International Charging Arrangements for Internet Services

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

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

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

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

8. We prefer to walk while we talk! Latin America & Caribbean region, millions 12 Main lines 10 Mobile subscribers 8 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998

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

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

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

12. IP backbone: limited competition 30% IP backbone providers 25% IP: 4 largest = 80% Tel: 4 largest = 30% 20% mmarket sahre Int'l 15% PTOs 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 Ranking of the company

13. Top backbone providers, spring 99 Source: Adapted from BoardWatch, ISP Directory, Spring 99.

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

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

16. Replacing PSTN with IP:Int’l circuits (‘000s) Central America IPL, PSTN, 42% 58% South America IPL, PSTN, 54% 46% Caribbean IPL, 18% PSTN, 82% 300 World 250 200 PSTN circuits 150 100 International Private Lines 50 (Internet) 0 1995 1996 1997 1998 Note: Based on usage of circuits between the US and the rest of the world. Source: FCC.

17. Dial-up Internet traffic as % of total traffic minutes 40% 35% Telia (Sweden) 38% 30% 25% 27% 19.5% 20% Telenor (Norway) 12% 15% 18% 10% Telecom Portugal 8.5% 5% 0% 1998 1999 Source: PTO annual reports. Note: For Telia, Internet traffic as % of local minutes. For others, as % of total

18. Total international VoIP traffic,In millions of minutes 7'000 5.5% 6'000 As percentage of int'l 5'000 outgoing traffic 3.2% 4'000 3'000 1.6% 2'000 1'000 0.2% 0.0% 0 1997 1998 1999 2000 2001 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. Settlements-based traffic PTO = Public PTOs A & Bsplit the cost ofthe int’l circuit Telecommunications Operator Delivers traffic PTO B PTO A Pays settlement fees Retains Collects Terminates Collects revenues revenues traffic traffic User 1 User 2 User 3 User 1 User 2 User 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. ……...

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

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 Developed Source: ITU.

29. The America’s digital divide (Jan. 2000)

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. Growing regional bandwidth Fuente:Kessler Marketing Intelligence.

32. International capacity and costs TAT-8 PTAT-1 TAT-10 TAT- TAT-14 Flag 1988 1989 1992 12/13 2000 Atlantic 1996 2001 TransAtlantic cables, 1988-2001 10'000 100'000 Circuit costs, falling by 72% p.a . 10'000 1'000 1'000 100 Circuit capacity (64 kbit/s, 000s) Circuit cost p.a. (US$) 100 10 10 Circuit capacity, rising by 89% p.a . 1 1 AC-1 1999 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.

33. IXPs around the world, Sept. 2000

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 deTelecomunicacioneshttp://www.itu.int/