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Economic aspects of fixed-to-mobile interconnection

Economic aspects of fixed-to-mobile interconnection. Dr Tim Kelly, Head, Strategy & Policy Unit, ITU ITU Workshop on Interconnection, Sanya City, 17-19 August 2001.

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Economic aspects of fixed-to-mobile interconnection

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  1. Economic aspects of fixed-to-mobile interconnection Dr Tim Kelly, Head, Strategy & Policy Unit, ITU ITU Workshop on Interconnection, Sanya City, 17-19 August 2001 The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of the ITU or its Membership. The author can contacted by e-mail at Tim.Kelly@itu.int.

  2. Agenda • A mobile revolution • Worldwide • Asia-Pacific • Fixed-mobile interconnection • Calling Party Pays vs. Receiving Party Pays • The problem of the “market of one” • Interconnection rate comparisons • Country case studies • India, Hongkong SAR • Looking ahead • Interconnection issues with 3G Mobile

  3. A Mobile Revolution Fixed Lines vs. Mobile Users, worldwide, Million 1'400 Mobile Users 1'200 Fixed Lines 1'000 800 600 400 200 0 1993 1995 1997 1999 2001 2003 Source: ITU World Telecommunication Indicators Database.

  4. Relationship between teledensity and mobile density, Asia, 1/1/01 90 More mobiles Taiwan, China Hongkong SAR 80 Singapore 70 Korea (Rep.) 60 Mobile per 100 inhabitants 50 Japan 40 30 Malaysia Macau, SAR 20 Philippines 10 China More fixed-lines Thailand 0 Viet Nam, 0 10 20 30 40 50 60 70 80 90 Indonesia Fixed-lines per 100 inhabitants India Source: ITU World Telecommunication Indicators Database.

  5. 5.0% 0.3% 5.0% 7.5% 19.9% 1993 89.7% 52.7% 23.4% 26.7% Fixed-to- Mobile-to- 19.9% fixed mobile 1998 Mobile-to- Fixed-to- fixed mobile 25.0% 25.0% 2003 Calling opportunities worldwide Source: ITU Fixed-Mobile Interconnect website: http://www.itu.int/interconnect

  6. Average retail prices Germany (D2) $61.91 Spain (Plan 7500) $50.20 Egypt (Click) $48.11 Argentina (Miniphone) $45.20 UK (Orange) $41.40 World Average $38.15 Brazil (Telesp) $35.34 Chile (Entel PCS) $26.07 USA (Bell South) $25.00 Canada (Bell Mobility) $23.59 Hong Kong SAR (HKT) $21.69 Price of monthly subscription plus Philippines (Globe) $16.26 100 minutes of mobilephone calls in US$, August 1999 India (Max Touch) $14.30 China (China Telecom) $10.87 Indonesia (Satelindo) $9.74 Note: Excludes charges for incoming calls in RPP markets. Source: ITU World Telecom Development Report 1999: Mobile Cellular

  7. Fixed-Mobile Interconnection • Interconnect prices are a major determinant of retail prices • Evidence of “market failure” • Interconnect prices are variable but generally very high, especially in Europe • In Calling Party-Pays environments, caller may not be aware of the charge they will be paying • Calling party does not have a choice of operator to terminate the call • Fixed-to-mobile and mobile-to-fixed interconnect rates are highly asymmetric • By 2003, 75% of all call opportunities worldwide will involve a mobile

  8. Orig. Access Switching Authentication Core Network Switching Locating the Customer Switching Term. Access Elements of a Fixed-to-Mobile call Call Origination Call Termination Calling Party (FIXED) Called Party (MOBILE) Transit service Source: Adapted from ECTA.

  9. The competitive cascade National roaming; The flow of competition Subscriptions Mobile number portability Retail calls Indirect access Origination Wholesale prices linked to retail tariffs for mobile-originated calls Termination Source: Ovum.

  10. RPP vs. CPP: What’s the difference? Receiving Party Pays • Mobile party pays for incoming calls and fixed party pays only local tariff • Often, no interconnect arrangement is negotiated with the fixed operator for F-M calls. Mobile operators bill mobile consumer directly for “airtime”. Calling Party Pays • Mobile party does not pay for incoming calls and fixed party pays a premium to call the mobile party • Call termination paid by fixed operators is a significant part of mobile operator revenues

  11. Fixed/Mobile interconnect rates in selected calling-party-pays countries, US$ per minute 0.017 Costa Rica 0.017 Mobile-to-fixed 0.034 Malaysia interconnect rate 0.034 Fixed-to-mobile 0.047 Guatemala 0.047 interconnect rate 0.026 Mexico 0.064 0.050 Cambodia 0.070 0.042 Dom. Rep. 0.078 0.051 Philippines Source: ITU Regulatory Questionnaire Survey. 0.205 0.052 Botswana 0.208 0.293 Antigua 0.293

  12. Fixed-to-mobile interconnection rates, Europe, US$ per minute Norway 0.156 UK 0.16 Denmark 0.17 Netherlands 0.18 Belgium 0.18 Spain 0.20 France 0.20 Finland 0.21 Source: ITU, compiled from ECTA/Analysys, EU Interconnection Tariffs in Member States, ITU Regulatory Survey 2000 Sweden 0.22 Austria 0.23 Italy 0.23 Germany 0.24 Switzerland 0.30

  13. Higher costs of financing Less economy of scale Higher cost technology Mobile termination is out of line with costs(even if costs are overestimated!) 16:1 Actualinterconnect charges 6:1 - 9:1 Ratio of mobile to fixed costs Ratio of mobile to fixed charges Note: This applies to CPP environments. Source: Ovum/EU.

  14. Sample prices in RPP environments, in US$ per minute 0.002 China 0.001 0.007 Mobile-to-fixed Canada 0.000 interconnect rate 0.008 Fixed-to-mobile HK SAR interconnect rate 0.008 0.008 Singapore 0.000 0.009 Sri Lanka 0.000 0.020 USA 0.020 Average 0.009 RPP 0.005 0.056 CPP 0.092 Source: ITU Regulatory Questionnaire Survey.

  15. Case Study India: The context • Teledensity 2.4% • Local market liberalized first, then long distance • Mobile Sector opened upin 1994 • The Dept. of Telecoms was both licensor and incumbent operator until late 1999 • Regulator TRAI createdin 1995 2.4% World’s Surface 1 billion people or 16.7% of World 34% Poverty

  16. Case Study India: The Mobile Sector • 34 mobile operators in circles (provinces) and 8 in metros • More than 3 million subscribers in Dec 2000 • Growth of > 50% a year since March 1997 • Mobile density around 0.3% • In the circles, mobile network development is patchy • Mobile operators rely on the incumbent (DoT/DTS) to carry much of their traffic • …and incumbents launched their own mobile services in Metros & Circles in 2000

  17. Case Study India: Attempt at CPP • Interconnection - main stumbling block for development of mobile in India • Only mobile operators pay to interconnect • DoT/DTS pays no access charges for F-M calls • Mobile operators obliged to use DoT/DTS network, but have only limited access to it (via PoIs) • Compromise proposed over WLL access • TRAI attempted to introduce CPP “revenue-sharing” scheme, but failed. Now trying again • Delhi High Court found that TRAI lacked jurisdiction • January 2000: TRAI Act amended

  18. Case Study, Hongkong SAR • Became a Special Administrative Region on 1/7/97 • 6.8 million pop. • Mobile competition since 1987 • Currently 6 main operators • Mobile density >80 per 100 inhabitants • Private and foreign ownership permitted Sunday New World PCCW 7% 14% 18% SmarTone 17% Peoples 14% Hutchison 30% Mobile operator’s market share (1/1/01)

  19. Hongkong SAR, Fixed-to-Mobile interconnection • Clear and transparent statement of regulations • Statement No. 7, (June 1995) sets out framework for carrier to carrier charging principles • Principle of cost-orientation • When requested to provide information, incumbent operator (PCCW) must provide detailed cost breakdown, according to OFTA’s cost manual. • Interconnect charges are US$10 per month per 64 kbit/s line plus 0.8 US cents per minute. • Number portability • Introduced in March 1999 • Has permitted greater user choice and has spurred market growth

  20. Looking to the future • Licensing of 3G systems and development of mobile Internet • Choice of standards • Choice of method for allocating licences • How many operators? • Mixed success for 2G mobile Internet • Huge success of i-Mode in Japan • Disappointing take-up of WAP in Europe • Difficult to reconcile business models • Mobile voice charged by the minute • Internet access charged on a flat-rate basis • Roaming issues • 3G is intended to permit global roaming • But, in Europe, EU competition policy authorities are conducting an inquiry into excessive roaming charges and recently conducted a series of raids on mobile operators

  21. Implications for public policy • Big difference between CPP and RPP • CPP environment appears more favourable to market growth • But CPP mobile operators frequently charge above-cost prices for interconnection • Regulators hesitant to intervene • Mobile perceived to be an open and competitive market • But, evidence of market failure in call termination rates • Operators can always blame high prices on someone else: • Mobile service providers blame other operators for high roaming charges • Fixed-line service providers blame mobile operators for high termination charges

  22. Case studies Finland India Mexico China and Hongkong SAR Malaysia For more information ... ITU Website at www.itu.int/interconnect … and on the licensing of 3G mobile at www.itu.int/3G

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