An evaluation of settlement rate reduction on the profitability of international voice carriers

The accounting rate system is an accounting technique by which each telecommunication company exporting a call to another country compensates the terminating carrier for its services with a pre-determined per-minute settlement amount which is usually 50% of what is called the accounting rate. Historically, the accounting/settlement rate system has served the industry well for many years, as a means to equitably share the revenues from international services between origin, destination and transit countries. While the accounting/settlement paradigm is still with us today, the conditions for it to work well have changed; thus challenging its very existence. The major reasons for this are: the difference in equipment/infrastructure efficiency between developed and developing countries, the imbalance of traffic between country pairs and the relative disparity in inflation rate and exchange rate. These asymmetric conditions raise serious questions about the appropriateness of the accounting rate paradigm.; The thesis analyzes different aspects of the accounting rate debate: What is an appropriate and fair split of the accounting rate? Is 50%–50% a fair split between industrialized and developing nations? We develop a modelling framework and apply it to specific examples to evaluate under what conditions lower accounting rates can be favorable to international voice carriers, whether they are still operating as monopolies, or if their country is opening up to competition, as has been the intent of the recent World Trade Organization (WTO) round. The thesis also investigates issues such as subsidies to upgrade the network, collusion between carriers. Finally, it looks at the effect of the development of technologies such as (i) callback, which involves a transit country to bypass the costliest link, or (ii) an “open-sky” competitive environment where carriers are allowed to compete overseas and bring back traffic to their own countries, and how they bring more fuel to the settlement rate debate.