The Distribution of Revenue: Alternative Views
BT’s Requests for Determinations
Introduction
1.1 This document sets out Oftel’s views on the future arrangements for setting retail prices for calls to a range of services known as Number Translation Services (NTS). These include access to the Internet.
1.2 The services governed by the formula are known generically as Number Translation Services. This is because the dialled number is ‘translated’ to a geographical number for delivery ( In some cases calls can terminate at different locations depending on where the caller lives even though the number dialled is the same from anywhere in the country.) The price paid for the call is determined by the number and not the distance of the call.
1.3 In 1996 Oftel determined a formula (the NTS formula) which sets out how telecommunications operators share the revenue from calls made using free (0800 or 0500), local call rate (0345, 0645 or 0845), national call rate (0870, 0990 or 0541) and premium rate numbers. The formula determines how much of the revenue from customers is kept by the originating operators (i.e. BT or the cable companies who provide the line to the customer) and how much is paid over to the terminating operator (the operator who hosts the service at the other end of the call eg Internet access).
1.4 Since the formula was set there has been a dramatic increase in the range and volume of NTS services. Call centres using free, local and national call rate numbers have increased significantly over the period and in recent months the introduction of subscription-free access to the Internet using 0845 local rate numbers (eg Freeserve, BT ClickFree, Tesco etc) has led to very rapid growth in the numbers of Internet users.
1.5 The nature of this growth especially for internet calls was not forecast by the companies. This has created tensions in the way the formula applied. As Internet use grew, in 1996 several operators came together to try to resolve the issues. The main areas of dispute were:
1.6 The most appropriate solution would have been industry agreement. However, as the companies were unable to resolve these differences after 2 years of negotiation, in June 1998, Oftel agreed to intervene. Oftel established a working group to consider these issues, and has also been looking at problems arising from complaints over who controls the setting of the BT retail price for services provided by other operators.
1.7 In addition, at the end of 1998, BT proposed changes to two of the component charges within the NTS formula. These were rejected by a number of operators; BT therefore asked Oftel to determine the charges that should apply.
1.8 In reviewing the operation of the NTS formula, Oftel:
1.9 This document sets out Oftel’s proposals in all three areas:
1.10 Oftel proposes that the established principles for establishing BT’s retention will remain unchanged until the end of the current retail price control. These proposals would give the industry certainty until August 2001 and will help in making business plans and investments. Oftel will, however, be discussing with industry what regulatory framework will be appropriate after 2001 in the context of the overall review of price controls.
Oftel’s Proposals
Setting Retail Prices
1.11 The NTS formula has channelled services into a limited range of retail price points because BT’s billing system could not offer more.. This is now changing, and by the end of the year Oftel proposes that NTS services should no longer be confined to certain prices. An operator selling an NTS service should set its own termination charge (the charge the originating operator pays it to terminate the call). The originating operator will add to that its own retention, to cover the costs of originating the call and billing the customer. This will produce the retail price.
1.12 If the terminating operator wants to compete more aggressively it can reduce its terminating charge so that it produces a lower retail price; if it wants to offer special services it can charge more. Any change in the termination charge would feed straight through to retail prices to which the customer pays.
1.13 This flexibility will allow operators to price services below local call rate, if they want to do so. As wider choice of pricing could cause confusion, Oftel, industry and consumers will need to consider together how numbering of services can be structured so that numbers give an indication of the price bands services fall into. Customers must know what services are costing them.
1.14 Oftel proposes that this new approach to retail pricing is adopted as soon as satisfactory numbering arrangements can be agreed. At that point, the current NTS formula would no longer be needed and it would be dropped. There would still need to be rules on how originating operators, primarily BT, set their retention. This is considered below.
1.15 The matter of how retail prices for services are set is an issue not just for NTS but for all services (other than geographic or mobile calls). In the longer term, in the new Price Control period beyond 2001, Oftel would want to see the more flexible approach set out above for NTS adopted for a broader range of services.
Originating Operator’s Retention
1.16 BT has around 85% of access lines in the UK hence most calls to NTS services originate on BT’s network. This clearly gives BT power in how it chooses to set the retail retention if there are no restrictions on its freedom to decide what level of retention would be appropriate. The current formula specifies a retention for BT on NTS calls. Oftel proposes that this should continue to be the case for the immediate future. When the additional price point flexibility is available, the retail price for NTS calls would then be determined by the charge set by the terminating operator (its choice) plus the BT retention (set by Oftel). BT’s actual retention will subject to the outcome of the two current determination requests.
1.17 In the longer term, beyond 2001, if the greater retail pricing flexibility is to apply to a wider range of calls to services, then a new approach will be required. Oftel has already opened up a debate with the industry about the appropriate approach in the future towards the retail retention and the interaction with the approach to call origination charging. Oftel will be considering this further in due course as part of the forthcoming price control review due to take effect in 2001.
Current Determination Requests
1.18 Oftel is dealing with two determination requests from BT which relate to the operation of the existing NTS formula. These are:
1.19 Oftel accepts the principles behind both proposals. These will lead to higher payments to BT. But it essential that operators are able to validate and agree the figures BT presents. Oftel is working with BT to achieve this and will make the resultant determinations shortly.
Consultation
1.20 Oftel seeks views on the proposals set out in more detail in paragraphs 4.7 to 4.14.
Chapter 2
Number Translation Services and the NTS Formula
2.1 The term Number Translation Services describes a range of specially tariffed services, primarily used for telemarketing, which include 080X/0500 Freephone, 0345/0645/0845 local call fee access, 0870/0990 national call fee access and 08xx/09xx Premium Rate Services. These services are offered at specific price points in order that customers calling from any fixed network will be able to associate the number range with a particular pricing arrangement. For example, 0800/0500 calls are free to the caller.
2.2 In 1995, following a detailed consultation, Oftel determined a formula for the financial arrangements which should apply to Number Translation Services where the call originated on one operator’s network and terminated on another. This formula is:
Originating operator retains: P - D + C
Terminating operator receives: D - C
where:
P is the actual retail price charged by the
originating operator to the customer;
C is the pence per minute charge for conveyance over a single tandem segment of
BT's network determined in this determination (multiplied by the number of minutes of the
call) plus an uplift (currently 46.3%) to allow for retail costs incurred by the
originating operator in handling these calls;
D is the Deemed Retail Price for the call and is:
2.3 The principle underpinning the NTS formula was that originating operators should be able to cover their costs if they set charges at the deemed level. Terminating operators receive what is left from the retail price after the originating operator’s cost have been deducted (excepting Freefone calls) and can also seek payment from their own customers (ie the service providers to whom calls are passed) for terminating calls.
Other calls
2.4 The formula sets the interconnection charging method used for non-geographic NTS calls. How this differs from that used for the two other main types of interconnected call, geographic and indirect access is described below.
2.5 Geographic calls - normal end to end or geographic calls are the prime source of revenue for originating operators. The originating operator pays a cost based termination charge to the terminating operator according to the number of switching stages used within the terminating operator's network. The originating operator thereby retains the remainder of the retail revenue.
2.6 Indirect Access calls - calls are billed by the indirect access operator who pays the originating operator a standard cost based call origination charge which excludes any uplift for retail activities. The indirect access operator may also pay a call termination charge as in 2.4 above or an international outpayment. It then retains the remainder of the retail revenue.
2.7 Since the NTS formula was determined, many new types of services have been introduced whilst others have grown from levels not considered significant in 1995. In particular, calls to dial-up Internet services using Local Call Fee Access numbers have grown from virtually nothing to a current level of around 15% of all BT’s calls. This growth is continuing at a rate estimated to be in the region of 200% per annum.
Development of the NTS Market
2.8 When the NTS formula was determined by Oftel early in 1996, the services to which it applied generally related to telemarketing activities or to other Premium Rate (information etc) types of services. At the time calls to the Internet represented only a tiny proportion of total calls and their potential impact on the telecommunications market and the interconnection charging arrangements was not foreseen.
2.9 The NTS formula has proved successful in encouraging the development and growth of new services including those related to the Internet. Media related services including radio/TV phone-ins and interactive programming and the expansion of the Call Centre industry have all benefited from non-geographic numbering (one number, any location). Additionally, in some cases, terminating operators have been able to use their share of the revenues to pay service providers for access to their services.
The Internet Market
2.10 The most significant development has been in Internet related services which have seen enormous growth since 1995. The first were subscription based services offered by a wide range of Internet Service Providers (ISPs) via a network of terminating operators, some of whom are also ISPs themselves. Services are almost universally offered using 0845 numbers where callers are charged at local rate for calls and are charged, separately, for Internet usage either by fixed monthly subscription, or by timed ‘on net’ usage, or a combination of both.
2.12 The closing months of 1998 saw the emergence of ‘pay-as-you-go’ Internet services such as Freeserve offered by Dixons and Energis. These services have no subscription charges; users pay only the call charge for unlimited web access and additional charges for helpdesk assistance. Calls to these services cost the same as, and use the same 0845 numbers as, the traditional subscription based services. Pay-as-you-go services have proved highly popular, with Freeserve claiming a million new customers in the first 18 weeks of operation. As a result Freeserve has been quickly followed by a range of similar services most of which are backed by large retail or media organisations. BT has launched its own ClickFree service, demonstrating that it too sees the potential of this market.
2.13 There is clear evidence that the availability of ‘free’ access has enabled many more customers to try the Internet for the first time and caused many existing users to migrate to the new services. As a consequence some large retailers are viewing Internet access as a potentially important way of attracting customers and are directing their marketing budgets to support it.
Problems with the NTS formula
2.14 While it is clear that the NTS arrangements have been successful in promoting the development of new services, particularly access to the Internet, a number of problems and potential problems have emerged. These problems are: first, the current arrangements do not provide for price competition at the originating end of the call. This means that the range of services and pricing arrangements is restricted by the use of the current NTS formula which effectively channels all calls into local rates. Second, both originating and terminating operators believe that they should be entitled to a greater share of the call revenue from local call fee access calls under the NTS arrangements. Third, BT has suggested that some of the parameters in the current formula are in need of adjustment because they do not reflect accurately the most up to date or reliable data on BT’s discounts and the routings of calls over the BT system. This document deals with these issues and sets out Oftel’s provisional conclusions on each of them.
Chapter 3
3.1 The current NTS arrangements promote the use of particular price points for services using recognisable number ranges. This is helpful to consumers, as it enables them to estimate reasonably accurately how much calls will cost. However, the current arrangements are inflexible, and do not promote competition in the setting of prices. Oftel proposes that terminating operators should have a greater say over the setting of retail prices. The competitiveness and flexibility of the market currently covered by NTS rules could be improved if the terminating operator were able to have a greater say in setting prices paid by the calling customer. In order for these arrangements to result in effective competition amongst service providers it would be necessary for the originating retention set by dominant operators to be non-discriminatory ie the same for the same types of call (eg Internet calls) to all competing service providers.
3.2 The outcome of these arrangements could be expected to be that a range of differently priced and packaged services would be made available. Internet SPs might choose to offer services of different quality at different prices. They might also offer alternative methods of paying: for example, some customers might prefer the current ‘Freeserve’ type of arrangements where there is no subscription and the service is paid for through usage charges. Other customers might prefer to pay subscription charges which included an amount (perhaps limited) of usage. Competition among terminating operators in setting prices at both ends of the call would tend to promote the availability of a range of packages with customers being able to choose those which suited them.
3.3 Currently flexibility is limited by the number of retail price points BT is able to offer owing to other constraints placed on its billing system. BT has recently increased the number of available price points from 63 to 99. This may at first sight seem plenty but it should be recalled that as well as dialled calls there are ranges of prices for calls made via BT’s operator service, calls from payphones, chargecards and calls to mobile phones, pagers etc. However, BT has signalled its intention to introduce further price points which will lift the total to 9999 by the end of the year.
3.4 Adoption of the type of pricing arrangements outlined here would also solve one of the difficulties in the current arrangements. This is the problem of inconsistent tariff gradients in the current NTS formula. The problem is that ‘D’ and ‘C’ in the formula for each time of day are calculated by applying different tariff gradients (based on relevant retail calls for D and on total wholesale traffic for C). This results in the shares of revenue going to each operator varying quite sharply by time of day. The table below sets out how the shares currently vary across times of day
| Daytime % BT: Operator |
Evenings % BT: Operator |
Weekends % BT: Operator |
|
| Current NTS Rates | 32:68 | 47:53 | 59:41 |
During the daytime peak period when calls cost almost 4p per minute the revenue share between BT, the dominant originating operator, and terminating operators is approximately 30%:70%. At these times terminating operators receive a little under 3p per minute. However, most Internet usage, particularly by domestic users, takes place during the evenings and especially at weekends when a local call costs 1p per minute before discounts. The revenue share then becomes nearer 60%:40% and terminating operators’ receipts fall to less than 0.5 p per minute.
3.5 The proposal by which terminating operators would specify their required receipt would enable this difficulty to be overcome, as terminating operators would be able to specify their receipt for each time of day.
3.6 NTS services are provided on specific number ranges in order that callers can understand what they are paying for calls. Oftel has to consider how consumer price visibility can be maintained where new prices are introduced. At present, all rates could be accommodated within the 080, 084 and 087 ranges, since these are defined as free, 'up to local rate', and 'up to national rate' etc. Consumers can always be sure that they are paying no more than these maximum prices. However, another option would be to allocate a new 08XX range for each new price, though this would be difficult to define given that different operators charge different amounts. Further work will be necessary to see how far price point visibility can be achieved.
3.7 When the new retail prices become available Oftel proposes that BT’s retention should be fixed on the same basis as under the NTS formula (subject to the impending Oftel determinations) and that the NTS formula would then be dropped. This will enable terminating operators to control the retail prices for their services by adding, to BT’s retention, the payment they require. These arrangements will, initially, be limited to services currently controlled by the NTS formula. Oftel does not believe it would be appropriate to mandate that all of BT’s retentions should be set at the level of C in the NTS formula. The whole issue of call origination pricing and BT’s originating retention for all services will be considered in the review of the price controls.
Chapter 4
The Distribution of Revenue: Alternative Views
Views of Originating Operators
4.1 BT and other originating operators receive considerably less for originating NTS calls than they do for geographic calls. This has led them to complain that their returns from Internet calls are insufficient to justify the investments they are having to make in new infrastructure to enable their networks to meet the explosive demand.
4.2 When the existing NTS formula was being determined in 1995/96, one of the key claims of terminating operators was that calls to the new services would be incremental. In this way the revenue streams of originating operators would not be damaged by migration or substitution of normal geographic calls to NTS. There is now, however, some concern that businesses formerly using geographic numbers are moving their services to NTS number ranges for both number recognition and financial reasons. The extent of this migration has not been quantified but may prove significant in the medium term if the formula stays as it is.
4.3 Arguments have also been put forward that the current differences in the pricing arrangements for telephony calls and calls to the Internet may create a number of distortions in the future. In particular, if technological developments make it possible for telephony to be conveyed easily and economically over the Internet, large migrations of telephone traffic could result. With the current imbalance in telephony prices (whereby line rentals are below cost with the resulting deficit funded through profits on calls) the viability of originating operators’ businesses could be threatened. However, while it is certainly true that the current arrangements could become unsustainable in due course, there is no evidence that they are unsustainable today.
Views of Terminating Operators
4.4 Terminating operators, on the other hand, have argued that the current distribution of revenue is unduly generous to originating operators. They have argued that originating operators should not be entitled to the retail uplift in C in the current formula, since billing is the only retail function they perform in relation to these calls. They also argue their marketing efforts have generated incremental volume growth and that BT, in particular, has benefited from the resultant reduction in its unit costs. These have fallen at a rate more quickly than was assumed in the setting of the current price controls.
4.5 Some terminating operators have also argued that the interaction of different tariff gradients (as described in paragraph 3.4 above) works to their disadvantage. The effect of the tariff gradients is to reduce the terminating operator’s share of revenue to 41% of revenue at weekends, when most Internet calls are made.
4.6 The view was also expressed that BT’s retention should be based solely on its network costs plus any costs associated with the billing of calls. The retail uplift included within the NTS formula is thought by some to provide BT with excessive returns.
Oftel’s Proposals
Retail Prices
4.7 As described in Chapter 3 Oftel proposes that, when the 9999 retail price points become available, BT’s retention should be fixed on the same basis as under the NTS formula subject to the impending Oftel determinations. The NTS formula would then be dropped.
Distribution of Revenue Between Originating and Terminating Operators
4.8 Oftel has considered all the arguments carefully. Oftel recognises that the NTS formula was not designed with Internet services in mind but, despite the distortions identified as being introduced, there is no evidence that the rationale behind the distribution of revenues under the NTS formula is fundamentally flawed.
4.9 It is clear that terminating operators and their ISPs do provide added value and it is to a large extent because of their efforts that a great variety of services have emerged and flourished on the back of the NTS formula. There is, in this market, vibrant competition and choice for consumers, albeit little price competition at the originating end of the call.
4.10 Oftel is not convinced that originating operators are being insufficiently rewarded for their network investments. They are recovering their costs, indeed the NTS formula was created to ensure they should do so, including those costs associated with any additional investment and an element of profit through a return on capital. Furthermore, a large proportion of Internet calls are made at evenings and weekends when networks are generally under-utilised. Accordingly, it seems probable that the main effect of the growth of Internet traffic on originating operators is to generate significant unit cost savings.
4.11 Nevertheless, Oftel does recognise the potential of the regulatory distortions through call migration from geographic to NTS numbers and, in 2 to 3 years, from voice to Internet (IP) telephony. One possible way of correcting this distortion would be to allow BT to align its retention for geographic and non-geographic calls. However to do this would potentially undermine the business plans of many other operators. It might also result in a rapid rise in retail prices as terminating operators seek to maintain their margins.
4.12 Oftel considers the best way of dealing with this issue is to include it with the overall price control review due to take effect by 2001. This will allow a period of 2 and a half years when operators will have certainty about the arrangements for these calls.
4.13 The price control review will take account of the arbitrage opportunities identified in this paper (paragraphs 4.2 and 4.3) and the controls needed to safeguard competition. It will also re-examine the charging methods for the different types of calls and the extent to which BT’s network and call prices remain unbalanced. Oftel will consult on any proposals before they take effect.There is no guarantee that BT’s originating retention will continued to be controlled beyond 2001.
The Immediate Future
4.14 Oftel proposes that the existing NTS formula should remain in place until the additional retail price points become available at the end of the year and assuming Oftel has resolved the numbering arrangements. The values of D and C within the formula will be adjusted to the levels set in the two associated determinations when these are made by the Director General.
Chapter 5
BT’s Requests for Determinations
5.1 In November 1998 BT issued charge change notices to operators proposing an increase to its NTS discount from its present level of 7.5% to 11.5%. The current figure was set when the NTS formula was determined in January 1996 and was based on BT’s average call discounts in place some time earlier. There have been several changes and increases to the discount BT’s customers can receive in the interim period and BT has sought to revise the average figure to take account of these charges.
5.2 Several operators rejected BT’s proposals, however, and under the terms of its Standard Interconnect Agreement BT has referred the dispute to Oftel for determination.
5.3 Oftel accepts that the average NTS discount should be revised. This is in accordance with its views stated in Annex 4 of the determination of Final Charges for BT’s Standard Services for the year ending 31 March 1997, published in April 1998, that ‘the current level of discounts may be more appropriately used in setting interconnection charges in the future’. Oftel is currently examining the data behind BT’s proposed figure. The draft determination to be published shortly will contain Oftels recommended average discount.
5.4 In December 1998 BT issued a further charge change notice seeking to de-average the conveyance charge contained within its NTS retention. The original NTS formula used an average conveyance charge which was based on the assumption that calls to other operators’ services used only one tandem switching stage in BT’s network. This assumption might be valid for larger operators with several points of interconnection with BT, but calls to regionally based operators with few points of interconnect inevitably use two BT tandem switching stages in many cases. This leads to two problems with the current arrangements. First, the average usage of BT’s network for these calls is likely to be greater than that of a single tandem segment, so BT is not recovering its costs if the charge reflects an assumption that only a single tandem segment is used. Second, the use of an average charge for all terminating operators removes any incentive on those operators to interconnect efficiently with BT.
5.5 Several operators rejected BT’s proposals and the dispute has been referred to Oftel.
5.6 Oftel supports the application of a de-averaged charge as this ensures operators pay for what they use. This again was stated in the 1996/97 Final determination referred to in 5.3 above. It is essential, however, that these operator specific charges are transparent and clearly understood by each operator. It is also vital they reflect the most efficient routing of calls to the operator from anywhere in the country.
5.7 Oftel has concerns about the degree of transparency of BT’s initial proposals and is discussing these issues with BT with the aim of establishing charges which operators can understand and accept. The forthcoming draft determination will again contain Oftel’s proposals. The table below sets out the split of revenue from a local call fee access call on a number of bases. It shows: the current split; the split if BT’s proposed amendment to D is incorporated; the split if in addition the more precise calculation of C led to it going up by 25%, and the split if this rise in C were 50%.
| Daytime % BT: Operator |
Evenings % BT: Operator |
Weekends % BT: Operator |
|
| Current NTS Rates | 32:68 | 47:53 | 59:41 |
| With 11.4534% discount and no change to C | 33:67 | 49:51 | 61:39 |
| With 11.4534% discount and 25% increase in C | 39:61 | 57:43 | 71:29 |
| With 11.4534% discount and 50% increase in C | 44:56 | 65:35 | 81:19 |
Oftel seeks the views of operators and service providers on the proposals contained in this consultation document by 7 April 1999. There will then be a further 2 week period during which comments on the representations made during the first period of this consultation are invited. This will end on 22 April 1999.
Views and comments should be made in writing and sent to:
Geoff Brighton
Compliance Directorate
Oftel
50 Ludgate Hill
London, EC4M 7JJ
Tel: 0171-634 8925
Fax: 0171-634 8949
or by e-mail
Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their response, or parts of it, are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing: 0171 634 8761 (fax: 0171 634 8946).
Internet Access
Oftel would like to set up a link between this Consultative Document and any responses places on respondents own Internet pages. Please contact Lauren Ryner at Oftel on 0171 634 8753 or by e-mail to arrange this. Confidential responses should not be sent via the Internet.
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Alternative Formats
Please contact the Oftel Research and Intelligence Unit on 0171 634 8761, or by e-mail, or call textphone 0171 634 8769 for more information.
Freefone – No fee calls to BT’s non-geographic NTS services which are free to calling customers
IP – Internet Protocol; refers to the special network arrangements required for transmitting data over the Internet.
Local Call Fee Access - Calls to non-geographic NTS services for which calling customers are charged at the local call rate
National Call Fee Access- Calls to non-geographic NTS services for which calling customers are charged at the national call rate
NTS - Number Translation Services - calls to certain non-geographic numbers including freefone, local call fee access, national call fee access and Premium Rate services
PRS - Premium Rate Services: Calls to certain non-geographic numbers for entertainment or information services
Originating operator – the telecoms company that provides the line to the customer
Terminating operator - the operator who hosts the service at the other end of the call (eg Internet access)
