 £19?
Infinity retail £26?

£7 margin too small?

In reply to a post by yarwell:

still leaves Talk Talk looking like they have a bigger margin but can't make the sales though ?

I think their point would be that it's not economically viable for them to match BT's retail pricing even with their lower costs via GEA.

In reply to a post by Chrysalis:

spreadsheet seems over complex.

BTw price for 80/20 £19?
Infinity retail £26?

£7 margin too small?

Backhaul? IP transit? Cost of own network? Customer support? Billing?

Margin squeeze is based around what a reasonably efficient operator could match.

thats why I asked the question.

What we not privy to is cost BT pay for support staff, contracts with offshore call centres etc.
Their user base usage patterns so how many are light users?
Billing if its paper based and not direct debit both have costs over the base price. So we can assume for £26 its direct debit and no paper billing.

If £7 is too small is talktalk and sky margin also too small?

If ofcom take action the result wont be good for consumers I feel.

In reply to a post by Ignitionnet:

In reply to a post by yarwell:

still leaves Talk Talk looking like they have a bigger margin but can't make the sales though ?

I think their point would be that it's not economically viable for them to match BT's retail pricing even with their lower costs via GEA.

Didnt you comment to me before thats it not about talk talk been able to match infinity pricing? (and it certianly shouldnt be) but more about if BT are failing a margin squeeze test.

440million profit for BT retail in Q4 2012. Seems profitable to me so margins are there.

http://www.btplc.com/news/articles/showarticle.cfm?A...

Edited by Chrysalis (Sat 11-May-13 01:14:17)