Telecoms Pricing Next


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Tariff Rebalancing

Tariff rebalancing refers to the process, initiated by many carriers in developed economies in the mid 1980s – in anticipation of competition – of re-aligning the retail prices of all services to bring them more in line with the cost of providing the service.

While in the past international telephony has generally been charged at a premium, technological advances have sharply reduced the real cost to the operator (see the death of distance). And since new market entrants will generally look to establish an early foothold where margins are highest and costs lowest, competition in long-distance and international markets has prompted carriers to reduce the cost of international calls to keep competitors at bay.

Of course, nobody willingly embarks on a course of action guaranteed to erode revenues, so as the price of international and long distance calls has fallen, so the price has risen for the various services traditionally subsidised by the high revenues earned from international telephony. For consumers, the upshot has generally been cheaper international and long-distance calls, but more expensive subscription or access charges, higher local call charges, and occasionally a reduction of the local calling areas to push a greater percentage of calls into higher price brackets.

International Pricing and the Death of Distance

It’s no secret that most carriers have long regarded international calling as a cash cow, charging high prices for international connections which often bear little relation to costs, and which can therefore be used to cross-subsidise loss-making activities such as free directory enquiries and, in some cases, local call provision.

Back in the 1950s and 60s, International calls were charged at a premium because they were perceived as a luxury item, and because the bandwidth needed to carry them – provided by high capacity submarine cables, satellites and the like – was often in short supply. That situation has changed dramatically with the advent of high capacity fibre optic cables, Synchronous Digital Hierarchy (SDH, or its US equivalent, SONET) equipment, and new optical transmission technologies like Dense Wavelength Division Multiplexing (DWDM). An abundance of bandwidth has caused the cost of carriage to plummet.

With DWDM systems now able to boost the capacity on a fibre optic cable by a factor of 32 – allowing it to carry more than a million simultaneous phone conversations – the cost of an inter-city three-minute call travelling across a fibre backbone has fallen to a tiny fraction of a cent in terms of actual costs to the telco.

A graphic illustration of this is the cost of a voice path on the new TAT-14 trans-Atlantic undersea cable, which is likely to be as low as US$2.50 per year – fifty times less than the US$125 a voice path costs on TAT-12/13, which was brought into service in 1995. To put this in perspective it’s worth noting that many Europeans are still paying close to US$ 2.50 for a three minute call to the US – 175,000 times more than carriers will expect to pay for use of the TAT-14 cable.

Postalisation and Flat-Rate Pricing

The most obvious result of tariff rebalancing and competition in long-distance and international markets has been the postalisation of telecommunications prices. The term ‘postalisation’ refers to the trend towards flatter pricing levels which are increasingly distance-insensitive, mimicking the pricing of old-fashioned postal services which impose a flat rate for delivery of a standard letter, regardless of whether it’s going across the street or across the country.

Early competition in markets like the US and UK saw operators devise a huge range of pricing schemes, many of which were overly complex or required customers to forecast their calling patterns well in advance. As competition matured, carriers have found there is considerable competitive mileage to be gained by offering flat-rate schemes which make it easy for subscribers to manage their telecommunications costs.

Initiated by several large US carriers in the early 1990s, the trend towards flat-rate tariffs is now well established in most developed markets. At present, access to postalised tariffs generally requires subscription to some kind of tariff plan.

For consumers, postalised long-distance rates offer greater simplicity, even if higher charges for some other calls or the cost of plan membership itself sometimes means they have little overall effect on bottom line telecommunications costs. The commonest example of postalised rates in many countries is the tariffs charged for using cellular networks, which are usually independent of distance.

Tariff Plans and New Pricing Models

Aside from simple reduction of tariffs, one of the most popular strategies for carriers in liberalised markets has been the introduction of a huge range of tariffing plans and pricing schemes which aim to keep users loyal to the network while offering a variety of discounts, from cheap, flat-rate long-distance and international calls to reductions on calls to certain numbers or certain countries, reductions during certain calling periods, and – in the wireless world – cheaper rates for calls to subscribers on the same network.

In addition, users of mobile phones can now benefit from pre-paid calling, a hugely popular innovation which is largely credited with taking the cellular phone from the boardroom and placing it squarely in the hands of the average consumer. A variation on the pre-paid theme allows contract wireless subscribers to pre-purchase a fixed number of minutes per month for a low rate, with additional minutes charged at a higher rate.

For telcos, the benefits of calling plans and subscription-based tariff schemes are many. For a start, they keep customers loyal to the network. At the same time, they can help carriers exploit periods of low network use – for example, by offering particularly low flat rates on weekends or late in the evening.

They can, however, inject a level of confusion into the minds of customers, making it hard to make direct comparisons between the prices of one carrier against another. Consumer frustration with increasingly complicated pricing plans has led to a new spate of simplified, flat-rate packages.

Calling Cards and Country Direct Services

A relatively new pricing innovation, calling cards are essentially telephone credit cards which allow customers to make calls when abroad using a PIN (Personal Identification Number), and to have those calls debited to their normal home phone bill. Country Direct Services are a little more complex, effectively sending the call back to the home country’s network, from which it is then forwarded to the desired international destination. This service is also known as call re-origination.

For users, Country Direct cards save them the bother of grappling with foreign calling procedures, dialling codes and operators – although some people express frustration with the enormously long strings of numbers needed to get through to the desired number.

For PTOs (Public Telecom Operators), both services have proved a valuable way of maintaining brand loyalty among customers whilst creaming off a share of international revenues which would otherwise have remained confined to foreign operators’ networks. Because carriers can charge a premium for such services, they have also become a significant new source of revenue in recent years.

The International Accounting Rate System

Every time you make an international call, a telecommunications carrier in the country you dial is obliged to use its own equipment and facilities to connect you to the person you wish to speak to. To cover one another’s expenses while at the same time promoting the growth of international telecommunications routes, the world’s PTOs devised the International Accounting Rate system, which sets out a standard way of dividing the revenues generated by international calls.

The system is based on a dual price model, whereby one price is charged to the calling party by the national PTO (the retail price, known as the collection charge), and a second price is set between the PTO and the foreign PTO terminating the call (the wholesale price, known as the accounting rate). The accounting rate determines the price the terminating PTO charges the originating PTO - a fee known as the settlement rate, which is generally half the accounting rate.

The accounting rate system has governed the inter-carrier distribution of income from international calls for more than 100 years, and has worked well for most of that time. Now, however the system is beginning to break down, a victim of new market forces brought about by liberalisation, competitive pricing, traffic flow imbalances and changes in technology, which have all conspired to create an inequitable environment biased against countries which reduce prices or make more phone calls than they receive.

Most carriers agree that the accounting rate system has become outmoded and needs to be replaced – the only question is, with what?

It is the task of ITU Study Group 3 (Tariffs and Accounting Principles ) to broker agreement on a new system which could equitably replace the accounting rate system whilst at the same time protecting the interests of countries, particularly developing countries, which are only now embarking on the road to telecoms liberalisation.

At its meeting in June 1999, Study Group 3 endorsed draft guidelines for the bilateral negotiation of a set of transitional arrangements towards cost-oriented accounting rates, which are now subject to formal approval by the ITU membership, expected in December 1999. The range of "indicative target rates" established by the Focus Group/Study Group 3 is between 6 and 44 US cents per minute, and the transition period proposed is to the end of the year 2001. For more detailed information, take a look at the ITU’s International Accounting Rate page at: http://www.itu.int/intset/whatare/index.html and the Focus Group web pages at: http://www.itu.int/intset/focus/index.html .

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Interconnect Rates

The interconnect rate is the amount which a competing operator must pay to the incumbent – the operator that was in place before competition was introduced – for the use of its facilities. This has grown to become one of the most hotly-contested issues of the moment, and is critical to the viability of new market entrants and the flourishing of competition in general.

How much should competing carriers pay the incumbent operator for the right to send their customers’ calls down its wires and switches?

Since most fixed-line networks ultimately rely on the incumbent-owned lines connecting each household, connection to this network is vital for competition, and operators in liberalised markets are obliged to offer it to rivals. New market entrants therefore generally prefer that interconnection rates be based on Long Run Incremental Costs (LRIC), as they are in the US and the UK, for example; incumbents, on the other hand, favour a model based on Fully Distributed Costs (FDC), which take into account past network expenditure, universal service obligations and so on.

Universal Service Obligations

Universal Service Obligations (USOs)are usually the province of the incumbent carrier – the operator that was in place before competition was introduced – since it is the incumbent that owns most of the hardware making up a country’s telecommunications network. USOs relate to the widely-held policy goal of extending access to telecommunications to as great a proportion of a country’s population as possible.

For the carrier, this often means obligatory, government-mandated investment in infrastructure to expand the network to outlying areas, as well as a requirement to maintain pricing for services at an affordable level for all customers, regardless of the cost of actually providing the service. Incumbent carriers’ USOs are an important factor in the country’s regulatory environment.

Cellular vs Fixed-line Pricing

Analysts have long asked themselves this question: how long before cellular mobile tariffs compete with tariffs for fixed-line service? While pricing of mobile calls in some regions, notably the nordic countries, is now relatively low compared with the users’ buying power, in most economies there remains a significant price difference between the two services.

For the moment, users still seem content to pay a premium for the convenience of mobility, although intense competition in some wireless markets, combined with the fact that wireless service plans are generally built around usage rather than fixed tariffs mean it’s possible for a user to pay less for a mobile than a fixed line, providing they are able to modify their calling pattern sufficiently to take advantage of the periods of highest discount. In the future, as wireless becomes predominant for voice traffic, it seems inevitable that the cost of an average monthly mobile subscription will fall significantly.

While prices for mobile service have declined significantly, tariffs are still generally high compared with fixed-line pricing. Until price parity is achieved between mobile and fixed services, substitution – that is, a mobile phone taking the place of a customer’s standard fixed line connection – is unlikely to become a reality in most countries. Where that isn’t the case is where fixed-line waiting lists are long or fixed-line service provision is unreliable, and in some countries in Eastern Europe and Latin America substitution is very much a reality.

In addition, just as metered local calling has proved poorly suited to the new calling patterns spawned by the birth of the Internet, so high prices for mobile access could stifle expected rapid growth in the demand for mobile data services. Some US carriers have already begun to introduce tariff packages aimed at mobile Internet usage, and many others around the world can be expected to follow suit in the coming months.

Leased Lines

Leased lines are important for businesses needing to transmit a large amount of voice or data traffic, as well as for Internet Service Providers, which use them to connect to the Internet backbone network. Between 1992 and 1998, according to the ITU, prices for medium- and high-speed leased lines fell an average of 46% in the world’s developed economies – good news for competition in the Internet services market and for consumers, who in turn benefit from cheaper on-line access charges.

Internet Pricing

Why is voice access to the Internet so cheap? While the question itself may appear to be frivolous, in the sense that getting connected to the Net in the first place requires a fairly hefty equipment outlay compared with simply installing a basic fixed-line phone, it’s true that per-minute usage costs for an Internet voice channel are frequently well-below what you’d normally pay for a voice channel from the PTO.

The reason Internet access costs are so low is manifold. For a start, the Internet is more efficient than voice circuits in the way it uses available network capacity. When you place a typical call over the Public Switched Telephone Network (PSTN), network switches establish a duplex (two-way) circuit which is available for your exclusive use for the entire duration of the call, regardless of whether you and your called party are actually talking or not. Conversely, a voice call placed over the Internet can be routed over a number of different circuits, each of which is only occupied for a fraction of a second. This is because the voice signal is carried in a series of discrete data ‘packets’, which are sent from one end of the line and reassembled – having followed whatever network path was available – at the receiving end.

Furthermore, the public switched network is optimised to carry traffic at 64kbps in chunks of 8-bit bytes, sampled at a rate of 8,000 times a second. While this method results in excellent signal quality, it’s at the expense of speed. The Internet, for its part, can send its voice packets at speeds only limited by the slowest link on the network (a LAN, phone line, wireless connection and so on) – a feature which often results in much faster transmission times. The quality of the voice signal may be low, but throughput will almost always be faster.

In addition, capacity utilisation of network resources is generally much higher on the Internet. While the Net generally runs at an average 60-70% of total capacity, on an average day network utilisation on the PSTN operates is a mere 20% of available resources. This seemingly shameful waste of resources can be explained by the fact that the PSTN has been optimised to be as robust and reliable a network as possible. A surge in demand – whether caused by a panic on Wall Street, a natural disaster or simply the arrival of Mother’s Day (the busiest day of the year on most operator’s networks) – will not result in dropped connections or even problems getting a line. Instead, the network’s reserve capacity will simply kick in, and users will make and receive their calls as normal, oblivious to any change in traffic levels.

The same, sadly, cannot be said of the Internet. Congestion on the network inevitably results in delayed or dropped packets, resulting in service degradation and, ultimately, calls cut off in mid-sentence. The Internet’s higher capacity use results in cheaper prices for users, but at the expense of the reliability of traditional networks.

Internet calls are also cheaper because they effectively by-pass the international accounting rate system which obliges PTOs to pay one another settlement rates for terminating one another’s international traffic. And finally, PTO tariff structures, traditionally based on distance and duration, are not entirely cost-based, but are determined by a complex range of factors such as the operator’s universal service obligations and the need for investment in expensive new equipment to maintain and grow the network.

Alternative Calling – Callback, Refile and International Simple Resale

These are three techniques which essentially exploit discrepancies in the way that bilateral pricing agreements work between different countries. The ITU has no formal position on such alternative calling practices – the ITU is essentially the sum of its 188 Member States and each of those states is free to decide its own policy on alternative calling practices. This means that callback, for example, is outlawed in some countries and legal in others, while international simple resale is currently allowed in only about 40 countries worldwide.

Callback is a system of international discounted calling which exploits the fact that the cost of international calls in some countries can be much lower than the price consumers pay in other countries.

The system generally relies on uncompleted call signalling systems, requiring the customer (located in a country outside the callback country) to dial a telephone number in the callback country and hang up before a connection is established. The callback operator then automatically initiates a call back to the customer, and provides them with a dial-tone, at which point they can proceed with their call to the country of their choice. Other call-back methods are also available which make use of global freephone number facilities or call conferencing systems, but the upshot for the user is much the same – considerably cheaper rates for international dialling.

International Simple Resale, currently permitted in only around 40 countries worldwide, allows competitive carriers to pool traffic to a particular destination and send it down an international leased line. Through this system, the carrier is able to charge clients a per-minute fee while itself paying a lower fixed charge for leased line rental.

International Refile exploits the fact that international accounting rates are negotiated on a bilateral basis between countries, and can therefore differ significantly. For example, the combined accounting rate between country A and country B, and country B and country C can be cheaper than the single accounting rate between country A and country C. In this case operators would have a financial incentive to route – or refile – country A to country C traffic through country B.

Refile is often used in conjunction with international private networks and leased circuits.