Economics for Telecommunications

Tim Miller is an economic consultant who spoke about his role as an economic consultant specialized in the telecommunications industry. In this specific area there is the the consideration of implementing new networks such as the next generation of data services for example 5G. Furthermore, in his role he provides costing analysis for the functioning of telecommunication businesses. This would take into account termination rates, spectrum holding, antennas, and the amount of users.

Termination rates are a consequence of calling or texting someone who is on a different network provider. Consider calling from your mobile, you connect to antenna, which provides access to the general network. It is at that point where the connection is made, as the other mobile connects to an antenna on its network and is then brought to the general network. In this the termination rate is incurred on the caller, this is due to the call/message going across a network.

In the early 2000s termination rates were around 7 pence per minute, however today they are as low as 2 pence per minute, partly a consequence of regulation by OFCOM in the United Kingdom. This is not the case for the United States with to some extent a duopoly active between Verizon and AT&T both of which charge between $50-$100 for an average contract, in comparison to around £10-£45 in the UK.

If we consider the nature of the termination rates we may note that they are inelastic. In that we have no particular choice in rate, with research suggesting the price elasticity of demand to be around -0.01. Showing the danger that consumers may face if this went unregulated. With termination rates declining year on year, so the question is where does mobile service revenue come from?

Firstly, termination rates are still providing on average £1.5 billion to the four main mobile service providers in the United Kingdom (O2, Three, Vodafone, and EE). Then there are huge profit margins on services such as texts as the average cost per text for the providers is around 0.0007 pence, whereas the average cost per text for the consumer is 5 pence. At first glance one would assume that data provides the next biggest stream of revenue, however from an industry perspective consumers are not paying enough for data and are not willing to spend more. In the majority of data packages for mobile phones once a threshold amount of data is used the provider begins to make a loss for that particular service up until they are able to apply surcharges for the consumer going beyond their data allowance.

The growing issue for mobile service providers is the type of costing analysis they decide to follow. With the greatest issue being the emergence of costs that are difficult to account for when the network is not one whole unit but rather segmented between the different providers. In this we essentially see the issue of share of spectrum, volume of users per spectrum held, and the number of antennas available. Market share is not defined by the share of spectrum held, this is because the share of the spectrum held is a constraint and it is difficult for providers to realize how much spectrum is required in a given area. Furthermore, we can consider antennas in that they are not all owned by the individual provider, but shared as well. With the complexity in costing a result of the need for only one network as it would be inefficient to have two but then the issue of creating a share for each provider of that network.

In regards to the future, as we have a growing consumption of data it will be interesting to see how the industry transforms to deal with the higher data requirement. With now a greater variety of services for calling and messaging rather than through the provider which all use data. For example the average smartphone will be able to have Skype (messaging/calling), Whatsapp (messaging), facebook, and twitter, just to name the popular data based services that can be accessed. This brings up the possibility of having a data only network, and contracts that are only based on data rather than minutes and text allowances.

The main issue in my opinion is still the lack of true competition within this sector, and consequently a lack of drive for innovation. There seems to be an acceptance that we will just go along with one-generation movements as we have seen with 2G, 3G, and now 4G. Contracts with the big four mobile providers in the UK are all relatively similar with the main differences occurring outside of the contract such as EE providing cinema tickets, O2 with priority ticket purchases, etc. To change the situation however would prove intangible, principally a consequence of the fact there is only one network and only so much spectrum that may be accessed.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website


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