Internet pricing and Voice over IP (VoIP)
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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.

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Internet pricing and voice over ip voip

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]


Agenda

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 growth story asia pacific

Internet growth story: Asia-Pacific

36.3

27.7

Internet host density, Asia-Pacificper 10'000 inhabitantsCAGR (1993-99) = 91%

13.2

9.6

5.6

2.6

1.2

0.6

1993

1994

1995

1996

1997

1998

1999

July 00

Source: ITU Internet Reports 2001: IP Telephony


Top 10 internet economies worldwide june 2000 millions

Top 10 Internet economies Worldwide, June 2000, millions

Note: Ranked by total number of users.

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

6.4

Taiwan-China

6.4

Australia

8.7

Germany

10.6

UK

11.1

Italy

11.9

Canada

15.8

Korea (Rep.)

16.9

China

26.3

Japan

83.8

USA


Minutes of use by month hongkong sar 000s

1'500

1'250

Dial-up Internet

1'000

(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

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

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


The geography of ip

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

USA &Canada

56’241 Mbit/s

19’716 Mbit/s

Asia-Pacific

Europe

2’638 Mbit/s

468 Mbit/s

171 Mbit/s

LatinAmerica &

Caribbean

Arab States, Africa

127 Mbit/s

Inter-regional Internet backbone

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

Top Internet cities,Ranked by Int’l IP bandwidth (Mbit/s) available per 1’000 inhabitants

World

Asia-Pacific

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

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

Western Europe

300

PSTN,

32%

IPL,

250

68%

Asia

200

PSTN circuits

PSTN,

150

IPL,

41%

59%

100

Caribbean

International Private Lines

50

IPL,

(Internet)

18%

PSTN,

0

82%

1995

1996

1997

1998

Source: FCC. Applies to US carriers only.


Alternative retail pricing models

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” dial-up 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 web-based e-mail service


Internet pricing and voice over ip voip

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

Singapore

Malaysia

Thailand

ISP charge

China

PSTN charge

India

Philippines

Lao PDR

Viet Nam

Cambodia

0

50

100

150

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


Why does internet access tend to be more expensive in developing countries

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


Internet pricing and voice over ip voip

Settlements-based traffic

Settlements-based traffic

PTO = Public

PTOs A & Bsplit the cost ofthe int’l circuit

Telecommunications

Operator

Delivers traffic

PTO B

PTO A

Pays settlement fees

Retains

Collects

Terminates

Collects

revenues

revenues

traffic

traffic

User 1

User 2

User 3

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 pricing and voice over ip voip

Internet Peering traffic (Web)

ISP = Internet

PTO B pays the full cost ofthe int’l circuit

Services

Provider

One-way (thick pipe)

ISP A

ISP B

Two-way (thin pipe)

Requestsand terminates

traffic

Collects

Exchanges

revenues

traffic

Web 1

Web 1

Web 1

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.


Developing country concerns

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

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.


Pricing ip for voice services

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


International outgoing traffic asia pacific in million minutes

3'176

10'714

1999

International outgoing traffic,Asia-Pacific, in million minutes

Monopoly

6'311

3'445

Competitive

1995

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


Comparative pstn telecom costs and retail tariff

Comparative PSTN telecom costs and retail tariff

US to Hongkong SAR

US to India

Int'l circuit,

Int'l

1.9¢

Origination, 2.1¢

circuit,

Origination, 1.7¢

0.2¢

Settlement,

6.5¢

Settlement,

54¢

Margin,

Margin,

29.6¢

74¢

Retail tariff: 22 US cents

Retail tariff: 132 US cents

Source: ITU/TeleGeography Inc.


Comparative pstn and ip telephony retail tariffs per minute from us

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

$0.08

Australia

Japan

China

India

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


Ip telephony four main stages of evolution

IP Telephony: Four main stages of evolution

  • PC-to-PC (since 1994)

    • Connects multimedia PC users, simultaneously online

    • Cheap, good for chat, but inconvenient and low quality

  • PC-to-Phone (since 1996)

    • PC users make domestic and int’l calls via gateway

    • Increasingly services are“free” (e.g., Dialpad.com)

  • Phone-to-Phone (since 1997)

    • Accounting rate bypass

    • Low-cost market entry (e.g., using calling cards)

  • 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

IP Telephony wants to be “free”

Cumulative number of Dialpad users & call minutes

Since launch on 18 Oct. 1999

6

350

300

Users

5

250

minutes

4

200

Registered users (million)

Call minutes (million)

3

150

2

100

1

50

0

0

18-Oct-

22-Nov-

10-Dec-

12-Jan-

04-Apr-

99

99

99

99

00

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


The influence of voice over ip

“Web Talk” revenues, US$bn

Source: IDC.

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


Total international voip traffic in millions of minutes

Total international VoIP traffic,In millions of minutes

7'000

5.5%

6'000

As percentage of int'l

5'000

outgoing traffic

3.2%

4'000

3'000

1.6%

2'000

1'000

0.2%

0.0%

0

1997

1998

1999

2000

2001

Source: ITU Internet Report 2001: IP Telephony


Implications of ip telephony for public telecom operators ptos

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?


Regulatory implications of ip telephony

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


Conclusions

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


World telecommunication policy forum 2001 ip telephony

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


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