Opening Forum Speech

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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

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
                 Internet pricing and VoIP

 Internet in the Asia-Pacific
 Why is Internet more expensive in developing
    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:                                    36.3
     Internet host density, Asia-Pacific
     per 10'000 inhabitants
     CAGR (1993-99) = 91%

                   1.2          2.6

       1993        1994        1995         1996   1997   1998   1999 July 00
Source: ITU Internet Reports 2001: IP Telephony
        Top 10 Internet economies
        Worldwide, June 2000, millions
                         Note: Ranked by total number of users.
Taiwan-China    6.4      Source: ITU “Asia-Pacific Telecommunication Indicators, 2000”.
    Australia   6.4
    Germany     8.7
         UK      10.6
        Italy     11.1
     Canada       11.9
Korea (Rep.)          15.8
      China           16.9
      Japan                  26.3
        USA                                                            83.8
                  Minutes of use by month,
                  Hongkong SAR ('000s)

                                 Dial-up Internet
                                 (via PSTN)


    250      International voice
             (incoming and outgoing)
           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 (
      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 &                  56’241 Mbit/s
                    19’716 Mbit/s

                                   Mbit/s             468                              Europe
          Pacific                                                           171
                                    Latin                        Arab
                                  America &                     States,
                                  Caribbean                      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                                                                      PSTN,
 250                                                               68%

 200                                                                  Asia
             PSTN circuits
 150                                                                    PSTN,
                                                                   IPL, 41%

                       International Private Lines                 Caribbean
   50                                                       IPL,
                       (Internet)                           18%
    0                                                                     PSTN,
     1995                  1996             1997     1998
Source: FCC. Applies to US carriers only.
                    Internet pricing and VoIP

       Alternative retail pricing models
 Flat-rate per month
    e.g., InfoCom in Uganda charges a flat-rate US$50
     per month for unlimited Internet Access. To this must
     be added line usage and rental charges.
 Usage-based
    e.g., Telecom Egypt offers a “premium rate 900” dial-
     up service, without subscription or pre-payment, with
     revenues shared 50/50 with ISPs;
    e.g., Energis in UK splits local call charge with ISP,
     freeserve, which advertises “free” Internet
 Advertising-based
    e.g., Hotmail offers “free” advertising-funded web-
     based e-mail service
Asia-Pacific, comparative prices,
In US$, based on 30 hours off-peak use per month
     Thailand                                          ISP charge
          China                                        PSTN charge

    Lao PDR
    Viet Nam

                    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
  A few exceptions …
     In Asia-Pacific, Malaysia is cheap but Japan
     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                                       PTOs A & B
Telecommunications                                 split the cost of
Operator                                           the int’l circuit
                       Delivers traffic
             PTO A     Pays settlement fees    PTO B
  Collects           Collects        Terminates           Retains
  traffic            revenues        traffic              revenues

    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 Peering traffic (Web)
ISP = Internet                                        PTO B pays
Services                                              the full cost of
Provider                     One-way (thick pipe)     the int’l circuit
                 ISP A
                             Two-way (thin pipe)    ISP B
Exchanges                            Requests               Collects
traffic                              and terminates         revenues
     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.
                     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
the sovereign right of each State to regulate its telecommunication, as
reflected in the Preamble to the Constitution,
a) the rapid growth of Internet and Internet protocol-based international
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,
   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




                        1995                                       1999
Source: ITU/TeleGeography Inc “Direction of Traffic Database.”
       Comparative PSTN telecom costs
       and retail tariff
  US to Hongkong SAR                                   US to India
                                                                     Int'l circuit,
                             Int'l              Origination, 2.1¢   1.9¢
         Origination, 1.7¢

                            6.5¢                                        Settlement,
                 29.6¢                            Margin,

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

                         PSTN        IP Telephony


                          $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
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.,
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”
    Cumulative number of Dialpad users & call minutes
    Since launch on 18 Oct. 1999
        6                                           350
     Registered users (million)


                                                                                      Call minutes (million)
                                  5                   Users
                                                      minutes                   250
                                  1                                             50
                                  0                                             0
                                      18-Oct- 22-Nov- 10-Dec- 12-Jan- 04-Apr-
                                        99      99      99      99      00
Source: ITU, adapted from press releases.
                   Internet pricing and VoIP

         The influence of Voice over IP
 IDC forecasts that “Web Talk”
  revenues will reach US$16.5 bn                    16.5
  by 2004 with
  135 billion mins of traffic
 Gartner Group forecast that        “Web Talk”
  voice over IP and competition      revenues,
  in Europe will reduce prices by    US$bn
  75% by 2002
 IP Telephony as % of all
  int’l calls in 2004
    Tarifica forecast 40%             0.208
    Analysys forecast 25%
 In developing countries, the        2000          2004
  majority of IP Telephony calls
  are incoming                       Source: IDC.
                                      Internet pricing and VoIP
                 Total international VoIP traffic,
                 In millions of minutes
     7'000                                                        5.5%
                            As percentage of int'l
     5'000                     outgoing traffic


     1'000                            0.2%
                     1997             1998       1999    2000     2001
Source: ITU Internet Report 2001: IP Telephony
                  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
 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

 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 ( 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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