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The pricing of international The pricing of international telecom services telecom services
Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Tim Kelly can be contacted by e-mail at [email protected].
Dr Tim Kelly (ITU), Seminar on tariff
strategies for competitive
environments,ALTTC, Ghaziabad,
20-22 July 1999
2Reducing the price of international callsReducing the price of international calls
AgendaAgendaWhat’s the problem?
The Accounting Rate system and how it works Concerns of developing countries
Two approaches to solving the problem FCC Benchmarks order ITU Focus Group Recommendations
The situation in IndiaWider context:
Rising share of market open to competition The implications of the Internet
Conclusions and next steps
3Reducing the price of international callsReducing the price of international calls
So, what’s the problem?So, what’s the problem?Accounting rates are traditional way of sharing
revenues from int’l services BUT, creates incentives among recipient countries
to sustain rates at high level Accounting rate system not well-adapted to
competitive market environment
Strong pressure to move towards a cost-oriented system BUT, a cost-oriented system would be asymmetric US wants cost-oriented but rejects asymmetric
charges for call termination
What are accounting and What are accounting and settlement rates?settlement rates?
Collection chargeThe amount charged to the customer by the Public Telecommunication Operator(PTO)
Accounting rateInternal price between PTOs fora jointly-providedservice
Settlement ratePayment from one PTOto another. Normally, half the accounting rate
Collection charge revenue, 30%
Net settlements, 37%
Domestic revenues,
33%
Sri Lanka
Bahamas
Colombia
India Mauritania Samoa
Senegal
Source of telecom revenues, Source of telecom revenues, 1996/971996/97
30.6 38.4
79.7
206.1
Cost (lowestimate)
Cost (highestimate)
Settlementrate
User tariff
Average range of costs, settlement rates Average range of costs, settlement rates and user tariffs, US cents per minuteand user tariffs, US cents per minute
Note: Average settlement rate is weighted by main traffic correspondents for each country. Average user tariff is based on collection charge revenue divided by international minutes.
0
50
100
150
200
250
300
350
400
Sri Lanka India Maurit-ania
Uganda Colombia TheBahamas
Senegal Samoa
User tariff
Settlement rate
Cost (low estimate)
Average costs, settlement rates and user Average costs, settlement rates and user tariffs, US cents per minutetariffs, US cents per minute
The dilemma facing developing The dilemma facing developing countries. How low dare we go?countries. How low dare we go?
If the rate of reduction is too low ...Traffic will migrate to “least cost routes”Increasing volumes of traffic will flow outside the accounting rate system (e.g., via Internet)Local consumers will not benefit from lower call chargesForeign correspondents may refuse to pay for traffic terminated
If the rate of reduction is too fast ...There may be a sudden reduction in the volume of net settlement paymentsThis may reduce the ability of the incumbent operator to finance its network build-outIt may reduce the value of the operator ahead of possible privatisationNational tariffs may need to increase to compensate
Good news: Settlement rates are Good news: Settlement rates are declining rapidly ...declining rapidly ...
Source: ITU-T Study Group 3 (COM 3-53). 1998 estimate is a minimum projection based on D.140 Annex D.
0.81
0.67
0.50
0.850.87
0.920.950.981.001.021.04
1.06
0
0.2
0.4
0.6
0.8
1
1.2
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Set
tlem
ent
rate
, in
SD
R p
er m
inu
te
Pre-1992 (D.140)Change = -2% p.a.
1992-1996Change = -4% p.a.
1996-98Change = -21%
p.a.
9
Global average
Bad news: Settlement rates are still way Bad news: Settlement rates are still way above costs on most routes ...above costs on most routes ...
Source: ITU-T Study Group 3 (COM 3-53). 1998 estimate is a minimum projection based on D.140 Annex D.
0.81
0.67
0.50
0.850.87
0.920.950.981.001.021.04
1.06
0
0.2
0.4
0.6
0.8
1
1.2
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Set
tlem
ent
rate
, in
SD
R p
er m
inu
te10
Global average
FCC benchmarksEU guidelines for interconnect
Even worse news: Prices are not falling Even worse news: Prices are not falling as fast as settlement rates:as fast as settlement rates: USA, 1990-97 USA, 1990-97
Source: ITU, adapted from FCC.Note: “Average US revenue per billed minute” = total int’l IMTS revenue divided by total outgoing int’l minutes.
US
$ p
er
min
ute
0.32
0.64
0.68
0.83
0.20.30.40.50.60.70.80.9
11.11.2
1990 1991 1992 1993 1994 1995 1996 1997
Average US settlement rate per minute
Average US revenue per billed int'l minute
Mark-up over gross settlement rate130%
212%
One approach: FCC BenchmarksOne approach: FCC Benchmarks3 elements:
international transmission;
int’l gateway; national extension
Based on operator’s tariffs and FCC estimates
For each income level, an average of the tariff rates for countries in that category were used to set the benchmark
NB: Many smaller countries were excluded from the analysis but are
nonetheless included in income group averages
Tariffed Components PricePer minute, US$
$0.00 $0.10 $0.20 $0.30 $0.40
Hong Kong
Korea
ThailandChina
JapanMalaysia
Philippines
PakistanIndia
Indonesia
Int'l TransmissionInt'l SwitchingNat'l Extension
23¢
23¢23¢
Benchmark
19¢
19¢
19¢
19¢
19¢
15¢
15¢
19¢
23¢
23¢
13Reducing the price of international callsReducing the price of international calls
Problems with FCC benchmarksProblems with FCC benchmarksAlmost universally rejected by other
countries (90 countries registered comments with FCC)
Based on highly suspect data (“Price-based costing”)
Sets price caps (ceilings?) which are too high for developed, competitive markets (15 cents per minute)
Ignores concerns of least developed (e.g., transit costs, dependency on net settlements)
Where do you fit in?Where do you fit in?Incomegroup
TeledensityLess Than
One
Low Income(less than
$726)
Lower MiddleIncome
($726-$2,895)
Upper MiddleIncome($2,896-8,955)
High Income($8,956 or
more)
Benchmarkrate
23¢ 23¢ 19¢ 19¢ 15¢
Deadline 1/1/2003 1/1/2002 1/1/2001 1/1/2000 1/1/1999
Countries AfghanistanBangladesh
BhutanCambodiaLao PDRMyanmar
Nepal
ChinaIndia
MongoliaPakistanSri LankaViet Nam
FijiIndonesia
IranKiribati
Korea, DPRMaldives
MicronesiaP. N. GuineaPhilippinesThailandTonga
VanuatuW. Samoa
Korea, Rep.Malaysia
N. Caledonia
AustraliaBrunei
Fr. PolynesiaHong Kong
JapanMacao
New ZealandSingapore
Taiwan-China
Who fits where? Asia-Pacific regionWho fits where? Asia-Pacific region
Potential impact of FCC Potential impact of FCC benchmarks policy, Asia-Pacificbenchmarks policy, Asia-Pacific
Revenue loss Based on 95 traffic, US$ m
-186.1
-42.8
-149.4
-81.8
-84.3
-84.9
-106.5
-38.5
China
Hong Kong
India
Japan
Korea, Rep.
Pakistan
Philippines
Thailand
Revenue loss as % of international revenue, 1995
8.2%
2.0%
11.0%
2.7%
6.0%
20.3%
18.2%
6.0%
China
Hongkong
India
Japan
Korea (Rep.)
Pakistan
Philippines
Thailand
Source: ITU.
16Reducing the price of international callsReducing the price of international calls
Alternative: ITU Focus GroupAlternative: ITU Focus GroupOpen membership
Chaired by Amb. Anthony Hill (Jamaica)
Working methods E-mail reflector & website
(http://www.itu.int/intset/focus/index.html) Plenary meetings in June & September 1998 Report by 6th Nov 1998; discuss in Dec 1998
Objectives “development of proposals for solutions for transitional
arrangements towards cost orientation beyond 1998, including ranges of indicative target rates”
Relationship between teledensity and Relationship between teledensity and lowest settlement rates lowest settlement rates (in SDR per min)(in SDR per min)
Teledensity, 1/1/98
Lo
wes
t se
ttle
men
t ra
tes,
in
SD
R
Source: ITU Focus Group, Methodological note on Transition Path, Contribution No. 75.
y = 0.4602e -0.023x
R2 = 0.4952
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0 20 40 60 80 100
Afghanistan, settlement rate to NZ = 1.307 SDRs per minute
Monaco, teledensity level = 99
Line of best fit (exponential)
17
Focus Group Recommendations on Focus Group Recommendations on “indicative target rates” by Teledensity (T) “indicative target rates” by Teledensity (T) Band, in SDR (and US cents) per minute.Band, in SDR (and US cents) per minute.
T<1 1<T>5 5<T<10 10<T<20 20<T<35 35<T<50 T>50
0.327SDR
0.251SDR
0.210SDR
0.162SDR
0.118SDR
0.088SDR
0.043SDR
44.3¢ 34.0¢ 28.4¢ 22.0¢ 16.0¢ 11.9¢ 5.8¢
Low income Lower middle Uppermiddle
High income
Note: The correspondence between teledensity band and income group shown in the bottom row is intended to be approximate, not precise. Source: ITU Focus Group Report. 1 SDR = US$1.355.
18
““Optional” indicative target rates Optional” indicative target rates for small island states and LDCsfor small island states and LDCs
Category Small islandstates
(pop<300’000)
LDCs and “asif” LDCs
Indicativetarget rate inSDRs perminute
0.292 SDR 0.312 SDR
In US centsper minute 36.0¢ 42.2¢
Source: ITU Focus Group Report. 1 SDR = US$1.355.
20Reducing the price of international callsReducing the price of international calls
Focus Group Recommendations Focus Group Recommendations on transition pathon transition path
Apply indicative target rate for direct relations within three years (year-end 2001) Extended transition period (to year-end 2004) for LDCs
as a function of dependence on net settlements
Apply indicative target rate for transit shares within two years (year-end 2000)
Indicative target rates could be applied: Symmetrically, with both Administrations/ROAs
applying the same rate which is at or below the target of the lower teledensity country
Asymmetrically, applying different rates below the target of the lower teledensity country
Focus Group Final Report and Focus Group Final Report and FCC Benchmarks comparedFCC Benchmarks compared
FCCBenchmarks
ITU FocusGroup
Coverage ofanalysis
72 countries 224 countries /territories
Range of rates(direct relations)
0.11-0.16 SDR 0.043-0.327SDR
Transit shares Not covered 0.05 SDR
Groups 4 by income +1 by teledensity
7 by teledensity+ 2 others
Target years Multi-year: 1998, -99, 2000, -01, -02
Year-end 2001(2004)
Dependency onnet settlements
Not covered Extendedtransition
US $ million 1994 1995 1996
Foreign exchange reserves 15’068 20’809 17’044
Foreign exchange earnedfrom net settlementpayments
149 267 389
Proportion of foreignexchange generated by netsettlement payments
1.0% 1.3% 2.3%
Focus On India: Growing importance of Focus On India: Growing importance of settlement paymentssettlement payments
Source: India country case study.
Total, incoming and outgoing traffic,Total, incoming and outgoing traffic,India and rest of world, 1991-1998India and rest of world, 1991-1998
Source: India country case study.
0
200
400
600
800
1'000
1'200
1'400
1991 1992 1993 1994 1995 1996 1997 1998
Tra
ffic
, in
mill
ion
min
ute
s
Incoming
Outgoing
Balance 1994 1995 1996 1997 1998
USA -90.2 -161.4 -265.8 -395.4 -527.3
UAE -32.7 -59.1 -80.3 -109.2 -74.3
Saudi Arabia 30.6 28.1 14.5 9.0 17.9
UK -16.4 -20.3 -30.7 -33.7 -40.2
Singapore -4.3 -7.3 -10.7 -9.1 -16.4
Other -54.2 -64.1 -91.8 -76.7 -195.8
Total -167.2 -284.0 -464.8 -615.1 -836.1
Traffic balance, (in minus out)Traffic balance, (in minus out)India and major partners, 1994-1998India and major partners, 1994-1998
Source: India country case study.
India/US, incoming and outgoing traffic,India/US, incoming and outgoing traffic,India and the United States 1991-1998India and the United States 1991-1998
Source: India country case study.
0
100
200
300
400
500
600
1991 1992 1993 1994 1995 1996 1997 1998
Tra
ffic
, in
mill
ion
min
ute
s
From US, to India
From India, to US
0
50
100
150
200
250
300
350
400
450
1994 1994 1996 1997US
ou
tgo
ing
tra
ffic
, mill
ion
min
ute
s
US originated traffic
Refile
Call-back
US outgoing traffic to India,US outgoing traffic to India,By traffic type, 1994-97By traffic type, 1994-97
Source: India country case study.
Year ending March 31 1995 1996 1997
OutgoingDoT pays VSNL 433 449 507
DoT keeps 208 215 240
IncomingVSNL pays DoT 419 551 683
VSNL keeps 158 161 173
Evolution of VSNL/DoT revenue-sharing Evolution of VSNL/DoT revenue-sharing agreement, 1995-97agreement, 1995-97
Source: India country case study. Under the current revenue sharing arrangement VSNL will pay DoT a charge per minute equal to "weighted average incoming settlement rate" minus Rs.10 on incoming calls. In turn DoT will
pay VSNL a per minute charge of "weighted average outgoing settlement rate" plus Rs.10 on outgoing calls.
Estimated costs for international traffic, Estimated costs for international traffic, in US$ per minutein US$ per minute
Cost element FCC tariffedcomponentprices
Case study costestimates
Internationaltransmission
8.1 ¢
Int’l switching(Gateway)
4.8 ¢
VSNL costs, around19.0 ¢
Nationalextension
18.0 ¢ DoT revenue-sharingaround 31.6 ¢
Total 30.9 ¢ 50.6 ¢
Source: India country case study. VSNL costs as shown above. DoT costs estimated at 10 Rps per minute.Note that the FCC actually applies a TCP of 23.0 ¢ per minute rather than 30.9.
35%46%
74% 85%
1990 1995 1998 2005
Mono-poly
Compe-tition
4 14 29 48
Number of countries permitting more than one operator for international
telephony
The wider context (1): Percentage of The wider context (1): Percentage of market open to competitionmarket open to competition
Note: Analysis is based on WTO Basic Telecommunications Commitments and thus presents a minimum level of traffic likely to be open to competitive service provision. Source: ITU, WTO.
“We started out running the Net on top of the phone system, and we’ll end up with telephony running over the Net.”
The EconomistMay 2nd 1998
Eric Schmidt, CEO, Novell,Quoted in Wired, August 1997
The wider context (2): The rise and rise The wider context (2): The rise and rise of the Internetof the Internet
31Reducing the price of international callsReducing the price of international calls
ConclusionsConclusionsFocus Group proposals resulted in new Annex E to
Recommendation D.140 for transitional arrangements beyond 1998
This marks a significant step towards rates which are cost-orientated, non-discriminatory and transparent (D.140)
Provides “smooth transition” for countries most dependent on net settlements
Recommendations proposed are based on extensive research and represent a consensus position (US excepted)
Presents multilateral alternative to imposition on US carriers of US/FCC Benchmarks Order
32Reducing the price of international callsReducing the price of international calls
Current status and next stepsCurrent status and next stepsITU-T Study Group 3 reviewed Focus Group report
at its meeting in December 1998 Willingness to reach a multilateral agreement But, the meeting ran out of time to conclude on the
revised text
Study Group 3 concluded work at following meeting, June 2-11 1999 Recommendation could be approved by end of the year
In the meantime, FCC benchmarks are being implemented … Beginning with high income countries