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Is distance really dead?

January 7, 2008 - 1 Comment

Distance is becoming less significant to the cost of telecommunications services. Prices are tending towards actual costs and these costs are predominantly associated with the origination and termination of traffic. In addition, the duration of calls is also becoming less significant as flat-rate charging is becoming more popular, even for mobile services. This leads to the situation in which bandwidth and access capabilities, such as location-based services, become more significant factors in charging and in generating Service Provider revenues.It is now generally recognized that the distance separating communicating parties and also the duration of a call are no longer key parameters in the cost and pricing of telecommunication services. Clearly technological developments have played a role in this development but government policy caused the initial moves in this direction. The monopoly telecommunications regimes that were the norm prior to the wave of liberalization of the telecommunication markets were perceived as subsidizing local calls by the revenue from long-distance and international traffic. The introduction of competition in the provision of telecommunication services required tariffs to be related to actual costs and one of the initial policy decisions in the first market to be liberalized, the UK, was to rebalance local and long-distance call charges between 1984 and 1986. International telephone call charges are affected by the system of settlement payments between operators known as the accounting rate system. This system is defined in an international treaty known as the International Telecommunication Regulations that is administered by the International Telecommunication Union (ITU). Under this system an operator that originates an international call makes a payment to the operator that terminates the call and there will be a net payment if the originated and terminated traffic is not in balance. In general there has been an imbalance on routes between developed and developing countries in that more calls originate in developed countries than in the developing countries. In 1995 US operators made net payments amounting to $5099 million to operators in other countries and these payments have been a significant form of revenue for operators in developing countries. For example, Mexico received payments from the USA in excess of US$ 1 billion in 1996 which accounts for more than 10% of Telmex’s revenues (US$ 8.5 billion in 1998). However, the international accounting rate system has increasingly been by-passed by using voice over IP on leased circuits between countries. In 2000 it was estimated that about half of all international telephone traffic by-passed the accounting rate system. In response to this trend there has been an attempt to reform the accounting rate system so as to set rates that more accurately reflect costs.The imbalance in international Internet traffic is greater than that for telephony and ISP peering arrangements are such that many ISPs in developing countries must pay the full circuit cost for interconnection with Tier 1 ISPs as they do not meet the conditions set by Tier 1 ISPs for settlement-free interconnection. This reverses the direction of payment flows. However, the dominance of the USA as the hub of the Internet may well decline as more local content is provided around the world and more direct connections are made between countries rather than being made via the USA. TeleGeography have reported that traffic growth is greater on non-USA international links than on US international links in Europe, Asia and Latin America. IP transit prices have also been falling significantly.In summary:- Tariffs for telecommunication services are tending towards actual costs and these costs are predominantly associated with the origination and termination of traffic.- There is recognition that distance and duration no longer significantly determine prices.- Bandwidth and access capabilities, such as location-based services, are becoming more significant factors in charging and in generating Service Provider revenues.

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  1. This blog post on the influence, or lack of it, of distance on service pricing is very valuable.