The pricing of international telecom services Note: The views expressed in this presentation are...

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


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¢


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.


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.


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


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


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


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


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


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


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

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