internet pricing and voice over ip (voip) dec ip pricing.pdf · " cheap, good for chat, but...

Internet pricing and Internet pricing and Voice over IP (VoIP)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 VoIPInternet pricing and VoIP

AgendaAgenda! 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: Internet growth story: AsiaAsia--PacificPacific

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

0.6 1.2 2.65.6

9.613.2

27.7

36.3

1993 1994 1995 1996 1997 1998 1999 July 00Source: ITU Internet Reports 2001: IP Telephony

Top 10 Internet economies Top 10 Internet economies Worldwide, June 2000, millionsWorldwide, June 2000, millions

83.826.3

16.915.8

11.911.110.6

8.7

6.46.4

USA

Japan

China

Korea (Rep.)

Canada

Italy

UK

Germany

Australia

Taiwan-China Note: Ranked by total number of users.

Source: ITU �Asia-Pacific Telecommunication Indicators, 2000�.

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

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

0

250

500

750

1'000

1'250

1'500

498

698

898

1098

1298

299

499

699

899

1099

1299

0200

Dial-up Internet (via PSTN)

International voice (incoming and outgoing)

The Geography of IPThe 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

InterInter--regional Internet backboneregional Internet backbone357 Mbit/s

19�716 Mbit/s

Asia-Pacific

LatinAmerica &Caribbean

2�638 Mbit/s

127 Mbit/s

Arab States, Africa

468 Mbit/s 171

Mbit/s

Europe

56�241 Mbit/sUSA &Canada

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

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

Geneva 15.06 Tokyo 0.31Amsterdam 9.81 Sydney 0.19Washington DC 7.36 Auckland 0.16Brussels 5.54 Kuala Lumpur 0.15Toronto 5.38 Singapore 0.15San Francisco 5.37 Taipei 0.12Seattle 4.98 Osaka 0.10Frankfurt 3.00 Seoul 0.10Stockholm 2.84 Hongkong 0.08

World Asia-Pacific

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

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

0

50

100

150

200

250

300

1995 1996 1997 1998

PSTN circuits

International Private Lines(Internet)

IPL, 68%

PSTN, 32%

IPL, 59%

PSTN, 41%

IPL, 18%

PSTN, 82%

Western Europe

Asia

Caribbean

Source: FCC. Applies to US carriers only.


Alternative retail pricing modelsAlternative 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

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

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

0 50 100 150

Cambodia

Viet Nam

Lao PDR

Philippines

India

China

Thailand

Malaysia

Singapore

ISP chargePSTN charge

Why does Internet access tend to be Why does Internet access tend to be more expensive in developing more expensive in developing countries?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 trafficSettlements-based traffic

PTO ACollectsrevenues

Collectstraffic

PTO BRetainsrevenues

Terminatestraffic

Delivers trafficPays settlement fees

User 1 User 2 User 3 User 1 User 2 User 3

For accounting rate traffic, a direct bilateralrelationship is established between the origin and

termination operators. Intermediate transit operatorsare compensated from the accounting rate which is

usually split 50:50. PTO B retains net settlement.��...

PTO = PublicTelecommunicationsOperator

PTOs A & Bsplit the cost ofthe int�l circuit

Internet Peering traffic (Web)

ISP A

Exchangestraffic

ISP BCollectsrevenues

Requestsand terminatestraffic

One-way (thick pipe)

User 1 User 2 User 3

For Internet Peering traffic, ISP B pays forboth halves of the International circuit(s) which areused 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.

ISP = InternetServicesProvider

PTO B pays the full cost ofthe int�l circuit

Two-way (thin pipe)

Web 1 Web 1 Web 1


Developing country concernsDeveloping 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?

ITUITU--T Rec. D.50: T Rec. D.50: Int�l Internet ConnectionInt�l Internet Connectionrecognizing

the sovereign right of each State to regulate its telecommunication, as reflected in the Preamble to the Constitution,

notinga) 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; andc) that continuing technical and economic developments require ongoing studies in this area,

recommendsthat administrations/ROAs involved in the provision of international

Internet connections negotiate and agree to bilateral commercialarrangements 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 servicesPricing 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,International outgoing traffic,AsiaAsia--Pacific, in million minutesPacific, in million minutes

3'445

6'311

1995

10'714

3'176

1999

Competitive

Monopoly

Source: ITU/TeleGeography Inc �Direction of Traffic Database.�

Comparative PSTN telecom costs Comparative PSTN telecom costs and retail tariffand retail tariff

Margin, 29.6¢

Int'l circuit, 0.2¢

Origination, 1.7¢

Settlement, 6.5¢

Margin, 74¢

Settlement, 54¢

Int'l circuit, 1.9¢Origination, 2.1¢

US to Hongkong SAR US to India

Retail tariff: 22 US cents

Retail tariff: 132 US centsSource: ITU/TeleGeography Inc.

Comparative PSTN and IP Comparative PSTN and IP Telephony retail tariffs Telephony retail tariffs per minute from USper minute from US

$0.17

$0.26

$0.59

$0.66

$0.08 $0.08

$0.21

$0.55

Australia Japan China India

PSTN IP Telephony

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

IP Telephony: IP Telephony: Four main stages Four main stages of evolutionof 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�IP Telephony wants to be �free�

0

1

2

3

4

5

6

18-Oct-99

22-Nov-99

10-Dec-99

12-Jan-99

04-Apr-00

Reg

iste

red

user

s (m

illio

n)

0

50

100

150

200

250

300

350

Cal

l min

utes

(mill

ion)Users

minutes

Cumulative number of Dialpad users & call minutesSince launch on 18 Oct. 1999

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


The influence of Voice over IPThe 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 Source: IDC.

0.208

16.5

2000 2004

�Web Talk� revenues, US$bn


0.0% 0.2%

1.6%

5.5%

3.2%

0

1'000

2'000

3'000

4'000

5'000

6'000

7'000

1997 1998 1999 2000 2001

As percentage of int'l outgoing traffic

Total international VoIP traffic,Total international VoIP traffic,In millions of minutesIn millions of minutes

Source: ITU Internet Report 2001: IP Telephony


Implications of IP Telephony for Implications of IP Telephony for public telecom operators (PTOs)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 Regulatory implications of IP TelephonyTelephony

! 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


ConclusionsConclusions! 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 World Telecommunication Policy Forum 2001: Forum 2001: IP TelephonyIP 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

internet pricing and voice over ip (voip) dec ip pricing.pdf · " cheap, good for chat, but...

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