Caller Pays as a mobile payment model

A few days ago I posted some thoughts on telecom regulation, EU Roaming Regulation: Be careful what you wish for, prompted by recent calls for regulation of international mobile roaming rates within the EU.  I wasn't advocating a specific policy, merely suggesting caution and pointing out earlier mobile telephone regulatory actions that have had unexpected consequences. After discussing my main idea, I briefly mentioned, in the last paragraph, that I considered Europe's adoption of "caller pays" "questionable."

That paragraph caused Tomi Ahonen to write a very detailed comment in defense of "caller pays."

Tomi has written a number of books on mobile services and mobile marketing, and has obviously thought about this issue at length. I very much appreciate him taking time to comment and I own everyone an apology for not elaborating in the original post. Let me do so here.

Typically, telecommunications regulators define how operators exchange traffic and thus determine the billing model for mobile phone services.  What's at issue is who pays for incoming traffic to the mobile phone.  In the US, the cost of the radio link in either direction (incoming & outgoing) is born by the mobile subscriber.  Most of the rest of the world has adopted "caller pays."  In this case a mobile subscriber only pays for the cost of placing calls - incoming calls are free. Because there is extra cost for mobile airtime, in "caller pays" countries, mobile phones typically have distinct dialing codes and callers, whether fixed or mobile, local or international, know (or should know) that the rates to call a mobile phone are different, typically higher.

Tomi and I agree the caller pays model facilitates rapid adoption of mobile phone service, and I'm sure we both agree caller pays is the best possible policy for developing countries. However, in markets like the US and the EU with highly developed, monopoly fixed-line telephone networks, I see both advantages and disadvantages.  Tomi lists advantages in his comment.

I broached the subject of disadvantages in my original post:

... caller-pays transfers the cost of fixed-to-mobile calls from the competitive mobile sector to the non-competitive fixed-line sector. The US did not adopt caller pays. The result: today, US fixed line subscribers see no difference when calling mobile subscribers and mobile subscribers pay with their previously mentioned large buckets of minutes at low fixed cost.  Meanwhile, fixed-line callers pay 10-20 cents or more per minute to call European mobile subscribers.

Let me illustrate the cost of calling a mobile subscriber in various places by referring to current SkypeOut rates.  The cost of calling any subscriber - fixed or mobile - in the US is € 0.017 ($ 0.021) per minute.  Similarly the cost of calling any fixed-line subscriber in western Europe is € 0.017.  However, the cost of calling a mobile subscriber is much higher:

France - mobile	€ 0.164
Germany - mobile	€ 0.200
United Kingdom - mobile	€ 0.205

Calling a mobile subscriber in the EU is roughly 10x the cost of calling a fixed-line subscriber.  There are exceptions.  If you are a mobile subscriber on the same operator's network, there can be dramatic savings.  But for the general case, calling a mobile subscriber is ludicrously expensive.

This expense has other implications. In the US, and in individual countries in the EU, there are 3 or more mobile operators per market and mobile service is highly competitive. This has driven down mobile calling costs everywhere, and in the US, it has driven down prices for mobile termination.  As a result, US mobile subscribers use their mobile phones more often and for longer calls.  The comparison is "minutes of use."  In the US, the average subscriber uses their mobile phone nearly 600 minutes per month versus EU mobile subscribers who average 142 minutes per month.

I don't want to argue whether caller pays is better or worse.  Certainly, adoption of mobile phones in the EU has run 3-4 years ahead of adoption in the US, and caller pays is at least one factor contributing to that difference.  On the other hand, US mobile phone utilization is way ahead of the EU and the costs to call US mobile subscribers are very low. Correlation doesn't prove causation, but the facts do suggest there are unanticipated consequences to any regulatory approach.

Comments

[Tomi T Ahonen]

Hi Brough and readers of the Communications blog

Thanks for mentioning my comment and I think we are much more in agreement than disagreement.

I think there is some "hidden economics" that is involved in the SkypeOut rates that you consider. And I think it fair that these should be discussed as well.

So when you say that the calls in the USA with SkypeOut incur "only" a 2.1 cent charge, surely that is the charge that SkypeOut charges the caller. There is also the accounting of the actual call received on the cellphone of who you happened to call. It used to be that all calls received on American cellphones were separately invoiced per minute, and now the majority of them are counted into your bucket of minutes. But you have to account for those minutes as well. And should you go over your minute allowance, then you pay your normal per-minute receiving charges for all those SkypeOut calls that you receive on your cellphone (or any other calls from fixed landlines or cellphones).

It becomes more relevant as Americans gradually get into prepaid cellphones (the vast majority of all cellphones in the world are prepaid accounts) who don't pay a monthly fee, they only "pay as you go" for the actual minutes, and go to buy top-ups to vouchers. Again here the incoming calls are of considerable per-minute cost. And these have to be added to the actual costs of receiving that SkypeOut call in America.

Meanwhile for the European model. I hear you, and the numbers you cite are totally correct. However, because it is a calling party pays model (the caller bears the full cost of the phone call, whether it is from fixed landline to fixed landline, or landline to cellphone, or cellphone to cellphone, or cellphone to landline) - there is no "discrimination" of the Skypeout caller. That call arrives from a landline connection and is charged (roughly the same) as any other call from a landline to a cellphone. Remember, in Europe the caller bears the full cost of the call, so if I use my landline to call a cellphone here in the UK, I pay about 20 cents per call.

Now, wireless carriers have used as promotional rates right from the start pricing models, by which calls inside their own networks are the lowest cost. Then under most circumstances calls to other cellphones on other carriers are next cheapest. As the majority of all phones became cellphones about three years ago in Europe, these became also the dominant pricing model. It is now quite unusual for someone to bother to try to call from a landline to a cellphone - as it is almost always cheaper to call directly from your cellphone - remember European penetration is over 100%, so anyone who knows numbers and can talk will also have their own personal cellphone.

SkypeOut is a very compelling offering in markets where the caller is not charged for the full cost of the call, and thus "shifts" part of the cost of carrying the telecoms traffic to the person receiving the call. Whether counted against the total minutes allowance of the receiving person, or whether in some cases actually the receiving person does pay for taking that call on SkypeOut.

But if the cost is fully calling party pays, then of course the caller has to be charged the going rate of the cost of the call - be it a caller from a cellphone, or a caller from a landline, or a caller on SkypeOut.

And one final comment, just to be clear, in Europe (actually all international calling) the exception to all of the above is international roaming. There it was decided that for those travellers who decide to carry their phone abroad, it would be unfair to levy very high international calling charges to an unknowing public thinking that cellphone was still in the same country as normal, so the exception is that even for "calling party pays" countries, if you take your cellphone abroad, you the cellphone owner do have to pay the international "roaming" portion of the call. Just to be clear about this, ha-ha...

But yes, SkypeOut prices are incredibly high in calling party pays countries like all of Europe, when compared with SkypeOut calls in America (or other receiving party pays countries). But the local calls from fixed landlines in those same countries in Europe are the same also to cellphones.

But let me put it in another way. The cellular network is using a scarce resource whenever you place a call onto a cellphone. There is both an actual cost of radio network cost, and an opportunity cost - there is congestion on the cellular network. It is generally counted that the actual cost from one cellphone to another costs roughly speaking 5 cents (with marketing costs and profits, thus the world average per minute price charged is about 10 cents on cellular networks).

Since if you call from SkypeOut and call a cellphone, you are obviously consuming only "half" of the full cost when compared to a call from one cellphone to another cellphone. Then the real economic cost of that call should be about 2.5 cents. In very rough terms, looking at the wholesale costs of "delivering" that call, whether it is in America or in Europe or in Asia, there should be roughly 2-3 cents paid to the network that was carrying the cellular call.

If the economic model is very "honest" it will account correctly for the actual traffic, and charge the user(s) for it.

But there is no free lunch. What happens in America? If you don't pay per minute for that call, and you bet your bottom dollar Verizon, Sprint, AT&T, Cingular, Nextel or whoever carries the call, actually incurs real economic costs very close to 2-3 cents per minute - how do they get their money. They are not in the charity business.

What they do, is charge you a monthly fee. In fact, second to Japan, the highest monthly fees in the world !

That is how they get you. In Europe and Asia, where callers are charged real economic costs for their calls, the actual monthly phone bills in industrialized countries, are about half of what they are in the USA (and Japan).

So if the carrier has made a huge monthly charge, and given you an allowance for call minutes, it is one way to go. I am sure sooner or later the clever customers - read the younger population for whom money is tight - will discover the better payment options..... That perhaps explains why Virgin for example is gaining so much ground in America.

Ok, enough of my pontificating. I really have enjoyed our dialogue. Did I already invite you and all of your readers to join us at Forum Oxford, the free discussion board on the future of wireless, set up by the world's top authors and bloggers on mobile? Join us at www.forumoxford.com - and for your first time sign-up, you'll need the enrollment key "forumoxford". I'd love to continue this discussion - and any other topics - over there.

Cheers !

Tomi Ahonen :-)

[brough]

Sorry Tomi. US mobile phone service is vastly cheaper than that in the UK.

Yes, average ARPU is slightly higher. For example, in 2H05, Verizon Wireless' monthly ARPU was $50.13, Cingular's was $49.85, while Vodafone UK's was only 23.8 pounds (roughly $41.75).

However, for that ARPU, US mobile users got four times as many minutes of use (nearly 600 vs. UK's 142).

And, if you compare per-capita GDP between the US & the UK, you'll find the difference is larger than the difference in ARPU. That suggests US consumers spend less of their total income on mobile service yet get vastly more service.

I suggest you read a recent paper by Professor Stephen Littlechild of Oxford, "Mobile Termination Charges: Calling Party Pays versus Receiving Party Pays" in Telecommunications Policy, Vol 30/5-6 pp 242-277. There's a copy online here:
http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe0426.pdf

It's a comprehensive study of the issue, with footnotes citing an array of other economics and regulatory literature. The growing consensus in the economics community, based on theory and on data from dozens of countries, is that RPP significantly preferable to CPP. Check it out.

[James Ebersold]

I think the caller pays option may have helped build out the networks but I think it unfairly shifts the cost of someones mobile phone to me the caller. Why should I have to pay extra as the caller because someone else decides to drop their landline in favor or a mobile phone. It also discourages competition. In the US carrier competition has driven down the cost of air time. In my own case I have free incoming calls built into my plan. I think this was one thing the US regulators did right about mobile phone services. In Europe where is the incentive to have those airtime costs dropped on the incoming side.

[brough]

Caller pays discourages competition - that's exactly right, James. A few days after I wrote this post I got additional data from Prof. Stephen Littlechild which I posted here:
http://blogs.nmss.com/communications/2006/05/yet_more_on_cal.html

At this point it appears caller pays didn't even help build out the networks, rather, other factors led to Europe's more rapid build out.

[James Ebersold]

It seems obvious to me there is no way with CPP that these costs will drop. I, the caller, have no way influence that cost other than to not call that phone. I was always aware of these costs to some degrees as I know people in Europe but I got more interested in the subject when Vonage added five European countries to the free calling zones with the unlimited plans. This of course excludes mobile phones. It seems to me that the owner of a phone should bear to cost of connecting it to the network. In the case of Vongage I bear the cost of the fibre optic internet service that gets me there. I do have a choice of providers so there is competition there. My call can travel "free" to Spain where my daughter can talk to her friend there at her home for the $24.99 / month I pay Vonage. The cost than skyrockets, to I believe $0.30 / minute, if she were to call her friends mobile phone. Clearly this is a price unjustified by the actual cost to carry that call on the airwaves.

My cellular phone provider Nextel manages to give me 700 anytime minutes, unlimited messaging, unlimited "direct connect", and free incoming for a cost of about $85.00. If I break out the messaging extras I have added and figure I use about 1000 minutes total each month than I am paying about $0.07 / minutes average including taxes. If I get more incoming calls than the average cost per call goes down. This does not factor in the hundreds of direct connect "walkie talkie" minutes I use that reduce my phone minutes. Clearly this is way out of whack with the $0.30 / minute for my call to terminate in a Spanish mobile phone.

So I think, as I said earlier, that was one thing the US regulators got right was to avoid the CPP system. Now carving up the country into all the cities for different cellular companies at the beginning well I think that was anti-competative. Think "roaming charges".

Well that's my humble opinion.