The International Handbook of Telecommunications Economics, Volume I
Edited by Gary Madden
Chapter 9: US settlement reform: an historic review
9. US settlement reform: an historic review 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,...
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