Interconnection and universal service: the rules that force sharing, MBA Training, MBA Training
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Interconnection and universal service: the rules that force sharing
# Interconnection and universal service: the rules that force sharing
A Kenyan fintech startup routes a customer support call to a farmer in rural Turkana. The call originates on the startup's virtual network, travels across infrastructure it does not own, and terminates on Safaricom's mobile network. Somewhere in that handoff, money changes hands: a termination rate, set or supervised by a regulator, determines what the startup's carrier pays Safaricom for completing the call. Multiply that by millions of calls and messages daily, and you see why interconnection pricing is one of the most consequential, least visible battlegrounds in telecom regulation.
This lesson covers two regulatory pillars that force network owners to share their infrastructure and its economics: interconnection and access regulation, and universal service obligations (USOs). Both exist because telecom networks have natural monopoly characteristics, and without intervention, incumbents could exclude rivals or abandon unprofitable regions entirely.
Why sharing has to be mandated
Building a nationwide network is capital-intensive. Once built, the incumbent that owns it has little commercial incentive to let competitors use it cheaply, or to serve villages with a handful of customers.
Regulators solved this with two mechanisms:
1. Interconnection mandates: force network owners to physically and commercially connect with rivals, at regulated prices.
2. Universal service obligations: force (or fund) coverage in areas the market would otherwise ignore.
Both are forms of access regulation: rules that convert a private network into something resembling shared infrastructure.
Interconnection: the plumbing of competition
Interconnection is the technical and commercial linking of two separate networks so calls, texts, and data can pass between them. Without it, a customer on Airtel could never reachreachThe number of unique people exposed to your message in a given period. Unlike impressions, reach counts each person once, no matter how often they see it.View full definition → a customer on Safaricom.
Key regulatory concepts:
Termination rate: the fee one network charges another to deliver ("terminate") a call or message onto its network. In Kenya, the Communications Authority of Kenya (CA) has repeatedly cut mobile termination rates, a move that historically squeezed Safaricom (the dominant incumbent) and benefited smaller rivals who terminate more traffic on Safaricom than vice versa.
Asymmetric regulation: when the regulator applies different rules to the dominant player versus challengers, precisely because of its market power. The EU's regulatory framework, overseen nationally by bodies coordinated through BEREC (Body of European Regulators for Electronic Communications), has used this logic for years, gradually deregulating fixed termination rates as competition matured, while keeping mobile termination rate caps harmonized across the EU.
Local Loop Unbundling (LLU): a specific fixed-line remedy requiring the incumbent (e.g., a former state monopoly like Deutsche Telekom or Telecom Italia) to lease the "last mile" copper or fiber connecting to homes to rival ISPs at regulated wholesale rates. This is how European consumers historically got broadband choice without every ISP digging up streets.
Significant Market Power (SMP): an EU regulatory designation. A firm found to have SMP in a defined market faces mandatory remedies, interconnection duties, price controls, non-discrimination rules, which lighter-weight competitors do not.
In the US, the framework runs through the Telecommunications Act of 1996, enforced by the Federal Communications Commission (FCC). It required incumbent local carriers to interconnect with competitors and lease network elements, the legal basis for early 2000s local phone competition. Its DNA persists in current FCC pole attachment and special access rules.
The economics, simplified
Interconnection pricing is not abstract. Consider a simplified termination rate calculation:
> If Network A sends 10 million minutes of traffic to Network B in a month, and the regulated termination rate is $0.005 per minute (illustrative, not a real current figure), Network A owes Network B $50,000 for that month, regardless of any retail plan pricing.
Regulators cutting that rate directly reallocates revenue between carriers. This is why termination rate decisions trigger intense lobbying: they are wealth transfers disguised as technical settings.
Universal service: subsidizing the unprofitable
Universal Service Obligation (USO): a legal requirement that basic telecom service (historically voice, now often broadband) be made available to all citizens at affordable prices, including in high-cost rural or remote areas, regardless of commercial profitability.
Two funding models dominate globally:
Universal Service Fund (USF): operators pay into a central pool (often a percentage of revenue), and the fund subsidizes carriers willing to build or operate in unprofitable areas. The US FCC's Universal Service Fund, administered via USAC, collects contributions from telecom carriers and disburses them through programs like the Rural Health Care Program and E-Rate (school and library broadband). Fund size has historically run in the multiple-billions of dollars annually (check USAC's current filings for exact figures, as contribution factors change quarterly).
Direct incumbent obligation: the license itself requires the operator to cover a defined percentage of population or territory. Kenya's CA has used this model, attaching rural coverage conditions to Safaricom's and other operators' spectrum licenses.
Why incumbents end up subsidizing rivals and rural users alike
Here is the connective logic the hook promised: termination rates and USOs are two sides of the same access-regulation coin.
Termination rate caps often favor the *smaller* player receiving more incoming traffic than it sends, effectively transferring margin from the incumbent.
USF contributions are typically assessed on *all* carriers' revenue, including the incumbent's dominant share, then redistributed to whoever (often smaller rural operators or the incumbent's own regulated rural arm) serves the costly geography.
The incumbent ends up financing both its competitive rivals (via low termination rates) and unprofitable rural coverage (via USF contributions or license conditions), even though it built the network. That is not accidental. It is the regulatory trade the incumbent implicitly accepted for the market power and spectrum access it holds.
Regulators to know
FCC (US): interconnection, USF, spectrum, net neutrality debates.
BEREC / national regulators (EU): SMP designations, LLU, roaming rules, harmonized mobile termination caps.
Ofcom (UK): post-Brexit, sets its own access and USO rules, including the UK's broadband USO guaranteeing a minimum download speed to eligible premises (10 Mbps as of recent policy; verify current threshold on Ofcom's site).
Communications Authority of Kenya (CA): termination rate setting, license-based rural coverage obligations, a widely cited example of assertive access regulation in an emerging market.
ITU (International Telecommunication Union): sets non-binding international recommendations and coordinates cross-border interconnection standards, though enforcement remains national.
Knowledge check
1. Why do regulators mandate interconnection between competing telecom networks rather than letting operators negotiate freely?
2. A termination rate in the interconnection scenario primarily serves what regulatory function?
3. What underlying market condition justifies treating both interconnection and universal service obligations as forms of 'access regulation'?
MULTIPLE CHOICE
4. Select ALL correct answers about why unprofitable rural areas require universal service obligations rather than being served through normal market competition.
Select all the correct answers.
MULTIPLE CHOICE
5. Select ALL correct answers describing what interconnection mandates require of network owners.
Select all the correct answers.
Compliance implications for professionals
If you work in strategy, legal, or regulatory affairs at a carrier, three things follow directly from this framework:
1. Rate changes are P&L events, not paperwork. A termination rate cut announced by a regulator flows straight into wholesale revenue lines. Finance and regulatory affairs teams must model these before they are finalized, not after.
2. License conditions are enforceable, not aspirational. Failing a rural coverage obligation can trigger fines or spectrum non-renewal. Compliance teams track coverage KPIs against license text, often down to specific district-level population percentages.
3. New entrants depend on your interconnection compliance. If you are the incumbent, delaying or degrading interconnection access is a classic anticompetitive complaint regulators investigate. The EU's history of SMP enforcement and the US 1996 Act's "unbundling" litigation both show regulators taking slow or obstructive interconnection seriously.
🎬 [VIDEO: "How Telecom Regulation Works: Interconnection Explained" - youtube.com - search for recent explainers from telecom policy institutes or regulators' own channels (e.g., FCC or Ofcom explainer content) covering interconnection and universal service basics]
Key Takeaways
Interconnection mandates force competing networks to connect and settle payments (termination rates), and regulators often apply asymmetric rules that favor smaller rivals over dominant incumbents.
Universal Service Obligations require coverage or affordability in unprofitable areas, funded either through a centralized fund (US-style USF) or direct license conditions (Kenya-style CA mandates).
Incumbents effectively subsidize both competitors (through low termination rates) and rural users (through USF contributions or coverage mandates), a deliberate trade-off for retaining market power and spectrum.
Key bodies to track: FCC and USAC (US), BEREC and national regulators plus Ofcom (Europe/UK), Communications Authority of Kenya (emerging market example), ITU (international coordination).
For compliance teams, treat rate decisions and license coverage obligations as binding financial and legal exposures, not administrative footnotes.