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Internet Telephony

Internet Telephony. A Broader Business Perspective of Delivering Telephony Service over Internet. Arya Satriananta Unit Bisnis Internet - Divisi Regional V PT. Telekomunikasi Indonesia. Presented on the “VoIP Seminar” Universitas Diponegoro Semarang, 14 th December 2000. Agenda.

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Internet Telephony

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  1. Internet Telephony A Broader Business Perspective of Delivering Telephony Service over Internet Arya Satriananta Unit Bisnis Internet - Divisi Regional VPT. Telekomunikasi Indonesia Presented on the “VoIP Seminar” Universitas Diponegoro Semarang, 14thDecember 2000

  2. Agenda • Infocommunication Industry Convergence • Internet Telephony Applications • Cheap and Treathening • Current Customer Views • Implications for Developing Countries • Strategic Impact on ISP • Strategic Impact on PTO • Market Opportunities • Internet Telephony Business Model • TELKOM Internet Telephony Business • Main Sources

  3. Infocommunication Industry Convergence

  4. Internet Telephony Applications Segmenting the Market • PC-to-PC • PC-to-Phone • Phone-to-Phone

  5. Cheap and Threatening Why is the Internet Telephony so cheap? 1. Technically efficient • The Internet: runs over packet-switched network. • The PSTN: runs over circuit-switched network. 2. Greater capacity utilization • The Internet: engineered to meet average loads, and the typical utilization over an extended time period is around 60-70% of network capacity. • The PSTN: engineered to meet the business peak hour and thus network components are in use for, perhaps, less than 20% of time. 3. The international accounting rate system bypass • The PSTN: PTOs bill the call according to its duration and destination, and the time of day or week when the call is made, and making traffic-based settlement payments (accounting rate system) to other PTOs for terminating or transiting the call. • The Internet: there are no accounting rate systems.

  6. Cheap and Threatening Settlements-based 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.

  7. Cheap and Threatening Internet Telephony traffic

  8. Cheap and Threatening Why is the Internet Telephony so cheap? 4. Economies of scale The Internet, like the PSTN, is a network of many, many network. An ISP, even a small one, can take advantage of the externalities provided by the interconnection of many networks. Nevertheless, there are differences between the two: • The PSTN would look like a dense mesh of connections in that many of the nodes in the network are connected to every other node or, if they lack a direct connection, could be connected by just one intermediary. • By contrast, a picture of the Internet would look much more like an airline route map in which a small number of hubs are connected to each other and are each surrounded by a star-shaped network of local peering arrangements. • A typical international voice telephony call would pass between the hands of two or perhaps three carriers; a typical Internet telephony call would pass through many more hops and multiple carriers.

  9. Current Customer Views 1. Corporate customer views In general, enterprises will not take the risk of replacing their current telephony technology until and unless they are convinced that: • The new technology is at least as good. • The replacement can be done without affecting quality, service levels or operational considerations (e.g., the numbering plan). • No wholesale end-user retraining is necessary. • They can continue to benefit from their (mostly already written off) investment in telephony equipment (e.g., PBXs and telephones). • The new system can be implemented universally throughout the company so that there is no need to support two different approaches simultaneously. • It can be effectively managed to maintain the current high level of uptime.

  10. Current Customer Views 2. Individual / residential customer views In general, individual / residential customers are less demanding with regard to quality, and more price sensitive. So: • They will likely accept the new technology as long as it can show significant cost reduction, and the call is still interpretable. 3. Service provider views They are currently very much interested on the technology. • The newly competitive environment is forcing existing and potential voice carriers to look at ways of offering services that compete with traditional carriers’ services by capitalizing on lower cost packet networks or the Internet. • Traditional carriers that see the potential threat from increased competition are also planning for increasing levels of network integration. Their goals are to reduce operational costs, increase efficiency and productivity, and expand both their service offerings as well as their service coverage.

  11. Implications for Developing Countries Dilemma for the Incumbent PTOs Internet Telephony presents a dilemma for developing countries, especially for their incumbent PTOs. • On the one hand, it promises to reduce the price of international telephone calls, for instance: • enabling their residential customers to make calls to relatives living abroad that might otherwise be too expensive; • enabling their business customers to participate more effectively in the global marketplace. • On the other hand, Internet Telephony could be viewed as a Trojan Horse, which: • threatens to undermine the pricing structure of the incumbent PTO and undercut its profitable business in originating and terminating international calls; • might threaten the ability of the PTO to invest in extending the domestic network and meeting its Universal Service Obligations (USOs).

  12. Implications for Developing Countries Distinction between Originating and Terminating Calls In understanding the issues, it is useful to draw a distinction between call origination and call termination: • For the business of originating international calls, the arguments are weighted on the side of encouraging the development of Internet Telephony. • Developing country markets tend to be much more price sensitive and less demanding with regard to service quality. Thus, low-cost international call could be just the “killer application” • The traffic generated is likely to be a net addition, that is, it would not necessarily substitute for calls that would otherwise have been made directly on the PSTN. • Furthermore, insofar as substitution does take place, it likely to be of the services of other discount calling offers, such as call-back or calling card services, not necessarily the PTOs core business. • Routing a percentage of outgoing calls via the Internet would also help to reduce the local PTO’s commitments to making settlement payments to foreign PTOs.

  13. Implications for Developing Countries Distinction between Originating and Terminating Calls • For the carriage and termination of incoming international calls, the arguments are more mixed. • If a substantial portion of incoming traffic arrives via the Internet, and is then patched onto the PSTN, either within the borders of the developing country or in a neighboring country, with a more liberalized regime, with whom it has a low settlement rate or a ‘sender-keeps-all’ agreement for international traffic, then this could have the effect of reducing incoming net settlement payments. • An incoming international telephone or fax call would bring with it a settlement payment, in some cases of one US dollar or more per minute. By contrast, an incoming Internet call which is patched to the PSTN might bring only sufficient revenue to cover the cost of a local call; a few US cents at most.

  14. Strategic Impact on ISP • ISPs seem to be in the best position to benefit from Internet Telephony: • They already connect to data networks; • The only change needed is to install VoIP gateways which would patch signals from telephone calls into the Internet and vice versa; • If two users are satisfied with using computers on both ends, no modification is needed. • ISPs could effectively target: • Their own subscribers who, by definition, already have computers; • Telephone users, which implies that phone gateways would need to be installed at the ISP; • Fax users who wish to reduce their transmission costs.

  15. Strategic Impact on PTO • For PTOs, the potential to win and the potential to lose with Internet Telephony exist in equally large and frightening proportions: • They could be hurt by the rise of Internet telephony, no matter from where it comes, since it would threaten their own customer base; • They could also benefit from the rise of Internet activity since they lease the lines that connect to the Internet.

  16. Strategic Impact on PTO PTO responses to the Internet Telephony 1. Protection through regulation • The government of Pakistan requires ISPs to write a clause in their contracts forbidding customers from using Internet Telephony; • The government of China applies three-layer regulation: • First layer: the contentFrom within China, websites can be accessed only by a proxy servers, which are computers that receive all data coming into and moving out of the network. Civil servants for the Chinese government can use these computers to check any website downloaded into China. • Second layer: the ISPSome ISPs are government-owned and even private ISPs must acquire a license and undergo regular inspection by government organizations. • Third layer: the userThe user must sign a pledge of allegiance to the interests of the state. It is called the “Net Access Responsibility Agreement” and commits an individual not to threaten state security or reveal state secrets and not read, reproduce, or transmit material that is considered dangerous or obscene.

  17. Strategic Impact on PTO PTO responses to the Internet Telephony 2. Modify pricing structure • PTOs could raise their local call prices, which would reduce the price advantage that Internet Telephony users enjoy. • They could also introduce usage or time-sensitive pricing, if it is not already applied. • Since one of the most attractive features of Internet Telephony is the affordability it offers for long distance and long duration calls, PTOs would do well to consider moving towards distance-independent call set-up charges as well as raising more from fixed charges. • For international calls, which face the most substantial threat from Internet Telephony that bypasses the international accounting rate system. In response to this, PTOs must reduce their international rates, which probably implies withdrawing from accounting rates and moving towards a regime based on call termination charges.

  18. Strategic Impact on PTO PTO responses to the Internet Telephony 3. Join in the fray • In passive way, PTOs can profit from local call revenues, leased lines revenues and from revenues from the provision of second lines to residential consumers for dedicated tasks (i.e., data telephony, regular telephony, etc.). • PTOs might benefit more from competing directly, which may bring risks, especially in the short-term: • customers may prefer Internet telephony over regular (PTSN) telephony; • PTO may end up undermining its existing customer base, and cannibalizing its own revenue stream. • They could buy out the very building blocks of the Internet, e.g.: • the companies who manufacture routers, servers and other network equipment, including companies who produce xDSL technologies; • the ISPs who provide Internet Telephony or other companies who develop software. • Testing the viability of Internet Telephony, and perhaps eventually deploying it broadly, is probably, from the PTO point of view, the best of a bad set of alternatives.

  19. 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Market Opportunities World Internet Telephony Market 1997 VoIP calls - 198M min/year (220% annual growth) End 1999 $600 million VoIP market End 2001 $1.89 billion VoIP market Source: Forrester Research Consumer & Small Business Enterprise & Institutions Wholesale

  20. Iceland Canada Belgium France USA Spain Japan Korea Indonesia Internet Telephony Business Model Traditional / Bilateral Model N = M(M-1) / 2 N = Number of bilateral agreements M = Number of parties 3 ISPs = 3 bilateral agreements 4 ISPs = 6 bilateral agreements 8 ISPs = 28 bilateral agreements

  21. Global Settlement and Clearinghouse Canada Iceland Belgium France USA Spain Japan Korea Indonesia Internet Telephony Business Model Multilateral Model

  22. Internet Telephony Business Model Clearing House Financial Model

  23. TELKOM Internet Telephony Business The Plan • Network deployment – start October 2000 • Services deployment – start January 2001 • TELKOM Internet Telephony services will include : • Internet Telephony service • Phone-to-Phone • Brand name : • Domestic Clearing House • Settlement function • Brand name : • IP Value Added Services • Voice VPN • PC-to-Phone • Unified Messaging Service (fax-SMS-email-voicemail) • Internet Call Waiting (Phone-to-PC) • Virtual Personal Phone

  24. Main Sources • Arya Satriananta (1999). Internet Futures and the Implications for Telecommunications Companies (With Special Reference to Developing Countries). Bath (UK): University of Bath. • Philip Lakelin, Katrina Bond, & Karin Sherwood (1999). Competitive Strategies for Internet Service Provision. Cambridge (UK): Analysys Publication. • ITU (1999). The Yearbook of Statistics: Telecommunication Services 1988—1997. Geneva: ITU. • ITU (1999). Challenges to the Network: Internet for Development. Geneva: ITU. • ITU (1997). Challenges to the Network: Telecommunications and the Internet. Geneva: ITU.

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