Termination rate volatility

Simon Woodhead

Simon Woodhead

10th February 2023

By Simon Woodhead

It won’t have escaped anybody’s attention that termination rates have been more volatile lately and I thought it would be helpful to explain why. Before doing so though, I need to stress this isn’t a Simwood phenomenon and rates are increasing across competitors and peers generally. I’ll touch on some of the unique things we’re doing to soften this for our customers where we can, and indeed some of the things that are making life hard for us which might have to change!

Whether you subscribe to the view that everything is Mr Putin’s fault (that’s the one you’re supposed to believe) or recognise that decades of profligate deficit spending and consequent money-printing, most recently during COVID, has a price to pay, everyone will hopefully agree we’re in an inflationary environment at the moment. This is a new thing in telecoms where for years prices have fallen consistently and, certainly in the UK, the Regulator has overseen a massive transfer of margin from carriers to retail operators (including from us to you!). That makes prices arguably more twitchy and will account for some of the increases as operators seek to recoup cost rises elsewhere. In our case, our pricing is algorithmic based on input costs and our models change very rarely so this doesn’t apply, but we know it does elsewhere and that feeds through.

In the UK, regulated prices are linked in part to CPI and this is a factor in other parts of the world too. On April first the inter-carrier rate for UK Fixed will increase 10.6% and the inter-carrier rate for UK Mobile will increase 12.5%. I’ve signaled previously we’ll track these but depending on business model and supply chain efficiencies, others may increase more. Thankfully most of our traffic flows directly to the destination network or their host so, in the most part, we’re not subject to increases on increases as this works its way down. This has undoubtedly been a factor in other parts of the world though where we’re not directly present. 

Indirectly related, I hope you noticed our appeals to the DCMS Minister for Ofcom to intervene in the CPI+3.9% scam which is about to hurt retail customers massively. Having replied apparently using the “we disagree with Simwood” template that is used for most consultations, they’re now looking into it. I like to think we made a difference here even though we’ll never be credited!

Alas I digress. There’s some technical factors we need to consider too…

As I may have mentioned a few dozen times, we are not passing on UK origin surcharges. They can change a call that would cost under 0.5p into one cost £2, simply due to the CLI. Whilst we have measures to protect ourselves here, which is why we’re the only people capable of taking this stance, it takes an awful lot of the wafer thin margin on 0.5p to compensate for the odd call costing £2 more. In fact, UK rates aren’t too much of an issue and you haven’t seen upwards volatility here on UK fixed or major UK mobile. You’ll have also seen our efforts to consolidate some of these to make them more manageable and better expose the value we’re adding. 

However, origin surcharges aren’t just a UK phenomenon, they’re happening in many parts of the world. I won’t bore you with the complexity of them but the result is that two calls to the same destination can now have radically different cost profiles, and our customers are in charge of which applies through the CLI they choose to use. We ensure it is valid, but you set it. Again, a few calls at euros per minute radically increases the cost profile even if there’s millions of calls at fractions of a cent. This feeds through into our pricing which is based on our effective cost over 30 days, 7 days or 24 hours depending on the volume to the destination.

In a related way, your CLI can impact call cost (and thus feed through to rates) in other ways. We’re seeing increasing localisation with country after country blocking international traffic presenting a local number as CLI (see Norway, Germany, Ireland to mention those we’ve blogged about recently). However, we’re also seeing operator level protectionism, e.g. operator A blocking calls from operator B which present operator A’s number as CLI. They want the margin to themselves and have regulatory cover to get it now. What this means for us is that if we have, say, 6 routes into a country, whereas a year or two ago the vast majority of traffic would use the first route, and the odd call would fall to the second route at a slightly higher cost, it is no longer the case. Now, if operator 1 to 4 all result in the call being blocked, the call could be completing on path 5 or 6 into the country at a massively massively higher cost to us. The difference is the CLI that was set, nothing else. Those of you doing what I’d call ‘lazy call forwarding’ in foreign markets will be passing us calls from and to foreign numbers, despite them routing through the UK. Those calls legitimately re-originated in the UK (not spoofed, that is not something we advocate!) would complete on route 1 at a lower cost. These costs flow through to prices.

Put all those together and you can imagine our input costs on some destinations can vary by thousands of a percent and thus inevitably we need to put some rates up. However, we put them down too using the same algorithms augmented by competitor price matching if they have a keener (but correct) price. Put together that gives volatility but nobody ever DMs me to moan about the 99.9% reduction in a price and how much profit it has made them, rather simply the increases.

There’s a few solutions to this, some implemented and others we’d love your feedback on.

  • We’ve been busy regrouping destinations to improve things in our core markets of UK (fixed and mobile), US and related markets like Canada. Have you see how our US pricing has tracked down since we did?!
  • We’re leveraging the fact we’re licensed in the US as well as being long-established in the UK to buy on both continents. This is resulting in rates to Canada and South America improving greatly (albeit slowly – see below) as well as calls completing more directly than simply jobbing them off to a European operator.
  • We’ve changed how rates change slightly such that they decrease more slowly. This reduces the volatility as certain destinations have been up and down like the proverbial when they adjusted both ways as quickly. Now, after a bump, prices will come down over a few subsequent rate updates which gives opportunity to find a more stable level rather than yo-yo’ing.
  • We seriously need to consider origin surcharges, not just for the UK but for the international market too. CLI is now driving more of our cost than the destination potentially yet it isn’t priced. We’ve fought this and tried to avoid it because they disgust us, but passing the problem down the chain at least puts us in the same place as our peers. Nobody has ever DMed me to thank us for the cost we’re absorbing here or applaud our position so I don’t know how much this is appreciated; we could be taking on cost needlessly. We’d welcome your thoughts.
  • Another solution is to block what I described above as ‘lazy call forwarding’ and insist that calls originate with a UK or US CLI. We could take that a stage further and insist that calls originate with only a CLI on the Simwood network. This is where the US market is heading naturally given STIR-SHAKEN attestation levels. Again we’d welcome your thoughts there.
  • Lastly, we could just jack all prices up to accommodate the range of costs. The trouble is that the range is so much bigger than it ever used to be and we would be talking of Pounds/Euros/Dollars per minute rather than hundredths of a cent as has been the norm in living memory. We don’t think that’d fly but would love to hear from you if this would be your preferred solution.

I hope that has shed some light on what I know some of you have viewed negatively, and has explained why carriers around the world, not just us, are passing on increased prices. We look forward to your feedback or any thoughts. 

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