STEM newletter

Analysing the impact of the incumbent’s wholesale prices

01 January 2008

The Croatian fixed telecoms market is undergoing rapid liberalization, and the regulator is faced with complex issues in attempting to encourage competition. This article describes how Lator, a Croatian telecoms consultancy, has used STEM to build a bottom-up model of the business of alternative operators using carrier pre-selection (CPS). Sensitivity analysis was then used to identify the key drivers that influence the profitability of the CPS business model - especially the level of the incumbent's wholesale prices.

Regulating the Croatian telecommunications market

Croatia is an EU candidate state, expecting to become a member of the EU by 2011. During the accession process, great efforts are being made to bring the Croatian telecommunications market more in line with the EC regulatory framework. Although the mobile market is considered to be liberalized and mature, liberalization of the fixed market did not begin until 2005. Alternative operators began by offering their services by wholesaling of the incumbent’s voice services through CPS, and have now started to offer broadband services based on unbundled local loops. Broadband penetration reached 8.5% of the population at the end of 2007, and there is great potential for increase in the number of broadband lines, as well as increased market share for alternative operators. 2008 is predicted to be a major milestone in the Croatian fixed market, due to even stronger regulation of the market as well as the expected conclusion of consolidation among alternative operators, which will result in larger investments in the market.

The demanding process of liberalizing the fixed telecom market is the responsibility of the national regulatory agency Hrvatska agencija za telekomunikacije (HAT). Given the circumstances, HAT has made, within a short period of time since the end of 2004, a very good job, yet with a couple of issues that might lead to further regulatory interventions.

Among others, the efficient supervision of the incumbent’s reference interconnection and unbundling offers is a challenging task, considering the early phase of liberalization and the frequently overvalued revenue expectations of the alternative operators, which have been repeatedly complaining that the incumbent’s wholesale prices for voice services do not allow them to reach a sufficient level of profitability.

The business model for CPS

In order to precisely determine the profitability level of the CPS wholesale option, HAT ordered a study project from Lator. After analysing the options, Lator concluded that the best way to precisely determine the profitability level would be to build a bottom-up CPS business model, which would take into account all the relevant revenues and costs faced by alternative operators. Such a model would be complex, needing to take into account a large number of input elements, such as:

  • call origination and call termination tariffs in different networks with peak and off-peak alternatives
  • various service bundles depending on customer type and region
  • involvement of legacy TDM technology in the incumbent’s network, VoIP-based technology in alternative operators’ networks.

Based on their previous experience with the STEM tool, Lator consultants decided to use this tool for the construction of the model, fully aware that such an approach would bring many advantages for the business-modelling process, compared to the traditional practice of performing calculations in Excel tables.

The first phase of the project included the construction of a CPS model in STEM (see Figure below), based on input data from the reference interconnection offers of the incumbent and the three mobile operators. The rest of the input data comprised market data related to the customer base and the price of telecom equipment.

Simplified view of the CPS business model in STEM

In the second phase of the project, Lator analysed the economic aspects of the business model, which included EBIT and EBITDA margin calculations per year, as well as NPV values over a five-year period. The results of the model were readily gained through STEM’s Results module, based on pre-defined sets of tables and graphs available within the tool.

NPV results for two interconnection scenarios

In order to provide HAT with options for future regulatory measures, Lator experts identified the key drivers that influence the profitability of the CPS model by performing sensitivity analysis. Thanks to STEM’s integrated sensitivity-analysis module, the sensitivity results were easily produced, making it possible to determine the quantitative influence that changes in the incumbent’s wholesale prices would have on the CPS business model.

Clarity for the end user

Aside from the fact that this project has provided HAT with lots of benchmark data that can be efficiently utilized in their daily regulatory work, our client was also impressed by STEM’s ability to clearly consolidate a great amount of technical and economic parameters, and to quickly introduce changes into a model and track the corresponding results that these changes would cause.

It is also obvious that the STEM tool can be similarly applied in HAT for techno-economic calculations related to issues in the fixed broadband market, such as local loop unbundling and bitstream, which could soon require important regulatory measures in order to further encourage competition.

Tomislav Majnaric is a Senior Consultant at Lator. Previously he worked for Ericsson in Croatia and for the local partner of Lucent Technologies and Nortel Networks. He has undertaken several telecoms consultancy projects in Croatia, and is currently working on projects dealing with techno-economic analyses of technologies and business opportunities in the local market.

Lator is an independent Croatian telecommunications consultancy firm whose mission is to provide expert and reliable support in the further development of the Croatian telecommunications market.

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