Time for sensible telco prices

Last week Telstra's hiked its fixed line pricing, which will see the price of a local call lift by two cents. This is the first time some of the charges have been altered for nine years but it is also a vindication for many of the positions that I have taken in recent months.

The fixed line hike is further evidence of desperate price gouging by Telstra which is trying to squeeze every cent out of the fixed wire network before the NBN comes along. It is also further proof that smartphones are changing the landscape far quicker than first anticipated. Unfortunately, it's the public that is going to cop the blows as the telcos make merry.

Having sat back to think about these price rises, and the spin Telstra has put on their justification, I was hit by the antiquated notion of telecommunications pricing in this country. Not just the notion in fact, but the application of old PSTN pricing constructs to modern day telecommunications services and plans. You don't even need to dig very deep to see how ridiculous most telecommunications pricing constructs are.

In the past, we have studied the calling patterns and costs of thousands upon thousands of telephone plans and calls and costs (see here for full study). This data is mystifying to say the least. Given the fact it was more expensive to call your next door neighbour on a fixed line than it is to speak to someone in Shanghai for a minute, one can only assume that some sort of a price gouging is at work here.

In fact, when you couple this sort of risible abnormalities with a comparison between many other pricing regimes, the fallacy of the telco pricing structure becomes abundantly apparent.

Perhaps a good way to understand the structure is to compare it with other industry pricing constructs:

Airlines

I have certainly bought my fair share of fares. There is a reasonably common theme to airline pricing, the further you fly the more it costs. There are exceptions to the rule, but that is generally the case. If it costs me $100 to fly between Melbourne and Sydney, it costs $120 to fly between Adelaide and Sydney. If it costs $200 to fly from Melbourne to Perth, then it costs $180 to fly from Adelaide to Perth.

There are sales and exceptional fares, but the basic foundation is based on distance because that is how it relates to the greatest input cost, fuel.

On top of your fare there are surcharges, booking charges, premium seat charges etc. Some of these charges are flat per ticket (i.e. the same no matter where you fly) and some are again related to distance, e.g. a premium business class seat will vary in price depending on the distance of your flight.

Of course, a mockery can be made of all of these if you need a seat in the coming days as the closer you are to booking your seat to the day you fly, the more expensive the seat will be; this is the supply and demand premium.

Utilities – Gas, Electricity, Water

With the above utilities, there are common themes there is generally a daily rate / service charge and a usage charge.

The daily rate or service charge is a fee for proving the “pipe” to and from your building. With electricity there is a pipe / cable to the network so you pay a daily network fee, with water there is a pipe to the network and leaving the network (as sewage) so you pay a daily fee for this access. Finally, the same applies to connect your gas pipes to the main.

On top of this you pay for what you use. You may pay an excess if you use a certain amount, you may pay a different fee for different times of the day, but all of these are economic based fees, fees based on supply and demand and usage allocations of scare resources. You do not pay for water you may not use on a monthly basis. If you did, would you be likely to actually use more water than you needed?

Now to the telcos

Since the early 2000s, we have been told to think of broadband in terms of pipes, in fact “fat pipes”. For as far as I can remember, telecommunications is a utility. So,  I am perplexed, why does a utility- that deals in a “grid” of pipes- not actually price on any economic fundamentals of supply and demand or paying for you're the amount of data you use over the distance traversed.

Now, I do understand that global interconnection and network sharing agreements may play some part in the complexity of the pricing model, but spare me telco pricing 101. Current models are simply creating artificial demand for a product and causing pricing that defies economic rationalisation. Pricing is inflated and gouges all consumers and users unnecessarily. 

Here are three examples of when pricing doesn't quite gel with the fundamentals.

Capped plans

I pay for my monthly PSTN access – let's call it $40 a month. Then I pay 20 cents per local call I make. If I make five of these in the month it costs me an extra $1. This is pay-as-you-go usage and so far so good. Now let's compare this to when I purchase an unlimited plan.

It costs me $90 per month and includes my monthly access fee. Under this structure, 2,000 local calls in a month will only set me back $50 not the $400 under the old plan. Did I just use more than I needed? Can the network costs be justified in economic pricing terms?

Australian vs USA vs STD calls

I make a call to my local fish and chips shop – it costs me 12 cents to call and order my meal.The physical distance from me to them is 100 metres.

I now call my mate Tex Jones in the USA. I speak for 30 seconds as he's in a meeting. That call costs me eight cents. The physical distance is over 14,200 kilometres.

I now call my old friend who lives in Sydney, we speak for two minutes and that costs me 10 cents.

Data

Now, I am going to purchase my monthly data plan. I pay $50 per month for 200GB. If I go over the allowance, I pay $1 per excess GB.

• In March I used 100GB – it cost me $50.
• In April I used 20GB – it cost me $50.
• In May, I used  250GB – it cost $100.

I download as much stuff as possible to get me value for money, so I now use 190 GB a month.

Should I not pay an access fee for the privilege of these services? Should I not then pay for what I use, when I use it, how I use it and for how much I use?

Surely, that would create a system where people only pay for what they use, they don't subsidise each other and the telcos don't create artificial demand on their networks?

There are countless other examples of where telco pricing does not match any sensible (or fair) pricing structure. See here for SMS pricing and costs as a proportion of data costs. Maybe that just makes a little too much economic sense and would mean we pay less for what we use.

Tony Simmons is the managing director and founder of The Full Circle Group, an independent telecommunications consultancy firm focused on Telco expense costs and management.