ngn interconnection - emerging strategic challenges (detecon executive briefing)

www.detecon.com

Dr. Markus Steingröver Martina Haunert [email protected] [email protected]

NGN Interconnection Emerging Strategic Challenges

> Executive Briefing

Detecon International GmbH 11/2007 2 www.detecon.com


NGN Interconnection – Emerging Strategic Challenges

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Executive Summary

In the future, telecommunications networks will be all-over-IP-based NGNs. In this context Interconnection as one of the most complex and disputed fields in telecommunications has to be revised. In particular Incumbents are forced to address two major issues in order to prevent disruptive effects on their established wholesale business: (i) the charging model applied in the context of NGN Interconnection and (ii) the Quality of Service differentiation with regard to Voice over Internet.

Recommendations for the Industry as a whole:

Enforce differentiated QoS by introducing different service classes based on quality parameters such as latency time, jitter, or the packet loss rate.

Use similar quality parameters collectively in different networks in order to define comprehensive Interconnection standards. The weakest link will determine the entire end-to-end quality standard.

Quality of Service

Detecon recommends for Incumbents:

Promote the continued application of the Calling Network Party Pays regime!

Try to avoid Bill & Keep at all cost!

Charging Model

Figure 1: Summary of recommendations

Why? See our line of argumentation on the following 4 pages.




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Migration to NGN urges change of interconnection paradigm

Driven by opportunities for significant cost savings and customer satisfaction improvements, incumbents worldwide are engaged in building up IP factories. Apart from the implications for operators’ subscribers, the shift from the PSTN to NGN will have a huge impact on network interconnection and on relations between operators. Interconnection as one of the most complex and disputed field in telecommunications encompasses technical, commercial and regulatory aspects. Migration to NGN will lead to a review of all these areas. It is fundamental for incumbents to preserve the viability of the interconnection business model. It will require their active participation in the ongoing regulatory discussions and influencing the emerging regulatory framework with a focus on the two major issues:

(i) the charging model applied in the context of NGN Interconnection

(ii) the Quality of Service differentiation with regard to Voice over Internet.

Charging models and the ‘Bill and Keep’ threat

The most important features of NGN Interconnection business models are payment arrangements and the corresponding charging models.

The currently applied “Calling network party pays” regime, in which origination and termination on other networks are paid on a per minute basis, is under forceful attack: The German regulator BNetzA for example promotes an alternative charging model for NGN Interconnection by proposing a dual regime. This regime would differentiate between the transport and the access network. According to BNetzA the ‘Calling Network Party Pays’ regime and hence termination charges shall remain in place in the NGN transport network, while charges for termination on the local level cease to exist. Hence, BNetzA suggests applying a ‘Bill and Keep’ model for traffic in the NGN access network.

This change of the charging regime would have tremendous impacts on incumbents’ revenues, since the major part of the interconnection revenues (up to 90%) is generated in the local network. According to Detecon estimates, this might lead to an overall reduction of incumbents’ wholesale revenues by as much as 20%. Moreover the decision on the wholesale level has potentially strong impacts on the retail market which is summarised in the following figure. Hence the decision whether the ‘Calling Network Party Pays’ principle is kept or if it is replaced by the ‘Bill and Keep’ principle has got very significant implications for operators.




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Relationship between retail and wholesale level

Initial/fixed per-month fee Initial/fixed per-month fee

Per-minute usage fee NN

Per-minute usage fee

Initial/fixed per-month fee

Per-minute usage fee

B&K

Applied IC regime

CPNP

Retail billing structure

The UK regulator Ofcom has been engaged in detailed industry consultations related to the roll-out of BT’s 21CN. Ofcom’s NGN interconnection policy gives clear indications how it intends to deal with charging, costing and pricing in a NGN world. Contrary to BNetza, Ofcom proposes keeping PSTN termination charges and lowering them continuously until NGN cost-based interconnection rates are introduced at a later stage.

The following figure summarizes the different approaches of Ofcom (Option 1) and BNetzA (Option 2) and introduces an alternative option for a NGN Interconnection charging regime (Option 3) in which charging depends on the particular service. This is the most advantageous for operators and requires differentiated Quality of Service.

Independent of network type and level.

Requires Possibility to distinguish between different services,

Service usage can be measured.

Necessity of marking different services or transporting them separately otherwise high risk of adverse selection, moral hazard and arbitrage.

Assigning different services to different QoS classes is also possible instead of differentiating regimes according to services.

Opt 2: Different network levels

Independent of network level and service

Basically represents the status quo where there is EBC or CBC for the PSTN and B&K for the IP network.

Can work well as long as traffic flows exclusively in PSTN or IP networks. The VoIP example shows, that calls often pass through different types of networks.

Not viable in the long run.

Opt 1: Different network types

Independent of network type and services.

Such a “two level” regime could be implemented as follows:

B&K on he access/backhaul level between customer and point of interconnection,

EBC or CBC for transit in the core network.

Helps to minimize the hot potato problem in which traffic is handed over asap.

Boundary between backhaul and core network plays a crucial role.

Opt 3: Different services




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Differentiated QoS

When considering how Interconnection products are to be defined in the NGN, the issue of QoS or guaranteed end-to-end quality arises. Introducing QoS could be the basis for new products and services and could enable network operators to counter the challenges faced in today’s telecommunications markets. In the “Best Effort” Internet world there is no differentiation between high value services (e.g. voice or IP TV) and low value services (downloads, file sharing). This leads to capacity bottlenecks and an unnecessary competition for network resources that creates no further value. The provision of higher value services with a guaranteed QoS would in contrast generate new revenue potentials.

A QoS differentiation with classes of services is hence a possible solution. A basic differentiation between four service classes is possible: real time services, streaming services, data services and best effort services. This difference is based on quality parameters such as latency time (the delay for end-to-end transmission), Jitter (the deviation of latency times from the average value), or the packet loss rate. The provision of real time services depends on these parameters since the delayed arrival of packets leads to disruption of the entire service.

QoS would enable network operators to develop new wholesale business models. One of these business models substitutes traditional PSTN voice telephony with a QoS Voice over Internet. This is a qualitative improvement on the current “Best Effort” Voice over Internet (Skype) as the voice quality is not noticeably different to that of the PSTN – even during peak hours. Achieving this vision requires that the same quality parameters are used in different networks. The weakest link defines quality of the entire service. Each network operator has to get paid for the quality provided. However, in the “Best Effort” Voice over Internet case no payment between the different network operators takes place as long as major part of Internet traffic is routed under free peering arrangements,. This has to change in case of QoS is guaranteed. As in the current PSTN network, payments have to be made to those networks which transport the traffic in accordance with the agreed quality standards. The same argument holds for the wholesale data business. This option guarantees efficient network dimensioning while ensuring a superior quality of service when – and only when – it is needed.




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QoS Voice: Basic Concept

Interconnection Partner 1

Application Plane

Transport Plane

Control Plane

Access network

Interconnection Partner 2

Application Plane

Transport Plane

Control Plane

Access network

VoNGNincludes

call control & media

(E2E QoS)

Difference of VoNGN & VoInternet

IP Interconnection

For the definition of interconnection services the entire industry collectively needs to set quality categories and parameters. This is a prerequisite for providing consumers with homogenous end-to-end products and services across different networks. But, aren’t the Internet founding principles being sacrificed for the implementation of QoS? Are NGNs – i.e. IP-based networks with managed routing and managed quality – really necessary? The answer is: yes, we need the NGN – at least if we want to avoid economic inefficiencies. QoS is already provided in the current Internet - but only as long as it continues to be over-dimensioned. But this does not provide a quality guarantee, nor is the excess capacity economically efficient. If transmission capacity is reserved exclusively for a particular service quality is ensured, but at the same time the capacity is blocked and cannot be used for other services – even if there is no traffic.

In contrast to this the managed NGN fulfils service-specific quality requirements while maintaining flexibility through the usage of category prioritization. Wholesale carriers hence should manage quality and should make quality differentiation one of the central defining characteristics of their NGN interconnection services and related interconnection business models.




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Conclusion & Recommendations

There are two possible strategies that incumbents might follow in the light of the upcoming technological, market and regulatory changes: One approach would be to respond to new regulatory obligations by sabotage and delaying tactics. In contrast a cooperative wholesale strategy can transform what is currently perceived as being a disruptive revolution into a promising level playing field providing new business opportunities.

In a nutshell, Incumbents need to design a defending NGN interconnection strategy with focus on charging models and QoS-based service portfolios. It will require their active participation in the ongoing regulatory discussions and influencing the emerging regulatory framework with a focus on the two major issues:

1. Incumbents should promote the continued existence of the Calling Network Party Pays (CNPP) regime and should try to avoid Bill and Keep (B&K) at all cost. Even if it is most probably not possible in the long term, when PSTN is switched off, it should be a short- and mid-term goal to maintain the CNPP model and avoid arbitrage.

2. The Industry as a whole should enforce differentiated QoS by introducing different Service classes based on quality parameters such as latency time, jitter, or the packet loss rate. Similar quality parameters have to be used collectively in different networks in order to define comprehensive Interconnection standards; the weakest link will determine the entire end-to-end quality standard. QoS based Interconnection services enable network operators to develop new wholesale business models and revenue streams that partly substitute traditional PSTN voice telephony.

ngn interconnection - emerging strategic challenges (detecon executive briefing)

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