Bordeaux, December 12, 2005 Halldor Matthias Sigurdsson ( halldor@cict.dtu.dk )

1. The Cost of Universal Service Obligations in PSTN and VoIPFor further information: www.viskan.net Bordeaux, December 12, 2005 Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

2. Research Interest • In this paper: • Analysing the current Universal Service Legislation • How does the transformation from PSTN to VoIP affect current or future USO • Estimate the cost and extent of Universal Service Obligations in PSTN Next Steps: • Is broadband becoming a commodity which everyone should be entitled to? • Should Universal Service Obligations be extended to include broadband? • Which methods exist to ensure widespread broadband? • What is the cost? The Cost of Universal Service Oblications

3. Context Center for Information and Communication Technologies Danish Technical University Techno-Economic Studies • BREADhttp://www.ist-bread.org • ECOSYShttp://www.celtic-initiative.org/Projects/ECOSYS/default.asp • TONIChttp://www-nrc.nokia.com/tonic/ • TETRAhttp://www.telenor.no/fou/prosjekter/tera/ Economic Theory • Laffont and Tirole, 2000Competition in Telecommunication • Bijl and Peitz, 2002Regulation and Entry into Telecommunications Markets • M.Cave et al., 2002Chapter 10, Handbook of Telecommunications Economics Extending Universal Service • P.Xavier, 2003Should Broadband be part of universal service obligations • García-Murillo and Mckninght,2005Internet Telephony: Effects on the Universal Service Program in the United States The Cost of Universal Service Oblications

4. Paper Structure • PSTN Structure • Cost Components • PSTN in rural areas • VoIP Structure • Cost Components • PSTN in rural areas • Universal Service • Universal Service Obligations • Universal Service Fund • Case Study: Iceland • Cost simulation model • Cost of USO in Iceland Paper is available on-line at: www.viskan.net/phd/publications.php The Cost of Universal Service Oblications

5. Universal Service • Universal Service • Availability, Accessibility and Affordability • Currently only basic voice telephony • Implemented differently by each member state • Defined in EU’s New Regulatory Framework from 2002 • Universal Service Obligation • Burden, usually put upon incumbent operator • Universal Service Fund • Compensation for fulfilling USO • Different approaches: UK and US The Cost of Universal Service Oblications

6. VoIP & Universal Service • Literature suggest • Redistribution through taxation rather than subsidies[Laffont and Tirole, 2002] • Inefficiency of USF ($1 raised costs $1.8) • [Laffont and Tirole, 2002] • Effect of VoIP on USF • García-Murillo and Mckninght simulate that contributions to the fund be reduced by 45% in the next 15 years, if VoIP operators are exempted for contributions to the Universal Service Fund • If VoIP operators are demanded to contribute to the Universal Service Fund, contributions will increase. But this is not enough to meet the increasing demands for its services • Extenstion of Universal Service • Xavier and now EU concludes that there is no need to introduce new legal requirements for mobile and high-speed internet services under the EU's universal service rules at the moment. The Cost of Universal Service Oblications

7.   PSTN Public Switched Telephone Network Local Loop Remote Subscriber Stages Local and Transit Exchanges Transmission System Control and signalling system Switching system Internal Services Housing Switching Transmission 12% 18% Cost Components 20% 46% The Cost of Universal Service Oblications

8. PSTN Softswitch Gateway CPE CPE ATA ATA Internet   VoIP Voice over IP Softswitch / Gateway CPE Customer Premises Equipment ATA- An Analogue Termination Adapter The Internet Internal Services Housing Switching Transmission 12% 18% Cost Components 20% 46% The Cost of Universal Service Oblications

9.   Comparing the two PSTN Softswitch Gateway CPE CPE ATA ATA Internet   Overlay Service Uses the Internet Broadband = Urban Service 10 % Penetration Infrastructure Service Costly Transmission USO = Rural Service 90% Penetration The Cost of Universal Service Oblications

10. The Case - Iceland Facts: • Inhabitants: 280.000 • Arial: 103.000 km2 • 70% in capital • 92% in towns • 2,5 Gb/s fibre ring connecting all towns Status: • Not a EU member • Member of EEA • High broadband penetration • 128 Kb/s minimum enjoyed by all (apart from 72 farms) The Cost of Universal Service Oblications

11. Hypothesis Cost of remote structures and operation is distributed but related to customer number The Cost of USO can be calculated and aggregated Reference Level Cost pr. user No. of users pr. location The Cost of Universal Service Oblications

12. Actual Cost The Cost of Universal Service Oblications

13. Approach 2 3 Pareto Analysis of Total Cost of Operation for Iceland Telecom (the incumbent) for 2002 1 VBA Model for cost components that can be calculated Regression Analysis for fixed cost components Chapter 4Problem Analysis The Cost of Universal Service Oblications

14. The Cost of USO The Cost of Universal Service Oblications

15. Conclusion • VoIP is a disruptive technology, has different cost structures and greatly reduces barrier to entry • Difference between PSTN and VoIP • Infrastructure vs. Overlay • Costly transmission vs. Internet • Rural vs. Urban • 90% penetration vs. 10% • 1,5% of customers require 33% of all locations • Loss of € 199 pr. non-profitable users requires € 2,96 subsidy pr. PSTN user The Cost of Universal Service Oblications

16. Questions ? For questions or comments Please feel free to contact halldor@cict.dtu.dk www.viskan.net The Cost of Universal Service Oblications