Termination rates

On every long-distance call in the United States, the customer pays for:

• Origination (dial tone service): connecting the call from the originating customer's equipment to a telephone company central office or exchange). In the era of wired local telephone service (slowly coming to an end with the ubiquity of cell service, starting in the 2010s) this was usually provided by a single company in each locality.
• The transportation of the signal (the call) to another telephone company office near the recipient of the call.
• Termination, completing the call from the receiving company central office to the receiving subscriber's equipment.[1]

Historically, each of these steps could be carried out via a separate company, and the toll paid by the originating (or in some cases the receiving) caller would be split among the three providers. In the United States, the long-distance connection between the two local telephone company offices was furnished by the Bell System, until that was dismantled in 1984 with the mandated splitting of American Telephone & Telegraph (AT&T for anti-trust reasons. Since then, especially with the two largest remaining companies – AT&T (the same name, but quite different equipment and service) and Verizon), if the same company provides all three components it keeps the entire charge (toll) paid by the customer. Otherwise, the money received is divided; this is known as intercarrier compensation (ICC) and is intended to keep the telecommunications system functioning, by having every phone company receive compensation for the use of its network.

Through 2019 this was the system used for most international phone calls. The originating company in the originating country collects the money (except for collect calls, in which the receiver agrees to pay), keeps some for its expenses, pays some to a company which connects the two countries' networks, and pays another charge, the termination charge, to the company or government agency which connects the incoming international call to the subscriber's equipment in the destination country. While the toll for intra-country (domestic) calls is often controlled by government regulation, there is no world supervision of international call charges. The destination country company or government agency can charge anything the market will bear for its portion of the call — sometimes this varies depending on the part of the receiving country being called — and the originating company must collect and remit this fee to the destination country. As of 2019, there are dramatic differences between countries in the charge demanded by the receiving company for completing (terminating) the call. For example, on one network the 2019 cost of calling from the United States to the Dominican Republic is 6¢ ($0.06) per minute, while a connection to Cuba, a shorter distance, is 92¢ per minute. To some extent this reflects different costs and efficiencies in different countries, but it is used by some countries as a revenue source.

In the past, high termination charges in some countries were used as a payment mechanism for phone sex services.[2] In the best-known example, the Guyana Telephone and Telegraph Company was acquired by a U.S. company specifically for this purpose.[3] The Guyanese were (deliberately) unable to access the phone sex lines.[4]

With the advent of cellular phone service, the basic structure did not change, but the services use different equipment than that used by the traditional networks, the companies are often different, and everything had to be renegotiated. There are often multiple providers for the originating and the termination portions of the call, since with cellular systems, in which the signal (the call) is transmitted between the customer and the central office via digital radio (before 2008, analog radio) rather than copper wire, the cost of setting up a new or competing service is far lower.

In the United States, as of 2011 the termination charge for cellular calls was eliminated by federal regulation, meaning that as perceived by the consumer, there is no difference between the cost of calling a phone on a cell phone network and a phone on the traditional wired network ("land line"). In most foreign countries this is not the case, and because of the termination charges charged by the mobile networks which complete the calls, which are usually paid by the caller ("calling party pays", although in a few places receiving party pays), the cost of calling a subscriber on a cellular network can be dramatically higher than calling a land line. In some countries the charges vary depending on which of several competing cellular companies completes the call (which company the call recipient subscribes to).

For example, a customer of Operator A wishes to call a friend who has an Operator B mobile. Operator A will charge the customer a fee per minute (the retail charge) for this call. Operator B will charge Operator A a fee for terminating the call on its network. This termination rate therefore forms part of Operator A's cost of providing the call to its customer.

Termination rates may be commercially negotiated or may be regulated. A range of approaches can be used to regulate rates. International benchmarking or cost models such as a LRIC (Long Run Incremental Cost Model) or LRIC+ cost models are the most common approaches to calculate the efficient levels of termination rates. In LRIC models, the termination costs are calculated for an efficient hypothetical mobile operator. The model assumes that firms use the best technologies to provide mobile calls and services. It is a long run model as it takes into account the growth of demand, which is calculated using data on observed traffic, income and user information. It considers the time period that the service provider needs to invest in capital improvements to provide the mobile call services. Termination rates (TRs) derived from this model therefore calculate capacity costs of each element of the network, expressed in terms of per minute use. Under a pure LRIC model, costs are also calculated for an efficient hypothetical firm. The difference between both models is that while the former calculates TRs through the division of total costs by total demand, pure LRIC methodology calculates TRs by comparing a firm that provides mobile voice access and one that does not, to determine the necessary costs of providing mobile services.[5][6]

Historically there was and, in some countries, still is much debate about the best level for interconnection rates. Some argue that approaches based on models do not take into account real world risks and costs and suffer, among other things, from survivorship bias (they consider that risk can be assessed by looking only at the returns of surviving companies) and therefore underestimate the true level of risk. Another concern is based on Real Options. This considers the benefit that is extinguished from the moment that an investor chooses to invest and suggests that the loss of this right to invest should be taken into account when looking at the expected returns on investments made.[7]

The fundamental principle of any telecommunications network is to allow calls originating from a subscriber A to reach a subscriber B, whether on the same network or on another network, commonly known as "any to any connectivity". In more technical terms, traffic, originating from Subscriber A is terminated at a point of destination, Subscriber B, and in order to allow for traffic to be routed and terminated between different operators, "interconnection" must be established. Interconnection allows for calls placed by a subscriber in one network to reach a subscriber in another network. Such a call is "terminated" in the destination network.

An alternative to traditional termination rates is to consider data transfer rates in conjunction with voice over IP (VOIP), which is, like the internet, a peering model. As data transfer is paid on both ends for the same VOIP call, this special form of termination is expected to gain importance. Such a model obviates the need for any regulation at a national level, other than a provision preventing mobile operators from restricting VOIP calls.[8]

The calling party pays (CPP) principle is the most commonly used termination charging approach among MNOs around the world, especially in the European markets.[45] Within the CPP principle the caller has to pay mobile termination rates (MTRs) and there is no contribution from the called party. However, the called party defined the cost of the MTRs once selected the MNO to register with. This is the root of the MTRs monopoly problem. Since the early days of mobile communications MTRs are considered to be a monopoly.[46] However, this is a market-defined monopoly, since there is no physical limitation such as wires for reaching a mobile user. Thus, MTRs are regulated by national telecommunications regulatory bodies across the world.

• History of mobile phones
• Interconnection