What if interconnect rates were simply set at zero?
This question occurred to me while asking a panel of luminaries whether cost-based interconnect regulations would not encourage operators to keep the costs they report high, instead of competing by finding ways to reduce them. My instinct says the market should set interconnect rates, but then I wondered, if you're going to set them by regulation, why not set them at zero?
The complexity of setting interconnect rates, whether by voluntary negotiation or regulatory fiat, is a result of the asymmetrical flow of telephone traffic across networks. Few calls originating on large networks terminate on small networks, so large operators can offer their customers a low on-net call rate, while encouraging competitors' customers to switch if they want the same low prices. By contrast, calls from smaller networks most often end up on the networks of larger operators. Especially in emerging markets, the relationship is further complicated (but not reversed) by the fact that small, new entrants often cater to the lower end of the market, where many customers receive more calls than they place.
The obvious justification for interconnection fees is that there is a cost to carrying incoming traffic on a network, and that cost has to be recovered in some way. The two incumbents, MTN and Vodacom, jointly hiked their interconnect rates from 20c to 123c between 1999 and 2001 - just when Cell C was given a licence to compete. With straight faces, they denied collusion and anti-competitive behaviour.
Either way, the hike suggests that cost-recovery was the last thing on their minds, and 20c would be a fair cost-recovery rate for interconnect.
In general, the fact is that large operators will resist any proposal to lower interconnect rates, let alone set them at zero. A higher interconnect rate benefits them at the cost of smaller operators.
As much as I oppose regulation in principle, the telecommunications sector is a highly regulated cartel, established by government decree. That the regulator should set interconnect rates in the interest of consumer protection and promoting competition seems unavoidable. It does not exist to protect cartel members, after all.
For this reason, the notion that operators would have to agree to interconnect regulations is a red herring. If it were up to them, interconnect fees would remain exorbitant in order to stifle upstart competition and fleece consumers who have little choice. (In fact, if it were up to them, they probably wouldn't interconnect at all, in the hope of establishing a natural monopoly.)
The two incumbents, MTN and Vodacom, jointly hiked their interconnect rates from 20c to 123c between 1999 and 2001 - just when Cell C was given a licence to compete. With straight faces, they denied collusion and anti-competitive behaviour.
Ivo Vegter, ITWeb contributor
The regulator fears legal challenges from operators should it move boldly on interconnect rates, but the likelihood of newspaper headlines that shout, "MTN, Vodacom sue for right to gouge you," should give the operators pause, and give the regulator confidence.
A change to interconnect rates would involve a major accounting adjustment, since interconnect revenue is at present part of a company's reported revenue. However, the adjustment will be painful to accountants no matter whether the rate is merely low, or zero.
Cell C and Neotel - late entrants to the market with smaller customer bases - have long argued for lower interconnect rates. The former offers 6c in under-serviced areas, and has said it can make a profit even at that meagre rate.
In the US, mobile users generally pay to receive calls. The price for call termination is thus directly visible to consumers. This not only promotes transparency, but also permits customers to use this price in their purchasing decision. If they receive a lot of calls, they'll want to join a network that charges little for this. If they place a lot of calls, they'll want the opposite. Packages can be tailored to specific customer needs, and operators compete for different customer segments. In this way, the termination price, instead of being fixed and hidden from consumers, becomes a competitive factor between various operators.
This may well be an interesting and fair tariff regime, but consumers who have never heard of paying to receive calls will surely revolt. There is also the concern that in such a regime, a caller imposes costs on the person they call, without their consent. This suggests the need for better control over who is permitted to call you, which introduces a whole new layer of complexity.
If call termination costs were not recovered via interconnect fees, they would still be passed on to consumers, of course, showing up in their own call rates or subscription fees. However, because the costs fall most heavily on the most popular networks, they could be amortised over larger customer bases. Networks would compete internally on economies of scale and more efficient infrastructure, while price competition would occur at the retail end of the market where prices are visible and comparable.
It's not like this model is all that revolutionary. Most of the Internet operates on a zero interconnect principle, and here, operators make perfectly good money while consumers receive ever-improving services.
So, if the regulator is going to set interconnect rates between telecommunications operators, it might as well set the rate at zero. A fixed rate of 20c, 40c or 60c is anyway just an arbitrary number that pops out of whatever cost-recovery formula the accounting alchemists conjure up.
Like a lower rate, a zero rate will level the playing field for smaller players, promote price transparency for consumers, and in the end, achieve the ultimate goal of lowering the price of telecommunications. Unlike a non-zero rate, however, it will also put direct downward pressure on termination costs, and will actively promote competition by smaller players in the market.
Best of all, it would make the rules simple and easily enforceable, since the regulator wouldn't have to bother wheedling honest cost-allocation reports out of the operators and then use those as an input to some massively complex formula. Unless you are a dominant member of the telecoms cartel (or an accountant) there's no downside.
Our telecoms sector cries out for simple regulation. Zero-rate interconnection would be a great step in the right direction.
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