Price war ends receiving party pays in Sri Lanka

Posted on October 4, 2008 / 17 Comments

In a fullpage advertisement that will be published in the Sunday papers on October 5th, Tigo, Sri Lanka’s “third” mobile operator (not that we place that much stock in market share calculations based on numbers of active SIMs), will effectively end the unloved receiving-party-pays regime in Sri Lanka. Its tariff scheme is about the simplest I have seen in a long time: all incoming calls free; offnet outgoing 10 LKR cents a second (roughly USD 0.001); onnet outgoing 5 LKR cents a second (roughly USD 0.0005). No time periods.

This is a case of the market responding to what the customer wants in the face of regulatory failure, or a work around of the type we discuss in our book. From 1999, the Telecom Regulatory Commission has been considering a shift to Calling Party Pays, but has balked for various reasons. In 2004, the decision was taken and a news conference was announced. Just hours before the news conference, the politically appointed Secretary to the Ministry/Chairman of the TRC, unilaterally and possibly illegally overrode the Commission decision, saying he cannot be responsible for allowing this decision to go through just before the election. He kicked it to a public hearing. The public hearing committee counted the NUMBER of submissions pro and con, and decided that the public was against CPP even though it was obvious that the con submissions were based on a common template and were orchestrated by a union. So Sri Lanka remained RPP, while both India and Pakistan, which started the process later, converted and gave the customers what they wanted. Regulatory failure caused by political interference and staff incompetence.

The Tigo action comes in the context of a full-blown price war initiated by “No. 2” operator Mobitel and the response last week by the market leader Dialog. For the last few years, everyone has been inching toward ending RPP. No RPP was being charged from postpaid customers for all practical purposes. The Mobitel salvo ended it for government employees and pensioners a few weeks back. The Dialog response last week ended it for all, but asked for a one-time fee to get the benefit. Now Tigo has written the script for Mobitel’s response and also perhaps for Hutch and Bharti Airtel Lanka.

The people have been given what they want. But the regulator still has work to do. The fixed networks should not get the free ride on the mobile networks they have enjoyed for the past so many years. Completion of a call originated in a fixed network on a mobile network causes costs on the mobile network. From the time mobile was introduced in Sri Lanka in 1989, the fixed networks have collected the retail price of the call (usually the higher price of a national call) and KEPT IT ALL, without giving one cent to the terminating network. The excuse was that the mobile networks could charge for terminating the calls under RPP.

On the other hand when a call to a fixed network is originated on a mobile network, the mobile operator PAYS A TERMINATION CHARGE to the fixed network. In 2007, for example, Sri Lanka Telecom earned LKR 593 million in such payments. A Sri Lankan fixed network operator will pay termination fees to other fixed operators; it will pay termination fees to foreign fixed operators; it will even pay termination fees to foreign mobile operators. The only operators it will not pay termination fees to are Sri Lankan mobile operators.

Now that consumer demands and competition have ended RPP, the mobile operators are providing termination services to fixed operators for free, cross-subsidizing it from origination services. This is wrong.

It is high time that this anomaly is remedied. Sri Lankan mobile operators are offering some of the lowest mobile prices in the world. The least the regulator can do is to ensure that they are treated fairly.

17 Comments

Curious George
October 4, 2008, 7:37 pm
Won’t this cut throat competition lead to a collapse of the industry. We, customers enjoy every reduction and we are happy. But if the industry collapse like the US housing market, we all will suffer. Are there examples of such collapses due to price wars from other countries???
Rohan Samarajiva
October 4, 2008, 7:49 pm
In October LIRNEasia will release mobile price benchmarks, which should give us a sense how much the prices have come down and how they compare with the other low-price countries, Bangladesh, India and Pakistan.

I do not know of any countries where mobile industries has collapsed as described above. Puzzled by the analogy to the US housing market. The problem was not price competition, but problems in the credit market which created an unsustainable bubble.

If the TRC acts to quickly level the playing field for the mobile operators by ordering the fixed operators to pay termination charges for calls completed on mobile networks, it will give the mobiles another revenue stream which should help with the collapse you fear.
Me
October 5, 2008, 7:33 am
What’s RPP?
Gini Appu
October 5, 2008, 7:44 am
The consumer will win, if the market is allowed to flourish.

The success, or failure, of TIGO’s move would depend on one player: Sri Lanka Telecom.
Jack Point
October 5, 2008, 10:13 am
Two issues:
I have been against calling party pays, which I believe is the system in the UK. This leads to very high call charges and less usage. Am I correct in this?

On the subject of industry consolidation, it is inevitable given the price war and there can only be one winner – SLT/Mobitel. They do not need to make a profit and I dont think Mobitel CAN make a profit selling the Uphara package (240 per month for virtually free calls during daytime)

Also we hear that SLT has managed to get instructions issued that all government departments and state institutions can only use SLT. This regime will only be too delighted to see the exit of the privately owned telcos and the emergence of the national champion.

The TRC will keep issuing new licenses – the government needs the cash but SLT seems to have a mandate to drive everyone out of business.
Careem
October 5, 2008, 10:38 am
Its great to hear news like these in the Sri Lankan Market where competition is playing a vital role and finally the customer gets the benefits. The authorities should do their job in serving the citizens needs and help implement strategies which will be a win win situation to the customer and supplier. This will lead the country to a better tomorrow.
Rohan Samarajiva
October 5, 2008, 11:15 am
What is receiving party pays?

In order to complete a call involving two networks (e.g., Dialog and SLT), the resources of both networks (switches, spectrum, wires, etc.) have to be used.

Currently, when a Dialog customer wants to call an SLT number, she pays a retail price to Dialog. In order to complete the call, Dialog pays a wholesale termination charge (normally less than the retail price the customer paid) to SLT. That is what adds up to the LKR 593 million I refer to above.

Currently, when a SLT customer wants to call a Dialog number, SLT charges that customer a price (national call, if I recall correctly). It does not pay Dialog anything, because under RPP, Dialog is free to cover the cost of completing the call from an incoming call charge. Under CPP, SLT would have to pay Dialog a termination charge.

Jackpoint’s objection to CPP should not be to CPP as such, but to high termination charges levied by mobiles in the UK. In India, they have CPP, but the termination charges are about the same for fixed-to-mobile and mobile-to-fixed.

There is nothing sacred about CPP. But in a converging environment you cannot have CPP for some and RPP for others. You got to have all under RPP or all under CPP. Stephen Littlechild makes a theoretical argument that RPP is superior to CPP, but it is clear that what the people want is CPP. They do not want to pay for calls initiated by others.
Janaka Beneragama
October 5, 2008, 2:34 pm
With incoming call charges virtually non-existent now I do not care if they have a CPP or RPP. Dialog was making so much profit and it did not seem the RPP system affected them. More than Rs. 9 billion a year is more than enough.
indi
October 6, 2008, 12:26 am
There’s generally pro-fixed, anti-mobile bias in all government policy, from taxes to termination. Part of it is just the legislation being 20 years behind, part of it is the bias towards the state-owned operator.

Think they also just think of fixed line as a service (like electricity) and mobile as a luxury (to be taxed). Think the fact is that mobile more than anything enables average people, and now enables them to access Internet. Anything that can leave the golden goose alone is welcome.
Absent
October 13, 2008, 10:15 pm
We need to thank Tigo for this move. The entire telecom market was waiting for this for ages. Finally it happend without regulatory intervine thanks to the competition.

just thought about the recent changes in the mobile market, outgoing free offers, “Upahara” for public sector employees by mobitel.It sounds like a political move infavour of the present government ( The posters and Advertising campaign implies so).

Actually speaking, can an entity offer such a scheme profitably?? where is the money comming from network expansion etc etc??if so why Sri Lanka Telecom cannot make such an offer???

or are we seeing a classical example of cross subsidisation between SLT and Mobitel???if so being a SLT consumer am I paying for somebody else’s calls???

is cross subsidisation legally allowed in Sri Lanka????

Appreciate if somebody clarify my doubts!!!
Nadun
October 26, 2008, 2:30 pm
HI Professor, I hear CPP is not in place, But do you think Tigo and Dialog jumped the gun. Since they will be loosing out on incoming revenues. And if CPP is in place do you think its fair for Tigo and Dialog to offer their tarrif packages with higher call rates. Since that is what they are doing on their per second and incoming free packages. I would think giving incoming calls free is very fair but increaseing outgoing call rates isn’t. As CPP anyway is benefited by the network which receives the call, why not pass this benefit to the customer.
Rohan Samarajiva
October 26, 2008, 4:24 pm
CPP is not in place.

It is fair for Tigo and Dialog to give their customers what they want, which is not to pay for incoming calls. Nothing is free, so they are paying for the incoming calls through their outgoing calls.

What is not fair is that the fixed networks keep all the money paid to them by their customers for calls to mobile numbers; and not pay any of it to the networks who spend resources to complete the calls.
MuHum
November 4, 2008, 10:16 am
Hi new to blog, but Mr.Rohan i think that you have got mistake in the last comment, as dialog & tigo have given I/C free. yes its true, that when you see it from out broth the network have given the I/C free, but other two operators too have given, but with “condition Apply” mode, but I see that only network that gives the real freedom on I/C call is only tigo, as it always gives the services to customers on “No Condition Apply”(this is published in public media too). So correct is tigo only doing the fair to its customers.
Rohan Samarajiva
March 15, 2009, 2:17 pm
The final nail in the coffin of RPP is the Dialog announcement that there will be no charges for incoming calls on postpaid and prepaid packages http://www.dialog.lk/en/mobile/. It some time, but now Sri Lanka is for all practical purposes, a CPP country.
Rudolf van der Berg
October 28, 2009, 12:15 am
Professor, I can agree with you that the fixed network receiving money for both incoming and outgoing calls is a bit excessive. I do not understand however how you can argue in favor of a CPP regime. It’s fixing one mess with another one. You surely are aware of termination monopolies. The European Regulators Group is now arguing for an end to CPP in Europe. The logical solution is to go to a Bill and Keep model (or better named a Peering and Transit model) Both the receiving network and the originating network are then responsible for their own costs and customers pay for the use of the network they want to use and not for the network the other party wants to use.

One important note, though on the retail side RPP has been abandoned, on the wholesale side it is still RPP in Sri Lanka, or I must have missed something on the TRC website
Rohan Samarajiva
October 28, 2009, 8:04 am
@Rudolf

I am fully aware of the weaknesses of CPP. But I do not understand why its proponents do not argue for it to be applied to fixed phones as well, in this age of convergence. Making a call is using a service that one has to pay for; receiving a call is also a service one has to pay for. If payments are to be made, they should be for both (and not one bundled with the other as in CPP).

This is economic theory, but this is not the only thing of relevance. It has been found, for whatever reason, that people hate the idea of paying for a call they did not initiate. Thus the victory of CPP. If one is against CPP, one’s opposition should not be limited to CPP in mobile.

SKA. Talk about moving from the frying pan to the fire. Bill and keep or sender keeps all gives an open license to the illegal bypass operators who live off the arbitrage between international and national calls. It causes additional perverse behaviors too many to mention. I make no judgment on its appropriateness for Europe, but it is definitely not the solution in countries where illegal bypass is a factor.

Perhaps the picture will become clearer if you do not conflate payment regimes at the consumer level (CPP and RPP; these directly affect the consumer) and those at the wholesale level, such as termination fees (symmetrical or not) and SKA/Bill and Keep, which do not affect consumers directly. You can mix and match: CPP and SKA; CPP and termination charges and so on.

Finally, it is Eurocentric and incorrect to say that CPP leads to high prices. India is CPP and has the lowest prices in the world.
Rudolf van der Berg
October 28, 2009, 1:48 pm
With regards to Bill and Keep or Peering and Transit as it’s known on the internet you couldn’t be more mistaken. It is the only business model that makes economic sense. It is the only one that doesn’t need and hasn’t had regulatory intervention. It is also the only one that promotes competition between transit parties and their customers to get the lowest rates possible for wholesale connections between two points. Not to be able to bypass the national telecoms operator for a voice call is a failure of a regulator to understand the reality of todays networks. National networks should live of their nations and not let the rest of the world pay extortionate prices for something that isn’t worth what they are charging. And if you do believe it is a fair price, let’s do an experiment, stop all international calls for a week and see who will be demanding that Sri Lanka is connected back to the world. I am willing to bet the world couldn’t be bothered, but Sri Lanka could.

The role of a regulator shouldn’t be to regulate voice. It should be to regulate communications. Communications are bits these days and voice is an infinitely small part of modern communications and if it isn’t already on mobile, it should become so very soon. Promoting any system that leaves the old and doesn’t promote the new is wrong in any way.

CPP or RPP at the wholesale level on any network and in any nation , including India overcharges for Voice interconnection by a huge margin. It also benefits the larger network operators and it makes it difficult to make voice just an application on the network. Delivering the call to the receiver is something the receiver should pay for and gladly pays for on the internet. They gladly pay because they are charged a fair price for those bits. the fair price is set such that most users never know how much they use and that is fair.

Saying that CPP or RPP leads to high prices isn’t Eurocentric. It’s a fact of life if left unchecked by a regulator. It doesn’t need a degree in economics to understand that if you could ask any price you wanted and the other party would have to pay, this would lead to people abusing the system. Well Orange in The Netherlands and Neuf in France did increase their termination fees. In Sri Lanka you have the evil incumbent who chares originating charges which are extortionate.

Sorry, it’s a bit of a rant.. trying to do two things at once