A world without termination rates - reality or fiction

By Steve Heap and Isabelle Paradis
July 2016

It is that time of the year again, when we, at HOT TELECOM, are putting our heads together to update our popular 'Future of international carriers' report, and share with you our future vision of the carrier business. The new 2016 report will be published this fall, so stay tuned.

Until then, we decided to share with you some of our views and insights into how we see the future of the carrier market from our last report. This article will discusses the potential impact of a world without termination rates on the wholesale business. Maybe we are closer to that reality than you think....


The reality of a world without termination rates

An intriguing concept in our future vision of the marketplace is the key role that rating and settlement plays in the wholeslale industry. The revenue of the industry is essentially the incoming payment from the originating service provider for call termination. The volume of calls influences this, but it is primarily driven by the cost of termination which itself is heavily influenced by the payment made to the distant service provider.

The ability of the industry to support many wholesale players and with it voice calls often routed via multiple companies (each of which claims the revenue and tries to make a margin), is all driven by the continued consideration of a voice minute as a “real thing”, rather than yet another set of IP packets to be routed through to some distant IP endpoint.

Before we discuss whether this business model is under threat, just consider for a moment the environment if there were no termination fees. With no termination fees, the international carrier would offer:

These things have value, and some of them are call set-up related and also volume related. The more calls or sessions that are established, the greater the need for addressing, the more the resultant connection is utilized for voice or video communication, the more capacity is consumed. So charging based on the number of session attempts and the total volume of data consumed would makes sense in this case. Data consumed, in this case, would be closer to Internet pricing levels although some extra payment for a quality managed path could be justified in many cases.

Session attempts drive some cost in network hardware, and payments to providers of global numbering portability databases, and so is a mix of a fixed and variable cost to the international carrier. The key message here is that without the inclusion of a significant termination fee in the invoice, the revenue from  this session connection service would be a fraction of the size of current bills. As a result, revenue to the international carriers would similarly drop significantly.

Now how about the role of the smaller wholesalers in all this? The 1000s of companies that make money by finding a slightly more cost effective way of terminating a voice call through either a special deal or a bypass routing opportunity. With no termination payment to be saved, there is no business for such providers.

In a nutshell, the current international wholesale voice termination market exists because of the per-minute termination business model.

A trigger to the disapearance of the wholesale middle-men?

There is perhaps an additional factor that will drive even more consolidation in this imagined environment. As each international carrier will be charging a fee based purely on its own costs, then including a second carrier in a routing to get to the destination service provider will have a significant impact on the cost of the service. At present, those incremental costs are hidden in the much larger termination price. This will have the impact of making those carriers with a large number of directly connected service providers even more attractive than those that build an international service via partnerships and interconnects with other international carriers.

The changing technology is pushing the industry in this direction quickly in our view, as the migration of end users to IP endpoints with VoIP and VoLTE is happening now at an increasing velocity. In the early days of VoIP, the IP experts predicted that all that was required was end-to-end IP routing to the phone, as with a global ENUM database, everyone could call everyone else with no need for a voice service provider at all. Of course, the experience of email with the masses of Spam was not a good advertisement for that approach, and it went nowhere. However, the basic principle of routing directly from one trusted party (the originating SP) to the distant party is a compelling approach.

The role of regulators

In addition, regulators in many countries are pushing constantly to reduce these termination rates. The FCC in the US, for example, is set on a path of making all intra-US calling “sender keeps all” in the next few years and termination rates are already very low as a result. In Europe, the regulators are similarly driving down costs. Finally, the complexity of making a ruling on how to handle the charging of incoming VoLTE calls that can first use more bandwidth with higher quality audio, and then can turn mid-session into a video connection using significantly more bandwidth, would cause a regulator to throw up their hands and say – “this is just data….” and mandate the end of incoming termination rates as the mechanism for settlement of voice calls.

To some extent the wholesale voice industry is bringing on this end-game in its constant push to reduce costs and increase margins. It is instructive to think about how costs are reduced in today’s marketplace. The key one is to identify lower cost elements within the normal charging regime in a country – cities may have a lower cost than rural areas and so highly specific routing plans can reduce the average cost of termination. Volume based discounts and reciprocal arrangements to exchange traffic provide other opportunities. Then there are approaches that could be said to breach some commercial terms and conditions of service – using SIM card based gateways to deliver the call into a distant mobile operator via a retail pricing plan rather than the interconnect rate.

The power is in the hands of mobile operators

Finally, the so-called Viber bypass methods where a call is queried against a real-time database to determine if the called number is to a smartphone with an active Viber client and then routed over the Internet, at much lower cost, directly to the application is gaining in popularity. In this case, the distant mobile operator loses all the incoming termination payments and yet may still be in the transport path if an LTE data connection is used. What potentially is occurring here with more frequency is that the distant operator is seeing their incoming termination revenue decrease over and above any action the regulator is taking on rates.

The million dollar question is: At what point does that mobile operator conclude that getting revenue from other sources and moving to a sender-keeps-all commercial model for voice termination makes a lot more sense to them?

We think we are getting closer…

This article is an extract from our report on 'The future of international carriers'

About the authors:

Isabelle Paradis

Isabelle Paradis, President of HOT TELECOM has worked for 22 years in the telecoms industry. Her personal experience ranges from International Wholesale through to Business Strategy, Marketing and Product Management along with extensive research and consulting experience. She has worked across all continents and has lived in North America, Europe and Asia.

Steve Heap

Steve Heap, CTO of HOT TELECOM is a senior telecom executive with 30+ years experience leading companies from small technology start-ups to global service providers. He is a recognized expert in voice services and VoIP, Internet backbones and IP services, optical and submarine networks with significant additional experience in operations.

HOT TELECOM has been serving global operators, governments, equipment vendors and telecom investors for over 13 years, providing leading edge market research and consulting services to industry leaders around the globe.

For more information on our HOT INTERVIEWS program, please contact Isabelle Paradis at: paradis@hottelecom.com or at +1 514 270 1636