Rethinking Telephone Call Charges

The UK telecoms regulator Ofcom is attempting to simplify the way consumers are charged for telephone calls. (Disclaimer: I work for a company which is regulated by Ofcom. This is my personal blog.)

To deal with the multitude of different types of phone numbers - each with their own unique cost - and the rise of the mobile phone, Ofcom want this to be the norm by 2015:

Under new rules confirmed today, telephone users calling service numbers will in future see the cost broken down into an 'access charge' to their phone company, plus a 'service charge' to the company or organisation they are calling.

I think that's short sighted - and not a particularly simple way of approaching the problem.

There are all sorts of ways we could re-imagine calling charges. When in doubt, I tend to err on the side of simplicity. Why can't all calls cost the same amount?

A Little History

In the UK we have the following situations when called from a land line (that is to say, a non-mobile phone).

• Geographic numbers. The dialling prefix is based on the phone's physical location. If you are calling from an landline phone close to the location, you will be charged a "local rate". Calling from far away gets you the "national rate".
• Non-Geographic local rate. The number isn't related to a specific location, but is charged at the "local rate".
• Non-Geographic national rate. The number isn't related to a specific location, but is charged at the "national rate".
• Freefone rate. The receiver pays for the cost of the call. The caller isn't charged.
• Premium rate. The caller pays a fixed rate per minute of the call. The charge can range from the low pennies up to several pound.
• Mobile rate. A set rate to call mobile phones.

Different phone providers will offer various bundles which may see a certain amount of free calls (at certain times or dates) to some of the numbers listed above.

Calls from mobiles, however, are charged at different rates. Because mobile changes the paradigm of being fixed to a single location, there are no such things as local or national rates. Because of the higher charges from mobiles (to pay for the investment in building the network) there is an additional charge for calling "freefone" numbers.

The main reason there are different call charges for mobiles is because it costs companies money to build and run infrastructure. In order to recoup that money, Mobile Network Operators (MNOs) charge access fees and interconnect fees.

Luckily, the UK hasn't imported the bizarre American notion of normal domestic customers paying for incoming calls.

A Simplified Explanation

Interconnect fees are interesting. Let's consider two fictional phone companies - MegaCom and TinyTalk.

MegaCom charges TinyTalk whenever a TT customer rings a MC customer. TT does the same for incoming calls from MC customers.

In an ideal world, there would be the same number of customers at each company calling each other and - over time - the interconnect fees would cancel each other out.

Because TinyTalk is a smaller company, the regulator has allowed it to charge higher interconnect fees than MegaCom. This means that TinyTalk earns more revenue from MegaCom customers calling in than MegaCom earns from TinyTalk customers.

This means TinyTalk can offer a price plan which is competitive with MegaCom. If it weren't for interconnect fees, new entrants to the market would either have to be run at a loss for many years, or compete against a lower-charging rival.

Similarly, the fictional foreign company PhonoVox charges interconnect fees to international rivals to call its customers. It hopes to generate more money in incoming revenue than it pays out.

Enter The Internet

For most domestic users, there is no extra charge for visiting a website which is hosted very far away, or on another provider's network. There's no incremental charge for sending email. Internet Telephony (VoIP) is free of charge. Call anyone, anywhere, and as long as their computer has speakers and a microphone it won't cost either of you a penny. Video chat is included in the price.

Behind the scenes, Internet Service Providers (ISPs) have to pay interconnect charges. They generally pay other networks ("Transit") or have reciprocal and free arrangements ("Peering").

Depending on the ISP's network, they may have to pay an infrastructure company (typically BT) to provide connectivity to the house, and rent space in one of their telephone exchanges. That's on top on paying for their own business costs.

To the consumer the proposition is simple - pay a single monthly fee and be able to send Internet traffic to wherever they like. Some ISPs will charge more for faster speed, or the volume of data which can be sent.

This is radically different from the way telephone companies operate.

Behind The Scenes

Telephone networks used to be all analogue. When you dialled London from Scotland, a set of mechanical robots would physically connect wires together up and down the country until there was an unbroken link of copper between the two parties.

Since the 1990s, the UK has had a purely digital landline network (System X) and a digital mobile phone system (GSM).

As the 21st Century wears on, both networks are transitioning to Internet Protocol as a means of moving sound between devices. In the case of BT, using 21CN - for mobiles the old network will be replaced by 4G VoLTE.

The Future

In the not too distant future, you will pick up your landline phone (if you still have one) and call a mobile number - the entire conversation will happen over an IP network. Just like the Internet.

Now, it's important to realise that the call itself may not be carried on the public Internet. Most probably the two providers will have a dedicated network link between each other for speed and security.

All the same, it's now clear that the way in which we are charged for phone calls no longer matches the reality of the network. Calling locally is no cheaper than calling nationally in an all IP network - not in any meaningful sense. Shuffling bits to non-geographic numbers, or to different networks doesn't represent a significant cost that can easily be charged for.

Landline and mobile networks still have an infrastructure cost to pay for - but it is not immediately clear if it is necessary to charge for calls at all any more.

This leads us to the inevitable conclusion that complex call charges should be scrapped. Indeed, it would make sense that calling plans (whether landline or mobile) should be charged on the basis of the volume of data consumed.

That could mean a fixed fee for "unlimited" reasonable incoming / outgoing calls - or a per MegaByte / minute charge which was identical no matter the number called.

Mobile networks now regularly include "unlimited" amounts of calls on their service plans. The only numbers which are generally excluded are non-geographic rate, international rate, premium rate, and freefone.

Non-geographic no longer makes sense in an IP network. A number could be routed to anywhere on the planet. Indeed, if you've ever rung a UK number and received a call-centre in India, you'll know this is already the case.

International phone networks are already moving towards IP networks. The network infrastructure for dealing with international VoIP is identical for dealing with domestic VoIP. Speaking over long distances is no longer a premium product for which a network can charge.

Freefone was excluded because the receiver didn't want to bear the higher call charges from mobile. If there is no difference in the charges for an IP interconnect, there is no reason why freefone numbers should exist at all. It is conceivable that a company or service may be willing to pay the charges of those with no way of paying for their own call (charities, emergency services) but I imagine that in a world where are calls are inclusive, they would be few and far between.

Finally, premium rate calls. When I am on the Web, my ISP doesn't get a cut of every £ I spend at Amazon. Nor does it take any part in the transaction when I pay a monthly subscription to a news site. Why then should my telephone company insert itself between me and a premium phone call?

There is a convenience factor for me of only needing to maintain a single financial relationship - but there's no extra cost involved for the phone network in routing my call, so it is not entirely necessary for them to profit from the call.

Free For All

Ofcom's proposed changes are - I think it is fair to say - a stop-gap. Well before 2020 I would expect a radical shake-up of the way telephone calls are charged for.

As more people move to Skype, Google Hangouts, and other VoIP products, phone service providers will be forced to come up with a competitive offering. A Skype call from the UK to New Zealand costs nothing extra to the consumer who is paying £20/month for broadband access.

As companies take more customer service queries via Twitter and email, they may well decide to ditch the expensive landlines and tell customers to get on to VoIP if they want to speak to a real human. The company may have to upgrade their networking infrastructure - but that will be cheaper than paying for phone calls.

Mobile companies are still able to charge a premium for the "novelty" of wandering around the country while you speak. As WiFi becomes more prevalent, will people ditch the mobile contract in the same way they ditched the landline? Why pay for a phone service you don't need when the high street is littered with free coffee-shop WiFi?

Voice is about to have its "MP3 Moment". A cheap iPod Touch, free WiFi, and a free VoIP app means people will "pirate" voice calls and deprive phone networks of their traditional revenue.

Tinkering around the edges with "access charges" isn't the solution the industry needs. The long term challenge is simply how does a company generate enough revenue to cover the costs of building a high-spec data routing network and make a reasonable profit?

Tricky Solutions

If I were the boss of the world (one day, dear followers, one day!) I'd look at a solution which was good for business and consumers. Accepting that voice becomes a near-zero revenue generating product, and that most modern CEOs want to be running exciting companies with fantastic profit opportunities, I think the solution becomes fairly obvious.

Mandate a national IP network. Ideally, government should be in the business of providing national infrastructure which is critical to the long term prospects of the country. The private sector isn't currently providing the technology needed for fixed-line services (BT hanging on to its ageing copper network and struggling to hit 76Mbps FTTC and Virgin Media having a reasonably fast Fibre Optic network to a tiny proportion of the country) - nor for mobile (massive coverage gaps with all the networks and data-speeds which are underwhelming by international standards).

Such a move could be accomplished by overt nationalisation. Imagine what we could accomplish with a Universal Service Obligation for ultra-fast Fibre-Optic Internet and 4G coverage!

Assuming that's not politically possible, networks should be mandated to share resources. We have already seen Vodafone and O2 (my current employers) enter into an infrastructure sharing project. T-Mobile and Orange have merged. Three still relies on T-Mobile for its 2G network.

Would a single national mobile network be such a radical change? It's going from 3 networks paying thrice for everything, down to one network which can benefit from economies of scale. The benefits of universal coverage would save MNOs a huge amount of money and mean they could compete on customer service, phone choice, and bundled deals.

I was once told that British Gas' main business wasn't supplying gas and electricity - it was convincing people to take out its expensive insurance products.

In the same way, most MNOs want to move away from the "boring" task of selling barely profitable voice, text, and data bundles - they want to sell music, apps, concert tickets, video subscriptions, and high APR mobile phone loans.

Voice and Data are utilities now. They're about as exciting as the energy or water markets. No CEO of a cool mobile brand wants to become the boring provider of a boring pipe.

That's what is happening right now - regardless of whether we end up with a nationalised network or not - voice is become data, and there's only one real way to charge for that; flat fee or per Byte.

Phone networks in their current configuration can't survive on selling access. They have to turn to selling a lifestyle, financing a device, supporting a must-have service, and constantly innovating new reasons for customers to stick with them rather than going down the "pirate" route of leeching WiFi to connect to their favourite VoIP service.

This is the consequence of the All IP Network. Everything is a bit - and large, lumbering, and expensive companies have to compete against small, nimble, and cheap/free providers of bits. Ofcom is right to make "freefone" numbers free to call from mobiles - but I worry that by the 2015 due date customers will simply have given up on traditional voice all together.