October, 1998

Although countries are at different stages of progress, virtually every country in the Americas is in the process of liberalizing its telecommunications sector to improve and extend service, expand choices, and reduce costs. Twenty countries in the hemisphere signed the February 1997 WTO agreement on basic telecommunications services, a set of commitments to liberalize and open telecom markets. (The full text of each country's commitment under that pact can be found at www.infoamericas.org.)

Typically, the process begins with the privatization of a state-owned monopoly carrier. Many governments permitted these carriers, once transferred to private ownership, to retain monopoly status for a fixed period, after which competition is introduced in "value-added" services such as paging and cellular telephony, and later in basic services such as local and long distance.

As countries liberalize, they also grapple with the challenge of creating a regulatory framework for a competitive market. The challenges include setting ground rules for the transition to competition, determining how to treat the former monopoly (especially if it retains substantial market power), and accommodating digital-era technologies and processes (such as Internet telephony) that defy old regulatory concepts and create new possibilities for telecommunications services.

The United States is at an advanced stage in this process, but it has by no means completed it. The 1996 Telecommunications Act promised greater competition, but a key promise of that law -- competition in local service -- has been thwarted to date by court battles fought by the local monopolies, the former Bell companies. Debates are raging over the 1996 Act and the FCC's implementation of it, the future of universal service obligations, and the regulatory treatment of Internet telephony.
 
 

Survey of costs

In July and August of 1998, the Alexis de Tocqueville Institution surveyed Latin American and Caribbean markets to find the cost of basic telecommunications services for residential consumers. We did not examine prices for "value-added services" such as cellular service, even though many consumers, especially in countries with large pent-up demand for phone service, use this as their basic telephone. Nor did we examine business rates.

For the sake of simplicity and uniformity, and to gauge the prices that affect the greatest number, we focus on the cost of basic residential service as an important benchmark in itself, and as a reasonable indicator of the general level of telecom costs.

Because billing methods differ, comparisons are imperfect. Comparing the cost of local service presented a particular problem: Ecuador, Haiti, and the U.S. allow unlimited local calling for a flat monthly rate, while all the other countries in our survey charge completely or partially (e.g. after a hundred-call threshold is reached) on a per-minute basis for local calls.

We used a "market basket" approach that is common to consumer cost surveys. We created two hypothetical usage patterns for two families, and we measured the costs on their monthly phone bills according to the rates in their countries.

The first family (Low Usage) makes primarily local calls and a minimal amount of long distance calls each month.

The second family (High Usage) is a high-income family that makes local calls, plus a substantial amount of domestic long distance service and some international calls, and pays for Internet access in the home. (This inclusion of Internet access is the only "value-added" service price we examined.)
 
 

Local service costs are generally low for minimal usage...

Monthly bill for 240 minutes of local calls (all charges in U.S. dollars).
 

The average of these charges for Latin American and Caribbean countries is $12.22, 34% less than a U.S. consumer pays (albeit, like his counterparts in Haiti and Ecuador, for unlimited local calling). This gap may be partially explained by the widespread practice of subsidizing local service with domestic and international long distance revenues (Haitians, for example, pay $5.90 per minute to call London or New York). "Rate rebalancing" is the process of eliminating this cross-subsidy; this has been undertaken in Chile, Mexico, and Argentina -- a fact that probably explains these countries' relatively high local service costs.
 
 

...while long distance rates are generally higher than in the U.S.

Monthly bill for ten five-minute domestic long distance calls.
 

The average charge for this modest amount of long-distance usage in Latin American and Caribbean countries is $15.81, two and one half times the U.S. charge. If we eliminate Haiti so that its exorbitant charges do not skew the sample, the charge is $8.35, still 39% higher than in the U.S.
 
 

"Low use" consumers pay approximately the same as in the U.S...

Monthly bill for 240 minutes of local calls, plus five ten five-minute domestic long distance calls.
 

This is a hypothetical phone bill for a family that makes minimal local calls and a modest number of domestic long distance calls each month.

The average charge in Latin American and Caribbean countries is $28.01, 15% higher than in the U.S. If we again eliminate Haiti to prevent it from skewing the sample, the average charge is $21.47, 12% lower than in the U.S.

So, while there are a wide range of charges, the average of these hypothetical "low use" phone bills is close to the bill paid by U.S. consumers. All of the countries in the sample, however, have per capita incomes less than half that of the U.S.
 
 

...while "high use" consumers pay significantly more.

Monthly bill for 1500 minutes of local calls, 240 minutes of domestic long distance, five four-minute calls to London, five four-minute calls to the U.S., and 30 hours of Internet access.
 

This is a hypothetical phone bill for a family that makes greater use of basic phone service, and uses some of the services essential to the information economy -- international long distance, and Internet access. In this category, the U.S. consumer's charges are less than one third (30%) of those paid by consumers elsewhere in the Americas. If Haiti is eliminated, the differential is still high: the U.S. charge is 32% of the non-U.S. average.
 
 

Conclusion: High Costs Are A Brake on Competitiveness

In February 1997 when the WTO telecom services agreement was reached, WTO Director-General Renato Ruggiero predicted that liberalization would bring "very significant" price reductions to consumers, perhaps resulting in global income gains of a trillion dollars in one decade. The agreement would also make "access to knowledge easier," he said, resulting on other benefits. "Information and knowledge, after all, are the raw materials of growth and development in our globalized world."

Policymakers know that access to reasonably priced telecommunications services is critical to any business that operates in the global economy, from start-ups to established international corporations. A British Telecom/MCI survey of the world's top thousand corporations placed telecom infrastructure as the third most critical factor in decisions about location of new international facilities -- only political stability and a skilled workforce ranked higher. The factors that drove the manufacturing economy (raw material and capital costs, transportation infrastructure) all scored lower.

Our data starkly show the way high rates can tilt the playing field to the competitive advantage of users in liberalized telecom markets.

For example, a home-based business proprietor in the U.S. may decide to explore marketing opportunities in the U.K. When the American entrepreneur makes five four-minute calls to London, he pays $5.40. His competitors in Latin America are at a disadvantage; for the same calls a Mexican pays $25.20; a Venezuelan $53.60; a Peruvian $31.20; and a Bolivian $43.60.

Our survey, then, indicates the gains that are to be realized when competitive markets are functioning, and prices are driven toward costs. There is no doubt that the hemisphere is moving in this direction; governments are committed to liberalization, and capital markets are financing the competitors who are building the infrastructure for competitive, digital-era telecom markets. However, many countries are struggling with the inherent challenges of transforming their telecom markets, and with the resistance posed by former monopolies opposed to changes that risk any erosion of their market position.

Will the situation improve?

High and uneven telecom costs ensure that the market will continue to provide incentives for technological innovation and creative routing of traffic to evade the traditional phone network through Internet telephony, "call-back" services, "by-pass" arrangements that avoid settlement rates on international traffic, and other means. These kinds of telecom "arbitrage" are sometimes vexing to regulators and they are always despised by traditional dominant carriers, but they do drive costs down.

Public policy is also helping, as countries carry out commitments to open their telecom markets. But in a sector where regulation can be unintelligible and "competitive" market conditions can be more apparent than real, consumer and public awareness is critical. We hope that this survey, and future editions of it, will help to create a clear standard against which the results of market liberalization can be measured.
 
 

Notes on the survey

1. We welcome readers' contributions to keep the survey data up-to-date. Anyone wishing to contribute data can send it or any inquiry to peters@infoamericas.org. We made a strong effort to reach multiple sources in each country, and to find the lowest prices available on the market. In the fast-paced telecom market, however, it is likely that we missed the lowest prices in some markets, and it's equally likely that new competitors have been undercutting rates in some of the hemisphere's highest-priced markets since we collected our data. So we encourage readers to contribute, and we will keep a current version of our data on the Infoamericas site.

2. We recognize that direct comparisons of long-distance charges in countries of differing size do not reflect equal conditions and cost structures. Our data reflect peak rates for the longest distance call in each country.

3. The region-wide cost averages we stated are not weighted by population.

4. In the international long distance data, we measured the cost of calls to London and the U.S. for all countries except for the U.S.; in that case, we measured the cost of calls to London and Chile.