What
Makes
International
Long Distance
Rates
Go Down?

What crucial product or service costs less today than it did 50 years ago? Not gasoline, not housing, not food. Long distance telephone rates, unlike any other necessity on the marketplace, went down as much as 70% in the past half century. Why?

International telephone rates, like any other product or service, are determined by the interplay of supply and demand. In a market with no outside influences, and increase in the supply of something without a corresponding increase in demand will make the price of that thing go down, whereas an increase in demand without a corresponding increase in supply will make the price go up. A corollary of this model is that if the price of something is lowered, demand generally rises, whereas if the price is raised, demand ultimately will drop.

One major outside factor, however, has kept international telecommunications from following these basic rules: in most countries around the world, long distance has been provided by a monopoly. All monopolies have two major problems. First, they are run inefficiently because there is no competition to force them to minimize costs and maximize productivity. Second, without competitors in the marketplace, there is no obvious method to determine what the price of a service really should be.

This competitive vacuum allows the monopoly carrier to take the "whatever the market will bear and then some" approach to pricing. As long as the whole world put up with this situation, very few citizens of any nation noticed how far out of alignment international telephony rates had become with the cost of providing that service.

But competition heated up in the USA's long distance market in 1984, and the reverberations from that started to dismantle the "traditional" pricing system in the rest of the world. Customers in Western Europe and the Pacific Rim already enjoy the benefits of increased competition. About two years ago, people started asking how an American reseller of long distance calls provides a service between the UK and the USA for $.19 per minute when BT and Mercury charged nearly $1.00 per minute. The simple answer is the American reseller buys in a fully competitive, cost-based market, whereas BT and Mercury had a relatively cozy duopoly.

The EC has shown a strong resolve to introduce competition, and that's what it will take to restore the market's fundamentals of supply and demand

By Cliff Rees

Consider that long distance supply in the developed world is enormous (the ITU estimates that nearly 75% of the global fibre optic cable capacity isn't used at all), and the supply will skyrocket over the next decade just by introducing better electronics at either end of existing cables. Consider that the incremental cost of sending a photon around the world is no greater than sending it down the street. Consider that demand for long distance services is certainly growing rapidly, but not exponentially. The only possible result is a rapid decrease in the rates for long distance services around the world. Competition will force rates to be based on the cost of providing service. It will force providers to minimize costs while improving the quality and variety of available services. The biggest winner? You are the consumer who was supposedly being served by your monopoly provider all these years.

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