Interconnect Charge for Mobile Operators
Principles and Costing Methodology
ITU (RWG) Forum Bangkok
August 03-05, 2005
Ahm...
2
Interconnect Rate Determination
● Benchmark Basis
(Difficult to follow because of varying economies and market sizes)
● ...
3
Composition of Cost Based Interconnect Rate
● Cost of Operation
● Return on Investment
Network Externality factor as ado...
4
Natural Evolution Process for Costing
Exercise
FAC Historical FAC Current Cost
LRIC – Top downLRIC – Bottom Up
FAC – Ful...
5
Cost Causation The Basic Principle
Key to all forms of cost modelling:
● Why was a cost incurred?
● What does the cost c...
6
Cost Model Structure
Direct Cost
Shared Cost
Common Cost
Depreciation
Network Element Split
CurrentAccount
Cost Pool
All...
7
Cost of Operation
● Direct Costs
– Related to one service only e.g. Co-location Charges
● Joint or shared costs
– Costs ...
8
Identification of Network Elements and
relationships between the services and the cost
pools
PSTN Fixed Network
BSC/BTS
...
9
Identification of System Elements and
relationships between the services and the cost
pools
Data Communications Network
...
10
Routing Factor Table
Call
types
MSC BTS
Lin
ks
BTS
to
MS
C
Links
MSC
-
MSC
HLR/
IN
Inter
conn
ect
links
Voic
e
mail
SMS...
11
Return On Investment - ROI
WACC = Rd D/V * (1-Tc) + Re * E/V
• Rd Cost of Debt
• Re Return on Equity
• D Value of Debt
...
12
Network Externality
“a cost or benefit that results from a decision where this cost or benefit
accrues to someone other...
13
Issues for Discussion
● Could ITU be approached on (non-binding basis) for guidance in
case of varying interpretation o...
14
Thank You !
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Interconnect costing for mobile operators at ITU Forum

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Interconnect costing is a specialized subject. The presentation by Ahmad Nadeem Syed made at ITU (RWG) forum in Bangkok discusses the principles and methodology for working out Interconnect charging.

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Interconnect costing for mobile operators at ITU Forum

  1. 1. Interconnect Charge for Mobile Operators Principles and Costing Methodology ITU (RWG) Forum Bangkok August 03-05, 2005 Ahmad Nadeem Syed Director Interconnect Mobilink Pakistan Ahmad.n@mobilink.net
  2. 2. 2 Interconnect Rate Determination ● Benchmark Basis (Difficult to follow because of varying economies and market sizes) ● Cost Basis - Regulatory Requirement - Business Requirement
  3. 3. 3 Composition of Cost Based Interconnect Rate ● Cost of Operation ● Return on Investment Network Externality factor as adopted in UK may be added on
  4. 4. 4 Natural Evolution Process for Costing Exercise FAC Historical FAC Current Cost LRIC – Top downLRIC – Bottom Up FAC – Fully Allocated Cost LRIC – Long Run Incremental Cost
  5. 5. 5 Cost Causation The Basic Principle Key to all forms of cost modelling: ● Why was a cost incurred? ● What does the cost contribute to? The answers to these questions vary from country to country thus no hard and fast rules can be applied with respect to treatment of certain expenses
  6. 6. 6 Cost Model Structure Direct Cost Shared Cost Common Cost Depreciation Network Element Split CurrentAccount Cost Pool Allocation/ Unit Cost WACC Cost/ Minute Routing Factors No. Of MSCs Call Scena rios Traffic Services
  7. 7. 7 Cost of Operation ● Direct Costs – Related to one service only e.g. Co-location Charges ● Joint or shared costs – Costs with relate to two or more services e.g. Network cost ● Common costs – Costs which relate to all services e.g. Overheads – Allocation on Ramsey Pricing or EPMU (preferred) basis
  8. 8. 8 Identification of Network Elements and relationships between the services and the cost pools PSTN Fixed Network BSC/BTS BTS BSC BTS MSC / BSC HLR/VLR BTS PSTN DTE PointofInterconnection MSC / BSC BTS BSC/BTS
  9. 9. 9 Identification of System Elements and relationships between the services and the cost pools Data Communications Network Mobile network elements Network Management Systems Mobile network elements Finance systems Rating & Billing Systems Mediation Platform Bill
  10. 10. 10 Routing Factor Table Call types MSC BTS Lin ks BTS to MS C Links MSC - MSC HLR/ IN Inter conn ect links Voic e mail SMS c Interc onne ct billin g Cust ome r billin g Cus tom er serv ices Cost of sale s % Split of traffic type Minutes Fixed to Mobile - Incoming 1 MSC 1 1 2 0 1 1 0 0 1 0 0 0 85% 85,000 000 2 MSC 2 1 2 1 1 1 0 0 1 0 0 0 15% 15,000 000 3 MSC 3 0 0 0 0 0 0 0 0 0 0 0 0 0 Mobile to Mobile On-net 1 MSC 1 2 2 1 1 1 1 1 0 1 1 1 75% 75,000 000 2 MSC 2 2 1 1 1 1 1 1 0 1 1 1 25% 250000 00 3 MSC 3 0 0 0 0 0 0 0 0 0 0 0 0 0
  11. 11. 11 Return On Investment - ROI WACC = Rd D/V * (1-Tc) + Re * E/V • Rd Cost of Debt • Re Return on Equity • D Value of Debt • E Value of Equity • V Total Value of the company, D+E • Tc Corporate Tax Rate Cost Of Equity Re = Rf + β (Beta) * (Rm - Rf) • Re Return on Equity • Rf Risk free return • Rm Market Risk • β Market Co-Variance Cost Of Debt • Interest Rate Or • Inter-bank Rate + Debt margin ROI = Net Capital Employed * WACC Net Capital Employed = Fixed assets+ Working Capital
  12. 12. 12 Network Externality “a cost or benefit that results from a decision where this cost or benefit accrues to someone other than the decision-maker and is not, therefore, taken into account by the decision maker….. ….Mobile call termination charges should be cost based plus a share of fixed and common overheads as well as an allowance for Network Externalities…..” (Report of UK Competition Commission enquiry into the costs of call termination in UK mobile networks) “Since callers to mobiles therefore benefit from the called party’s decision to subscribe to a mobile network, the economically efficient charge they pay for the call must reflect this benefit” (Oftel) Oftel assumed that the Rohlfs-Griffin factor is between 1.3 and 1.7
  13. 13. 13 Issues for Discussion ● Could ITU be approached on (non-binding basis) for guidance in case of varying interpretation of principles by the operators and regulators? ● How could ITU (RWG) provide assistance in developing a standardized costing methodology/model and establish guiding principles considering that both operators and regulators in Asia Pacific region are in learning curve? ● Accounting separation plays a major role to determine interconnect cost. How can ITU provide assistance in this respect? ● β for mobile sector is generally not available. How could ITU provide assistance in this respect? ● Should network externality factor be considered? ● Could a permanent ITU (RWG) Asia Pacific region interconnect working group be established to provide guidance and professional assistance, where needed?
  14. 14. 14 Thank You !

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