Friday, 7 March 2008

Mein Gott, Europeans may get unlimited phone calls!

The great thing when journalists react to brilliant papers is that they generally summarize the myriad of pages and the fruits of years of work back to one sentence: the headline. This week, this piece of brilliance on the basis of termination fees in the context of European regulation and the development towards IP-networks was headlined as: "Should Europeans pay to receive phone calls?" and "Mein Gott!" My headline for this piece could be: "Mein Gott, Europeans may get unlimited phone calls!" or "Telecoms and interconnections for dummies!"

Both articles mentioned show a complete lack of clue on how the telecommunications industry works. Raving on about how we will pay for incoming calls and don't forget the poor children in Africa. They also show us why it will be hard to change the industry, since the misconceptions are so entrenched ever 'hack' will instantly write them down and not know the depths of their incompetence. Abolishing terminating fees is good from a public welfare and market economics point of view. Abolishing terminating fees is bad from the private perspective of a telecoms operator. If I was a regulator, I would promote it. If I owned a telecoms company I would oppose it. I am a consultant, an arms merchant, I therefore supply both sides. (Typical Dutch thing, we supplied the Spanish their guns in our war of independence 1568-1648)

The problems starts at the root: Knowing what a telecommunications network is. Economics/financials quickly make people scream Adding interconnection to the equation complicates stuff way beyond the knowledge of most people in the industry. The business models of interconnection complicate stuff even more Looking at it from the point of a regulator/market economist adds another layer of problems. So here in my arrogance I write down my For Dummies Guide.

Misconceptions about the network
The biggest misconception is that telecommunication is about communication. It's not. It's about enabling communication across distances using some form of technology. Communication is between end-points (people/machines) Telecoms is just about carrying the data from a to b. (Correlation, switches just connect wires, they don't connect and change data. Only end-points do. Therefore there is no intelligent network, knowing how to handle data is limited to putting it onto the right wire. That's fast, simple and efficient.)

Data is carried by modulating a signal onto a wavelength. In the case of digital communications this is represented by 0's and 1's, the strings of 0's and 1's together form the data.

Carrying data from A to B requires a network. For real-time communication a wired or wireless network is best. Fibre is used in the core, copper is still used to get close to the end-user and wireless is used to hop to the end-user and allow the end-user to move around and maintain mobility.

The costs of sending bits over a network is zero. The costs of a network is in building the infrastructure (60-90%) and maintaining it (people, electricity etc.) Whether you send no bits or a million bits per second doesn't matter costwise. 10% full is just as expensive as 88%.

When the network is full. (the amount of data reaches the maximum throughput) You need to upgrade the network. QoS mechanisms won't work.


It's not good business to build multiple networks. Has to do with all the networks offering the same thing, high capex, low marginal costs, mutually assured destruction and stuff. That's why we only have one gas, water and electricity network. Even Telco's like Vodafone and Orange now understand that they should share infrastructure and endorse structural separation. Much to the delight, no doubt, of mrs. Reding.

Telecommunictations networks are not expensive. They are cheap. The costs per year of a high speed fibre optic network to the home, including wireless service is only one quarter ($600 of the average electricity bill $2200).

You can get very richt from just building infrastructure. See Reggefiber and Free.fr. Building networks can be a profitable business as long as you follow the simple business rules of the local grocery store: Don't spend more than you can afford. Make sure people want to be your customer. Make sure the price is right.

Bandwidth is not scarce. Our current appetite for online video still doesn't bring the network down. Andrew Odlyzko sais that the rate of growth of traffic has declined (and if he sais so, it's true).

There are no bandwidth hogs. Every month different people are in the top 10% download group (cho et. al.) There isn't a Pareto distribution where the top 20% are incurring 80% of the network upgrade costs. And with 50% growth per year, there is no use in delaying the increase in network capacity.

The flow of traffic is mostly incoming for consumers. Not outgoing. Cho et al. show a factor 2 to 1.

Misconceptions about the economic/financial side of networks
Usage is a very bad way to determine how costs should be allocated over the network. The amount of data you send/receive may determine a bill, but this says nothing about how costs are incurred. Capital expenditure and operational expenditure is mostly determined by having a a connection tot the network. Not what you do with it.

The type of service you use is an even worse way of charging for network use. An SMS is only 160 bytes. A telephone call at standard GSM quality 1200 bytes per second. The price of an SMS is however higher than the per minute charge for a voice call. As said, bits are bits, there are no bits that incur higher costs than other bits.

Paying per connection is the fair way of paying for a network, separate of the network. Being connected means you're able to use the network in any way you please and therefore enjoying the full benefits of the network. So an owner should pay his/her fair share of the network. Now I know that economic theory allows for differential pricing to get more out of the market, or to offer the basic service at a lower price to those who are not able to pay. In this case i do think that the market is better served with universal access and a single price and some government fund for the poor than by differentiating prices.

The flow of money in a transaction says nothing about the perceived value between two parties, since it is met with an equal flow in goods/services/information.

Price fortunately says nothing about value. Selling below value is very good for consumer surplus.

Time is one of the ultimate resources. A person spending time on a voice communication values the communicaton more than the time involved in the communication.

European customers have absolutely no problem with paying for incoming traffic. If you are European and you read this blog, you've paid for incoming traffic. I don't hear you complaining. You can also observe that when being called some Europeans may offer to call you back if they are on a cheaper plan or the boss is paying. If you offer them an all you can eat model they will go for it.

Little Children in Africa don't get telecommunications because we call them and pay for interconnection. Telecoms in Africa is best served by direct investment and liberalisation of the telcoms market. The economies in Africa are best served by cheap incoming and outgoing data traffic. 10% more mobile phones means 0.6 point extra growth.

Misconceptions about interconnection
The costs of an interconnection between two networks is the cost of a dedicated switch for an exchange and two network ports on each of the networks. The AMS-IX currently switches the equivalent of 5 million parallel VoIP conversations at 80Kbit/s. All for €800 per port per month. Couple of thousand dollar per network per month for multiple interconnects (let's say $100000 per "day, month, week, year) for interconnects on multiple places for 1 million users). The cost per user is about 10 cent per user. Could you spare a dime?

Paying to deliver traffic for an interconnection sais nothing about the value of the interconnect, nothing about the value of the communication and hurts consumer surplus. If you factor in Metclafe's law and the improvements made on it by the aforementioned Andrew Odlyzko, than the act of interconnecting itself generally adds enough value on its own to obliterate any specific value calculation for a communication.

There is no economic rationale for paying more from a fixed line to a mobile network and/or vice versa. The costs of a network are not in the interconnection or use, but in the existence of the network and should therefore be born by those that want the network to exist. If you disagree, then please tell me by dialling +31900XXX which connects to my super-duper-self-designed-gold-plated-QoS-enabled network(€2000 per minute) It's so expensive, because I wanted a network that is completely based on fiction, pidgeons and elfs. Elfs are expensive, but because you want to tell me I'm wrong, you now have to contribute to that network. It's only fair you see.

Misconceptions about Calling Party Pays and Mobile Party Pays/Peering and Transit
CPP is not the reason why Europe is ahead of the US in mobile calling. MPP or Bill and Keep models are used in countries like Singapore and China without any problems in proliferation of mobile technology. Europe is ahead because their was one standard that everyone converged on. In the US different technologies, different handsets, spotty coverage, weird roaming plans, corporate incompetence etc all fought against proliferation of mobile technology. Add to this the fact that areas like Alabama are third world nations in effect and the national income in the US is distributed unevenly and you have some interesting reasons. (BTW could someone do an analysys of distribution of broadband vis a vis income per family etc. might explain too why the US is lagging there)

CPP rates have to be high in order for companies to be able to pay for the networks. Nope, in India they make due with half a cent per minute.

Peering and transit can be profitable, provided that it is done right. So whenever you provide a link between two points you will have to make sure that your price is low enough and dropping quickly enough to make sure that no one will enter the market. When traffic has grown from 100 to 150 your price will have to go down from 100 to 66.

CPP pays for handset subsidies. Nope it doesn't. In some countries handset subsidies are even prohibited by law. Finland and Belgium come to mind, but somebody should check. What really happens is that all income of various sources is poured together. No money is specifically earmarked for handsets. For competition authorities the rule should be: A waterbed effect from a non-competitive area (CPP to keep handsets) to a competitive area (no CPP and cheaper handsets) is a great thing. This would give consumers choice instead of making them feel stupid for not getting a new phone after two years, because they do pay for it.

CPP is more efficient, because it limits calls to the essential calls and therefore makes that we need to invest less in networks. As said before there is no basis for this reasoning. From a market economics perspective the consumer surplus in the United States is much higher than in Europe, because of them calling 4 to 10 times as much.


The European telecommunications market is not competitive as some people think. Both Roaming and Interconnection have such rules that it becomes impossible to compete on price. If you have a 20 euro per month mobile bundle, you can only call 200 minutes at a 10cent interconnect rate. Anybody wanting to offer 400 minutes is committing commercial suicide

All in all it's late and I have to go to bed :-) I have ranted enough, but I hope I got the feeling across that its not just fine to belief that its normal to pay termination charges. That actually there is no reason to do so and that by allowing the system to continue we're actually allowing competition on price to be non-existent.

Goodnight.

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