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Wednesday, March 07, 2007

FMC... does it break the interconnect charging model?

Had an interesting meeting with Rebtel this morning that set me thinking about interconnect fees to fixed and mobile operators. I have a suspicion that the model is broken.

At the moment, the cost of terminating a call to a mobile number (07xxx in the UK, for instance) is much higher than to a fixed geographic number (020 xxx for London). This is rooted in the idea that mobile operators' costs are much higher (spectrum, radio network etc) and that therefore they deserve a hefty premium (maybe 10x the fixed-telco price) for the privilege of transferring another operator's call to one of their end customers. So maybe terminating a call on fixed-line costs 1p per minute, but it's 8p on mobile (roughly speaking).

This is the reason that fixed-to-mobile calls are much more expensive than vice versa. Terminating SMS's is also quite expensive, for similar reasons.

(note that in the US, there is no differentiation between fixed and mobile numbers - this doesn't apply).

Up to a point, this is all fairly reasonable - after all, mobile operators' overheads are generally pretty high, if you include the cost of spectrum & infrastructure.

But the model breaks down in two ways:

- firstly, if a VoIP service provider gets a mobile number range (& therefore the interconnect revenues for inbound calls), but uses a cheaper way to terminate the calls (eg WiFi).
- secondly, if a mobile provider uses its own mobile numbers for services that don't use the expensive spectrum and infrastructure (eg also terminates on WiFi via UMA/VCC, or alternatively uses mobile numbers for fixed-VoIP offers like softphones).

In either of these instances, the whole "moral basis" for supposed mobile 07xxx numbers to have more costly interconnect than fixed geographic numbers disappears. While there's a justification for a mobile premium when using a complex mobile network, the justification evaporates if the only difference is the number of the endpoint & the call routing.

(interesting side comment here by the CEO of Rebtel - if the call terminates on a voicemail server rather than an actual cellphone, is the costly interconnect fee still justifiable?)


Paul Jardine said...

Shhhh, don't tell Vivianne Reding! If you look at global costs of terminating on mobile networks, Europe is (generally) ridiculously high.
Seriously, though, if interconnect is 'cost-based' - as it's supposed to be, then there is no justification for the abnormally high termination fees.
On the voicemail issue; would it be possible for the other operator to know that the call was redirected to voicemail (as opposed to any other number). The pricing model would have to be based on statistical evidence rather than routing information.

Paul Sergeant said...

Good point Dean. Throw in higher "blended" termination charges for 3G networks and the whole issue becomes even more murky. The voicemail question is interesting: Presumably the majority of recipients retrieve messages with a free call - unless, of course, they are roaming.

Daniel Taylor said...

Readers in the North America may be more familiar with the term access charge to describe the same fee.

Anonymous said...

Surely the "moral basis" (ugly phrasing there, Dean) is dependent on what proportion of ALL calls cases 1) and 2) represent?

Chris Seilern said...

Good points Dean! I would add to that the regulatory "holiday" operators still enjoy to this day.

What I mean by that is that national telcos, back in the days when national telcos were still mostly state owned and their mobile network coverage still far from complete, benefited from regulatory leniency (i.e. they were allowed huge margins to cover the cost of deploying these networks).

Fast forward to today (around 20 years later), and those same networks have now been fully deployed and coverage has been excellent for years now.

Even if you take into account the investment required handle the huge rise in call volumes, it pales into comparison to the investment needed to build this network in the first place. So, VOD's Capex was an average of 20% of sales between 1991 and 2001, but only 16% of sales since then.

So... they spend less on the network, but their margins are still astronomically high: avg EBITDA % 1992 to 2001 was 43%. EBITDA % in 2006? 43%.

So operators now have huge returns as well as huge margins! And consumers are paying for this by proxy of interconnect pricing designed by the Soprano family! Talk about toothless regulators!

So, thank you Ms Redding for putting in motion what should have happened long ago: price controls to end mobile operators pricing cartels.