What is fair interconnect?

January 18, 2016

Multicolored telecommunication cables

What is interconnect?

Interconnection is at the core of communication among mobile subscribers and mobile operators alike. For a number of operational years, and sometime even before operations, mobile operators have signed stockpiles of agreements on top of infrastructure, to fulfil both subscriber and business demand for global reach. Operators spared no expense interconnecting with each other, either via local and regional carriers, submarine cables and even satellite uplinks.

The market

While the interconnect market was closed on mobile operators and a few international carriers in the early 2000’s – resellers, wholesalers, brokers and universal telecom providers have increased the number of market players. The telecommunications market now, on a wholesale level, resembles commodities trading or stock trading with equal number of suppliers and operators. Terms like ask and bid price, fair value and market value, commitments and targets are commonly and widely used.

Buyers & sellers

Without a doubt, mobile operators still hold the majority of high quality supply of A2P Voice and Messaging airtime into any given market. They own the network and the capacities and are the price givers in relation to their business models, budgets, targets and return on investment. On the other hand, enterprises, OTT’s, big Silicon Valley conglomerates, and a few other products and online services in operation now, and yet to come in the near future, hold the key to current and future demand and are the demand creators.

Wholesalers buy from mobile operators and sell to enterprises, on a buy low sell high business model, driven by global high volumes and small margins. For a wholesaler to go about any inter-operator agreement, three main conditions need to be met:

  • Mutual interest
  • Technical diversity
  • Fair value

Fair value

Fair value in investing?
Is the value an individual investor assigns to a company marketable security based on own analysis of the company financial information?

Fair value in economics?

Is the potential price of a good or a service, which is a close approximation of the value, said in a perfect market? Consideration is given to supply and demand and competitive goods and utilities received from that good or service.

Perfect market in economics?

A theoretical market structure in which the following five criteria are met:

1) All firms sell an identical product (true in messaging).

2) All firms are price takers – they cannot control the market price of their product (true to some extent with the exception of a few relationships).

3) All firms have a relatively small market share (true to some extent with the exception of a few monopolies).

4) Buyers have complete information about the product being sold and the prices charged by each firm (true in messaging).

5) The industry is characterized by freedom of entry and exit (true in messaging).

Perfect competition is sometimes referred to as “pure competition”.  Stock and commodities market are the best approximation to perfect competition

The conclusion

From the above we can deduce that fair interconnect Is the value a wholesale buyer assigns to a mobile operators messaging product, based on analysis of interconnection cost in the operators country of operation, considering:

  • The price of competitors (other wholesalers)
  • The number and price of all substitutes (email, voice and IM)
  • The wholesaler historical quantity demanded (volumes analysis)
  • The return from a complete cycle of buying and selling (bottom line)
  • Local currency of the mobile operator (foreign exchange impact)
  • Local interconnection in the operator home country (regulations and price caps)
  • Retail messaging pricing (wholesale never pay the ticket price volume based reductions)

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