2014/11/20 Bitstream and VULA tariffs in several European countries will need rebalancing to enable IPTV replicability

When IPTV leads to a strong increase in the average traffic profile, bitstream and VULA offers may no longer enable replicability of the incumbent operator's offers.

Bitstream and VULA are wholesale offers that many alternative operators around the world use to provide broadband offers in regions where they do not identify a business case for deploying their own local loop or for using physical access. The development of IPTV, in particular for non-linear content, will require several incumbent operators to revisit the pricing structures of these offers, because traffic-driven price components may make it impossible for alternative operators using bitstream or VULA to replicate some of the incumbent operators' offers.

IPTV can have a significant impact on broadband average traffic profile

Bitstream and VULA pricing structures generally include a fixed component per connection (that typically depends on connection characteristics, such as peak speed) and a variable component based on traffic (typically measured as peak traffic, 95 percentile traffic or average throughput). When regulators test whether bitstream or VULA offers enable alternative operators to replicate the incumbent operators' offers, they have to use traffic assumptions – these can be based on actual market data or on a forecast evolution.

IPTV can have a dramatic impact on such traffic assumptions, because IPTV requires significantly more bandwidth than applications such as web browsing or VoIP. Content delivery networks (CDNs) can limit the traffic increase in some cases (by multicasting linear channels or caching popular content, for example), but they are less efficient when demand becomes a wide diversity of non-linear programmes, and they may be too expensive to address some low-density areas. When IPTV leads to a strong increase in the average traffic profile, bitstream and VULA offers that had been designed to enable replicability of the incumbent operator's offers may no longer enable this replicability because of the increase in traffic-driven costs. This can be the case even when additional revenue that the incumbent operator can get from these IPTV services is taken into account (see Figure 1).

Figure 1: Impact of a strong increase in the average traffic profile on replicability tests [Source: Analysys Mason, 2014]

Ensuring replicability with IPTV is likely to result in a decline in the variable component of bitstream and VULA prices

A recent Analysys Mason report on optimising wholesale broadband access tariffs showed that high usage had made the bitstream and VULA services with bandwidth-based backhaul charges very uncompetitive in several European countries.

In its latest Market 5 analysis (decision no. 2014-0734, 26 June 2014), French regulator ARCEP imposed an obligation on Orange to adapt its bitstream offer in zones where it is the only wholesale broadband service provider, by taking into account the development of non-linear IPTV services during the next 3 years in the cost accounting allocations used to set these bitstream tariffs. This review should lead to a strong decline in the traffic-driven component, which is necessary to enable alternative operators to replicate Orange's IPTV services.

In most countries where the development of non-linear IPTV services leads to a significant change in average traffic profile, regulators and operators will need to revisit the pricing structure of bitstream and VULA offers in order to ensure replicability. This is likely to result in a reduced variable component of bitstream and VULA prices and, potentially, in an increased fixed component.

Source: Analysys Mason