Pricing Internet services: Trends and tactics

Pricing Internet services: Pricing Internet services: Trends and tacticsTrends and tactics

Dr Tim Kelly, International Telecommunication Union (ITU)Workshop on settlement reform and the costing and pricing of

telecom services, Vientiane, 16-18 November 1999Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Tim Kelly can be contacted by e-mail at [email protected].

“We started out running the Net on top of the phone system, and

we’ll end up with telephony running over the Net.”

Eric Schmidt,CEO, Novell,

Quoted in Wired, August 1997

The EconomistMay 2nd 1998

Pricing Internet servicesPricing Internet services

AgendaAgenda

The phenomenal growth of the Internet Worldwide Sub-region

Retail pricing modelsWholesale pricing modelsDeveloping country concerns

Winners and losers?Scenarios

New business models, or old ones in disguise?

Internet hosts (million) Internet hosts (million) July 1993-July 1999July 1993-July 1999Compound Annual Growth Rate = 61.8%Compound Annual Growth Rate = 61.8%

Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards.

1.8 3.28.2

16.7

26.1

36.7

56.2

Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99

Canada & US

64.1%

Europe, 24.3%

LAC*

1.2%

Africa0.5%

Developing Asia-Pacific

2.9%Other4.6%

Australia, Japan & New

Zealand7.0%

Distribution of Internet hosts, Distribution of Internet hosts, January 1998January 1998

Source: ITU “Challenges to the Network: Internet for development, 1999”.

Internet host computers,Internet host computers,Asia-Pacific regionAsia-Pacific region

175.8 381.3853.4

1'821.3

3'150.7

4'377.4

5'654.4

1993 1994 1995 1996 1997 1998 Jul-99

CAGR (1993-98) = 100.2 %


35.8

10.3

4.0

2.5

0.13

Malaysia

Thailand

Philippines

Indonesia

Cambodia

Internet host computers per 10’000 Internet host computers per 10’000 inhabitants, inhabitants, selected Asian economiesselected Asian economies



Alternative retail pricing modelsAlternative retail pricing modelsFlat-rate per month

e.g., AOL (America OnLine) charges US$22.95 per month for unlimited Internet Access. To this must be added line usage and rental charges.

Usage-based e.g., Freeserve in the UK offers “free” Internet access.

Users pay only line rental and usage. Freeserve takes a percentage of the per minute call charge in an agreement with the service provider (Energis)

Advertising-based e.g., Hotmail offers a “free” email service, funded by

advertising

0 20 40 60 80

Japan

Thailand

Philippines

Hongkong

Singapore

India

Indonesia

MalaysiaISP chargeLocal callsLine rental

Asia-Pacific, comparative prices,Asia-Pacific, comparative prices,In US$, based on 20 hours off-peak use per monthIn US$, based on 20 hours off-peak use per month


Where does the money go? Typical Where does the money go? Typical Internet Service Provider cash-flowInternet Service Provider cash-flow

$19.95 per month subscription

$7.50-$10.50 Wholesale PoP Access

$2.00 - $3.00 Customer Care

$3.00 amortised customer marketing

$3.50-$7.50 margin per customer

Source: Adapted from Paul Stapleton, ISP$ Market Report, Boardwatch Magazine.


Peering: What’s on the menu?Peering: What’s on the menu?Peer-to-peer bilateral

Each Internet Exchange Point (IXP) has similar size, traffic flow, technology

Hierarchical bilateral IXPs in “Mother/Daughter” relationship with ISPs and smaller IXPs “Mother” may require capacity-based traffic settlements from

“Daughter”Third-Party Administrator

Network Access Points (NAPs) Metropolitan Area Networks (MAEs)

Co-operative agreement

Settlements-based trafficSettlements-based traffic

PTO ACollectsrevenues

Collectstraffic

PTO BRetainsrevenues

Terminatestraffic

Delivers traffic

Pays settlement fees

User 1 User 2 User 3 User 1 User 2 User 3

For accounting rate traffic, a direct bilateralrelationship is established between the origin and

termination operators. Intermediate transit operatorsare compensated from the accounting rate which is

usually split 50:50. PTO B retains net settlement.……...

PTO = PublicTelecommunicationsOperator

Internet telephony trafficInternet telephony traffic

Collectsrevenues

Collectstraffic

May collectlocal call fee

Terminatestraffic

ISP A

User 1 User 2 User 3

ISP B

User 1 User 2 User 3

Internet

IXP X IXP Y

ISP A pays fortransit capacity

ISP B pays fortransit capacity

Peering

IXP = InternetExchangePoint

ISP = InternetServiceProvider

Different wholesale pricing Different wholesale pricing arrangements arrangements

Public switched telephone servicePer minute wholesale pricing of end-to-end int’l trafficInternational accounting rate and settlements system appliesDomestically-regulated interconnect regimesAccess charges payable for call origination and terminationSome transparency

Public Internet serviceUsage-based wholesale pricing is rare (NZ and AUS are exceptions)Peering arrangements, usually based on capacity or traffic exchangedNo end-to-end int’l settlement paymentsNo regulation of peering arrangementsNo access charges payable for IP traffic in USNo transparency


Settlements and Peering: Settlements and Peering: What’s the difference?What’s the difference?

Settlement-payment traffic Substantial revenue transfers, from core to periphery of

network Promotes “organic” network growth BUT, Operators generating less traffic than they receive

have an incentive to keep prices highPeering traffic

Some revenue transfers, from periphery to core of network Promotes “spontaneous” network growth BUT, ISPs generating less traffic than they receive have an

incentive to force prices down

Internet traffic flows are highly Internet traffic flows are highly asymmetric asymmetric

Public switched telephone serviceTraffic flows are bilateral and broadly match value flow in that caller, who initiates the call, also pays for itCall-back reverses the direction of the call, from a statistical viewpoint, but caller still pays & benefitsTraffic flows unbalanced between developed and developing countries

Public Internet serviceTraffic flows are multi-lateral: A single session may poll many countriesWeb-browsing is dominant form of traffic: traffic flow is dominantly towards user who initiates the call. Web traffic highly asymmetricNewer forms of Internet traffic (telephony, push media, streaming video etc) reverses traffic flow to be from user which initiates the call

Traffic flows between Telia Traffic flows between Telia (Sweden) and US Internet (Sweden) and US Internet backbone. backbone. By time of dayBy time of day

Traffic from the USTraffic from Sweden

Source: [email protected]

If …. If …. usage-based settlements usage-based settlements were introduced on the Internetwere introduced on the Internet

Different types of traffic would need to be identified and tagged (problematic)

Traffic flows would need to be measured and billed on a bilateral basis between nodes (difficult)

Correspondent relations would need to be established between nodes (very difficult)

All intermediate transit providers would need to be compensated (extremely difficult)

The system would need widescale agreement which could only be enforced, when necessary, by cutting off service (virtually inconceivable)


Developing country concernsDeveloping country concernsDeveloping countries receive no international

settlement payments for IP traffic Increasingly, incoming IP traffic includes IP telephony and

fax traffic which they must terminateThey must pay to peer with US backbone

Peering costs are rising as IP traffic continues to grow exponentially

They must pay both half-circuits of the International Private Line to the USA Even though traffic flows in both directions over the circuit,

once it is establishedTelephone and fax traffic shifting to the Internet

What will replace the US$7-10 bn from settlements?

Gains and Gains and losses ...losses ...Gains /

opportunitiesLosses / Threats

DevelopedcountryTelcos

Increased demandfor leased lines

Additionalsubscriber lines

Higher valueservices / e-commerce

Lower internationalfax and voice callcharges

Markets for e-mailand content lost

Multiple new marketentrants

DevelopingcountryTelcos

As above, pluslower barriers toentry todevelopedcountry markets

As above, plussignificant reductionin net settlements

Requirement to payfull-circuit costs

Winners and Winners and loserslosers ......Factor Winners Losers

Erosion ofsettlementssystem

Telcos with bigdeficits (e.g.,AT&T, Sprint,MCI/WorldCom)

Telcos with bigsurpluses (e.g.,Nitel, Telkom SA,KPTC)

Increaseddemand forleased lines

Infrastructuresuppliers (e.g.,Project Oxygen,INTELSAT)

Developing countryTelcos locked intolong-term supplyagreements

“All calls arelocal calls”

Telcos withmeasured localservice

Telcos with “free”local calls

“Own” thecustomer

Local loopproviders

Long-distanceservice providers

Joint Statement on the Cost Sharing of the International Internet Interconnection Link between the USA and Asia-PacificResolves:that it is inappropriate for the ISPs and operators in

the region to bear the entire cost of the international Internet backbone between AP and the US;

that the current practice should be rectified;Urges Operators, ISPs and the ITU:to study appropriate mechanisms to measure the

actual traffic as the basis of usage-based or cost-oriented charging and settlement arrangements

Declaration signed on 26th January 1999 by CAT, Chungwa Telecom, IndoSat, KDD, Korea Telecom, PLDT, SingTel, Telecom Malaysia.


Possible scenariosPossible scenariosUSA sets the rules

USA continues to dominate, as home of most content and principal backbone, and continues to require all-comers to pay full-circuit costs plus peering charges.

Internet diffuses globally Internet grows at a faster rate outside USA, with regional

backbones being set-up and local content expanding. Leased line prices fall dramatically.

Internet converges with telephone network Network access and quality of service become major issues.

Separate Internets, largely owned by PTOs, are established with gateways to public Internet. PTOs offer to carry traffic at commercial rates and with traffic-based settlements between Internets.

For more information ...For more information ... Updated version launch:

10 October 1999(TELECOM ‘99)

Available on paper andonline (PDF format)

World Telecom IndicatorsDatabase available online

http://www.itu.int/ti

Other reports launchedOther reports launchedat TELECOM ‘99at TELECOM ‘99

World Telecommunication Development Report 1999:Mobile Cellular

Direction of Traffic 1999: Trading Telecom Minutes Trends in Telecom Reform 1999: Convergence

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Pricing Internet services: Trends and tactics