Internet pricing and Voice over IP (VoIP) Dr Tim Kelly, ITU “Workshop on international settlement reform and the costing and pricing of telecom services”, Hanoi, 11-13 December 2000 Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Tim Kelly can be contacted by e-mail at [email protected].

Internet pricing and VoIP

Agenda ! Internet in the Asia-Pacific ! Why is Internet more expensive in developing countries? " Internet tariff comparisons " Wholesale IP connectivity and leased line pricing

! What will be the impact of IP Telephony? " In the Asia-Pacific region " In high, medium and low-priced markets

! World Telecom Policy Forum 2001: IP Telephony

Internet pricing and VoIP

Internet growth story: Asia-Pacific

36.3 27.7

Internet host density, Asia-Pacific per 10'000 inhabitants CAGR (1993-99) = 91%

13.2 9.6 0.6

1.2

1993

1994

2.6 1995

5.6

1996

Source: ITU Internet Reports 2001: IP Telephony

1997

1998

1999 July 00

Top 10 Internet economies Worldwide, June 2000, millions Taiwan-China Australia Germany

Note: Ranked by total number of users.

6.4

Source: ITU “Asia-Pacific Telecommunication Indicators, 2000”.

6.4 8.7

UK

10.6

Italy

11.1

Canada

11.9

Korea (Rep.)

15.8

China

16.9

Japan USA

26.3 83.8

Minutes of use by month, Hongkong SAR ('000s) 1'500 1'250 1'000

Dial-up Internet (via PSTN)

750 500 250

International voice (incoming and outgoing) 0 4 6 8 10 12 2 4 6 8 10 12 02 98 98 98 98 98 99 99 99 99 99 99 00

Source: OFTA (www.ofta.gov.hk)

The Geography of IP ! Investment in IP networks is still highly US-centric " More than 95 per cent of inter-regional IP bandwidth connectivity is to/from North America " Accelerating returns to scale means that big get bigger

! Europe catching up fast " Major investment in fibre-based networks since opening up of EU markets in late 1990s

! Asia-Pacific lagging behind " Top European city (Geneva) has 50 times more connectivity per inhabitant than top Asian city (Japan)

! Latecomers disadvantaged by high prices " Non-liberalised telecom markets and obligation to pay both cost of both half-circuits of Int’l Private Line " Insufficient demand to force down prices

Inter-regional Internet backbone 357 Mbit/s

19’716 Mbit/s

AsiaPacific

USA & Canada

2’638 Mbit/s

Latin America & Caribbean

56’241 Mbit/s

468 Mbit/s

171 Mbit/s

Europe

Arab States, Africa 127 Mbit/s

Source: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 2000.

Top Internet cities,

Ranked by Int’l IP bandwidth (Mbit/s) available per 1’000 inhabitants World

Asia-Pacific

Geneva

15.06

Tokyo

0.31

Amsterdam

9.81

Sydney

0.19

Washington DC

7.36

Auckland

0.16

Brussels

5.54

Kuala Lumpur

0.15

Toronto

5.38

Singapore

0.15

San Francisco

5.37

Taipei

0.12

Seattle

4.98

Osaka

0.10

Frankfurt

3.00

Seoul

0.10

Stockholm

2.84

Hongkong

0.08

Source: ITU, adapted from TeleGeography Inc. Global Backbone Database. Data valid for Sept. 1999.

Number of int’l circuits in use, worldwide, and by region 1998 (in thousands)

Western Europe

300 IPL, 68%

250 200 150

Asia

PSTN circuits

PSTN, IPL, 41% 59%

100 50

International Private Lines (Internet)

IPL, 18%

0 1995

PSTN, 32%

1996

Source: FCC. Applies to US carriers only.

1997

1998

Caribbean PSTN, 82%

Internet pricing and VoIP

Alternative retail pricing models ! Flat-rate per month " e.g., InfoCom in Uganda charges a flat-rate US$50 per month for unlimited Internet Access. To this must be added line usage and rental charges.

! Usage-based " e.g., Telecom Egypt offers a “premium rate 900” dialup service, without subscription or pre-payment, with revenues shared 50/50 with ISPs; " e.g., Energis in UK splits local call charge with ISP, freeserve, which advertises “free” Internet

! Advertising-based " e.g., Hotmail offers “free” advertising-funded webbased e-mail service

Asia-Pacific, comparative prices, In US$, based on 30 hours off-peak use per month Singapore Malaysia Thailand

ISP charge PSTN charge

China India Philippines Lao PDR Viet Nam Cambodia 0 Source:

50

100

ITU Asia-Pacific Telecommunication Indicators, 2001. Data valid for July 2000.

150

Why does Internet access tend to be more expensive in developing countries? ! A few exceptions … " In Asia-Pacific, Malaysia is cheap but Japan expensive " But across world as a whole, US & Europe cheapest

! Where there is competition … " … leased line prices are generally lower " … incentives to create national local call ISP access " … incentives for tariff innovation (e.g. “free” Internet)

! But problems remain … " Peering and transit model of Internet is very different from settlements-based model of PSTN

Settlements-based traffic PTO = Public Telecommunications Operator

PTOs A & B split the cost of the int’l circuit Delivers traffic

PTO A Collects traffic

Pays settlement fees Collects revenues

User 1 User 2 User 3

PTO B

Terminates traffic

Retains revenues

User 1 User 2 User 3

For accounting rate traffic, a direct bilateral relationship is established between the origin and termination operators. Intermediate transit operators are compensated from the accounting rate which is usually split 50:50. PTO B retains net settlement. ……...

Internet Peering traffic (Web) ISP = Internet Services Provider

One-way (thick pipe)

ISP A

Two-way (thin pipe)

Exchanges traffic Web 1

Web 1

Web 1

PTO B pays the full cost of the int’l circuit

ISP B

Requests Collects and terminates revenues traffic User 1 User 2 User 3

For Internet Peering traffic, ISP B pays for both halves of the International circuit(s) which are used for peering with ISP A. ISP B also pays for traffic exchange. ISP B may pay for the circuit directly, or in conjunction with one or more PTOs.

Internet pricing and VoIP

Developing country concerns

! Developing countries receive no international settlement payments for IP traffic " Increasingly, incoming IP traffic includes IP telephony and fax traffic which they must terminate

! They must pay to peer with US/EU backbone " Peering costs are rising as IP traffic continues to grow exponentially

! They must pay both half-circuits of the International Private Line to the foreign ISP " Even though traffic flows in both directions over the circuit, once it is established

! Telephone and fax traffic shifting to the Internet " What will replace the US$7 bn from settlements?

ITU-T Rec. D.50: Int’l Internet Connection recognizing the sovereign right of each State to regulate its telecommunication, as reflected in the Preamble to the Constitution, noting a) the rapid growth of Internet and Internet protocol-based international services; b) that international Internet connections remain subject to commercial agreements between the parties concerned; and c) that continuing technical and economic developments require ongoing studies in this area, recommends that administrations/ROAs involved in the provision of international Internet connections negotiate and agree to bilateral commercial arrangements enabling direct international Internet connections that take into account the possible need for compensation between them for the value of elements such as traffic flow, number of routes, geographical coverage and cost of international transmission amongst others.

Internet pricing and VoIP

Pricing IP for voice services ! In competitive, low-price markets " Main market opportunity for IP Telephony is for value-added services, e.g., unified messaging

! In markets in transition to competition " IP Telephony offers a route towards early introduction of competition and creates downward pressure on prices

! In high-price, monopoly markets " Where permitted, IP Telephony creates opportunities for low-cost calls " Even if not permitted, IP Telephony is widely used to reduce costs of international call termination

Internet pricing and VoIP

International outgoing traffic, Asia-Pacific, in million minutes Monopoly

3'176

6'311 10'714 3'445

Competitive

1995 Source: ITU/TeleGeography Inc “Direction of Traffic Database.”

1999

Comparative PSTN telecom costs and retail tariff US to Hongkong SAR Int'l circuit, Origination, 1.7¢ 0.2¢

US to India Int'l circuit, Origination, 2.1¢ 1.9¢

Settlement, 6.5¢ Margin, 29.6¢

Settlement, 54¢ Margin, 74¢

Retail tariff: 22 US cents Source: ITU/TeleGeography Inc.

Retail tariff: 132 US cents

Comparative PSTN and IP Telephony retail tariffs per minute from US

$0.66

$0.59 $0.55

PSTN

IP Telephony

$0.26 $0.21

$0.17 $0.08

Australia

$0.08

Japan

China

Source: PSTN rate = WorldCom One; IP Telephony rates = deltathree,com PC-to-phone. Rates valid at September 2000.

India

IP Telephony: Four main stages of evolution 1. PC-to-PC (since 1994) " Connects multimedia PC users, simultaneously online " Cheap, good for chat, but inconvenient and low quality

2. PC-to-Phone (since 1996) " PC users make domestic and int’l calls via gateway " Increasingly services are“free” (e.g., Dialpad.com)

3. Phone-to-Phone (since 1997) " Accounting rate bypass " Low-cost market entry (e.g., using calling cards)

4. Voice/Web integration (since 1998) " Calls to website/call centres and freephone numbers " Enhanced voice services (e.g., integrated messaging)

IP Telephony wants to be “free”

5

Users

300

4

minutes

250 200

3

150

2

100

1

50

0

0 18-Oct- 22-Nov- 10-Dec- 12-Jan- 04-Apr99 99 99 99 00

Source: ITU, adapted from DialPad.com press releases.

Call minutes (million)

Registered users (million)

Cumulative number of Dialpad users & call minutes Since launch on 18 Oct. 1999 350 6

Internet pricing and VoIP

The influence of Voice over IP ! IDC forecasts that “Web Talk” revenues will reach US$16.5 bn by 2004 with 135 billion mins of traffic ! Gartner Group forecast that voice over IP and competition in Europe will reduce prices by 75% by 2002 ! IP Telephony as % of all int’l calls in 2004 " Tarifica forecast 40% " Analysys forecast 25%

! In developing countries, the majority of IP Telephony calls are incoming

16.5

“Web Talk” revenues, US$bn

0.208 2000

Source: IDC.

2004

Internet pricing and VoIP

Total international VoIP traffic, 7'000 6'000 5'000

In millions of minutes

5.5% As percentage of int'l outgoing traffic

4'000 3'000

1.6%

2'000 1'000

3.2%

0.0%

0.2%

1997

1998

0 Source: ITU Internet Report 2001: IP Telephony

1999

2000

2001

Internet pricing and VoIP

Implications of IP Telephony for public telecom operators (PTOs)

! Prices

" To what extent has competition already reduced prices for international traffic?

! Competition " Does the PTO provide IP Telephony services? " Are competitors allowed to provide IP Telephony? " What percentage of incoming int’l traffic comes in as IP Telephony traffic? What loss of settlements?

! Costs " Can the incumbent PTO deploy IP-based networks to reduce costs? What savings can be expected?

Internet pricing and VoIP

Regulatory implications of IP Telephony ! Allow it, license it, prohibit it? " Should IP Telephony be regarded as a service or an application? " Should incumbent PTOs be permitted to provide IP Telephony services? " Should other service providers be allowed to provide it? Should they be licensed? " Should incoming IP Telephony calls be treated any differently from outgoing ones?

! Universal Service " Should IP Telephony service providers contribute towards universal service

Internet pricing and VoIP

Conclusions ! IP is overtaking voice " For PTOs, IP Telephony offers a chance to reduce operating costs and develop future-proof networks " If PTO does not adopt IP, its competitors will

! ISP pricing highly competitive " Price innovation is essential " Price comparisons can help in setting prices

! IP Telephony is here to stay " Incumbent carriers cannot hope to retain monopoly " IP Telephony will be used to terminate incoming calls as well as for outgoing calls

Internet pricing and VoIP

World Telecommunication Policy Forum 2001: IP Telephony ! ! ! !

To be held, 7-9 March 2001, Geneva Agenda established by Council Decision 498 Information session, 6 March 2001 To participate: " Visit the website (www.itu.int/wtpf) and register " Read and comment on the Secretary-General’s Report (on website) " Join the informal expert group to prepare " Co-ordinate national and regional positions