The pricing of international 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 at Dr Tim Kelly (ITU), Seminar on tariff strategies for competitive environments, ALTTC, Ghaziabad, July 1999

2 Reducing the price of international calls Agenda Whats 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 India Wider context: Rising share of market open to competition The implications of the Internet Conclusions and next steps

3 Reducing the price of international calls So, whats the problem? Accounting rates are traditional way of sharing revenues from intl 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 settlement rates? Collection charge The amount charged to the customer by the Public Telecommunication Operator (PTO) Accounting rate Internal price between PTOs for a jointly-provided service Settlement rate Payment from one PTO to another. Normally, half the accounting rate

Collection charge revenue, 30% Net settlements, 37% Domestic revenues, 33% Sri Lanka Source of telecom revenues, 1996/97

Cost (low estimate) Cost (high estimate) Settlement rate User tariff Average range of costs, settlement rates and 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.

Sri LankaIndiaMaurit- ania UgandaColombiaThe Bahamas SenegalSamoa User tariff Settlement rate Cost (low estimate) Average costs, settlement rates and user tariffs, US cents per minute

The dilemma facing developing 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 charges Foreign 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 payments This may reduce the ability of the incumbent operator to finance its network build-out It may reduce the value of the operator ahead of possible privatisation National tariffs may need to increase to compensate

Good news: Settlement rates are declining rapidly... Source: ITU-T Study Group 3 (COM 3-53) estimate is a minimum projection based on D.140 Annex D Settlement rate, in SDR per minute Pre-1992 (D.140) Change = -2% p.a Change = -4% p.a Change = -21% p.a. 9 Global average

Bad news: Settlement rates are still way above costs on most routes... Source: ITU-T Study Group 3 (COM 3-53) estimate is a minimum projection based on D.140 Annex D Settlement rate, in SDR per minute 10 Global average FCC benchmarks EU guidelines for interconnect

Even worse news: Prices are not falling as fast as settlement rates: USA, Source: ITU, adapted from FCC. Note: Average US revenue per billed minute = total intl IMTS revenue divided by total outgoing intl minutes. US$ per minute Average US settlement rate per minute Average US revenue per billed int'l minute Mark-up over gross settlement rate130% 212%

One approach: FCC Benchmarks 3 elements: international transmission; intl gateway; national extension Based on operators 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

13 Reducing the price of international calls Problems with FCC benchmarks Almost 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? Who fits where? Asia-Pacific region

Potential impact of FCC benchmarks policy, Asia-Pacific Revenue loss Based on 95 traffic, US$ m China Hong Kong India Japan Korea, Rep. Pakistan Philippines Thailand Revenue loss as % of international revenue, % 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.

16 Reducing the price of international calls Alternative: ITU Focus Group Open membership Chaired by Amb. Anthony Hill (Jamaica) Working methods reflector & website ( 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 lowest settlement rates (in SDR per min) Teledensity, 1/1/98 Lowest settlement rates, in SDR Source: ITU Focus Group, Methodological note on Transition Path, Contribution No

Focus Group Recommendations on indicative target rates by Teledensity (T) Band, in SDR (and US cents) per minute. 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$

Optional indicative target rates for small island states and LDCs Source: ITU Focus Group Report. 1 SDR = US$1.355.

20 Reducing the price of international calls Focus Group Recommendations on 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 FCC Benchmarks compared

Focus On India: Growing importance of settlement payments Source: India country case study.

Total, incoming and outgoing traffic, India and rest of world, Source: India country case study '000 1'200 1' Traffic, in million minutes Incoming Outgoing

Traffic balance, (in minus out) India and major partners, Source: India country case study.

India/US, incoming and outgoing traffic, India and the United States Source: India country case study Traffic, in million minutes From US, to India From India, to US

US outgoing traffic, million minutes US originated traffic Refile Call-back US outgoing traffic to India, By traffic type, Source: India country case study.

Evolution of VSNL/DoT revenue-sharing agreement, 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, in US$ per minute 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% Mono- poly Compe- tition Number of countries permitting more than one operator for international telephony The wider context (1): Percentage of market 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 well end up with telephony running over the Net. The Economist May 2nd 1998 Eric Schmidt, CEO, Novell, Quoted in Wired, August 1997 The wider context (2): The rise and rise of the Internet

31 Reducing the price of international calls Conclusions Focus 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

32 Reducing the price of international calls Current status and next steps ITU-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 Recommendation could be approved by end of the year In the meantime, FCC benchmarks are being implemented … Beginning with high income countries