International Settlements: An Urgent Need for Equity in Benefits?

A Presentation at the:

Second Jamaica Internet ForumAccelerating Internet Access: National Development and

Universal Access in the Social Sectors

May 26-28, 2004 Ocho Rios, Jamaica

©Rob FriedenProfessor of Telecommunications

Penn State University, 102 Carnegie BuildingUniversity Park, Pennsylvania 16802

(+1 814) 863-7996; rmf5@psu.edu web site: http://www.personal.psu.edu/faculty/r/m/rmf5

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The Main Points

Downward trajectory of accounting rates, leaky “private” Downward trajectory of accounting rates, leaky “private” lines, market access initiatives, privatization, increased lines, market access initiatives, privatization, increased competition and Internet telephony (“VoIP”) will trigger competition and Internet telephony (“VoIP”) will trigger in the near term significant loss in international in the near term significant loss in international telephony settlement revenues.telephony settlement revenues.

Technological innovations and entrepreneurism typically Technological innovations and entrepreneurism typically trump legislative and regulatory relief.trump legislative and regulatory relief.

Migration to an IP-centric, bit delivery transport model Migration to an IP-centric, bit delivery transport model largely forecloses above cost rates and jeopardizes the largely forecloses above cost rates and jeopardizes the traditional carrier “correspondent” shared cost/revenue traditional carrier “correspondent” shared cost/revenue settlements process.settlements process.

Nations reliant on settlement surpluses must adapt. Nations reliant on settlement surpluses must adapt.

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Established Telephony Settlements Model

The traditional arrangement for international telephony The traditional arrangement for international telephony involves carrier correspondents matching half-circuits involves carrier correspondents matching half-circuits and dividing toll revenues; the process and regulator and dividing toll revenues; the process and regulator scrutiny prevent discrimination between carriers scrutiny prevent discrimination between carriers regardless of size, traffic volume, number of operating regardless of size, traffic volume, number of operating agreements, etc. agreements, etc.

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User3

Carrier A

Collectsrevenues

Collectstraffic

Carrier B

Receives half AR

Terminatestraffic

User 1 User 2 User 1 User 2 User 3

Traditional Accounting Rate Settlements

Carriers match half-circuits and split all transport and switching costs.

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Developing Telephony Model:Termination Charges

Even without VoIP, carriers historically making Even without VoIP, carriers historically making large outpayments seek lower ARs, or a large outpayments seek lower ARs, or a replacement method where they provide the replacement method where they provide the entire long haul, but only pay a local termination entire long haul, but only pay a local termination fee.fee.

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Carrier A

Collectsrevenues

Collectstraffic

Carrier B

Receives access fee

Terminatestraffic

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

Carrier A provisions a full circuit to an int’l gateway of Carrier B, but only pays local transport and switching costs.

New Telephony Model Settlements

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Telephony vs. Internet Settlements

International charging arrangements for Internet services International charging arrangements for Internet services started democratically with zero cost “peering”for started democratically with zero cost “peering”for everyone; with commercialization ICAIS now varies as a everyone; with commercialization ICAIS now varies as a function of operator market power; only the largest Tier-function of operator market power; only the largest Tier-1 Internet Service Providers (“ISPs”) peer; everyone else 1 Internet Service Providers (“ISPs”) peer; everyone else pays for peering or transit.pays for peering or transit.

Telephony settlements no longer provide Caribbean Telephony settlements no longer provide Caribbean carriers generous surpluses and this model has not carriers generous surpluses and this model has not applied to VoIP, despite efforts by governments of applied to VoIP, despite efforts by governments of Australia, Singapore, Korea and China.Australia, Singapore, Korea and China.

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ISP A

Exchangestraffic

ISP B

Collectsrevenues

Requestsand terminatestraffic

One-way (thick pipe)

User 1 User 2 User 3

For Internet paid peering or transit traffic, ISP B pays forboth halves of the International circuit(s) which areused for access to ISP A’s network (peering) or for access to some or all of the networks to which ISP A has access (transit). ISP B also pays for traffic exchange (“port charges”). ISP B may pay for the circuit directly, or in conjunction with one or more carriers.

ISP = InternetServicesProvider

ISP pays the full cost ofthe int’l circuit

Two-way (thin pipe)

Web 1 Web 1 Web 1

Internet Paid Access

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Telephony

Causation

The caller usually triggers transport setup and uses facilities provided by the originating carrier plus facilities of other carriers secured by the originating carrier.

Traffic measurementCalls and minutes can be measured.

Parties

Agree on a multilateral basis to divide cost and share toll revenues based on ITU Recommended model.

Internet

Causation

Traffic types and routing vary making it difficult to use traffic flows for determining who should pay; conduit and content merge.

Traffic measurement

Possible, but does not necessarily indicate which party initiated the link and who benefits.

Parties

A connectionless protocol where many carriers may be involved in switching and routing packets on “best effort”model; evolved from zero cost peering to a commercial hierarchy of peers and clients.

Telephony and Internet Models

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Developing country concerns Accounting rate settlement surpluses dwindle even as infrastructure development Accounting rate settlement surpluses dwindle even as infrastructure development

needs grow (wireline needs grow (wireline plus plus wireless wireless plusplus broadband). broadband). Call-back, VoIP prevent carriers from overpricing international traffic rates to Call-back, VoIP prevent carriers from overpricing international traffic rates to

subsidize local and other services.subsidize local and other services. Efforts by developed nations to force lower accounting rates come across as a Efforts by developed nations to force lower accounting rates come across as a

threat to sovereignty and assertion of extraterritorial jurisdiction, but the ITU and threat to sovereignty and assertion of extraterritorial jurisdiction, but the ITU and other multilateral forums have not helped forge a compromise.other multilateral forums have not helped forge a compromise.

The ICAIS regime forces non-Tier 1 ISPs, including all ISPs from LDCs, to pay The ICAIS regime forces non-Tier 1 ISPs, including all ISPs from LDCs, to pay both half-circuits of the International Private Line to both half-circuits of the International Private Line to overseas backbones and overseas backbones and foreignforeign ISP ISPs even s even though traffic flows in both directions over the circuit. though traffic flows in both directions over the circuit.

LDCs receive no international settlement payments for VoIP traffic, and may not LDCs receive no international settlement payments for VoIP traffic, and may not even receive compensation for some int’l private line traffic that leaks into the even receive compensation for some int’l private line traffic that leaks into the PSTN.PSTN.

Short term strategies (higher termination charges and mobile termination Short term strategies (higher termination charges and mobile termination surcharges) may trigger retaliation and prove unsustainable.surcharges) may trigger retaliation and prove unsustainable.

The need for a transition period.The need for a transition period.

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Strategies for Securing a Compromise

Consistent with ITU Recommendations, LDCs should have the Consistent with ITU Recommendations, LDCs should have the opportunity to demonstrate that termination costs are not opportunity to demonstrate that termination costs are not symmetrical; LDCs may not have the same scale economies and symmetrical; LDCs may not have the same scale economies and positive network externalities as developed nations.positive network externalities as developed nations.

LDC governments and carriers alike need to pay greater attention to LDC governments and carriers alike need to pay greater attention to cost accounting; did the FCC and ITU SG-3 make legitimate cost cost accounting; did the FCC and ITU SG-3 make legitimate cost estimates? Do VoIP and wireless terminations cost the same as estimates? Do VoIP and wireless terminations cost the same as telephony terminations?telephony terminations?

Recognize that the revenue issue has largely moved from accounting Recognize that the revenue issue has largely moved from accounting rates to securing proper compensation for accessing the PSTN and rates to securing proper compensation for accessing the PSTN and other first and last km media for the national extension.other first and last km media for the national extension.

Insist that any form of traffic that traverses a national extension will Insist that any form of traffic that traverses a national extension will trigger a cost-based access charge, even VoIP!trigger a cost-based access charge, even VoIP!