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4. Cost and Price Trends

If the cost of making an international telephone call was directly related to the costs of international infrastructure, then it would be declining by some 40 per cent per year. Thanks to technological change, the infrastructure costs of providing international telephony are tending towards zero. But of course there are many other components involved in the cost of a call. In particular, the national extension part of an international telephone call has not experienced the same dramatic price reductions. Furthermore, as the physical costs of conveying the call have become less significant, the costs associated with marketing, billing and maintenance have become relatively more significant. The result is that there has been a divergence between the cost trends underlying wholesale and retail prices. Overall, the rate of reduction for wholesale costs has been accelerating (see Figure 4).

At the heart of the debate between developed and developing countries over settlement rates is the issue of whether the cost of terminating a telephone call varies according to the level of development of a country, and if so, by how much? The approach taken by the FCC, in its Benchmarks Order, is that the range of variation in costs is likely to be small. After all, it is argued, the basic elements necessary to construct a network (switches, cables, transmission devices etc.,) can be bought on the global market at competitive prices. Consequently, the FCC proposes a relatively narrow range of costs, between 15 and 23 US cents per minute, or a ratio of 1 to 1.5.

By contrast, the approach taken by the ITU Focus Group was based on a "best practice" approach using actual market prices for settlement rates in all the economies of the world, not just the ones with large traffic streams to the United States. The enonomies were divided into seven teledensity groups and the average of the lowest 20 per cent of published settlement rates in each group was established as the target for the group. Two additional groups were defined, covering small island states and the Least Developed Countries (LDCs). The resulting analysis gives a range of costs between 6 and 44 US cents per minute, or a ratio of 1 to 6. The rationale here is that the volume of traffic generated by a country is a critical factor in determining its unit cost.

The real cost difference between developed and developing countries probably lies somewhere between that suggested by the FCC and the Focus Group. Furthermore, the cost distribution, if it could be plotted, would probably be a highly skewed one with the highest costs occurring in the LDCs and in other small states, especially remote islands. Cost differences are unlikely to be so high between, say, a large developing economy with a high volume of traffic and a small developed country with limited traffic.

The infrastructure costs of providing international telephony are tending towards zero

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Updated : 2007-08-28