Engineering The Economics Of Communication Services

Communication Services are an important part of the economic well-being of communities. It has been established over a century, for example, that the Gross Product of communities has a high correlation with teledensity in the community. It is no surprise that progressive societies have tried to ensure equitable access to communication infrasructure for all sections of society.

Universal availability of services is a concern that has been addressed for more than eight decades in the USA, with the last three seeing some significant interventions. I was catching up on FCC’s “Connect America Fund” related news.

Communications in Rural America

Governed by the Universal Service Fund (USF) initiative for the last two decades, US has made some significant progress in ensuring that the unserved and underserved communities – including schools, universities, healthcare providers etc. – are able to get affordable access to communication services.

Last year, FCC had come up with a plan to relook at the way Intercarrier Charges (ICC) and the USF were utilized and the availability of modern services – viz. IP based services and broadband are available. They had created a new fund called the “Connect America Fund” (CAF) to enable this process.

Fund explained

Telecom Operators invest in Telecom Infrastructure and Operate it – the cost of which can be looked at as both Capex and Opex components. Operators have the mechanism of rentals, subscription fees and usage based billing to make their profits. For non-lucrative segments such as those for rural communications needs, the cost of setting up this infrastructure and operating it will make it very unviable.

Up to a point, it is possible for operators to subsidise these services, based on profits generated on more lucrative services – typically long distance and international call services. However, once it is mandated that there has to be universal coverage, this model would also collapse.

20130104-071246.jpg

The USF mechanism implements a centralised fund collected as a surcharge, typically on long distance calls, and made available to operators who provide coverage to unserved and under-served communities. Mechanism of revenue sharing between originating carrier and terminating carrier to compensate the high-cost of termination have also been put in place

Criticism of USF

As with all such initiatives, there are two opinions about the fund – which can be availed by both the big operators and small operators alike. There is criticism that the big players have sufficient means to subsidize High Cost connectivity with revenues from other lucrative services while for smaller players the fund may appear insufficient by their estimates.

For example, you can catch a video on Light Reading on CAF which presents the view of NTCA, a non-profit organization that represents the interests of carriers that operate in rural America at this link LRTV.

Potential For Fraud

My personal experience has been that these mechanisms seem to look at what is happening at the last leg of the call. There is a large value-chain before the last leg with various cost components involved and these costs tend to change over a period of time. This can lead to general dissatisfaction and worse, in some cases, can lead to some undesirable situations in some countries.

I have the experience of providing consultations to a regulator in an Asian country, where a surcharge was levied on incoming international calls as declared by the terminating exchanges. An elaborate arrangement for prefixing CLI was implemented for traceability as there was an unusually high number of licenced operators of International Incoming Gateways.

Unfortunately, the fund had collected negligible amount over a period despite the country having a large expat community residing across the world! A preliminary analysis showed that almost all the Internations Gateway Operators, were bringing in calls over VoIP through the International leg (low cost) and were delivering the call with a Local Number CLI and accounting the call as a local call. This amounted to a fraud.

Further analysis revealed that the Gateway Operators were forced into the situation because the surcharge which was set on the basis of a fixed $ value per minute, was not profitable to deliver because of the price at which “Calling Card Companies” were providing the services in the originating country (see the figure below)!

20130104-071254.jpg

We recommended both a pricing model and a technology solution to catch fraud in that situation.

Conclusion

The need for regulators to demand universal service obligations from operators is clearly understood. Can the mandate be left to operators to be inventive and come up with solutions for this problem? Besides a fund model – an idea that has been around for 30-40 years now – can there be a better model?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s