1

Market trends in Tariff and Accounting

Saburo TANAKAWTSA preparatory meeting for Africa,

Victoria Falls, June 2004

The original document is elaborated by Dr Tim Kelly, ITU/SPU. It has completed by Saburo Tanaka. The views expressed in this presentation are those of the authors, and do not necessarily reflect the opinions of the ITU or its membership. Authors can be contacted by e-mail at: Tim.Kelly@itu.int saburo.tanaka@itu.int

AgendaAgendaMarket trends

Network evolution Paradigm shift Tariff evolution

Challenges for developing countries IP Telephony Mobile services Interconnection, cost Internet issue

Some solutions studied in ITU-T SG3

A Mobile RevolutionA Mobile Revolution

Source: ITU World Telecommunication Indicators Database.

0

200

400

600

800

1'000

1'200

1'400

1993 1995 1997 1999 2001 2003

Mobile Users

Fixed Lines

Fixed Lines vs. Mobile Users, worldwide, Million

Calling opportunities worldwideCalling opportunities worldwide

89.7%

5.0%5.0% 0.3%

1993 52.7%

19.9%

19.9%

7.5%

1998

23.4%

25.0%25.0%

26.7%

2003

Fixed-to-fixed

Fixed-to-mobile

Mobile-to-fixed

Mobile-to-mobile

Source: ITU Fixed-Mobile Interconnect website: http://www.itu.int/interconnect

Mobile and Internet: Identical twins born Mobile and Internet: Identical twins born two years apart?two years apart?

0

200

400

600

800

1,000

1992 93 94 95 96 97 98 99 2000 01

0

2

4

6

8

10

12

14

16

18Mobile subscribers

Internet users

Mobile penetration

Internet penetration

Users (millions) and penetration per 100 pop.

Asia-Pacific international Asia-Pacific international communications capacity, Gbit/scommunications capacity, Gbit/s

0 0 0 0 0.1 2 38

26

65

8 9 1114 16 18 20

23

30 31

0

10

20

30

40

50

60

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

InternetTelephone

1999 2000 2001 2002 2003

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,00012,00013,00014,00015,00016,00017,00018,00019,00020,000

Growth In DSL Subscribers-Regional Division (000s)1999-2003

Asia-PacificNorth AmericaWestern EuropeSouth & South East AsiaLatin AmericaEastern EuropeMiddle East & Africa

0

100

200

300

400

500

600

700

800

900

1000

90 91 92 93 94 95 96 97 98 99 00 01 02

Serv

ice

reve

nue

(US$

bn)

Domestic Telephone/fax

Int'l

Mobile

Other: Data, Internet, Leased lines, telex, etc

Revenue growth (US$bn)Revenue growth (US$bn)

Source: ITU.

39%

39%

14%

8%

9

X X

Traditional regime:Traditional regime:Joint provision of serviceJoint provision of service

Country A Country B

9

10

X

Emerging regime:Emerging regime:Market entry and interconnectionMarket entry and interconnection

XXCountry A Country B

Jointly provided circuit

Circuit provided by operator B

10

Country A Country B

Operator A

Operator BPST

N

IWF

Interconnect

Leased lines

International simple resale (ISR)International simple resale (ISR)(By-passing accounting rate)(By-passing accounting rate)

Once a foreign carrier accepts the benchmark rate, it can negotiate ISR arrangements with US carriers

Country A Country B

Telephone service using data transmissionTelephone service using data transmission(By-passing accounting rate)(By-passing accounting rate)

Operator A

PSTN

Voice is packetized = data transmissionTelephone regulations do not apply

VSAT

Inter-connection

T0208500-00(106147)

IP Network

IWF

TerminatingNetwork

Local or distributedfunction Call initiated from PSTN/ISDN/PLMN

to PSTN/ISDN/PLMN

PSTN/ISDN/PLMN

IWF

PSTN/ISDN/PLMN

Local or distributedfunction

OriginatingNetwork

Call from International Telecommunication Network (ITN) to another ITN via IP-based Network

IP TelephonyIP Telephony

ADSLADSL

Or Call initiated by ADSL

Mobile tromboningMobile tromboning (using accounting rate)(using accounting rate)

Called BCaller A

Operator A’s national network Operator B’s

mobile network

Operator A’s Int’l facility

Operator B’s Int’l facility

Operator X or Operator A’s facility in another

countryInternational boundary

High Interconnection

charge

Originating internationalvoice traffic

Traditional bilateralsettlement rate

system

Traditional bilateralsettlement rate

system

Refile via athird countryRefile via athird country

Sender keeps allexchange of trafficSender keeps all

exchange of traffic

Via a point ofpresence in the

terminating country

Via a point ofpresence in the

terminating country

Via a wholesale

carrier

Via a wholesale

carrier

Direct dealing with the

terminatingcountry

Direct dealing with the

terminatingcountry

30%20%

15%

70% 65%

Delivering international voice Delivering international voice traffic in 2002traffic in 2002

Falling prices (1)Falling prices (1)

$0.00

$0.50

$1.00

$1.50

$2.00

90 92 94 96 98 00 02 04

Average retail price of one minute call to USA.

Mark-up

Settlement

Source: ITU adapted from FCC and national data (34 countries).

Forecast

Falling Price (2):Falling Price (2):SwissCom, price per minute of local call and call to USSwissCom, price per minute of local call and call to US

57

28

43

5858

74

3444455

95 96 97 98 99 00 2001

Swiss call prices. US cents per minute.

Source: ITU.

Call to USA

Local call

1

10

100

1'000

10'000

100'000

TAT-71983

TAT-81988

TAT-91991

TAT-101992

T-111993

T-12/131995

Gemini1998

TAT-142000

Cos

t per

voi

ce p

ath

(US$

)

1

10

100

1'000

10'000

100'000

1'000'000

100'000'000

Cap

acity

(voi

ce p

aths

)

Cost per voice path (US$), declining by

41% p.a.

Infrastructure capacity and costs,Infrastructure capacity and costs, TransAtlantic cables, 1983-2000TransAtlantic cables, 1983-2000

Source: ITU, TeleGeography Inc., FCC.Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

10'000'000

Capacity (voice

64% p.a.paths), growing by

If distance is dead, and bandwidth is

infinite …

What do we bill for?

What do we bill for?What do we bill for?

Bill for network connection Increasing integration of monthly telephone

subscription and Internet subscription pricesBill for privacy/advertising

Privacy-protected customer pays premium Customer agreeing to receive advertising pays

lessBill for quality of service

Differentiated by transmission quality, waiting time, bandwidth on demand, value-added secretarial support, mail functions etc.,

Bill for Billing Customising of billing: by service, by user, by site

Internet, price and service trendsInternet, price and service trends

Towards a flat-rate price structure All you can eat for US$20.00

Towards lower service quality “Best efforts” service delivery at lowest price

Death of distance Message to other side of earth costs same as a message

sent next door Cross-promotion of Internet and other services

“Free PC” with three year’s ISP subscription “Free Internet” with residential local loop charges

Tendency towards industry concentration AOL’s subscriber base > next ten ISPs added together

Challenges for developing countriesChallenges for developing countriesService, tariff and technical issues

Alternative calling procedures Public switched network to IP based network Challenges related to mobile service

Regulatory issues Interconnection rules Implementation of USO Tariff Rebalancing

Internet connectivity in developing countries Guideline for negotiating IIC Traffic based negotiation

The influence of IP Telephony on priceThe influence of IP Telephony on price

IDC forecasts that “Web Talk” revenues will reach US$16.5 bn by 2004 with 135 billion mins of traffic

(skype.com, Gartner Group forecast that IP

Telephony and competition in Europe will reduce prices by 75%

Telegeography; in 2002 VoIP incresed by 80%, and comprised about 10.8% of all int’l call traffic (8 trillions mins)

IP Telephony as % of all int’l calls in 2004

Tarifica forecast 40% Analysys forecast 25%

In developing countries, the majority of IP Telephony calls are incoming Source: IDC.

0.208

16.5

2000 2004

“Web Talk” revenues, US$bn

24

Accounting Rate IP-Telephony Difference

PTO in Developed

country

Collect US$ 1.00 from user

Pays US $ 0.55 settlement.

Retains US $ 0.45

CollectUS$ 1.00 from user

Pays US$ 0.30 to ISP for terminating call.Retains US$ 0.70

+0.25 US$

PTO in Developing

country

Receives US $ 0.55 settlement.

Receives US $ 0.02 local call charge.

-0.53 US$

ISP in Developing country 0

Receives 0.30 US $ for terminating charge

Pays 0.02 US $ for local call.

Retains 0.28 US $

+0.28 US$

ChallengesChallenges

Revenue gain and revenue loss

Declining prices for mobile access, Declining prices for mobile access, global average, in US$, 1992-2000global average, in US$, 1992-2000

Note: CAGR = Compound Annual Growth rate.Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

547

410

231180

86 75

1992 1994 1996 1998 1999 2000

Connection charge, in US$

CAGR, 1992-2000 = -32.1% p.a.44.9

38.134.2

31.3

20.216.6

1992 1994 1996 1998 1999 2000

Monthly subscription, in US$

CAGR, 1992-2000 = -9.2% p.a

14%

22%

24%

40%

53%

36%

8%

3%

Customers

Average revenueper user (ARPU)

Expe

nditu

re p

er m

onth

40 per cent of low-spending customers

generate 3% ofrevenue

14 per cent of high-spending customers

generate 53% ofrevenue

Cultivate the high-spendersCultivate the high-spenders

Source: Price Waterhouse Coopers, based on Canadian data.

Mobile and Fixed-line ARPU in Japan

278

230

158

878891929496981009998979898

160152141

127134

272284275

265252

0

50

100

150

200

250

300

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Years

Fixed lineMobile

Key Interconnection Rules in the Key Interconnection Rules in the WTO Reference PaperWTO Reference Paper

Interconnection with “Major Supplies”must be available

- At any technical feasible point in the network- In a timely fashion- At cost orientated rates- On non discriminatory and transparent terms- On an unbundled basis - At non-traditional interconnection points if requester pays charges

Procedure Procedures for interconnection to major suppliers must be made public

Transparency Agreements of major suppliers’ model interconnection offers must be made public

Dispute resolutionAn independent entity (which may be the regulator) must be available to resolve interconnection dispute within a reasonable time frame

Regulatory and technical issuesRegulatory and technical issues Policy makers must resolve such basic questions as:

which carriers are required interconnection How the costs will be calculated and recovered, and At what points in the PSTN interconnection should occur

Regulatory issues Establishing guidelines in Advance (without it, interconnection

negotiation are frequently protracted, delaying the introduction of competition)

Introducing competition require “dominant carriers” to interconnect with other carriers

Cost orientation: excessive prices deter market entry, hinder competition, end user suffer and can provide a pool of revenue

Technical issues Points of interconnection: incumbent operators permit inter-

connection with their networks at any technically feasible point Dialling Parity and Pre-selection: Call-by-call customer selection

or Operator pre-selection by pre-subscription Quality of Interconnection Service

Economic issuesEconomic issues

The economic issues involved in interconnection largely come down to question of cost: cost definition, cost measurement, cost allocation and cost recovery

How can interconnection costs be measured? Theoretical Frameworks (Historica, Fully Distributed costs,

LRIC) Cost study Approaches (Top-Down, Bottom-Up, Outside-In)

Interconnection charge

Cost based charges Retail-based charges Price Caps “Bill and Keep” or “Sender Keeps All” Revenue Sharing

Accounting rate reform Transitional arrangements Action to facilitate negotiations Cost Methodologies Network externalities

Mobile termination charge Differences with fixed network services Level of termination charges

International Internet Connectivity Implementation of Recommendation D.50 Improving connectivity in LDCs

Other studies International Telecommunication Regulations

Main study items in ITU-T SG3Main study items in ITU-T SG3

Solutions & difficulties Solutions & difficulties New Remuneration system (adopted)

Termination charge system Settlement rate system Special arrangement

Difficulty to quickly implement those systems Condition is to reach cost-oriented rate, but No cost data or model for some administrations SG3 ⇒

developed principles and TAF, TAS, TAL cost models Transitional arrangements (review at WTSA)

To facilitate staged reduction to cost based rate to avoid sudden fall of revenue (smooth transition)

SG3 developed: Guidelines for negotiation

33

Global trends, challenges and solutions

33

 

 INTERNATIONAL TELECOMMUNICATION UNION

  ITU-T D.600R

 

TELECOMMUNICATIONSTANDARDIZATION SECTOROF ITU

(10/2000)

  SERIES D: GENERAL TARIFF PRINCIPLESRecommendations for regional application – Recommendations applicable to the African Region 

Cost methodology for the regional tariff group for Africa applicable to the international automatic telephone service

Inter-regional Internet connectivityInter-regional Internet connectivity

Asia /Pacific

LatinAmerica

USA / Canada

Europe

Africa,Arab

162Gbit/s

0.1 Gbit/s

0.77 Gbit/s

Note: Gbit/s = Gigabits (1’000 Mb) per second.Source: ITU adapted from TeleGeography.

41.8Gbit/s

0.4 Gbit/s

14 G

bit/s

0.45 Gbit/s

Typical ISP cost comparisonsTypical ISP cost comparisons

Commercial & operational

costs

National connectivity

International connectivity

Commercial & operational

costs

National connectivity

International connectivity

<<<Developing countries

OECD countries >>>

ITU-T Recommendation D.50 International ITU-T Recommendation D.50 International Internet ConnectionInternet Connection

The World Telecommunication Standardization Assembly (Montreal, 2000),recognizingthe sovereign right of each State to regulate its telecommunications, as

reflected in the Preamble to the Constitution,notinga) the rapid growth of Internet and Internet protocol-based international

services;b) that international Internet connections remain subject to commercial

agreements between the parties concerned; andc) that continuing technical and economic developments require ongoing

studies in this area,recommendsthat Administrations involved in the provision of international Internet

connections negotiate and agree to bilateral commercial arrangements enabling direct international Internet connections that take into account the possible need for compensation between them for the value of elements such as traffic flow, number of routes, geographical coverage and cost of international transmission amongst others.Greece and the United States of America have expressed reservations and will not apply this Recommendation.

“Administration” means telecommunication administration or recognized operating agency

Results of SG3 meetingResults of SG3 meeting (May/June2004) (May/June2004)

①Adoption of Appendix to facilitate implementation of D.50

② Self-help by smaller networks with limited traffic

③Continuation of work on Traffic Measurement

Network ExternalityNetwork Externality

Universal Service Obligation Fund = Cross Subsidy Not recognized as cost

Network extremity = increase utility of a network to users

operators to provide incentives for users to join the network = this can be added to the usage price or to the monthly subscription fee

the network externality effect has a solid basis in economic analysis and had successfully – at least with some regulators – been brought to bear by mobile operators on their case for higher termination rates

Can be used by the developing countries to enhancing take-up and roll-out of the network

Country A

(Calling)

International operator A

Country B

(Called)

Access network A2Access network A1

International operator B

Access network B2Access network B1

Customers A

Customers B

Do Customers in A derive benefit from

more Customers in B?

Accounting

rate

How can we be sure that an externality will be passed through to

connect more customers in B?

Is benefit to calling operators in A enough

incentive to agree prices above cost?

If so, how much?

International International externalitiesexternalities

International TelecommunicationInternational Telecommunication Regulations (ITRs)Regulations (ITRs)

ITRs elaborated in 1988 Monopoly situation Basic services only (Telephony)

New Market situation Competition New services (Mobile, Internet)

Need for new ITRs? Redraft ITRs Integrate into Constitution and Convention

Study Group 3 starts reviewing ITRs Rapporteur Group on ITR review (tsg3itr)

ChairmanMr. Alaa Fahmy

Coordinator-1Mr. Affleck, UK

Coordinator-2Dr. Mufungahema

Tanzania

Coordinator-3Mr. Marks, USA

Sub-Group-1

SecretaryS. Tanaka

SecretaryR. Hill

Sub-Group-2 Sub-Group-3

Sub G1: Analyze past work and contributions submittedSub G2: Examine current ITRSub G3: Examine need for new provisions

Council Working Group on ITRCouncil Working Group on ITR(See: http://www.itu.int/itr)