Bilateral Voice - Does It Have A Future?Introduction Ten years ago, international voice was a very different product to what we see today. Bilateral voice Carriers exchanged information and voice minutes with each other in a formalised manner, meeting once per quarter, or once every six months to negotiate a deal that would give them a net cost base that would be sufficient to be able to price their traffic to that destination over the coming period, and hence to make a profit. The methodology of a bilateral voice agreement is often misunderstood, but in reality is fairly simple. The worked example below highlights a very simple bilateral agreement, and how its cost accounting advantages both companies : Example of a net cost bilateral voice deal : A UK carrier negotiating with a Spanish carrier for termination of minutes over their joint facilities… UK – Spain : 3million minutes per month @ $0.05/minute Spain – UK : 2.5 million minutes per month @ $0.05/minute. Cost of terminating a minute locally in the UK (eg via BT) = $0.01/minute Cost of terminating a minute locally in Spain (eg via Telefonica) = $0.015/minute Net Outpayment for UK carrier (for minutes to Spain) = 3m * $0.05 – 2.5m*$0.05 + 3m * $0.01 = $55,000 = $0.0183/minute Net Outpayment for Spanish carrier (for minutes to the UK) = 2.5m * $0.05 – 3m * $0.05 + 3m * $0.015 = $20,000 = $0.008/minute It may seem like the Spanish carrier has won a great deal from this negotiation. However, consider what happens if the market price that allows each party to sell these volumes is as follows : Market Price to UK = $0.012/min The total profit of the UK carrier for traffic to Spain = (0.025-0.0183)*3m mins = $20,100 The total profit of the Spanish carrier for traffic to UK = (0.012-0.008)*2.5m mins = $10,000. Therefore, all other things equal, the UK carrier has come out of the negotiation better off.
2. Quality should be of the highest order, given that traffic is always passing over dedicated circuits (unless circuits become full and some traffic overflows) 3. Both Carriers receive a high stream of revenue from incoming minutes (which can be a significant part of overall Telco revenues) 4. Good bilateral voice relationships often form the basis for sale or exchange of other communications products through the long-term and stable relationship that develops 5. Such deals may ‘tie-in’ traffic, such that very few minutes are available to competitor Carriers, giving you a stronger market position. For the above reasons, bilateral deals have continued to develop between (mainly incumbent and second) operators. However, some forces in the market have started to change the model somewhat, and many Carriers are now reporting that bilateral voice forms a smaller proportion of their overall voice minutes than it has done in the past. Bilateral voice does have some disadvantages, and these have become more significant as the market has developed. The Disadvantages of Bilateral Voice 1. What is a good bilateral voice deal today may not necessarily be so in 6 weeks time. Market prices in some emerging destinations have been known to fall by as much as 20% over a 6 month period, meaning a bilateral deal made at month 0 with profit margin of 10% was unprofitable at month 3. The Carrier, being unable to sell the traffic, is forced to sell at a loss by ‘dumping’ traffic on the market. 2. The international voice market has become increasingly complex. For example, there are now hundreds of country code breakouts to the USA, each having a different cost base. The practicalities of bilateral voice have therefore diminished, as deals have simply become too complex. 3. Premium priced breakouts, for example, mobile networks and audiotext numbers, attract a much higher cost. As a result, these have to be excluded from deals, meaning complex programming on Carrier switches. Those operators not clever enough to exclude such numbers risk being arbitraged by their customers, and therefore potentially losing a fortune. 5. Market information is readily available and transparent, more so than ever. For example, it is easy for a Carrier to gain all the information on local regulated termination costs in a country, meaning they are fully armed to go into a bilateral negotiation, and the chances of super-normal profits being made by one party are therefore slim. 6. In many cases, the ‘refile’ or market rate of voice minutes is now at the same level as the net cost from a bilateral agreement. Therefore, there is limited value (and higher risk exposure) from bilateral deals, meaning some are being abandoned altogether. 7. Following the MCI and Enron scandals, Accounting Standards Bodies are demanding more and more stringent controls on revenue reporting, and the question of bilateral deal revenues (often at above market rates) has raised its head. Many operators now do not report the full extent of this revenue stream, meaning the revenue value of the bilateral has diminished. 8. Voice Over IP! VoIP has offered alternative means of termination into many traditionally hard to reach destinations, driving the market price down and offering in some cases improved levels of call quality. In these cases, the incumbent bilateral model is breaking down, and relies only on governments to use legislation to prevent the development of VoIP, which nowadays is rarer and rarer. Summary - So Where Does This Leave Bilateral Voice? Bilateral agreements still have some value, particularly where the local cost of termination is very low, or in countries where the opportunity to make super-normal profits still exists (though these are becoming fewer and fewer). It is also important not to under-estimate the value of the relationship in terms of other products sold, which still accounts for a large proportion of Carrier wholesale revenues for some Carriers. However, the market is evolving rapidly, and most Tier 1 operators are having to rapidly re-think their bilateral voice-focused business models. Many are plunging into the VoIP market, lured by the lower costs of termination, some are moving their business models over to the Trading Exchange type model. Some are continuing to rely on the bilateral deals as the key element of their cost and revenue base. However, over the next couple of years, the cost base opportunities from bilateral deals is set to diminish further, as the value they bring to those operators employing them becomes less and less. VoIP has played a powerful part as a catalyst in this move away from bilateral voice arrangements, and as global as well as national IP-based voice networks continue to develop over the next few years, expect to see the gradual demise of the great traditional bilateral.
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