Metered Local Call Charges Are Reasonable
The cost of local phone calls in the UK has been steadily coming down since BT's privatisation despite inflation
(loudly trumpeted by BT, despite the fact that most of these reductions have been made in response to edicts from Oftel)
and this has led some of the British public to believe that metered local call charges are reasonable.
Michael Wills of the Department of Trade and Industry recently noted in a letter to CUT that BT’s minimum call charge
of 5 pence does not seem like a huge price for
collecting e-mail: much less than the cost of a second class stamp. Certainly 5 pence is not a lot
of money and seems easily affordable, but is it really reasonable?
Metered local call charges expressed on a per minute basis range from 1 penny to 4 pence per minute also
seem affordable, but are they really reasonable?
The answer to both these questions is a resounding NO! Metered local call charges are not reasonable
based on the following:
- BT retains a near monopolistic control over local phone service in the UK providing service to 85% of UK fixed line subscribers. Competitive pricing pressure on BT with respect to local service provision has remained minimal and BT’s reductions in local call rates have been proportionately less than that for international calls where competition has been intense. The consequence is that peak BT metered local call rates now exceed competitive international rates to the United States!
- Local call charges that appear affordable on a per minute basis are not affordable on a per hour basis. This discourages lengthy phone calls in the UK to the point where British phone use is only half that in the U.S. The disparity in Internet use is even worse with the average Internet user in the U.S. spending 3 to 4 times longer online than one in the UK.
- The incremental cost of a metered phone call in the UK to BT is less than 0.01 pence with most of this cost being generated by itemising the call on the phone bill. Virtually all of the cost of providing local phone calls is fixed. This means that BT can handle large increases in local call volumes at negligible additional expense. Consequently, virtually all of the additional revenue generated from increased call volume falls straight to the bottom line as profit.
- As a standard practice in the U.S., local calls are not metered. Despite the rapid increase in Internet traffic, U.S. telcos have not had to increase their monthly standard service charge. U.S. monthly standard service charges that include unlimited unmetered local calls (and 3 free directory inquiries we might add) are less than BT’s monthly standard service charge with metered local calls additional.
- By its own accounting figures (“Historical Cost Financial Statements for the Businesses and Activities 1999”) BT earns an extraordinary return on local calls. In the Fiscal Year ended 31 March 1999, BT generated a profit of £1.057 billion on local call revenues of £1.998 billion, a return on turnover of 53% and an incredible return on capital of 328%. This does not include the local call pro rata share of the £0.819 billion that BT earned on the BT network which is set at a level as to allow a 12.5% return on capital investment. In comparison, BT earned a profit of £0.464 billion on international call revenue of £1.225 billion, a return on turnover of 38% and a return on capital of 62% which is less than one fifth that for local calls.
- Lastly, to demonstrate convincingly the unreasonable levels of BT’s metered local call rates in the UK, we estimated
the impact on profits if a major U.S. telco, Bell Atlantic, were to charge BT’s metered local call rates (see
If the U.S. Paid BT Local Call Rates). The result was that Bell Atlantic‘s
domestic telecoms pre-tax operating income would have risen to between $15.2 billion and $19.9 billion which is
2.67 times to 3.5 times as much as it actually earned. This would have made Bell Atlantic the world’s most
- Intuitively, a seemingly nominal charge of several pence for metered local calls seems eminently reasonable.
It is only by thoroughly examining the consequences of applying this “nominal” charge to the large volume of phone
calls in the UK and in the US and looking at the effects on profitability that one can fully understand how
extremely unreasonable BT’s metered local call charges are.