Accounting and Settlements Method for covering the costs incurred by each entity involved in providing an international call Based on bilateral, route-specific negotiations between carriers at each end of the route

The Basic Idea Athens, Ohio Athens, Greece Costs at this end: access charges to Verizon, hauling call to Gateway switch Costs of international link (cable, satellite, etc.) Costs to OTE for terminating the call

Who pays who? OU Student pays AT&T Collection Rate for the call AT&T pays Verizon access charges AT&T pays Settlement Rate to OTE (accounting rate times 50%)

Basic Definitions Collection Rate: long distance charge the customer pays to the originating carrier Accounting Rate: negotiated rate that theoretically reflects the cost of hauling the long distance call on that specific route Settlement Rate: negotiated split of the accounting rate between originating carrier and the terminating carrier (usually 50/50)

More definitions Rule of proportionate return: carriers return traffic in the same proportion in which they receive it Whipsawing: single provider at one end of the route seeking concessions from multiple carriers at the other end of the route Transit routes: are taken for technical or economic reasons

Proportionate return AT&T MCI Sprint PTT/ Carrier 25% 45% 30%

Transit Route Country C Country B Country A Country B = Transit Route

What can go wrong? Asymmetrical traffic Accounting Rate > Cost Accounting Rate > Collection rate

Activism of the FCC US settlement deficit in 1996: $5.78B US settlement deficit in 2000: $4B US settlement deficits from : $52.8 B IB Docket No (August 1997) –Benchmarks set for settlement rates $0.15/minute for upper income countries $0.19/minute for middle income countries $0.23/minute for lower income countries –US carriers required to negotiate at or below benchmarks transition periods of one to five years depending on economic status of country

Examples of Settlement Rates As of 10/5/05 (still the same in January 2012): –Afghanistan: $5.15 –Burma: $3.75 –Chad: $2.43 –Vietnam: $1.19 –Kyrgyz Republic: $2.00 (Benchmark $.23) –Iraq: $2.00 –North Korea: $2.92

US International Settlement Policy has been (ISP) Non-uniform accounting rates allowed but FCC and competitors must be informed Waiver required from FCC for accounting rates that diverge in structure from the norm Settlement rate must be 50/50 US carriers not to negotiate exclusive rates and not to get more than proportionate return

International Simple Resale (ISR) FCC policy to encourage ISR as way to undercut accounting and settlement system To avoid one-way bypass, FCC limits routes on which US carriers may provide ISR: – For WTO Member countries, only where settlement rates for at least 50% of traffic on route is at or below benchmark, or foreign market allows equivalent resale –For Non-WTO member, only where 50% of traffic is at benchmark rates and foreign market offers equivalent resale

Try to avoid one-way bypass AT&T OTE AT&T is not allowed to terminate traffic In Greece* using resale, so cannot avoid Paying settlement rates. If OTE were allowed to terminate traffic in The US using resale, it could avoid Paying settlement rates. * this is just an illustration; ISR is now allowed in Greece

Removal of ISP FCC Docket No. CC (May 1999), in order to encourage lower settlement rates, allows removal of ISP: –For settlement arrangements between US carriers and foreign carriers that lack market power; –For all settlement arrangements on routes where US carriers are able to terminate at least 50% of the traffic at rates at least 25% below benchmark rate.

Routes exempt from ISP In 2003, there were only 16 routes Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy, The Netherlands, Norway, Sweden, UK, Saudi Arabia, Monaco, Bermuda, Bosnia/Herzegovina, Algeria March 11, 2004, FCC added more routes, including all of the routes approved for ISR As of January 2012, 38 countries were still listed as subject to ISP

Definition of market power A foreign carrier lacks market power if it possesses less than a 50% market share in each of the following foreign markets: –International transport facilities or services, including cable landing station access and backhaul facilities –Inter-city facilities or services –Local access facilities or services on the foreign end

Avoiding settlements VoIP Cross border service providers