Telecom myths: the international revenue settlements subsidy

The US FCC claims that 70% of its net settlement payments to foreign operators is a subsidy, and has used this as a basis for its 1997 Benchmarking Order-determining price cap settlement rates that US operators should pay to foreign operators for terminating US traffic. The evidence shows this is not a subsidy, but monopoly profit. However, the margin of monopoly profit (price minus unit cost) is lower than the margin realised by US operators for terminating traffic from other countries. These margins, in turn, are lower than the mark-up of price over cost that is charged to consumers of US international services. Imbalances in traffic flows between countries are a normal part of international trade in any industry, and with the possible exception of US-Mexico relations, the 1990s international telecom trends are explained by the success of the US economy, particularly in exporting services, and the direct actions of the FCC and US operators. As the FCC benchmarks are implemented, high-cost countries, including many poor developing countries, will be required to subsidise the monopoly profits of US operators, introducing a major constraint on the capabilities of these countries to develop national networks. The ITU has taken a more constructive approach to reform, based on consensus and a more detailed examination of termination costs in different countries. But this is unlikely to be supported by the US as its operator's benefit more under the umbrella of the FCC order. Ultimately the settlement rate system will have to give way to a uniform structure of termination rates in each country for traffic coming from any other country. This will benefit consumers and efficient network development at all levels. But the path to get there is likely to be a difficult one, with substantial resistance from the most powerful interests reaping monopoly profit from the existing system.