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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 - PowerPoint PPT Presentation
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International Protocol
George Vinall
April 1, 1998
Economics of Internet
Telephony
International Protocol
2GEORGE VINALL // [email protected]
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 QuestionIs Internet Telephony
a legitimate new industryor a just a passing arbitrage
opportunity built on the avoidance of international
settlement payments and US access costs?
International Protocol
3GEORGE VINALL // [email protected]
PC-to-Phone (Same Carrier)
Cisco 7513Router
US Calling Party
IBM Compatible IBM Compatible IBM Compatible
The Internet
US ISP
PTT Called Party
Local Exchange
Private Line / Frame Relay
US
Foreign
Call Direction
PTT National Network
TerminatingGateway Foreign
ISP
International Protocol
4GEORGE VINALL // [email protected]
PC-Phone (Interconnection)
CDRCollection& Rating
Sun SPARC
Cisco 7513Router
Optical drive
OriginatingISP Network
US Local Exchange
Calling Party
PTT National Network
Called Party
IBM Compatible IBM Compatible IBM Compatible
3rd PartyTerminating
Gateway
Optical drive
Optical drive
Router
Hub
The Internet
International Protocol
5GEORGE VINALL // [email protected]
CDRCollection& Rating
Class 4 IXC Switch
LEC Access Network
US Calling Party
Sun SPARCNetwork
Management
ITSPOriginatingGateway
ITSPTerminating
Gateway
PTT National Network
Private Packet Network over
International Private Lines
DomesticPrivate Line
Local ExchangeLines
USOutside
US
In-BandCDR
Collection
In-BandNetwork
Management
Call Direction
Phone-to-Phone
Class 4 International
Switch
PTT Called Party
International Protocol
6GEORGE VINALL // [email protected]
VON vs. PSTN Costs
Issue VON PSTN AdvantageTransmission TCP/IP Mulitplex/DCS TieCompression Codex Multiplexing TieFill Ratios Ethernet Overflow Tie Edge Device Gateway POP/FX PSTNScaling Servers Port Cards PSTNCall Switching Router Switch PSTNRedundacy BGP4 SONET PSTNSignalling Gateway SS7 PSTNFeatures Gateway CLASS PSTNPublic Net Internet DDD VONPrivate Net Intranet Hierarchy PSTNAccess Fees -None- FCC VONIntl. Settlement -None- ITU VONForeign Transport Tariff -None- PSTN
International Protocol
7GEORGE VINALL // [email protected]
Arbitrage
• Avoidance of ITU/FCC international settlement payments to foreign carriers
• Avoidance of certain domestic access charges
• Use of “public” Internet backbones for traffic
International Protocol
8GEORGE VINALL // [email protected]
Very Wishful Thinking
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1995 1996 1997 1998 1999 2000 2001
Reve
nue
(US$
in M
illion
s)
SOURCE: Frost & Sullivan (Mountain View, CA)
Worldwide Forecast of IP Gateway & Software Sales
International Protocol
9GEORGE VINALL // [email protected]
US Access Charges
LECC.O.
LECC.O.
IXCPOP
IXCPOPLong Haul
OriginatingAccess
TerminatingAccess
IXC Carriage
98% = I-LEC98% = I-LEC 2% = CAP2% = CAP
99.8% = I-LEC99.8% = I-LEC .2% = CAP.2% = CAP
AT&TAT&TWorldCom/MCIWorldCom/MCI
SprintSprintQwestQwestIXC IXC
RegionalsRegionals
International Protocol
10GEORGE VINALL // [email protected]
US Access Charges
LECC.O.
LECC.O.
IXCPOP
IXCPOP
Long Haul
OriginatingAccess
TerminatingAccessIXC Carriage
Year Total
Pre-1982 Pre-1982 6 / 3.66 / 3.6 2 / 32 / 3 6 / 3.66 / 3.6 14 / 10.2 14 / 10.2
1984 1984 4.94.9 2.0 2.0 4.94.9 11.8 11.8
1996 1996 2.32.3 .9.9 2.32.3 5.5 5.5
1998 1998 2.12.1 .9.9 1 1 4.0 4.0
2001 2001 .8 / 1.8 / 1 .5.5 .8 / 1.8 / 1 2.1 / 2.5 2.1 / 2.5AT&T/IXC
AT&T/IXCAT&T/IXC
AT&T/IXC AT&T/IXC AT&T/IXC
AT&T/IXC AT&T/IXC
International Protocol
11GEORGE VINALL // [email protected]
US Access Charges
LECC.O.
LECC.O.
IXCPOP
IXCPOP
Long Haul
OriginatingAccess
TerminatingAccessIXC Carriage
1998 Total
IXC IXC 2.12.1 .9.9 1 1 4.0 4.0
IP Voice IP Voice n/an/a 2.0* 2.0* 1 1 3.0 3.0
C-LEC C-LEC .8*.8* .9 .9 1 1 2.8 2.8
.4*.4* .9 .9 .4*.4* 1.7 1.7
* estimated cost
I-LEC I-LEC .4*.4* .9 .9 1 1 2.3 2.3Bell Atantic w/Bell Atantic w/Long DistanceLong Distance
International Protocol
12GEORGE VINALL // [email protected]
ITU/FCC Settlement Policy
RichCountry
“A”
PoorCountry
“B”
International Protocol
13GEORGE VINALL // [email protected]
ITU/FCC Settlement Policy
RichCountry
“A”
PoorCountry
“B”
$ 1
$ 3
Accounting Rate =$ 2
Average of bothcountries costsbecomes the
Accounting Rate
International Protocol
14GEORGE VINALL // [email protected]
ITU/FCC Settlement Policy
RichCountry
“A”
PoorCountry
“B”
$ 1
$ 3
Accounting Rate =$ 2
Half of the Accounting Rate
becomes theSettlement Rate
Settlement Rate =$ 1
International Protocol
15GEORGE VINALL // [email protected]
ITU/FCC Settlement Policy
RichCountry
“A”
PoorCountry
“B”
$ 1
$ 3
Accounting Rate =$ 2
Settlement Rate =$ 1
100,000 Calls
30,000 Calls
Traffic Ratio 3:1
International Protocol
16GEORGE VINALL // [email protected]
ITU/FCC Settlement Policy
RichCountry
“A”
PoorCountry
“B”
$ 1
$ 3
Accounting Rate =$ 2
Settlement Rate =$ 1
100,000 Calls
30,000 Calls
100,000- 30,000 70,000
$ 70,000
Traffic Ratio 3:1
International Protocol
17GEORGE VINALL // [email protected]
Two Calls to Hong Kong
Full Scale Traditional Telephony
US Land-Side $.044Intl Transmission$.026Intl Settlement Cost $.202
Total Cost $.272
Consumer Rate $.65Gross Margin $.378
Gross Margin 58%
Internet Telephony *
US Land-Side $.075Intl Transmission$.106HK Termination Costs $.004
Total Cost $.185
Consumer Rate $.65Gross 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
International Protocol
18GEORGE VINALL // [email protected]
Two Calls to Hong Kong
Full Scale Traditional Telephony
US Land-Side $.044Intl Transmission$.026Intl Settlement Cost $.202
Total Cost $.272
Consumer Rate $.65Gross Margin $.378
Gross Margin 58%
Internet Telephony *
US Land-Side $.075Intl Transmission$.106HK Termination Costs $.004
Total Cost $.185
Consumer Rate $.65Gross 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
International Protocol
19GEORGE VINALL // [email protected]
Two Calls to Lucerne, Switzerland
Full Scale Traditional Telephony
US Land-Side $.044Intl Transmission$.016Intl Settlement Cost $.047
Total Cost $.107
Consumer Rate $.40Gross Margin $.293
Gross Margin%73 %
Internet Telephony *
US Land-Side $.075Intl Transmission$.069Swiss Termination Cost $.276
Total Cost $.420
Consumer Rate $.40Gross Margin ($.02)
Gross Margin%0 %
* Phone-to-Phone IT call from any US locations with T1/E1 gateway35% fill factor, day rate, termination on Swiss PTT, 10 minute call
See Appendix III
International Protocol
20GEORGE VINALL // [email protected]
Two Calls to Lucerne, Switzerland
Full Scale Traditional Telephony
US Land-Side $.044Intl Transmission$.016Intl Settlement Cost $.047
Total Cost $.107
Consumer Rate $.40Gross Margin $.293
Gross Margin%73 %
Internet Telephony *
US Land-Side $.075Intl Transmission$.069Swiss Termination Cost $.276
Total Cost $.420
Consumer Rate $.40Gross Margin ($.02)
Gross Margin%0 %
* Phone-to-Phone IT call from any US locations with T1/E1 gateway35% fill factor, day rate, termination on Swiss PTT, 10 minute call
See Appendix III
International Protocol
21GEORGE VINALL // [email protected]
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
International Protocol
22GEORGE VINALL // [email protected]
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
International Protocol
23GEORGE VINALL // [email protected]
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 LineInternet Telephone
both benefits from and suffers from a similarcost/service structureas line-side dialing (Feature Group “A”)
telephone service did between 1980-1984
International Protocol
24GEORGE VINALL // [email protected]
International Protocol, LLC
Questions ?Questions ?Email:
[email protected]@erols.com
Calls From US To Hong Kong
Traditional Telephony Internet TelephonyPer Minute Costs Incurred by Facilities-Based Provider of IDD Participating in Settlements
Cost Per Minute Costs Incurred by Non Facilities-Based Provider of Internet Telephony
Cost
US Land-Side Cost of Origination or Termination US Land-Side Cost of Origination US Sw itched Access Charges $0.030 Long Distance 800 In-WATs $0.070 Domestic Sw itching $0.002 Internet Telephony Gatew ays & Routers (pair) $0.005 US Transmission to International Gatew ay Sw itch $0.010 International Gatew ay Sw itching $0.002 Total Domestic Land-Side Costs $0.044 Total Domestic Land-Side Costs $0.075
US-HK E1: US 1/2-Ckt US-HK E1: Full Ckt Gatew ay to NMC Backhaul IRU Capital $35,000 US Local Loop Monthly Expense $500 Beach Termination IRU Capital $15,000 US 1/2 Ckt Monthly Expense $29,000 Undersea IRU Capital $500,000 HK 1/2 Ckt Monthly Expense $48,700 Total Capital $550,000 HK Local Loop Monthly Expense $400 Lifetime in Years 7 Interest Rate 9.5% Monthly Depreciation & Interest Expense $7,170 Monthly O&M Expense $2,083 Monthly Dual Landing Expense $500 Total Monthly Expense $9,753 Total Monthly Expense $78,600
Outbound Operating Minutes per E1 Ckt Outbound Operating Minutes per E1 Ckt Theoretical Minutes per DS0 Channel 10,000 Theoretical Minutes per DS0 Channel 10,000 Usable DS0 Channels per E1 31 Usable DS0 Channels per E1 31 Time of Day Fill Factor 30.0% Time of Day Fill Factor 30.0% Voice Codec Compression Ratio 4 : 1 TCP/IP Codec Compression Ratio 8 : 1 Total Inbound & Outbound Minutes 372,000 Total Outbound Minutes 744,000
Cost of International Transmission per Minute $0.026 Cost of International Transmission per Minute $0.106
International Settlement National Termination Accounting Rate $0.790 HK Local Exchange Line $0.004 Settlement Rate $0.395 HK National Usage $0.000 Ratio of Outbound Minutes to Inbound Minutes 3.08 Effective Net Outpayment Ratio 51.0% Effective Settlement Rate for Inbound+Outbound $0.202 Total National Termination Costs $0.004
Total Cost per Minute $0.272 $0.185
Consumer Rate $0.650 $0.650
Gross Margin $ $0.378 $0.465Gross Margin % 58.2% 71.6%
Appendix II US-HK Costs
Calls From US To Lucerne, Switzerland *
Traditional Telephony Internet TelephonyPer Minute Costs Incurred by Facilities-Based Provider of IDD Participating in Settlements
Cost Per Minute Costs Incurred by Non Facilities-Based Provider of Internet Telephony
Cost
US Land-Side Cost of Origination or Termination US Land-Side Cost of Origination US Sw itched Access Charges $0.030 Long Distance 800 In-WATs $0.070 Domestic Sw itching $0.002 Internet Telephony Gatew ays & Routers (pair) $0.005 US Transmission to International Gatew ay Sw itch $0.010 International Gatew ay Sw itching $0.002 Total Domestic Land-Side Costs $0.044 Total Domestic Land-Side Costs $0.075
US-Sw itzerland E1: US 1/2-Ckt US-HK E1: Full Ckt Gatew ay to NMC Backhaul IRU Capital $35,000 US Local Loop Monthly Expense $500 Beach Termination IRU Capital $15,000 US 1/2 Ckt Monthly Expense $23,000 Undersea & Overland DDP IRU Capital $370,000 Sw iss 1/2 Ckt Monthly Expense $45,000 Total Capital $420,000 Sw iss Local Loop Monthly Expense $0 Lifetime in Years 7 Interest Rate 9.5% Monthly Depreciation & Interest Expense $5,475 Monthly O&M Expense $2,083 Monthly Dual Landing Expense $500 Total Monthly Expense $8,058 Total Monthly Expense $68,500
Outbound Operating Minutes per E1 Ckt Outbound Operating Minutes per E1 Ckt Theoretical Minutes per DS0 Channel 10,000 Theoretical Minutes per DS0 Channel 10,000 Usable DS0 Channels per E1 31 Usable DS0 Channels per E1 31 Time of Day Fill Factor 40.0% Time of Day Fill Factor 40.0% Voice Codec Compression Ratio 4 : 1 TCP/IP Codec Compression Ratio 8 : 1 Total Inbound & Outbound Minutes 496,000 Total Outbound Minutes 992,000
Cost of International Transmission per Minute $0.016 Cost of International Transmission per Minute $0.069
International Settlement National Termination Accounting Rate $0.340 Sw iss Local Exchange Line $0.004 Settlement Rate $0.170 Sw iss National Usage $0.272 Ratio of Outbound Minutes to Inbound Minutes 1.75 Effective Net Outpayment Ratio 27.4% Effective Settlement Rate for Inbound+Outbound $0.047 Total National Termination Costs $0.276
Total Cost per Minute $0.107 $0.420
Consumer Rate $0.400 $0.400
Gross Margin $ $0.293 -$0.020Gross Margin % 73.3% -5.0%
Appendix III US-Swiss