International

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Economics of Internet Telephony
George Vinall
April 1, 1998
International Protocol
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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 Question Is Internet Telephony a legitimate
new industry or a just a passing arbitrage
opportunity built on the avoidance of
international settlement payments and US access
costs?
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PC-to-Phone (Same Carrier)
Private Line / Frame Relay
The Internet
Terminating Gateway
Foreign ISP
US ISP
Local Exchange
US
PTT National Network
Foreign
Call Direction
US Calling Party
PTT Called Party
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PC-Phone (Interconnection)
Originating ISP Network
3rd Party Terminating Gateway
PTT National Network
US Local Exchange
Calling Party
Called Party
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Phone-to-Phone
In-Band Network Management
Domestic Private Line
Class 4 International Switch
Private Packet Network over International Private
Lines
ITSP Originating Gateway
ITSP Terminating Gateway
In-Band CDR Collection
Class 4 IXC Switch
Local Exchange Lines
PTT National Network
US
Outside US
LEC Access Network
US Calling Party
Call Direction
PTT Called Party
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VON vs. PSTN Costs
Issue VON PSTN Advantage Transmission TCP/IP
Mulitplex/DCS Tie Compression Codex Multiplexin
g Tie Fill Ratios Ethernet Overflow Tie Edge
Device Gateway POP/FX PSTN Scaling Servers Por
t Cards PSTN Call Switching Router Switch PSTN
Redundacy BGP4 SONET PSTN Signalling Gateway S
S7 PSTN Features Gateway CLASS PSTN Public
Net Internet DDD VON Private
Net Intranet Hierarchy PSTN Access
Fees -None- FCC VON Intl. Settlement -None- I
TU VON Foreign Transport Tariff -None- PSTN
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Arbitrage

• Avoidance of ITU/FCC international settlement
  payments to foreign carriers
• Avoidance of certain domestic access charges
• Use of public Internet backbones for traffic

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Very Wishful Thinking
Worldwide Forecast of IP Gateway Software Sales
Revenue (US in Millions)
SOURCE Frost Sullivan (Mountain View, CA)
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US Access Charges
Originating Access
Terminating Access
IXC Carriage
LEC C.O.
Long Haul
ATT WorldCom/MCI Sprint Qwest IXC Regionals
98 I-LEC 2 CAP
99.8 I-LEC .2 CAP
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US Access Charges
Originating Access
Terminating Access
IXC Carriage
LEC C.O.
Long Haul
Year
Total
ATT/IXC
ATT/IXC
ATT/IXC
ATT/IXC
Pre-1982 6 / 3.6 2 / 3
6 / 3.6 14 / 10.2
1984 4.9 2.0
4.9 11.8
1996 2.3 .9
2.3 5.5
1998 2.1 .9
1 4.0
ATT/IXC
ATT/IXC
ATT/IXC
ATT/IXC
2001 .8 / 1 .5
.8 / 1 2.1 / 2.5
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US Access Charges
Originating Access
Terminating Access
IXC Carriage
LEC C.O.
Long Haul
1998
Total
IXC 2.1 .9
1 4.0
IP Voice n/a 2.0
1 3.0
C-LEC .8 .9
1 2.8
I-LEC .4 .9
1 2.3
Bell Atantic w/ Long Distance
.4 .9
.4 1.7
estimated cost
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ITU/FCC Settlement Policy
Rich Country A
Poor Country B
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ITU/FCC Settlement Policy
Accounting Rate 2
Rich Country A
Poor Country B
3
Average of both countries costs becomes
the Accounting Rate
1
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ITU/FCC Settlement Policy
Accounting Rate 2
Rich Country A
Poor Country B
Settlement Rate 1
3
Half of the Accounting Rate becomes
the Settlement Rate
1
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ITU/FCC Settlement Policy
Accounting Rate 2
Rich Country A
Poor Country B
Settlement Rate 1
3
100,000 Calls
Traffic Ratio 31
30,000 Calls
1
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ITU/FCC Settlement Policy
Accounting Rate 2
Rich Country A
Poor Country B
Settlement Rate 1
3
100,000 Calls
100,000 - 30,000 70,000
70,000
30,000 Calls
1
Traffic Ratio 31
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Two Calls to Hong Kong
Full Scale Traditional Telephony US
Land-Side .044 Intl Transmission .026 Intl
Settlement Cost .202 Total Cost .272 Consumer
Rate .65 Gross Margin .378 Gross
Margin 58
Internet Telephony US Land-Side .075 Intl
Transmission .106 HK Termination
Costs .004 Total Cost .185 Consumer
Rate .65 Gross 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
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Two Calls to Hong Kong
Full Scale Traditional Telephony US
Land-Side .044 Intl Transmission .026 Intl
Settlement Cost .202 Total Cost .272 Consumer
Rate .65 Gross Margin .378 Gross
Margin 58
Internet Telephony US Land-Side .075 Intl
Transmission .106 HK Termination
Costs .004 Total Cost .185 Consumer
Rate .65 Gross 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
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Two Calls to Lucerne, Switzerland
Full Scale Traditional Telephony US
Land-Side .044 Intl Transmission .016 Intl
Settlement Cost .047 Total Cost .107 Consumer
Rate .40 Gross Margin .293 Gross
Margin 73
Internet Telephony US Land-Side .075 Intl
Transmission .069 Swiss Termination
Cost .276 Total Cost .420 Consumer
Rate .40 Gross Margin (.02) Gross Margin 0

Phone-to-Phone IT call from any US locations
with T1/E1 gateway 35 fill factor, day rate,
termination on Swiss PTT, 10 minute call See
Appendix III
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Two Calls to Lucerne, Switzerland
Full Scale Traditional Telephony US
Land-Side .044 Intl Transmission .016 Intl
Settlement Cost .047 Total Cost .107 Consumer
Rate .40 Gross Margin .293 Gross
Margin 73
Internet Telephony US Land-Side .075 Intl
Transmission .069 Swiss Termination
Cost .276 Total Cost .420 Consumer
Rate .40 Gross Margin (.02) Gross Margin 0

Phone-to-Phone IT call from any US locations
with T1/E1 gateway 35 fill factor, day rate,
termination on Swiss PTT, 10 minute call See
Appendix III
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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

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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

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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 Line Internet Telephone both benefits
from and suffers from a similar cost/service
structure as line-side dialing (Feature Group
A) telephone service did between 1980-1984
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International Protocol, LLC

• Questions ?
• Email
• gvinall_at_erols.com

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Appendix II US-HK Costs
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Appendix III US-Swiss