Friday, February 29, 2008

Terminate terminating fees: EC Interconnection report released

The WIK institute has released a paper on "The Future of IP Interconnection" written for the European Commission, by Scott Marcus, Dieter Elixmann and Kenneth Carter. I know Scott and Kenneth as some of the smartest people in the business (Dieter by association must be as well :-)

I just read the Executive Summary and it is a joy to read. I can hear the gnashing of teeth in the boardrooms of the GSM companies already and they would do right to oppose it everywhere they can. (The GSMA already has the a very low quality report on the subject) In my previous job I tried to set this on the agenda and it was interesting to see how NRA's and competition authorities haven't yet thought about the problem. This will give them much to think about .

Currently interconnection with a mobile network is an expensive affair with extremely high terminating costs. These costs in no way reflect an economic or technical reality, but they are very beneficial to the industry. They stop anybody from competing on price, by setting a limit to the price per minute. (Equal to termination costs *(1-market share)) If you price below that limit every call the customer makes will loose the telco money. This is a great way to keep prices high, competition limited to non-price items and since termination fees are set by the regulators telco's can say that it's not their fault. It's a great model from a telco point of view: No price competition, regulators that have to take the blame for setting the fee, difficult economic models that can be attacked on all sides and best of all when you stand to loose money you can try and manipulate the system to bolster your business.

The internet world works with a different model based on peering and transit agreements and no requirements to pay terminating fees. It has some very interesting effects. The price setting of one telco has no influence on the price setting of another. It also means that there is no terminating monopoly, therefore no need for regulators to step in. There is a dynamic market for transit and because of that prices continuously drop. From the point of view of a telco company this is not a very good model, since it introduces competition on price. This might lead to losses, bankruptcies and all that stuff. In the internet world you actually have to know what you're doing or you might lose your business.

The report "The Future of IP Interconnection" has the following edited for size conclusions and recommendations:

  • For reasons explained more fully in the report, it is clear that current CPNP arrangements already have a substantial negative effect on welfare, especially for the mobile network, in a number of respects:
    • They tend to lead to inefficiently high wholesale termination fees, even when the fees are regulated;
    • High wholesale mobile termination fees in effect create collusory incentives to maintain high per-minute (mobile) retail prices;
    • The high retail prices depress use of the service to levels far below those that are efficient, and may in some cases depress use below the level of efficient monopoly price for the operators as well. CPNP systems with high mobile termination fees may tend to drive faster take-up of mobile services, which can be positive in developing countries; however, with minor exceptions, further stimulus to mobile adoption for the EU27 is not needed.
    We conclude that CPNP arrangements are already problematic today.
  • We do not advocate an interconnection obligation as regards IP data traffic in general, and we do not see a need to mandate any-to-any peering; however, NRAs must be able to intervene if interconnection breaks down, especially where this is a manifestation of some form of market power.
  • Independent of the migration to NGN, we think that societal welfare would be substantially enhanced if mobile termination rates were much lower than they are today, and possibly no higher than the rates that prevail today for fixed termination rates. This could be implemented by (1) accelerating the speed with which the maximum call termination rate declines from year to year under existing CPNP arrangements, so as to reasonably quickly achieve levels much lower than those that pertain today; or (2) by requiring all fixed and mobile operators to eliminate call termination fees altogether; or (3) by permitting negotiated termination fees subject to an obligation that the fees be reciprocal (the same in both directions) between each pair of interconnected (fixed or mobile) networks.
  • What we concretely recommend instead is that the Commission mandate that fixed and mobile call termination rates “fast glide” to prespecified target levels over a predefined number of years (somewhere between three and five).
  • What we concretely recommend instead is that the Commission mandate that fixed and mobile call termination rates “fast glide” to prespecified target levels over a predefined number of years (somewhere between three and five).
One thing I partially disagree with is what they say on Net Neutrality.
"In regard to network neutrality, we do not advocate major regulatory initiatives at this time. We see merit in the use of Articles 20 and 22 of the Universal Service Directive to require ECSPs to document their practices as regards blocking access to services or degrading the quality of access to services. There may also be merit in enabling NRAs to mandate a minimum quality of service, as the Commission has proposed. NRAs and NCAs need to be prepared to address wilful deviations from network neutrality, especially where an element of economic foreclosure appears to be present; however, the existing regulatory framework for electronic communications probably provides adequate tools, and competition law provides additional mechanisms."

I agree with them that their should be no heavy handed etc. But I do think that the current regulatory framework needs to be tweaked in order to deal effectively with violations of Net Neurtrality. Currently only telco's can appeal to an NRA when something nefarious is happening on the networks. Furthermore it's unclear if the NRA has a stick to hit with, since it can only require parties to negotiate. I therefore belief that we should have a rule that gives NRA's a stick that they can use in case something bad happens and the market can't solve it itself.

All in all, great read and let's see what kind of opposition it will draw.

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