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Summary:

The OECD has published a report on so-called termination rates, pointing out the folly of governments who think keeping them high will boost telecom revenues.

Apparently, if you make it more expensive to call somewhere, people are less likely to call that place. Obvious, you’d think, but empirical evidence is always welcome, and on Friday the Organization for Economic Cooperation and Development (OECD) produced just that.

Termination rates are the fees that Carrier B charges Carrier A to connect an incoming call from A’s network. The higher they are, the more Carrier A needs to charge its customers to call someone on Carrier B’s network. In a report about international traffic termination rates, the OECD said the evidence showed that high, non-market-based rates suppress demand. This is usually the result of a government mandating minimum termination rates, thereby “entirely eliminating the role of competition.”

What’s more, the countries that restrict the market’s ability to establish low termination rates are often the ones whose citizens have moved around the world – African countries such as Benin and Senegal come in for particular criticism – meaning the ones getting hurt include both the operators at home and the diaspora citizens in countries such as the U.S., who must pay more to call home.

The OECD is an international economic cooperation group of 34 countries, mostly European but also including the U.S., Australia, Canada, Israel, Turkey, Japan, South Korea, Mexico and Chile.

According to a blog post accompanying the report:

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.”

This chart shows the difference between India, where termination rates have fallen and inbound traffic has exploded, and a sample of African countries, where termination rates have risen and inbound traffic has remained more or less static:

OECD termination rate chart

That’s covering the period from 2003–2011, when the number of mobile phones in use shot up in both India and the relevant African countries.

Interestingly, while carriers love to complain about how lower termination rates hurt their revenues, the report found this:

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.

Again, you’d think all of this would be obvious, but: “Unfortunately, the number of countries that have raised termination rates in recent years, by eliminating competition, is expanding.” Perhaps the regulators in those countries should have a look at the stats, then.

  1. Obvious and true.

    We are an MVNO serving international communities in the US. We have a very diverse subscriber base and route to 200 countries per month, and have a unique view of this. In addition to Ultra Mobile, we also run IndiaLD which serves non resident Indian (NRI) diasporas around the world and does hundreds of millions of minutes to India.

    With Ultra we live in a world where we can offer most of our subscribers all the international calling they could ever want. Places like China, India, North America, and Western Europe are generally cheap to terminate to. More and more international calls to those destinations are being treated like just another call.

    For Central America, Africa, and the Caribbean however, high international termination rates prevent us from properly serving those countries. If you put termination rates in those regions on par with the cheaper group above, call volume would triple overnight.

    India and South Asia is a bit of an outlier. The per subscriber call volume for that region is much higher than someone from say China. This is most likely due to cultural differences and that South Asia is a much more mobile to mobile communcations infrastructure. South Asians communicate more via voice than most other international diasporas. If you put Africa on par with India rates, you would see a big spike in volume, but not the same jump.

    In the end it is the home country losing out. Emigrants provide a vital economic, educational, and cultural link to their home country. High termination rates mean that those emigrants talk to only 1/3 of the people they would normally speak to back home, and that talk time is spread out over more days and lasts 1/3 as long as it does in countries with low termination rates. That translates to fewer ideas being shared and fewer relationships being kept strong. Ultra Mobile would love to live in a world where it’s just a call, whether its across the street or around the world.

    We are getting there with more and more of the world’s population. Our unlimited mobile plans provide 1000 free minutes of international calling to over 3.5 billion people. We try to work with carriers in countries with high termination rates, but government mandated termination rates keep them and us from properly serving those diasporas. In the end, its more often than not the financial interests of the few that block the many from staying in touch.

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  2. Do we need a study for this?

    (illusion: http://goo.gl/qaEZ45)

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  3. Seeing as how in many countries where corruption is norm, the national telcom is owned by a relative or friend of the party/dictator in charge. This owner doesn’t view their telcom as a business. They view it as a cash printing machine which they have to use to pay their monthly graft to their masters with.

    Normal business common sense doesn’t apply in conditions like this. These guys are on the hook for X amount of revenue to their masters each month. So they just simply set the price at whatever their license fee is, plus a nice profit for themselves. Outlaw all competition. And *voila!*, magic! Then go on shopping vacation with all the money you print.

    They aren’t businessmen. They are thugs with a poorly run business. And they don’t care.

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