[ NNSquad ] Re: 2 thoughts (new ideas) on Entry level pricing

[Rahul Tongia <tongia@cmu.edu>]

Hi George,

Regarding your points/queries:

1) Labor costs
Yes, Indian labor costs are low, but they're not as low as one would think.  One rule of thumb is to consider what higher end (engineers make) - it's some 3-5 times lower, and it gets to be much greater gap only down the line.  BUT, in India they have vastly more labor deployed per job, removing some of the benefits (lower efficiency in some operations). I remember 5 people came to install DSL in my apartment in Bangalore, when the interior wiring was already done.  [aside - in the power sector, the cost of electricity going to labor is almost the same, if not higher, than the US, due to this factor!]  
Let us assume labor is 1/10 or even 1/20th in India (which it's not). Can I ask you to tell me the breakdown of costs for US Telcos? How much is labor (broken down by task)?

2) Unlimited usage plans are often $20/month here, but that' because they make disproportionate money on these. Let me flip the Q and say the same provider in the US wants to offer capped vs. uncapped plans. We already have the data that says "uncapped" (or, what you call, generously capped) plans in the US are under $3/month. Thus, the delta between a capped and uncapped plan shouldn't be more than $3/month if one looked only at the marginal costs. But we know that's not the case.  

Your point on relative costs is well taken, but then again, the "average" person in India doesn't take a DSL connection.  If one examines cost of connectivity versus income, then the US isn't the best off (that is Hong Kong) - that ignores speed of "broadband".  So places like Chad are the worst off, where it is some 8x annual income for 20 hrs of going online (2004 data). BUT the average person in Chad doesn't take a broadband connection. One might re-jig averages to look at costs across the applicable pool.

3) I was referencing something Dave published using public data, and I can supply similar data from India.  You also state in the same paragraph something re. this being a small component of marginal costs.  Well, capex are not marginal costs.  Can you also please clarify the other costs?

In my paper referenced previously, I split broadband costs into several buckets, and let's discuss numbers for these:
i) Uplinking ($2-3/month)
ii) Capex (few dollars per month, amortized, for DSL)
iii) One-time costs (installation, marketing, etc.); DSL is now self-install at the CPE level. 
iv) Operating costs (maintenance, CRM, etc.)

Then, there's profit. 

4) I don't quite see how the US has rejected cheaper plans that are capped - they just haven't been available.  The US likes unlimited (witness iPhone usage).  

Let me state things very starkly. There is a major issue of framing.  IF we agree that the difference between capped/uncapped should only be $2-3/month or so, then the issue is NOT that we should have $27/month uncapped versus $30/month uncapped. We should have $15/month capped and $18/month uncapped.  OR, we have to recognize there are other things that need coverage in rates, including higher profit margins, marketing issues, bundling, etc.

Rahul

On Mon, Oct 5, 2009 at 12:18 PM, George Ou <george_ou@lanarchitect.net> wrote:

What’s the average Telco employee earn in India as opposed to the US?

 

You’re also not comparing apples to apples when you’re talking about capped prices.  A severely capped circuit is far different from the sorts of generously capped circuits in US broadband service plans.  You need to compare similarly capped plans.  Now hypothetically speaking let’s say that similarly capped 1.5 Mbps DSL connection costs $10 per month compared to the $20 US plan.  What is the relative cost of $10 to a typical Indian citizen relative to income?  Wouldn’t that be the equivalent of $80 to $100 per month to an American?

 

If you’re going to quote Dave Burstein’s vague statements from anonymous sources, I can’t take you too seriously.  Try citing a specific name and the exact statement and then we can start discussing the facts.  Besides, you’re talking about a very small component of the marginal costs to begin with.

 

 

As to your last question, the US market has rejected cheaper capped plans and we now have groups like Free Press lobbying to make cheaper capped plans illegal.

 

 

George Ou.

 

From: nnsquad-bounces+george_ou=lanarchitect.net@nnsquad.org [mailto:nnsquad-bounces+george_ou=lanarchitect.net@nnsquad.org] On Behalf Of Rahul Tongia
Sent: Sunday, October 04, 2009 9:52 PM
To: David Farber; nnsquad@nnsquad.org
Subject: [ NNSquad ] 2 thoughts (new ideas) on Entry level pricing

 

People talk of entry level pricing. A few thoughts.

1) Entry level pricing is cheapest (or amongst the cheapest) in a place like India.  The list price for DSL (now 1 Mbps) is some 256 Rupees/month, just over $5.  BUT, this is usage capped. Unlimited plans are more expensive. So, if that is the trade-off, that is something worth explicit discussion.  However, folks I've talked to and my own analysis indicate this is not cross-subsidized, esp. at the marginal level.  They don't really make much money on the cheapo DSL, but this also gives them a landline subscriber.  [note, I've seen the incumbent offer $2/month DSL as part of a package, under a special offer]
My old TPRC paper (http://web.si.umich.edu/tprc/papers/2006/592/TPRC06-Tongia-submission%20v2.pdf)
goes into some analysis on how you really can provide DSL for <$10/month in the US, assuming the appropriate local loop copper is there.  Dave Burstein and others have shown how capex is now approaching $50, and we have the famous statement from ?CTO of a major ISP saying uplinking is between $2-3/month, average.  Thus, for the "entry" subscriber, it would be on or below the lower end of the range. 

2) A major issue is whether entry level broadband is just a "lite" version of other ("regular") broadband or is it something different? DSL is especially interesting since other than the well-known distance-bandwidth tradeoff, there is little to physically differential entry and regular DSL. "Regular" DSL can typically go faster than what they offer (my own modem allows me to line test, and I find it capable of 31 Mbps, here in India!). Thus, entry DSL is cheap in part because of marketing reasons, not because of any cross-subsidy.  So, by this analysis even even "regular" (megabit class) DSL is "lite". 

This, to me, speaks volumes of why carriers in the US don't offer really cheap (but still slightly profitable) DSL - they don't want people to understand how much higher the gross margins are for "regular" DSL than entry-level DSL. 

Rahul