International Settlements: An Urgent Need for Equity in Benefits? A Presentation at the: Second Jamaica Internet Forum Accelerating Internet Access: National Development and Universal Access in the Social Sectors May 26-28, 2004 Ocho Rios, Jamaica ©Rob Frieden Professor of Telecommunications Penn State University, 102 Carnegie Building University Park, Pennsylvania (+1 814) ; web site:

2 The Main Points Downward trajectory of accounting rates, leaky “private” lines, market access initiatives, privatization, increased competition and Internet telephony (“VoIP”) will trigger in the near term significant loss in international telephony settlement revenues. Downward trajectory of accounting rates, leaky “private” lines, market access initiatives, privatization, increased competition and Internet telephony (“VoIP”) will trigger in the near term significant loss in international telephony settlement revenues. Technological innovations and entrepreneurism typically trump legislative and regulatory relief. Technological innovations and entrepreneurism typically trump legislative and regulatory relief. Migration to an IP-centric, bit delivery transport model largely forecloses above cost rates and jeopardizes the traditional carrier “correspondent” shared cost/revenue settlements process. Migration to an IP-centric, bit delivery transport model largely forecloses above cost rates and jeopardizes the traditional carrier “correspondent” shared cost/revenue settlements process. Nations reliant on settlement surpluses must adapt. Nations reliant on settlement surpluses must adapt.

3 Established Telephony Settlements Model The traditional arrangement for international telephony involves carrier correspondents matching half-circuits and dividing toll revenues; the process and regulator scrutiny prevent discrimination between carriers regardless of size, traffic volume, number of operating agreements, etc. The traditional arrangement for international telephony involves carrier correspondents matching half-circuits and dividing toll revenues; the process and regulator scrutiny prevent discrimination between carriers regardless of size, traffic volume, number of operating agreements, etc.

4 User3 Carrier A Collects revenues Collects traffic Carrier B Receives half AR Terminates traffic User 1User 2 User 1 User 2User 3 Traditional Accounting Rate Settlements Carriers match half-circuits and split all transport and switching costs.

5 Developing Telephony Model: Termination Charges Even without VoIP, carriers historically making large outpayments seek lower ARs, or a replacement method where they provide the entire long haul, but only pay a local termination fee. Even without VoIP, carriers historically making large outpayments seek lower ARs, or a replacement method where they provide the entire long haul, but only pay a local termination fee.

6 Carrier A Collects revenues Collects traffic Carrier B Receives access fee Terminates traffic User 1User 2User 3 User 1 User 2User 3 Carrier A provisions a full circuit to an int’l gateway of Carrier B, but only pays local transport and switching costs. New Telephony Model Settlements

7 Telephony vs. Internet Settlements International charging arrangements for Internet services started democratically with zero cost “peering”for everyone; with commercialization ICAIS now varies as a function of operator market power; only the largest Tier- 1 Internet Service Providers (“ISPs”) peer; everyone else pays for peering or transit. International charging arrangements for Internet services started democratically with zero cost “peering”for everyone; with commercialization ICAIS now varies as a function of operator market power; only the largest Tier- 1 Internet Service Providers (“ISPs”) peer; everyone else pays for peering or transit. Telephony settlements no longer provide Caribbean carriers generous surpluses and this model has not applied to VoIP, despite efforts by governments of Australia, Singapore, Korea and China. Telephony settlements no longer provide Caribbean carriers generous surpluses and this model has not applied to VoIP, despite efforts by governments of Australia, Singapore, Korea and China.

8 ISP A Exchanges traffic ISP B Collects revenues Requests and terminates traffic One-way (thick pipe) User 1 User 2User 3 For Internet paid peering or transit traffic, ISP B pays for both halves of the International circuit(s) which are used for access to ISP A’s network (peering) or for access to some or all of the networks to which ISP A has access (transit). ISP B also pays for traffic exchange (“port charges”). ISP B may pay for the circuit directly, or in conjunction with one or more carriers. ISP = Internet Services Provider ISP pays the full cost of the int’l circuit Two-way (thin pipe) Web 1 Internet Paid Access

9 Telephony Causation The caller usually triggers transport setup and uses facilities provided by the originating carrier plus facilities of other carriers secured by the originating carrier. Traffic measurement Calls and minutes can be measured. Parties Agree on a multilateral basis to divide cost and share toll revenues based on ITU Recommended model. Internet Causation Traffic types and routing vary making it difficult to use traffic flows for determining who should pay; conduit and content merge. Traffic measurement Possible, but does not necessarily indicate which party initiated the link and who benefits. Parties A connectionless protocol where many carriers may be involved in switching and routing packets on “best effort”model; evolved from zero cost peering to a commercial hierarchy of peers and clients. Telephony and Internet Models

10 Developing country concerns Accounting rate settlement surpluses dwindle even as infrastructure development needs grow (wireline plus wireless plus broadband). Accounting rate settlement surpluses dwindle even as infrastructure development needs grow (wireline plus wireless plus broadband). Call-back, VoIP prevent carriers from overpricing international traffic rates to subsidize local and other services. Call-back, VoIP prevent carriers from overpricing international traffic rates to subsidize local and other services. Efforts by developed nations to force lower accounting rates come across as a threat to sovereignty and assertion of extraterritorial jurisdiction, but the ITU and other multilateral forums have not helped forge a compromise. Efforts by developed nations to force lower accounting rates come across as a threat to sovereignty and assertion of extraterritorial jurisdiction, but the ITU and other multilateral forums have not helped forge a compromise. The ICAIS regime forces non-Tier 1 ISPs, including all ISPs from LDCs, to pay both half-circuits of the International Private Line to overseas backbones and foreign ISPs even though traffic flows in both directions over the circuit. The ICAIS regime forces non-Tier 1 ISPs, including all ISPs from LDCs, to pay both half-circuits of the International Private Line to overseas backbones and foreign ISPs even though traffic flows in both directions over the circuit. LDCs receive no international settlement payments for VoIP traffic, and may not even receive compensation for some int’l private line traffic that leaks into the PSTN. LDCs receive no international settlement payments for VoIP traffic, and may not even receive compensation for some int’l private line traffic that leaks into the PSTN. Short term strategies (higher termination charges and mobile termination surcharges) may trigger retaliation and prove unsustainable. Short term strategies (higher termination charges and mobile termination surcharges) may trigger retaliation and prove unsustainable. The need for a transition period. The need for a transition period.

11 Strategies for Securing a Compromise Consistent with ITU Recommendations, LDCs should have the opportunity to demonstrate that termination costs are not symmetrical; LDCs may not have the same scale economies and positive network externalities as developed nations. Consistent with ITU Recommendations, LDCs should have the opportunity to demonstrate that termination costs are not symmetrical; LDCs may not have the same scale economies and positive network externalities as developed nations. LDC governments and carriers alike need to pay greater attention to cost accounting; did the FCC and ITU SG-3 make legitimate cost estimates? Do VoIP and wireless terminations cost the same as telephony terminations? LDC governments and carriers alike need to pay greater attention to cost accounting; did the FCC and ITU SG-3 make legitimate cost estimates? Do VoIP and wireless terminations cost the same as telephony terminations? Recognize that the revenue issue has largely moved from accounting rates to securing proper compensation for accessing the PSTN and other first and last km media for the national extension. Recognize that the revenue issue has largely moved from accounting rates to securing proper compensation for accessing the PSTN and other first and last km media for the national extension. Insist that any form of traffic that traverses a national extension will trigger a cost-based access charge, even VoIP! Insist that any form of traffic that traverses a national extension will trigger a cost-based access charge, even VoIP!