Internet Pricing and Voice over IP: Implications and

developmentsLearning Initiatives on Reforms

in Network EconomiesLirne.Net, Copenhagen,

11-16 March 2001.

The views expressed in this paper are those of the author and may not necessarily reflect the opinions of the ITU or its membership. Tim Kelly can be contacted at tim.kelly@itu.int.

AgendaAgenda! Internet around the world! IP Telephony:

" What are the issues?" Implications for high, medium and low-priced

markets" Country case studies

! World Telecom Policy Forum 2001: IP Telephony" Geneva, March 7-9, 2001" Opinions and outputs" Information resources

Source: ITU, adapted from Internet Software Consortium <www.isc.org>.

0.1 0.2 0.4 0.7 1.3 2.7 5.814.4

21.829.7

43.2

72.4

104.0

44%

67%

46%36%

70%

95%

79%

107%

81%93%

100%

135%

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Number of Internet host computers, Number of Internet host computers, in millions, and annual growth in %in millions, and annual growth in %

Top Internet marketsTop Internet markets

60%

49%

46%

41%

40%

37%

35%

35%

35%

30%

Iceland

Norway

Sweden

Canada

Finland

Denmark

Korea (Rep.)

Australia

USA

Singapore

Top 10 countries by Internet user penetration, Jan. 2001

95

39

23

20

16

15

13

7

7

6

USA

Japan

China

Germany

Korea (Rep.)

UK

Canada

Australia

France

Italy

Top 10 countries by number of Internet users (millions), Jan. 2001

Source: ITU, Internet Software Consortium <www.isc.org>, RIPE <www.ripe.net>.

InterInter--regional Internet backboneregional Internet backbone357 Mbit/s

19�716 Mbit/s

Asia-Pacific

LatinAmerica &Caribbean

2�638 Mbit/s

127 Mbit/s

Arab States, Africa

468 Mbit/s 171

Mbit/s

Europe

56�241 Mbit/sUSA &Canada

Source: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 2000.

IP Telephony: IP Telephony: What is it?What is it?

! Internet Protocol (IP) Telephony is a generic term describing voice or fax carried over IP-based networks, such as the Internet.

! IP Telephony is important:" In the short-term, because it cuts the cost of calls,

especially if routed over the public Internet" In the longer-term, because telecoms carriers are

migrating their separate voice and data networks to converged IP-based networks

! Examples of IP Telephony Service Providers include Net2Phone, Dialpad.com, iBasis etc.

IP Telephony: IP Telephony: Four main stages Four main stages of evolutionof evolution

1. PC-to-PC (since 1994)" Connects multimedia PC users, simultaneously online" Cheap, good for chat, but inconvenient and low quality

2. PC-to-Phone (since 1996)" PC users make domestic and int�l calls via gateway" Increasingly services are�free� (e.g., Dialpad.com)

3. Phone-to-Phone (since 1997)" Accounting rate bypass" Low-cost market entry (e.g., using calling cards)

4. Voice/Web integration (since 1998)" Calls to website/call centres and freephone numbers" Enhanced voice services (e.g., integrated messaging)

Why is IP Telephony important?Why is IP Telephony important?IP Telephony traffic, in million IP Telephony traffic, in million minutesminutes

0.0% 0.2%

1.6%

5.5%

3.2%

0

1'000

2'000

3'000

4'000

5'000

6'000

7'000

1997 1998 1999 2000 2001

As percentage of int'l outgoing traffic

Source: ITU Internet Reports, adapted from TeleGeography Inc.

Pricing IP for voice servicesPricing IP for voice services

! In competitive, low-price markets" Main market opportunity for IP Telephony is for

value-added services, e.g., unified messaging! In markets in transition to competition

" IP Telephony offers a route towards early introduction of competition and creates downward pressure on prices

! In high-price, monopoly markets" Where permitted, IP Telephony creates opportunities

for low-cost calls" Even if not permitted, IP Telephony is widely used to

reduce costs of international call termination

Country case studies: Country case studies: IP Telephony legal statusIP Telephony legal status

Source: Summary of ITU country case studies, available at: www.itu.int/wtpf/casestudies.

Country case studies: Potential Country case studies: Potential price savings using IP Telephonyprice savings using IP Telephony

Note: �IDD� refers to published prices from the incumbent operator for international direct dialling. �IP out� refers to using the Net2Phone IP Telephony service within the country. �IP in� refers to using Net2Phone in the US to call to the country.

Source: Summary of ITU country case studies, available at: www.itu.int/wtpf/casestudies; Net2Phone; PTOs.

Country case studies: The stakes Country case studies: The stakes in international traffic flowsin international traffic flows

Note: �Outgoing�, �Incoming� and �Total� show international traffic in millions of minutes p.a. �Per inhabitant� and �per main line� shows traffic in minutes p.a., �As % of revenue� shows revenue from international traffic as a % of total telecom revenue for the country. Source: Summary of ITU country case studies, available at: www.itu.int/wtpf/casestudies. ITU World Telecommunication Indicators Database.

World Telecommunication World Telecommunication Policy Forum: Policy Forum: What is it?What is it?

�The purpose of the forum is to provide a venue for creating a shared vision among policy-makers worldwide on the issues arising from the emergence of new telecommunication services and technologies, and to consider any other policy issue in telecommunications which would benefit from a global exchange of views�

! �Rough consensus� in the form of opinionswhich are non-prescriptive and non-binding

! Some 750 senior policy-makers, regulators and industry experts were present, from more than 120 countries and 100 private sector members

IP Telephony: IP Telephony: What are the What are the issues?issues?

! Technical:" How to define IP Telephony?" Is quality of service comparable? Will it improve?" How to handle numbering issues?

! Economic:" What price and cost savings can be expected?" How quickly will carriers migrate their networks?" Isn�t it just a form of bypass of telecom monopolies?

! Regulatory:" Is it voice or is it data?" License it? Prohibit it? Restrict it? Liberalise it?" Should IP Telephony contribute to Universal Service?

Opinion A: General implications Opinion A: General implications of IP Telephony of IP Telephony

! Implications for Member States" the deployment of IP-based networks benefits users, industries,

and the economy at large, because it fosters technical and market innovation, diversity and economic growth

" IP � could be viewed as a significant opportunity for all countries to respond to the convergence of information and communication technologies and evolve their networks;

! Implications for Operators" continuing development of the Internet and IP-based networks is

a significant medium for communications and commerce;" mobile wireless systems are expected to migrate towards an IP-

based architecture in order to deliver integrated voice, data and multimedia services, as well as access to the Internet;

! ITU � is of the view that:" IP Telephony applications are best supplied in a market in which

consumers have choices among multiple, alternative sources because only then will citizens, businesses and the overall economy reap the benefits of innovation and cost effectiveness

Opinion A: Invites �Opinion A: Invites �

! Member States and Sector Members to consider the possibility of the introduction and deployment of IP technologies and IP applications, including the exchange of information;

! All Member States to review their current regulatory frameworks with a view to:" encouraging investment, spurring innovation and advancing

development;" achieving public policy goals in the context of a converged

communication services environment; " considering the possibility of opening their communication

services market with respect to IP Telephony by adopting a competition-oriented approach in order to achieve clearly defined public policy goals, taking into account, among other things, the concept of technology neutrality for fully-substitutable services

Opinion B: Actions to assist Opinion B: Actions to assist Member States and Sector MembersMember States and Sector Members

! Encourages Member States to share experiences:" on approaches towards making any sector specific regulation

technology-neutral;" the application of domestic competition laws as part of a pro-

competitive policy;" establishing sustainable bases to generate financing for

universal access/service.! Invites the ITU to:

" Carry out and update IP Telephony case studies;" Carry out cost studies and assist Members in performing cost-

benefit analyses;" Help Member States attract investment

! Invites ITU to carry out regional workshops on:" IP-based technologies and network evolution" Cost structures, pricing mechanisms, interconnection,

numbering, attracting investment, market considerations etc.

Opinion C: Human Resources Opinion C: Human Resources DevelopmentDevelopment

! Recognising that:" the transition to an IP environment places new demands on the

management and operation of ITU members;" the speed with which countries can extend the benefits of

telecommunication technologies will depend on their ability to deploy skilled personnel;

! Invites the ITU:" to facilitate the sharing of knowledge and views, by Member

States and Sector Members, of global trends in all new technologies, in particular IP applications;

" to encourage Member States and Sector Members to create integrated human resources transition plans towards IP;

" to assist Member States and Sector Members in evaluating and identifying new and changing human resources requirements

Opinion D: Essential Studies to Opinion D: Essential Studies to facilitate introduction of IP Telephonyfacilitate introduction of IP Telephony

! Invites the three ITU sectors to initiate studies to facilitate the introduction of IP Telephony on:" compatibility and inter-operability of radio access between IP

networks and PSTNs," working definitions of IP telephony and Internet telephony" whether, and to what extent, to require compatibility with the

existing international telephone service, including developing appropriate performance metrics and QoS

" Whether, and to what extent, IP Telephony can be part of national PSTNs and whether traffic identification and measurement need to be considered

" identifying the cost elements of international IP connectivity with respect to the introduction of IP Telephony

! Invites the ITU-D to establish a group of experts to:" Prepare a checklist of Factors to be considered;" Advise on the policy impacts in developing countries;" Prepare a report to the next World Telecom Development Conf.

Information resourcesInformation resources

! ITU Internet Reports 2001: IP Telephony

! Secretary-General�s report (sole working document of the Forum)

! Chairman�s report (output of Forum)

! Website: www.itu.int/wtpf

! Country case studies: Canada, China, Colombia, Egypt, Korea (Rep.), Nepal, Peru, Uganda, etc