Forbes' Peter Huber on inter-exchange pricing

Rohit Khare (
Fri, 27 Aug 1999 20:03:28 -0700

Munchkin reserve currency exchange rates, anyone? :-)

The concept that Bell Atlantic owes him money seems preposterous
today, but just you wait....

Wherever you roam
By Peter Huber

TAKING YOUR NEW WIRELESS PHONE to Disney World can cost you more than
taking your kids. It's quite a shock when the "roaming" charges show
up on your bill some weeks later. Chalk it up as a lesson in what
could be the most important unsolved problem in modern economics.

How much should one network pay to hand off traffic (or peripatetic
customers) to another? Wireless phone companies ask that question
more often than most. Hundreds of them own separate bands and blocks
of spectrum, scattered across the country. So they negotiate hundreds
of bilateral agreements to carry each other's roaming traffic.
Current prices vary wildly, from 25 cents a minute to well over $1.
And these are wholesale prices, between very large buyers and sellers
of minutes.

But don't roaming imports just balance roaming exports? No. AT&T, for
example, has acquired licenses in almost every major market. So its
customers don't roam off network very much. That's why AT&T can
profitably offer "one-rate" service packages. But AT&T can still sell
lots of roaming to smaller carriers, and it does. At the other
extreme, a virtual wireless company can sell nationwide service
without owning a single license or tower. It just signs roaming
contracts everywhere. A carrier's roaming books can run all surplus,
or all deficit, or anything in between.

Next problem: All minutes aren't equal. Big networks are worth more
than little ones. I own a phone network myself--eight phones,
scattered throughout my home. I receive about as many phone calls as
I place. If all networks and minutes are equal, Bell Atlantic ought
to pay me to terminate calls on my network, just as I pay to
terminate calls on Bell Atlantic's. But that would be economic
nonsense. Our two networks are so unequal that in fact I pay the
phone company for both inbound traffic and outbound, and that's
obviously how it should be.

How much network A is worth to network B also depends a lot on
proximity. Manhattan needs roaming in Brooklyn more than it needs
roaming in Burundi. And building a million-person network requires a
lot less wire in Manhattan than in Maine. Beyond that, Manhattan's
wireless carrier may give away expensive handsets to sign up
customers, hoping to make back the cost on the minutes. That suggests
cheap rates for Miami's roaming customers, who bring their own
bottle. But then, the Manhattan carrier's own customers pay it $30
for their first minute of use each month--that's the flat monthly
fee. The Miami customers don't pay any flat fee--not to the Manhattan
carrier. How, the Manhattan carrier asks, can we recover our huge
fixed costs from these Floridians who aren't paying the $30? At this
point a stiff roaming charge doesn't look so ridiculous.

The puzzles get harder still when networks are part substitute, part
complement. In the 1970s MCI built the cheap parts of the long-haul
network on the prairies, but counted on AT&T to convey traffic over
mountains, and over the last, most expensive, mile to the customer's
home. AT&T tried to set interconnection rates accordingly. Lawsuits
followed, and the upshot was the breakup of Bell in 1984. But that
didn't solve the underlying economic conundrum. Fifteen years later
long distance and local phone companies are still negotiating
interconnection rates. They've just brokered a major new deal, in
fact. The FCC will be reviewing it shortly.

Similar problems have beguiled owners and regulators of networks
since the early days of the telegraph and railroad. But they are
multiplying now as never before, in local phone markets and at the
interfaces between the various tiers of the Internet. No economic
theory specifies how interconnection prices "ought" to be set, and no
stable pattern has emerged from the market itself.

Up to a point, network companies can sidestep the complexities by
extending their own reach. That's what AT&T is now endeavoring to do
in both its wireless and its cable ventures. But nobody will ever put
it all in one package, wire and wireless, voice and Net, Brooklyn and
Burundi. Providers will keep promising single rates and simple bills,
but networks will keep multiplying faster than any single provider
can build and bundle.
From the consumer's perspective, it will all remain a tangled
economic mess. The frugal consumer will nonetheless labor to pair his
calling habits with the best option in the tangle, or pay a stiff
premium for declining to do so.

Peter Huber, a senior fellow at the Manhattan Institute, is the
author of Law and Disorder in Cyberspace (Oxford Press, 1997); E-mail
address:; home page: