1. 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 Tim.Kelly@itu.int.

2. Internet pricing and VoIP Agenda 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

3. Internet pricing and VoIP Internet growth story: Asia-Pacific Internet host density, Asia-Pacific per 10'000 inhabitants CAGR (1993-99) = 91% 0.6 1.2 2.6 5.6 9.6 13.2 27.7 36.3 1993199419951996199719981999July 00 Source: ITU Internet Reports 2001: IP Telephony

4. Top 10 Internet economies Worldwide, June 2000, millions 83.8 26.3 16.9 15.8 11.9 11.1 10.6 8.7 6.4 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”.

5. Minutes of use by month, Hongkong SAR ('000s) Source: OFTA (www.ofta.gov.hk)

6. 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

7. Inter-regional Internet backbone 357 Mbit/s 19’716 Mbit/s Asia- Pacific Latin America & Caribbean 2’638 Mbit/s 127 Mbit/s Arab States, Africa 468 Mbit/s 171 Mbit/s Europe 56’241 Mbit/s USA & Canada Source: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 2000.

8. Top Internet cities, Ranked by Int’l IP bandwidth (Mbit/s) available per 1’000 inhabitants WorldAsia-Pacific Source: ITU, adapted from TeleGeography Inc. Global Backbone Database. Data valid for Sept. 1999.

9. Number of int’l circuits in use, worldwide, and by region 1998 (in thousands) 0 50 100 150 200 250 300 1995199619971998 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.

10. 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

11. Asia-Pacific, comparative prices, In US$, based on 30 hours off-peak use per month Source: ITU Asia-Pacific Telecommunication Indicators, 2001. Data valid for July 2000. 050100150 Cambodia Viet Nam Lao PDR Philippines India China Thailand Malaysia Singapore ISP charge PSTN charge

12. Why does Internet access tend to be more expensive in developing 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

13. Settlements-based traffic PTO A Collects revenues Collects traffic PTO B Retains revenues Terminates traffic Delivers traffic Pays settlement fees User 1User 2User 3 User 1 User 2User 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. ……... PTO = Public Telecommunications Operator PTOs A & B split the cost of the int’l circuit

14. Internet Peering traffic (Web) ISP A Exchanges traffic ISP B Collects revenues Requests and terminates traffic One-way (thick pipe) User 1 User 2User 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. ISP = Internet Services Provider PTO B pays the full cost of the int’l circuit Two-way (thin pipe) Web 1

15. 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?

16. ITU-T Rec. D.50: Int’l Internet Connection recognizing the sovereign right of each State to regulate its telecommunication, as reflected in the Preamble to the Constitution, noting a) 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; and c) that continuing technical and economic developments require ongoing studies in this area, recommends 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.

17. 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

18. Internet pricing and VoIP International outgoing traffic, Asia-Pacific, in million minutes 3'445 6'311 1995 10'714 3'176 1999 Competitive Monopoly Source: ITU/TeleGeography Inc “Direction of Traffic Database.”

19. Comparative PSTN telecom costs and 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 SARUS to India Retail tariff: 22 US cents Retail tariff: 132 US cents Source: ITU/TeleGeography Inc.

20. Comparative PSTN and IP Telephony retail tariffs per minute from US $0.17 $0.26 $0.59 $0.66 $0.08 $0.21 $0.55 AustraliaJapanChinaIndia PSTNIP Telephony Source: PSTN rate = WorldCom One; IP Telephony rates = deltathree,com PC-to-phone. Rates valid at September 2000.

21. 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., 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)

22. 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 Registered users (million) 0 50 100 150 200 250 300 350 Call minutes (million) Users minutes Cumulative number of Dialpad users & call minutes Since launch on 18 Oct. 1999 Source: ITU, adapted from DialPad.com press releases.

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

24. Internet pricing and VoIP 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 19971998199920002001 As percentage of int'l outgoing traffic Total international VoIP traffic, In millions of minutes Source: ITU Internet Report 2001: IP Telephony

25. 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?

26. Internet pricing and VoIP Regulatory implications of IP Telephony 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

27. Internet pricing and VoIP Conclusions 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

28. 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 (www.itu.int/wtpf) and registerwww.itu.int/wtpf  Read and comment on the Secretary-General’s Report (on website)  Join the informal expert group to prepare  Co-ordinate national and regional positions