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International Protocol

Economics of Internet Telephony . George Vinall. April 1, 1998. International Protocol. Discussion Topics . Diagrams of IT services Cost vs. Circuit Switching State of the Economics International Settlements Domestic Access Charges Regulation & Public Policy

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International Protocol

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  1. Economics of Internet Telephony George Vinall April 1, 1998 International Protocol

  2. Discussion Topics • Diagrams of IT services • Cost vs. Circuit Switching • State of the Economics • International Settlements • Domestic Access Charges • Regulation & Public Policy • Logical Conclusions The Question Is Internet Telephony a legitimate new industry or a just a passing arbitrage opportunity built on the avoidance of international settlement payments and US access costs?

  3. Cisco 7513 Router PC-to-Phone (Same Carrier) Private Line / Frame Relay The Internet Terminating Gateway Foreign ISP US ISP Local Exchange US PTT National Network Foreign Call Direction US Calling Party PTT Called Party

  4. CDR Collection & Rating Optical drive Optical drive Optical drive The Internet Cisco 7513 Router PC-Phone (Interconnection) Originating ISP Network 3rd Party Terminating Gateway PTT National Network US Local Exchange Calling Party Called Party

  5. Network Management CDR Collection & Rating Phone-to-Phone In-Band Network Management Domestic Private Line Class 4 International Switch Private Packet Network over International Private Lines ITSP Originating Gateway ITSP Terminating Gateway In-Band CDR Collection Class 4 IXC Switch Local Exchange Lines PTT National Network US Outside US LEC Access Network US Calling Party Call Direction PTT Called Party

  6. VON vs. PSTN Costs Issue VON PSTN Advantage Transmission TCP/IP Mulitplex/DCS Tie Compression Codex Multiplexing Tie Fill Ratios Ethernet Overflow Tie Edge Device Gateway POP/FX PSTN Scaling Servers Port Cards PSTN Call Switching Router Switch PSTN Redundacy BGP4 SONET PSTN Signalling Gateway SS7 PSTN Features Gateway CLASS PSTN Public Net Internet DDD VON Private Net Intranet Hierarchy PSTN Access Fees -None- FCC VON Intl. Settlement -None- ITU VON Foreign Transport Tariff -None- PSTN

  7. Arbitrage • Avoidance of ITU/FCC international settlement payments to foreign carriers • Avoidance of certain domestic access charges • Use of “public” Internet backbones for traffic

  8. Very Wishful Thinking Worldwide Forecast of IP Gateway & Software Sales Revenue (US$ in Millions) SOURCE: Frost & Sullivan (Mountain View, CA)

  9. IXC POP IXC POP LEC C.O. US Access Charges Originating Access IXC Carriage Terminating Access LEC C.O. Long Haul AT&T WorldCom/MCI Sprint Qwest IXC Regionals 98% = I-LEC 2% = CAP 99.8% = I-LEC .2% = CAP

  10. IXC POP IXC POP LEC C.O. US Access Charges Originating Access Terminating Access IXC Carriage LEC C.O. Long Haul Year Total AT&T/IXC AT&T/IXC AT&T/IXC AT&T/IXC Pre-1982 6 / 3.62 / 36 / 3.6 14 / 10.2 1984 4.92.0 4.9 11.8 1996 2.3.92.3 5.5 1998 2.1.9 1 4.0 AT&T/IXC AT&T/IXC AT&T/IXC AT&T/IXC 2001 .8 / 1.5.8 / 1 2.1 / 2.5

  11. IXC POP IXC POP LEC C.O. US Access Charges Originating Access Terminating Access IXC Carriage LEC C.O. Long Haul 1998 Total IXC 2.1.9 1 4.0 IP Voice n/a2.0* 1 3.0 C-LEC .8*.9 1 2.8 I-LEC .4*.9 1 2.3 Bell Atantic w/ Long Distance .4* .9.4* 1.7 * estimated cost

  12. ITU/FCC Settlement Policy Rich Country “A” Poor Country “B”

  13. ITU/FCC Settlement Policy Accounting Rate =$ 2 Rich Country “A” Poor Country “B” $ 3 Average of both countries costs becomes the Accounting Rate $ 1

  14. ITU/FCC Settlement Policy Accounting Rate =$ 2 Rich Country “A” Poor Country “B” Settlement Rate =$ 1 $ 3 Half of the Accounting Rate becomes the Settlement Rate $ 1

  15. ITU/FCC Settlement Policy Accounting Rate =$ 2 Rich Country “A” Poor Country “B” Settlement Rate =$ 1 $ 3 100,000 Calls Traffic Ratio 3:1 30,000 Calls $ 1

  16. ITU/FCC Settlement Policy Accounting Rate =$ 2 Rich Country “A” Poor Country “B” Settlement Rate =$ 1 $ 3 100,000 Calls 100,000 - 30,000 70,000 $ 70,000 30,000 Calls $ 1 Traffic Ratio 3:1

  17. Two Calls to Hong Kong Full Scale Traditional Telephony US Land-Side $.044 Intl Transmission $.026 Intl Settlement Cost $.202 Total Cost $.272 Consumer Rate $.65 Gross Margin $.378 Gross Margin 58% Internet Telephony * US Land-Side $.075 Intl Transmission $.106 HK Termination Costs $.004 Total Cost $.185 Consumer Rate $.65 Gross Margin $.465 Gross Margin 72% * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on HKTI local lines, 10 minute call. See Appendix II

  18. Two Calls to Hong Kong Full Scale Traditional Telephony US Land-Side $.044 Intl Transmission $.026 Intl Settlement Cost $.202 Total Cost $.272 Consumer Rate $.65 Gross Margin $.378 Gross Margin 58% Internet Telephony * US Land-Side $.075 Intl Transmission $.106 HK Termination Costs $.004 Total Cost $.185 Consumer Rate $.65 Gross Margin $.465 Gross Margin 72% * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on HKTI local lines, 10 minute call. See Appendix II

  19. Two Calls to Lucerne, Switzerland Full Scale Traditional Telephony US Land-Side $.044 Intl Transmission $.016 Intl Settlement Cost $.047 Total Cost $.107 Consumer Rate $.40 Gross Margin $.293 Gross Margin% 73 % Internet Telephony * US Land-Side $.075 Intl Transmission $.069 Swiss Termination Cost $.276 Total Cost $.420 Consumer Rate $.40 Gross Margin ($.02) Gross Margin% 0 % * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on Swiss PTT, 10 minute call See Appendix III

  20. Two Calls to Lucerne, Switzerland Full Scale Traditional Telephony US Land-Side $.044 Intl Transmission $.016 Intl Settlement Cost $.047 Total Cost $.107 Consumer Rate $.40 Gross Margin $.293 Gross Margin% 73 % Internet Telephony * US Land-Side $.075 Intl Transmission $.069 Swiss Termination Cost $.276 Total Cost $.420 Consumer Rate $.40 Gross Margin ($.02) Gross Margin% 0 % * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on Swiss PTT, 10 minute call See Appendix III

  21. Clever Pricing Formats • Good News: • Real rates are mixed, some higher than IDDD • IT from US Gateways just resold IDDD bought at carrier rates • Hybrid IT, resale per route • Postalized international pricing (with sever restrictions) • Bad News: • Change customer behavior • PC - to - PC captures low-end • Phone-to-Phone facilities costs are higher • Phone-to-Phone pricing requires scale, terminating facilities

  22. State of the Regulations • History of Computer III • Is Phone-to-Phone exempt? • IVANs • General US policy • FCC, White House, Congress • General International policy • ITU, WTO Accord • Reciprocal Compensation for CLECs

  23. Logical Conclusions • Internet technology is a not an immediate treat to “carrier” grade service • Cost savings is solely based on avoidance of US domestic access fees and international settlement payments • PC-to-PC best cost service, but relies on spotty quality of the public Internet • Inherent efficiencies require scale, technological development, bandwidth management tools • If traffic grows, regulators will start changing rules, charging IT carriers The Bottom Line Internet Telephone both benefits from and suffers from a similar cost/service structure as line-side dialing (Feature Group “A”) telephone service did between 1980-1984

  24. International Protocol, LLC Questions ? Email: gvinall@erols.com

  25. Appendix II US-HK Costs

  26. Appendix III US-Swiss

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