Annex 1

Some Features of Pricing and Costs of Telecom Products

The product profile and cost characteristics of a sector are important considerations for any regulator examining the price mechanisms relevant for that particular sector.

Telecom operators provide two types of services. One is the link-up of their infrastructure facilities to other operators who can then use these facilities (interconnection) to provide its own services to its clients. The other is the regular services provided to end-users. Prices for both these types of services normally involve charges for access to the network, rental of hardware facilities, and charges for actual provision of the service (i.e. for the use of the facilities). Examples of different services include basic telecom and value added services, and within basic telecom the local, long distance and international calls. Examples of different types of users include those in the rural or urban areas, or residential or business users.

A significant feature of telecom costs is that, since the same telecom facility can be used to provide more than one service, there is a need to allocate common costs to different services. This is usually a difficult exercise. Also, a large proportion of the total telecom costs are fixed costs (i.e., a small proportion is marginal cost), and the average and marginal costs decline with an increase in output. Furthermore, telecom technology is changing rapidly, there are different types of technologies in use at any time, and a consideration of aspects such as numbering policy, pulse rates, and billing technology and costs are important to get an overall picture regarding telecom revenue and costs.

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