Time to terminate termination charges?

See your correspondent and avoid termination charges with the Skype Cinephone!
Avoid termination charges with the Skype Cinematophone!

Today’s post is by Alexia Gonzalez-Fanfalone, Sam Paltridge and Rudolf van der Berg of the OECD’s Science, Technology and Industry Directorate

It used to cost well over $2 a minute to call between OECD countries. The breakup of telecoms monopolies and the introduction of competition means callers now pay as little as $0.01 per minute, or may even have unlimited calls as part of a monthly bundle. Outside the OECD countries, the price has been dropping too, accompanied by a huge increase in traffic. Calls from the United States to India increased eight fold over 2003-2011 for example. But not everybody has benefited. Despite a massive increase in the number of telephones in Africa, international calls to that continent from the United States remained stagnant during this same period.

A new OECD report International Traffic Termination looks at one aspect of why some consumers are losing out: the termination charges imposed on calls coming into a country. The report finds empirical evidence that imposing mandatory higher charges for the completion (termination) of international inbound traffic suppresses demand. Moreover, governments that impose higher termination charges do not see their revenues increase proportionately. Traffic into Pakistan for example has plummeted over the past two years following the creation of a cartel for international telephone calls.

The number of telephone calls from the United States to Asia has dramatically increased in recent years compared with those to the rest of the world. While the spectacular rise in traffic is undoubtedly associated with the growing importance of Asian economies, other factors are at work. One is that much of this traffic reflects tremendous growth in calls between the United States and India. Indeed, people in the United States now make more calls to India than to Western Europe, taking advantage of the growth of mobile telephone penetration. Traffic between the United States and Europe, both of which have high broadband availability, has shifted to substitutable services over the Internet (e.g. VoIP). India still has a low broadband penetration, meaning people in the United States call mobile telephones.

Outgoing calls

High mobile penetration and low broadband availability are, however, only part of the story. Full liberalisation of communication markets plays a role. Africa, like India, has experienced remarkable growth in the number of mobile subscribers but still has low broadband penetration. Yet calls to Africa have not increased in the same manner as for India. International inbound traffic to India (measured by minutes or calls) was less than Africa’s in 2003 but grew to 10 times higher by 2011. At the same time, the rates to call India decreased tenfold. The difference lies in whether governments let the market set the rates for incoming calls or impose a single rate through an official cartel.

Between 2003 and 2011, for example, the termination charges paid by telecommunication operators carrying traffic from the United States to the rest of the world halved on a per minute basis (from around $0.09 to $0.04). For the highly competitive India market, rates dropped from more than $0.14 to less than $0.02 over the same period. In Africa on average, rates increased, suppressing demand for calls to people on that continent.

Fig 2

A growing number of African countries have introduced a government mandated standard termination surcharge for incoming international traffic even though they have liberalised their domestic communication markets. For example, in 2010 Ghana, which has one of the most competitive domestic telecommunications markets in Africa, set a surcharge that raised the international termination rate by 46%-73% for fixed and mobile services respectively from an average of $0.11-0.13 to $0.19. Authorities in other countries, especially in neighbouring ones, take reciprocal action once someone makes the first move, although independent competition authorities see the perils of such approaches, and in Pakistan, for example, have successfully challenged their introduction.

Some argue that raising international termination rates increases the amount of capital available to invest in infrastructure or simply contributes to general government revenue. The OECD report, however, argues otherwise. When Pakistan raised its rates from $0.02 to $0.088 in 2012, traffic fell from more than 2 billion minutes per month to 500 million according to government officials. There was no increase in revenue but rather a massive loss in consumer welfare.

This is partly due to suppressed demand in foreign countries and partly to various players bypassing the system. The price difference between international and domestic termination rates becomes so large that a “grey” market is created to bypass the official rate by terminating traffic at local levels. This criminalises an activity that in a liberalised market would be viewed as a routine practice, and creates costs in monitoring traffic and in law enforcement.

Communication network operators are also disadvantaged. Between 2009-2011, African countries that did not raise termination rates received 36% more termination revenue per line than those that did. Where rates were raised, not only were there fewer calls, they were shorter.

The argument that the burden is progressive since it falls upon those with a greater ability to pay is also false. Customers with the financial and technical means may use broadband and VoIP to bypass the system. The standard rates only come into effect when calls terminate on a public network where the end user may be unable to afford an Internet connection. As a result the users most likely to be affected, are the diaspora calling relatives and friends in such countries. In many cases, therefore, the people most affected at both ends of the call are likely to be those least able to afford increased prices. Unfortunately, the number of countries that have raised termination rates in recent years, by eliminating competition, is expanding.

Two other reports were released by the OECD this week on communication market developments. Access network speed tests reviews the approaches being taken in OECD countries to measure broadband performance by reviewing information on official speed tests. The development of fixed broadband networks examines the development of fixed networks and their ability to support the Internet economy.

Useful links

Internet traffic exchange: 2 billion users and it’s done on a handshake

Developments in mobile termination rates

International cables, gateways, backhaul and IXPs

Oh, Joybubbles, how could you?

You ain't callin me a phreak, are ye?

If you invented a mechanical defecating duck, you’d expect to make a fortune, wouldn’t you? But not if somebody stole your idea and sent a raft of imitations waddling and thingmying all over market stalls the length and breadth of the country.

So then you’d sue the copyducks for violating your intellectual property, only for some snooty judge to decide that the work of mere craftsmen didn’t merit patent protection.

This edifying anecdote from 18th century Britain is one of many in Piracy: The Intellectual Property Wars from Gutenberg to Gates by Adrian Johns.

Johns’ argument that “piracy has been an engine of social, technological, and intellectual innovations as often as it has been their adversary” is discussed in this post, but here ‘d like to mention another of Johns’ characters, Joe Engressia.

I’ve never seen Joe mentioned on those lists of people with disabilities who have achieved great things, but this blind boy of Virginia discovered at the age of seven how to make free phone calls and wreak havoc in the telecoms network by whistling into the mouthpiece at exactly the right frequency (2600 Hz if you want to try it at home).

He later changed his name to Joybubbles, but before that he created a group of phreaks like himself, and hacking was born. Joybubbles’ brand of phreaking has now disappeared, in part because phreakable exchanges were replaced and also because the FBI and phone companies were threatening to send the phreakers to jail.

There used to be lots of other ways of getting cheap phone calls. Here in Paris for instance, I can remember seeing long lines of people queuing to use certain public phones that were known to have defective timers, and some people were skilful at hitting the coin drop with a five-franc coin on a string.

The OECD played a role in putting an end to all this, arguing over the years that by breaking up the big telecoms monopolies and allowing different service providers to compete, prices would fall and technological progress would be encouraged.    

The snappily-named OECD Statement of the Benefits of Telecommunication Infrastructure Competition of 1994 represented a milestone, in that for the first time OECD governments agreed on the benefits of opening the business up to competition, even though the majority still had monopolies.

In the coming years the sector was rapidly transformed, with rapid growth in mobile telephony, the Internet, and broadband, in large part due to the lower prices for consumers predicted by the OECD.

You can read more about it in a special chapter celebrating the OECD’s 50th anniversary in this year’s Science, Technology and Industry Outlook, one of several we’ll be including in our flagship publications this year, including a more complete account in the forthcoming Communications Outlook.

(Of course we could have got cheaper calls by substituting capital for labour, like John T. Draper who  discovered that the free whistle in Cap’n Crunch cereals produced the magic 2600 Hz frequency too.)

Useful links

OECD work on information and communications policy

OECD study on Piracy of Digital Content

OECD study on the Economic Impact of Counterfeiting and Piracy