Tariff strategies and the Internet
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Tariff strategies and the Internet. Dr Tim Kelly (ITU), Seminar on tariff strategies for competitive environments, ALTTC, Ghaziabad, 20-22 July 1999.

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Tariff strategies and the internet

Tariff strategies and the Internet

Dr Tim Kelly (ITU),

Seminar on tariff strategies for competitive environments,ALTTC, Ghaziabad, 20-22 July 1999

The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its Membership. Dr Kelly can be contacted by e-mail at [email protected]


Tariff strategies and the internet

“We started out running the Net on top of the phone system, and we’ll end up with telephony running over the Net.”

Eric Schmidt,

CEO, Novell,

Quoted in

Wired, August 1997

The Economist

May 2nd 1998


Agenda

Agenda

  • The phenomenal growth of the Internet

  • Internet economics

  • Internet telephony

  • Pricing the Internet: What makes it different?

    • Retail pricing

    • Pricing of local calls

    • Wholesale pricing

  • Vulnerability of telephone companies to competition from the Internet

  • Implications of the Internet for developing countries


Tariff strategies and the internet

Internet hosts (million) and growth rates,

1990-1998

50

43.5

40

29.7

30

20

16.1

9.4

10

4.7

2.3

1.3

0.7

0.4

0

90

91

92

93

94

95

96

97

98

Source: ITU “World Telecommunication Development Report, 1998”, Network Wizards.


Tariff strategies and the internet

Distribution of Internet hosts, January 1998

Australia,

Japan & New

Zealand

7.0%

Developing

Canada &

Asia-Pacific

Other

US

2.9%

4.6%

64.1%

Europe, 24.3%

LAC* 1.2%

Africa

0.5%

Source: ITU “Challenges to the Network: Internet for development, 1999”.


Tariff strategies and the internet

Internet host density by region, January 1999, Per 10’000 inhabitants

363.1

362.1

132.9

9.1

2.4

Africa

Asia

Europe

Americas

Oceania

Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards.


Tariff strategies and the internet

Internet traffic overtaking int’l voice traffic

Internet traffic overtaking int’l voice traffic

Hongkong-China, monthly minutes of use,

Hongkong-China, monthly minutes of use,

April 1998-March 1999

April 1998-March 1999

800

Dial-up Internet

600

(via PSTN)

400

International voice

200

(incoming and outgoing)

0

4/98

6/98

8/98

10/98

12/98

2/99

Source: ITU, TeleGeography Inc., “Direction of Traffic, 1999”, OFTA.

Note: Excludes Internet access from leased lines.


Tariff strategies and the internet

Internet

Internet

commerce,

infrastructure,

31%

35%

Internet

Internet

intermediaries,

applications,

18%

17%

How big is the Internet economy?

How big is the Internet economy?

Estimated value of US Internet economy, 1998

Estimated value of US Internet economy, 1998

US Internet

economy,

US$301.4 bn

Source: University of Texas/Cisco, www.internetindicators.com


Internet economics five factors that make the internet different

Internet Economics: Five factors that make the Internet different

1.Packet-switched network architecture

  • Connection-less not connection-oriented

    2.Pricing independent of distance & duration

  • Average message covers 15 or more “hops”

    3.Peering arrangements, not settlements

  • Based on a full-circuit regime, not on half-circuits

    4.Traffic flows highly asymmetric

  • Dominant flow is to terminal that initiates a session (though this is changing ….)

    5.The United States sets the rules!

  • There is no “Internet Telecommunication Union”


Internet telephony different modes

Internet

Phone Gateway Computer

Phone Gateway Computer

Internet

Phone Gateway

Computer

Public Switch

Telephone

Internet

Phone Gateway Computer

Phone Gateway Computer

Telephone

Public Switch

Telephone

Internet telephony:Different modes

  • Computer to computerSince 1994

    • Conversation between two similarly equipped computer users via Internet

  • Computer to telephoneSince 1996

    • Internet user interconnecting with Public Telephone Network via an intermediaryservice provider (e.g., call-back company) or a service provider’s Website

  • Telephone to telephone Since 1997

    • Telephone carrier routes telephone or fax message via a data network (Internet, frame relay) rather than viathe Public Telephone Network


Tariff strategies and the internet

Which would you choose?Price per minute of a 3 minute international telephone/fax call from US (in US$)

AT&T basicAT&T OneInternet UK 3.270.36 0.60

Germany 3.751.050.96Australia 4.531.351.02

Japan 4.351.441.29Korea (Rep) 5.461.771.17

Source: Adapted from data in TeleGeography 1997/98. Original source of AT&T tariff data is Tarifica. AT&T basic refers to the peak rate basic offering. “AT&T One” refers to the AT&T One Rate for which a US$3 per month fee is payable. Internet Telephony tariff data is sourced from Global Exchange Carrier and is relevant for October 1997.


Tariff strategies and the internet

Internet charges,

global average 1998

Total monthly cost = US$94

ISP

charges

Telephone

24%

charges

45%

PC price

31%

Note:PC charges depreciated over 3 years.Source: ITU “Challenges to the Network: Internet for development, 1999”.


Tariff strategies and the internet

Asia-Pacific, comparative prices,In US$, based on 20 hours off-peak use per month

Malaysia

ISP charge

Indonesia

Local calls

India

Line rental

Singapore

Hongkong

Philippines

Thailand

Japan

0

20

40

60

80

Source: ITU “Challenges to the Network: Internet for development, 1999”.


Tariff strategies and the internet

OECD, Internet monthly

As % of GDP

access charge, US$

per capita

14.8%

Mexico

94

65

12.8%

Turkey

50

Japan

2.6%

33

Finland

2.2%

USA

29

1.2%

24

Australia

1.5%

The relative cost of services

The relative cost of services

Source: ITU 1999 “Challenges to the Network: Internet for Development”


Internet price and service trends retail market

Internet, price and service trends: Retail market

  • Until recently, flat-rate pricing dominant

    • All you can eat for US$19.95

  • Now, “Free Internet” becoming highly popular

    • Price of Internet access cross-subsidised by cost of local calls plus revenue drawn from advertising

  • Towards lower service quality

    • “Best efforts” service delivery at lowest price

  • Cross-promotion of Internet and other services

    • “Free PC” with three year’s ISP subscription

  • Tendency towards industry concentration

    • AOL’s subscriber base > next ten ISPs added together


What makes the internet so cheap

What makes the Internet so cheap?

  • Network externalities

    • Interconnection of networks shares costs and builds economies of scale

  • Technical efficiency

    • Packet switching, routing, statistical multiplexing

  • Piggybacking on Public Telephone Network

    • Much of network investment already amortised

    • Telephone network has built-in cross subsidies

  • Competitive network and service provision

  • Public policy subsidies (esp. in US)

  • No settlements between operators


Tariff strategies and the internet

$19.95 per month subscription

$7.50-$10.50 Wholesale PoP Access

$2.00 - $3.00

Customer Care

$3.50-$7.50 margin per customer

$3.00 amortized customer marketing

Where does the money go? Typical Internet Service Provider cash-flow

Source: Adapted from Paul Stapleton, ISP$ Market Report, Boardwatch Magazine.


When is a local call not a local call

When is a local call not a local call?

  • Internet usage has grown fastest in countries which permit “free” or untimed local calls (e.g., USA, Canada, HK, Australia)

  • But, PTOs claim that Internet users and ISPs are “free-riding” the network

    • longer average sessions

    • asymmetric traffic flows

  • In countries where local calls are metered, users complain that Internet is too expensive

    • “Strikes” of Internet users in Germany, France

  • Rapid take-off of “Free Internet”

    • Free monthly Internet access in return for loyalty to dial-up local loop service provider


Tariff strategies and the internet

  • Internet Service Providers do not pay usage-based access charges:

    • US access charge for telephony = US$0.02 per min

    • US access charge for Internet = US$0.0009 per min

  • Internet users have no incentive to terminate or shorten calls:

    • average length of telephony call = 5-10 mins

    • average length of Internet call = 20-40 mins

Tariff policy

Usage patterns

The Regulators’ dilemma

Introduce usage-based access charges

Do nothing

Risk political meltdown

Risk local loop meltdown


Tariff strategies and the internet

Settlements-based traffic

Settlements-based traffic

PTO = Public

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.

……...


Tariff strategies and the internet

May collect

Terminates

traffic

local call fee

Internet telephony traffic

Internet telephony traffic

IXP = Internet

Internet

Exchange

Point

IXP X

IXP Y

ISP = Internet

Peering

Service

Provider

ISP A pays for

ISP B pays for

transit capacity

transit capacity

ISP B

ISP A

Collects

Collects

revenues

traffic

User 1

User 2

User 3

User 1

User 2

User 3


Settlements and sender keeps all what s the advantage

Settlements and sender-keeps-all: What’s the advantage?

  • Settlement-payment traffic

    • Transfers revenue from core to periphery of network

    • Promotes “organic” network growth

    • BUT, where traffic is unbalanced, leads to big deficits (e.g., US$5.7 bn deficit in US, in 1996)

  • Sender-keeps-all traffic

    • No revenue transfers

    • Promotes “spontaneous” network growth

    • BUT, no incentive to carry traffic being transited or terminated

Note: Where traffic flows are in balance, there is no practical difference


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