Access%20and%20Termination%20Charges%20in%20Telecoms

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Access and Termination Charges in Telecoms

• Jonathan Sandbach
• Head of Regulatory Economics
• Vodafone Group
• 44 7795 300653
• jonathan.sandbach_at_vodafone.com
• 30 June 2006

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Net Neutrality in context of 2SM
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Net Neutrality Debate

• Net Neutruality debate started in US...
• ...appying to incumbent network platforms
• Access networks (DSL, fibre, CATV)
• Next generation networks (NGN)

Opposing View
Net Neutrality
Non-discriminatory access to all content providers
Networks make judgements on how different types
of content are to be handled and priced
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2SM Model

• 2SM model incorporates two special cases
• Content providers (e.g. Google, Yahoo) want to
  push content onto networks with lots of
  subscribers 
• Networks want to pull content (e.g.UEFA champion
  league) onto their networks to get subscribers

Opposing View
Net Neutrality
Assumes first case only applies - and so is
special case of 2SM
Networks have flexibility to arrange and price
content to maximise value to subscribers
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When can net-neutrality be applied?
Net Neutrality
Opposing View
Non-discriminatory access to all content providers
Networks make judgements on how different types
of content are to be handled and priced

• Mature/incumbent monoply platforms ?

Developing/competing platforms ?
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Mobile networks in developing markets2SM and
investment incentives
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Mobile networks as 2SM

• 2SM Call origination and termination
• Developed markets
• ...where platform coverage is complete
• ? interest
• price structures
• Developing markets
• ...where platform coverage is incomplete (and
  function of investment)
• ? interest
• price structures
• endogenously determined investment levels

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Numerical example (1)

• Assumptions
• Annualised cost of a mobile network rural base
  station 1,200
• Expected incremental traffic (both originating
  and terminating) 10,000 minutes/year
• Simplistic assumption orig. term. calls incur
  equivalent capacity cost on the base station
• Average cost of a call minutes 12 cents.
• Ratio of inbound to outbound call minutes for
  this rural base station 21
• Ratio of incremental/average cost of minute on
  whole network 50
• Retail price of a call minute 20 cents.

Overall impact of investment in new rural base
station Total incremental revenue 2,000 (10,000
minutes x 20 cents/minute). Incremental cost of
base station 1,200 Other Incremental capacity
investment 600 (10,000 minutes x 50 x 12
cents) Total cost 1,800 Incremental
profit 200 ? Worthwhile investment.
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Numerical example (2)
Impact on individual network operator with a
market share of 25 when termination rate is set
at cost of 12 cents. Incremental
minutes 10,000 Outbound 3,333 Inbound 6,667 On-
net outbound 833 (25 x 3,333) On-net
inbound 1,667 (25 x 6,667) Other operator
outbound 5,000 (6,667 less 1,667) Other operator
inbound 2,500 (3,333 less 833) Outbound
revenue on new base station 667 (3,333 minutes x
20 cents) Outbound revenue in rest of
network 333 (6,667 minutes x 25 x 20
cents) Inbound revenue 600 (5,000 minutes x 12
cents), Total incremental revenue 1,600 Incremen
tal cost of the base station 1,200 Other
incremental capacity investment 150 (2,500
minutes x 50 x 12 cents) Terminating
outpayments 300 (2,500 minutes x 12 cents) Total
incremental cost 1,650 Incremental
profit -50 ? Investment will not be made
In fact, if the investment were made, the other
operators would gain 250, arriving back at the
net industry gain of 200. The point is that no
operator will be incentivised to make the
investment that is profitable for the industry as
a whole.
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Numerical example (3)
Impact on individual network operator with a
market share of 25 when termination rate is set
at cost of 15 cents. Incremental
minutes 10,000 Outbound 3,333 Inbound 6,667 On-
net outbound 833 (25 x 3,333) On-net
inbound 1,667 (25 x 6,667) Other operator
outbound 5,000 (6,667 less 1,667) Other operator
inbound 2,500 (3,333 less 833) Outbound
revenue on new base station 667 (3,333 minutes x
20 cents) Outbound revenue in rest of
network 333 (6,667 minutes x 25 x 20
cents) Inbound revenue 750 (5,000 minutes x 15
cents), Total incremental revenue 1,750 Incremen
tal cost of the base station 1,200 Other
incremental capacity investment 150 (2,500
minutes x 50 x 12 cents) Terminating
outpayments 375 (2,500 minutes x 15 cents) Total
incremental cost 1,725 Incremental
profit 25 ? Worthwhile investment
Higher termination incentivises investment
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Numerical example (4)

• In this simple example incentives to invest in
  new base stations will be positively related to
  the termination charge
• when inbound/outbound traffic ratio is skewed
  towards incoming calls (which will be the normal
  case for marginal base stations in developing
  markets).
• when inbound/outbound traffic ratio is skewed
  towards outbound calls incentives would be
  reversed.
• Numerical example of what may effect optimal
  level of investment (profit maximising welfare
  maximising)
• regulated price structure
• demand and network externality characteristics of
  incremental users on each side of market (e.g.
  incoming/outgoing call asymmetries)
• High market share, or more on-net traffic, will
  internalise the effect (profit maximising
  investment converges on welfare maximising)
• Application to roll-out of mobile platforms in
  developing markets