1. International Charging Arrangements for Internet Services Ben A. Petrazzini International Telecommunication Union UIT - ITU

2. Agenda Evolution of the Internet The North South gap IP-based vs. PSTN networks The challenge of Internet settlements ITU-T Recomendation D. 50 Strengths and weaknesses Alternative approaches Is there a solution?

3. Countries online Nro. of countries connected to the Internet Source: ITU.

4. Internet Penetration January 2001 > 5% 1 - 5% 0 - 1% (59) (37) (99) The online landscape

5. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Internet users Mobile users Telephone lines Popul- ation High income Upper-mid income Lower-mid income Low income 280 million 490 million 912 million 6 billion 82 % 69 % 58 % 15 % User distribution, by income group, Jan 2000 Source: ITU World Telecommunication Indicators Database. Digital divide = Telecoms divide

6. The digital divide is shrinking 18% Jan. 1995 Share of low and lower-middle income countries in: Telephone main lines Mobile subscribers Estimated Internet Users Jan. 2000 Source: ITU World Telecommunication Indicators Database. 28% 5% 1.1% 14% 7.6%

7. Catching up in the Americas 1996 Share of Latin America & Caribbean (LAC) in Americas: Telephone main lines Mobile subscribers Internet host computers 2000 Source: ITU World Telecom Indicators Database. 20%25% 10% 29% 2.0%2.7% North AmericaLAC

8. We prefer to walk while we talk! 0 2 4 6 8 10 12 199019911992199319941995199619971998 Main lines Mobile subscribers Latin America & Caribbean region, millions

9. Cellular overtaking fixed 57% [99] 80% 40% [99] 50% 38% [99] Venezuela Paraguay Peru Mexico Brazil Mobile as a percentage of total telephone subscribers

10. 100% 43% 57% 10% 90% 19% 81% 13% 86% 0%20%40%60%80%100% Europe Arab States Asia Americas Africa MonopolyCompetition % of countries with Net competition

11. ENTEL Internet 60% CTC Internet 35% Others 5% Chile Total=100 Others 50% Uninet (Telmex) 50% Mexico Total=300 Concentration of market power Argentina Venezuela 170 ISPs; Arnet-Advance = 34%165 ISPs; CANTV = 35% Internet market controlled by incumbents, Jan 2000

12. IP backbone: limited competition 0% 5% 10% 15% 20% 25% 30% 12345678910 Ranking of the company mmarket sahre IP backbone providers Int'l PTOs IP: 4 largest = 80% Tel: 4 largest = 30%

13. Top backbone providers, spring 99 Backbone providers Connections to ISPs As % of total C&W USA (ex MCI) 1’94429.3% WorldComm1’49622.5% Sprint1’40721.2% GTE I nternetworking 3545.3% Source: Adapted from BoardWatch, ISP Directory, Spring 99.

14. Global Internet Bandwidth Asia / Pacific Latin America USA / Canada Europe Africa 56 Gbps 0.1 Gbps 0.5 Gbps Note: Gbps = Gigabits (1’000 Mb) per second. Source: ITU adapted from TeleGeography. 18 Gbps 0.4 Gbps 3 Gbps 0.2 Gbps 2000

15. Global Internet Bandwidth USA & Canada Europe 13’258 Mbit/s Asia- Pacific 5’916 Mbit/s Latin America & Caribbean 949 Mbit/s Arab States, Africa 170 Mbit/s 152 Mbit/s 63 Mbit/s 69 Mbit/s Fuente: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 1999. 1999

16. Note: Based on usage of circuits between the US and the rest of the world. Source: FCC. 0 50 100 150 200 250 300 1995199619971998 PSTN circuits International Private Lines (Internet) IPL, 42% PSTN, 58% Central America South America IPL, 54% PSTN, 46% Caribbean IPL, 18% PSTN, 82% World Replacing PSTN with IP: Int’l circuits (‘000s)

17. Dial-up Internet traffic as % of total traffic minutes 38% 27% 19.5% 8.5% 18% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 19981999 Telia (Sweden) Telecom Portugal Telenor (Norway) Source: PTO annual reports. Note: For Telia, Internet traffic as % of local minutes. For others, as % of total

18. 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

19. The geography of the IP world 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: big gets bigger Europe catching up fast  Major investment in fibre-based networks since opening up of EU markets in late 1990s Developing countries lagging behind  Geneva has more bandwidth than the whole of Latin America and the Caribbean together Latecomers disadvantaged by high prices  Insufficient demand to force down prices  Non-liberalised telecom markets and obligation to pay both cost of both half-circuits of Int’l Private Line

20. 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 Settlements-based traffic

21. 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 Internet Peering traffic (Web)

22. Developing country concerns They must 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, once it is established  Interconnection costs are rising as IP traffic continues to grow exponentially Developing countries receive no international settlement payments for IP traffic  Increasingly, incoming IP traffic includes IP telephony and fax traffic which they must terminate Telephone and fax traffic shifting to the Internet  What will replace the US$7 bn from settlements?

23. 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.

24. Recommendation D.50 The ITU-T, recommends that administrations 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.

25. Virtues of Rec. D50 Raises global awareness of the problem Timing is in sink with the digital divide wave Little opposition to the initiative Support from several industrialized nations Opens the door for negotiating alternative solutions to the problem

26. Weaknesses of Rec. D50 ITU Recommendations are not mandatory ITU Rec have weight with national administrations, much less with Internet access providers Rec D50: no precise def. of terms, ways of measuring traffic, establishing costs, etc. [cost est. 3% or 60%?] Consolidates the USA as a global hub for Internet traffic and undermines incentives for regional IP backbones Tends to consolidate current oligopolistic nature of the IP backbone market

27. Is it inevitable? It is a comercial arrangement in a liberalized marketplace Responds to the current global infrastructure lay out High cost of leased lines in LDCs and lower in the US A considerable amount of content is in the north Countries in the south gain a global presence

28. People on the Net Number of Internet users, millions Source: ITU. Developed

29. The America’s digital divide (Jan. 2000) Americas region Users per 10’000 inhab. Hosts per 10’000 inhab. PCs per 100 inhab. North3’5332’71157 Central245434 South267384

30. Alternative approaches Effective competition in the leased line market of developing nations Development of regional IP backbones Establishment of local and regional IXPs  Leverage for negotiating better conditions with backbone providers in the north

31. ProjectCapacityDeveloperReady Atlantica 11.28 Tbps360 NetworksSept 2000 South America Crossing 40 GbpsGlobal Crossing Early 2001 Emergia1.92 TbpsTelefonica, Tyco, IDT 2001 Arcos 1 Americas 8 15 Gbps 720 Gbpse New World Network 2001 - 2002 Americas 34 TbpsEmbratel, Sprint, C&W and Teleglobe 2002 Mercus1.5 TbpsBiasEnd 2001 - 2002 Growing regional bandwidth Fuente:Kessler Marketing Intelligence.

32. TransAtlantic cables, 1988-2001 Source: ITU, adapted from FCC. Note: Circuit costs assume a usage level of 18%, a compression level of 5:1 and a life-time of 20 years. 1 10 100 1'000 10'000 TAT-8 1988 PTAT-1 1989 TAT-10 1992 TAT- 12/13 1996 AC-1 1999 TAT-14 2000 Flag Atlantic 2001 Circuit cost p.a. (US$) 1 10 100 1'000 10'000 100'000 Circuit capacity (64 kbit/s, 000s) Circuit capacity, rising by 89% p.a. Circuit costs, falling by 72% p.a. International capacity and costs

33. IXPs around the world, Sept. 2000 Americas region IXPsOther regions IXPs North109Africa2 South6Asia/Pacific38 Europe78

34. A task for the “Digital Divide” movement? Problem with the digital divide initiatives: too many issues no clear sense of priorities One priority: reduce cost of Internet services to make them commercially self- sustainable Opportunity to get the political and financial support of international aid agencies, multilateral lending institutions, G8 governments, and multinationals to build IP infrastructure to concentrate traffic regionally

35. Unión Internacional de Telecomunicaciones http://www.itu.int/