Bypass an option or a necessity?: Top world carriers account for most of the traffic being rerouted from the traditional international system

An estimated 7 billion minutes of international telecom traffic will flow outside the global accounting rate regime this year in what is termed "refile traffic." The top 25 world carriers will be responsible for more than 95% of those minutes, according to a study by M.J. Scheele & Associates, San Francisco.

Although the carriers are not likely to talk openly about it, indirect traffic routing is prevalent. The international telecommunications market is fiercely competitive, and carriers constantly are searching for ways to lower their internal costs (Figure 1).

The global accounting rate system holds hostage the traditional routes that large carriers use to send their international traffic. The rates network operators pay to have their calls completed on foreign networks is governed by the traditional bilateral system.

Accounting rates were established when no competition existed. As a result, charges can be as much as 30% higher than if the carrier used nontraditional routes

Although many issues must be considered when refiling traffic, it is sometimes a simple choice of economics. The estimates compiled in the study show a steady increase in the amount of refile traffic (Figure 2).

These estimates are conservative. The majority of the top carriers in terms of minute volumes and network infrastructure predict that 25% of all international traffic will be refile by 2000-that is, 15.5 billion minutes of traffic. The study is based on carrier data and anecdotal information compiled from the top 25 carriers worldwide. PTTs were categorized as either aggressive (those that actively pursued alternatives to their bilateral agreements) or non-aggressive (those that approached refile on a trial basis and were more conservative in the amount of traffic they rerouted). A third category included international wholesale carriers.

The following assumptions about carrier traffic were used in calculating the amount of transit and refile traffic taking place globally (Tables 1 and 2).

These wholesale carriers are growing rapidly, some as much as 25% annually, which is giving rise to alternative routes for international traffic. These carriers are extremely aggressive and are not tied to the same bilateral correspondent relationships that govern many of the routing choices of the larger carriers. They also use refile services as a vehicle to build their traffic volume and fund the growth of their companies. At last count, more than 300 newly licensed 214 international carriers were operating in the U.S. alone.

The study divided the world into three regions: Europe, the Americas and Asia/Pacific. Europe and the Americas were the most aggressive regions, with 14% and 13% of their 1998 regional traffic being refiled respectively.

Asia/Pacific's refile accounted for only 9% of that region's traffic. The regulatory environment and cultural differences may account for the difference. But the region is one of the most likely targets for refile by other countries.

The countries that experience the most refile generally are those with high accounting rates and strict regulation. The countries cited in the M.J. Scheele & Associates study as targeted most often for refile are Malaysia, Korea, Indonesia, Singapore, China, India, Pakistan, the Philippines, Russia, Georgia, Poland and Lebanon.

Although these markets are not liberalized, they are experiencing competition despite the regulatory environment meant to protect them.

Accounting rate reform Increased competition and alternative routing and termination options are forcing the wholesale cost of terminating international calls down.

But other forces are at work. The FCC's benchmark ruling and the World Trade Organization's accord, which took effect Jan. 1, add to the pressure for reform.

Although many countries believe the U.S. has tried to become the global police, many avenues toward compromise are built into the FCC's benchmark ruling. A number of countries are asking to extend their transition time before they must meet the benchmarks, which are designed to bring international telecommunications rates more in line with the true cost of terminating international calls.

The WTO accord adds to the reform pressure. Besides increasing the number of openly competitive markets, the countries that committed to the provisions of the WTO reference paper agreed to give operators from any member country certain rights to use new modes of operation. Those new modes include using alternative call termination methods that bypass the global accounting rate system.

The amount of traffic flowing outside the bilateral stream will continue to increase rapidly. Besides refile, other options include private line bypass, frame relay and voice and fax over IP.

These options represent different levels of service and quality. Carriers now are willing to pay less for lesser grades of service, and this willingness has given rise to the spot market (see http://www/spotrates.com for more information). In today's marketplace, the price you pay for international wholesale services is directly proportionate to your market knowledge and not to traffic volume.

The global accounting rate system is fast becoming obsolete. Powerful factors are leading to its demise, including competition spurred by the World Trade Organization accord, European Commission liberalization, an FCC benchmark ruling and the market itself.

The swiftest changes come from bypass practices that most carriers employ to skirt the accounting rate system. International wholesale rates available on the spot market average 30% less than the settlement rates. The wholesale rates are expected to decline 10% to 13% each year for the next two years.

Although regulations usually take longer to change the marketplace, the WTO accord is proving to be encouraging for carriers aiming to bypass the accounting rate system.

In effect, the accord paves the way for the use of new modes of operation, described in the Chairman's Report of the Seventh Regulatory Colloquium as:

* Leased line resale (private line resale or international simple resale)

* Refile, hubbing and reorigination

* International alliances of operators to provide service to multinational corporations

* The extension of networks from one country into another using end-to-end circuits (not half circuits) with points of presence at the distant end, interconnected to the public service network.

These and other little-known ramifications of the WTO started becoming clear last March at the International Telecommunication Union's Forum '98 World Telecom Policy meeting in Geneva.

For example, member countries have committed themselves to regulatory safeguards that assure fair treatment of foreign operators.

They also agreed in an understanding that participating countries would not use the WTO dispute mechanism to deal with accounting rate issues. This item is to be raised for further study in the next round of WTO negotiations scheduled to begin no later than Jan. 1, 2000.

The FCC benchmark ruling also has varying effects on the system. It aims to reduce the cost of international traffic termination to a more market-based level. Although anti-U.S. sentiment over the ruling is widespread, the FCC will move forward with its benchmarks unless the ITU member countries can devise a multilateral agreement that would override it.

Such an agreement on rate reform would give developing nations that depend on telecom payments a soft landing into the world of market-based competition. If a multilateral agreement is not reached, the market will compensate and bypass will become the norm.