international traffic termination session 13b
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InternationalTelecommunicationUnionOctober 2010 1
ITU workshop onInternational Roaming and
International Traffic Termination
Session 12: International Traffic Termination
Bangkok 5-8 October, 2010
David Rogerson
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Agenda
Why is international termination different?Why is there a regulatory problem?Stakeholder viewpoints
OperatorsGovernmentsNational regulators
Approaches to regulation
InternationalTelecommunicationUnionOctober 2010 3
Why is international termination different?
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International traffic termination
International traffic termination allows subscribers in one country to receive calls from subscribers in other countries.International traffic termination applies to both fixed and mobile termination …although different charges may apply.
For the purpose of this presentation we focus on voice traffic but termination can also apply to text (SMS) and switched data services.
Typical call scenario
Y X
1. Caller pays retail IDD rate for call to Country Y
3. International operator in Country X pays termination rate in Country X
2. Operator from Country Y pays Int’l Settlement Rate to partner in Country X
NationalSwitch (NS)
Int’lGateway (IGW)
IGW
NS
The system is symmetrical
Y X
1. Caller pays retail IDD rate for call to Country X
3. International operator in Country Y pays termination rate in Country Y
2. Operator from Country X pays Int’l Settlement Rate to partner in Country Y
NS
IGW IGW
NS
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Key principles of Int’l Accounting RatesDeveloped at a time of national monopolies and before mobile networks were establishedInitial settlement rates were (at best) loosely based on costs
They have failed to keep up with cost reductions caused by technology improvements and competition
Although the system appears symmetrical the money flows are from developed to developing countries:
Most traffic originates from rich countriesHigh settlement rates favour the recipient countries
Simple example: calls between two monopolies in Countries X and Y
Call type IDD rate Settlement rate
Revenue Operator X
Revenue Operator Y
From X to Y 22cpm 15cpm 7cpm 15cpm
From Y to X 20cpm 15cpm 15cpm 5cpm
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Note:• Reciprocal settlement rate which covers costs and margin• Reciprocity usual but not necessary• Each operator controls profitability by setting IDD rates
Complication: competition lowers prices in country Y
Call type IDD rate Settlement rate
Revenue Operator X
Revenue Operator Y
From X to Y 22cpm 15cpm 7cpm 15cpm
From Y to X 16cpm 15cpm 15cpm 1cpm
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Note:• Margins squeezed for operators in Country Y• Lower IDD prices increases the % of outbound traffic from Y to X, exacerbating the loss of margin• Country Y wants to reduce settlement rates.
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Pressure to reduce Int’l Accounting RatesDeveloped countries, where competition increased fastest and costs fell fastest, wanted to lower settlement rates to protect operator profitsThe FCC in the 1990s imposed benchmarks on US carriers: rates above which they were prohibited from settling international payments. Developing countries saw inbound international calls as an important source of revenue and resisted the tide to lower settlement rates.
Complication: differential mobile termination rates make some calls
unprofitable Call type Settlement
rateTermination rate
Revenue for int’l operator
Inbound call to fixed
10cpm 2cpm 8cpm
Inbound call to mobile
10cpm 12cpm -2cpm
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Note:• Affects countries where calling party pays is the norm for all calls (e.g. Europe)• Not an issue for countries where mobile party pays to receive calls (e.g. USA)
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How to deal with international calls to mobile (in CPP countries)
The mobile operator could accepts a lower termination rate for international calls
But this encourages refile, where national calls are presented as if international, so as to obtain lower termination rate.Early revenue sharing schemes in Europe were abandoned as a result
Differential settlement rates, higher for mobile than for fixed
May allow all calls to be profitable, but increases complexity especially between RPP and CPP countriesSustainability requires rapid reduction in mobile termination rates.
Example of reciprocal, differentiated settlement rates
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US EU
Mobile settlement = 10cpm
Fixed settlement = 2cpm
Unified settlement = 6cpm
Assumes 50/50 traffic split. Would need to be renegotiated if significantly different in practice.
InternationalTelecommunicationUnionOctober 2010 14
Why is there a regulatory problem with international
termination?
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National regulatory objectivesThe NRA is charged with looking after the national economic interestsWill lower settlement rates be in the national interests?
Consumers will benefit from lower international calling charges Operators and Government may prefer the higher rates that brings in hard currency and can fund investment.
Where the balance of traffic is heavily in favour of inbound international calls, it is hard to regulate settlement rates down.
The benefits of cost-based settlement rates will largely be experienced by consumers in other countries.
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Lack of regulatory independence: government objectives may trump regulator’s objectives
Regulator’s objectives
Government’s objectives
The regulatory balance
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InternationalTelecommunicationUnionOctober 2010 18
Stakeholder perspectives
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Stakeholders in international roaming
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Brainstorm of key issues for each stakeholder group
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Approaches to regulation
Approach 1: Hold back the tide
Maintain high settlement rates as long as possibleRequires monopoly / government control of international gatewayVoIP should be banned to limit bypassHard to sustain in the face of international pressure, trade agreements, technology change etc
Example - monopoly international gateway
Country XInternational
IGW Provider (incumbent)
Mobile 2
Mobile 1
Fixed 2
7cpm
18cpm
15cpm
Numbers are indicative. Each operator sets its own termination rates.
10cpm (Fixed)18cpm (Mobile 1)21cpm (Mobile 2)
Approach 2: Controlled evolution
Accept that international settlement rates are going to fall towards cost-based levels but seek a gradual changeVarious methods of achieving this e.g:
Prohibition on transit trafficRegulated glidepath
Example - Prohibition on transit traffic
Country XInternational
IGW Provider (incumbent)
Mobile 2
Mobile 1
Fixed 2
7cpm
18cpm
15cpm
Numbers are indicative. Only larger operators can negotiate direct international connectivity
10cpm (Fixed)18cpm (Mobile 1)21cpm (Mobile 2)
Example – regulated glide-path
X
IGW
National POI 8cpm
14cpm
1412
108
0
2
4
6
8
10
12
14
US
cent
s pe
r m
inut
e
2010 2011 2012 2013
International termination rates as at 1 January
National termination rates much below internationalIGW-POI transit costs close to zeroGlide-path removes difference over several years
Approach 3: Let the market decide
Introduce competition in national and international servicesAllow transit of incoming international callsCharges for terminating international calls are gradually reduced to similar level to national call termination.
Liberalised international traffic
Any operator can enter this market so long as it can negotiate an agreement with an international partnerThe ability to handle traffic destined for another network potentially allows smaller operators to achieve sufficient scale to enter this market Margins are competed away because of the transit capabilityHigh price elasticity of demand – international operators will switch traffic in bulk between national termination partners based on small price differentials.
Liberalised market outcomes - initial
Country XInternational
IGW provider
Mobile 2
Mobile 1
Fixed 2
3cpm
7cpm
7cpm
Numbers are indicative. Termination rates are the same as for national calls. Transit operator retains a small margin.
6cpm (Fixed)10cpm (Mobile)
6cpm (Fixed)10cpm (Mobile)
6cpm (Fixed)10cpm (Mobile)
6cpm (Fixed)10cpm (Mobile)
3cpm 3cpm
3cpm
Liberalised market outcomes – long term
Country XInternational
IGW provider
Mobile 2
Mobile 1
Fixed 2
1cpm
1cpm
1cpm
Numbers are indicative. Termination rates are the same as for national calls. Transit operator retains a small margin.
1.5cpm
1.5cpm
1.5cpm
1.5cpm
1cpm 1cpm
1cpm
A possible regulatory strategy
InternationalTelecommunicationUnionOctober 2010 32
Thank you.
In the final session we will look at a case study with role play on
international traffic termination