Fixed-Mobile Interconnection Issues Dr Tim Kelly, ITU “Workshop on international settlement reform and the costing and pricing of telecom services”, Hanoi, 11-13 December 2000 The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its Membership. Dr Kelly can be contacted by e-mail at Tim.Kelly@itu.int

Pricing mobile services: Agenda A Mobile Revolution Worldwide and in the sub-region Pricing Mobile Options Price comparisons and trends Price trends Average Revenue Per User (ARPU) Fixed-Mobile Interconnect A Mobile Future

A Mobile Revolution Fixed Lines vs. Mobile Users, worldwide, Million 1'400 Mobile Users 1'200 Fixed Lines 1'000 800 600 400 200 1993 1995 1997 1999 2001 2003 Source: ITU World Telecommunication Indicators Database.

Mobile subscribers per 100 inhabitants Year-end 1999 Sub-region Lao P.D.R. 0.17 Viet Nam 0.42 Cambodia 0.81 Indonesia 1.06 Sri Lanka 1.22 China 3.42 Philippines 3.66 Thailand 3.84 Malaysia 13.70 Source: ITU World Telecommunication Indicators Database.

Mobile subscribers as % of total telephone subscribers Year-end 1999 Sub-region Viet Nam 13.5% Lao P.D.R. 20.8% Sri Lanka 25.1% Indonesia 26.8% China 28.5% Thailand 31.0% Malaysia 40.3% Philippines 48.5% Cambodia 76.3% Source: ITU World Telecommunication Indicators Database.

The secret of mobile success Why is mobile currently growing ten times faster (~55% p.a.) worldwide than fixed lines networks (~5.5% p.a.)? Why is the average mobile user much younger than the average fixed-line user? Why do users make calls using a mobilephone even when a fixed-line telephone is available and cheaper? What is the secret of the success of mobile? Price Options

A selection of price options From Orange (UK) Source: http://www.uk.orange.net/kit/index.html.

Pricing Mobile Price of 100 minutes per Indonesia $9.74 month mobile usage, in US$ China $10.87 Philippines $16.26 Sri Lanka $17.80 Thailand $19.34 Lao P.D.R. $19.55 Malaysia $21.02 Viet Nam $27.71 Cambodia $37.00 Note: Price basket based on monthly subscription plus 50 mins peak and 50 mins off-peak use. Source: ITU World Telecommunication Indicators Database.

Declining prices for mobile access, global average, in US$, 1992-98 Note: CAGR = Compound Annual Growth rate. Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

Average revenue per user (ARPU) Bell Mobility (Canada) 120 1'600 Revenue per sub/month Revenue/cost per subscriber per month (US$) 1'400 100 1'200 80 1'000 Cost per sub/month 60 800 Subscribers ('000s) 600 40 Subscribers 400 20 200 90 91 92 93 94 95 96 97 98 Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

Cultivate the high-spenders Source: Price Waterhouse Coopers, based on Canadian data.

Mobile ARPU converging with Fixed-line ARPU, Japan (Yen ‘000s p.a.) 300 Mobile ARPU 250 200 150 Fixed-line ARPU 100 50 1990 1991 1992 1993 1994 1995 1996 1997 Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

Pricing mobile and fixed: Monthly subscription charges (US$) Ratio: Cellular/fixed 25 Residential fixed-line 3.0 Digital cellular 20 2.4 1.1 5.0 1.7 15 10 5.0 5 Malaysia HK Sar Cambodia Indonesia Thailand Sri Lanka

Pricing mobile and fixed: Price of 3 minute local calls (US$) Residential fixed-line 1.0 n.a. Digital cellular Ratio: 18.2 0.8 Cellular/fixed 6.7 0.6 10.0 0.4 3.0 7.5 0.2 0.0 HK Sar Cambodia Thailand Sri Lanka Malaysia Indonesia

RPP vs. CPP: Mobile users don’t always pay to talk Receiving Party Pays Mobile party pays for incoming calls and fixed party pays only local tariff Often, no interconnect arrangement is negotiated with the fixed operator for F-M calls. Mobile operators bill mobile consumer directly for “airtime”. Calling Party Pays Mobile party does not pay for incoming calls and fixed party pays a premium to call the mobile party Call termination paid by fixed operators is a significant part of mobile operator revenues

Components of a Fixed to Mobile Call Call Origination Call Termination Calling Party (FIXED) Called (MOBILE) Transit service Orig. Access Switching Authentication Core Network Locating the Customer Term. Access Source: Adapted from ECTA

Fixed-Mobile Interconnection Interconnect prices are a major determinant of retail prices Evidence of “market failure” Interconnect prices are variable but generally very high In Calling Party-Pays environments, caller may not be aware of the charge they will be paying Calling party does not have a choice of operator to terminate the call Fixed-to-mobile and mobile-to-fixed highly asymmetric By 2003, 75% of all calls worldwide will involve a mobile

Problems in calling-party-pays (CPP) environments Lack of tariff transparency Mobile operators not subject to commercial consequences of keeping rates elevated Vertical integration further reduces incentives to lower rates Inefficient pricing Non-transparent Tariffs Market Structure

Calling opportunities worldwide 5.0% 5.0% 0.3% 7.5% 19.9% 1993 89.7% 52.7% 23.4% 26.7% Fixed-to- Mobile-to- 19.9% fixed mobile 1998 Mobile-to- Fixed-to- fixed mobile 25.0% 25.0% 2003 Source: ITU Fixed-Mobile Interconnect website: http://www.itu.int/interconnect

Calling opportunities, Cambodia Fixed-to- fixed 5% Fixed-to- Mobile-to- mobile mobile, with 17% interconnect 34% Mobile-to- Mobile-to- mobile, fixed without 17% interconnect 27% Note: Mobile subscribers = March 2000; fixed-line subscribers = December 1999. Source: ITU World Telecommunication Indicators Database.

Calling opportunities, Lao PDR Mobile-to- mobile, without interconnect 6% Mobile-to- fixed 18% Fixed-to- fixed 58% Fixed-to- mobile 18% Note: Mobile subscribers = March 2000; fixed-line subscribers = December 1999. Source: ITU World Telecommunication Indicators Database.

Calling opportunities, Viet Nam Mobile-to- Mobile-to- Mobile-to- fixed mobile, mobile, with 10% without interconnect Fixed-to- interconnect 0.71% mobile 0.74% 10% Fixed-to- fixed 78% Note: Mobile subscribers = March 2000; fixed-line subscribers = December 1999. Source: ITU World Telecommunication Indicators Database.

Fixed/Mobile interconnect rates in selected calling-party-pays countries 0.017 Costa Rica 0.017 0.034 Mobile-to-fixed Malaysia 0.034 interconnect rate 0.047 Fixed-to-mobile Guatemala 0.047 interconnect rate 0.026 Mexico 0.064 0.050 Cambodia 0.070 0.042 Dom. Rep. 0.078 0.051 Philippines 0.205 0.052 Botswana 0.208 0.293 Antigua 0.293 Source: ITU.

Sample prices in RPP environments RPP countries 0.002 China 0.001 0.007 Mobile-to-fixed Canada 0.000 interconnect rate 0.008 Fixed-to-mobile HK SAR 0.008 interconnect rate 0.008 Singapore 0.000 0.009 Sri Lanka 0.000 0.020 USA 0.020 Average 0.009 RPP 0.005 0.056 CPP 0.092

The race for 3rd Generation mobiles: IMT-2000 2,000 1G Video Streaming Video Streaming Remote Medical Service (Medical image) 2G 3G Video Conference (High quality) Still Still 384 Imaging Imaging Video on Demand: Sports, News Weather Audio Streaming Audio Streaming 144 Video Conference (Lower quality) Text Messaging Text Messaging Data Transmission Speed - kbit/s 128 Video Surveillance, Video Mail, Travel Image Mobile TV Voice Voice 64 Electronic Newspaper JPEG Voice Mail Still Photos E-Commerce Electronic Publishing 32 Karaoke Mobile Radio Fax E-Mail 9.6 Data Weather, Traffic, News, Sports, Stock updates Audio Voice-driven Web Pages Streaming Audio Telephone (Voice) Time Source: Adapted from Motorola.

Future Trends: Mobile Internet Pricing and billing unmetered flat-rate (Internet) per-minute charges (Mobile) From circuit-switching to packet-switching Impact on nature of interconnection agreements? Evolution of the interconnection value chain: connectivity, capacity, content … How to measure value? How to split revenue among players?

For more information ... ITU Website at www.itu.int/interconnect Case studies Finland India Mexico China/HK Trends in Telecom Reform, 2001 edition: Interconnection