Billing

Before mobile operators can become banks or recoup the billions invested in third-generation networks, they need to sort out how they are going to charge their customers. On the customer end, consumers and businesses need to choose whether to pay for their airtime in advance or receive a monthly bill. But behind the scenes, an even more fundamental battle is taking place: just who should pay?

Interconnection

Whether fixed or mobile, most phone companies can only send bills to their own customers. If a Deutsche Telekom customer in Frankfurt calls a Bell Atlantic customer in New York, only Deutsche Telekom can send the customer a bill. Yet, the call has actually passed through Bell Atlantic's network too, as well as that of a long-distance or international carrier. To ensure that all carriers are compensated for carrying each others' traffic, the phone companies have a complex set of regulations known as interconnect agreements.

Most countries originally had only one phone company, owned by the government (except in the U.S.) and known as the PTT (Post, Telegraph, and Telephone Authority). These companies had a monopoly at home, so interconnect agreements were needed only for international calls. As shown in Figure 7.1, the telcos in both the country where a call originated and the country where it was received got a share of the profits, with the customer who dialed the call ultimately footing the cost.

The Accounting Rate System

Rather than have every carrier negotiate a separate agreement with every other, the ITU devised the international accounting rate system This allowed each operator to charge as much it wanted to foreign companies terminating calls on its network. Not surprisingly, most wanted to charge a lot.

Though some international calls were once genuinely expensive to set up, using scarce capacity on subsea cables, the charges set by the accounting rate system owed more to politics than recouping costs. Interconnect rates have no impact on a company's own customers or a government's own voters, so there was no incentive to reduce them. Indeed, many poorer countries began to rely on interconnect fees as a major source of hard currency.

The international accounting rate system began to crumble in the 1990s, when alternative carriers first appeared. Each country then had to set up its own national interconnect scheme, so that customers of competing operators would be able to call each other. The rates were usually regulated by governments to encourage competition.

Though new operators usually complained that they had to pay too much, these national interconnect rates were many times lower than those set by the international system. Anyone could set up an international gateway of their own, undercutting the accounting rate system and connecting to the PTT via the national regime. With telcos competing for incoming international calls, prices fell. At least, that was what should have happened.

In Europe, international call prices are still very high. It usually costs more to telephone across a border than across the Atlantic. In part, this is explained by competition—there are more carriers in the U.S. than in most European countries, fighting more aggressively for traffic. But the popularity of mobile phones is also a factor. Cellular operators keep international call prices high, even for people who don't use a mobile or make calls to one.

Mobility

Although it is actually cheaper to build a wireless network than a fixed one—erecting a single transmitter costs less than digging hundreds of holes and laying cable to every customer—wireless operators have discovered that they can charge more than their fixed line counterparts. Their excuse is that they need to invest in building new infrastructure and introducing new technologies, one that has some justification where spectrum is auctioned for huge sums.

This mobility premium varies widely according to the customer's contract, the time of day, and the type of call, but is usually several hundred percent. The basic philosophy of mobility says that prices shouldn't be distance-dependent, so the premium is highest for local calls and lowest for international. The good news for mobile customers is that the premium is falling, as mobile operators attack the fixed line market. In 1999, one UK operator charged as much as 70 times the fixed line rate for a call made from a mobile; a year later, this was down to "only" five times the cost.

More controversial is how the mobile operators charge for calls made to their customers. There are two main approaches, both of which are confusingly known by the same acronym, CPP.

• Calling Party Pays. Used in Europe, this system is shown in Figure 7.2. It adds the mobility premium to the interconnect fee, so that the caller pays the full cost. Mobile phones have special area codes, similar to 900 numbers in the U.S., so that people know they will be charged more than for a regular phone call.

• Called Party Pays. Used in the U.S., this system is shown in Figure 7.3. The mobility premium is paid by the mobile customer, so the caller only has to dial a regular number. It was needed because Americans are used to local calls being free, while in most of the world they are billed per minute.

The mobile mania in Europe is often attributed to the Calling Party Pays approach because it means that customers are in control of their own costs. Europeans tell everyone their mobile numbers freely, knowing that the high costs of calling a mobile will put off most telemarketers. As they don't have to pay to receive calls, they also leave their phones switched on at all times. American customers often turn their phones off, and many don't even know their own number because they never give it out.

But Calling Party Pays has its dark side. Most mobile operators market themselves based on the cost of calls made from a mobile, where there is fierce competition. There is far less among the interconnect fees because few customers bother to check how much it will cost others to call them. This makes the charges for calling a mobile very high, on a par with international rates. In Western Europe, it is usually more expensive to call a mobile phone than to call America.

Within a country, charges are passed on to the person making the call, but the accounting rate system allows no way to do the same internationally. A call from France to Britain costs the customer the same whether the destination phone is fixed or mobile, yet the interconnect fee charged by the mobile operator is often higher than the international rate charged to the caller. As shown in Figure 7.4, this could mean that the French carrier actually takes a loss.

In an attempt to stem these losses, companies keep their international call rates high, effectively subsidizing calls made to mobiles from those made to fixed lines. There are only two possible solutions: either charge more for international calls made to mobiles or persuade the operators to end the mobility premium. Neither seems likely, as the former would confuse customers and the latter would give the mobile operator no way to recoup the costs of their licenses.

Roaming

Mobile users suffer the highest charges when roaming internationally, thanks to both the home network and the mobile network wanting to take a cut as shown in Figure 7.5. The costs are so great in Europe that in 2000, the European Commission began an investigation into an alleged cartel. It accuses operators of engaging in anti-competitive behavior by charging more to people roaming on their networks than to their own customers.

The problem is particularly severe in countries with large populations close to an international frontier, because radio frequencies don't respect borders and can "leak" between them. The Swiss city of Geneva, for example, is surrounded on three sides by France. Swiss users sometimes find that their GSM phones accidentally connect to a French network, forcing them to pay roaming and international charges. Most modern phones have a facility to display the network they are using, but not all users understand these messages.

Calling Party Pays does not apply when roaming because people making a call to a mobile can't know whether it is roaming or not. As shown in Figure 7.6, the caller pays the usual cost of calling a mobile phone, then the customer pays the extra roaming fee. The exceptions are some satellite phones, which often connect via a regular cellular network if there's one available. These have their own special country codes, and the highest international rates of all.

Present Pricing Strategies

The other big question facing mobile operators is just what they will charge for. At present, there are two models, one from the Internet and one from the phone system.

• Minutes. Traditional phone operators charge per minute (or other time unit). This is well-suited to the circuit-switched world because a circuit has to be kept open whether or not it is actually being used. It is still the predominant method of charging in both fixed and mobile phone networks, but is not popular among Internet surfers. Per-minute charges are widely believed to have been responsible for WAP's lukewarm reception when it first arrived in Europe.

• Bits. On the Internet, large backbone providers charge each other for the amount of data sent across their networks. It is based on the "snail mail" postal service, in that the payment is traditionally made by the sender. This approach is taken by mobile phone operators who offer SMS messaging; customers pay per message sent, not received. On the Web, it may make more sense to charge the recipient, as few people running sites are going to pay mobile operators for people to look at them. Palm Computing's Web Clipping service does this, as do many fixed wireless operators.

Future Pricing Strategies

Pricing per bit is growing in the short term, but many companies and analysts believe that neither of these pricing models is sustainable in the long term. In both the fixed and mobile industries, telecommunications visionaries believe that capacity will eventually become "too cheap to meter." Many surfers already expect this on the Internet, particularly in the U.S.; they don't pay for every file that they download or for every minute that they're online. As these become free, operators might charge according to

• Access. Most businesses and individuals already pay a fixed fee for Internet access, dependant only on the type of connection they have. The same is true for local phone calls in the U.S., though the actual cost of connecting a phone call is the same whether it is local or intercontinental. In the future, people may pay a flat rate for all their voice and data communications, perhaps with a small premium for mobility.

• Content. Because all mobile operators already have a billing system, they are easily able to charge customers micropayments— fees of only a few cents for looking at specific information. The Japanese operator NTT DoCoMo has already implemented such a system and found that people are willing to pay extra for services as diverse as stock quotes and horoscopes. Each customer spends an average of $25 per month on such premium content, which adds up to huge profits for a network with millions of users.

The closest analogy is to cable TV, where customers pay a set monthly subscription for a limited number of channels, but are also able to access pay-per-view programming.

Payment Plans

Until 1998, mobile phones were given away or sold at a large discount to their true cost. Customers had to sign a contract tying them in to one operator for a minimum period, usually a year. Monthly line rental charges over that year would recoup the cost of the phone, with calls and line rental after that being pure profit. This annoyed customers, who found that the initial "free" phone often locked them into uncompetitive contracts.

Free mobile phones still exist, but in Europe most users don't choose them, nor do they choose to receive a bill. They pay for both their phones and airtime in advance. According to consultants at the Strategis Group, in 1999 this prepay system accounted for two-thirds of all new mobile phone subscriptions in Europe, and a full 90 percent in Portugal, where it was invented. Customers "recharge" their phones with money as they run low, usually by keying in special code numbers found on vouchers or by inserting the phone into a special slot within some cash machines.

Prepay's popularity may seem odd in the U.S., where it has only about 10 percent of the market and is restricted to old analog phones. But Europeans aren't as used to buying on credit, and prepay was originally marketed as an alternative to payphones rather than fixed lines or other mobile plans. They generally allow more minutes per euro (a monetary unit adopted for use by most countries of the European Union in 1999) than calling cards, and of course are far more convenient.

From a customer's point of view, the advantage of prepay is that it allows her to buy a phone straightaway, without a credit check or a contract to sign. It also allows phones to be given as presents or entrusted to teenagers, the most enthusiastic users of all. In Britain, phones regularly top the list of children's most requested "toys" at Christmas.

From an operator's point of view, prepay was originally a great way to grow the market, but it has become something of a threat to their original customer base. Price wars have forced operators to subsidize the cost of prepay phones, so that they can often be bought complete with some airtime for $50 or less. This lets people buy phones and use them only to receive calls, leaving the operator out-of-pocket.

The highest subsidies of all are in the UK, where phone "smuggling" has become popular. Syndicates buy cheap phones in Britain, then resell them in countries where the market is not so competitive and phones are unsubsidized. This annoys operators, but is not actually illegal.

Operators responded to what they saw as abuses of prepay by watering down the concept. Many block incoming calls unless the customer buys a new voucher every few months, and some even charge a fee just for having the phone switched on. Most importantly, call charges are usually far higher for customers on prepay plans. As for many other services, people unable to get credit have to pay more.

The rise of mobile data and banking services gives prepay operators another opportunity—to become banks, rather than just partnering with one. Charging phones with prepay vouchers can be thought of as putting money into a deposit account. This money doesn't have to be used to purchase airtime; customers could also use it for m-commerce purchases, with the operator taking a cut, of course. The same applies to traditional billing, though under this system the operator acts like a credit card company and so has to wait longer for its money. Many traditional banks feel understandably threatened by this and are rushing to develop services of their own.