1. Pricing IP Services: For data and voice Dr Tim Kelly, ITU “Workshop on Trends in Regional Telecom Prices in Asia-Pacific” Bangkok, 11-15 Sept 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. Pricing IP services: For data and voice Agenda When and where will IP overtake voice?  By volume and value?  By geography? Why is Internet more expensive in developing countries?  Different retail pricing models  Elements of an Internet tariff comparison model What will be the impact of IP Telephony?  In developed economies  In developing economies

3. Relative bandwidth requirements (highly approximate!) Typical usage Duration and volume Bandwidth per month Relative size Voice telephone user 6 hours per month: 8 kbit/s duplex 350 Mb Current Internet user 30 hours per month: 56 kbit/s downstream, 4 kbit/s upstream 6.5 Gb Future Internet user (streaming media) 50 hours per month: 1 Mbit/s downstream, 56 kbit/s upstream 190 Gb

4. When will IP overtake voice (1): By volume? Measured by traffic:  Just over 100 billion minutes of international PSTN traffic in 1999 (mainly voice and fax)  Around 5 trillion minutes of total PSTN traffic  Global quantity of data traffic not known, but growing exponentially (doubling every 100 days?)  Comparable data available for individual countries (e.g. Hongkong SAR, Germany, Portugal, Sweden) Measured by circuits:  Data available for US carriers, broken down by PSTN, IPL and other  Crossover between PSTN and IPL in 1998

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

6. When will IP overtake voice (2): By value? Paradigm shift postponed  Most Public Telecommunication Operators still heavily dependent on voice revenues  Mobile revenues (largely voice) represent main current area of growth  Price erosion of Internet revenues is offsetting volume gains (e.g., falling leased line prices) Paradigm shift regained  Mobile Internet is likely to be a major area of future revenue growth  Possible future shift of broadcast entertainment (TV, music, pay-per-view) onto telecom-type networks (broadband Internet)  PSTN voice traffic shifting to IP-based networks

7. 0 100 200 300 400 500 600 700 800 900 1000 90919293949596979899000102 Service revenue (US$ bn) ActualProjected Domestic Telephone/fax Int'l Mobile Other: Data, Internet, Leased lines, telex, etc Projection of revenue growth (US$bn) Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

8. 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

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

10. 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.

11. 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.

12. Pricing IP services: For data and voice 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

13. Pricing IP services: For data and voice Elements of an Internet tariff comparison basket PSTN usage charges  20, 30, 40 hours per month?  Call set-up charge? Local call rate?  Peak rate, off-peak rate? ISP charges  E-mail only or full web access? Premium services?  Flat-rate monthly subscription?  Usage charges?  ISP access additional to PSTN usage charge? PSTN line rental charge?  Additional line required? ISDN access?

14. Asia-Pacific, comparative prices, In US$, based on 20 hours off-peak use per month Source: Forthcoming, ITU Asia-Pacific Telecommunication Indicators, 2001. Data valid for July 2000. 020406080 Indonesia Korea Taiwan-China Malaysia Philippines Hongkong China Singapore Thailand Japan ISP charge Call charge Line rental

15. 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

16. 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

17. 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

18. Pricing IP services: For data and voice 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?

19. Pricing IP services: For data and voice Draft ITU-T Recommendation D.120: International Internet Connection Noting the rapid growth of the Internet and Internet based international services: It is recommended that administrations* negotiate and agree bi-lateral commercial arrangements applying to direct international Internet connections whereby each administration* will be compensated for the costs that it incurs in carrying traffic that is generated by the other administration. Note: To be voted at the World Telecom Standardization Assembly in September 2000. * “Administration” means national administration of recognised operating agency

20. Pricing IP services: For data and voice 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

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. Pricing IP services: For data and voice 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. Pricing IP services: For data and voice Conclusions IP is overtaking voice  For TOT, it offers a chance to reduce operating costs and develop future-proof networks  If TOT 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  TOT and CAT cannot hope to retain monopoly  IP Telephony will be used to terminate incoming calls as well as for outgoing calls