What is interconnection and why is it important?

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[Response by Eric P. Chiang, May 2009]

“According to ITU surveys, interconnection-related issues are ranked by many countries as the single most important problem in the development of a competitive marketplace for telecommunications services…” (Intven et al. 2000)

This statement exemplifies the importance of the role that telecommunications regulators have on interconnection. Interconnection, which is the linking of telecommunications networks so that customers of one network can communicate with customers of another network, is important for several reasons, including:

  1. It eliminates the need for a customer to subscribe to multiple networks in order to be able to communicate with all other customers.
  2. Dominant carriers can hinder or eliminate competition by delaying interconnection, degrading the quality of interconnection, or charging high prices for interconnection.

For example in some countries, mobile carriers sometimes become ensnarled in interconnection disputes and delink their networks. Many customers in these countries find it necessary to have a SIM card for each mobile operator to ensure that they can reach customers on all networks during the times of these interconnection disputes. This raises costs for customers and decreases the rate of call completion, which costs customers time.

Furthermore, as global commerce continues to become more integrated and paperless, efficient interconnection is important to enable activities such as electronic banking, e-commerce, mobile roaming, and e-mail. Efficient interconnection also facilitates the implementation of new technologies as countries reap value from global connectivity and strive for cost-saving technologies. Although the term interconnection and the term access are often used interchangeably, many industry experts prefer to draw distinctions between the two. Intven et al. (2000)describes the distinction as follows:

  • “Interconnection means the physical and logical linking of public electronic communications networks used by the same or a different undertaking in order to allow the users of one undertaking to communicate with the users of the same or another undertaking, or to access services provided by another undertaking.”
  • “Access means the making available of facilities and/or services, to another undertaking, under defined conditions, on either an exclusive or non-exclusive basis, for the purpose of providing electronic communications services.”

A general overview of interconnection issues can be found in Module 2 of the ICT Regulation Toolkit (2007), a new Internet-based resource available at: http://www.ictregulationtoolkit.org/en/index.html

Regulatory approach to developing interconnection: Regulation is vital in the development of interconnection agreements, especially in countries new to competition within its telecommunications sector. Incumbent operators face gains and losses from interconnection:

Gain to incumbents:

  • expansion of network
  • increasing total traffic
  • development of new technologies

Loss to incumbents:

  • loss of market share to new entrants
  • decreased power to influence policies and laws

Because incumbents often perceive that the value of potential losses outweighs the gains, incumbents often engage in strategies to hinder interconnection and protect their markets; for example, by delaying implementation of the interconnection agreement or by charging excessive fees to entrants. As a result, intervention or guidance by regulatory bodies is seen as a necessity in promoting a healthy competitive environment.

The key roles of the regulator include determining appropriate prices, which generally involve identifying appropriate costs so that prices are cost based, and resolving disputes.1 Inherent in these roles is the regulatory challenge of removing cross subsidies. Jamison (1998) points to two main issues relating cross subsidies with interconnection and competition. The first issue deals with how to fund universal service obligations, which in some countries have been funded through usage prices. (Some studies challenge the notion that such monies were actually used to promote network expansion and subscription.) The second issue deals with how much price flexibility should be permitted in markets subject to competition. The role of cross subsidies appears throughout the discussion on interconnection, from its role in allocating joint costs to the need for rate rebalancing in order to create a fair competitive market.2

 

Resources

Telecommunications Regulation Handbook, Module 3
Washington, D.C.: World Bank, 2000.
Intven, Hank

ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.

Regulatory Techniques for Addressing Interconnection, Access, and Cross-Subsidy in Telecommunications
Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 113-129.
Jamison, M.

 

Footnotes

  1. See also What are common cost models used for determining interconnection tariffs and how do they deal with common costs? and What is the difference between cost-based and retail-price based interconnection charges? in this note for more on pricing models.
  2. See also How can a telecommunications regulator determine whether the interconnection tariffs a company proposes will encourage efficient entry by low cost suppliers? for more on this topic.