Interconnect Business Models

1
Interconnect Business Models

• Jim.Dalton_at_TransNexus.com

2

• The kind of situation which economists are prone
  to consider as requiring corrective Government
  action is, in fact, often the result of
  Government action.
• R. H. Coase, 1960

3
Agenda

• The Debate
• Calling Party Network Pays
• Bill and Keep
• The existing PSTN interconnect business model
• The IP interconnect business model
• The emerging network interconnect model

4
The Debate
Calling Party Network Pays
Bill Keep
versus
5
The Debate
for a Google or Yahoo! or Vonage or anybody to
expect to use these pipes for free is nuts!
BusinessWeek 7 Nov 2005
Within several years, all telephone calls will
be made for free using VoIP
Rueters 19 Oct 2005
versus
6
The Debate
Youre a Dinosaur!
Your Nuts!
versus
7
PSTN Interconnect Model

• Incumbent Local Exchange Carriers (ILECs) must
  offer interconnection.
• Network of the calling party is the cost
  causer.
• Since called party networks are forced to accept
  all calls, they are entitled to compensation
  access fees.
• Price for interconnection is based on historical
  average cost per minute.

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Intercarrier Compensation Rates
9
PSTN Interconnect Rates
Local Area or LATA
CMRS Switch out MTA
CLEC2 Tandem Switch
CLEC1 Tandem Switch
CMRS Switch in MTA
CLEC1 End Office
CLEC2 End Office
ILEC Incumbent Local Exchange Carrier CLEC
Competitive Local Exchange Carrier IXC
Inter-Exchange Carrier
CMRS Commercial Mobile Radio Service LATA
Local Access Transport Area MTA Metropolitan
Trading Area
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Interconnect Comparison
Local Area or LATA
CMRS Switch out MTA
CLEC2 Tandem Switch
CLEC1 Tandem Switch
CMRS Switch in MTA
CLEC1 End Office
CLEC2 End Office
11
Interconnect Fraud
Local Area or LATA
CMRS Switch out MTA
CLEC2 Tandem Switch
CLEC1 Tandem Switch
CMRS Switch in MTA
CLEC1 End Office
CLEC2 End Office
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IP Interconnect Model

• Peering Bill and Keep model.
• IP Networks of similar size choose to
  interconnect directly to save costs. No
  interconnect fees.
• Transit Small IP networks pay to interconnect
  with larger IP networks.

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In the beginning of IP
Web Browser

• Bill and Keep Model
• ISPs charged for Internet access.
• ISPs interconnected at public exchange points.
• No interconnect payments.
• Quality of service via free interconnection
  collapses.

MAE East
14
IP Peering Develops
Web Browser

• Large ISPs use private peering to bypass public
  exchange points.
• Peering ISPs pay only for their peering costs.
  There are no inter-ISP settlement payments

MAE East
15
IP Transit Develops
Web Browser

• In general, the cost for a large ISP to peer with
  a small ISP exceeds the benefits.
• Small ISPs must pay to access or transit backbone
  IP networks.
• IP interconnect fees are based on cost of
  access not usage.

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New Ideas about Interconnect

• A Coasion Alternative to Pigovian Regulation of
  Network Interconnection by Atkinson Barnekov
• Existing PSTN regulation violates the property
  rights of ILECs - they are forced to accept
  traffic.
• Regulators provide interconnect access charges,
  based on average cost of usage, as the remedy for
  called party networks.
• Average historical costs based on usage do not
  represent the real cost of interconnect.
• Lessons from IP interconnect indicate the future.

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Emerging Interconnect Model

• Carriers should not be forced to accept traffic.
• Customers will require their carriers to provide
  global access to all network.
• Network service providers recover their operating
  costs from end users not from network
  interconnection.

18
Emerging Interconnect Model

• Split incremental costs of interconnection
  evenly between interconnecting networks.
• Incremental cost is driven by number and
  distribution of subscribers.
• When networks of dissimilar sizes interconnect,
  most of the incremental cost of interconnection
  will impact the larger network.
• Splitting the incremental cost results in a net
  payment from the small network to the large
  network.
• This is not Bill and Keep.

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Conclusions

• Current Calling Party Network Pays policy will
  disappear.
• Universal Bill Keep model will not occur.
• Interconnect via IP will replace TDM.
• Network interconnect fees will continue
• Based on market driven rates.
• No interconnect fees for similar sized networks
  Bill and Keep model
• Rates based on network access, not usage Calling
  Party Network Pays
• Interconnect requirements for common carriers
  will be replaced by Net Neutrality.

20
References

• A Coasian Alternative to Pigovian Regulation of
  Network Interconnection by senior FCC economists
  Jay Atkinson and Chris Barnekov September 2004.
  This excellent white paper provides an economic
  model which explains current IP peering market
  behavior and provides a proposed framework for
  regulating network interconnection that does not
  mandate interconnection or interconnect rates.
  http//web.si.umich.edu/tprc/papers/2004/348/Coasi
  anAlternative040901b.pdf
• Executive Summary of Intercarrier Compensation
  and Universal Service Reform Plan published by
  the Intercarrier Compensation Forum (ICF) in
  August 2004. This white paper defines the
  interconnect regulatory policy recommended by the
  ICF, a organization of nine interexchange
  carriers (IXCs) including ATT, Sprint and
  Level3. http//web.si.umich.edu/tprc/papers/2004/3
  48/CoasianAlternative040901b.pdf
• FAQs for the Facts Questions, answers and
  opinions on interconnect policy published by the
  Alliance for Rational Interconnect Compensation
  (ARIC). http//www.arictelecom.com/section1.cfm
• US Code governing common carrier interconnection
  Title 47, Chapter 5, Subchapter II, Part II
   251.
• http//www4.law.cornell.edu/uscode/search/display.
  html?termsInterconnect20Obligationsurl/uscode/
  html/uscode47/usc_sec_47_00000251----000-.html
• http//cpr.bellsouth.com/pdf/ga/e996.pdf This
  link leads to the BellSouth Access Services
  Tariff for the state of Georgia. This 177 page
  tariff only covers network access. Published
  interconnect agreements between the CLECs and
  ILECs are usually over 500 pages long giving
  fuel to the Bill and Keep model proponents that
  interconnect fees have absurdly high overhead
  costs.
• BusinessWeek Interview with Ed Whitacre, CEO of
  ATT 7 November 2005 http//www.businessweek.com
  /_at__at_n34hIUQu7KtOwgA/magazine/content/05_45/b395809
  2.htm
• Intercarrier Compensation by Gary Epstein, VON
  Magazine - Nov. 2005. Epstein is a partner with
  Latham and Watkins (source of the Intercarrier
  Compensation Rates chart ) and adviser to the
  ICF. http//www.vonmag.com/issue/2005/nov/columns/
  epstein.asp
• Phantom Traffic Identifiable but Not Billable
  by Susana Schwartz, Billing World July 2005.
  This article provides insight to how carriers
  avoid billing for interconnect access fees.
  http//www.billingworld.com/archive-detail.cfm?arc
  hiveId7687
• Intercarrier Compensation A Balancing Act by
  Susan Schwartz, Billing World -
  http//www.billingworld.com/archive-detail.cfm?arc
  hiveId7704