Competition in Telecom
Market for Voice Telephony
Saburo TANAKA
Councellor,
Seminar on Economic and Market Analysis for
CEEC and Baltic States
Prague, 9 – 11 September 2003
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.
Competition in Voice Telephony
Agenda
l Status of competition
ð Competition in Voice Telephony
ð How traffic flow in the competitive market
l Role of Regulators
l Importance of Interconnection
ð Regulatory and technical issues
ð Economic issues
l Importance of tariff rebalancing
2
Private, competitive, mobile and global
By
country
2%
13%
39
Status of
telecom
Ot
privatization
h
2001
113
85%
Fully or
partly private
incumbent
Other private
operators
(e.g. mobile)
No private
operators
49
By telecom
revenue
Status of telecommunication privatization , by country and by share of global revenue, 2001
Percentage of countries with competition
for selected services, 2001
100
Monopoly
90
Competition
80
70
In %
60
50
40
30
20
10
0
Basic services
Leased lines
Wireless local
loop
Cellular
Source: ITU World Telecommunication Regulatory Database, 2001
Cable TV
VSAT
ISPs
Percentage of countries allowing
competition for basic services
100
70
Monopoly
Competition
Monopoly
90
Competition
60
80
50
70
60
In %
In %
40
30
50
40
30
20
20
10
10
0
0
Local
Long distance
International
Source: ITU World Telecommunication Regulatory Database, 2001
Africa
Americas
Asia-Pacific Arab States
Europe
World
Competition in ISP and Leased Line Markets,
by Region
ISPs
100
Monopoly
Leased line services
100
Competition
90
Monopoly
90
80
Competition
80
70
70
60
In %
60
In %
50
50
40
40
30
30
20
20
10
10
0
Africa
Americas
Asia-
Arab
Pacific
States
Europe
World
Source: ITU World Telecommunication Regulatory Database, 2001
0
Africa
Americas
Asia-Pacific Arab States
Europe
Competition in Mobile Cellular Services
100
Monopoly
90
Competition
80
70
In %
60
50
40
30
20
10
0
Africa
Americas
Asia-Pacific
Source: ITU World Telecommunication Regulatory Database, 2001
Arab States
Europe
Legal status of competition
Distribution by country, 2001
37%
38%
43%
Long
distance
Int'l
Local
Legal status of telecommunication competition, by country, 2001
Monopoly
Competition
78%
86%
Mobile
Internet
Competition in Voice Telephony
10
Growth in fixed line teledensity,
Chile and Argentina, 1986-2000
Teledensity, in Chile and Argentina
25
20
1990: Privatization w ith 7-year
exclusivity in Argentina
15
Exclusivity
extended by 3
years in
Argentina
10
5
1988: Privatization and
competition in Chile
0
1986
1988
1990
1992
1994
1996
1998
2000
Competition in Voice Telephony
11
Growth in mobile teledensity,
Hong Kong SAR and Singapore, 1988-2000
Mobile penetration rate, per 100 inhabitants
90
Six additional PCS licences
awarded in 1996
80
70
60
50
40
Hongkong
SAR: Mobile
competition
introduced in
1988 for
analogue
30
Additional
competition
introduced w ith
digital mobile in
1993
Singapore:
Mobile
competition
delayed until
April 1997
20
10
0
1988
1990
1992
1994
1996
1998
2000
Teledensity with rising rank
Country
China
2000
17.8
1990
0.6
Rank
2000
95
V iet Nam
4.2
0.1
141
189
48
Botsw ana
21.6
2.1
91
129
38
El Salvador
21.8
2.4
90
125
35
Jamaica
34.1
4.5
71
106
35
Hungary
67.4
9.6
43
78
35
Mauritius
38.6
5.4
67
100
33
Chile
44.4
6.7
61
93
32
Philippines
12.4
1.0
112
143
31
Morocco
13.3
1.6
107
136
29
Paraguay
20.7
2.7
92
120
28
Cambodia
1.2
0.0
167
194
27
17.2
2.4
98
125
27
137.0
31.4
5
31
26
45.6
8.6
60
85
25
Cape Verde
Taiw an, China
Poland
Rank
1990
159
Change
64
Teledensity with falling rank
Country
2000
1990
Rank
2000
Armenia
15.6
15.7
102
60
-42
Iraq
2.9
3.9
149
109
-40
Tajikistan
3.6
4.5
143
105
-38
Uzbekistan
6.9
6.9
128
92
-36
Kyrgyzstan
7.9
7.2
125
90
-35
Angola
0.7
0.8
177
146
-31
Liberia
0.2
0.4
190
162
-28
DPR Korea
4.6
3.8
138
111
-27
96.1
58.6
33
6
-27
Turkmenistan
8.4
6.0
123
97
-26
Cuba
4.4
3.1
140
115
-25
Moldova
16.5
10.6
99
74
-25
Kazakhstan
12.5
8.0
111
87
-24
1.0
0.8
171
149
-22
22.7
13.6
87
66
-21
Canada
Comoros
Ukraine
Rank
1990
Change
Traditional regime:
Joint provision of service
14
Country A
Country B
X
X
Emerging regime:
Market entry and interconnection
15
Jointly provided circuit
Country A
Country B
X X
X
Circuit provided
by operator B
International simple resale (ISR)
(By-passing accounting rate)
Country A
Operator A
Country B
PSTN
Operator B
Interconnect
IWF
Leased lines
Once a foreign carrier accepts the benchmark rate, it can negotiate ISR
arrangements with US carriers
Telephone service using data transmission
(By-passing accounting rate)
Country A
Country B
VSAT
Operator A
Interconnection
PSTN
É
Voice is packetized = data transmission
Telephone regulations do not apply
IP Telephony (by-passing accounting rate)
Terminating
Network
PSTN/ISDN
/PLMN
IP Network
IW F
Local or distributed
function
Local or distributed
function
IW F
Call initiated from P S T N / I S D N / P L M N
to P S T N / I S D N / P L M N
PSTN/ISDN
/PLMN
Originating
Network
Call from International Telecommunication Network
(ITN) to another ITN via IP-based Network
T0208500-00
(106147)
CALL BACK
using
Accounting Rates
Alternative
calling
procedures
Using AR
Call-Back
Country A
Call-Back
1.2$
1.0$
0.8$
1.5$
2.0$
Country B
4.5 $
Country C
3.5$
Interconnection of two outgoing calls in country A
7
Mobile tromboning (using accounting rate)
Operator X or Operator A’s
facility in another country
International
boundary
Operator A’s
Int’l facility
Operator B’s
Int’l facility
Operator A’s
national network
É
Caller A
Operator B’s
mobile network
High
Interconnection
charge
È
Called B
Refile and other practices using
accounting rate system
Operator in A sends traffic to
operator in C under an
arrangement of exclusivity
1
C
in A
Orig nation B
i
Dest
Operator in C declares
traffic to B on transit
through A
A
C
• Operator in A is a partner
of operator in C
• Settlement rates A/B > C/B
B
3
A
C
B
igin ation
r
O tin
s
De
Operator in
B receives
traffic at
settlement
rate C/B
instead of
A/B
2
Operator in C
“re-labels” the
traffic as originated
in C
B
4
Calling opportunity in the world
5.0%
5.0%
0.3%
7.5%
More than 75% of
calls involve mobile
19.9%
1993
89.7%
52.7%
26.7%
Mobile-tomobile
19.9%
1998
Mobile-tofixed
25.0%
2003
Source: ITU Fixed-Mobile Interconnect website: http://www.itu.int/interconnect
23.4%
Fixed-tofixed
Fixed-tomobile
25.0%
Delivering international voice traffic in 2002
Traditional
Traditional bilateral
bilateral
settlement
settlement rate
rate
system
system
Via
Via aa
wholesale
wholesale
carrier
carrier
30%
15%
20%
Originating
international
voice traffic
Direct
Direct dealing
dealing
with
with the
the
terminating
terminating
country
country
70%
65%
Refile
Refile via
via a
third
third country
country
Sender
Sender keeps
keeps all
all
exchange
exchange of
of traffic
traffic
Via
Via aa point
point of
of
presence
presence in
in the
the
terminating
terminating country
country
Competition in Voice Telephony
24
So, what’s the problem?
l Competition is everywhere but..
ð Incumbents, New-comers and Regulators are not ready
l Accounting rates are the traditional way of sharing
revenues from int’l services
ð BUT, creates incentives among recipient countries to
sustain rates at high level
ð Accounting rate system not well-adapted to competitive
market environment
l Strong pressure to move towards a cost-oriented
system
ð BUT, a cost-oriented system would be asymmetric
ð US want cost-oriented but reject asymmetric charges for
call termination
l How to calculate cost ?
ð How interconnection charge should be determined
0.35
Movement of settlement rates
0.327
T>50
(as per Recommendation D.140, Annex E)
35<T<50
0.3
20<T<35
10<T<20
Settlement rates (SDR)
0.25
5<T<10
0.245
0.251
1<T<5
0.225
0.2
0.21
0.05
0.142
0.139
0.088
0.043
0.183
0.165
0.171
0.15
0.1
TAL
0.206
0.162
0.118
T<1
0.215
0.137
0.115
0.116
0.122
0.099
0.108
0.083
0.074
0.039
0.115
0.038
0.102
0.061
0.038
0.148
0.113
0.114
0.104
0.101
0.085
0.058
0.039
0
1998
1999
Years
2000
2001
2002
Competition in Voice Telephony
26
Solutions & difficulties
l New Remuneration system (adopted)
ð Termination charge system
ð Settlement rate system
ð Special arrangement
l Difficulty to quickly implement those systems
ð Condition is to reach cost-oriented rate, but
ð No cost data or model for some administrations ? SG3
developed principles and TAF, TAS, TAL cost models
l Transitional arrangements (review at WTSA)
ð To facilitate staged reduction to cost based rate
ð to avoid sudden fall of revenue (smooth transition)
l SG3 developed:
ð Guidelines for negotiation
Annex E to Recommendation D.140
“indicative target rates” by Teledensity (T)
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
0.327
SDR
0.251
SDR
0.210
SDR
0.162
(
SDR
0.118
SDR
0.088
SDR
0.043
SDR
43.7¢
33.5¢
28.0¢
21.6¢
15.8¢
11.8¢
5.7¢
(end 2001)
2
7
(end 2001)
Low income
FCC : 23 ¢
(January 2002/2003)
(end 2001)
(end 2001)
Lower middle
FCC : 19 ¢
(January 2001)
end 2001)
Upper
middle
19 ¢(J.2000)
(end 2001)
(end 2001)
High income
FCC : 15 ¢
(January 1999)
Note: The correspondence between teledensity band and income group shown in the bottom row is intended to
be approximate, not precise. Source: ITU-T SG3 Report. 1 SDR = US$1.39.
Guidelines to facilitate the negotiation
The following non-binding guidelines could be applied when negotiating
accounting rates and accounting rates share in the international service:
1 Each party should ensure that; i.e., all information to be given to the
other party should be credible in order to lead the negotiations into right
direction.
2 The parties should negotiate freely and make agreements voluntary, any
kind of coercion should be avoided.
Each party should act constructively, any offer, proposal, action, etc.
should be directed towards reaching an agreement. Complex concepts
should be simplified as much as possible.
4 Each party should act time-saving, any delay should be avoided.
5 Regular re-negotiations and future amendments should be possible.
6 Until such time as an appropriate dispute settlement arrangement may
be approved by the ITU with respect to accounting rates, both parties
should have the possibility to consult a person or institution for mediation.
Addition to Recommendation D.140
1 accountingnrates for international telephone
services should be cost-orientated and should
take into account relevant cost trends;
2 each Administration should apply the above
principle to all relations on a non-discriminatory
basis; Accordingly, international calls should not
be treated any less favorably than comparable
national calls.
Alternative proposal from Vietnam:
Accordingly, under normal circumstances (where
tariff rebalancing has been effectively achieved)
international calls should be treated any less….
The importance of interconnection
l Key to developing competitive markets
ð Interconnection is the main driver of growth and innovation in telecom
market, it promote efficient infrastructure development
ð But constructing a sound interconnection framework is no easy task
l Approaches to Interconnection Policy
ð National approach – by 2000 101 countries had established
interconnection regulatory framework
ð Regional Approach – European Union (interconnection directive),
CITEL (Guidelines and Practices for Interconnection Regulation),
APEC (Recommended Principles for interconnection),
TRASA(proposed interconnection guidelines)
l WTO Reference Paper on Regulatory Issues
ð Puts forward a series of interconnection commitments:
- provide interconnection at any technically feasible point
- non discrimunatory terms, conditions and rates
- in a sufficiently unbundled and timely fashion
- calls for transparency
Key Interconnection Rules in
the WTO 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
An independent entity (which may be the
Dispute resolution regulator) must be available to resolve
interconnection dispute within a reasonable time
frame
Competition in Voice Telephony
32
Regulatory and technical issues
l Policy makers must resolve such basic questions as:
ð which carriers are required interconnection
ð How the costs will be calculated and recovered, and
ð At what points in the PSTN interconnection should occur
l Regulatory issues
ð Establishing guidelines in Advance (without it, interconnection
negotiation are frequently protracted, delaying the introduction
of competition)
ð Introducing competition require “dominant carriers” to
interconnect with other carriers
ð Cost orientation: excessive prices deter market entry, hinder
competition, end user suffer and can provide a pool of revenue
l Technical issues
ð Points of interconnection: incumbent operators permit interconnection with their networks at any technically feasible point
ð Dialling Parity and Pre-selection: Call-by-call customer
selection or Operator pre-selection by pre-subscription
ð Quality of Interconnection Service
Economic issues
The economic issues involved in interconnection largely come
down to question of cost: cost definition, cost measurement, cost
allocation and cost recovery
l How can interconnection costs be measured?
ð Theoretical Frameworks (Historica, Fully Distributed costs,
LRIC)
ð Cost study Approaches (Top-Down, Bottom-Up, Outside-In)
l Interconnection charge
ð
ð
ð
ð
ð
Cost based charges
Retail-based charges
Price Caps
“Bill and Keep” or “Sender Keeps All”
Revenue Sharing
Cost Model
OBJECTIVES
BUSINESS DECISION
SUPPORT
•Pricing and Product
Planning
•Investment
evaluation
•Economics of
direct/transit routing
FINANCIAL
CONTROL
REGULATORY
COMPLIANCE
•Monitor actual
performance and
compare with plan
and past trends
•Set D.140 as
globally
acceptable
standard
•Cost control
•Rationalize tariff
charges
•Identify Cross
Subsidy
•Derive TAR,
USO
MARKETING
TECHNOLOGY
•Minimize
opportunity for
arbitrage
•Enhancement
towards global
technology
•Generate more
revenue by
increased traffic
•Long term
cost/benefit of
technology and
options
•Impact of
technology on
global relations
Costing Methodologies
METHODOLOGIES
ACCOUNTING CONVENTION
HISTORICAL
COST
ACCOUNTING
•Actual costs
incurred
CURRENT
COST
ACCOUNTING
•Cost of today of
providing service
•Mirrors competitors
potential cost
COSTING APPROACH
FULLY
DISTRIBUTED
COST APPROACH
•All costs are
allocated to
services
INCREMENTAL
COST
APPROACH
•Incremental
costs only
•Often long-run
incremental costs
only
Competition in Voice Telephony
36
No much differences if…
l Current cost accounting is used
ð FDC=Historical Cost is no more relevant
l Costs of efficient services provision is used
ð this should be the aim of all operators
ð spare capacity (legitimate if transparency)
ð Disagreement on time horizon to achieve this
l Principle of cost causality is applied (ABC)
ð Common cost must be attributed to the service
on the basis of the causality priniple
ð However an exhaustive application of an ABC
approach may be very costly
l Need for cost recovery realised appropriately
ð IC approach should contain a markup
Agreed General principles
l Principle of transparency : The open availability of information
used in the cost deviation process in order to allow comprehension of the final rate
from the vantage point of an external analyst
l Principle of practicability : The ability to implement a costing
methodology with reasonable demands being placed on data availability and
data processing in order to keep the costing exercise economical, yet still useful
l Principle of cost causality : The demonstration of clear causeand-effect relationship between service delivery on the one hand and the network
element and other resources used to provide it on the other hand, taking into account
the relevant underlying cost determinants (cost drivers)
l Principle of reasonable contribution to common
costs : Costing methodologies should provide for a reasonable contribution to
common costs
l Principle of efficiency : The provision of a forecast of cost
reductions that result from a more efficient combination of resources
Cost Study Methodologies
Top Down
(Total Company costs)
Outside In
(Proxy inputs results)
Service
Unit cost
Results
Bottom UP
(Facility, operating cost
inputs)
Interconnection Rates in Selected European
Countries
Calling Party Pays (CPP). In US $ per minute.
European fixed-to-mobile interconnect charges, (US$/min)
Norway
0.156
UK
0.16
Denmark
Fixed-tomobile
0.17
Netherlands
0.18
Belgium
0.18
Spain
0.20
France
0.20
Finland
Mobile-tofixed DOUBLE
TRANSIT
0.22
Austria
0.23
Italy
0.23
Sw itzerland
Lowest
Best-practice
(20%) guideline
Mobile-tofixed SINGLE
TRANSIT
0.21
Sweden
Germany
EU, range of interconnect rates, (US cents per min.)
Highest
Mobile-tofixed LOCAL
0.24
0.30
0
5
10
15
20
25
30
Interconnection rates in selected
non-European countries
Calling Party Pays (CPP) vs. Receiving Party Pays (RPP). In US$ per minute.
China
RPP countries
0.0096
0.0012
0.007
0.000
0.008
HK SAR
0.008
0.008
Singapore
Canada
Mobile-to-fixed
interconnect rate
Malaysia
Fixed-to-mobile
interconnect rate
Guatemala
Mexico
0.000
0.009
Sri Lanka
0.000
USA
Costa Rica
Cambodia
0.020
0.020
Dom. Rep.
Philippines
RPP
CPP
CPP countries
0.017
0.017
Mobile-to-fixed
interconnect rate
0.034
0.034
0.047
0.047
0.026
0.20
0.050
0.070
0.042
0.078
0.051
0.205
Average
0.010
0.005
Botswana
0.056
0.105
Antigua
Fixed-to-mobile
interconnect rate
0.052
0.208
0.293
0.293
TAL average interconnection charges
MobileMobile
Interconnecti
on charge
Fixed-Mobile
Interconnectio
n charge
Mobile-Fixed
Interconnectio
n charge
Fixed-Fixed
Interconnection
charge
2001
0.155
0.1418
0.0546
0.0269
2002
0.1406
0.13505
0.0461
0.0252
Average
TAF average interconnection charges
Average
Fixed to Mobile
Interconnect
charge
Mobile to fixed
Interconnect
charge
Local
Mobile to fixed
Interconnect
charge
Single transit
Mobile to Fixed
Interconnect
charge
Double transit
0.167
0.078
0.096
0.150
Conclusion and Recommendation
l Erosion of traditional system of accounting rates
for exchange of international traffic
ð Domestic interconnect fees will be dominant mode
l Major price cuts in international calls
ð Availability of new infrastructures
ð Impact of Internet pricing model (distance and duration
independent)
l Mobiles exceed fixed-line phones worldwide
ð Introduction of “third generation” mobiles
ð Generational shift, as new users reject fixed-lines
“ Interconnection and tariff rebalancing”