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Traditional Telecommunications Networks

The International Handbook of Telecommunications Economics, Volume I

Edited by Gary Madden

This major reference work provides a thorough and up-to-date survey and analysis of recent developments in the economics of telecommunications. The Handbook serves both as a source of reference and technical supplement for the field of telecommunications economics.
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Chapter 9: US settlement reform: an historic review

Michael A. Einhorn


Michael A. Einhorn INTRODUCTION The issue of international settlements has suffered from more than a century of relative neglect since its inception in 1865, when twenty European nations formed the International Telegraph Union (later the International Telecommunication Union, ITU) to provide a governing framework for the settlement of international telegraph traffic. Under ITU guidelines settlement interconnected national carriers set rates, for minutes passed between nations, in bilateral negotiation. Without administrative oversight or restraint, carriers had an incentive to negotiate settlement rates well above cost so as to extract higher accounting profits. Retail prices were further inflated by domestic landline monopolies (often PTTs) that passed network infrastructure costs on to international callers. Though settlement charges for calls between pairs of nations are generally equal regardless of call direction, revenues flow periodically from the net originator to the net receiver. The latter receives a per-minute profit equal to the difference between the settlement rates and call cost. This process is advantageous to carriers in less developed countries (LDCs), which typically receive more international message telephone service (IMTS) minutes than they originate, and disadvantage the United States (USA), which is the largest call originator. US billed international minutes grew faster than foreign IMTS in the 1980s and early-1990s (see Figure 9.1). Consequently, both billed and net carrier revenues increased (Figure 9.2) despite declines in billing and settlement rates (Figure 9.3). The revenue difference, which represents outgoing net settlement payments, grew as well. Consequently, the net revenue...

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