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Fixed-Mobile Interconnection

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Fixed-Mobile Interconnection

    INTERNATIONAL TELECOMMUNICATION UNION

    Document: WFMI/04 14 September 2000

     FIXED-MOBILE INTERCONNECTION Original: English

     WORKSHOP

    GENEVA ITU NEW INITIATIVES PROGRAMME 20 - 22 SEPTEMBER 2000

    BRIEFING PAPER *

    TABLE OF CONTENTS

    1 Introduction ............................................................................................................................................... 2 2 MArket power and market structure .......................................................................................................... 6 3 Interconnection rates between fixed and mobile networks ........................................................................ 9 3.1 Interconnection rates for fixed-to-mobile and mobile-to-fixed calls ................................................. 9 3.2 Interconnection rates between mobile networks .............................................................................. 10 3.3 Charges for physical links ............................................................................................................... 12 3.4 Rules on points of interconnection affecting interconnection rates ................................................. 12 3.5 Charges affecting international calls ............................................................................................... 13

    3.5.1 Settlements Regime ................................................................................................................. 13

    3.5.2 WTO Regime ........................................................................................................................... 14 4 Regulating fixed-mobile interconnection ................................................................................................ 16 4.1 Overarching principles .................................................................................................................... 16 4.2 Regulatory process .......................................................................................................................... 16 5 Interconnection costing............................................................................................................................ 20 5.1 The role of cost-related mandates .................................................................................................... 20 5.2 Cost methodologies ......................................................................................................................... 21 5.3 Benchmarking .................................................................................................................................. 22 6 The Mobile Internet: Implications for Interconnection ........................................................................... 22 6.1 One-to-one messaging ..................................................................................................................... 22 6.2 Information retrieval ........................................................................................................................ 23 7 Concluding Remarks ............................................................................................................................... 23

* This paper was written by Rohan Samarajiva and William H. Melody of the Economics of Infrastructure Programme, Delft

    University of Technology (Netherlands), in conjunction with Lara Srivastava of the ITU’s Strategies and Policy Unit (SPU). The

    authors gratefully acknowledge valuable discussions with Vineeta Shetty (Communications International), Sam Paltridge

    (OECD), Lorne Salzman (McCarthy Tétrault), Divakar Goswami (The Ohio State University) and Henrik Rood (Delft University

    of Technology), and the assistance of ITU staff including Tim Kelly and Susan Schorr. The responsibility for errors and

    omissions lies with the authors. The views expressed in this paper are those of the authors and do not reflect the views of the ITU or its membership.

    ITU Fixed-mobile Interconnection Briefing Paper 2

1 INTRODUCTION

    11 Most ITU Member States are witnessing a veritable explosion in cellular mobile services (Figure 1). The fast growth of mobile networks has led to almost half the calling opportunities in the worldwide

    telecommunication network of networks being related to mobile lines. By 2003, that number will have 2reached more than three-quarters (Figure 2). Mobile networks have made tremendous contributions to

    institutional reform in telecommunication by demonstrating the benefits of competition and innovation and

    by extending connectivity to hitherto marginalized groups such as young adults and the less creditworthy.

    Figure 1: The growth of mobile cellular services

    1993-1999 actual, with forecasts to 2003, in millions

    Mobile users added each year, MillionFixed Lines vs. Mobile Users, worldwide, Million107%250 1'400 Mobile users as a % 95%Mobile Users82%of fixed1'200 67%Fixed Lines200

    52%1'000

    150 800 38%

    600 100 27%20%400 13%50 9%6%200

    0 0

    199319951997199920012003199319951997199920012003 Source: ITU World Telecommunication Indicators Database and ITU forecasts.

Figure 2: Worldwide calling opportunities

    Among mobile and fixed-line users, in 1993, 1998 and forecast 2003

    7.5%23.4%5.0%26.7%0.3%5.0%

    Mobile-to-19.9%mobile

    52.7%Mobile-to-fixed

    25.0%25.0%19.9%20031998199389.7%

    Source: ITU World Telecommunication Indicators Database, ITU forecasts.

    2. Revenues from mobile services are predicted to overtake revenues from fixed-line services in 2004, 3and have already overtaken fixed-line revenues in leading mobile markets such as Finland (Figure 3). However, mobile calls, being shorter in duration than fixed-line calls, generally amount to a smaller 4proportion of total traffic volumes, but are growing at a faster pace than fixed-line volumes (Figure 3).

    ITU Fixed-mobile Interconnection Briefing Paper 3

    Figure 3: Mobile and fixed-line networks in Finland

    By revenue, in US$ million, 1994-99, and by outgoing call volumes, 1995-99

    Outgoing calls, million minutes per yearRevenue, US$m

    1'60018'0001'40016'000Fixed-line1'200Mobile14'0001'00012'000

    10'000800

    8'000600MobileFixed-line6'0004004'0002002'000

    00

    19951996199719981999199419951996199719981999 Source: Statistics Finland, Arno Wirzenius, Fixed Mobile Interconnection: The Finnish Case‖ at http://www.itu.int/interconnect

    3. As Box 2 illustrates, some of the fastest growth rates in mobile services are found in the developing

    Member States, partly because of difficulties in meeting demand in fixed-line services but also because

    mobile meets a real need.

    4. The significance of interconnection in general, and fixed-mobile interconnection in particular, in a

    Member State (Sri Lanka) that has achieved competition-driven fast growth in fixed and mobile connectivity

    is shown in Figure 4. Within a short period of four years, the proportion of intra-network calling

    opportunities that do not require interconnection has fallen from 60 per cent to just above 40 per cent.

    Despite a compound annual growth rate (CAGR) of almost 40 per cent in the fixed-line network in 1995-99,

    the proportion of calling opportunities that require fixed-mobile interconnection had increased almost to the

    level of intra-network calling opportunities by 1999.

    Figure 4: Calling opportunities and interconnection in Sri Lanka, 1996-1999

    Calling opportunities in percentages, and connections in thousands

    Requiring Sri Lanka connections, in thousands100%mobile-to-mobile3.6%5.7%Interconnection700Requiring 90%12.3%fixed-to-fixedInterconnection80%600

    IncumbentRequiring 70%fixed/mobile500Interconnection60%

    40050%

    40%300Not requiringInterconnection30%Four mobile operators62.1%20041.6%20%Two fixed-line competitors10010%

    0%019961997199819991996199719981999

     Source: Authors; Data from Telecommunications Regulatory Commission of Sri Lanka

    ITU Fixed-mobile Interconnection Briefing Paper 4

    Box 1: Calling-Party-Pays (CPP) vs. Receiver-Party-Pays (RPP)

    The Calling-Party-Pays (CPP) regime is the most common pricing structure for mobile communications, notably in

    Europe and in other markets where the GSM standard is used. Exceptions include the United States and Canada.

    Under CPP, the person initiating the call pays the entire cost of the call, whether it originates from a mobile or from a

    fixed-line telephone. Under the Receiving Party Pays (RPP) regime, the recipient of the mobile call directly contributes

    to the cost of each call. For the most part, the RPP system exists in countries with unmetered local calls on the fixed

    network. The main reason for the adoption of RPP in these countries was that it provided a simple transition from the

    billing systems of the traditional fixed network. This, however, was not the case in countries with metered local calls,

    where CPP could be more easily introduced. Once a decision was made whether to adopt CPP and RPP, other aspects

    were considered. For instance, in CPP countries, different numbering schemes are generally used for mobile networks

    in order to alert the fixed user that they will be paying a premium to contact a mobile number. In RPP countries, such

    as Canada and the United States, mobilephone numbers and fixed-line phone numbers have similar prefixes there is

    no need to make a distinction since there is no price differential. However, this makes it difficult to move to CPP at a

    later date.

    In countries where RPP is predominant, there is much debate about the suitability of a transition to CPP. According to

    the OECD, although RPP markets may outperform CPP markets in the early years of mobile communications, recent

    figures demonstrate that CPP countries have much higher subscriber growth than RPP countries. CPP has also

    stimulated the development of pre-paid schemes for mobile. Proponents of the CPP system argue that RPP discourages

    mobile use. Subscribers in RPP countries are much more likely to turn their phone off, or refuse to answer calls, in

    order to avoid paying for them. Calls to mobilephones are increasing dramatically in CPP countries, where mobile users

    can receive calls free of charge on their home network.

    Although a transition to CPP may increase mobile penetration in some RPP countries, there are many regulatory

    barriers to its introduction. The main obstacles revolve around user notification and billing. Since fixed subscribers

    were not paying a premium for mobile calls, some method would have to be applied nationwide in order to advise them

    that the charge for calling a mobilephone will be higher. Furthermore, arrangements may have to be made in order to

    bill and collect from the called (mobile) party. Regulators must ensure that such arrangements are entered into without

    creating any undue barriers to entry or stifling competition.

    Mexico introduced CPP on 16 April 1999. One of the incumbent’s arguments against the introduction of the regime

    was that the fixed-to-mobile traffic would decrease as a consequence of the higher fixed-to-mobile charge. However, as

    can be seen from the charts below, there was a significant increase in incoming mobile traffic (+28.7 per cent), despite

    the fact that the effective fixed-to-mobile tariff went up from US$ 0.115 to US$ 0.403 per minute (i.e. 250 per cent). Minutes of use per subscriber,Before CPP Mar-99Mexico, fixed & mobile users added each year, 000sBox Figure 1: The impact of CPP introduction in Mexico before and after CPPAfter CPP Dec-994'50094894'000Main lines833'50073Mobile subscribers3'000CPP introduced

    2'500

    2'000Pre-paid introduced

    1'500

    1'000

    500

    0Outgoing mobile trafficIncoming mobile traffic199119921993199419951996199719981999

    Source: Mexico Case Study available at http://www.itu.int/osg/sec/spu/ni/fmi/case_studies/index.html, OECD, Mobile Cellular Pricing and Trends, DSTI/ICCP/TISP(99)11/FINAL, April 2000.

    55. The mobile sector has been extremely innovative, introducing new service features at a rapid pace.

    Generally subject to lighter regulation than fixed services, including exemption from retail-price regulation

    in most countries, the mobile sector has recently attracted regulatory attention because of massive mergers 6and acquisitions spanning multiple markets, high (in many cases, non-transparent) termination and roaming 78charges in some countries and disputes over the division of fixed-to-mobile call revenues. The increased

    regulatory attention should not take away from the achievements of the mobile sector so far and the utility of

    ITU Fixed-mobile Interconnection Briefing Paper 5

    the competition-centred regulatory policies that were pioneered in this sector. The challenge is to develop

    appropriate solutions that will advance the sector and increase benefits to the broad user population, while

    preserving the achievements of the first phase of development.

    6. In the early years, policies relating to mobile services were premised on the notion of mobile as a 9luxury service, peripheral to the fixed-line service. This is no longer the case. Mobile connections are

    overtaking fixed connections not only in high-income Member States, but also in low-income Member States

    such as Cambodia and Uganda (Box 2, Table 1).

    Table 1. Mobile overtaking fixed

    Mobile Fixed Line subscribers Subscribers Date mobile in 1999 in 1999 Mobile Fixed Total overtook fixed (000s) (000s) Density Density Density

    Cambodia 1993 89 28 0.81 0.25 1.07

    Finland Dec-98 3445 2856 66.7 56.29 121.99

    Paraguay May-99 436 297 8.13 5.54 13.67

    Uganda Jul-99 87 59 0.4 0.27 0.68

    Venezuela Aug-99 3400 2586 14.34 10.91 25.25

    Italy Sep-99 30296 26500 52.83 46.21 99.05

    Portugal Sep-99 4671 4230 46.81 42.39 89.2

    Cote d'Ivoire Oct-99 257 219 1.77 1.51 3.28

    Korea (Rep.) Nov-99 23443 21250 50.44 45.72 96.16 Note: Mobile has overtaken fixed-lines in a number of other economies during 2000 including France, Hong Kong SAR, Japan and Netherlands. Source: ITU World Telecommunication Indicators Database.

7. Potential users who were excluded from full access to the fixed networks because they lacked

    permanent addresses or did not meet credit requirements have gained access to mobile services through

    prepaid card schemes, notably in countries using the Calling Party Pays (CPP) pricing structure, under which

    mobile users generally receive incoming calls free of charge (Box 1).

    8. Leading information-communication technology providers duel over whose systems are better 10positioned to reach the Internet through mobile handsets. It is increasingly becoming clear that mobile

    services can no longer be considered merely as a luxury. Implicitly, if not explicitly, many Member States

    are beginning to develop policies that seek to recognize mobile networks as integral components of their

    national telecommunication systems, equal in importance to the older fixed networks.

    9. This paper is intended to provide a useful background for a discussion of regulatory questions

    pertaining to fixed-mobile interconnection. These issues include:

    ? The role played by market structure and competition in the setting of mobile-to-fixed and fixed-to-

    mobile interconnection rates;

    ? The rationales behind the wide degree of variation for mobile termination rates. For instance, in some

    Receiving Party Pays (RPP) Member States, mobile termination rates are zero (in Singapore, Sri Lanka),

    while in Member States employing a Calling Party Pays regime, rates can go as high as US$ 0.293 per

    minute (in Antigua and Barbuda), or US$ 0.30 (in Switzerland);

    ? The asymmetry of prices for fixed-to-mobile and mobile-to-fixed calls, caused partly by asymmetrical

    interconnection rates;

    ? The effects of RPP (Receiving Party Pays) and CPP (Calling Party Pays) on interconnection rates;

    ? Difficulties experienced in some countries in obtaining technical interconnection, including quality-of-

    service problems;

    ? Disputes regarding charges for the provision of interconnection links;

    ITU Fixed-mobile Interconnection Briefing Paper 6

    ? Intervention by National Regulatory Authorities (NRAs) in fixed-mobile interconnection disputes,

    including the timing and form of intervention and the pros and cons of allowing/encouraging joint

    participation by mobile operators in negotiations/regulatory proceedings; ? The lack of transparency in pricing for fixed-to-mobile and mobile-to-fixed calls; ? The design of appropriate interconnection arrangements for Short Messaging Services (SMS) and GPRS

    and "always on" services and, more generally, the emerging mobile Internet. 2 MARKET POWER AND MARKET STRUCTURE

    10. Competition is at the core of current telecommunication policy, especially policy pertaining to

    mobile networks that were introduced within the past twenty years. More than 99 per cent of mobile users across the globe have a choice of service providers. The basic premise is that competition encourages

    innovation, increases efficiency, gives choice to customers, reduces prices and increases quality of service commensurate with price. Dilution, if not elimination, of market power is at the core of contemporary

    regulatory practice.

    11. The first step of regulatory analysis is to examine the market power and market structures affecting fixed-mobile interconnection. Technical interconnection between a fixed network and a mobile network is necessary for completion of a fixed customer's call to a mobile customer, and vice versa. If the two networks

    are disproportionate in size, as is the case when a new competitor enters a market, the larger/incumbent network operator has greater negotiating power and may refuse interconnection or impose unfavourable

    terms. Generally, regulators constrain the use of this power, mandating interconnection by incumbents or 11operators with significant market power (SMP). Where such a power asymmetry does not exist, i.e., when

    both networks lack SMP, current regulatory practice, and in some cases the governing legislation, tends to leave interconnection to negotiation between the operators. Generally, interconnection is not mandatory for networks without SMP and is not subject to regulatory intervention. Box 2 shows how the negotiating

    relationship changes in the case of a mobile network overtaking fixed network in connectivity.

    12. Resources of both the fixed network and the mobile network are utilized for the completion of a

    fixed-to-mobile or a mobile-to-fixed call. Therefore, both must be compensated. The form of compensation can range from sender-keeps-all (SKA) to mutual measured compensation, generally on a per-minute basis. The SKA method is preferred when traffic is more or less equal in both directions, the transaction costs are high relative to the compensation, measurement mechanisms are unavailable and/or where a simple solution is sought. In the case of mutual compensation, the payments can be symmetrical or asymmetrical.

    Symmetrical payments are generally associated with fixed-fixed interconnection regimes and the

    asymmetrical ones with fixed-mobile regimes (with some significant exceptions).

    13. Current regulatory practice favours commercial negotiation between the operators, with the regulator intervening as a last resort. Negotiation in the pure form would include the ability for either party to refuse interconnection if the other party's offer is unacceptable. Where public policy deems one operator to have SMP, that operator is generally prevented from refusing interconnection and is obliged to offer cost-oriented termination rates. The operator without SMP is usually not subject to any such obligations. An unintended 12consequence of this, however, is that the less dominant operator can gain significant negotiating power.

    14. The patently unfair early terms of interconnection imposed on new-entrant mobile operators in 1314China and Sri Lanka by an incumbent abetted or unrestrained by a regulator, demonstrate the power of

    unconstrained incumbents and the vulnerability of fledgling mobile operators (Box 3). The high termination fees imposed by many European mobile operators demonstrate the effects of regulating interconnection by

    incumbents, thereby constraining their negotiating ability, while at the same time not imposing any

    requirements on the other operators at the negotiating table.

    ITU Fixed-mobile Interconnection Briefing Paper 7

In most competitive markets, interconnection rates are negotiated. Because the relative positions of the players can

    change over time, the process can yield different outcomes at different stages, as shown in the case of Uganda. Mobile

    has gone from being a minority of the mix to a majority very quickly (see left chart in Box Figure 3.1). Uganda licensed

    a ―second‖ full-service operatorMTN Uganda, a joint venture between MTN of South Africa and Telia of Sweden

    in April 1998 and within 18 months of starting operations, it had already surpassed the incumbent fixed-line operator, Box 2: The changing balance of power in UgandaUTL, in number of subscribers. As of the end of 1999, there were some 87’000 mobile users in Uganda compared with

    just 59’000 fixed users. With UTL poised to enter the mobile market and a third operator, Celtel, newly revitalised, the

    mobile market seems likely to grow even faster.

    While UTL was still the dominant operator, it charged relatively high prices for calls terminated on its fixed network.

    Now, with a significant and rising proportion of UTL-billed calls going to Celtel or MTN mobile subscribers, UTL is

    seeking lower interconnection prices. The original negotiation between Celtel and UTL set interconnect rates at

    500 Ush (USD 0.33) per minute for termination of calls on Celtel’s network (mobile) and 300 Ush (USD 0.2) per

    minute for terminating on UTL’s network (fixed). These high rates contributed to Celtel’s early difficulties in

    popularising mobile services.

    MTN’s entry into the market changed the situation radically. It offered UTL a termination rate for calls on the mobile

    network of just 350 Ush (USD 0.23) per minute and agreed to pay UTL 150 Ush (USD 0.1) for calls terminating on the

    fixed network. With these low rates in place, MTN was able to offer considerably reduced prices to consumers. MTN’s

    initial efforts to negotiate a low rate of interconnect with Celtel for mobile to mobile calls was rejected and a rate of Ush

    210 (USD 0.14) per minute was established. However, this was subsequently reduced and Celtel is now negotiating a

    lower interconnect rate with UTL too as part of its efforts to relaunch its service. As from 1 March 2000, Celtel’s new

    interconnect rates are 160 Ush (USD 0.107) per minute for calls to and from the fixed network.

Box Figure 2: Mobile overtakes fixed-lines in Uganda

    Ugandan calling opportunities, Dec. 99Subscribers to communication services, Uganda17.0%21.7%100'000Fixed-to-fixedMobile80'000

    Mobile-to-60'000Fixed line voicemobile with interconnect12.8%24.2%40'000

    Mobile-to-Internetfixed20'000

    24.2%0

    199419951996199719981999

    Source: ITU, Uganda Internet Case Study, available at: http://www.itu.int/ti/casestudies/uganda/uganda.htm.

15. Interconnection involves two sets of opportunities. First, an operator seeks to provide increased

    calling opportunities to its customers, thereby increasing the utility of the service it provides as well as its

    revenue potential. Interconnection to a larger network dramatically increases calling opportunities for the

    customers of a new network. In addition, the presence of many key social actors such as government

    agencies, emergency services, and commercial organizations on the incumbent's network makes those calling

    opportunities more valuable. Second, the operator seeks to increase the number of parties from whom its

    customers may receive calls, or to increase call-receiving opportunities.

    16. True competition does not exist in either of the markets for these opportunities. The nature of human

    communication is such that one does not want opportunities to call just anyone, or opportunities to receive

    calls from just anyone. One wishes to call, or receive calls from, specific individuals or organizations. The

    only way there could be a competitive market in either of these opportunities is if each individual and

    organization were to become a customer of multiple competing networks. A given subscriber would thus

    have the possibility of choosing among different networks to originate a call, based on price and other factors,

    and would have the same possibility for the termination of the call. In the current environment, there is a

    ITU Fixed-mobile Interconnection Briefing Paper 8

    direct relationship between the subscriber and the operator in the case of call origination. Users choose an 15operator on the basis of price and other information. However, under current conditions, the subscriber

    originating a call does not have a direct relationship with the call-terminating network and is unable to receive, let alone respond to, price and quality signals from the call-termination market. The following discussion, therefore, focuses on call termination, which is the more problematic issue. Box 3: The power of state-owned incumbents

    The Indian case provides a prime example of one of the main issues facing developing countries on the path to liberalization: the power of state-owned incumbents. Until the 1980s, the Department of Posts and Telegraphs was given the mandate of both regulating and providing telecommunications services in India. In 1985, it was split up into the Department of Telecommunications (DoT) and the Department of Posts. The DoT was thus established as state operator, licensor and regulator. Although a regulatory agency, TRAI, was created in TRAI, it was only in late 1999 than the government made a serious effort to separate the incumbent service provider from the DoT, via the creation of the Department of Telecom Services (DTS). In theory, the DTS is responsible for offering telecommunications services whereas the DoT is responsible for licensing and policy-making. However, there is still significant overlap between the activities of both Departments. They are effectively one and the same organization. In fact, many officials still hold posts in both the DTS and the DoT simultaneously.

    The effect of this de facto regulatory structure is an incumbent with increased negotiating power. The close

    organizational relationship between the traditional operator and the policy-maker means that new entrants find it difficult to obtain fair treatment, notably in the case of interconnection. For instance, when mobile operators were first licensed in 1995, the requirement that all inter-circle mobile traffic had to pass through the incumbent’s network was

    written into their agreements. Furthermore, under the license, the DoT/DTS was not required to make any payments to mobile operators for calls terminating on the mobile network. Thus, the incumbent operator kept all revenues from fixed to mobile calls, and still does, under a sender-keeps-all arrangement. Mobile operators have since appealed to the national regulator, the TRAI, but this regime has yet to be altered.

    The government plans to move ahead with the privatisation of DTS as India Telecom, and with the liberalization of the long-distance market. Although this may be a slow process, it is hoped that it will serve to reduce the current overlap between the DoT and the DTS, as well as provide more suitable interconnection environment for mobile operators.

For more detail, see the India Case Study at http://www.itu.int/osg/sec/spu/ni/fmi/case_studies/indiaFMI_final.doc

    17. If subscribers had the choice of terminating network, a network's ability to obtain quality, low-cost termination services would be a factor in attracting and retaining customers. In reality, a caller seeks to 16terminate his/her call at a specific address (even though the called party may have multiple addresses). A

    single operator controls access to that address, thereby excluding the possibility of competition in 17termination services. Because every operator controls access to a set of addresses (except a new entrant at

    the moment of entry), the issue then becomes one of bilateral negotiation, rather than competition. 18. Access terms for the purposes of termination can be decided on the basis of reciprocity, as part of a bundle of rights that include origination and other services. In some cases, access can be gained through the use of refile through a different interconnected network. In situations where one network with SMP is mandated to interconnect, the bilateral negotiation may yield an outcome that favours the network without SMP. Where the network with SMP is able to pass on the termination costs to its customers (as in a CPP regime) and/or collect a retention/administrative fee, it may have less incentive to negotiate a lower termination fee. In sum, the relation of bilateral monopoly that characterizes interconnection tends to yield power-based outcomes: favourable to the larger network with SMP when there is no regulatory mandate to interconnect; and unfavourable to the network with SMP when interconnection is mandated. The latter outcome may be further exacerbated by the CPP regime, as well as by cross-ownership between fixed and mobile operators.

    19. Interconnection involves bilateral negotiation between operators, rather than between the calling subscriber and the called subscriber. Yet the actual calling parties are directly affected by the outcomes of interconnection, especially in the case of CPP where the calling party pays a non-transparent charge that has been set directly or indirectly by an operator with whom he/she does not have a relationship. In conditions of effective competition (for customers affiliating with operators for purposes of originating and receiving calls) and transparency of tariffs, the operators may be expected to fairly represent their customers. But these conditions do not exist, especially in relation to call termination. For example, mobile operators (who generally face more competition) may be more likely to negotiate lower termination rates for mobile-to-fixed

    ITU Fixed-mobile Interconnection Briefing Paper 9

    calls, than fixed operators (who generally face less competition). In addition, a fixed operator may have the incentive to keep fixed-to-mobile charges high to enable its lightly regulated mobile affiliate to offer lower prices for outgoing calls. Both mobile and fixed operators may have the incentive to cross-subsidize other parts of their businesses from interconnection revenues.

    3 INTERCONNECTION RATES BETWEEN FIXED AND MOBILE NETWORKS 20. The primary objective of interconnection is the enabling of seamless communication between any customer of a network and any customer of another network. The increase of calling opportunities maximizes network externalities. Ideal interconnection arrangements will be compatible with competition policy and will provide effective incentives for optimal use of existing networks and for investment in new network capacity.

    21. Unlike in the case of fixed-to-fixed interconnection, where use of unbundled network elements is generally involved, interconnection between fixed and mobile networks generally occurs at the interface of the networks. The rates usually take the form of minute-based termination fees (fixed-to-mobile and mobile-to-fixed) and assorted charges connected with the physical links that connect the networks (e.g., leased line and collocation charges). In a few cases such as Canada, the charges are based on capacity of links (see Box 5). This mode may become more important with the proliferation of IP-based networks. Where CPP prevails, the fixed-to-mobile termination fee is collected from the call-originating customer by the fixed operator (along with an administrative fee that is retained) and transmitted to the mobile operator. One exception to this system is in Finland, where a unique billing arrangement exists between fixed and mobile operators, one that does not require specific interconnect rates (Box 4).

    3.1 Interconnection rates for fixed-to-mobile and mobile-to-fixed calls 22. Figures 5 provides a comprehensive summary of fixed-to-mobile and mobile-to-fixed interconnect rates in Europe. For fixed-to-mobile calls, the average is US$ 0.21 per minute, with Deutsche Telekom and Swisscom at the high end (0.24 and 0.30 respectively). Norway and the United Kingdom have the lowest interconnect rates. The United Kingdom has recently carried out a detailed investigation into high 18termination rates and this may account for its position on the interconnect scorecard. The ratios of fixed-to-

    mobile and local mobile-to-fixed rates range from a low 8.7 in Norway to a high of 34 in France and 30 in Germany.

    23. Figure 6 summarizes the latest data from the 2000 ITU survey for CPP and RPP countries. The average interconnect charge in CPP countries for fixed-to-mobile calls is 13.8 US cents per minute and for mobile-to-fixed calls is 5.9 US cents. Of the CPP countries for which fixed-to-mobile rates are available, Antigua and Barbuda has the highest at 29.3 US cents while Costa Rica has the lowest charge at 1.7 US cents. The global average fixed-to-mobile interconnect rates for the selected CPP countries (13.8 US cents per minute), is lower than the figure for European countries (21.0 US cents). The average for the RPP countries in the set is just 0.056 US cents per minute.

    24. Examination of the available data for industrialized countries (i.e. OECD member states) shows a range of 1 to 4 for fixed-to-mobile and mobile-to-fixed charge ratios in CPP countries. Hong Kong SAR, Canada and the United States have a ratio of 1, which contrasts with the other RPP countries where the rates are not symmetrical. This suggests cases where the fixed operators negotiated strongly. Singapore and Sri Lanka have fixed-to-mobile rates of zero.

    25. In some countries, such as France and Portugal, mobile operators unilaterally set the mobile termination rates that are paid by fixed customers. This could lead to different fixed-to-mobile call rates to consumers, depending on different terminating networks. Where the fixed operator is allowed to set the price, under regulatory oversight, it is likely that the rates for calls from each mobile network will be identical, leading to simpler tariffs.

    26. Among industrialised CPP countries, local mobile-to-fixed termination rates in 2000 range from a low of 0.5 US cents (United Kingdom, BT) to a high of 2 US cents per minute (Spain, Telefonica). In non-industrialised CPP countries, there is a wide range from Costa Rica at 1.7 US cents to Antigua and Barbuda at 29.3 US cents per minute. The average is considerably higher than that for the higher-income countries.

    ITU Fixed-mobile Interconnection Briefing Paper 10

    All CPP countries in this set have fixed-to-mobile rates that are higher than or equal to mobile-to-fixed rates,

    as in OECD countries.

    Box 4: CPP does not always involve mobile termination rates: Peculiarities of the Finnish Case

    Finland is home to a unique form of mobile cellular pricing in the Calling-Party-Pays (CPP) world. Interconnection

    arrangements differ greatly from other European countries. The main differences are the following

    1. Local fixed operators act as invoicing agents for long distance, international and mobile operators. Thus, mobile

    operators charge the fixed user for calls to mobile via local fixed operators;

    2. End-to-end retail call charges are not in use in most interconnection cases. Retail calls apply to call segments and

    therefore consumers usually pay two separate charges for each call;

    3. In most cases, interconnection access and termination rates are not used. Rather, retail charges are used as the basis

    for revenue-sharing between operators.

    For fixed-to-mobile calls, mobile operators set the retail charges for their own call segments, and forward the charging

    information to the local fixed operators on a call-by-call basis. The local operator then invoices the subscriber and

    collects the charge. The local operator does not have the power to amend the charge set by the other operator. It only

    provides an invoicing service, for which it collects an invoicing fee (between 4 and 10 per cent of the invoiced amount).

    The calling party pays a separate local network tariff (from the caller to the local point of interconnection) to the local

    fixed operator and a separate mobile call charge to the mobile operator. This is different from most other countries,

    where the local fixed operator sets and bills the tariff for the entire call and pays a mobile termination charge (MTC) to

    the mobile operator.

    For mobile-to-fixed calls, the calling party pays only the mobile call charge. The mobile operators then pays a local

    fixed termination charge to the local fixed operators. This charge covers the segment from the destination local point of

    interconnect to the called subscriber.

    One cannot conclude with certainty that the Finnish system for revenue-sharing between fixed and mobile operators has

    been pivotal to the phenomenal growth of mobile services in that country. What is clear, however, is that the

    interconnection regime in Finland has meant transparency in tariff setting, which in turn has contributed to increased

    usage and lower retail charges. Box Figure 4: Fixed and Mobile Penetration in Finland

    Per 100 inhabitants and per 100 households

    Household penetration, in %Penetration rate, per 100 inhabitants

    10080

    70Fixed-line80Fixed-line60

    5060

    40

    4030

    2020Mobile10Mobile

    00

    9091929394959697989990919293949596979899

    For more detail, see the Finland Case Study at http://www.itu.int/osg/sec/spu/ni/fmi/case_studies/finlandFMI_final.doc

3.2 Interconnection rates between mobile networks

    27. Calling opportunities among mobile networks are rapidly increasing. In Finland, for instance, mobile

    to mobile calling opportunities accounted for more than 27.4 per cent of all domestic calling opportunities in 19June 1999. Mobile-to-mobile interconnection rates are generally subject to commercial negotiation between operators and have not generally formed the basis for any regulatory intervention. Regulators have

    been more concerned with fixed-to-mobile interconnection rates, because typically, mobile-to-mobile

    charges have tended to be significantly lower. In many cases, mobile subscribers pay less to reach other

    mobile subscribers than to reach a fixed subscriber.

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