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Is your telephone carrier ripping you off? The hidden rules of telco pricing [Part 1]

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Having seen Australian retailers come under fire for the perceived “price gouging” of consumers, Tony Simmons, founder and managing director of The Full Circle Group, has undertaken research that reveals parallel pricing regimes in the telecommunications industry.

From its client billing databases, The Full Circle Group reviewed 600 clients, 5,000 mobile phone rates, 4,000 fixed line rates, 14,250,000 unique telephone records representing a total of $61M in annual telecommunications spend over a 5 year period. All of these rates were obtained from Tier 1 Australian Telcos.

Here, in the first of two articles, Simmons reveals the group findings on fixed lines – and a wealth of hidden truths about Australia’s telco pricing.

For most of 2010, we saw telecommunication carriers in the news for the wrong reasons.

We frequently read about accusations of anti-competitive behaviour, rising customer complaint levels, endemic billing errors reaching an all-time high and network issues impacting mobile users in major CBD locations.

The worst part is that no real solutions were being proposed for any of these problems – the regulators all appeared to be spectating.

2011 has started off in similar fashion, as a class action against a major mobile carrier takes shape and questions are still being asked about the competitive pricing advantages of the NBN.

And now, it turns out that allegations of “price gouging” are not just reserved for Australian retailers: the telcos are allegedly in on it too.

Over the last six months, The Full Circle Group has been processing a wealth of pricing information in order to present our findings to the Australian business community. This pricing information falls into two categories: fixed line pricing and mobile pricing.

The findings on fixed line rates are numerous and startling, but they might best be summed up in two words: size matters.

Here’s what we found.

Why is it the same price to connect to Shanghai as it is your local fish and chip shop?

Some Australian businesses have fixed-line call rates of 2c per minute (billed per second) for calls to China with an 11c flagfall.

Our calculated total average rate for a local call for any Australian business is 11.7c.

This means the connection rate for a call to China can be less than a call to any local number, even your next-door neighbour.

Of course, you can speak locally for any length of time for no extra charge.

However, when you consider that the average local call time is 142 seconds, the disparity seems hard to reconcile.

Why is PSTN pricing so expensive?

Our calculated average price for business line rental in Australia is $38.18.

If you were a consumer and paid for a standard HomeLine Plus, you would pay less than this amount.

How does this happen? Should all businesses open personal accounts?

Also, as larger businesses generally do not have local rates linked to the line rental charges of PSTN lines, such as with consumer plans, we can not find a reason for this price differential.

Businesses should not be paying STD flagfalls

We have seen flagfalls for National calls all but disappear over the past 4 years.

It seems very incongruous that there is no connection fee for a call from Melbourne to Brisbane, but a connection fee for a call to the shop at the end of the street.

Accordingly, it would be a fair assumption to conclude that domestic call pricing is not based on the geographical location or the distance that a call traverses.

Why? Because it is generally the same price for a call from Adelaide to Melbourne as it is for Adelaide to Cairns.

Regulation aside, pricing for Local vs. National calls appears to be a simple case of telcos charging a lot more for a lot less.

Businesses should not be paying flagfalls on STD calls anymore. If your business is on an older style plan, start looking for cheaper options.

Mobile calls should be getting cheaper… right?

Calls to mobiles phones have become the mainstay of business telecommunications.

Over the last five years, we have seen significant substitution of Local and STD calls for mobile calls. It is to be expected that this massive increase in mobile call volume would translate into a decrease in unit price.

The average price for a call to a mobile phone from a fixed line business phone is 24.4c per minute with a 2c flagfall.

However, when you consider that many mobile calls are still being charged at 42c per minute with a 22c call connection fee – with some standard small business or residential plans being much more expensive – it demonstrates that there is a significant margin being made by the Telcos on all fixed calls to mobiles.

As this is the most important and voluminous call type, most businesses are paying far too much.

International calls should be negotiated for your specific needs

Among key calling destinations worldwide, the average calculated rate for calls to the United States is 8.9c per minute with a 2.4c flagfall. For calls to China, on the other hand, the average is 30.4c per minute with a 3.3c flagfall.

Why is it cheaper to call these destinations using a tier 3 or 4 carrier than our major carriers? Tier 1 carriers carry a lot more traffic and, because of volumes, should be in a position to negotiate more favourable interconnection rates.

And why is China, a major trading partner with Australia, still so expensive to call? In all likelihood, this is an historical pricing artefact that has not been updated to reflect volumes, because it is not financially convenient to do so.

It also demonstrates that businesses that remain on long-term contracts miss downward price shifts.

And now, the real issue.

The bigger the company, the better the rates.

Is that justified?

Australian telecommunications networks are shared among all users for telephone calls. As far as we understand operational detail, there are no real incremental costs for new network customers. Most of the telecommunications assets are already depreciated, sunk in the ground or established at existing exchanges.

When a new customer connects they are quite often charged installation fees for new connections. However, most of the systems are automated, so there are only really a few keystrokes and operator time involved. How does this manifest itself in the vast price discrepancies between smaller organisations, consumers and bigger businesses?

In traditional manufacturing or supply-chains you can often, legitimately, argue that pricing can be lower for larger orders as there are “economies of scale” with certainty of orders of delivery. In telecommunications, there is no such certainty, pricing is set for 24+ months in advance and volumes over certain call types may never eventuate.

Furthermore, most telecommunications network support systems are automated and customer service and client management for smaller customers are generally managed by large, shared (often off-shored) call centres. Larger customers are much more expensive to service as they often have dedicated account teams and more complex solutions which require elements of bespoke billing or management.

We all understand the concept of larger customers buying more and thus paying less per unit. However, the question must be asked: is this reasonable, justified or even fair? Not much in business is fair, but are small businesses being gouged because telecommunications is an essential service for which they will pay?

Next month: In Part 2, Simmons presents the Full Circle Groups findings on the costs of mobile phone calls.

Image by skippyjon [Alexandre Normand]

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