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  • What if the US Paid BT Local Call Rates?

    Note that the arguments here are merely indicative.

    The Federal Communications Commission (FCC) publishes an annual report which gives an overview of telephone usage in the United States. The most recent data were for 1997. Since US local calls are unmetered, the call cost being included in a flat-rate monthly tariff, the FCC gave an estimate that 2,683 billion local dial equipment minutes were used in 1997. This was based on a complete two week measurement of all local, intrastate and interstate phone traffic which the FCC requires every telephone service provider in the US to perform each year. When this two-week data set is expanded to a full year, the FCC considers the yearly figure to be accurate to within 10%. Because dial equipment minute data counts double for each phone call minute, and because it also includes the dialing and ring time, the FCC advises that it should be divided by 2.07 in order to convert it to phone call minutes. On this basis, 2,683 billion dial equipment minutes equates to 1,296 billion phone minutes or 20.3 minutes per day of local phone calls per local loop.

    Using this as a basis, I developed the following calculation of how much US phone companies' collective profits would have increased in 1997 had BT local call rates been in effect:

    Low Estimate 1,296 billion x £0.02/minute average cost = £25.92 billion x $1.60/£1.00 = $41.5 billion

    High Estimate 1,296 billion x £0.03/minute average cost = £38.88 billion x $1.60/£1.00 = $62.2 billion

    These are extraordinarily huge amounts and would greatly add to industry revenues of $300 billion.

    In their 1998 annual report, BT stated they had 27.6 million phone lines. If phone usage in the UK were the same as in the US, then BT should be generating local call revenue from 27.6 million x 20.3 minutes/day x 365 days = 204.5 billion minutes.

    Local call revenues should fall between:

    Low Estimate 204.5 billion x £0.02/minute average cost = £4.09 billion

    High Estimate 204.5 billion x £0.03/minute average cost = £6.13 billion

    As BT's total inland (local, regional and national) call revenue in 2000 was £4.294 billion, this suggests that UK local calls are of significantly shorter duration than those in the US. Either the British are extremely terse people or metered local calls compel them to keep these local calls relatively short and few in number.

    This relative shortness of UK phone calls is confirmed by OFTEL's published data on UK phone use which states that 155 billion call minutes were generated by inland calls for the year ending March 1998 by 32 million fixed phone lines. This works out to 13.3 call minutes per line per day as compared to 27.5 call minutes per day in the US for all local and intrastate and interstate calls. Simply put, this means that average phone use in the UK is slightly less than half that of the US.

    This makes the growing use of the Internet in the UK an extremely important source of revenue growth for BT since local phone use can be expected to mushroom by a factor of two to five for each new Internet user. BT acknowledges the growing importance of Internet related local calls which it states currently account for 18% of local call traffic in the most recent fiscal year ending 31 March 1999. This rapid growth in Internet traffic suggests that BT can gradually cut local phone rates and not suffer any loss in its total local call profits. It is perfectly understandable how BT earned a 19.3% rate of return on capital employed in 1998 (note that this is twice that of the IT industry and about 50% higher than other utilities - Alastair). It is also perfectly understandable why BT is so far unwilling to offer unmetered phone service since local calls account for a lion's share of their net profits before taxation of £3.219 billion.

    In order to better understand what charging BT local call rates in the US would do to US phone company profits, it is useful to examine what would happen to the Bell Atlantic Corporation.

    Bell Atlantic is a company formed from the merger of two Baby Bells spun off from the AT&T break-up in 1982 - Bell Atlantic and Nynex. In 1997, it had $30.2 billion in operating revenues and operating income of $5.3 billion before tax and special items. Domestic Telecoms accounted for $24.8 billion in revenues and produced $5.7 billion in operating income before tax and special items. In 1997, Bell Atlantic had 39.9 million phone access lines in service. Based on 20.3 minutes local call usage per day, local calls for Bell Atlantic in 1997 amounted to 295.6 billion minutes. The net increase in operating revenues and pre-tax profits to Bell Atlantic if it charged BT local phone rates would have been:

    Low Estimate 295.6 billion x £0.02/minute x $1.60/£1.00 = $9.5 billion

    High Estimate 295.6 billion x £0.03/minute x $1.60/£1.000 = $14.2 billion

    This means Bell Atlantic's Domestic Telecoms' revenues would have increased by between 38% and 57%. Most significantly Domestic Telecoms' pre-tax operating income would have risen to between $15.2 billion and $19.9 billion, which is 2.67 to 3.5 times as much as it actually earned. This would have made Bell Atlantic the most profitable corporation in the world!

    Text by Charlie Sands

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