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Cautionary note on price expectations
Friday 14 May 2004 16:42:00 by Andrew Ferguson

The news that BT was to cut the line rental for a LLU line, along with its connection charge has sparked massive media interest it seems. Some reports are seizing on the 70% reduction figures, and giving the public the impression that sweeping price cuts are going to happen across the board e.g. a service costing £25 today will be available for £10 in a few weeks. The reality is that only for LLU lines will the line rental drop from £4.42 per month to £2.26 as of 1st June 2004.

To clarify this one needs to realise the actual extent to which LLU services are used by BT's rivals at present, there is around 10,000 LLU lines, compared to a couple of million other ADSL lines. There are three main players in the LLU arena, Bulldog, HomeChoice and EasyNet, the latter is mainly a business provider. The parts of the UK that these providers offer an LLU service to is restricted currently to the areas highlighted on this map. As one can see this is a relatively small number of exchanges, the line rental price cut is meant to stimulate providers to roll-out further services to other parts of the UK.

For those who are not aware of what Local Loop Unbundling is. It is when an operator installs their own DSL hardware inside a BT exchange, and this operator links the hardware directly to their own network. When you buy the service, your line is unbundled in the sense that control of it is handed over to the new operator, and you must decide whether to continue using the line for voice traffic, or dedicate it solely for broadband. A big reason that LLU is so rare in the UK is the costs of putting the kit into each exchange, and linking this to an operators network, which Ofcom are continuing to review.

In amongst the mass of material released on Thursday was also indications that the margin between BT Datastream and BT IPstream products was going to be increased, by lowering the price of BT Datastream products by probably £1 per month. The BT Datastream product is used by a number of suppliers including Bulldog, Netservices, Telefonica, Thus, Tiscali and a few other suppliers. These wholesale providers, actually do resell to other ISP's, so your line may be a DataStream service without you knowing. Generally these Datastream services are a subset of the national ADSL exchanges, e.g. Bulldog cover around 450 exchanges out of a potential 2,600, Tiscali claim around 60% coverage. Datastream is a half-way house between LLU and the standard ADSL product, the provider still uses the BT ADLS hardware in the exchange, but splits traffic onto their own network shortly after the exchange. This allows the provider to control it's costs better, generally resulting in lower prices, e.g. the 2Mbps services from Fast24 for £37.50. Though if a Datastream cuts pricing and corners too much the quality of service can suffer.

The final price change is related to the changes BT are introducing to the standard BT IPStream products that are currently available at 2,645 exchanges around the UK. This is the introduction of usage and capacity based pricing, we have mentioned this in our news a couple of times ( here, here, and here). Capacity based charging is the first option that will be available to service providers, and while the monthly ADSL rental will drop from £13 to £8.40 a month, the cost of other parts that ISP's must rent will increase dramatically. For example the pipe that can connect 8000 users from BT Wholesale to the ISP, will change in price from £45,000 to £316,200 per year. If the ISP has 8,000 users on that pipe, under the old scheme they would be paying £1,293,000 per year, under the new scheme it will be £1,122,600 per year. The savings work out at around £1.77 a month per user, of course this assumes an ISP fills the pipe with 8,000 users. It is important to note that many ISP's do not fill their pipes to maximum capacity, since doing so can affect the Quality of Service users receive.

In summary, we have had three separate potential price changes this week, and they affect different types of broadband providers in different ways. The impact of the capacity based pricing model has been felt already with the wide-scale introduction of 0.5Mbps ADSL services under £20, but most of these include some form of bandwidth metering. The vast majority of existing unmetered ADSL packages are unlikely to drop in price, and if they do, it may only be by a pound or two. In fact for some service providers the new capacity model may increase their costs.

Bulldog has bucked the trend slightly, with it's offer of a 1Mbps service at £19.99, but this is a limited time offer, and only runs at up-to 1Mbps during the weekend and evenings. It is very likely that the trend in the UK will now be to more packages like Bulldog's that offer peak-time, off-peak options, or services like 2Mbps packages which are bandwidth metered.

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