International Traffic Changes Lanes

Posted: 1/2004

International Traffic Changes Lanes

By Khali Henderson

The wholesale international termination
business is far different from the days of bilateral agreements between
incumbent operators. These deals do exist and remain the foundation for
worldwide traffic exchange, but the introduction of mobile and VoIP players are
changing the landscape not only the sources for termination but also its
prices.

The traditional bias toward bilaterals versus resale isnt
what it was, notes Michael Musa, vice president of international long
distance for Qwest Communications International Inc. Qwest formed the
international long distance unit as part of its wholesale business in April
2003. Musa, a veteran of the international telecom business, says, unlike years
past, his job now is to manage a stable of suppliers that meet the quality and
price requirements of wholesale customers. These might include operators,
resellers or IP carriers.

Underlying this change, Musa says, is an evolution of the
international long-distance market to one that has to be more precise in
addressing customer needs and in recognizing, ultimately, the end user is that
customer.

Dan Vargas, vice president of sales and marketing for the
United States and Latin America at France Telecom Networks & Carriers,
agrees, adding some wholesalers have lost sight of that fact. Some players are coming around to this way of thinking, he
says and notes, The pure play wholesale- to-wholesale model is not as
sustainable as it once was. He says price alone is not working anymore and
almost every international wholesaler has retail and wholesale rate
tables even for carrierto- carrier traffic. The so-called retail rate table
enables them to break out the higher quality and higher priced routes.

Evidence of this migration also is in the September 2003
launch of Select Routing by Arbinet Inc., operator of thexchange minutes trading
floor. Select Routing products feature only routes tested by the exchange to
meet certain quality standards for the previous seven consecutive days.

While France Telecom resells and manages several of its own
lower-cost VoIP routes, it also maintains many traditional bilaterals, which
enables it to offer customers international toll-free service, tollfree home
country calling for travelers and ISDN services that its wholesale customers can
pass on to their end users. More and more customers are coming to us as a
stable provider, Vargas says, noting France Telecom has seen a 15 percent
increase in U.S. originated traffic over the last 12 months. He adds, where France Telecom has direct termination
agreements it may be second or third on customers wholesale routing tables,
but typically are first on their retail ones.

QoS isnt the only aspect affecting rate tables; traffic type fixed or mobile also is having a great
impact. Worldwide, says research house Telegeography, approximately 25 percent
of international call volumes, or 36 billion minutes, are terminated on mobile
phones a percentage that is increasing, the firm reports. This increase
affects call pricing because terminating on mobile networks usually is more
expensive than on fixed-line networks. In Spain, for example, wholesale costs to
mobile phones may be up to 14 times those of calls to fixed lines.

This situation is largely mirrored in countries
particularly in Europe with a calling party pays billing structure. In
the United States, however, both parties the caller and the called pay
for mobile connection, so termination rates for mobile calling are much more
like those for fixed lines. Where U.S. wholesale carriers have blended fixed and
mobile international termination rates, the opportunity for arbitrage for savvy
players is apparent. Thus, such pricing has been broken out.

Meanwhile, U.S. carriers working through the U.S. Trade
Representative and the Federal Communications Commission have been pressuring
foreign regulatory bodies to end the U.S. ratepayer subsidy of foreign mobile networks by bringing
mobile termination in line with costs. According to Telegeographys tracking, the results have been
mixed, ranging from the establishment of best-practice guidelines for setting
interconnection prices in France to direct mandates for costoriented pricing in
Sweden to no intervention whatsoever in Germany.

Speaking on background, one executive from a large CLEC told
PHONE+ the situation is absolutely untenable. When compared to wireline
interconnection, wireless interconnection is so much higher there is no economic
justification. If you have rates out of whack, you are going to have
arbitrage, he adds.

Indeed, there are companies operating in the gray, either
posing as end users to pass traffic to carriers that still charge blended rates,
or by operating GSM gateways wherein they run traffic through a device that
makes the traffic appear to be originated from a mobile phone for which
termination rates are cheaper. The operators eventually discover these tactics,
and the posers are disconnected.

If you see a lower-priced source, you might be able to get
it for a month or two, but then it gets shut off, explains Rich Grange, CEO
for New Global Telecom, adding in that case it was probably a fixed cellular
box. The strategy is to use all means to force them [wireless operators] to
play ball.

Their incentive, however, may be low. Telegeography reports mobile operators depend on termination
for 25 percent of their revenue.

VoIP wholesaler ITXC Corp., however, claims to have negotiated
attractive mobile interconnection rates and it credits the strategy in part with
boosting its wholesale customer base. Its not a problem; its an
opportunity, says Dan Fitzgerald, senior product manager for ITXC.