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Study for the European Commission
The Future of IP Interconnection:
Technical, Economic, and Public Policy Aspects
Authors: J. Scott Marcus, Dieter Elixmann Contributing Author: Kenneth R. Carter Senior Experts: Scott Bradner, Klaus Hackbarth, Bruno Jullien, Gabriele Kulenkampff, Karl-Heinz Neumann, Antonio Portilla, Patrick Rey, and Ingo Vogelsang WIK-Consult GmbH Rhöndorferstr. 68 53604 Bad Honnef Germany
The opinions expressed in this study are those of the authors and do not necessarily reflect the views of the European Commission.
Bad Honnef, 29 January 2008
Final Report: The Future of IP Interconnection
Figures Tables Key Concept Boxes Executive Summary 1 Introduction 1.1 The changing electronic communications environment 1.2 The economics of Interconnection today 1.2.1 The distinction between access and interconnection 1.2.2 Current European arrangements for switched network interconnection 1.2.3 Negotiated arrangements 1.2.4 The GSM Association’s IP-based Interconnection model 1.3 Emerging challenges to IP network interconnection 1.3.1 Decoupling of the network from the service 1.3.2 Migration to NGN 1.3.3 The evolution of the access network 1.3.4 Changing cost structure 1.4 Implications of interconnection payments for consumer and supplier welfare 1.5 Regulatory objectives 1.6 Methodology 1.6.1 Desk research 1.6.2 Stakeholder interviews 1.6.3 Consolidation and analysis of results, formulation of recommendations 1.7 Structure of this report 2 Underlying drivers of change 2.1 Technological and market evolution 2.1.1 De-coupling of the service from the network 2.1.2 Continued price/performance improvements due to Moore’s Law and to enhancements in fibre optic transmission (e.g. DWDM) and optical switching and cross-connection 2.1.3 Fundamental changes in the delivery of voice and video services 22 24 V V VI VII 1 2 3 3 4 5 7 8 8 11 12 12 13 14 16 16 16 17 17 18 19 19
2.1.4 Implications for IP-based traffic patterns 3 Economic theory and practice: Interconnection today and tomorrow 3.2 Peering 3.1 Key underlying economic principles 126.96.36.199 Transaction costs 3.2 Market power 3.3 Differentiated Quality of Service (QoS) in the Internet today 4 Differentiated Quality of Service (QoS) 4. Peer-to-Peer (P2P).2 The technology of QoS management 4.4 Gradual modernization of exterior IP routing 2.1.2 The impact of management of QoS 4.8 Replacement of the circuit-switched access network with a high speed IPbased network 2.7 Changes in network back-haul 2.5 Future evolution of higher-level routing functions 2.2.3 Long term versus short term effects 2.2. and the shift to user-provided content 2.2.3 IP interconnection models 3.2 Traditional telephony interconnection models 3.0.1 Web 2.2 The changing environment within the home 188.8.131.52.1.1 Transit 3.3 Where management of QoS is likely to be beneficial 27 29 29 31 32 33 33 35 39 40 43 43 43 45 47 48 49 49 52 63 69 71 72 76 77 77 80 80 82 84 .6 Gradual deployment of IP version 6 (IPv6) 2.1 Retail arrangements for voice telephony 3.II Final Report: The Future of IP Interconnection 2.1 Application requirements 184.108.40.206.4 Two-sided markets 3.2 Wholesale arrangements among switched fixed (PSTN) and mobile (PLMN) telephone networks 220.127.116.11.3 Implications 3.1 The performance of IP-based networks in the absence of QoS management 4.2 Broader changes in the use of electronic communications 18.104.22.168 Externalities 3.
4 Technologies used to manage QoS 4.3.1 Quality differentiation.2 Incumbent or competitive entrant? 22.214.171.124.4. and IP interconnection 5.4. or historically IP-based? 126.96.36.199.4.3 NGN/IMS technology and interconnection at the service level and the IP level 5.1 Rationale for VoIP peering 5.2.3.Final Report: The Future of IP Interconnection III 4.3 Implications for European policymakers 5 NGNs.1.1 Interconnection at various levels 5.2 Technical characteristics of NGN 5.3 Transaction costs 4.2.3. Voice over IP (VoIP).3 Implications for Carrier Selection and Carrier Pre-Selection 5.4 Implications of the different migration paths 85 89 89 89 90 90 91 92 94 95 95 97 98 98 99 99 101 114 116 117 122 122 122 123 124 124 125 125 125 126 .4 Related threats to competition 5. innovation.2 Prospects for third party services over NGN 5.5 Slow deployment between service providers to date 4. and market power 4.2 Number portability and VoIP peering 188.8.131.52 IMS and NGN – standards and implementation 5.2 Vertical integration and other vertical relationships between network operators and applications and content providers 4.4 Different market players – different evolutionary paths to NGN 5.1 Service differentiation 4.1 Implications of standardized NGN equipment 5.4 The Network Neutrality debate in the United States and elsewhere 4.4.3 The economics of differentiated QoS 4.2 Network externalities 4.3 ENUM and VoIP peering 5.1. social welfare.1 Interconnection of VoIP 5.4.3. mobile or both? 5.3.4 Incentives for interconnection 4.3.4 VoIP peering and market power 5.1 Historically a telco.3 Fixed.
4 The level of charges among IP-based network operators 6.1 The evolution of the market 6.5 Network neutrality 7.5.3 The changing average incremental cost of service during the transition period 128 5.3 Interconnection obligations for data 6.2 The call termination monopoly 6.4.2 The level of charges for voice 6.5.1 Traditional remedies versus new remedies 184.108.40.206 The level of charges for IP data traffic 6.3 Interconnection obligations – voice call termination 7.4 Interconnection payments – voice call termination 7.2 Wholesale payments for IP traffic interconnection 7.5 The migration to an IP-based NGN 6.5 Regulation and the transition period to VoIP and NGN 5.6 Technical considerations in the evolution of the IP protocol 7 Recommendations 7.1 Interconnection obligations – IP traffic 7.6 Technical considerations in the evolution of the IP protocol References Annex 1: Annex 2: Survey of recent published work on IP interconnection Glossary of Terms 129 130 130 131 132 134 134 136 137 138 139 139 140 140 142 145 146 148 153 162 .4 A risk of arbitrage? 6 Conclusions 6.2 Number of Points of Interconnection (PoI) 126 126 127 5.4.IV Final Report: The Future of IP Interconnection 5.
Figure 17: Mobile revenue per MoU versus MoUs per month Figure 18: Two peers and their respective transit customers Figure 19: Application requirements for stringent QoS Figure 20: MIT reference model for inter-provider QoS Figure 21: End-to-end SLAs and charging with the GSM-A IPX Figure 22: Different Forms of VoIP Implementation Figure 23: The ITU’s layered NGN architectural model Figure 24: Layered view of the IMS Model Figure 25: Functional elements of IMS Figure 26: Fixed and mobile interoperability under ETSI TISPAN Figure 27: Evolutionary paths to IMS NGN 9 10 19 21 22 24 37 38 39 42 44 48 53 56 56 57 65 73 79 88 109 111 115 118 119 120 121 Tables Table 1: Coasian arrangements: Backbone peering versus U.S. 2001-2004 Figure 16. Bill and Keep 75 . Fixed-to-mobile interconnection fees in the EU25. 2000-2004 Figure 15: Fixed-to-mobile interconnection fees in the EU15. 2004-2006.Final Report: The Future of IP Interconnection V Figures Figure 1: The TCP/IP Reference Model Figure 2: IP-based applications running in your Personal Computer (PC) Figure 3: The NGN layered structure Figure 4: Convergence of content delivery Figure 5: Introduction of Intel Chipsets 1992 -2006 Figure 6: The value chain for the provision of VoIP Figure 7: Protocol hierarchy of E-Home related standards Figure 8: Timeline of E-home related standards Figure 9: E-home value chain and potential business models Figure 10: Cisco estimates of global consumer Internet traffic Figure 11: Network Externalities Figure 12: Two-sided markets Figure 13: Calling Party's Network Pays (CPNP) wholesale arrangements Figure 14: Fixed-to-fixed interconnection fees in the EU15.
NGN Key Concept Box 21: Conclusions Key Concept Box 22: Conclusions cont’d 1 4 6 14 15 18 34 35 41 61 79 94 96 97 100 100 105 108 112 117 130 133 . asymmetric relationships Key Concept Box 8: Web 2.0. Interconnection Key Concept Box 3: Call termination fees and the migration to IP Key Concept Box 4: Call termination fees: Mobile networks Key Concept Box 5: Migration to Next Generation Networks: Regulatory Objectives Key Concept Box 6: Technological and market evolution Key Concept Box 7: Symmetric vs. Symmetry Key Concept Box 11: Quality of Service economics and engineering Key Concept Box 12: Network Neutrality Key Concept Box 13: Net Neutrality: US vs. and the shift to user-provided content Key Concept Box 9: Internet Traffic Growth Key Concept Box 10: Reciprocity vs. cont’d Key Concept Box 16: Carrier ENUM and Public ENUM Key Concept Box 17: Mobile Interconnection Key Concept Box 18: Mobile IP Interconnection Key Concept Box 19: VoIP Interconnection Key Concept Box 20: Internet vs. Peer-to-Peer (P2P).VI Final Report: The Future of IP Interconnection Key Concept Boxes Key Concept Box 1: Note to the reader Key Concept Box 2: Access vs. Europe Key Concept Box 14: VoIP peering Key Concept Box 15: VoIP Peering Issues.
Fixed versus mobile networks: Previous papers on IP-based NGN interconnection have often ignored the differences between fixed and mobile networks. Interconnection arrangements for switched PSTN/PLMN networks have been markedly different than those for IP networks. We see signs that mobile networks are already following a somewhat different evolutionary path than fixed networks. but they are not the same thing. Among them: • Access versus interconnection: Our focus is on interconnection between independent networks. it is the convergence to NGNs that makes this study particularly timely. We attempt to clearly delineate between the two. we discuss the goals and the challenges of regulation. In the study. The convergence of these networks raises difficult questions as to how interconnection should be regulated going forward. • • This Executive Summary follows roughly the same sequence of presentation as the report itself. Our conclusions and recommendations reflect these differences. and our recommendations to the European Commission. Indeed. the economic theory of interconnection as it relates to the Internet and to the PSTN/PLMN.Final Report: The Future of IP Interconnection VII Executive Summary Network interconnection by means of the Internet Protocol (IP) has been a vital enabler of the Internet’s ubiquity and success. Retail versus wholesale level: There are linkages between the retail and the wholesale levels. we have taken the position that regulatory remedies should be imposed only where necessary. A number of technological and market developments pose challenges to IP-based interconnection. and has for the most part been highly effective. the drivers of change. Access. we have taken the position that needed remedies should if possible be imposed only on the wholesale level. With the increasing importance of the Internet in the global economy. moreover. not only at a technical level. whereby one network operator uses facilities of another in support of the former’s own services and customers. but also in terms of associated regulatory obligations. the economic theory of differentiated Quality of Service (QoS). and to traditional interconnection in the fixed (PSTN) and mobile (PLMN) networks as well. the significance of IP-based interconnection will become even greater in the years to come. . not on the retail level. In the following sections. we have attempted to draw clear distinctions in a number of areas that are sometimes blurred together in the relevant literature. is out of scope for this report. Consistent with the general philosophy of the European framework. IP-based interconnection has usually been achieved without explicit regulatory obligations. these networks are physically and logically converging to IP-based Next Generation Networks (NGNs). with potentially large regulatory implications. Notably.
In particular. or greater than market power in current voice networks? The answer is not yet altogether clear. and may be motivated to try to thwart the emergence of these new forms of competition if they can. and that are already present in today’s Voice over IP (VoIP) services. This evolution represents both an opportunity and a challenge. price. regulation will need to be carefully reviewed with these objectives in mind. 1 See the Framework Directive.1 As the fixed and mobile voice networks migrate to IP. to minimize any distortion or restriction of competition in the electronic communications sector. This evolution makes it possible for different underlying platforms (for example. inasmuch as some existing operators may perceive this evolution as a competitive threat. lawful intercept (wiretapping). As a closely related phenomenon. . Article 8. market power has been a central concern of regulation. with a single integrated IP-based network (whether called an NGN or not) delivering some combination of data. specifically in regard to IP interconnection and also generally. thus changing the character of competition and possibly introducing new challenges to competition. Will market power in the emerging. Independent service providers can compete with established network operators to offer data. to ensure that all users derive maximum benefit in terms of choice. convergence implies that the service becomes largely independent of the network. Drivers of change The most noteworthy driver of change is the convergence of the network. and a great step forward for consumer choice. Examples that are relevant to NGN. voice and video. include access to emergency services (112).VIII Final Report: The Future of IP Interconnection Regulatory challenges. posing as it does risks of distortion of competition. Regulation also has a role to play in ensuring that necessary services are deployed even in cases where market mechanisms would not suffice. and access by those with disabilities. This development potentially represents a potential boost to competition. fixed telecommunications and cable television) to offer equivalent services. regulatory goals Regulators seek. and quality of electronic communication services. This same evolution enables bundled offers of multiple services to the end-user. IP-based converged Next Generation Networks be less than. and to avoid barriers to innovation and to efficient investment in infrastructure. voice and video services to end-users. potentially benefiting competition. comparable to.
telecommunications. . 2 Other IP interconnection arrangements exist. telephony service providers adhere to wholesale payment arrangements known as Calling Party’s Network Pays (CPNP). Economic theory shows that network operators (even small network operators) would prefer to set these fees at exceptionally high levels. generally for a fee. and data can be delivered over cable television. but will decline somewhat as a fraction of all Internet traffic. Economic theory: Interconnection in the switched network and in the Internet IP-based interconnection is normally implemented by a mixture of peering and transit. Video over the Internet is likely to represent a major driver of future traffic growth.Final Report: The Future of IP Interconnection IX This same phenomenon of IP-based convergence implies that services are no longer tied to a single physical transmission platform. such as mutual transit. IP-based traffic continues to grow dramatically. Technology continues to evolve. but will never represent a large fraction of total Internet traffic. but the rate of growth (contrary to what many have assumed) is gradually slowing in percentage terms over time. with transit.2 With peering. sometimes without payment. and price/performance continues to improve dramatically over time. so they are generally subject to regulation in the European Union today. and do not (in most cases) depend on any regulatory obligations. These changes signal shifts in traffic volumes and in traffic patterns. two Internet Service Providers (ISPs) agree to exchange traffic solely among their respective customers. Voice over IP (VoIP) usage will continue to grow. through improvements in Dense Wave Division Multiplexing [DWDM]). not only for computational power and memory (Moore’s Law). but also for communications bandwidth (for instance. Peerto-peer traffic will continue to grow. with a current global average of 50-60% growth per year and a European average perhaps slightly higher. Another major driver of change is the evolution to user-provided content. or mobile infrastructure (albeit possibly with differences in price and performance). Any combination of voice. where the network of the party that places (originates) a phone call makes a wholesale payment to the network of the party that receives (terminates) the call. and the associated shift from pure client-server applications to peer-to-peer (P2P) models. video. These freely negotiated arrangements result in a richly interconnected Internet. In most of the world. one ISP agrees to carry the traffic of a customer (possibly also an ISP) to third parties. but they are less frequently used.
further stimulus to mobile adoption for the EU27 is not needed. The high retail prices depress use of the service to levels far below those that are efficient. 4 It is sometimes also argued that these high retail prices inhibit undesired calls (the telephony equivalent of SPAM). the switched network model. Under these alternative arrangements. or some third model (possibly a blend of the two)? To answer this.3 which can be positive in developing countries. should interconnection of future NGNs be based on the Internet economic model. and heavily subsidized handset prices. Given that they also inhibit desired calls.S. we find the argument unpersuasive. Canada. however. Mobile telephone services in a CPP/CPNP system tend to have some combination of low (or zero) monthly fees. users of fixed services subsidize mobile take-up. for a variety of reasons: 3 In effect. subject to obligations to interconnect and typically subject to the requirement that both networks that are parties to the same agreement must be subject to the same per-minute fees. the network operators freely negotiate termination fees. High wholesale mobile termination fees in effect create collusory incentives to maintain high per-minute (mobile) retail prices. This behaviour is rational for the firms. respectively. . especially for the mobile network. even when the fees are regulated. with minor exceptions. • • CPNP systems with high mobile termination fees may tend to drive faster take-up of mobile services. They often choose to set these fees to zero (a system known as Bill and Keep). and may in some cases depress use below the level of efficient monopoly price for the operators as well. low initial fees. The inevitable question is. it is clear that current CPNP arrangements already have a substantial negative effect on welfare. and is comparable to that of firms that subsidize the sale of razors or computer printers in the hope of “locking in” longer term highly profitable sales of razor blades or ink. IP-based NGNs represent the convergence of the Internet and the traditional switched PSTN/PLMN network. in a number of respects: • They tend to lead to inefficiently high wholesale termination fees.. Service providers are willing to subsidize these fixed prices because usage prices are greatly in excess of average incremental cost. and Singapore) use alternative arrangements for mobile operators and for non-dominant fixed operators (while still requiring dominant fixed operators to use CPNP).4 We conclude that CPNP arrangements are already problematic today.X Final Report: The Future of IP Interconnection A few countries (the U. For reasons explained more fully in the report. it is helpful to begin with an assessment of how the two sets of interconnection arrangements operate in their current milieus. Carrying them forward at current fee levels into the realm of IP-based NGNs would lead to additional problems.
Notably. they will invite arbitrage that seeks to correct for the irrationalities in the pricing system. but it is associated only with the voice service. or a modernized version of them.Final Report: The Future of IP Interconnection XI • The call termination fee is intended to capture costs of the network. As long as Europe operates under CPP/CPNP retail and wholesale arrangements. They might perceive the migration as an unacceptable regulatory risk. the payment makes no sense. they might choose an IP interconnection strategy that attempts to lock in the current inefficient arrangements. These concerns suggest that waiting for the migration to IPbased NGNs to implement changes might be a self-defeating strategy. and even more so in an IP-based world where the direction of the call can trivially be reversed. rather than enabling IP-based interconnection arrangements to evolve in a healthy and natural way. The payment assumes that the party that placed the call is the sole beneficiary of the call. Voice traffic represents a small and declining fraction of the cost of an NGN. If the voice service provider is not the same company as the network provider (as can readily be the case in an NGN). To the extent that wholesale termination fees are unrelated to cost. If termination fees were to remain at current levels. Alternatively. Minutes of voice use will bear even less relation to the cost of the network going forward than they do today. preferably zero. we anticipate that many mobile operators and some fixed operators might choose not to evolve their networks to IPbased interconnection. that he or she should bear the total retail costs of the call. . The migration to IPbased NGNs might possibly compound this familiar termination monopoly with other forms of market power. the disparity between mobile termination rates and fixed should be vastly less than it is today. At the same time. and that his or her network should consequently bear the total wholesale cost of the call. the migration to IP-based NGNs will not ameliorate the termination monopoly (the tendency to charge high prices for termination) until and unless mechanisms emerge to enable more than one telephone service provider to terminate calls to a single telephone number. • • • All of these considerations lead us to feel that interconnection fees should be much lower than they are today. the complexity of the system going forward leads us to feel that negotiated arrangements are to be preferred to regulated arrangements wherever they are likely to lead to efficient outcomes (and not to prices that reflect market power). The rationality of this assumption is dubious in the current network.
As of now. Reasons for slow deployment include: • Inability of most customers to perceive much of a quality difference most of the time. these challenges will not necessarily go away. and of monitoring compliance with the terms of those agreements.6 These capabilities have been routinely deployed within IP-based networks. We think that the appropriate regulatory response is not to inhibit the ability of network operators to offer different levels of QoS. 5 For one-way “streamed” audio or video. however. We think that the market should determine whether differentiated QoS deploys or not – to a first order. we do not see either promoting or inhibiting the deployment of differentiated QoS as a proper matter for industrial policy. we note that. even for delay-sensitive applications such as VoIP. Over the past two decades. Consequent lack of customer willingness to pay much of a premium for better service. differentiated QoS in IP-based networks is most often implemented using a combination of DiffServ and MPLS technologies. Some experts have expressed concerns over the use of different levels of QoS among networks (one of several possible concerns over network neutrality). • • Differentiated QoS has been a major theme for network operators migrating to NGN. there has been growing interest in enhancing IP-based networks to provide greater assurance that traffic is consistently delivered quickly enough. and the likelihood of packet loss) for perhaps a decade. in the absence of market power. but rarely between networks. IP-based networks have been able to offer IP-based service at different levels of quality (typically expressed in terms of the mean and variance of delay. DiffServ and ATM were often used. it seems to us that the degree of market acceptance going forward of differentiated QoS between providers remains unclear. different levels of QoS generally enhance welfare. . as real time bi-directional5 IP-based voice and video services have become increasingly commercially significant. Ten years ago. simpler and cheaper solutions are often possible. and The transaction costs associated with negotiating QoS-sensitive interconnection arrangements with a large number of interconnection partners. however.XII Final Report: The Future of IP Interconnection Economic theory: Quality of Service (QoS) in the switched network and in the Internet The Internet was designed with non-delay-sensitive applications such as email in mind. but rather to ensure that consumers are empowered to make informed decisions. 6 Today. and also to ensure that NRAs make consistent use of the tools already present in the regulatory framework to address any market power problems that might emerge.
. • o 7 In general. however. the second option would appear to offer many advantages in comparison to the other two. especially where this is a manifestation of some form of market power. To be effective. Should intervention related to the price of IP data interconnection prove to be required. this power to intervene must include the ability to cap the price of IP data interconnection. a principle known as Ramsey-Boiteux pricing. because (1) it is not clear how it would be justified under the current regulatory framework. Independent of the migration to NGN. so as to reasonably quickly achieve levels much lower than those that pertain today. The main conclusions are: • We do not advocate an interconnection obligation as regards IP data traffic in general. o In an ideal world. and (2) a glide path would be necessary in any case in order to enable operators to adjust their retail payment plans over time to match the changing wholesale arrangements. or (3) by permitting negotiated termination fees subject to an obligation that the fees be reciprocal (the same in both directions) between each pair of interconnected (fixed or mobile) networks. The outright elimination of call termination fees is simple. it should address the aggregate level of prices. This could be implemented by (1) accelerating the speed with which the maximum call termination rate declines from year to year under existing CPNP arrangements. it minimises economic distortions. We nonetheless stop short of recommending the second option. but leave operators free to choose the structure of prices. and possibly no higher than the rates that prevail today for fixed termination rates.Final Report: The Future of IP Interconnection XIII Conclusions and recommendations Our conclusions and recommendations are presented more fully in the body of the report.7 and also makes it possible to apply differential network-to-network interconnection prices to reflect different levels of Quality of Service. This enables the operator to choose an efficient pricing structure. or (2) by requiring all fixed and mobile operators to eliminate call termination fees altogether. we think that societal welfare would be substantially enhanced if mobile termination rates were much lower than they are today. NRAs must be able to intervene if interconnection breaks down. and we do not see a need to mandate any-to-any peering. it is desirable for the structure of retail prices to reflect the degree to which customer demand responds to price. and it involves the fewest impediments to the evolution over time of interconnection arrangements as networks evolve to an IP basis.
rather. . This corresponds to option 1. 10 This concern is largely independent of whether the interconnection to the IP voice service is physically distinct from the IP data interconnection. There is a strong argument that this lowering of mobile termination rates should be implemented before the migration to IP-based NGNs. the terms and conditions. We are not indicating exactly what the target levels for fixed and mobile voice termination should be. it means that NRAs must be empowered to ensure that standard interconnection 8 Under the authority provided by Article 19 of the Framework Directive. were mobile termination fees to be in the same range as current fixed termination fees. This is not to suggest that a new remedy is needed. and allows for mid-course corrections if necessary. one could reasonably expect that flat rate retail plans would emerge that included off-net calls to mobile phones. since this is far beyond the scope of this study. and to substantially increased use (expressed in minutes of use per month) of mobile telephones. It is conceivable that this might lead to manipulation of the prices. or the quality of the IP interconnection that will have become the basis for voice interconnection.10 It may be necessary for NRAs to take action from time to time (possibly ex post) to ensure that operators subject to an SMP remedy do not take actions that would render the IP-based voice service interconnection ineffective or unusable. We note that zero is in many respects an ideal number. Reduction in mobile termination rates would tend to lead to a substantial decrease in usage-based retail prices for mobile service. That seems to us to be a matter for the market to decide. or common with it. at the expense of a significantly smaller increase in the fixed portion of the retail price9 of mobile service (the “waterbed effect”). it is possible that some operators would respond by attempting to capture economic rents from other operators in some other way. attempts by operators to preserve high rates would tend to distort the migration. to increased availability and consumer take-up of flat rate and “buckets of minutes” retail plans. We also observe that. 9 Initial fees and monthly fees if any would tend to be higher. otherwise. It is possible to degrade the quality an IP interconnection in subtle. o o o • If call termination fees were in fact either eliminated or greatly reduced.XIV Final Report: The Future of IP Interconnection o What we concretely recommend instead is that the Commission mandate8 that fixed and mobile call termination rates “fast glide” to prespecified target levels over a predefined number of years (somewhere between three and five). handset subsidies would be lower. difficult-to-detect ways. for reasons noted above. This fast glide path gives the operators time to adjust their business plans.
however. technology and standards appear to be evolving satisfactorily. what most customers want is neither CPP nor RPP. In any case. • Any necessary remedies should operate at the wholesale level. Four areas where policy initiatives may be appropriate are (1) considering techniques to address or ameliorate the consequences of the exhaustion of IPv4 addresses. and thus well in advance of the full blown deployment of IPv6. and is moreover altogether unnecessary in this report – this choice should be a market outcome.11 In regard to network neutrality. until supplanted in most cases by new SMP remedies (to the extent that SMP is still applicable). The migration to an IP-based NGN inevitably implies a host of transition challenges. but rather some variant of a flat rate plan. In particular. CPP versus flat rate) should be a matter for the service provider to determine (reflecting the preferences of its customers). In most respects. (2) continued research and • • • 11 Numerous recent papers have taken up the question of the relative desirability of Calling Party Pays (CPP) retail arrangements versus Receiving Party Pays (RPP). and competition law provides additional mechanisms. There may also be merit in enabling NRAs to mandate a minimum quality of service. It might be sufficient to require that the overall quality of IP-based voice interconnection that an SMP voice operator provides to competitors cannot be unjustifiably inferior to that which it supplies to itself (a condition more akin to equivalence of input than to non-discrimination). If a network operator with SMP wishes to close Points of Interconnection. it should do so in consultation with competitors and with appropriate notice. especially where an element of economic foreclosure appears to be present. we do not advocate major regulatory initiatives at this time. 12 Possibly to include the Regional Internet Registries (RIRs) enabling a secondary market for IPv4 addresses. not something for the regulator to mandate.12 which (after several false alarms) now seems to be quite likely in the 2010-2011 time frame. We see merit in the use of Articles 20 and 22 of the Universal Service Directive to require ECSPs to document their practices as regards blocking access to services or degrading the quality of access to services.Final Report: The Future of IP Interconnection XV remedies (updated to deal with new technology) are not subverted. Existing SMP remedies should be kept in place for a reasonable transition period. the choice of retail payment model (for example. We think that this discussion is somewhat off the mark. and no public policy response is required. absent a compelling need for retail remedies. NRAs and NCAs need to be prepared to address wilful deviations from network neutrality. . as the Commission has proposed. We generally consider the approach that a number of Member States have taken to be appropriate. the existing regulatory framework for electronic communications probably provides adequate tools.
and for measurement of compliance to those classes. and (4) research into technologies that could over time ameliorate the termination monopoly.XVI Final Report: The Future of IP Interconnection standards development in regard to classes of service for QoS. such as user ENUM (rather than carrier ENUM) or techniques to enable multiple operators to serve calls placed to a single telephone number. (3) research into the longer term issue of unbounded growth (“bloat”) of the BGP global routing table. .
See Elixmann et al (2007). Hackbarth/Kulenkampff (2006). Key Concept Box 1: Note to the reader In this report. societal and regulatory factors are converging in such a way as to raise profound questions about how interconnection arrangements should work in the future. Marcus (2006a). the Hungarian NRA. one can gain a high-level overview of the report. See Marcus (2006b). IP interconnection has also been featured prominently in one report after another in the context of regulatory challenges as networks evolve to Next Generation Networks. and then delve into the full text of the report. Today. the European Regulators Group (ERG)14. market. with the support of a number of distinguished outside experts.Final Report: The Future of IP Interconnection 1 1 Introduction This is the Final Report of a consulting study on “The Future of IP Interconnection” which has been undertaken for the European Commission by WIK-Consult GmbH. A key element of this success has been the availability of a global IP-based network. The concept boxes may be particularly useful to the uninitiated or novice reader. Some readers may wish to skim the concept boxes first. and the International Telecommunications Union (ITU)16. for example in the recent report of the NHH. Berg et al (2006). including those conducted on behalf of the German Federal Network Agency.17 13 14 15 16 17 See Vogelsang (2006). and any errors. a number of technological. The views expressed. These developments have motivated several important studies of interconnection in the evolving IP-based environment over the past two years. Experience in the Internet has been profoundly different in this regard from that in the Public Switched Telephone Network (PSTN/PLMN). are our own. others may prefer to glance at the concept boxes as they work their way through the full document. or Bundesnetzagentur13. See Paltridge (2006). Continued in Access vs. . See ERG (2007a). the OECD15. By skipping from box to box. These network operators voluntarily agreed to connect their networks so as to form a global network – no significant regulatory intervention has been required to date in order to drive the interconnection of IP-based networks. Each key concept box contains a reference (a “hot link”) to the next one. the Internet. we have highlighted key concepts in boxed comments like this one. Marcus (2007). comprised of many independent network operators. Electronic communications services based on the Internet Protocol (IP) have been incredibly successful. Interconnection on page 4.
even if they are not network operators.2 Final Report: The Future of IP Interconnection For this report. it is possible that substantially all electronic communications will be IP-based. explains why the future evolution of IP interconnection is a challenge. but not the ability to offer it. and with data transmission continue to decline. It quickly reviews the objectives of the European regulatory framework and discusses their relevance to IP interconnection. it explains the structure of the balance of the report. The character of the underlying network may affect the efficiency and cost of the application. A set of recommendations as to how IP interconnection should be addressed in a regulatory context. For computation and data storage. 1. • • This introductory chapter seeks to motivate the discussion that follows. by way of noting that current arrangements leave much to be desired even in today’s PSTN/PLMN world. the European Commission has requested: • An analysis and comparison of traditional interconnection models based on circuit switched technology.1 The changing electronic communications environment Notable among the technological. market and societal changes that motivate this study are: • All networks appear to be migrating from a circuit-switched technological basis to an IP packet-switched technological basis – in the future. The unit costs associated with computation. Finally. multiple applications (such as real-time voice. with data storage. • • . It then touches briefly on the welfare implications of interconnection arrangements. In the case of data transmission. It explains the methodology of the study. improvements based on Dense Wave Division Multiplexing (DWDM) could result in even faster improvements in price/performance. and of IP interconnection models that are used in Europe and other world regions. Service providers can provide services. including applications that were historically tied to a specific underlying network. As a related phenomenon. they have tended to improve by a factor of 4 every three years (Moore’s Law). data is digital rather than analogue to a progressively increasing degree. As a result. It provides a brief overview of the economics of interconnection. or video) can be provided over a single network. A forward-looking analysis of IP interconnection regimes in the light of the evolution of both the traditional telecommunications and Internet environments. It notes the key drivers of change in the electronic communications environment.
1 The distinction between access and interconnection This report is concerned with interconnection. however. 1. different interconnection arrangements have prevailed. Individual consumers can develop their own application content – consumers are not exclusively dependent on commercial content providers. and Singapore.Final Report: The Future of IP Interconnection 3 • In this environment. there are also a few examples of successful large scale voluntary arrangements in the PSTN/PLMN world. .3. and regulatory intervention has only rarely been attempted. not with access.18 It has been widely recognized that.19 In the world of the Internet Protocol (IP). Voluntary negotiated arrangements have tended to form the core of this system. regulation is usually needed to ensure interconnection and to address asymmetries in bargaining power.2. 19 The European regulatory framework also leaves open the possibility that regulatory intervention to ensure interconnection might occasionally be necessary even where Significant Market Power is not present. See Article 5 of the Access and Interconnection Directive. notably in the United States. the latter is the mobile network. electronic communications have served to link people to one another. 18 The former is the fixed network. these new communications services are likely to link devices to people and to one another. A comprehensive discussion appears in Chapter 3. • • 1. where only one party to the interconnection has Significant Market Power (SMP). but they are not the same thing.2 The economics of Interconnection today Network interconnection has evolved historically in the context of the “traditional” Public Switched Telephone Network (the PSTN/PLMN) and of the Public Land Mobile Network (the PLMN). Canada. new communicating applications can be brought to the mass market far more quickly than in the past. Historically. The two are closely linked in popular perception and in the literature.2. Increasingly. This section provides a brief overview of key issues and considerations. As described below in section 1.
interconnection enables an operator to establish and maintain communications with the customers of another operator. in that one operator is providing access to another. Access can thus be viewed as an inherently asymmetric relationship.4 Final Report: The Future of IP Interconnection Key Concept Box 2: Access vs. which may involve the connection of equipment. access to fixed and mobile networks. Interconnection enables an operator to establish and maintain communications with the customers of another operator. where the network of the party who placed the call (the originating network) makes a payment to the network of the party that received the call (the terminating network). access to relevant software systems including operational support systems.”21 It defines interconnection as “… physical and logical linking of public communications networks used by the same or a different undertaking in order to allow the users of one undertaking to communicate with users of the same or another undertaking. under defined conditions. or to access services provided by another undertaking.2 Current European arrangements for switched network interconnection Substantially all European PSTN/PLMN (fixed and mobile) interconnection follows a set of arrangements known as Calling Party’s Network Pays (CPNP). access to number translation or systems offering equivalent functionality. 20 Directive 2002/19/EC. e.. to another undertaking.g. on either an exclusive or non-exclusive basis.2. Access is therefore often referred to as one-way access and “interconnection” as two-way access. Interconnection is a specific type of access implemented between public network operators …“ 23 See Marcus (2007). can be viewed as being a symmetric relationship between two operators. in particular for roaming. p. by contrast. by fixed or non-fixed means (in particular this includes access to the local loop and to facilities and services necessary to provide services over the local loop).23 1. The termination payment is intended to approximate the terminating network’s usage-based unit costs. 5. for the purpose of providing electronic communications services. The Access and Interconnection Directive20 defines access as “…the making available of facilities and/or services. ducts and masts. Continued in Call termination fees and the migration to IP on page 6. . 21 The Directive goes on to say: “It covers inter alia: access to network elements and associated facilities. Laffont/Tirole (2000). access to conditional access systems for digital television services. while access enables an operator to utilize the facilities of another operator in the furtherance of its own business and in the service of its own customers. access to virtual network services…” 22 The Directive continues: “Services may be provided by the parties involved or other parties who have access to the network. access to physical infrastructure including buildings. Interconnection Access enables an operator to utilize the facilities of another operator in the furtherance of its own business and in the service of its own customers.”22 For our purposes. Interconnection. See.
but there are also significant differences. led to agreements to interconnect and to exchange traffic without payment.3 Negotiated arrangements In his landmark 1959 paper.27 Negotiated arrangements have also long been the norm for PSTN/PLMN interconnection among mobile operators in many countries and also among non-dominant fixed operators in. See Bomsel et al (2003). the ideas are potentially just as relevant to interconnection. It is generally accepted that operators would be motivated to set these termination payments at inappropriately high levels in the absence of regulation (even small operators.2. These negotiated arrangements have frequently. calls from fixed phones to mobile transfer substantial sums of money to mobile operators.4. One of our major thrusts in this report has been to try to develop a deeper understanding of these distinct Coasian interconnection regimes. See EU-Commission (2007). CPNP arrangements imply the need to maintain regulation indefinitely..26 This results in a net transfer from fixed networks to mobile. What accounts for the differences? Privately negotiated arrangements are frequently superior to regulated arrangements. 24 25 26 27 See Section 5. . while calls from mobile phones to fixed return only a small fraction of that money. See Marcus (1999). for example. presumably distorting the evolution of both. certain preconditions have to be met – for example.1. 25-32. and Singapore.25 as a result of this large differential. property rights of the parties involved need to be clearly defined. a system sometimes referred to as Bill and Keep or Sender Keeps All.2. however. Canada.Final Report: The Future of IP Interconnection 5 The implications of these payments are complex. and exceed by a still greater margin the level that would maximise overall welfare. For this to be true.24 European termination fees on mobile networks tend to be about nine times greater than those on fixed networks at present. pp. Coase was thinking of spectrum management. There are similarities between PSTN/PLMN negotiated interconnection arrangements and Internet negotiated interconnection arrangements. and even in otherwise competitive markets). 1. but nonetheless in our view still greatly exceed usage-based marginal cost. and his work led to spectrum auctions and to liberalised spectrum management in general. thus. Ronald Coase (who subsequently received a Nobel prize in economics) argued that private negotiated arrangements are frequently superior to regulated arrangements. Negotiated arrangements among Internet peer backbone networks have been commonplace from the first days of the commercial Internet in 1995. but not invariably.chapter 14. a ratio that cannot be justified by differences in cost. Regulated mobile termination prices in Europe have been on a glide path downward for several years now. the United States.
we see no serious prospect of a Coasian solution for voice services until and unless technology is widespread that enables more than one operator to deliver calls to a single phone number. To the extent that wholesale termination fees are unrelated to cost. or that otherwise reduces the importance of the telephone number as a bottleneck resource. unfortunately.6 Final Report: The Future of IP Interconnection Given (1) that it is widely acknowledged that “traditional” CPNP arrangements will at best be severely stressed by the evolution to IP-based networks. If the service provider is not the same company as the network provider (as can readily be the case in an IP-based NGN). Key Concept Box 3: Call termination fees and the migration to IP The migration to IP places stress on existing call termination arrangements: • The call termination fee is intended to reflect costs of the network. but it is associated with a service. The payment also assumes that the party that placed the call is the sole beneficiary of the call and should bear the total retail cost of the call. and data services have all converged so as to be delivered to European consumers over a common set of ultra high speed broadband access arrangements. video services (television). they will invite arbitrage that seeks to correct for the irrationalities in the pricing system. • • • Continued in Call termination fees: Mobile networks on page 14. Minutes of voice use will have less and less relation to the cost of the network going forward. and we have explored changes that might be necessary to equip a Coasian system appropriately for IP interconnection in a world where telephony services. It is entirely possible that regulatory and competition problems will emerge in regard to applications other than real-time voice. and we see no need to take action against threats that for now are merely speculative. will continue to be problematic whether delivered by a conventional switched network or by an IP-based network. we think that today’s Coasian arrangements will continue to be workable in general going forward. The migration to IP will not in and of itself ameliorate the termination monopoly as long as only a single operator can complete a call to a given telephone number. For IP data services in general. The rationality of this assumption is dubious in the current network. (2) that these Coasian systems represent the primary alternative model that is known to work. the payment no longer represents the cost of the network. but they are not in evidence today. and even more so in an IP-based world where the direction of the call can easily be reversed. The voice service. . Voice traffic represents a small and declining fraction of the cost of an IP-based NGN. and (3) that they have already been shown to work well for IP-based traffic. As long as Europe uses CPP/CPNP retail and wholesale payment arrangements. we have considered carefully whether Coasian arrangements might represent a more future-proof approach to IP interconnection going forward.
but we see no realistic prospect of totally withdrawing regulation of the voice service in the near or intermediate term.4 The GSM Association’s IP-based Interconnection model A consulting study for the GSM Association has recently propounded a set of recommendations as regards IP Interconnection in an NGN environment. We have explored different regulatory regimes in the hope of finding less intrusive mechanisms.Final Report: The Future of IP Interconnection 7 1. the GSM Association has developed a series of standards for interconnection of mobile (PLMN) networks. We find that a regulatory response to the termination monopoly on the voice service will continue to be required for the foreseeable future. reflecting the volume of traffic each operator has carried and the Quality of Service at which it has been carried. The IPX is intended to provide accounting and charging arrangements capable of “cascading biling”. release 3. 28 See Reynolds et al (2007).30 By implementing a common traffic interchange fabric among mobile operators.” One key foundation stone to their analysis is their claim that the migration to IP will solve the call termination problem. IPX is an upgrade to GRX that supports 2. coupled with some specific analysis of the conditions under which regulatory intervention might be required: “…[E]ven if a particular charging model develops commercial currency. thanks to IP’s inherent capabilities to route traffic over multiple paths. More concretely.. . 29 See GSM Association. That claim is. The termination monopoly persists. referred to as GRX in the current generation.5G and 3G roaming and interworking. The bottleneck resource is at the level of the telephone number. provides IP interconnection and service interworking between mobile networks. it is not necessarily appropriate for regulators to mandate this model. This is a positive outcome. the termination monopoly is likely to persist. as well as MMS interworking. 4 April 2006. even though the technology has been routinely deployed within individual Internet Service Provider (ISP) networks for perhaps a decade. simply incorrect. rather than less. not at the level of IP packet – re-routing at the IP level has no more effect than re-routing at the circuit level. it is possible that GSM-A will overcome the transition cost issues that have tended to inhibit the deployment of QoS among Internet providers. As long as a call to a single telephone number must be served by a single operator. however.28 They propose the use of Coasian arrangements.7. With the multitude of products being developed in the IP environment it would appear that operators will need more freedom to negotiate interconnection charges tailored to their situation.29 The inter-PLMN backbone.2. A single wholesale model will constrain the variety of retail models that are necessary for efficiency. 30 See Inter-PLMN Backbone Guidelines and also Reynolds et al (2007). as would be prescribed by a mandated charging model. Inter-PLMN Backbone Guidelines.
IP is the pre-eminent example today of a layered network protocol. a router.8 Final Report: The Future of IP Interconnection At the same time. We deal with this subject at length in Chapter 4. telecommunications or wireless – has profound implications for the evolution of competition. (2) the migration to Next Generation Networks (NGN). and (4) the changing cost structure of the network.31 In a layered network. or for that matter can simultaneously carry any mix of applications. Applications and the associated Transport mechanisms 31 For general background on layered network protocols. or more recently WiFi). Among them are: (1) the decoupling of the network from the service. As such.1 Decoupling of the network from the service The decoupling of the network from the service – the ability to offer any combination of voice.3 Emerging challenges to IP network interconnection A number of factors suggest that fixed and mobile switched interconnection and IP interconnection will all need substantial re-thinking in the years ahead. they inevitably raise regulatory and competition policy concerns. the endeavour raises a number of potential public policy concerns. To a significant degree. . IP is a key element of the “glue” that binds the applications to the underlying networks. 1. computer scientists developed the notion of layered data communications protocols in order to insulate data applications (such as the protocols associated with the worldwide web) from the transmission facilities over which they operate (such as Ethernet local area networks.32 Figure 1 below shows the TCP/IP reference model. dial-up lines. Each vertical “stack” represent software. video or data over cable. (3) the evolution of the access network to an all-IP basis. 32 Whether the link can carry the traffic with the desired performance characteristics is a separate question. Moreover. and also of the Next Generation Network (NGN). typically running in a single device – a server computer. which is a manifestation of convergence. the IPX is a billing model rather than a technical model. leased lines.1. even as the network evolves in directions that would otherwise make them less relevant. In the early eighties..2 of this report.3. a single transmission link can carry any application.4. a personal computer (PC). which is the foundation of the Internet. see Tanenbaum (2003). it can be viewed as an attempt to lock in today’s inefficient pricing structures. 1. and serve to motivate the current study. and for regulation generally. We return to these points in section 5. To the extent that common interconnection arrangements facilitate coordination among mobile operators. new applications and new transmission technologies can be introduced without disrupting existing arrangements.
A router appears in the middle of Figure 1. cable television. They can all operate over a single IPbased network connection (and it scarcely matters whether this connection takes place over the telecommunications network. radio. which is why no Application or Transport layer is shown. Each Application talks to its corresponding “partner” Application in other computers. Voice over IP (VoIP). web browsing. or some wireless technology). and could use different technologies to connect its routers. whatever. The first is that the application resides in large part in systems at the edge of the network – for example. in your PC. and then back down again in order to be reach the next “hop”. and possibly a VoIP client. and a web browser. The Data Link and Physical layers are concerned with physical transmission of packets over wires. Note that data packets work their way up the stack to the IP layer. but the applications implement this (horizontal) communication by requesting services from successively lower layers in the stack.Final Report: The Future of IP Interconnection 9 provide useful services to end-users – for example. An IP-based network could contain dozens of hops. The IP layer. You can invoke them whenever you want. You probably have an e-mail client in your PC. which is crucial. forwards information from one system to the next. and can run more than one of them at once. This migration has profound implications for network evolution. Figure 1: The TCP/IP Reference Model Server Router Personal Computer Application Transport Network Data Link Physical Network Data Link Physical Application Transport Network Data Link Physical Source: wik-Consult Routers are relatively simple devices that exist solely to forward information – they are not in principle involved with the application. and thus for regulation. IP television (IPTV). . e-mail.
there is likely to be a server somewhere – but while that server might be offered by the network operator. rather than their own voice services? Probably not! So they might be motivated to slow or to outright block this evolution if they can. unidirectional video is IPTV. depending on how you use it. but not at all in the P2P service. This capability clearly exists in terms of the technology. real time bidirectional voice is just an IP-based application (referred to as Voice over IP. telephony and television. Thus. . In the case of peer-to-peer (P2P) services. Will network operators welcome this change with open arms? Suppose your telecommunications incumbent provides your DSL broadband – will they be delighted if you make all of your telephone calls using Skype (an independent VoIP services that is either cheap or free. for example. the network operator is only involved in IP forwarding of packets. but provides little or no revenue to the incumbent).4. Analogously. The network operator need not be the voice service provider – it might simply be forwarding packets. We return to this point in Section 4. can now be offered as network-independent services.10 Final Report: The Future of IP Interconnection Figure 2: IP-based applications running in your Personal Computer (PC) Personal Computer E-mail Client Web Browser VoIP Client IPTV Client Network Data Link + Physical Source: wik-Consult This fundamentally alters the job of the network operator. The degree to which consumers will really enjoy increased choice under NGN is thus at issue. There is thus the risk that network operators who have market power might try to impede the ability of others to offer services that compete with their own – this is at the core of the Network Neutrality debate. or VoIP). it could instead be offered by some third party. which once were closely linked to the networks over which they operated. In this context. For other services.
S. and for interconnection in particular. Many more are likely to in the years to come. apparently plan to upgrade the core of the network to NGN but not necessarily to make drastic changes to the access network. is a question to which we return in Chapter 5. might place greater emphasis on upgrading the access network to IP-based facilities that bring fibre close to the subscriber’s home. there can be hundreds of PoIs for the PSTN. but they have tended to focus on this problem in the context of access rather than interconnection. and in some cases their mobile networks. 33 See Elixmann et al (2007). The physical facilities that support traditional fixed and mobile switched interconnection today would not necessarily exist in these NGNs unless regulators insist that they be maintained.2 Migration to NGN A number of prominent European incumbents (including BT and KPN) have announced plans to evolve their existing PSTN fixed networks. and if so for how long. the migration to NGN potentially represents a major acceleration of the trend to base future electronic communications on IP. possibly including DTAG. A number of regulatory proceedings have considered the reduction in the number of Points of Interconnection (PoIs). Operators in the U. Some operators. It manifests slightly differently for interconnection. do not speak of NGN. Thus. it is sometimes associated with plans to phase out the existing PSTN altogether. including the full range of capabilities that we expect from fixed and mobile switched networks today. Still others.3. For an incumbent in a typical Member State. perhaps as few as three or four. An NGN delivers a wide range of services. notably BT.33 NGNs will not all evolve at the same time. an NGN is IP-based.Final Report: The Future of IP Interconnection 11 1. IP-based interconnection facilities could potentially be much more concentrated than PSTN interconnection facilities. and possibly some stranded investment. but their evolution is not very different from those of their counterparts in Europe. Some emphasize only the fixed network. are committed to upgrading the core and the access at once. while others will look to use NGN (often in conjunction with the Integrated Multimedia System [IMS]) to integrate their fixed and mobile services. only a handful of points of interconnection (PoI) are strictly necessary from a technical and economic perspective. to Next Generation Networks (NGNs). This potentially implies a complex transition for competitors. Moreover. These different scenarios may have somewhat distinct implications for regulation in general. such as KPN. Notably. Whether they should be maintained. Some operators. if not into it outright. By contrast. or in the same way. .
4 Changing cost structure All indications are that the emerging IP-based networks when fully deployed will have lower operating costs than existing circuit switched networks. cost-based fees should follow this roller coaster ride. however. Ofcom has proposed to deal with this by ensuring that narrowband interconnection fees follow a glide path downwards. have technical or economic reasons to continue to provide voice using the conventional low frequency capabilities of the DSL line. particularly as regards the likely future evolution of competition. it is possible that operating costs will increase before they decline. In the nearer term. this implies challenges for the regulator. 35 See Ofcom (2005) and also Section 5. 34 Some operators may.5. that is a key driver to migrate an existing network to an IP base. with or without NGN in the formal sense. their operating costs will not be as low as the eventual operating costs when transition is complete. residential subscribers typically have a voice telephone line. it might be most appropriate to operate the subscriber line on an IP-only basis.34 This once again has regulatory and public policy implications. In technical and economic terms. operators in the midst of transition will simultaneously bear the costs of both the old network and the new. On a unit cost basis. and possibly a DSL broadband connection using the high frequency capacity of the same line.12 Final Report: The Future of IP Interconnection 1. WIK recommended instead that rates should. In fact. Indeed. As the network evolves to a pure IP base.3.3.36 There is thus some debate as to whether a glide path or a step function is preferable in general. and in the absence of business drivers to the contrary we expect that it will be increasingly common to do so. Implicitly. simply be set to the forward-looking unit cost of the NGN.35 In a 2005 study for the Australian regulator.3 The evolution of the access network Today. but ensuring that they remain somewhat above the “blended” unit cost until migration is complete. 36 See WIK (2005). . 1. there will no longer be a direct functional reason to maintain traditional voice capabilities on the subscriber line. at a suitable point in time.3. To the extent that interconnection fees are intended to reflect unit costs.
in the mobile network. there is good reason to reconsider interconnection arrangements. Mobile operators in particular are motivated to subsidize the price of handsets and to provide other incentives to consumers in the hope of capturing lucrative termination fees. and consequently its termination fees will legitimately be higher. however. and for mobile-to-mobile. Thus.37 in those cases. for some of the newer Member States. but not always. We would also note that very little analysis has been done of the corresponding negative impact that one might expect on the pace of adoption of fixed services. Where an operator’s territory is remote or otherwise expensive to serve. and that the number of calls originated and terminated between a pair of providers are roughly comparable. Some of these are beneficial.39 37 This is often the case. with nominal penetration in excess of 100%38. termination fees sometimes aid in providing universal service. 39 A few recent papers have questioned these assumptions. .Final Report: The Future of IP Interconnection 13 1. Globally. termination fees generally result in very little money changing hands at wholesale level. its costs will tend to be higher than those of operators whose territories comprise easy-to-serve urban areas. the termination fee arrangements have provided large subsidies that may have accelerated adoption of mobile services. These tendencies imply a net transfer of funds from areas of high teledensity to those of low teledensity. 38. but others appear to be damaging to welfare. it is often the case that termination rates charged by both interconnected network operators are similar. does not need to stimulate adoption. and from developed countries to developing countries. p. This is felt to accelerate the adoption of mobile services. because there is generally a single fixed incumbent that is obliged to provide universal service. these implicit subsidies may still produce benefits. 38 See EU-Commission (2007). These factors play a minimal role in the fixed network in Europe. The prevailing view has been that high termination fees encourage strong competition for individual customers. The EU as whole.4 Implications of interconnection payments for consumer and supplier welfare The current payment regime has complex consequences. For fixed-to-fixed calls. especially Littlechild (2006) and Dewenter/Haucap (2005). There is also a tendency at the international level for significantly more calls to be placed from developed to developing countries. quite aside from the evolution that the network is undergoing. however.
2. 1. price. the Framework Directive itself establishes a series of regulatory objectives40. and to the exclusion of calls to mobile phones from flat rate plans. Worse. Continued in Migration to Next Generation Networks: Regulatory Objectives on page 15. (b) ensuring that there is no distortion or restriction of competition in the electronic communications sector. and quality. the mandates for optimising user choice. Article 8. These negative factors are quite substantial. High mobile termination fees appear to contribute to high retail prices for consumers. price and quality and for avoiding distortions of competition lead directly to regulatory provisions that address harmful market power in all of its forms. however. … This is a useful and comprehensive set of goals. Against the backdrop of these neutral or positive factors.3. and is 40 Directive 2002/21/EC. (c) encouraging efficient investment in infrastructure. including disabled users. many of which bear directly on IP interconnection. it is useful to review the objectives of regulation. one must consider the impact on retail price and on the use of these electronic communications services.14 Final Report: The Future of IP Interconnection Key Concept Box 4: Call termination fees: Mobile networks The fees that mobile operators receive for terminating calls are currently too high.2. and promoting innovation. In the context of the European regulatory framework. and thus reducing welfare. This complex balancing act infuses many aspects of regulation. . derive maximum benefit in terms of choice. these provisions necessitate complex judgments on the part of the regulatory community. as is often the case. We return to these points in Section 3. In particular. it provides little guidance to the policymaker to the extent that there is tension among the goals. however. depressing use. The most directly applicable of these are: Article 8(2): (a) ensuring that users.5 Regulatory objectives Before embarking on an exploration of regulatory policy. the goal of encouraging investment and innovation can be interpreted as an admonition to avoid needless regulation. the high retail prices that high termination fees encourage appear to severely depress the use of mobile phones and the amount of fixed-to-mobile (F2M) calling. Taken together.
threats to competition have arisen more often in connection with access and interconnection than in any other area of regulation. … Article 8(4): … (c) contributing to ensuring a high level of protection of personal data and privacy. for example. associated facilities and services and electronic communications services at European level. in similar circumstances. however. our judgment is that market power in regard to interconnection will still be an issue that regulators need to address. (c) ensuring that. and promoting innovation. and end-to-end connectivity. 41 See. (d) promoting the provision of clear information. Haucap/Marcus (2005). Other relevant objectives relate to the European single market.41 These questions are therefore very central to this report. and to consumer rights. in particular requiring transparency of tariffs and conditions for using publicly available electronic communications services. (b) encouraging the establishment and development of trans-European networks and the interoperability of pan-European services. Key Concept Box 5: Migration to Next Generation Networks: Regulatory Objectives Key regulatory objectives include: • • • Ensuring that users derive maximum benefit in terms of choice. price. and quality. . there is no discrimination in the treatment of undertakings providing electronic communications networks and services. and Encouraging efficient investment in infrastructure.Final Report: The Future of IP Interconnection 15 relevant in judging the degree to which various aspects of IP interconnection should be regulated going forward. Ensuring that there is no distortion or restriction of competition. The migration of voice communication services from a circuit-switched basis to a packet-switched basis will change the character of market power. Among the relevant goals are: Article 8(3): (a) removing remaining obstacles to the provision of electronic communications networks. Continued in Technological and market evolution on page 18 In the realm of electronic communications.
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(e) addressing the needs of specific social groups, in particular disabled users; and (f) ensuring that the integrity and security of public communications networks are maintained.” The concern about discrimination in Article 8(3)(c) is, as we shall see, relevant to the entire debate about Network Neutrality (see Section 4.4).
We conducted the study using a mixture of desk research, stakeholder interviews, indepth analysis, and formulation of recommendations.
1.6.1 Desk research
An extensive literature exists on the economics of interconnection in the fixed and mobile switched world42, and a smaller but still substantial literature on interconnection in the world of the Internet. Despite this substantial investment in economic research, significant gaps exist in the literature, notably as regards (1) the relationship between interconnection in switched networks and IP interconnection43, (2) the relationship of both models to likely interconnection arrangements in the IP-based multi-service networks that are emerging today, and (3) the differences among fixed and mobile switched interconnection regimes in different countries. In the course of our research, we also came to feel that the literature had not adequately considered the termination monopoly in the context of a (PATS) service somewhat de-coupled from the underlying network.
1.6.2 Stakeholder interviews
In the course of the study, we formally interviewed many knowledgeable market players, regulators, and academic experts in order to gain insight and to understand their views. We also had numerous informal discussions with colleagues in government, industry and academia. We met informally with the European Regulators’ Group (ERG). Much of this interaction was by means of email or telephone, but some was face to face.
42 Laffont/Rey/Tirole (1998a), Laffont/Rey/Tirole (1998b), and Armstrong (1998) are generally regarded as the groundbreaking works.. For a comprehensive review of the economic literature on interconnection, see Annex 2. 43 See, however, Laffont et al (2003).
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1.6.3 Consolidation and analysis of results, formulation of recommendations
We analyzed the interview results and compared them with the results of our desk research. We attempted to bridge any gaps in theory and in knowledge in order to develop a more comprehensive understanding of the likely evolution of IP interconnection, and the implications of regulatory innovations. Finally, armed with this background and based on our own assessment of likely developments, we developed near term and long term recommendations to the Commission as to the appropriate regulatory direction going forward.
Structure of this report
Chapter 2 describes the technological, market and societal forces that motivate a reexamination of IP interconnection arrangements at this time, and concludes with a overview of likely IP-based traffic trends going forward. Chapter 3 provides a comprehensive overview of the economics of interconnection arrangements in the fixed and mobile switched environment in various regions of the world, and in the Internet, both at a theoretical and at an empirical level. Chapter 4 delves into the special topic of Quality of Service in an IP-based environment, with particular emphasis on (1) the distinction between QoS within a network versus QoS between networks, (2) the likely root causes of slow deployment to date of QoS between networks, and (3) the Network Neutrality debate. Chapter 5 draws on both the economic background in Chapter 3 and the material on QoS in Chapter 4 in order to address IP interconnection for VoIP services, and IP interconnection in the context of Next Generation Networks. Finally, Chapter 6 provides conclusions and Chapter 7 presents our recommendations.
Final Report: The Future of IP Interconnection
Underlying drivers of change
This chapter provides the broad context in which changes are taking place, distinguishing between shorter term phenomena and longer term (the latter being out to 2018). Key drivers are noted: separation of service from network, progressive improvements in price/performance, the migration of services to IP, the deployment of NGNs, changes in the access network, and so on. Broader effects, such as changes in Key Concept Box 6: Technological and market evolution
The marketplace has been continually upended by rapid technological change. Some of the most important changes under way include: • The decoupling of the service from the network: In contrast to telecommunications networks in the past, services and the connectivity needed to provide them in the future need not be provided by a single integrated firm. • Ongoing price/performance improvements due to Moore’s Law are enabling better, faster, and cheaper communications by fiber optic transmission (e.g. DWDM) and optical switching and cross-connection. Breakthroughs are also possible in the years to come, but their exact nature is difficult or impossible to predict. • The fundamental changes in the delivery of voice and video services evolving to IPbased networks. Video is migrating to IP much as voice is, but the implications are not necessarily the same. Video has enormous bandwidth demands, unlike voice; however, much video use is unidirectional. Not all video will migrate to IP; conventional cable television and satellite are very efficient media for delivering linear video to multiple subscribers. To the extent that video is indeed carried over IP, there are significant implications for network design. • Network operators throughout Europe are replacing traditional circuit-switched networks with IP-based Next Generation Networks (NGNs). • Communication protocols used for IP routing between independently managed networks (Autonomous Systems, or AS) will continue to evolve and improve, which will facilitate the ability of the Internet to grow and to scale. • IP address exhaustion and gradual deployment of IP version 6 (IPv6) is likely to become a significant concern over the next few years, with probable exhaustion of IPv4 addresses in the 2010-2011 time frame. The generally accepted solution, migration to IPv6, has seen only scant deployment to date. • Network back-haul in carrier core networks has historically been accomplished by dedicated circuits and Asynchronous Transfer Mode (ATM). In the future, these communications are expected to be implemented to an increasing degree by means of enhanced “carrier grade” versions of the Ethernet Local Area Network (LAN). Ethernet equipment is simpler and less expensive. • Network operators are deploying fiber progressively deeper in the local loop, i.e., closer to the customer’s premises. Continued in Symmetric vs. asymmetric relationships on page 34.
home networking and the increasing use of user-provided content (e.g. Web 2.0) are also addressed. Finally, we attempt to distinguish likely short-term, medium-term and long-term developments.
The following figure shows that from a functional perspective a NGN basically consists of four different layers: the access and transport layer. coupled with progressive refinements are likely. the media layer. Breakthroughs are also possible over the ten year time frame that we have been asked to consider. the control layer.Call State Control .1 De-coupling of the service from the network In section 1. Interrogation-. and the network service layer.Final Report: The Future of IP Interconnection 19 2. provided either by a central unit (call server or media gateway controller) or distributed over various functional elements (Proxy-. we discuss the same developments in a Next Generation Network (NGN) context.1 Technological and market evolution The marketplace has been continually upended by rapid technological change. The key element of an NGN (apart from the transport function) are softswitch functions. A key trend is the separation of the service from the network. 2. we discussed these developments from the perspective of the Internet Protocol (IP) in general. Figure 3: The NGN layered structure Network Service Layer Softswitch Control Layer Media Gateway Media Layer Access and Transport Layer Enterprise Customers Remote Office / Small Office / Home Office Residential Users Mobile Users Source: Uebele and Verhoyen (2001). Serving. Ongoing improvements in price-performance. in this section.1.1. and that change is continuing.3. but these are in their nature difficult or impossible to predict.
1.e. IPTV (television over IP). Media Gateway Control and Service Control. Amazon. they are purchasing it from third parties as a wholesale service and they rely on the existing physical access and transport infrastructure that the end user is paying for with his/her monthly rental for the broadband access line. which are responsible for signalling and the control of resources in the network. which is still in its early days. only the telecoms network provider was in a position to offer telephony. has the analogous potential to provide an effective substitute to conventional television. Platform providers like e. and Skype offer services that substitute in greater or lesser degree for conventional telephony. i. We return to this point in Section 4.4.20 Final Report: The Future of IP Interconnection Functions) in the IMS frame. These new network-independent services. today. to avoid to be reduced to the mere pipe provider. In particular. Vonage. independent VoIP service providers such as SIPgate. • It is still an open question whether network operators who have market power might try to impede the ability of others to offer services that compete with their own – this is at the core of the Network Neutrality debate. 2. have profound implications.com etc.1 Third party service providers Historically. e-bay. on the other hand do not have (that much) an incentive to migrate their business to mere transport and routing capacities and functionalities. Google. .g. Rather. From an institutional perspective more or less integrated business models are likely to evolve in the next decade: • Traditional telco players (incumbents and competitors alike) of course have an incentive to keep the end user not only in the physical access and transport business but also with respect to services and applications. the competitive landscape is transformed. inasmuch as competition to provide the consumer’s broadband access might be distinct from competition to provide the customer’s voice service over some broadband connection.1. and the changes in the entire value chain that they imply. The control functions can be specified as follows: • • • Call Control. The degree to which consumers will really enjoy increased choice under future IP-based networks is thus at issue.
Final Report: The Future of IP Interconnection 21 2. Telecoms providers are capable of providing voice. video and data. The differences in price and in performance may be greater in these cases. but fundamentally they are interchangeable. all transmission media can be fundamentally treated as “dumb pipes”. the same is true of cable operators.1. Platforms may have price-performance or other advantages for delivering one service or another.2 Interchangeability of networks The de-coupling of the service from the network implies that the differences between networks based on distinct technologies matter much less than they used to. Figure 4: Convergence of content delivery Narrowband World 1920s – 1990s Broadcast/Radio (RF Spectrum) Broadband World 1990s – present Broadcast/Radio (RF Spectrum) CATV (coaxial cable) Telecommunications (twisted copper wire) CATV (coaxial cable) Telecommunications (twisted copper wire) Voice Broadcast Video Broadcast Voice Broadcast Video Broadcast Broadband Data Choice Endusers Endusers Source: wik-Consult Telephony ISDN Broadband Data Multimedia Multimedia Multimedia Telephony Data Telephony Data Telephony . but the underlying principle is the same: In an all-IP world.1. The same considerations apply in principle to fixed wireless access. and to mobile service as well.
.g.1.800 1.1. 2.2 Continued price/performance improvements due to Moore’s Law and to enhancements in fibre optic transmission (e. The attractiveness to the customer is driven by convenience. many operators are motivated to offer as comprehensive a package of services as possible to the end-user. video and data.400 1.600 1.720 1. often reinforced by competitive pricing that reflects the triple play provider’s economies of scope. The hope is that. The computers that use the network (and thus generate load) have gotten faster at about the same rate as the routers that provide the underlying network.000 Intel Dual Core Itanium® processor 1. by offering for example triple play (voice.3 Tripe play / multiple play services In response to these trends.000 800 Intel® Xeon™ Processor MP 675 Intel® Itanium® 2 592 Intel® Pentium® 2 410 Pentium® 3 1993 1994 1995 1996 Pentium II Pentium III 24 8 1997 1998 1999 Pentium 4 Intel® Itanium® 2 42 220 Intel® Itanium® 55 2000 2001 2002 2003 2004 2005 2006 600 400 200 0 1992 Source: Intel Technological progress has lead to substantial improvements in the price/performance of computers and of communications devices over the past two decades. DWDM) and optical switching and cross-connection Figure 5: Introduction of Intel Chipsets 1992 -2006 Millions 2.22 Final Report: The Future of IP Interconnection 2. all over a common connectivity platform) to a customer. thus maintaining a virtuous cycle. the network operator mixes higher mark-up services with low and at the same time reduces the risk that the customer will “churn” to another network operator.1.200 Transistors 1.
” In other words. however. Wave(length) Division Multiplexing (WDM): WDM is a technology allowing to multiplex multiple optical carrier signals on a single optical fibre by using different wavelengths (colours) of laser light to carry different signals. of course. the network designer seeks to avoid unnecessary optical-electrical-optical (O-E-O) conversions. At the same time. 2007). Semiconductor product development cycles subsequently accelerated to the point where it was more nearly three years. a Tbps is 1012 bits per second. then communications power doubles every six months. some predictions along these lines have been overblown – notably. Gilder’s advocacy of a pure fibre “home run” between any two parties who wish to communicate.org/w/index.Final Report: The Future of IP Interconnection 23 • Moore’s Law asserts that the number of transistors on an integrated circuit for minimum component cost doubles every 18 months. overall the prices “per unit” have decreased considerably.44 Moore's Law is not a law of nature. and as with any exponential relationship in real life it is not going to hold forever. fibre optic capacity has grown exponentially in parallel with computing capacity (largely as a result of DWDM. Rather. which has meant that network capabilities have kept pace with bandwidth demand. Thus. The Free Encyclopedia. 47 Wikipedia contributors. The assertion was probably never true45. 45 Around 2000. . optical switching will be used only where traffic density is high enough to warrant. This trend enhances both price-performance and reliability. Some examples might underline this: 44 The initial claim was that the number was quadrupling every four years. WDM systems allow carriers to expand network capacity without laying more fibre. "Wavelength-division multiplexing.php?title=Wavelength-division_multiplexing&oldid=134919128 (accessed June 8. 1. it conforms well with empirical evidence since it was formulated in 1965. and can thus expand a basic 10 Gbps fibre system to a theoretical total capacity of over 1. As much as possible. 46 A Gbps is 109 bits per second. however. This effectively multiplies the capacity of each optical fibre by the number of wavelengths carried. Thus. see the next paragraph).47 Optical (lambda) switching: Wherever possible. which is still amazing. some estimates were that the number of wavelengths being carried on an optical fibre using DWDM was doubling every ten months. Current WDM systems can handle up to 160 signals.wikipedia.6 Tbps46 over a single fibre pair. the network core is designed today to switch at a purely optical level." Wikipedia. if computer power doubles every 18 months (Moore’s Law). For the foreseeable future. http://en.6 Tbps is 160 times greater than 10 Gbps. • • • This significant increase in performance has not been accompanied by linear price increases. Gilder’s Law asserts that "bandwidth grows at least three times faster than computer power. even if absolute prices have increased.
3.”49 They conclude that these rapidly declining prices reflect in turn an acceleration of Moore’s Law.1. which can be explained on the basis of Figure 6. Several business models can be observed.3 Fundamental changes in the delivery of voice and video services The movement of voice service from the circuit-switched world represents a profound transformation.1 Migration of voice to VoIP and more generally of multimedia to IP The migration of traditional TDM based voice traffic to IP based technology is already under way in many countries of the world. 49 Jorgensen/ Vu (2007). This is effectively $30 per GFLOP. • 2. of course.24 Final Report: The Future of IP Interconnection • In 1997 a processing platform capable of providing 1 billion (109) Floating point Operations per second (GFLOP) cost about $30. .1. The effective increase is less. or one 1.000th of the price of nine years ago. as semiconductor product cycles shrank from three years to two. an off-theshelf PC provides about 10 GFLOPs for about 300 US $.48 At a macroeconomic level.000 US. The impending migration of video may represent yet another. 2. Today. Figure 6: The value chain for the provision of VoIP ITSP-Services Local Line Network Access Network IP Transport PSTN Ga w te ay BB-PoP End Customer Phone Number Terminal Equipment/ Softphone DSLAM IP-Platform Ga te w ay Other IPPlatform Source: wik-Consult 48 Ibid. Jorgenson and Vu find that the “… surge of IST investment [in the G7 from 1995-2000] resulted from a sharp acceleration in the rate of decline of prices of IST equipment and software. due to increased operating system overhead and codebloat.
as is the case with television today. ISP. In the German market. Conventional cable television and satellite are very efficient media for delivering linear video to multiple subscribers. . prerequisite: Broadband access and Internet access of any provider. Video has enormous bandwidth demands. These characteristics have significant economic and practical implications. Service Provider. broadband access based on a resale product of the incumbent. there is significant prospect that multiple subscribers will want to view the same video at the same time. but the implications are not necessarily the same. ISP.3. prerequisite: DSL access line from the incumbent.2 Evolution of video to an IP-based service Video is migrating to IP much as voice is. may continue to be the preferred solution for some video for some time to come. however. First.Final Report: The Future of IP Interconnection 25 With this figure. VoIP offering also for other customers. VoIP services bundled with Internet access. and using inherent multicast capabilities of the underlying medium. unlike voice. Moreover. • • • • • 2.711) up to services without any definite QoS. much of the use is unidirectional. separate provision of VoIP services. services are identical with the services in the preceding category. partly bundling with own broadband access facilities and Internet access. one can identify a multitude of more-or-less facilities based VoIP business models. customer is contractually obliged to keep his PSTN access line with the incumbent. prerequisite: broadband access and Internet access of any provider. VoIP services bundled with broadband access and Internet access. objective: full replacement of traditional PSTN incumbent access. In all of these cases. however. Multiplexing in the frequency domain. it is not clear that all video will migrate to IP. and PON-based FTTH systems can offer similar capabilities to subscribers. separate provision of VoIP services. provided under different QoS parameters ranging from a PSTN/ISDN quality standard (G. we find examples of the following alternative business models: • Fully-fledged infrastructure based provider: VoIP services bundled with broadband access based on fully owned network access facilities and Internet access. “Skype”. the physical transmission path has already been optimized to a significant degree for video. pure VoIP offering. main difference: the provider is not an ISP.1. ISP.
Insofar as possible.26 Final Report: The Future of IP Interconnection Second. and that they work internally with virtual containers provided by the so called Generic Framing Procedure (GFP).50 the trade-off would tend to shift in favour of shipping video somewhat longer distances. the authors point out that there are basically two different approaches to migrate from the current network world to a unique next generation multi-service network51: • On the one hand. To this end. A key question is whether storage capacity is likely to improve in price-performance faster than transmission capacity. . and thus to avoid sending video one stream at a time over large distances.3. These systems often are based on NG-SDH (Next Generation Synchronous Digital Hierarchy).3 Deployment of Next Generation Networks Many communications carriers – incumbents and competitors alike – all over the world are currently investing in NGN technology. carriers can follow a piecemeal approach to migrate to a NGN. There are also questions as to the degree to which differentiated Quality of Service (in terms of delay and packet loss) will prove to be relevant to IP video that flows across the interconnect point.1. to the extent that video is indeed carried over IP. Thus. it is quite possible that the preferred service model will be to use QoS only within individual IP-based networks (if at all) rather than between networks. unique virtual containers are reserved either for voice services or for packet oriented data services. as some have predicted. 51 See Pohler/Beckert/Schefczyk (2007). a service provider’s preference would generally be to cache non-real-time video close to the viewers. 52 For an introduction into the concept of NG-SDH see Kartalopoulos (2004). hybrid network elements are implemented containing upgrade options for broadband data technologies. 2. Given the huge data volumes associated with video. If transmission capacity were to decline in unit price even faster than storage and processing power. 50 See the discussion of Gilder’s Law in this chapter. there are significant implications for network design.52 Within the SDHframings. the deployment strategy could be characterized as an attempt to achieve the “best of both worlds”. In this case. the operator can rely on already existing and paid-for network technology. At present. Also. streamed video does not require better-than-best-efforts QoS as long as the user is wiling to tolerate a second or two of delay when a video stream is first initiated. In other words. conventional PSTN technologies are utilized in parallel with modern IP components. video would tend to be cached today within the same network as the user – file transfer of video from the content provider to the cache would not require better-than-best-efforts QoS. which is to say that the network elements are linked over SDH technology. In a recent report submitted to the German Ministry of Economics and Technology.
we consider first the routing protocols. but no specific proposal has yet emerged that seems likely to attract enough support.g.1. Typically. and as conventional GSM-based mobile service otherwise. Nonetheless. if new living areas are constructed. In the following sub-sections of the report. a new breed of services is evolving combining fixed-link services with mobile services. the network technology in the access networks often rests heavily on traditional PSTN technology. several carriers in the world are making this transition. it is likely that BGP4 will remain the dominant inter-domain routing protocol for a long time to come. and more cost-efficient than the piecemeal migration. will not be able to scale enough to meet the needs of the Internet a decade from now.1 Routing protocol enhancements (BGP) Many Internet researchers believe that the current inter-domain routing protocol. and finally the related issues driven by Multi-Protocol Label Switching (MPLS). e. then the AS numbers.1.4 Gradual modernization of exterior IP routing Routing between independently managed networks (Autonomous Systems. In the final stage of migration to such an NGN access network. to become BGP4's successor – thus. or AS) in the Internet is accomplished by exterior routing. . particularly in the standards organizations. and it is based on real next generation broadband systems. Conventional wisdom holds that this solution is better. and utilized only for some exotic or legacy services. however. the first step of the migration towards an end-to-end IP based network is the transition of the backbone (core) network. for example by offering handsets and respective services for the end user which function as WiFi-based VoIP where Fixed Wireless Access technology is available. A number of researchers have been working on improved routing protocols for quite a while.Final Report: The Future of IP Interconnection 27 • The second migration variant rests on the establishment of an end-to-end IP infrastructure. The communication protocols used for this routing will continue to evolve. This variant is used in particular in greenfield situations. Moreover.4. faster. The system technology underlying this variant is called Multi-Service Access Node (MSAN) or Access Hub (AXH). 2. as will the system of AS number identifiers used for purposes of exterior routing. Border Gateway Protocol v4 (BGP4). 2. the traditional narrowband world plays only a minor role. in many countries of the world carriers are in the process of deploying fibre optic technology “nearer” to the end user. Indeed.
At the current rate of ASN usage. if they deploy at all. and also to support traffic engineering. use Autonomous System Numbers (ASNs) as identifiers for multi-homed sites or ISPs.3 Multi-Protocol Label Switching (MPLS) within and among networks (and the evolution to GMPLS and beyond) Multi Protocol Label Switching (MPLS) is a technology developed by the Internet Engineering Task Force (IETF). an ISP can specify which path a particular stream of data traffic will take. and more than half of the possible ASNs have already been assigned in the Internet. while solutions that involve significant complexity or incompatibility are often slow to deploy.1. The problem is well understood.53 There have been a number of attempts over the years to enhance the security of the BGP routing protocols. When Classless Inter-Domain Routing (CIDR) was introduced in the mid-nineties. but it has not been solved. Traffic engineering is used to distribute traffic in a network in ways that normal IP routing will not. Note that the migration to IP version 6 (IPv6) (see Section 2. The standards are now mostly done.1. it initially resulted in a substantial simplification of the routing tables by organising them hierarchically. ASNs were originally defined as 16bit values. CAIDA. k. the Internet routing environment is becoming progressively more complex. “bushier”.4. it exacerbates it.c. Over time. the revised software should be complete and deployed long before the current 16-bit ASNs run out. Normal IP routing will send traffic along the shortest path to a destination -. solutions that can be simply layered on topic of existing mechanisms have decent prospects of deployment. and less hierarchical. With traffic engineering. .4. The IETF has been working on 32-bit ASNs for a number of years ( which will increase the number of ASNs from about 64 thousand to about 4 billion). This is causing a steady growth in the size and complexity of the global routing table. claffy. however. and vendors are starting to implement them. 54 It is based in large measure on earlier work by Cisco Systems.2 Autonomous Systems Numbers BGP4. 53 Private communication. As one might expect.6) does not solve the problem of routing table bloat – if anything. 2. and thus be better able to match capacity to demand.which may not be the path with the most capacity. and some intra-domain routing protocols.54 It was originally designed to reduce the complexity and thus to improve the performance of routers in ISP backbones. 2.28 Final Report: The Future of IP Interconnection The steady growth in complexity of the global Internet routing table poses a severe challenge to BGP routing.1.
for example. and have been progressively refined ever since. and it is likely to become more so over time. MPLS has been adapted to enable the support of optical switching. The ITU-T and the IETF are both working on inter-ISP MPLS interconnection technology and methodology. There are some significant complexities with interprovider traffic engineering. provisioning the traffic path. 57 See Deering/Hinden (1998). MPLS has been progressively extended to address traffic engineering. not the least of which is the need to know more about your competitor's network than your competitor is comfortable with you knowing. IPv6 can address about 2 times as many devices as IPv4. IPv6 could potentially address up to 2128 devices. give or take a few powers of two.S. Service providers will likely be even more interested in such capabilities as the entire switched telephone network migrates to an IP base. Even so. That is more than enough. however. One must be careful with this kind of hyperbole – the IPv6 address space is 16 used with incredibly low efficiency. not between or among ISPs.1. 56 It is sometimes claimed that the IPv6 address range is. MPLS is now widely used for virtual private networks (VPNs) within a single ISP. GMPLS allocates an optical path through the network.6 Gradual deployment of IP version 6 (IPv6) The maximum number of devices addressable by IPv4 is 232 (about 4 billion). not all of which are available for general use. rather than IP routing.55 There has been interest for many years in higher level routing functions.Final Report: The Future of IP Interconnection 29 High-end routers are now fast enough that the performance improvement provided by MPLS has turned out not to be an important factor. setting up cross-connects. The actual path that the traffic will take through the network is not specified by the user. Still more recently. greater than the number of electrons in the universe. A key component of this transformation has been the incorporation of traffic engineering into interior routing protocols (OSPF-TE and ISIS-TE). 2.56 The specifications for IPv6 were for the most part developed from 1991 to 1994.5 Future evolution of higher-level routing functions A number of research institutions are studying the future evolution of the Internet. National Science Foundation (NSF). and especially in policy-based routing. . MPLS-based VPN services generally operate only within a single ISP. Today. 2.57 55 Major research initiatives are in progress on the part of the European Commission and the U. and allocating bandwidth from the paths for the user requested service. In contrast. The core specification for IPv6 has been stable since 1998.1. traffic engineering can be important. in many of today's networks.
58 IPv4 systems commonly also support IPSEC. In addition. 59 See http://www. Simplified management of mobility. To date. all indications are that address depletion really will be a significant factor over the next few years. IPv6 attempts and rationalise the IPv4 protocol design in a number of small but possibly ways.58 An expanded number of code points for differentiated Quality of Service.30 Final Report: The Future of IP Interconnection The vast expansion of address space in IPv6 enables a number of advantages. NGN IMS (ETSI TISPAN) supports both versions of IP: IPv4 and IPv6. some immediate and some potential. The other benefits of IPv6 were not sufficient to drive widespread deployment. consequently. Hopefully. it might be difficult or impossible to expand existing IP-based networks or to deploy new IP-based networks or services. systems that have sought to use IPv6 addresses have had mixed results.59 Some experts worry that hoarding of scarce IPv4 addresses could cause problems somewhat sooner. A quite credible analysis by Geoff Huston shows the IPv4 address space exhausting in the 2010-2011 time frame. The depletion of IPv4 addresses that had been feared since the early nineties was averted through a number of address conservation measures. By contrast. There have been a number of “false alarms” where address depletion was incorrectly predicted. . IPv4 systems may support IPSEC. If this is not the case. additional to simplify significant offers the Integrated support for the IPSEC security protocol (providing privacy and authentication). IPv6 systems must support it. Lack of enthusiasm for IPv6 has been one of several reasons why most deployed IMS at present is non-standards-compliant IPv4-based “pre-IMS”. At this point. the prime motivation for IPv6 deployment failed to materialize. Faster processing of protocol header information. IPv6 will be widely deployed before IPv4 addresses are depleted. In addition to the ability to address more devices.potaroo. For example. 3GPP IMS was designed to operate only under IP version 6. • • IPv6 has seen scant deployment to date. for example in 2005.net/tools/ipv4/ . IPv6 potentially following advantages: • • • Simplified auto-configuration.
typically used in conjunction with 802. Multi-level Administrative Domains. Ethernet equipment is simple. . IPv6 is thus an integral component of the Korean government’s master plan for industry. Ethernet QoS. the Korean government has placed great emphasis on IPv6 deployment as part of its “Ubiquitous Korea” national ICT strategy. and support for virtual private LANs (VLAN). Many factors are driving this evolution.1q or with bridging). the Japanese government has actively promoted IPv6. Moreover. NATO is moving to IPv6 overall. and therefore inexpensive. requiring agencies to take up IPv6 whenever they replace equipment and generally no later than 2008. Ethernet-based solutions can also offer a number of advantages. Eurocontrol plans to use IPv6 for next generation Air Traffic Control. Point to point Ethernet Transport. First and foremost. and education) are already motivated to adopt IPv6 for reasons that are in many instances linked to their respective specific circumstances. Standards bodies are currently taking up eight additional Ethernet improvements that are expected to collectively ensure that Ethernet will be a central element in the future access architecture of NGN: • • • • • • • • Duplex Ethernet. In the future.Final Report: The Future of IP Interconnection 31 A number of significant firms and organisations in specific vertical industries and sectors (including transportation.e. these basic Level 2 communications are expected to be implemented to an increasing degree by means of enhanced “carrier grade” versions of the Ethernet Local Area Network (LAN). and the ability to provide QoS (dealt with in the IEEE 802. including the ability to deal with much more widely distributed networks. much of the communication at Level 2 of the OSI Reference Model (the Data Link Layer) has historically been accomplished by equipment that implements the Asynchronous Transfer Mode (ATM). Also. Ethernet VLAN Identifier Switching. Hierarchical Addressing.1. Optional add-on standards to Ethernet already address a number of key needs that were historically lacking. Ethernet VLANs. including better multicast support. defence. Indeed. The Chinese CERNET higher education network is pure IPv6 (i. 2. Protection Switching. there is no native support for IPv4).1p standard.7 Changes in network back-haul In carrier networks.
These characteristics are at least threefold: • • • Number of Main Distribution Frames (MDFs) Number of street cabinets Distribution of sub-loop lengths. a VDSL strategy might not turn out to be useful because VDSL 2+ loses all of its advantages if the loop lengths are “too long”.8 Replacement of the circuit-switched access network with a high speed IPbased network Several carriers in the world are currently are already underway in migrating to NGN access technologies (or at least they have announced a migration). the average sub-loop length is 300 metres. for example. however. which is to say that they are inversely correlated. there are also some characteristics of the current (narrow band TDM) network which have a severe impact on the decision which kind of fibre architecture a carrier should deploy. Several alternatives can be identified: • • FTTN: Fibre-To-The-Node. A relatively high ratio of street cabinets to MDFs tends to imply that loop lengths are short. the average subloop length is more than 700 metres. If the loop lengths are too great. In Europe. fiber is deployed up to the Street Cabinet FTTP: Fibre-To-The-Premises FTTB: Fibre-To-The-Building (also called Fibre-To-The-Basement or Fibre-ToThe-MDU (Multi-Dwelling-Unit) FTTH: Fibre-To-The-Home • • • The incentives for carriers to deploy one of these alternatives rest on many factors such as competition intensity and capital market conditions. which enables the incumbent to exploit the full bandwidth potential of VDSL to a substantial share of its customers.e. the ratio is 10:1. Roughly speaking. while in Germany the ratio is 40:1 and in the Netherlands it is 20:1. a low ratio of street cabinets/MDF implies (ceteris paribus) relatively low unit costs to deploy fibre to the street cabinet and to follow a VDSL (2+) strategy. this means that fibre is deployed deeply in the local loop. Generally speaking. which means that the bandwidth that can actually be delivered to end-users is not that much higher than with ADSL 2+. . In France. fibre is deployed up to the MDF FTTC: Fibre-To-The-Cabinet or Fibre-To-The-Curb. i. In Germany. however.1.32 Final Report: The Future of IP Interconnection 2. these ratios differ a lot between the Member States: in France.
now offers all of their content for free. which historically charged for some of their highest value content.2.0. . in the sense that the software running on the customer’s Personal Computer (PC) (often just a web browser) is the client of software running on a server platform of the service provider. The relationship is asymmetric – the client’s job is not the same as that of the server.0 and peer-to-peer). our hypothesis is that incumbents in some countries have an inherent incentive to start with FTTC/VDSL technologies. many radio stations make their broadcasts available to the public. In all of these cases. 2. In some of these cases. while in other countries they have an incentive to deploy FTTB/H technologies. and also a profound transformation in the way in which consumers utilize electronic communication services. Whether the network operator chooses FTTC/VDSL or FTTB/H fibre infrastructure.1 Web 2. Peer-to-Peer (P2P). and then reflects the evolution of the home network.Final Report: The Future of IP Interconnection 33 To make a long story short. 2. most content and most application services were offered by commercial service providers. Amazon. the technical implementation can be viewed as being client-server. and a single server can support a great many clients. This section of the report considers first the shift to user-provided content (including Web 2.com offers books for sale over the Internet. the ultimate goal is the same: to eventually migrate the network to IP over Ethernet over fibre. newspapers such as the New York Times. there are changes in the way that this technology is being implemented in the home.2 Broader changes in the use of electronic communications In parallel with these broader trends in the service provider world. and this continues to be an important business model. and the shift to user-provided content The migration to IP-based services is substantially changing the value chain of services and in turn the character of business relationships at the application and services layer is changing over time. Historically. often for free. the customer “pays” by being subjected to advertising.
which is often referred to as Web 2. and share it with others over the Internet. which has generally been viewed as appropriate under the fair use doctrine of copyright law? These are important public policy issues. Peer to peer (P2P) – a configuration where two or more networked computers jointly deliver a service. Peer-to-Peer (P2P). (2006) define Web 2. 60 Where users have the ability to legally share their own materials.0. these services are often implemented as peer to peer (P2P) systems. . In these systems. Continued in Web 2. the server. accesses services on another networked computer. they also have all the technical capabilities necessary to share materials copyrighted by third parties – either by copying the recorded medium directly. asymmetric relationships Client-server – a configuration where one networked computer (often the user’s Personal Computer (PC). Do these recordings suppress the incentives for artists to innovate? Or are they instead more akin to an individual’s use of a videocassette recorder (VCR) to record a television program. a technical realization that better fits the traffic flows and control relationships that characterize these systems. YouTube is a conspicuous example of this new development. This is an inherently asymmetric relationship – the functions of the two computers are not the same. perhaps best exemplified by the Napster case in the United States. the “customers” or users may provide their own content. rather than emanating from a central server.0. These capabilities raise profound public policy questions. A single server can support a great many clients. or by recording the event (for instance. but basically the migration to NGN does not alter these dynamics. the users typically have a symmetric relationship with one another. the client. or by pointing a video recorder at a screen display of a movie). NGN/IMS could enhance these interactions (for example by communicating bandwidth requirements back to the underlying transmission platform). Högg et al. The content is shared among users. The computers typically have a symmetric relationship with one another. by making an unauthorized recording of a live performance. participant by formalized and dynamic information sharing and creation.34 Final Report: The Future of IP Interconnection In newer business models.0 as a philosophy of mutually maximizing collective intelligence and added value for each Key Concept Box 7: Symmetric vs. but in the context of the present study they can be ignored. and the shift to user-provided content on page 35. 60 The TCP/IP connection model of the Internet inherently supports both models of application interconnection – both client-server and peer-to-peer. At a technical level.
Their WebCenter Suite does not only encompass wikis. see www. In newer business models. several software vendors are in the process of enhancing their core applications with Web 2. and share it with others over the Internet. The TCP/IP connection model of the Internet inherently supports both models of application interconnection – both client-server and peer-to-peer. and social bookmarking. Presumably. an individual user can determine via feeds when he downloads Key Concept Box 8: Web 2. Indeed. and the shift to user-provided content The migration to IP-based services is substantially changing the value chain of services and in turn the character of business relationships at the application and services layer. YouTube is a conspicuous example of this new development. enabling the use of RSS feeds. rather than emanating from a central server. the users (and their respective computers) typically have a symmetric peer-to-peer relationship with one another. one can basically distinguish the following main application areas:62 61 Indeed. Oracle is pursuing a somewhat different approach. but it supports the use of VoIP solutions because the open SIP standards are supported. knowledge management and internal cooperation (collaborative working). Continued in Internet Traffic Growth on page 41. . blogs or discussion platforms. communities.0 components.0. thus. tagging. organisations external to a company can be connected to the internal network. and wikis.de/web2.. wikis. which information. via “Connections for Partners“.0. often referred to as Web 2.berlecon. important information can be made available centrally via weblogs.Final Report: The Future of IP Interconnection 35 Web 2. Microsoft is introducing the SharePoint Server. as are Lotus Notes and Microsoft Office. and the flow of information can be managed via search engines. Peer-to-Peer (P2P). a new product is developed jointly with external partners or suppliers. Moreover. for example. Web 2. For more information. In the growth market of E-home. The content is shared among users. social bookmarks and the like. This option might be reasonable if.2 The changing environment within the home Convergence of technologies and services will have a significant impact on people’s everyday lives in the coming years. Indeed. most content and most application services were offered by commercial service providers. Historically.2. with Lotus Connections IBM offers functions such as blogs.0 62 See Schäfer (2005).0 technologies will become core applications within many companies. In these systems.0 approaches might also have a market potential regarding companies.61 2. Areas where these approaches might be reasonable and pertinent include intra-company communication. Moreover. the “customers” or users provide their own content. Home networks (E-home) will play an important role in this development.
. images. protocols and network infrastructure. video. it is clear that an extensive variety of technical devices may serve as parts of home networks. security systems and domestic appliances. TV) from different sources via user-defined devices. • • • • • In light of this evolution. which classifies the relevant standards into different functional components. Leisure/entertainment: Sharing of entertainment applications in the home environment and with external users. (Tele-)Communication: Integration of all incoming and outgoing communication channels on different devices. Figure 7 shows an E-home related protocol hierarchy.36 Final Report: The Future of IP Interconnection • Integrated media consumption: Access to content (e. Home office: Sharing of data. Presently.g. Health: Monitoring of vital functions and automation of information exchange. the provision of services at home is mainly based on different technologies. audio. office applications and hardware in the home and business environment. Controlling of building services: Automation and remote control of home installations.
Voice . Runtime Environment Operating Systems . … | Automatation | Sensors and Actors | | .. XP MCE .. 63 See SerCHo Consortium (2005).AVI .. we anticipate a strong tendency toward convergence in order to foster interoperability of services and devices...Final Report: The Future of IP Interconnection 37 Figure 7: Protocol hierarchy of E-Home related standards SerCHo-System Services Basic Services Middleware HGI Jini HAVi UPnP DLNA MHP J2EE .Hypertext . Video. PDA..WMF -… Video .Windows CE. Source: SerCHo Consortium63 In the future.MAC OS -… Virtual Machines .. Jcontrol) . Settop-box.. The most important standardisation activities in the context of E-home focus on middleware aspects where actually still a lot of competing and overlapping standards are available...(Embedded) Linux .NET Device Platform | Entertainment (Audio. Games) | Communication | PC.Java (J2ME. .GSM .LPCM .NET OSGi Communication Security Transport RTP UDP HTTP TCP IP Wireless UMTS GSM GPRS WLAN Bluetooth Wired DSL Ethernet Firewire LonMarks EIB/KNX Signaling SIP UDP Media Audio .MP3 .MPEG-2/-4 .. Figure 8 illustrates the development of these standards over time. … | Mobile Phone. Text . Game console..
There will be not a single unique business model. mainly in the computer and consumer industry. while HGI is mainly a network operator-driven initiative with a focus on the residential gateway. As a consequence. thus enabling service deployment and lifecycle management as well. a child of the DVB consortium is a middleware solution designed to provide an abstraction of settop-box hardware and software. HAVi. which will in turn drive a strong need for interoperability and interconnection. 64 See SerCHo Consortium (2005). the essential link between LAN and WAN. nor a single unique value chain. we anticipate a further increase of complexity in the field of E-home. OSGi is a component framework for service-deployment and lifecycle-management with a broad spread in other markets as well. Moreover. . The complexity of E-home results not only from the multitude and variety of relevant standards. many distinct entities involved in the development.38 Final Report: The Future of IP Interconnection Figure 8: Timeline of E-home related standards 1999 2000 Auto-Config WG 2001 2002 2003 DSL Home 2004 2005 2006 Home API UPnP Forum UMA OSGi HGI HAVi DHWG DLNA SerCHo Source: SerCHo Consortium64 For network connectivity and device detection UPnP. Both MHP and OSGi are device-independent since they rely on Java. deployment and provision of E-home based services. DLNA and HGI are important standardisation bodies. DLNA and UPnP have a broad supporting community. MHP. as illustrated in Figure 9.
and requirements regarding quality and security. What is obvious is that the developments tackled bring about fundamental changes in particular regarding • • • physical communications infrastructure. and the likelihood that services will be provided by third parties that are not necessarily the provider of network access to the house. traffic volumes and flows. further services supplied by specialised content providers Source: wik-Consult In consideration of the complex structure of stakeholders in the technological process of providing home networks and associated services. and accounting. At the same time. The relevant issues relate to security. IP interconnection may be a critical success factor. . transport network and platforms* Partly integrated manufacturer: management of platforms and user interface (devices. home networks)* Fully integrated E-home provider* * Possibly with integrated basic services. because many of the salient issues are more relevant to the application level.3 Long term versus short term effects Many of the aforementioned changes are already under way even though the exploitation of their full potential still might need some time. 2. Digital Rights Management (DRM). the focus may be somewhat different than it has historically been the case in PSTN interconnection.Final Report: The Future of IP Interconnection 39 Figure 9: E-home value chain and potential business models User interface Access Transport Platform Service Specialised service provider: management of platforms Partly integrated network provider: management of transport network and platforms* Fully integrated network provider: management of access network.
and reaches the following conclusions: “In spite of the widespread claims of continuing and even accelerating growth rates. leading to a catastrophe for network operators.4 Implications for IP-based traffic patterns Over the past decade.” Significantly. Nonetheless. This is still an enormous growth rate. Some estimates have been only weakly grounded in real data. and global IP-based traffic growth rates of 50-60%.g. the phasing out of MDFs. In the United States.S. there was a brief period of ‘Internet traffic doubling every 100 days’ back in 1995-96.65 Given that many calls for changes in network interconnection payments in the IP-based world have been based on the assumption that traffic is about to explode. they go on to say that “… although service providers are pushing to throttle customer traffic. when in fact it was doubling roughly once per year.40 Final Report: The Future of IP Interconnection The migration of traditional communications networks to new designs entails new topologies and architectures. It is not easy to develop reliable estimates of Internet growth. but already by 1997 growth subsided towards an approximate doubling every year …. but a number of groups have made credible estimates. estimates of the rate of growth of IP-based traffic have varied enormously. find overall U. for a more or less long time there will be a co-existence of old networks (TDM) and new networks (access and core NGN). …Traffic growth rates of 50% per year appear to only about offset technology advances.g. Internet traffic growth appears to be decelerating. an argument can be made that they should instead be 65 Odlyzko (2003) explains the sources of rumors that Internet traffic was doubling every 100 days. Andrew Odlyzko’s group at the University of Minnesota. a significant reduction of interconnection points . and more recently even that growth rate has declined towards 50-60% per year. PoPs the migration to IP over Ethernet over fibre 2. it is worth considering actual growth trends. Short(er) term effects are e. as transmission capacity available for a given price steadily increases. . • In the access networks deployment of o o • • • • VDSL/FTTstreet cabinet technologies FTTB/H technologies Mid and long term effects are e. but vastly different from what many in the industry had assumed.
P2P will continue to grow. growing at a compound annual growth rate (CAGR) of 37 percent and nearly quintupling the monthly traffic run rate from 2006 to 2011.68 which predicts that “ … IP traffic will nearly double every two years through 2011. which finds that “…international Internet traffic grew 57 percent from mid-2006 and mid-2007. international Internet network capacity grew faster than the volume of traffic carried on these networks. that growth rate is about 50-60% per year. and continues to decline. while VoIP traffic will continue to be small as a fraction of the total.”67 Some interviewees felt that IP traffic growth was much greater in Europe than in North America. Consequently. which corresponds to a quintupling from 2006 to 2011. viewed on 14 December 2007. peak international Internet backbone traffic grew 60 percent between 2006 and 2007 (see Figure 1. to fill the growing capacity of transmission links. Indeed. International Internet Traffic and Bandwidth Growth. that traffic growth is exceeding capacity growth: “In 2007. their findings tend to contradict the notion Key Concept Box 9: Internet Traffic Growth Estimates of Internet traffic growth have varied widely. One credible projection of consumer IP traffic projects a compound annual growth rate of 37 percent. page 4. On average. 67 Telegeograpy (2007). That's down from 74 percent growth in the previous year. but will decline somewhat as a fraction of total Internet traffic.” 66 See “Minnesota Internet Traffic Studies (MINTS)” at http://www. if then.umn. while bandwidth grew 68 percent.”66 These estimates are generally consistent with those of Telegeography. compared with 85 percent the previous year. Telegeography found that “… [i]ntra-European Internet traffic grew 71 percent in 2007. 68 See Cisco (2007). From 1997.” Like the Minnesota group. with various forms of video likely to play a large role going forward. peak utilization declined somewhat. 2004-2007). but huge by the standards of most other industries.Final Report: The Future of IP Interconnection 41 encouraging more traffic and new applications. Currently. Continued in Figure 11: Network Externalities on page 44. worldwide growth subsided to a still impressive rate of doubling (plus or minus 30%) every year. The character of IP-based traffic is changing over time.” These estimates are again consistent with a comprehensive study by Cisco Systems. … Driven by high-definition video and high-speed broadband penetration. Only during a brief period between 1995 and 1996 did Internet traffic “double every 100 days”. consumer IP traffic will bolster the overall IP growth rate so that it sustains a fairly steady growth rate through 2011. from 47 percent in 2006 to 44 percent in 2007.dtc.edu/mints/home. .html.
They expect healthy continuing growth for peer-topeer (P2P) traffic. as shown in Figure 10 below. with various forms of video likely to play a large role going forward. In the near term. Note that VoIP traffic will continue to be small in comparison to other services.42 Final Report: The Future of IP Interconnection Significantly. but at rates that are either stable or gradually declining in percentage terms (albeit on a growing base). the most formidable challenge that online video poses for the Internet will be flash crowds rather than the overall volume of traffic. They do not suggest a radical discontinuity with present trends. P2P will decline somewhat as a fraction of total Internet traffic. . at rates of 35% per year for the next few years declining to 30% per year by 2001. these historical estimates and forward-looking predictions point to substantial ongoing IP-based traffic growth. Figure 10: Cisco estimates of global consumer Internet traffic Source: Cisco (2007) Taken together. Nonetheless. the Cisco study finds that “… [t]he Internet is not collapsing under the weight of streaming video.” The character of Internet traffic is changing over time.
and transaction costs. and transaction costs. recurring themes in the economics of interconnection for the fixed (PSTN) and mobile (PLMN) world. Wikipedia. we discuss two externalities: the first (network externalities or network effects) relates to the benefits to all users of a network as the number of participants in the network increases. where unit costs decline as the number of units produced and 69 Wikipedia contributors. providing both theoretical and empirical assessments. we first need to consider the implications of different levels of Quality of Service (QoS). 3.org/w/index. It begins with key theoretical underpinnings: market power. 3. 'Externality'. the IP-based voice service.1. It concludes with a lengthy assessment of welfare implications of different wholesale regulatory arrangements. and their implications for retail prices. use.1 Key underlying economic principles This section introduces a number of common. especially in conjunction with the migration to Next Generation Networks (NGNs). which is the topic of Chapter 4.Final Report: The Future of IP Interconnection 43 3 Economic theory and practice: Interconnection today and tomorrow This chapter deals with the economics of interconnection. mobile network and Internet arrangements are presented. 15:44 UTC. PSTN.php?title=Externality&oldid=132458322> [accessed 25 May 2007] .”69 In this section.1 Externalities In economics. while the second is the benefit derived by the party to a call who is not responsible for the call (often the call receiver). both at retail and at wholesale level. Before we can consider the economics of VoIP interconnection.1.1 Network effects (network externalities) Economists speak of network effects when the value of a network is a function of the number of parties who participate in the network.wikipedia. and for the IP world. The Free Encyclopedia. and overall consumer welfare. Chapter 5 returns to economic analysis to consider economic implications of interconnection of the voice service as networks evolve to VoIP. This is not a mere question of economies of scale. 21 May 2007.1. both traditional CPNP and newer negotiated “Coasian” arrangements. These include network effects (a form or network externalities). an externality is “… a cost or benefit from an economic transaction that parties "external" to the transaction receive. <http://en. market power. 3. network externalities. adoption.
Ten years ago. it can be very difficult to get the market to move to a significantly superior (but less than perfectly compatible) service. that act of joining enhances the value of the network to all network users. Rohlfs . because there is one more person that they might conceivably contact. that the value perceived by each user increases with the number of participants. that is. A new customer joins a network by engaging in a transaction with the service provider. The level or adoption often stalls at a level far less than the socially optimal level. however.44 Final Report: The Future of IP Interconnection consumed increases. rather. however. Figure 11: Network Externalities Perceived Value Network Externality: A new customer who joins a network enhances the value of the network to all network users. Positive Externality Number of participants Continued in Reciprocity vs. it enabled interaction with only a few thousand people. Source: wik-Consult Let’s consider a concrete example. even though we ourselves had e-mail. Initial introduction of a service that is subject to network externalities poses special challenges. these network effects are a form of network externality. even though they were not parties to the transaction. Note that the shape of the curve in Figure 11 is irrelevant – what is important is that it slopes upward. the answer is probably yes – the chances are that most of your friends can be reached by e-mail. it is linked to the number of parties with whom the subscriber could potentially interact. because too few of our friends were reachable. Today. would you have considered using email to invite your friends to a private party? For many of us. Your telephone service has enormous value to you because it potentially enables you to interact with any of billions of people. which makes the service much more valuable to you. if. it might have far less value. where an adequate service has been widely adopted. Symmetry on page 61. Moreover. the answer would have been no. It is often difficult for a new service to reach the point where it serves a critical mass of people – that is. or only a few dozen. to get over the initial adoption hump. To an economist.
81-83. It has been known for some time that call externalities and network externalities are interdependent. call externalities were largely neglected in the telecommunications literature under the argument that calling and receiving party can internalize such benefits directly. In general. . Videocassette recorders (VCRs). raises the threat of more subtle forms of exploitation of market power. The higher the penetration. But there are also many examples of seemingly meritorious products and services that never achieved sufficient deployment. In contrast.” 3. the receiving party is subject to a call externality. CDs appeared in part because there were companies (notably Phillips and Matsushita) that were positioned to profit from two vertically related markets. if the receiving party is responsible. 70 See Mitchell/Vogelsang (1991). Historically.2 Call Externalities Call externalities refer to benefits (or disutility in case of nuisance calls) received by a party to a call who is not part of the calling transaction with the network. interconnection.Final Report: The Future of IP Interconnection 45 (2003) notes that different products and services have historically solved the initial adoption hump problem in different ways. the externality is an external benefit to the caller. the called parties would choose to subscribe to networks that charge low termination charges.2 Market power Market power is a central theme in European regulation. “nothing succeeds like success. This consumer surplus in turn usually is the sum of the benefits from being able to call (at certain prices) and from being called by others. however. most of the time.1. Otherwise.1. however. Moreover. 3. the question of which product or service will ultimately succeed in a market characterized by network externalities is not uniquely determined by the quality of the service. The European regulatory framework is largely premised on a traditional analysis of market power. pp.1. for example.70 The network externality arises from the expected consumer surplus enjoyed by joining a network. such internalization does not occur. the amount of call externalities increases with the number of people who are on the network. success may instead be determined by which product or service is the first to secure a sufficient user base. Thus. the more important call externalities become relative to network externalities. particularly in an IP context. the importance of the call externalities relative to network externalities rises with the level of penetration. from both the players and the content. were in moderately wide use for time-shifting of television programs before a video rental business emerged. Conversely. if the caller is responsible for the transaction. Where network effects are in play. the more recent discussion about termination monopolies has made it clear that.
This loss to consumers is a deadweight social loss.4. a firm is “… deemed to have significant market power if. firms would in effect be forced to accept the price that the market was willing to pay for their goods or services. Where a company that has market power chooses to produce less than it otherwise could.g. one market player has a sufficiently large share of network customers. 73 See Katz/Shapiro (1985). This is so to the extent that no other service provider can complete calls to the telephone number associated with the end-user.. it enjoys a position equivalent to dominance. Note that the earlier papers deal with interoperability in the context of standards compliance. For purposes of European regulation. Perfect interconnection would interfere with its ability to exploit its interconnection. however.2. both in terms of the overall market and also relative to its next largest competitor. all market participants are likely to be motivated to provide near-perfect interconnection with one another in order to maximize the benefits of the network externalities.46 Final Report: The Future of IP Interconnection 3. customers and ultimately consumers. notably in Section 4. or PATS) generally have market power relative to the termination of calls to their end-user customers – a phenomenon known as the termination monopoly. but to thus command a higher unit price (thanks to the normal working of supply and demand). either individually or jointly with others. a special form of market power can come into play in connection with interconnection. It was only much later that . Most markets are. Providers of telephony services (e. To the extent that market shares are well distributed over multiple market players. however.2. but consumers are short-changed to the extent that more goods and services could have been produced and consumed at a lower yet cost-covering price. imperfect to a greater or lesser degree.1.2 Network effects and market power Where network effects are present.1. The large player derives market power from its control over access to customers. the company may earn a good profit. Publicly Available Telephone Services72. 71 See Directive 2002/21/EC. Farrell/Saloner (1985). 72 See Directive 2002/22/EC. perfectly competitive market. If.73 We return to this point repeatedly. Article 2(c). Article 14(2). 3.1 Traditional market power In an ideal. but were not.3. Crèmer/Rey/Tirole (2000).”71 Incumbent providers of electronic communication services often have Significant Market Power as regards their last mile access capabilities. then that large player may be motivated to implement less than optimal interconnection. that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors. These imperfections often enable firms to offer a smaller quantity of products or services than the market is capable of accepting.
These interact with network effects.org/assignments/as-numbers. but it also shows that the upper bound is large. thousands of IP-based networks. In practice.000 Autonomous System numbers have been assigned to ISPs. the number is large enough to imply significant transaction costs in evolving the system. and DNS security. which empowers “national regulatory authorities … to impose: (a) to the extent that is necessary to ensure end-to-end connectivity. The most noteworthy mechanism appears in Article 5(1) of the Access and Interconnection Directive74. including in justified cases the obligation to interconnect …” This authority is directly relevant to interconnection. The combined effects of transaction costs and network effects have arguably played a large role in delaying the roll-out of any number of seemingly desirable Internet capabilities. when buying or selling a stock.Final Report: The Future of IP Interconnection 47 The European regulatory framework is well equipped to deal with conventional forms of market power. each pair of networks that wish to directly exchange traffic need in general to execute a set of contractual arrangements. See: http://www. the largest IP backbones have tended to have dozens of interconnection (peering) agreements (not counting the transit services that they offer to customer networks) rather than hundreds or thousands. including IP version 6 (IPv6). This number represents a very coarse upper bound on the number of independent IP networks. that commission is a transaction cost of doing the stock deal. by some measures. or to the Regional Internet Registries (RIRs) for assignment. the same constellation of factors has tended to delay implementation of differentiated Quality of Service (QoS) between IP-based service providers. economists realized that network interconnection was essentially the same problem as standards compliance. must pay a commission to their broker. 74 Directive 2002/19/EC. 3.3.76 Most relevant to this report. but it has rarely been used. largely because it is seen as potentially being too powerful a tool and insufficiently constrained. obligations on undertakings that control access to end-users. 76 See Marcus (2004a). We return to this point in section 4. For example. but has only limited mechanisms to deal with this subtler form of market power. 75 More than 46. typically accompanied by a number of operational agreements and understandings. to multi-homed organisational users.75 this could potentially represent daunting transaction costs.5 of this report.” In the context of interconnection.1.3 Transaction costs A transaction cost is “…is a cost incurred in making an economic exchange. inasmuch as any change has limited effect until it has been implemented for a substantial fraction of the interconnected networks.iana. Still. Given that there are. . most people.
.48 Final Report: The Future of IP Interconnection 3. a singles bar serves to bring interested males and females together. for an average incremental price to be less than the corresponding average incremental cost would normally indicate some market failure. Notably. possibly predation. so as to ensure adequate participation from both sides. free-to-air television is distributed free to consumers in order to ensure an adequate audience for advertisers. a singles bar might find it rational to offer free drinks to ladies (or to men) in order to ensure that both are present in adequate numbers. In a conventional market. in a two-sided market. A cable television operator serves to bring broadcasters and advertisers together with consumers. however. A two-sided market has some unique characteristics that distinguish it from a conventional market. Figure 12: Two-sided markets Two-Sided Platform $ Free-to-Air TV Broadcasting Seek attractive programs: more viewers add value for advertisers. and not just the level of prices.1. For example. who bear the full cost of the service (see Figure 12). 77 See Rochet/Tirole (2004). economists have come to recognize a class of market players (platforms) who serve to bring two distinct sides of a market together. Advertiser $ $ $ Advertiser $0 Advertiser Viewer Advertiser Source: wik-Consult Nearly any market could be analysed as a two-side market. the two-sided analysis is likely to provide additional insights only for markets whose two-sidedness implies that the structure of prices matters.77 It can be perfectly rational to subsidise one side of the market or the other. however.4 Two-sided markets In recent years. it could be perfectly normal and rational. Analogously. the structure of prices often plays a crucial role in bringing the two sides of the market together.
The established theory represents a useful point of departure for understanding the economics of IP-based interconnection. section 3. These fixed fees may be instead of usage-based fees. from voice services. it is important to remember that voice telephony is likely to represent only a tiny fraction of the traffic on future integrated Next Generation Networks (NGNs). particularly in light of the ongoing convergence of the PSTN/PLMN and the Internet.78 There can also be fixed fees per unit time (for instance. the retail payments are payments that an enduser (whether a residential consumer or a large enterprise user) makes to the telephony service provider. The transmission of voice requires relatively little bandwidth – much less than video. Whether this will continue to be the case is something of an open question. and much less than many forms of data.2. They often reflect the duration of the call. At the same time. in which case they might reflect the time of day or the day of the week on which the call was placed.2. 3. There may be higher charges for calls that travel a greater distance.2 reviews wholesale arrangements.1 reviews retail arrangements for voice telephony. 78 The European Commission took action in 2007 to reduce excess roaming charges.2 Traditional telephony interconnection models Much of the economic theory associated with interconnection has been developed for voice telephony in the Public Switched Telephone Network (PSTN) and the Public Land Mobile Network (PLMN). or that cross national borders. Today. Most of us grow up in one system. This chapter applies established theory to the networks of today. The wholesale payments are payments that one network operator makes to another. . In this context. monthly charges).Final Report: The Future of IP Interconnection 49 3. It is important to keep in mind that substantially different systems exist in different parts of the world. We return to many of the same economic themes in Chapter 5. or they may be in addition to them.2. Section 3. and thus recover most of their costs. where we consider the impact of the emergence of VoIP and of NGN on current arrangements. telecommunication companies derive most of their revenues. and also that some of these payment systems have evolved significantly in recent years. and take these charging arrangements for granted. There are usually quite substantial surcharges for calls placed or received when one is travelling outside of the country in which the call was placed (mobile roaming).1 Retail arrangements for voice telephony Retail plans for voice telephony can reflect a wide range of factors.
the recipient could simply hang up.1. and should be viewed as the primary cost causer.50 Final Report: The Future of IP Interconnection 3.. and whether the recipient’s telephone service is in a foreign country. or CPP. and possibly also reflecting the date and time on which the call was placed. or wherever the service provider does not wish the cost of the call to represent an impediment to the use of the service. For example. and that flat rates are likely in consequence to prevail whenever the underlying usage-based costs to the service provider are not prohibitively high. These can be useful for customer service numbers. The recipient pays nothing. The party that places the call pays a price reflecting the duration (number of minutes) of the call. Jeon. no distance-based charges. the recipient may incur substantial charges for receiving the call. 83 See Odlyzko (2001). 81 See also Hermalin/ Katz (2004). The American mathematician Andrew Odlyzko has argued that consumers generally prefer flat rate plans to usage-based.2. The program 79 As a noteworthy exception. where a mobile call recipient is roaming (traveling outside of the country to which the subscription pertains). see de Graba (2000) and Armstrong/Wright (2007). independent of usage. the distance to the recipient. and no domestic roaming charges.81 A number of economists have suggested that it would be more appropriate if payment were split more evenly between the party placing the call and the party receiving the call. 82 In addition to Jeon/Laffont/Tirole (2004) and Hermalin/Katz (2000). .79 These CPP arrangements implicitly assume that the party placing the call derives most of the benefit. A particularly dramatic example was AT&T Wireless’s introduction in the United States of Digital OneRate in 1998.83 Experience tends to support his prediction.2. 80 See Jeon/Laffont/Tirole (2004). many operators offer some form of freephone service (“800” numbers) where the called party pays.1 Calling Party Pays (CPP) The most common arrangements worldwide are referred to as Calling Party Pays. banded flat rate (“buckets of minutes”) An alternative set of arrangements that have become increasingly popular in recent years are based on a fixed fee (or flat rate) per unit time (usually per month).2 Flat rate. They offered a nationwide flat-rate mobile telephone plan.1. hotel reservation services. 3.82 Alternative means of payment are often available where CPP arrangements are the norm. Laffont and Tirole80 speak of the principle of receiver sovereignty – if the recipient did not perceive value in the call. with no per-minute charges. More recent economic theory has called into question this traditional view of cost causation.
http://www. Consumers think of the plan as providing a zero marginal cost. these banded flat rate plans have been well accepted by consumers and industry. and they therefore perceive no financial disincentive to making extensive use of the service. The subscriber enjoys a true flat rate plan so long as he or she does not exceed a maximum number of minutes. in addition to some fee per minute (or perhaps some fee per minute when a pre-agreed number of minutes were exceeded). to the extent that usage-based average incremental costs in the United States are primarily a function of air time. whether banded or not. Notably.S. so as to enforce the need to upgrade to the next higher band as the customer’s usage increases over time. For example.86 These plans are most appropriately viewed as representing banded flat rate arrangements. 85 This expression can be confusing to those of us who are not economists. the consumer will tend to think of the plan as being purely flat rate. 86 See. Customers appreciate the predictability and the relative simplicity of the plans.Final Report: The Future of IP Interconnection 51 was hugely successful. Digital OneRate transformed the U. There are different bands. They probably track underlying costs of mobile telephone service reasonably well. mobile market.S.t-mobile.0). but they are markedly less attractive than their North American counterparts. 84 See FCC (2006). but the Y-intercept is not at the origin (0.com/shop/plans/. or sometimes as non-linear prices. The per-minute charges are not intended to be used on a routine basis. they are set at high or punitive levels. These hybrid “non-linear” prices are linear in a mathematical sense. rather. mobile arrangements. a monthly usage fee might be assessed.85 In U. for instance. tend to encourage use of the service. off-net calls to (other) mobile operators (which would normally be associated with high mobile termination fees) are usually excluded. but it would be a mistake to analyse a banded flat rate plan as if it were a simple two-part tariff. Flat rate plans for mobile telephones have also become widely available in Europe over the past few years. representing different numbers of total air minutes per month. forcing AT&T Wireless’s competitors to merge or form alliances in order to achieve nationwide coverage so as to be able to package together a competitive offering. . Economists refer to these hybrid plans as two-part tariffs. Plans of this type usually incorporate a per-minute charge for minutes in excess of those permitted in the band. So long as the consumer does not exceed the maximum number of minutes in the band. far beyond their expectations.84 Monthly subscription fees can serve as an exclusive pricing mechanism. Flat rate plans. In the United States. or they can be combined or mixed with usage-based fees. it is common to find a variant of the flat rate plan that is sometimes referred to as the “buckets of minutes” plan.
52 Final Report: The Future of IP Interconnection 3. and both prices to be about half of the price of placing a call in a CPP system.2. 3.2.2 discusses voluntarily negotiated arrangements. other things being equal. however. and Singapore. Starting with the introduction of banded flat rate plans in the U. the fixed networks in North America have evolved toward flat rate plans. Service providers benefit from a predictable revenue stream. these arrangements were the norm for the mobile industry in the United States. In other words. Consumers tend to prefer banded flat rate because of its predictability. agree not to charge one another (an arrangement known as Bill and Keep).1 below). both reflect both outgoing and incoming calls.2.1 discusses CPNP arrangements. Historically. . in 1998. these arrangements have basically disappeared in North America. and from the fact that consumers tend not to use the maximum number of minutes that they have purchased.87 Ten years ago.S. while Section 3. and the receiving party also pays.1.2. CPP was the norm for calls from fixed telephones in countries where RPP was used for mobile. A commonality between RPP and banded flat rate plans for mobile phones is that both generate charges that vary primarily with the total amount of air time used. 87 Europeans pay for calls received only in the case where they are roaming in another country. One would expect the price of placing a call in a RPP system to be similar to that of receiving a call. the consumer preference for banded flat rate has been overwhelming. or else they are voluntarily negotiated between the networks. In practice. Canada.2 Wholesale arrangements among switched fixed (PSTN) and mobile (PLMN) telephone networks Wholesale arrangements in the PSTN/PLMN generally are of one or two forms: either they follow the principle of Calling Party’s Network Pays (see Section 3. it is difficult to make a comparison inasmuch as no country that we are aware of ever implemented RPP for all calls. If negotiated. Section 3. In an RPP system. more recently. the networks often.2.2. but not always. the calling party pays based on the number of minutes of use.2.3 Receiving Party Pays (RPP) and hybrid arrangements A few countries historically made limited use of an alternative set of arrangements known as Receiving Party Pays (RPP) at retail level.2.
the CPNP wholesale payment is to a significant degree a reflection of the lack of payment by the call recipient under CPP – in the absence of a retail payment. according to the 12th Implementation Report – so the termination fees do in fact influence the relative positions of fixed and mobile networks. 88 For some networks.1 Calling Party’s Network Pays (CPNP) Calling Party’s Network Pays (CPNP) arrangements reflect a payment at the wholesale level from the originating network (the network whose customer placed the call) to the terminating network (the network whose customer received the call). call termination payments made and received are comparable in magnitude. and they are related to one another. of course.Final Report: The Future of IP Interconnection 53 3. Figure 13: Calling Party's Network Pays (CPNP) wholesale arrangements Call placed Call received Retail CPP Payment Originating Network Terminating Network Wholesale CPNP Payment Source: wik-Consult CPNP wholesale payments and CPP retail payments are often found together. the terminating network would not be paid at all for the call.2. and thus have little direct influence on profitability. The network shown as Terminating in Figure 13 is. but they are not the same thing. Mobile termination fees tend to be much higher than fixed – nine times higher in Europe. Between fixed networks. paid by its own customers for calls that they place.88 The CPNP wholesale payment thus seeks to correct for the lack of a retail payment from the party that receives the call. . including the relative number of calls originated and terminated between the two networks and the relative magnitudes of the termination fees per minute.2. Figure 13 depicts the relationships and the flow of payments. the lack of a termination payment need not pose a problem. Whether the CPNP termination payments balance for a particular network depends on a number of factors. First. or between mobile networks.
Clearly. One could imagine CPNP variants that would work a bit better than the current system. however. or € 0.20 per minute of use. this discussion glosses over a number of assumptions that usually hold in CPP/CPNP systems. which provides a ranked list of different IPbased services that can be used to reach an end-user based on his or her telephone number.2054 in 2001. the th corresponding figure is just over half of that.91 Experience in the European Union tends to confirm these predictions. 89 The end-user might. Kruse (2007). page 35). We return to this point in Section 3. that end-user is typically accessible only by means of that telephone service provider. many years for such solutions to become widespread. and would thus suppress demand to place calls to its customers.90 Even where the market for call origination is effectively competitive. however. page 29). implies changes to programming and possibly the hardware of the installed base of GSM phones. however. 12 Implementation Report. the smaller the market share of the service provider. A provider with a large market share would nonetheless be somewhat constrained by the likelihood that setting a high termination fee would cause its competitors to set even higher retail prices. Prior to the implementation of the current European regulatory framework in 2003. The service provider will. has suggested that the GSM standard might be modified to enable a preferred operator to complete a call to any phone. Annex 2. A provider with a small market share has a correspondingly lesser impact on overall retail prices. CPNP suffers from a number of well-documented deficiencies. a call placed to a particular telephone number can in general only be terminated by a single telephone service provider. CPNP fees for fixed incumbents were generally set to cost-based regulated levels of less than € 0. Perversely. . however. technical solutions to the termination monopoly might be possible. Annex 2.2.1. of course. it is a different network provider’s customer whose demand is being suppressed. there will usually be market power in the market for call termination. 10th Implementation Report. this.1140 (cf. be motivated to set a high termination price.54 Final Report: The Future of IP Interconnection A second relationship between the two is that the CPNP wholesale payment tends in effect to set a floor for the retail price of the call. and also greatly in excess of real usage-based average incremental costs. 90 In the longer term. it would take many. could potentially provide a very comprehensive way around the termination monopoly. the end-user usually has little or no visibility into the termination prices to individual networks. ENUM. prior to implementation of the current European regulatory framework (cf. for instance. and is therefore less constrained.02 per minute of use. have different telephone services with different service providers and different telephone numbers. 91 In the interest of brevity. in this case.92 The mobile fees were greatly in excess of fixed. 92 Fixed-to-mobile termination rates were € 0. In 2007. the higher the termination price that it is likely to be motivated to set.89 This effectively confers a form of market power on the terminating service provider.3. For example. One of these is the terminating monopoly. One must take care in comparing the figures. most notably because the size of the EU was different at the time of the 10th Implementation Report. Once an end-user has selected a telephone service provider. in the absence of regulatory constraints. Even a monopoly price is normally constrained by the risk that high prices will suppress demand. but mobile termination fees were set by mobile operators without regulation and were on average in excess of € 0.
due not only to new Member States joining the EU. Call termination on individual public telephone networks provided at a fixed location. … [Market] 7. Note that figures are not strictly cross-comparable between the earlier and later reports. The pertinent definitions of wholesale termination markets susceptible to ex ante regulation. delineated in such a way as to be consistent. …95 The market definitions for termination of fixed and mobile calls are in terms of individual networks. These market power findings have empowered NRAs to impose remedies so as to address high termination fees. 93 94 95 96 See Recommendation on Relevant Markets (2003/311/EC). See EU-Commission (2004). For the purposes of this Recommendation. Voice call termination on individual mobile networks. 24-25 and 29.Figure 15. Termination fees have been on a downward glide path since 2003 (as shown in Figure 14.Final Report: The Future of IP Interconnection 55 In response to the termination monopoly. call termination is taken to include call conveyance. in the context of the analysis of a single network. that a network operator will in general be found to have market power relative to its own customers unless there is some specific reason to be believe otherwise. with the delineated boundaries for the market for call origination and the market for call transit on the public telephone network provided at a fixed location. and Figure 16) .93 and nearly all have found it necessary to do so.96 but are probably still well above true average incremental costs in most if not all Member States.94 are: [Market] 3. See ibid. and also EU-Commission (2007). in a national context. EU-Commission (2007b). the European Commission has so defined the markets for termination of fixed and mobile calls as to enable national regulatory authorities to regulate termination fees. pp. . but also due to changes in the data reported. reflecting the updated market definitions issued by the Commission in December 2007. This means.
. 2001-2004 Source: 10th Implementation Report.56 Final Report: The Future of IP Interconnection Figure 14: Fixed-to-fixed interconnection fees in the EU15. Annex 2. Annex 2. 2000-2004 Source: 10th Implementation Report. Figure 15: Fixed-to-mobile interconnection fees in the EU15.
g. Termination fees have sometimes reflected different rates for national versus local traffic.Final Report: The Future of IP Interconnection 57 Figure 16: Fixed-to-mobile interconnection fees in the EU25. 2004-2006. CPNP arrangements have evolved somewhat over time in response to the realization that the average incremental costs of today’s communication networks are only weakly linked to these indicators (and that they probably will be even less closely linked to the costs of the Next Generation Networks that are about to be deployed). peak versus non-peak hours). Worse. these were assumed to reflect the underlying cost of the network. Annex 2. termination fees have primarily been set based on minutes of use.2. .1. presumably reflecting different average incremental costs for the respective networks. inasmuch as it implies the need to maintain intensive regulation indefinitely. In effect. Even though the Commission has responded effectively and appropriately to the problems associated with the terminating monopoly. 3.1 Traditional reliance on minutes of use.2. or for the time of day or day of the week (e. Substantially different rates have been set for fixed versus mobile networks. the regulated call termination prices are still well above efficient levels that would maximize social welfare. Source: 12th Implementation Report. for the distance that the traffic must be carried. and distance Historically. this outcome must be viewed as being less than ideal.
Calls are assigned to the local. packet switching does not lend itself to minutes as a measure of network usage. Within the CPNP approach. In Europe. 3. capacity-based charging would appear to follow naturally in a CPNP environment. without triggering any further charges for usage as long as usage remains within the specified capacity limit. A difficulty with CBC arises from the contractual arrangements between access seeker and network provider (the terminating network in the case of CPNP). This was quite adequate in the PSTN world. types of calls are defined by sets of network elements that they use. much more so than tracking types of calls through the network. A network ‘A’ wanting to terminate calls on network ‘B’ using local termination would have to terminate in one of the many local exchanges of network ‘B’. This prediction can be quite complex.3 Capacity Based Charging (CBC) Capacity Based Charging (CBC) relates to interconnect services.2. local interconnection requires branching out the network much more than double transit.2. while double-transit termination would require PoIs only at remote switches. As a result. for which the maximal capacity utilization is booked in advance and paid in monthly or one-time fees. where networks and services are sometimes distinct.1. peak usage patterns of all network users have to be .2. it is customary to distinguish between local. and because this dependency of costs on capacity is increasing rather than decreasing.58 Final Report: The Future of IP Interconnection 3. it is necessary to establish which parts of the network will be used by interconnection and to what extent the interconnection requires additional capacity. Each type is characterized by a profile of network usage leading to characteristic quantities of network elements. The costs of these quantities are determined in bottom-up analytical cost models. EBC usually does not track peak behaviour very well. Also. As there can be no doubt that most network costs depend on the capacity utilized. A major feature of EBC is that minutes are the primary measure of usage. but rather depend on the parts of the network that are required for a call. CBC therefore generally can follow efficiency criteria more closely than per-minute charges. Typically. but it does not carry over well into the IP world. Furthermore.1. What distinguishes CBC from per minute charges is the tracking of network costs and the possibility for risk sharing between the dominant network operator and the other competitors. because network costs are becoming progressively less distance dependent over time. and double-transit categories by the Points of Interconnection (PoI) that are being used by the interconnecting parties.2. single-transit and double-transit calls. singletransit. Moreover. In order to conclude an agreement.2 Element Based Charging (EBC) Element Based Charging (EBC) has largely replaced distance-related charging of origination and termination services. EBC has been an efficiency improvement.
These negotiated arrangements can be viewed as generally reflecting the thinking of the Nobel-prize-winning economist Ronald Coase. will networks in fact agree to interconnect? What preconditions. In the case of spectrum. a key precondition was that “property rights” be adequately defined. in the form of spectrum auctions and spectrum trading. this has led to lower and arguably more appropriate termination rates than existed prior to 2003. .2. Most experts would regard spectrum auctions and spectrum trading as representing best practice today. one would expect that Coase’s analysis would be equally applicable to PSTN/PLMN interconnection arrangements. however. One might expect that the network operators were better positioned to determine the right rates than is the regulator. Coase argued that private parties were generally much better positioned than regulators to negotiate mutually acceptable arrangements based on commercial principles. Today. rather than being assigned by (hopefully) benevolent bureaucrats as was then standard practice. Canada. This line of reasoning raises several key questions. and Singapore): • • Under Coasian arrangements.2. many interconnection fees are set to nominally cost-based rates by regulators.2 Negotiated “Coasian” arrangements The main alternative to CPNP arrangements is permitting network operators to negotiate fees among themselves. Last. are necessary to ensure that a Coasian system would work for switched PSTN/PLMN network interconnection? What is the likely outcome of such arrangements? • The willingness to interconnect cannot be taken for granted. it is difficult for a regulator to determine a rate that is altogether satisfactory. In Europe. “The Federal Communications Commission”97. the time frame for CBC has to be established. In Coase’s famous 1959 paper. as previously noted. 3. In principle. the Bell System had simply refused to 97 See Coase (1959). Even with the best of intentions.Final Report: The Future of IP Interconnection 59 aggregated. and even with the best of tools. which are answered in part by experience in the countries that have Coasian “Bill and Keep” arrangements today (notably the United States. if any. He proposed that blocks of spectrum be managed more nearly like property. Coase’s ideas have since been put into practice in many leading economies. resulting in more risk sharing the longer the time frame. the arrangements can hardly be viewed as ideal. In the United States prior to the Kingsbury Commitments of 1912. provided that certain preconditions were met.
It is worth noting that when we speak of reciprocity in U. The question of preconditions is complex. all operators have interconnection obligations. see Marcus (2004b). law require Bill and Keep arrangements. For a more expansive assessment of call termination arrangements in the United States. however. in the case of the Internet (and presumably also for other IP-based services). i. Telecom New Zealand refused to interconnect with Clear for years until forced to do so by court action. Later in this chapter. as Bill and Keep). this implies the need for some kind of regulation.99 Experience suggests that large PSTN incumbents with market power are unlikely to voluntarily interconnect with much smaller competitors in the absence of government intervention. then symmetry means that aAC (the termination rate from A to C) must be the same as aBC..98 More recently. mobile operators and non-incumbent fixed operators usually choose Bill and Keep arrangements with one another. (Reciprocal compensation fees are two-way termination fees. In Europe.S. we consider why the experience has been so different. which is tantamount to setting the termination rate in both directions to zero.S. the same in both directions. and also non-dominant fixed operators. however. but there is no obligation that aAC be equal to aBC.60 Final Report: The Future of IP Interconnection interconnect with competitors. . if three mobile operators (call them A. which are one-way payments from the long distance network operator to the local network operator. including zero. reciprocity obligations mean that aAB must equal aBA. but only fixed incumbents are subject to cost-based reciprocal compensation termination fees. we mean something quite different from the European notion of symmetric termination rates. are free to set any rate they wish.S. In the United States. 99 See Haucap/Marcus (2005) 100 This discussion necessarily abstracts and simplifies what in reality is a very complex system. Nonetheless. regulation has not been necessary to date. so long as the rates are reciprocal.e. For the PSTN.S. B and C) are operating in a Member State.100) Wireless operators. in no case does U. United States law explicitly permits network operators to mutually agree to pay no reciprocal compensation fees (a system referred to in the U. termination rates. 98 See Mah (2003). In the U. generally applicable to local interconnection. Long-distance-to-local interconnection is implemented by access fees.
for networks A. unlike most CPNP regimes. the dominant fixed incumbent usually interconnects under arrangements that include CPNP-like termination fees at the capped rate. however. including payments to mobile network operators. but in addition their termination fees are capped by regulation so as not to exceed cost. is a market-based outcome in a regulatory environment that bounds the negotiated options. Without reciprocity. however. they still influence retail prices. independent of the relative sizes of the networks.103 In the case of the fixed incumbent.S. two interconnected networks charge each other the same termination rate per minute. are at the same respective rate for each corresponding network as those that the fixed incumbent collects. Even though the payments net to zero. With this in mind. and B. Continued in Quality of Service economics and engineering on page 79. moreover. operators should set these rates to monopoly levels. 103 See Armstrong/Wright (2007).2. It is not always the case in practice. the obligations of symmetry appear to play a central role in motivating the mobile operators to agree to a Bill and Keep system in regard to these two-way reciprocal compensation arrangements. . With symmetry.S. reciprocal compensation system is characterized.102 The symmetry obligations between fixed and mobile.101 so there is typically no reason for the mobile operators to prefer a high termination fee to a low one. In effect.Final Report: The Future of IP Interconnection 61 This is a subtle but important point: The use of Bill and Keep arrangements is the U. Symmetry means that aAC must be the same as aBC. framed within a requirement to maintain reciprocity. In other words.1. Fixed incumbents are subject to the same obligations. not by a regulatory obligation to charge nothing for call termination. Symmetry With reciprocity. reciprocity mean that aAB (the termination rate from A to B) must equal aBA. We return to this point in section 3. Mobile-to-mobile (M2M) traffic will tend to be roughly balanced in any case. a network charges the same termination rate per minute to each network with which it is interconnected. but rather by the absence of an Key Concept Box 10: Reciprocity vs. affirmative obligation to pay something other than zero.3. 102 See also Laffont/Tirole (2000). change the negotiating game in a fundamental way – they prevent the mobile operator from collecting highly asymmetric payments from the fixed operator. the payments that they make to other network operators. the mobile operator cannot demand a higher termination fee than the fixed incumbent itself is permitted to charge (based on 101 This is the general expectation. The U. which independently models mobile-to-mobile and fixed-to-mobile termination arrangements. or vice versa – the charges will tend to net to zero whether the fee is high or low.
and mobile usage is consequently much higher than in Europe. Rohlfs finds that countervailing buying power cannot ameliorate the terminating monopoly.005 per minute. and arguably offer advantages in comparison with current European practice. are low in these systems. law and regulation. There are no charges for mobile-tomobile termination. Thus. the termination fee to and from fixed incumbents is effectively capped at rates well under €0. measured in terms of service-based revenues per minute of use. In the United States. and non-dominant fixed operators. i. however. (Curiously.107 The arrangements in the United States. Fixed-to-mobile and mobile-to fixed charges are low. and unless the mobile operator expects to terminate far more calls than it originates it has no reason to prefer a charge at the high end of the range over a charge of zero.62 Final Report: The Future of IP Interconnection the costs of the fixed incumbent). Significantly.) The FCC found it necessary.105 The FCC solved the problem by limiting these non-dominant fixed operators to the same fees charged by the incumbent operator for the same area. the long distance network operators were historically distinct from the wired incumbents. and in the absence of the ability to charge that network they had no countervailing bargaining power. see Rohlfs (2007).106 Singapore’s arrangements are surprisingly similar to those of the United States. As we explain later in this chapter.e. to a Bill and Keep system. This can be viewed as a variant of the termination monopoly problem – the long distance network operators were obliged to complete the calls. mobile operators are not entitled to collect access charges at all. 106 They also invited operators with higher costs to document their costs in order to receive higher access fees.S. 107 Hong Kong’s system is also interesting. enormously in excess of their cost. there was only a single network that they could use. Again. the average normalized price of mobile services. The former Bell system incumbents. As in the United States. except for those of the fixed incumbents. but it is slightly different. . completing the call. the negotiated arrangements usually lead to an agreement to not charge termination fees. low termination rates lead to low retail prices and high usage. on the order of half a cent per minute. the regulator need not be involved with setting termination rates.01 per minute in any case. This option has rarely if ever been exercised. are generally limited by regulation to access charges of less than € 0. to impose new regulations to limit the access charges of small (non-dominant) fixed operators – they were unilaterally imposing fees of several cents per minute.104 Long distance network operators were obliged to make oneway payments (access charges) to local network operators. 104 A series of mergers over the past few years have blurred these distinctions today. exchange traffic pursuant to negotiated arrangements. 105 For an analysis of countervailing buying power and termination fees. Mobile operators. The dominant fixed network operator interconnects with other networks pursuant to CPNP arrangements at regulated rates. Canada and Singapore are working well. known as Regional Bell Operating Companies (RBOCs). but they are still reflected in U.
109 This is the usual expectation. 112 It is unusual. independent of the relative sizes of the networks. This is true whether the termination fees are low or high. Network operators will tend to be reluctant to offer service at a average incremental price below their average incremental cost.2. because they do not incur termination charges in this case. It is not always the case in practice 110 Laffont/Tirole (2000). 111 See Laffont/Tirole (2000).Final Report: The Future of IP Interconnection 63 3. 108 Where flat-rate plans are available that include calls to networks that collect high termination fees. pp 201-202. It is. however. however.113 If an operator were to set its retail price for off-net calls below the level of the termination fee. for adoption of services. . however. The willingness of network operators to charge less for on-net calls than for off-net calls strongly suggests that the network operators themselves view termination fees as being well in excess of the real costs that they themselves incur. For on-net calls – calls from one subscriber of a network to another subscriber of the same network – operators can and often do offer lower prices that correspond to the operator’s real costs.111 For off-net calls (calls to a subscriber of another network). the originating network might choose to disregard it and offer a flat rate at retail.02 per minute). however. 3. not neutral even if traffic is balanced. as Laffont and Tirole have noted: “It is correct that a change in the access charge need not affect the (absence of) net payment between the operators.109 and if they were to charge identical termination fees to one another.112 even where termination payments are likely to net to zero. Where the CPNP payment is small.108 If traffic were balanced between two operators. are often too high to ignore – they sometimes represent the preponderance of the total cost of the call. Mobile termination fees set in the absence of regulation. and for use of the service once adopted.”110 Each network operator views its payments to other network operators as a real cost. 113 Again. more than about € 0. then there would be a zero net payment between them. one might be tempted to think that termination fees do not matter very much. but the access charge affects each network’s perceived average incremental cost and therefore retail prices. Since termination fees have no impact on net payments under these conditions. it is unusual to see retail prices below a “high” wholesale call termination rate. but it is not unheard of. where the CPNP wholesale payment is large (as a rule of thumb.3 Implications The use of CPNP versus Coasian arrangements has significant implications for retail price.3. an operator might choose to ignore a termination fee that constitutes only a small fraction of the total cost of the call. it usually leads to an even higher CPP retail price per minute.1 Relationship between wholesale arrangements and retail arrangements The CPNP wholesale payment tends in effect to set a floor for the retail price of the call. Flat rate plans typically exclude the ability to call phone numbers associated with high CPNP wholesale fees.2. the associated monthly charges are usually so high as to be unattractive to most potential subscribers. therefore.
2. 3. FCC.S. (2) services associated with high CPNP termination fees are typically excluded from flat rate retail plans. each at a price below cost.115 114 See EU-Commission (2007). but also the actual use that is made of them. . The original source of the data is a series of well-regarded quarterly surveys by MerrillLynch. These tendencies are much more visible in mobile services than in fixed. retail price per service minute. for reasons that we return to shortly. Comparative international data suggest that (1) high CPNP termination fees lead to high retail price per minute.114 Figure 17 shows the relationship between the service-based revenue per minute of use (MoU). and CPNP The implications of termination arrangements on consumer welfare are quite complex. These data correspond to the last quarter of 2005. There is a slight anomaly where Merrill-Lynch correctly counts minutes for Bill and Keep countries. selected data are cited annually in reports from the U. Servicebased revenue per minute is a useful normalized proxy for retail price – it has the advantage that it already reflects not only the plans that are available. and (3) end-users consume less of services that have high prices.64 Final Report: The Future of IP Interconnection it runs the risk that its customers will capitalize on the favourable price by placing too many off-net calls. Note that the y axis of the graph reflects a logarithmic scale. but counts on-net minutes in CPNP countries only once rather than twice – this does not change the conclusions that follow. expressed in US dollars.3. thus generating a net payment (an access deficit) to other operators. because mobile termination fees are much higher than fixed – about nine times higher in Europe. and thus does not take handset subsidies into account.2 Demand elasticity. in comparison with the total number of MoUs for mobile services in a number of leading economies around the world. 115 Service-based revenue excludes equipment.
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Figure 17: Mobile revenue per MoU versus MoUs per month
Mobile Revenue per MoU versus MoU per Month
1000 US, 798
Minutes of Use (MoU) (logarithmic scale)
Hong Kong, 395 Singapore, 313
Canada, 403 South Korea, 322 Finland, 279 France, 235 Australia, 178 Sweden, 141 UK, 146 Spain, 150 Italy, 126 y = 685.2e-7.1487x R2 = 0.7873 Japan, 147
100 Germany, 81
Service-based Revenue per Minute of Use (MoU)
wik-Consult, based on data from the US FCC’s Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services, 11th Report (11th CMRS Competition Report), September 2006, Table 12, based in turn on Merrill Lynch Telecom Services Research, Interactive Global Wireless Matrix 4Q05.
Countries where service-based revenue per MoU is high tend to have low usage – for example, Germany (with service-based revenue of $0.28 per MoU) has just 81 minutes of use per month. This suggests that prices are so high that end-users are reluctant to use their mobile phones. Conversely, countries where service-based revenue per MoU is low tend to enjoy high usage. Singapore (with service-based revenue of $0.08 per MoU) has a substantial 313 minutes of use per month. The United States (with service-based revenue of $0.07 per MoU) has a whopping 798 minutes of use per month. It is possible that US consumers are responding not only to low prices overall, but also to the prevalence of flat rate arrangements – they tend to perceive the average incremental cost of each additional phone call as nil, and are therefore willing to use their mobile phones with abandon. Economists speak of the price elasticity of demand. Where prices are high, consumer demand is suppressed. Where prices are low, consumer demand is stimulated. The line on the graph represents a best-fit (regression) exponential trend line, and might be viewed as an estimate of this demand elasticity. This trend line appears to be linear because the data have been plotted on a logarithmic scale. The trend line is associated with an R2 value of 0.787, a goodness of fit measure that suggests that the trend line fits
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the data well. At the same time, one should be careful about interpreting this data as elasticity – consumers in Germany cannot really substitute a U.S. mobile service for a German mobile service, and Japanese consumers may be either more or less talkative than Italians for cultural reasons.116 Nonetheless, the data strongly suggest that demand is elastic, which is to say that demand responds strongly to price.117 Companies seek to maximize profits. Other things being equal, they will seek to maximize gross revenue as well. The Average Revenue per User (ARPU) is a useful measure of the contribution of each end-user to that gross revenue. In this case, high prices are not necessarily indicative of high ARPU. To understand this, consider that the (service-based monthly) ARPU can be viewed as being the product of the service-based revenues per MoU and the MoUs per month.118 Germany’s service-based revenues per MoU are four times higher than those of the US, and nearly twice as high as those of France; however, U.S. usage is ten times higher than that of Germany, while French usage is three times higher than that of Germany. Germany’s service-based revenue is four times higher than that of the US, but U.S. (service-based) ARPU is nonetheless 2.5 times higher than that of Germany. Germany’s service-based revenue per MoU is nearly twice as great as that of France, but French ARPU is nonetheless nearly twice that of Germany.119 This is a striking observation – it suggests that European mobile operators in many cases could actually increase ARPU by lowering prices.120 Moreover, to the extent that they are maintaining high prices to enhance profits at the cost of suppressing use, the suppressed usage should be viewed in economic terms as a deadweight social loss, a loss of consumer welfare. In other words, these high prices clearly harm consumers, and are so high as to also reduce European gross revenues and possibly in some cases the profits of the firms themselves. It is also worth noting that high retail unit prices do not necessarily correspond to higher unit costs. Other things being equal, one would expect high density countries to have lower unit costs for mobile service than low density countries; however, the U.S., Canada and Australia (all relatively low density countries) all have lower service-based
116 If mobile roaming charges were negligible, perhaps they could. 117 In fact, this simple graph suggests that demand might be far more elastic than most economists have assumed. 118 In general, for any point on the graph, a country’s ARPU is the area from the (0,0) point to the point associated with the country. In light of the logarithmic scale, however, one cannot simply compare areas. 119 The Merrill-Lynch data are expressed in U.S. dollars at then-pertinent exchange rates. The comparison would look a little different at today’s exchange rates, but not enough to change the conclusions. 120 In the rather extreme case of Germany, the unusually low usage might suggest the presence of double marginalisation. The combined effects of high wholesale termination rates and even higher retail prices have an effect equivalent to that of multiple monopolists in vertically related markets, and collectively drive usage levels down even lower than the level of monopoly pricing (i.e. below the levels that are profitable for the firms themselves). We have not assessed the degree to which this might be present in other Member States.
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revenues per MoU than do Japan and Germany (both of which have high density). Nor could technological differences have driven lower unit costs – the U.S. market is about 45% comprised of GSM, at frequencies not so different from those in use in Europe. The CPNP arrangements that are universally in place in the European Union are widely accepted, but they are not without cost. To the extent that they lead to higher unit prices at retail, and thus to suppressed use of services, they negatively impact consumers.
220.127.116.11 CPNP and mobile adoption Most experts feel that CPNP, particularly when associated with relatively high termination fees, tends to lead to rapid take-up of mobile services.121 Mobile operators are motivated to offer plans (especially pre-paid plans) with no initial fee and no monthly subscription fee, and to subsidize the cost of the end-user’s handset, largely because of termination fees that are well in excess of cost. Even if the customer makes few (or no) outgoing calls, the calls that the end-user will receive make it profitable to gain him or her as a customer. Bomsel et al. (2003) found that high fixed-to-mobile (F2M) termination rates resulted in the involuntary transfer of many billions of euro per year from fixed customers to mobile operators.122 Fixed operators rarely complain, because their own mobile operations benefit; however, the system as a whole may have an overall tendency to distort the evolution of network, favouring the development of mobile networks over that of fixed to a degree not otherwise warranted.123 Mobile operators may have some tendency to compete away some of these profits through promotional handset subsidies and other promotional incentives, but they retain more than they return to consumers.124 Promoting penetration of Publicly Available Telephone Services (PATS) is a meritorious goal in general, but it is not clear that promoting mobile penetration at the possible expense of fixed is an appropriate policy goal for the EU at this point in time. According to the 12th Implementation Report, mobile penetration in the EU25 as of October 2006 was 103.2%, having increased 8.2 percentage points from October 2005. This is to say that the number of mobile subscriptions was greater than the number of inhabitants. Seventeen of the twenty-five then-current Member States had penetration rates in excess of 100%. Only France (82%), Malta (83%) and Slovakia (86%) had penetration less than 90%.125
121 This is the prevailing wisdom, but it is not universally accepted. See for instance Littlechild (2006) and Dewenter/ Haucap (2005). 122 WIK estimates the financial transfers from fixed to mobile networks in Germany to have been about 10 ten billion (10 ) euro for the period 1998-2006. 123 For example, these transfers may lead to a faster decline of fixed network subscriptions and of fixed network usage than would otherwise be the case. They may be a significant factor in the dramatically rapid decline of fixed subscriptions in some Member States. 124 See also Littlechild (2006) and also Genakos/Valletti (2007). 125 See EU-Commission (2007), pp. 37-38.
to be sure. particularly at a time when the fixed network appears to be critical for the next phase of broadband deployment. 128 Page 18. There are also a number of other factors that could affect the welfare maximizing charge.3. one leading expert127 has argued cogently not only that there is no consensus on the proper theoretical basis for the termination rate. Historically. Valletti and Houpis (2005) find that “…the proper regulation of F2M termination charges is a challenging task and the inter-relationships between the different pricing choices and the scope of regulatory intervention are not always obvious. the type and intensity of competition in the mobile outbound market. an imperfect measure of access to PATS. computing this cost involves numerous complexities. and growing. mobile penetration is clearly high.128 With that in mind.” 126 Eurobarometer. In practice. who is quoted in this section. . and the pattern of demand of mobile subscribers. they argue that “… including fixed and common costs [as a markup to regulated termination charges] is likely to be a flawed policy. the existence and significance of network externalities. 3. 127 Littlechild (2006). the size of fixed and common costs in the mobile market and the size of any (un-internalised) call externalities. and possibly a range of other effects as well. In fact. including the degree of competition in the fixed telecommunications market. …[T]he direct intervention to set the welfare maximizing fixed to mobile termination charge requires a regulator to form a view on the demand elasticities. have felt for quite some time that an optimal termination rate would also take into account network externality benefits on the part of the recipient.4 What is the “right” call termination rate? Determining the “correct” termination rate is not at all straightforward. It is not clear that it is appropriate to provide further stimulus to the mobile network at the expense of the fixed network.68 Final Report: The Future of IP Interconnection Penetration as routinely measured (dividing the number of subscriptions by the number of inhabitants) is. Economists. however.” It drives the termination rate too high.2.126 Nonetheless. but also that there never will be. A Eurobarometer survey found that 20% of Europeans do not have access to a mobile phone. Armstrong and Wright (2007) find that the termination rate that optimizes welfare is less than marginal cost by the value of the network externality to the recipient of the call. E-Communications Household Survey. many regulators have assumed that the “correct” call termination rate should be set at the average incremental cost of terminating the call. July 2006 (reflecting December 2005 – January 2006 survey data).
There are strong arguments that current termination rates in Europe are too high. it may be possible to identify a wrong one.3 IP interconnection models The majority of connections between two IP-based networks today take place according to one of two basic interconnection models: transit and peering. . you are using transit.Final Report: The Future of IP Interconnection 69 Littlechild. The main conclusions that we draw are: • The post-2003 European regulatory practice is clearly superior. but the transit customer is not under any obligation to carry traffic for the transit provider. • • 3. to the previous practice of allowing mobile operators to set these rates unilaterally. for example a DSL or cable broadband service.4. 130 Littlechild (2006). We discuss this at length in section 5. although not necessarily by that name: If you subscribe to an Internet access service. The rates that are being set are nonetheless greatly in excess of efficient levels. 129 A Sisyphean task is unending and unrewarding. Most readers are familiar with transit services. not the other way around. The service that a large Internet Service Provider (ISP) provides to a large business enterprise. who is not only a prominent economist but also an experienced regulator. or to a smaller or less well connected ISP. With the consultancy fees available there is no likelihood of economists running out of ideas or agreeing with each other. the transit customer. if not impossible. for a regulator to determine a “perfect” rate. but It is difficult. The name derives from the Greek legend of King Sisyphus. Transit is an inherently asymmetric model.”130 While it is impossible to say what the right charge is. to the Internet for a fee.2. raises similar concerns about the Sisyphean task129 of attempting to compute a correct termination rate: “The idea of an ‘optimal price’ is a chimera: there are as many optimal prices as there are different specifications of the underlying economic model.1. The transit provider (the ISP) carries traffic for the transit customer. With the cross-subsidies and economic rents at stake the interested parties can be expected to continue to devise new models and to argue their corner. to the point where they strongly deter people from placing calls to mobile phones. is on a larger scale but is not fundamentally different from your individual transit service. Regulation of termination charges is a Sisyphean task. The transit customer pays the provider. who was compelled to roll a stone up a hill and watch it roll down again for all eternity. in terms of welfare. A transit service provider connects you.
… Transit is usually a bilateral business and technical arrangement.doc. peering has often been done on a bill-and-keep basis. page 7.70 Final Report: The Future of IP Interconnection If transit were the only way for ISPs to interconnect. … Transit is an agreement where an ISP agrees to carry traffic on behalf of another ISP or end user. and also a potential single point of failure.org/fg/fg4/ISP_Interconnection. and possibly also in terms of robustness and reliability. described131 peering and transit in this way: Peering is an agreement between ISPs to carry traffic for each other and for their respective customers. by contrast. Transit. an industry advisory council to the U. where two providers agree to accept traffic from one another. With peering. In most cases. Peering is usually a bilateral business and technical arrangement. … is typically used where both parties perceive a 131 Report of the NRIC V Interoperability Focus Group. … Historically. installation support. Peering where there is no explicit exchange of money between parties. and Network Operations Center (NOC) support. then the only possible structure for a fully interconnected Internet would be a logical tree structure. the transit provider carries traffic to and from its other customers. as part of the transit arrangement. without cash payments. and to and from every destination on the Internet.S. but not for third parties. available at http://www. Peering thus offers a provider access only to a single provider’s customers. and where each party supports part of the cost of the interconnect. with a single ISP at its root. Peering does not include the obligation to carry traffic to third parties. In a transit agreement. “Service Provider Interconnection for Internet Protocol Best Effort Service”. The Network Reliability and Interoperability Council (NRIC). ISPs exchange traffic for their respective customers (and for customers of their respective customers). . Such a tree structure would raise serious concerns in terms of competition policy. local telecom provisioning. such as Service Level Agreements. there is an alternative way for ISPs to interconnect. The single ISP at the root of the tree would be a potential competitive bottleneck. the ISP often also provides ancillary services. Happily. where one provider (the transit provider) agrees to carry traffic to third parties on behalf of another provider or an end user (the customer).nric. FCC. Peering is a substantially symmetric form of network interconnection. usually provides access at a predictable price to the entire Internet. and from one another’s customers (and thus from their customers’ customers).
this 95th percentile measurement corresponds to a “busy hour” measurement. 136 Transit agreements associated with web hosting may continue to reflect traffic volume or intensity. however. it is a substantially different service from transit. this throttling based on the size of the customer access line is less and less meaningful. Other pricing arrangements have existed at various points in time. typically based on a 95th percentile of traffic samples taken at intervals of. 134 In reality. no provider can guarantee access to every single IP address. in a sense. 133 There is some tendency in the trade press. al. which reflect near-peak traffic and is closely related with the additional capacity needed to carry the traffic (which is once again roughly equivalent to CBP). but not always. Peering is often. Note that the NRIC definition of peering includes paid peering (which differs from payment-free peering only in the level of payment. not the rule. they have much in common with Capacity-Based Pricing (CBP) in the switched PSTN/PLMN world.3. fifteen minutes. large corporations). say. to treat peering as if it were effectively a transit service provided without cost. . and both paid peering and partial transit have had their role to play in the Internet for at least as long. Peering therefore is fundamentally a barter relationship.132 Peering and transit are thus distinct. This is especially true for broadband services to individual consumers. From the ISP’s perspective. usually dependent on the maximum traffic that the user could possibly send. particularly for enterprise customers (e. provided without cost. In the mid-nineties. many ISPs charged for transit based on actual traffic characteristics. It is also worth noting that transit arrangements exist that offer access to portions of the Internet. mutually complementary services. however. A difference is that these transit prices are usually set by the ISP in response to market forces. and occasionally in the academic literature.1 Transit Transit is. The bandwidth available to the consumer is physically limited by the size of the “pipe”. and that the NRIC definition of transit includes partial transit in the sense meant by Faratin et. In fact. (2007) argue that changes in the nature of the Internet. not by the regulator.Final Report: The Future of IP Interconnection 71 roughly equal exchange of value. 135 As broadband and fibre interfaces to the home take on progressively higher maximum bit rates. are leading to new forms of interconnection including paid peering and partial transit. notably traffic imbalance.136 132 Faratin et.134 Transit prices are most often flat rate per unit time. This was a perfectly reasonable system.135 To the extent that these prices reflect the incremental capacity that the ISP must deploy. The transit customer pays the transit provider for access to the entire Internet. the customer access line.g. but customer preference for flat rate was strong – sophisticated corporate users were willing to pay a surprisingly large premium for the certainty of knowing that they would not find one time “spikes” in their bills.133 3. traffic imbalance has been a major consideration in Internet interconnection for more than ten years. al. the simpler of the two services. providers come close enough to satisfy their customers. not at all in the nature of the service). but not to all – such arrangements are the exception.
3. These ISPs can choose to use peering as an economic optimization – they peer with another ISP primarily to offload traffic from their transit connection. and thus to reduce their costs. as depicted in Figure 11 below. ISPs attempt to peer with those IP-based networks where peering is most advantageous. and could therefore reach substantially all Internet destinations by means of transit. All other ISPs have a transit arrangement with some transit provider. . Peering might possibly also improve the reliability and the performance of their service in comparison with use of the transit connection. There are also infrastructure costs. They are sometimes referred to as Tier 1 ISPs. including traffic for their respective transit customers.137 They are richly connected to one another by peering.72 Final Report: The Future of IP Interconnection 3. It is not technically feasible to peer with all of them. and to use transit to reach the rest. The transit provider might have routes to a few destinations that would otherwise be inaccessible.2 Peering Peering serves two distinct but closely interrelated functions in the Internet: • A few large. no ISP would attempt to peer with all other networks. each peering arrangement requires personnel resources to maintain over time – not only operationally. Instead. but also contractually. These transit connections typically carry very little traffic. • There are at a minimum thousands of independent IP-based networks in the world. 137 Even a large and well-connected (backbone) ISP might find it useful to maintain a transit relationship as something of a safety measure. Each peering relationship represents an exchange of traffic between a pair of ISPs. Aside from that. This implies an unbroken chain of downstream transit arrangements from a pair of peering ISPs to their respective customers. well-connected Internet service providers have no significant need for a transit provider. For all of these reasons. and for respective transit customers of their transit customers.
and that there are in most countries no obligations to peer and no set prices for interconnection. it is natural to wonder: • • How do ISPs decide with which other ISPs they will peer? How do they charge one another? . and may reflect volume of traffic or near-peak traffic level. These arrangements collectively imply a roughly hierarchical structure for Internet interconnection. A richly interconnected mesh of Tier 1 ISPs exists at the top of this hierarchy.Final Report: The Future of IP Interconnection 73 Figure 18: Two peers and their respective transit customers Upstream C D ISP ISP Peering Connection B ISP ISP ISP ISP E ISP ISP Transit Arrangements A Downstream ISP ISP Parties A–B B–C E–D C–D Interconnection Arrangement Transit Transit Transit Peering Typical Nature of Agreement Bilateral Bilateral Bilateral Bilateral Typical Commercial Arrangements Payment reflects capacity. based on Gao (2000). A succession of smaller ISPs have transit relationships to these Tier 1 ISPs. and often have a sparse network of peering connections to one another. At the lowest tier of the hierarchy (the “leaves” of the hierarchical tree) are networks that have no customers. together with their individual computer systems and users. Given that ISPs cannot peer with every other ISP (for a range of practical reasons. Often done without payment Source: wik-Consult. some economic). some technical. This roughly hierarchical structure makes the Internet as a whole cost-effective and manageable.
The bit-Kilometre product could be unequal due to the relative geographic scope of the two ISP networks. Chapter 14. they may be providing the competitor with an advantage that will ultimately hurt them in the marketplace. traffic sent to another network travels less distance and is thus inherently less expensive to carry than traffic received from the other network. A network operator has to invest in order to reach a location at which it could “meet” a prospective peering partner. but also reflects competitive considerations. (2007). These factors might come into the negotiation in terms of ensuring that the parties have enough traffic to exchange to ensure that the transaction costs are warranted. 141 See Marcus (1999). among ISPs that use shortest exit routing. . For this reason. by reduced expenditure for transit arrangements). multiplied by the distance that it is carried. Due to a phenomenon known as shortest-exit routing. this will tend to be the largest ISPs. or it could be unequal because of traffic asymmetries. Where there is rough parity. number of IP addresses served.) 140 On the other hand. some large ISPs look for a rough parity in bit-Kilometres in the peering arrangements. The decision is not just about revenue maximization. and also to accept the transaction costs associated with managing another complex relationship. they are motivated to peer under even-handed terms. 139 For an explanation of shortest exit routing (sometimes referred to as “hot potato routing”). an ISP may have to carry traffic received from a peer further than would be the case if the same ISP received the same traffic from a transit provider. al. This presumes that each ISP’s costs are roughly driven by the amount of traffic carried. and total traffic carried. which typically implies additional infrastructure investments.141) For this reason. often with no money changing hands. Peering is often not charged for. however.139 Whether a firm will choose to make these infrastructure investments. See also Faratin et. The reason for this is that they and their peering partner both compete in the end market for the same end-users. traffic symmetry (and thus the bit-Kilometre product) is generally independent of most other measures of the relative “size” of the network.74 Final Report: The Future of IP Interconnection The short answer138 is that firms make these decisions primarily as an exercise in costoptimization. Large ISPs tend to have an especially strong preference for peering exchanges where they feel that they derive at least as much benefit as the other ISP. including number of customers. but that a range of marketing and practical factors come into play. depends primarily on whether the ISP expects to save money overall (for example. Other things being equal. If their competitor derives more benefit than they do from the interconnection. that does not mean that it is without cost. see Marcus (1999) or refer to the NRIC V (FCC) report on ISP interoperability (op. but they are not directly related to traffic balance or comparability of costs. ISPs tend to be motivated to exchange traffic by peering with those ISPs with whom they have the greatest volume of traffic to exchange. cit.140 (As previously noted. web hosting ISPs (which tend to send more traffic than they receive) tend to be more motivated to peer than networks 138 The discussion that follows is largely based on first hand experience negotiating peering arrangements for one of the largest Internet backbones in the world.
Peering is a true Coasian arrangement. and (3) mature network operation capabilities.S. as shown in Table 1 below. or might agree to peer only subject to payment. The systems achieve somewhat similar results. Occasionally. Termination charges would still be set at levels far in excess of those that maximise welfare. .S. but they rest on different foundations. some have established a set of internal decision guidelines that they use in negotiations with other ISPs. The reasons for this are tied to network externalities. these guidelines have been published. Farrell and Saloner (1985). guidelines seek to ensure some combination of (1) rough parity of the bit-Kilometre product. and Cremer.Final Report: The Future of IP Interconnection 75 that primarily serve consumers (which tend to receive more traffic than they send). It is for reasons of traffic asymmetry (and the resulting cost asymmetry) that web hosting ISPs sometimes find themselves in peering disputes with ISPs that primarily cater to consumers (“eyeballs”) and thus receive their traffic. There are similarities to the Coasian (generally Bill and Keep) reciprocal compensation arrangements among mobile operators and non-dominant fixed operators in the United States. The U. If the disparity in cost is large enough.S. Rey and Tirole (2000). the ISP that perceives its costs as being higher might decline to peer. Our assessment is that a pure Coasian framework is insufficient to address the call termination monopoly associated with the voice service. a generally unconstrained commercial negotiation. In order to simplify the internal decision process and to reduce the risk of disputes. Mobile Operators Obligation to Interconnect Applies to all carriers. but there are also noteworthy differences. Some level of regulatory intervention is required. Bill and Keep U. Backbone ISPs No regulatory obligations in most countries. Constraints on fees charged Source: wik-Consult Must by law be reciprocal (equal in both directions). Many ISPs receive far more requests to peer than they can profitably accommodate. There is also a tendency for small ISPs to be more motivated than large ones to peer. Generally unconstrained. but may not be the best way forward for Europe. Some backbone ISPs adhere voluntarily to guidelines or to principles of non-discrimination. Table 1: Coasian arrangements: Backbone peering versus U. All of this implies a complex decision process. There is no standard formula for payment. and are explained in Katz and Shapiro (1985). Typically. (2) a sufficient volume of peering traffic to make the connection worthwhile. FCC’s approach is interesting inasmuch as it is relatively unintrusive.
not technical. The technologies used (often including DiffServ and MPLS) are not particularly difficult. What is sometimes lacking in the discussion of QoS is the fact that differentiated QoS has been commonplace within individual networks for perhaps ten years now.3 Differentiated Quality of Service (QoS) in the Internet today With the migration to Next Generation Networks.3. The reasons appear to be economic. there has been keen interest in the implementation of differentiated levels of Quality of Service (QoS). and have been deployable for many years. We return to these points in the next chapter. implementation of differentiated QoS between networks is rare or nonexistent. .76 Final Report: The Future of IP Interconnection 3. Nonetheless. but has not been implemented to any significant degree. It has been discussed extensively in conjunction with IP-based interconnection.
but there are several that are of particular interest in an IP-based data communications network: • The end-to-end delay (reflecting both the average and the variability of delay) through the network. QoS between networks has failed to deploy. and concludes with a discussion of Network Neutrality. Technical and economic considerations tend to confirm what U. and possibly also due to incorporation of multimedia and streaming services like IPTV and Video on Demand [VoD]).Final Report: The Future of IP Interconnection 77 4 Differentiated Quality of Service (QoS) Differentiated QoS is closely interrelated with undifferentiated interconnection. not voice or video per se. however. that customers do not perceive much difference most of the time. • Packet protocols in general. Applications that depended on reliably receiving all packets would use communication protocols (for . or even a few minutes. and shipped over the network as quickly as capacity permitted. There are many misconceptions regarding QoS that need to be addressed. Providers of IP-based publicly available Electronic Communication Systems (ECS) have therefore not been sufficiently motivated to strike deals with their competitors.1 Application requirements The Quality of Service (QoS) of a network has many dimensions. 4. even though QoS within networks has been widely implemented. the packets could be either delayed or else dropped outright. If an email is delayed for a few seconds. Consequently. experience already suggests: namely. data could be broken up in small chunks. and the IP protocol in particular. The thought was that data traffic typically is not highly delay-sensitive.S. In the event of a momentary overload of network capacity. and are consequently not willing to pay much of a premium for better-than-best-efforts QoS. It then reviews the economic background. users will not be greatly distressed. This chapter explains the application requirements that drive the need for QoS. and The probability of loss of a packet. QoS within and between networks has been technically feasible for perhaps ten years. or packets. QoS is supposed to be an important sales driver for NGN (primarily due to the integration of real time services like VoIP. QoS will not necessarily fare better in NGN than it has in the Internet until and unless these challenges are properly understood and addressed. for transmission. then goes on to discuss technologies in support of data transmission and of accounting for QoS. were originally created in support of data transmission. but it poses unique regulatory challenges. however. and has been at the centre of the Network Neutrality debate in the United States.
and vice versa. and with broadband speeds to home.” C. From the earliest days of the Internet and its predecessors. all is well. it was difficult or impossible to consistently achieve the necessary delay characteristics for real time bidirectional voice. Version 2 (ST-II). It is important to note at the outset that delay and loss are not a major concern for all voice traffic. As long as the overall probability of a packet arriving too late (which depends on both the mean and the standard deviation of delay) is sufficiently low. In an era when consumer access at home was primarily limited to dial-up access at speeds of not more than 56 Kbps. there is a substantial likelihood that both parties to the call will try to speak at once. delay and loss are important to bidirectional real time voice and video. but its roots go back to the late seventies. delay or loss of packets does not represent a failure of the network. The receiving system can establish a buffer of audio packets. Experimental Internet Stream Protocol. The motivation for the original protocol was that IP … did not provide the delay and data rate characteristics necessary to support voice applications. there has been interest in the transmission of voice and video over the Internet. In an IP-based network. Topolcic. listening to the radio over streamed audio – moderate delay and loss are not a problem as long as the listener is willing to wait a second or two for the program to begin. By 1990. it is a part of the normal operational behaviour of these networks. They are important only when both sides are interested in speaking (transmitting) – in other words. If delay exceeds roughly 150 milliseconds. because neither knows that the other has already begun to speak. The IP protocol is optimized for applications that are somewhat tolerant of loss and delay of packets. variants of the IP protocol family had already appeared to “… to support efficient delivery of streams of packets … in applications requiring guaranteed data rates and controlled delay characteristics. and the human ear is good at compensating. For one way traffic – for example. both the mean (average) and the standard deviation (a measure of variability) of delay must be bounded.78 Final Report: The Future of IP Interconnection example the Transmission Control Protocol [TCP]) that would deal with occasional dropped packets. and can use the buffer to “smooth out” minor variability in packet delay. Many of the IP-based systems of the eighties and the early nineties could not reliably achieve round-trip delay of 150 milliseconds. however. the days of the ARPANET. in sharp distinction to traditional telephony networks. With today’s high speed network core. For a delay buffer to be effective. especially in conjunction with transoceanic transmission via geosynchronous satellites (where round trip delay is about 270 milliseconds). Voice over IP (VoIP) is entirely workable.142 The impact of delay on realtime voice was well understood from studies of telephony networks. October 1990. Even an occasional lost packet is not a catastrophe – the CODECs (encoding devices) are often smart enough to interpolate for the missing data. . rather. it is possible to a point to accept a bit more variability where the average delay is low. 142 Many assume that this is a recent phenomenon.
and inter-network QoS has been technically feasible for perhaps ten years. Differentiated QoS is. shooter IRC Audio Streaming Channel Surfing role-playing low Browsing. Banking Email Video Streaming cards. A normal voice telephony circuit requires 56 Kilobits per second (Kbps). the implementation of QoS to support voice traffic does not enable the designer to implement a significantly smaller or cheaper network – not unless he or she is willing to intentionally sacrifice performance for the non-delay-sensitive data traffic. although some require much more depending Key Concept Box 11: Quality of Service economics and engineering Differentiated QoS poses unique regulatory challenges. and are consequently not willing to pay much of a premium for better-than-best-efforts QoS. Customers do not perceive much difference most of the time. small relative to the total capacity available. networks need to be overengineered with massive excess capacity in order to carry voice properly. in the absence of QoS. in many cases. Internet packet protocols were originally designed to transmit data. If the core of the network is properly designed to carry non-delay-sensitive traffic. . potentially valuable for bi-directional real-time voice and video. nonetheless. racing. it will also tend to have sufficient capacity to carry the delay-sensitive voice traffic at adequate QoS under normal operating conditions. not necessarily voice and video. Shopping. With or without QoS.Final Report: The Future of IP Interconnection 79 Figure 19: Application requirements for stringent QoS General Applications Stringent Latency Requirements Stringent Latency Requirements high Gaming Applications VoIP Video Telephony high sports. Continued in Network Neutrality on page 94. however. board games strategy FTP low low low high high Bandwidth Requirements Bandwidth Requirements Source: wik-Consult It is also worth noting that the amount of voice bandwidth for which delay and loss must be controlled is. Conversely. The presumption is that one could implement a substantially less costly network if one were to implement differentiated QoS. It is often incorrectly assumed that. A compressed audio stream could require as little as 8 Kbps. QoS between networks has not been widely deployed. Intra. a network needs to be properly dimensioned to carry the offered load. both delay-sensitive and non-delay-sensitive.
the impact of QoS enhancement: and the technologies that can be applied. In technical terms. or (2) the end-user is unwilling to tolerate a second or two of delay each time that a new video stream is initiated (for example.2 The technology of QoS management As noted in the previous section. These video data streams thus represent most or all of the capacity of a typical broadband interface – in fact.80 Final Report: The Future of IP Interconnection on the encoding used. as for audio.1 The performance of IP-based networks in the absence of QoS management Delay has multiple components. no special attention to delay and loss is required. Compared to a run-of-the-mill consumer broadband access at a couple of Megabits per second. that wires and fibres do not run in a perfectly straight line. For streamed one way video. we consider the performance of IP-based networks in the absence of special QoS mechanisms. For most data applications. which is less than the speed of light in vacuum. there are exceptions. may care about delay that would not be of concern to most users. For example. the end-user is “channel surfing”). what does this imply? How can appropriate bounds be implemented? In this section. Similar considerations apply to video. This is a function of the distance that the signal must travel. Strict control of delay is required where (1) the video is real time bidirectional or multi-directional. and especially players of multi-player real time interactive games. a voice channel consumes less than one percent of available bandwidth. First. however. . they are the prime motivation for the deeper deployment of fibre into the access network. it is necessary to bound the mean and standard deviation of delay. and the speed of light143 – the 143 We are speaking here of the speed of light in a fibre or wire. Note. players of online games . 4.2. a high definition video stream might represent 8-11 Mbps. as long as the end-user is willing to tolerate a second or two of delay. including both VDSL and Fibre to the building/home (FTTx). but the amount of bandwidth required is far greater. as in the case of a videoconference. For video. and the probability of packet loss. there is the propagation delay through each link of the network – the time that it takes for light or electricity to reach its destination. not every video stream needs to have controlled packet delay and loss. A compressed video stream at conventional television quality might involve 2-3 Mbps of data. too. a buffer on the receiving side can compensate for typical variability in delay. 4.
147 This is computed using the Pollaczek-Khichine formula for an M/G/1 queuing system. pp.147 The exact service time is not critical for the “wave of the hand” analysis that follows. the percent utilisation should not exceed 90% for the busiest hour. but we can nonetheless make some general statements about these delays. See Marcus (1999).146 Under these assumptions. an IP-based network with fast links can perform quite adequately with busy hour load in the 80-90% range. 145 Contrary to popular belief. 148 There are some suggestions that this number is declining over time. this last being a function of the packet length.148 The average delay for the network as a whole is the sum of the average 144 The detailed arrival pattern of packets can also play a role. First. The same mathematics that are used to analyse wait time in a supermarket can be used to analyse the time that packets spend waiting for a transmission link or for the processing unit of an IP-based router. a typical traffic mix for the Internet in the past would reflect a coefficient of variation (a measure of variability) of about 1. Some will be much faster. The more interesting delays have to do with queuing – the need for one packet of data to wait for another in order to gain access to a shared facility. the variability of the time to service the packet.2. will generally be at least 155 Mbps. The total service time of the network will typically reflect dozens of links. Experienced network designers plan accordingly.144 Obviously. 321-322. See Marcus (1999). These delays can be analysed using a branch of mathematics known as queuing theory. and (3) to a lesser degree. Experienced designers compensate by designing their networks with a little extra tolerance. See Huston and also CAIDA (2007) . while packet length distributions may vary with the customer mix. but queuing theorists usually work with simplified mathematical models that ignore this aspect.Final Report: The Future of IP Interconnection 81 network designer should avoid needlessly circuitous routing of the traffic. one would reasonably expect the service time through each link in the network to average about 175 microseconds for a 155 Mbps link at 90% utilization with a coefficient of variation of packet length of 1.145 Third. Second. the large circuits inside the core of a modern IP-based network. but otherwise there is nothing to done about propagation delay. The queuing delay of packets of a link is a function of (1) the capacity of the link. not thousands. The queuing delays for the transmission links are the relevant ones to consider in this case – the queuing delays through the routers (based on the router’s processing time) are small enough to ignore for purposes of this discussion. there are substantial differences from one network or another. 146 See Marcus (1999). a standard dimension. performance will be very bad. (2) the utilisation (percent busy) of the link. however. or between high speed IP-based networks. If offered load exceeds capacity (load effectively greater than 100%). Each IP packet travels over a network of these queues.2. The unusually “bursty” nature of Internet traffic is such that the measured performance of IP-based networks can be somewhat worse than the most basic theoretical models would suggest.
. this will happen only rarely. rather. the mean is not the key issue here. In general. Differentiated QoS reduces the risk of disruption of real time voice or video due to momentary spikes in load.3. This explains why services such as SIPgate and Vonage function quite adequately most of the time.2. Similar considerations apply to packet loss. to prefer some packets over others. except in the case where a router or link is saturated. But the designer can choose: • To prioritise some packets above the normal best-efforts level. Fibre-based networks experience very little packet loss due to transmission errors. and possibly to prioritise others below that level. The point is.82 Final Report: The Future of IP Interconnection delays of the individual queues. It is often impossible for a normal end-user to distinguish between the quality of a fixed network voice call and the quality of VoIP over best-efforts IP.2. The normal performance of the Internet is good enough most of the time.2 The impact of management of QoS The network designer has a limited number of tools available to manage QoS. 4. To a make a long story short. as noted in Section 4. and corrects for many other potential problems.149 however. assuming that network designers have done their job properly. even in the absence of differentiated QoS. what fraction of packets require more than 150 milliseconds round trip. nearly all packets will arrive in time as long as no link in the path is saturated (load 100% or greater). packets are occasionally lost because buffers in routers overflow. This is not to say that QoS is irrelevant for VoIP. The speed of the circuits is what it is – the designer cannot make them faster for some packets than for others. that endusers who are willing to use mobile phones with less-than-perfect voice quality will probably find best efforts VoIP service to be quite a reasonable substitute for fixed network voice service at some appropriate price point. The relevant question is. • 149 Per Jackson’s Theorem. and also on the fixed propagation delay (which could represent tens of milliseconds where the distances are large). In the event that packets must be dropped. on the variability of the wait time. the point at which bidirectional real time VoIP is problematic? The answer to this question depends on the number of hops (links) through the network. rather.
but the data rate associated with that stream is fairly low in comparison with data traffic. it is by no means clear that volumes of Internet traffic are surging more than usual due to video.150 It is worth noting at this point what managed and differentiated QoS is not about. Conversely. First. the rate of growth has been slowing. the impact on non-prioritised traffic might be substantial. as noted in Section 4. VoIP data is much less “bursty” than typical data traffic. one can achieve lower average delay and also lower variability of delay. Conversely. even if they will not necessarily be obvious to the user. Second. in the absence of QoS. Thus. not accelerating. Intentionally assigning traffic that does not require real time delivery – email. Moreover. Current traffic growth year over year is about 50-60%. moreover. this is likely to work well. QoS is unnecessary (and needlessly expensive) for streamed one-way video as long as the end-user can tolerate a couple of seconds of delay at the outset. for instance. Prioritising video presents more complex issues. Even large volumes of VoIP traffic do not represent that much data volume. the benefits for the voice traffic (reduction of the risk of momentary overload of some circuit along a long path) are clear. they would derive only limited benefit from prioritisation. which is stil quite healthy. If we are talking about a network that carries data. it is not excessive in comparison with the rate of improvement in the price/performance of routing equipment and fibre optics (with DWDM). The presumption is that one could implement a substantially less costly network if one were to implement differentiated QoS.4. It is often assumed that. the packets that are disfavoured will have higher delay than in the nominal non-prioritised case. the degree to which non-voice traffic is likely to be slowed by prioritised voice traffic is not likely to be a concern. while video is likely to play a large role in bandwidth demands going forward. networks need to be over-engineered with massive excess capacity in order to carry voice properly.2. We question these assumptions. In essence. In the past few years. If the video streams represent a large fraction of the total traffic.3. because video is voluminous. Many authors assume that video is about to create an enormous surge in Internet traffic. and that QoS will therefore prove to be essential in order to maintain the price/performance of the network. Internet traffic has tended to roughly double from one year to the next for most years since the founding of the Internet. VoIP represents a fairly steady stream of packets. If only VoIP packets are favoured. substantial voice 150 These trends are discussed at some length in section 2. or peer-to-peer file transfers – to a lower-than-nominal priority can be advantageous for analogous reasons. by preferring one class of packets over another. nonetheless. .Final Report: The Future of IP Interconnection 83 Queuing theory provides formulae for prioritised queues.
Real time bidirectional voice and/or video clearly do.84 Final Report: The Future of IP Interconnection traffic. Conversely. this is simply incorrect.3 Where management of QoS is likely to be beneficial The discussion in the previous section suggests that differentiated QoS is not required for all applications. With or without QoS. both delaysensitive and non-delay-sensitive. Where would we expect better-than-best-efforts QoS to be beneficial? Packet delay is most likely to be an issue. 151 This statement reflects the authors’ practical experience in designing large IP-based data networks. the implementation of QoS to support voice traffic does not enable the designer to implement a significantly smaller network – not unless he or she is willing to intentionally sacrifice performance for the non-delaysensitive data traffic. rather than remaining on-net. or (2) there is a strong demand to provide instant response to channel surfing. If such a network core is properly designed to carry non-delay-sensitive traffic. . it will also have sufficient capacity to carry the delaysensitive voice traffic at adequate QoS under normal operating conditions. Unidirectional (streaming) video does not necessarily require QoS management as long as the user is willing to tolerate a second or two of delay at the outset to fill a delay buffer. and perhaps even streaming video. and (3) the video traverses the interconnection point.or multi-directional.151 Video could potentially change the above assessment – but video would imply a demand for differentiated QoS over the interconnection only to the extent that (1) the video is real time bi. • • • As noted in section 4. a network needs to be properly dimensioned to carry the offered load. and QoS management thus most beneficial: • • For slower circuits at the edge of the network. and/or When a natural or man-made catastrophe has occurred.2. Many data applications do not. not all applications benefit from better-than-best-efforts QoS.1. cable modem services) at the edge of the network.g. for reasons noted in the previous section. 4. For shared access facilities (e. and also that performance at high speed Points of Interconnection (PoI) in the core of large networks is unlikely to benefit greatly (in the most likely scenario) from special QoS arrangements for bidirectional real time voice. When one or more components have failed. When one or more circuits are saturated.
in the end-user’s own network – it may not be cost-effective to send the video in real time across an interconnection between networks.2. For reasons noted in section 2. It was eventually shut down. 4. at least one Internet Service Provider (BBN) had a working network based on RSVP.Final Report: The Future of IP Interconnection 85 Again. not due to technical problems. Where an enduser initiates video on demand.1 The Integrated Services Architecture (ISA) and RSVP In the early nineties. In fact. The common wisdom has been that these protocols were hopelessly complex. considers the ongoing evolution of standards in regard to QoS management. and MPLS/GMPLS. (Non-real-time transfer from the content provider to the cache does not require managed QoS. notably including RSVP. the video will often be stored or cached closer to the user.3. 4.2. and then explores the implications of differentiated QoS for network management and Operational Support Systems (OSS). DiffServ. the IETF evolved a much simpler communications protocol referred to as DiffServ (for Differentiated Services). due in part to implementation complexity.1. 4. but not every video stream will need managed QoS across an interconnection PoI. It was delivering services to real customers.4.2.4. This is particularly relevant to video data. as exemplified by the RSVP protocol. and are in use in many large networks today. This section considers each of these technologies. DiffServ enables hop-by-hop traffic management. QoS will obviously not be needed at the PoI unless data is actually sent across the PoI. which tends to be voluminous.) Video will certainly be a factor for managed QoS. linear data may continue for quite some time to be transmitted using non-IP-based cable television and PON capabilities. the IETF was active in evolving a series of relatively complex solutions under the rubric of the Integrated Services Architecture. DiffServ and MPLS are trivial to implement within a network.2. The IETF developed a number of mechanisms for QoS management. where selected packets . but rather because the company never found enough customers who were willing to pay much of a premium to use the RSVP-capable network. RSVP never saw widespread deployment. It was a technical success but a commercial failure.4 Technologies used to manage QoS A number of technologies are in widespread use already for management of QoS.2 Differentiated Services (DiffServ) In response to concerns over the complexity of RSVP and the ISA.
Still. it can provide adequate overall assurance at a statistical level. they would need to verify that each actually delivered services within its own network at the level of quality that it had committed to the other. It has generally been assumed that a network operator would be willing to provide better-than-best-efforts quality only to the extent that either the end user or another network operator were willing to pay them a premium to do so. The first is trivial. It is a natural complement to DiffServ. Even here. then. with Multi-Protocol Label Switching (MPLS) being perhaps the most common today.152 Finally. billing and accounting The implications for Operational Support Systems (OSS) in support of differentiated QoS tend to be overlooked in most discussions. 4. It is up to each router. and distinguishing among different marked classes of traffic is no harder. First.2. Second. Capturing first-order statistics on traffic sent between the parties is straightforward. and when – otherwise. To the extent that this implies the need to account for QoS-capable traffic. rather than end-to-end. Various techniques can then be used to ensure hop-by-hop performance. there is 152 At a minimum.4 Implications for OSS.3 MPLS/GMPLS Multi-Protocol Label Switching (MPLS) is a technique and protocol that can be used to implement differentiated QoS.86 Final Report: The Future of IP Interconnection can be marked as having application requirements other than best efforts. and less on the problem of how to ensure that someone pays for those movements.4. they would need to be able to perform spot checks so as to deter systematic violations. Technologists tend to focus more on the problem of getting the bits to move as they are supposed to move. and to deal with discrepancies between the measurements of the parties.4.3. some prior agreements would be needed as regards what is being measured. MPLS and GMPLS are discussed at length in Section 2. each would need some tools to deter fraudulent use or “gaming” of the system. Measuring traffic across a link would seem to be straightforward. to do what it can to implement the desired transmission characteristics (or to decline to do so). Finally. there would be the need to reconcile statistics.1. DiffServ provides a more limited service than RSVP in the sense that it assures performance only on a hop-by-hop basis. 4. it implies surprising complexity. the second and third are difficult.4. . a pair of network operators would need to agree on how much QoS-relevant traffic each delivered to the other.2.
Take one or three. otherwise any measures of variability (quantiles. 4. not for the use of the network. There is an old Dutch proverb: “Never go to sea with two compasses.Final Report: The Future of IP Interconnection 87 the risk that network A has a slightly different view of the traffic delivered on the link from A to B than does network B. Interest continues to focus on DiffServ and on MPLS. At the same time. even though both are measuring (different ends of) the same link using substantially similar tools. It might possibly be far simpler to bill.pdf. network A needs to ensure that network B delivered the committed performance. Particularly noteworthy in this regard is the Inter-provider Quality of Service white paper153 developed by the Communication Futures Program (CFP) at the Massachusetts Institute of Technology (MIT). .edu/resources/papers/Interprovider%20QoS%20MIT_CFP_WP_9_14_06. but rather for the services that benefit from differentiated QoS. Reconciling data would be challenging. there are challenges – in an IPbased NGN. Network A thus needs reliable performance statistics about network B’s network. and if so who might that trusted third party be? The challenges in verifying that the quality of service that was actually delivered was consistent with the quality committed are much more profound. and neither will want to rely on measurements provided by their respective end users. The MIT white paper was developed with substantial industry participation.4. standard deviation) are likely to reach different conclusions due to the perverse effects of the Central Limit Theorem (if two sensors sample the same distribution. whose statistics should govern? Is there scope here for a trusted intermediary. It seeks to develop a standard framework for standardized QoS classes.1. these networks are likely to be direct competitors for the same end users – network B is not about to let network A place sensors in its network.mit. Each network is likely to be skittish about providing internal performance data to one another. and for end to end 153 White Paper draft 1.5 The ongoing evolution of QoS-relevant standards The core IP-based technologies that are being deployed for QoS have changed only marginally over the past ten years. and for implementing measurement regimes. 2006. the service provider will not necessarily be the network provider. available at http://cfp. And sampling intervals need to be mutually agreed.2. too. There has been substantially more positive movement in regard to the development of practical QoS metrics for use between providers. the one that is sampling at more frequent intervals will tend to see an apparently more lumpy distribution). In this case. November 17. Here.” If the providers do not agree.
the MIT white paper represents important progress. Inter-provider Quality of Service. Figure 20: MIT reference model for inter-provider QoS Source: MIT CFP. they assume only two classes of service. Still. the economic transaction costs of reaching agreement may be reduced. the other oriented toward conventional best-efforts service. draft 1. The MIT work assumes multiple customers seeking services among a group of at least two interconnected networks.g.1. These metrics are then apportioned to the multiple networks involved in delivering the service (e. By providing standard service classes and measurement methodologies. or optionally a slightly more expansive group of networks including both core and access IP-based networks. one way variability of delay. one suitable for bi-directional real time VoIP. As a useful simplifying assumption. Provider A and Provider B in Figure 20 above). It is not the whole story – the most daunting challenges to deployment of inter-provider QoS continue to be economic rather than technical. with an average of five per second. These are measured using IPPM probes – one way measurement packets sent at irregular (Poisson-distributed) times. page 23. and one way packet loss. The White Paper defines suitable end-to-end values for one way delay. the MIT paper potentially represents a significant advance in achieving inter-provider QoS. . drawing heavily on the IETF IPPM metrics that have been stable for many years. By providing a standard framework for discussion and negotiations between providers.88 Final Report: The Future of IP Interconnection measurement. It focuses on end-to-end metrics.
with a higher price for the former. When an airline offers cheaper tickets to passengers who are willing to stay overnight on Saturday.2 Network externalities As explained in section 3. it reflects the greater willingness to pay (lower elasticity of demand) of business travellers. My telephone is worth more if there are a great many people whom I can call. but they manifest themselves somewhat differently in conjunction with differentiated QoS. In consequence. and also of the Internet. By definition. price discrimination may be linked solely to the willingness of the customer to pay.3 The economics of differentiated QoS This section introduces the basic economic factors that are relevant to differentiated QoS. the new service starts with a zero market share. it has nothing to do with their costs. In the absence of market power. and finally. and emergence of price discrimination.1.3. 4. Getting a new service launched in a sector dominated by network externalities can be challenging. the 154 See Hotelling (1929).1. but are in most cases unwilling to stay overnight outside of the Monday to Friday time frame. . It usually seeks to replace a service that has a substantial market share.154 When we buy a ticket for a train or an airplane. and a great many websites to which I can connect. we explore service differentiation in general. and may be largely unrelated to underlying costs.1 Service differentiation It has long been recognized that providers of goods or services could potentially achieve some pricing power and profitability by distinguishing their goods and services. this kind of price discrimination tends to enhance consumer welfare. then. incentives for interconnection. then. Deregulation of the airline industry. My Internet connection is worth more when there are a great many people to whom I can send an email.1. This is true of telephone service. network externalities. we take it for granted that we may be offered first class and second class tickets. A service may be most useful when a great many people use it (and not just because of economies of scale). Many of these are familiar themes from Chapter 3. many industries experience network externalities. First. rather. In some cases. Business travellers are willing and able to pay more.3. transaction costs. is generally acknowledged as having resulted in lower prices for consumers.Final Report: The Future of IP Interconnection 89 4. and by offering different qualities at different prices to different groups of customers. 4.
It might have great value if it were available to every destination on the Internet. The adoption of Internet Version 6 (IPv6. the value of deployment might be significant to those networks that implement it later.155 Agreements. Katz and Shapiro (1985)) that demonstrates that. in a market characterized by strong network effects. monitoring tools. firms are in general motivated to be fully interoperable. and away from the new. and thus tends to be to the benefit of all market players. A number of Internet capabilities are faced with similar economic challenges. because perfect interoperability would dilute the firm’s ability to exploit the market power that its large market share confers. then it is of limited value. these costs might be roughly linear in the number of networks with which that network maintains QoS-capable arrangements. both in absolute terms and relative to its next largest competitors. however. 157 See See Katz/Shapiro (1985) and Farrell/Saloner (1985). one firm has a large enough market share. For a given network.3 Transaction costs Extending differentiated QoS to each additional network implies transaction costs.156 4. The service has some value within a network. Differentiated QoS between and among networks is subject to these network effects.3. a new version of the Internet Protocol with a greatly expanded address range) and of DNSSEC (a security enhancement to the Domain Name System) have arguably been only glacial deployment due to similar network effects / transaction cost problems. 156 See Marcus (2004a). 4.90 Final Report: The Future of IP Interconnection externalities associated with the pre-existing service keep pulling the sector back to the old. If it were available to only two or three networks.4 Incentives for interconnection A recurrent theme in the discussion of IP interconnection is whether network operators will be motivated to interconnect (on reasonable terms) in the absence of a regulatory obligation. Thus. . There is a body of economic literature (most notably.3. Thus. but the initial benefit to the first two or three networks to deploy it is minimal. it is hard to get the process started. and it would be hard to get it to completion once it had been launched. If. Full interoperability implies the largest possible target market. and coordination in general would need to be put in place.3.157 155 The concept of transaction costs was introduced in Section 3.1. then that firm will prefer less-than-perfect interoperability. These concerns are not unique to differentiated QoS.
perhaps. would these operators refuse to interconnect with their most capable competitors? Might they block access to certain destinations? Might they intentionally and perhaps selectively degrade the quality of the interconnection? Might they relegate competitors to best-efforts service. how? In the absence of regulation.Final Report: The Future of IP Interconnection 91 Katz and Shapiro (1985) was formulated in terms of standards compliance. or perhaps both. a series of challenges related to network externalities and to transaction costs have inhibited deployment. For reasons noted in Section 4. the basic answer is obvious: Had the benefits of deployment clearly exceeded the costs.2 of this paper.159 In addition. as some proponents might claim. These considerations manifest themselves in a number of concerns as regards the quality of interconnection that IP-based network operators who have market power in one form or another might prefer. . The technology has been basically mature for a decade. Cremer/Rey/Tirole (2000) applies the Katz and Shapiro (1985) analysis to the question of the incentives that large Internet backbones have to peer with one another. keeping superior QoS as a competitive advantage for their own affiliated offerings? Are there countervailing forces that limit the ability of providers with market power in their ability to execute anticompetitive strategies? 4. 159 Assuming. but economists subsequently realised that the same analysis applied with equal force to network interconnection.2 has shown. that network operators with market power do not choose to degrade it. of course. Thus. and given its widespread use within networks. why has it been so slow to achieve deployment between and among networks? Differentiated QoS is not a new idea.3. and if so. 158 We speak from first hand knowledge. and the idea was extensively discussed by large backbone Internet service providers in the US many years ago. it would have deployed.158 As Section 4. Even in the absence of managed QoS.5 Slow deployment between service providers to date Given that the technology of differentiated QoS is not particularly challenging. From an economic perspective. but merit nonetheless. there are indeed questions as to whether the perceived benefits are too low. one might infer that either that the perceived costs are too high. the idea has technical merit – not as much. or that the perceived benefits too low. end-users are likely to perceive QoS as being adequate for VoIP most of the time. Might they be motivated to exploit their market power in anticompetitive ways.
or to outages). 4. Katz/Shapiro (1985) and Farrell/ Saloner (1985). or where links are saturated (due. to poor planning. Some services never get past the initial adoption hump. a body of economic theory says that.2.3. and were thus motivated to ensure that both players and content were available.4.161 160 See Rohlfs (2003). Users are unlikely to perceive a difference. In the absence of sufficiently strong demonstrated customer demand. cable television broadband systems) at the edge of the network. 161 See Cremer/ Rey/ Tirole (2000).g. and are therefore unlikely to be willing to pay a substantial premium. 4.3. CDs were successful because Matsushita and Phillips had commercial interests in both CD players and studios. in shared media (e.1 “Bandwagon Effects” and network externalities As previously noted. 4.1.5. As noted in Section 4..5. only when enough consumers had purchased VCRs did a video rental business emerge.3. as a function of the network effects associated with control of access to large numbers of customers.92 Final Report: The Future of IP Interconnection 4. to traffic “spikes”.3 Transaction costs For reasons noted in Section 4.5.3. QoS can make a greater difference elsewhere – for example.3 above. each QoS-capable interconnection agreement requires non-trivial management attention to maintain. it will tend to be motivated to implement less-than-perfect interconnection and/or interoperability in order to exploit its advantage. for reasons explained in Section 4.3. network operators have been reluctant to make the necessary investments.4 The Network Neutrality debate in the United States and elsewhere A new form of market power is possible in the IP-based world. for example. VCRs were initially purchased for time-shifting of television programs. .2 Benefits are often not visible to the end-user The performance of traffic between large ISPs will tend to be excellent most of the time and under most circumstances. It is difficult to get past the initial adoption hump in order to achieve critical mass. where a single firm controls a sufficiently large share of the user base. even in the absence of any special QoS management technology. getting a new service launched in a sector dominated by network externalities can be challenging. The economist Jeffrey Rohlfs160 has explained that different services historically got past the initial adoption hump in different ways.
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The concern that has most often been expressed is that a network operator might either block or degrade access to disfavoured content in order to favour its own content or affiliated content. For example, a network operator might strike a deal with one online bookseller, and impede access to competing booksellers. In one concrete instance, a small dominant wired operator blocked access to the Vonage VoIP service, apparently in order to hamper a competitor to its own conventional voice services.162 To date, there are few concrete indications of exploitation of this form of market power. The emergence of the Network Neutrality debate in the United States and (with somewhat less vehemence) in Europe reflects legitimate concerns over possible abuse of market power in connection with the Internet in the absence of regulation. It is no accident that this debate, which had been simmering for years, only reached a boil when three interrelated things happened163: (1) the FCC eliminated obligations of nondiscrimination toward content for providers of broadband access to the Internet;164 (2) the wholesale ADSL market segment in the U.S. collapsed165; and (3) the U.S. telecommunications industry underwent significant consolidation, where two of the largest Internet backbones were acquired by presumably dominant local incumbents.166 Violations of Network Neutrality could be viewed primarily as an anticompetitive manifestation of market power. The objectionable forms often represent a form of economic foreclosure, where a firm that possesses market power in one market segment attempts to project that market power into an otherwise competitive market segment upstream or downstream. At the same time, widespread violations of Network Neutrality could conceivably impact free speech and media pluralism in the longer term.
162 Consent degree in the matter of Madison River Communications, LLC and affiliated companies, available at http://fjallfoss.fcc.gov/edocs_public/attachmatch/DA-05-543A2.pdf. 163 See Marcus (2005a) 164 FCC, In the Matters of Appropriate Framework for Broadband Access to the Internet over Wireline Facilities; Universal Service Obligations of Broadband Providers …, adopted August 5, released September 23. 165 Less than 4% of those Americans who use DSL broadband Internet access get their access from a wholesale provider (a CLEC), according to FCC data, and this percentage is declining year over year (see FCC (2007)). A substantial fraction of Americans get their broadband access from cable, but there is no wholesale offer. 166 SBC acquired AT&T, taking on the latter’s name in the process; Verizon acquired MCI.
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Key Concept Box 12: Network Neutrality
Network Neutrality is a many-faceted problem. A common concern has been that a network operator might either block or degrade access to disfavoured content in order to favour its own content or affiliated content. For now, we do not see a need for comprehensive new regulation to address Network Neutrality challenges. European underlying markets are either competitive or well regulated, and the European regulatory framework provides adequate tools to address problems should they emerge. Modest improvements, such as those proposed by the Commission on 13 November 2007, seem to be appropriate as a means of ensuring that consumers can exercise informed choice. Continued in Net Neutrality: US vs. Europe on page 96.
4.4.1 Quality differentiation, social welfare, innovation, and market power
Many so-called “violations” of Network Neutrality should not in reality be viewed as problematic. In the sometimes confused debate that is taking place in the United States, there is a tendency to view offers of different grades of QoS to end-users as if they were somehow insidious, when in fact many are probably either neutral or perhaps consumer-welfare-enhancing. As noted in Section 4.4.1, price differentiation (in the absence of market power) can enhance consumer welfare. As an example, one widely cited paper on violations of Network Neutrality167 suggested that charging extra for a static IP address was anticompetitive. In fact, a static IP address facilitates the ability of the end-user to host IP-based services (such as a web site), which may increase the cost to the network. The static IP address also presumably correlates with willingness to pay. It is rational, and not necessarily anticompetitive, to charge a premium. The prospect of service differentiation should not be viewed as a problem per se. It is the risk of economic foreclosure that is a potential problem.
167 See Wu (2005).
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4.4.2 Vertical integration and other vertical relationships between network operators and applications and content providers
Vertical integration between network service providers and web-based content providers has not automatically conferred advantages in the past. When America Online (AOL) purchased Time Warner, there were widespread concerns that the combination of AOL’s Internet content with a major cable television operator (that was also a major broadband ISP168) would harm consumers. The U.S. FTC and FCC went so far as to impose merger conditions entailing wholesale access to cable broadband capabilities, and interoperability with AOL’s Instant Messenger Internet chat service. In reality, however, the merged firm has found it very difficult to exploit synergies between cable broadband Internet access and Internet content. The acquisition of Excite by @Home provides a similar lesson. @Home, a firm which provided support to the Internet Service Provision operations of several of the largest cable broadband service providers in the U.S., purchased Excite, a then-large search engine and portal. There are no indications that the cable companies attempted to make it difficult for their customers to access competing search engines and portals (such as Yahoo), nor is there any suggestion that Excite subsequently tried to limit access to @Home’s broadband users. Again, the parties fail to exploit any synergies. These results are not inconsistent with the Katz-Shapiro theory, if one assumes that the firms involved were below the necessary market share threshold. The prediction is that they would seek to maximize profitability by serving the whole market.
4.4.3 Implications for European policymakers
In the U.S. context, these concerns are real; moreover, they cannot easily be fixed through regulation. The problems are too complex. It is too difficult for regulators to distinguish between those forms of service differentiation that enhance consumer welfare versus those that harm it. Moreover, any legislative or regulatory fix is likely to impact innovation. In Europe, by contrast, the underlying markets are much more competitive; moreover, the regulatory system in Europe is likely to ensure that they remain competitive. Even in relatively concentrated European broadband markets, most consumers can choose among multiple broadband Internet Service Providers (many of them service-based rather than facilities-based). For the most part, the network neutrality debate has not emerged in Europe, and it is unlikely to emerge in the same form in which it has in the United States.
168 In the United States, a majority of broadband Internet access was and is provided by cable television companies.
we consider the risk of network providers intentionally degrading service. Continued in VoIP peering on page 97. is a complex judgment call..S. Whether this should be done in advance. NRAs and NCAs probably have adequate tools to deal with it. or whether the regulator should instead wait to see if the harm really appears. The regulator could also require the operator to make QoS information publicly available pursuant to Articles 20 and 22 of the Universal Service Directive. since intentional degradation would appear to represent a form of anticompetitive foreclosure or tying. Europe Europe enjoys a more robustly competitive market for broadband access than does the U. As a result. The alternative to a regulatory ex ante solution would be to instead approach this kind of intentional degradation as an ex post competition law matter.3. the Network Neutrality debate has a very different character in Europe than it has in the United States. it might be appropriate to impose non-discrimination obligations on incumbents with SMP. . either selectively to disfavoured applications and content or else to their best-efforts IP services overall. and the European regulatory framework provides a much richer range of tools with which to address competitive bottlenecks. At the regulatory level. In Section 5. If this potential problem were to emerge with full force in Europe.96 Final Report: The Future of IP Interconnection Key Concept Box 13: Net Neutrality: US vs.
The chapter includes a discussion of different migration paths to NGN. and of the NGN are not really distinct phenomena – they are all aspects of technological and market convergence. It is important to note that the evolution of VoIP. then it goes on to cover NGN. raising economic and regulatory issues. it covers VoIP. and IP interconnection This chapter discusses applications that may necessitate new approaches to IP interconnection. which appears to be poised to achieve widespread deployment.Final Report: The Future of IP Interconnection 97 5 NGNs. especially in connection with IMS/TISPAN (which potentially poses the risk of new bottlenecks at the Application Layer). and how to deal with cost modelling when costs increase due to parallel operation before they decline due to improved long term price/performance. First. what to do about changing numbers of points of interconnection. • VoIP peering must deal with identifying the service provider responsible for a number. Key Concept Box 14: VoIP peering The evolution of VoIP. . VoIP peering becomes increasingly attractive due to positive externalities (more VoIP users to connect to) and the efficiency gain (priceperformance) that derives from avoiding multiple conversions from VoIP to circuitswitched and back. cont’d on page 100. • VoIP peering is likely to exist as something physically and economically distinct from IP peering. which has become complicated due to number portability. • As the number of VoIP users grows. and closes with a discussion of key migration and transition issues: how long to maintain SMP remedies. and of the NGN are not really distinct phenomena – they are all aspects of technological and market convergence. of IPTV. Continued in VoIP Peering Issues. • VoIP service providers can interconnect at lower cost and with greater efficiency by using VoIP peering with one another rather than PSTN interconnection. There are many uncertainties as to how today’s networks will in fact evolve. but it seems safe to predict that services will continue to migrate to an IP base. Voice over IP (VoIP). It includes a discussion of the technical structure of NGN. even if their ISPs are not directly interconnected. which is already widespread. of IPTV. • Interconnection at the IP level could also facilitate new services such as video conferences and presence services.
and as the corresponding likelihood increases that a given VoIP call will be received by a VoIP service or phone.169 At the same time. for instance. the basis for the preponderance of telephony. using VoIP. 5. MultiKabel. VoIP peering can respond to the need to determine the provider of VoIP service for a particular telephone number. but one of the most significant is easily overlooked. this can be done more cheaply and more reliably using IP-based tools rather than traditional PSTN databases.co.98 Final Report: The Future of IP Interconnection 5. 2006. see no need to invest in traditional telephony database approaches. Now. the association is no longer reliable – each individual number must be somehow looked up a in database. Moreover. .1 Interconnection of VoIP In interconnecting islands of VoIP. large blocks of telephone numbers tended to be assigned to service providers according to a publicly understood allocation scheme – when a company wished to complete a call to that number. For IP-based providers.eurocomms. much less work has been done to date on the likely evolution of these arrangements at both a technical and an economic level in the event that IP becomes. VoIP peering becomes more attractive as the number of VoIP users grows. Instead. Essent and CaiW jointly select XConnect to exchange all VoIP traffic”. as a result of number portability. PSTN-to-PSTN interconnection is mature. they will build their new voice businesses directly on their broadband Internet access capabilities. and must deal with the further complexities of number portability. There are a number of motivations for VoIP peering. Casema. “UPC Netherlands. VoIP peering can take place even if the VoIP providers are themselves using ISPs that are not directly interconnected. some of which are new entrants to telephony.1. VoIP Peering has been of particular interest to the cable television industry in North America and in Europe. January 26. indeed. at: http://www. the traditional switched PSTN/PLMN world will be with us for many years to come. European Communications. it is increasingly common for techniques to be used beyond those of conventional IP peering. These firms. Historically. 169 See.1 Rationale for VoIP peering The primary driver for interconnecting VoIP services at the IP level is the gain in efficiency (and thus in price-performance) that derives from avoiding multiple conversions from VoIP to circuit-switched and back. and exchanging traffic with other VoIP providers purely at the IP level.uk/1319. and PSTN-to-VoIP interconnection is reasonably well understood. as most analysts now expect. however. the transition to that world is not well understood. the number itself encoded which service provider must be used.
2 Number portability and VoIP peering Historically. These conversions are sometimes accomplished by a Session Border Controller. drawing on the technology of the Domain Name System (DNS). the historical mapping breaks down altogether. In effect. in connection with (for example) freephone services and premium services. analog voice into a digital signal. to map a telephone number to a ranked list of Internet services. and that needed very little new technical 170 A CODEC is a coder-decoder device that encodes. it is possible that there will be a need for conversion from one CODEC170 to another.1. and a more customized look-up mechanism is required. which might also serve as a security frontier (firewall) and/or a measurement and control point to the VoIP service provider’s network. the relationship between a phone number and the physical location at which service is provided begins to look more like a database query problem. in this instance. H. the phone number must be looked up (much as a DNS name is looked up and mapped to an IP address) in order to find the call routing information with which the telephone number is associated. . it may be possible to use the traditional PSTN mechanisms for these look-ups. When VoIP interconnects with the switched PSTN/PLMN in the traditional way. 5. At that point. These assignments were effectively part of the national numbering plan.Final Report: The Future of IP Interconnection 99 This is not to say that no conversions are required. it is more natural to use other look-up mechanisms. the operators have found it necessary to construct increasingly sophisticated relationships between telephone numbers and the end-point of services. This approach was simple and logical in an era when telephone numbers mapped one to one to physical lines. Where VoIP operators interoperate with one another. and MGCP. but it happens to represent a relatively straightforward approach that drew on pre-existing stable technical standards. conversion among SIP.3 ENUM and VoIP peering One look-up capability that has been of particular interest in this regard is based on (carrier) ENUM. large blocks of telephone numbers were associated with individual carriers. ENUM is a mature standards-based mechanism. 171 For example. Over time. however. IP-based look-up mechanisms can offer not only improvements in operational efficiency for the interconnection of voice services. Finally. 5. ENUM was not specifically designed as an aid to VoIP peering.1.323. but potentially also interoperability for video and presence services. or from one VoIP signalling protocol standard171 to another. In interconnecting different VoIP services. with the advent of number portability. Many different CODEC standards are in use today.
but individuals can choose not to be listed. . Carrier ENUM. based on ENUM technology but accessible only to carriers (in this context.100 Final Report: The Future of IP Interconnection development. the information need not be made available to the general public. uses the same technology but lists all users. visible only to service providers. there has been interest in private carrier ENUM systems. visible only to the carriers. however. The Internet Engineering Task Force (IETF) created the ENUM standard and defined a zone in the public DNS space where public ENUM will reside. In addition. after much Key Concept Box 16: Carrier ENUM and Public ENUM Public ENUM is publicly and globally visible. cont’d • ENUM is a mature standards-based mechanism. Carrier ENUM in its nature must list all connected individuals. thought. but it will evolve in a somewhat different direction from that of the original “public” ENUM. Individual privacy rights must be respected. Public ENUM is designed to be publicly and globally visible. Continued in Carrier ENUM and Public ENUM below. to map a telephone number to a ranked list of Internet services by means of which the user can be reached. The original ENUM standards contemplated a publicly available service where anyone could look up Internet services associated with a particular phone number. ENUM is said to be considerably more efficient than traditional telephony look-up mechanisms. drawing on the technology of the Domain Name System (DNS). it is of interest only to other carriers. Individual privacy rights must be respected. it would be a private ENUM. Carrier ENUM and public ENUM use the same technology. • ENUM could be particularly useful as an aid to VoIP peering. In the case of carrier ENUM. 172 This use of ENUM is referred to as carrier ENUM. however. but they will not necessarily be the same implementation.173 It is likely that the International Telecommunications Union (ITU-T) will define a DNS zone for carrier ENUM. For this reason. Carrier ENUM is likely to continue to evolve for this purpose. but will be available only to service providers. VoIP service providers). in principle.172 Key Concept Box 15: VoIP Peering Issues. but not all connected individuals will wish to be listed. which raise fewer concerns as regards user privacy. not the “public” ENUM envisioned by the original IETF standards. Continued in Mobile Interconnection on page 105. they declined to define a space for carrier ENUM.
as distinct from data services.Final Report: The Future of IP Interconnection 101 5. in principle.4.ietf. it is for the traffic it carries. If a ISP is paid.4.4 VoIP peering and market power Will VoIP peering exist as something physically and economically distinct from IP peering? There is reason today to think that it will. might drive the evolution of these arrangements.1. . paid for by advertising. which we touch on in Section 5.4. also reflect the QoS requested.1.4.3 of this report addresses IP traffic exchange. Today. primarily in the context of peering and transit. 5. In the past.1. however.1. respectively. Section 5. or bundled with the overall price of connectivity. These are the same mechanisms that are in play when independent third parties offer application services – the payment flows from the end-user to the application service provider.4. Charges could.org/.1.1.3 discusses what we know from our interviews and literature review as regards the likely evolution. Charges at wholesale typically reflect just the capacity provided and/or the volume of traffic transmitted. To the extent that an ISP also provides application services. but generally not the fact that a particular user was invoking a voice or video service. this area is beginning to see active research as a result of the network neutrality debate. we do not see service-based wholesale payments today either because ISP network operators lack sufficient market 173 See http://www1.2 reflects on specific incentives of fixed and mobile operators to offer IP-based interconnection to their intrinsic voice services.1. primarily in the form of third party VoIP.1 considers the issue from a economic perspective. what economic arrangements are likely to prevail for VoIP peering? What charging and accounting arrangements are likely to prevail for IP-based services.1 What the literature implies about VoIP peering The economic analysis of IP-based interconnection in Section 3. If so.4 evaluates the degree to which competitive alternatives. Section 5. These issues have important public policy implications. independent of the underlying network? What market power concerns might these charging arrangements raise? What are the implications for regulators? Section 5. Section 5.5. Presumably. and perhaps the QoS associated with that traffic – both of which are directly related to the ISP’s costs. we do not seem to see separate wholesale payments between Internet Service Providers (ISPs) for IP-based services that ride on top of their respective networks.4. They also play a significant role in our conclusions and recommendations in Sections 6 and 7. the ISP’s own application services are typically either charged to the end-user of the service at retail. relatively little economic analysis had been undertaken of interconnection challenges at the upper levels of the network architecture.
4 is relevant here. it is easy to make an economic prediction.174 Wholesale payment arrangements at the application layer going forward have been difficult to predict.164 telephone number.3. A number of papers175 have suggested that the migration to NGN. The caller’s ability to initiate the call from a different network is irrelevant to the monopoly on termination. as termination monopoly will become less long as only a single operator is in relevant as voice moves to an IP-based a position to terminate a call to a world due to (1) the ability of the initiating single E. 5. for the same reason that circuit-level alternate routing is irrelevant in a conventional network. section 7. as long as only a single operator is in a position to terminate a call to a single E.164 telephone number. .102 Final Report: The Future of IP Interconnection power to successfully demand them. The inherent routability of IP traffic is equally irrelevant. Fixed and mobile incumbents who benefit from current termination arrangements will attempt to preserve them for as long as possible. and especially to IMS. or both. or else appear to be factually incorrect. Consequently. for reasons of technical efficiency. Under CPP/CPNP arrangements. inherent ability of the Internet to use alternate paths.4. One recent paper argues that the Under CPP/CPNP arrangements. the party to use a different network. Internet peering. Horrocks (2005) suggested that interconnection payments should. one might expect conventional switched PSTN/PLMN operators.3. The paper provides several additional rationales. the termination monopoly will persist. and (2) the termination monopoly will persist. 176 See Reynolds et al (2007). might create new forms of market power in the upper layers of the network. a migration to IP-based interconnection might threaten or end this cash flow. evolve to a system where network layer payments for traffic carried should be quite independent of application layer wholesale payments.2 Incentives of mobile and fixed operators At one level. 174 This discussion of Network Neutrality in section 4. to attempt to prolong their termination revenue. as we saw in Section 3. all or which are either irrelevant to conventional voice service. closer to the application. or because the existing pricing mechanisms are sufficient.1. 175 See Cullen International/Devoteam (2003) and Elixmann et al (2007).176 This argument is clearly incorrect.3. is most often implemented without payment between the parties — in the absence of separate payments at the application level. and especially mobile operators.
service-based revenue per minute of use (i. or both – any or all of which argue that call termination rates are in excess in costs. 181 Littlechild (2006) provides a regression of these same Merrill-Lynch data. but the difference cannot explain these differences in price. he found a difference of about $0.4.2. the CDMA IS-95 that is used in the U. 180 This is consistent with Littlechild (2006).177 A number of specific observations support this view: • Many European mobile operators offer much lower prices for on-net calls than for off-net mobile-to-mobile (M2M) calls. uses the same GSM technology as Europe.S. and Littlechild (2006). mobile operators will see some competitive benefit in price differentiation between calls to on-net and off-net mobile. There is no evidence that RPP lowers mobile penetration rate.] cents per minute compared to CPP) and significantly increases average usage (by about 143 minutes per month). so the difference presumably is mostly a reflection of termination rates. Armstrong and Wright (2007) find that the welfare-maximising termination rate would be less than marginal cost (and much less than current European rates). .S. In a more detailed comparison of the UK and US.S. but not for off-net M2M calls to other mobile operators. which means that they function as a banded flat rate. Littlechild refers to countries with a U. worse in others. See Figure 17 in this report.3. including the U. Singapore and Canada.Final Report: The Future of IP Interconnection 103 In the case of mobile operators.181 Given that the mobile industry in Europe is generally considered to be competitive. service based revenue per minute is more than twice as high as that of the U..S.4.2. normalized service-based revenue. either as a means of gaining market share or of disadvantaging rivals.S.S. but rather about how mobile operators perceive the profitability of the termination rate.178 Ignoring for the moment network externalities.. Note that the Merill-Lynch data appear not to count on-net mobile-to-mobile calls in CPNP systems (because they do not generate revenue. Alternatively. this strongly implies that they themselves see the termination payments that they must make to other mobile operators as being greatly in excess of their own marginal costs to terminate a call. they offer flat rate pricing for calls to the fixed network and for on-net calls to mobile operators. 178 Some plans are effectively “buckets of minutes” plans.S. 179 See Armstrong and Wright (2007). and may thus somewhat understate MoU and correspondingly overstate service-based revenue per MoU. one would expect that retail prices would otherwise be set to competitive levels. Harbord and Pagozzi (2007). For the remainder. Littlechild found: “RPP significantly reduces average revenue per minute (by about 12 [U. See section 3.” By RPP. mobile market is GSM. there is good reason to believe that they perceive their termination revenues to be greatly in excess of their true average incremental cost. This on-net/offnet price difference is not solely a difference of cost.182 and • 177 This section is closely related to the discussion of the “right” termination rate in section 3. Singapore and Hong Kong.e. which includes revenues from termination) is typically between 50% and 400% higher in European Member States than it is in the U. incorporating other potential explanatory variables. Technology cannot explain this difference – to a significant degree. With externalities in mind.3. the U.S. Canada. The apparently large on-net/off-net price difference is strongly suggestive of a difference in perceived costs.180 For most Member States.-style system.S.14 per minute. depending for example on terrain. the discussion in this section is not about social welfare. might do better than GSM in some circumstances.179 We expand on this point later in this section. because the mobile operator does not pay a termination fee to itself). in order to reflect externality benefits of the party receiving the call. with minutes of use four times higher in the U. 182 About 45% of the U. but also reflects network externalities. or of strong network externality benefits to the recipient of a call. however. According to Merrill-Lynch data on the wireless industry.
184 these costs are quite low. As Littlechild puts it.0225. according to Armstrong and Wright (2007).03 to € 0. the welfare maximising termination rate should in any case be lower than marginal cost in order to reflect externality benefits to the recipient of the call. .02 per minute. which is well under € 0.S. (2007). Nor can teledensity explain this difference. a Member State of the EU.” • • These observations support the notion that mobile operators in Europe probably view the termination fees that they receive as being well in excess of their true marginal cost. 183 See Brinkmann et al. The US incremental price is [so low as to make] only a negligible contribution to the variable cost of outgoing calls. has a mobile termination rate of some € 0.185 Cyprus.02 per minute. [This in turn suggests] that the variable cost of making or terminating mobile calls is considerably lower than CPP regulators commonly assume.012 per minute. Again. incremental cost might have been a mere € 0.114. no operator is likely to sell service at less than its marginal cost. nor labour costs.183 In comparison with average European mobile termination rates of € 0. Retail rates often converge (for plans at the high end of usage) to an incremental retail price of € 0. Again. Littlechild (2006) finds the marginal retail price of T-Mobile in the U. We understand that the rate is about € 0. 184 See EU-Commission (2007) 185 Today. this suggests that the variable cost itself cannot be very high.186 One would not expect costs in Cyprus to be significantly lower than in other EU Member States.02 or less per minute for mobile minutes in countries with low or zero termination rates. had traffic volumes been higher. European rates seek to reflect average incremental cost.04 per minute. “The level of the incremental price for the higher volume plans may provide some indication of the incremental cost of termination.01 per minute. Presumably their mobile operators are not providing service at a deficit. in the largest “buckets” to be $0. • A recent WIK study found real average incremental cost per minute for an Australian mobile operator to be in the range of € 0.104 Final Report: The Future of IP Interconnection the frequency bands are not that much different. 186 See ERG (2007b).
however.1 pence 187 See also Harbord and Pagnozzi (2007).S. Singapore and Canada. while on-net M2M calls had an average retail price of 4. had traffic volumes been higher. the simplistic interpretation (still ignoring network externalities) would be that the correct termination rate should have been negative (i. incremental cost might have been € 0. the expected price of off-net calls is the cost of origination plus the termination fee (ignoring network externalities).2 pence.9 pence minus 7. There is no obvious reason why costs should be more than twice as high as in the US on average.. Service-based revenue per minute of use is typically between 50% and 400% higher in European Member States than it is in the U. but not for off-net calls to other mobile operators. A number of observations support the observation that termination rates are too high: Many European mobile operators offer favourable or flat rate pricing for calls to the fixed network and for on-net calls to its mobile network. .04 per minute. for a regulator to determine a “perfect” rate. The rates that are being set are nonetheless greatly in excess of efficient levels. They argue that the expected on-net price is adjusted downward to reflect externalities.03 to € 0. In conjunction with the 7. They also note (quoting Ofcom) that off-net M2M calls in the UK in 2005 had an average retail price of 11. Given that the termination rate at the time was 5.02. The difference in the two prices therefore is exactly the amount by which the termination fee exceeds the marginal cost of terminating the call. Armstrong and Wright demonstrate (consistent with others) that the expected price for on-net calls is equal to the cost of origination plus the cost of termination.Final Report: The Future of IP Interconnection 105 Key Concept Box 17: Mobile Interconnection Key conclusions include: • • • • The post-2003 European regulatory practice is clearly superior. while the expected off-net price is adjusted upward (for reasons that they describe as anticompetitive). This strongly suggests that there is a significant difference between the incremental cost that the mobile operator perceives for calls on its own network in comparison to the payments that it makes to complete calls to other mobile operators.3 pence. and are probably well in excess of real usage-based marginal cost. • • Continued in Mobile IP Interconnectionon page 108.9 pence. if not impossible.1 pence. for prices to be so much higher suggests the presence of economic distortions.1 pence)!187 Armstrong and Wright (2007) go on to provide a more comprehensive analysis that considers network externalities. to the previous practice of allowing mobile operators to set these rates unilaterally. Expanding on the discussion of on-net / off-net pricing differences. A recent WIK study (Australia) found real average incremental cost per minute to be approximately € 0. 5. in terms of welfare. for a difference of 7.e. but It is difficult.
S. This is generally consistent with Genakos and Valletti (2007).193 One possible explanation for this seemingly counter-intuitive result is an economic phenomenon known as double marginalisation.2. this leads to the same conclusion: the termination rate that has been set is greatly in excess of the efficient rate. At the same time. as a notable example. The high termination fees lead to high retail prices. where prices that are too high are charged in two vertically related markets (in this case. we are not necessarily claiming that the mobile operators are making windfall profits – that is a more complicated question. 189 See Littlechild (2006). which depress use. both to consumers at retail and to 188 See. counterparts. than in Germany. that even to the extent that profits are returned to customers though subsidies. .188 Some may be burned off as inefficiency in the form of too-rapid handset replacement. is about 2. In the case of Germany. it is quite clear that mobile operators could increase ARPU by lowering their prices. 191 ARPU in the U.S. for instance. they still harm consumer welfare by distorting pricing structures. Returning to the claim that European termination rates are too high. however.189 The higher revenues may also motivate mobile operators to incur higher costs in their auction bids for spectrum. Note.190 There is another reason why high termination fees do not necessarily imply windfall profits. A number of financial analysts have observed the same over the years. 190 The high prices bid for European spectrum might themselves constitute an additional level of multiple marginalisation. thus depressing ARPU and total revenue. Bomsel et al (2003). this implies that the externality value to the recipient is large. This is so because minutes of use per month is ten times higher in the U.S. They found that termination fees were not all being returned to consumers.191 It is not necessarily the case that shareholders in European mobile operators simply pocket the benefits of greater profitability – it is entirely possible that European investors in mobile telephony receive a proportionately similar slice192 of a much smaller pie than their U. Also. and that there was moreover a net transfer away for users of fixed telephony. even though service based revenue per minute is four times higher in Germany than in the U. incidentally. presumably as a result of the difference in retail price per minute. and low or zero monthly fees (the “waterbed effect”).S. and thus also suffer under current European arrangements. and a question that is well beyond our remit in the current study. counterparts.3. introductory offers.5 times higher than in Germany. as we did in section 3. and given back to customers in the form of handset subsidies.S.106 Final Report: The Future of IP Interconnection difference in price between on-net and off-net calls. even though national spectrum authorities do not necessarily seek them. Some of the profits associated with termination revenues are presumably being competed away. termination fees in Europe are lower today than they were at the time. they noted that the analysis was difficult because so many operators are on both the fixed and the mobile markets. however. Note that handset revenues and subsidies do not constitute service based revenue. 193 See Marcus (2004). If one follows the reasoning of Armstrong and Wright (and many others) that the welfare-maximizing termination rate reflects the cost minus the network externality value to the call recipient. We would caution. or too much customer churn. 192 EBITDA for European mobile operators does not seem to be conspicuously higher than for their U.4. which interacts with the analysis in complicated ways. that there is no consensus as to what constitutes an optimal termination rate.
1. and mobile operators have apparently implemented and are using the GRXes. it is likely to be the case that all or nearly all consumers will have broadband Internet access over their fixed service at home (if they have fixed service at all). potentially usable worldwide. one might expect third party VoIP providers to be excluded. See Laffont/Rey/Tirole (1998a).4. incidentally. that we are not suggesting that all mobile operators have fully aligned interests as regards mobile termination fees – small operators may have different preferences than large. The IP addresses used in the GRX/IPX are public IP addresses. the termination fees tend to be roughly neutral to net revenue.. however. this is required. we have not determined that this is the case. and that they will be able to access IP-based services from their mobile handsets. and all are likely to seek to differentiate themselves. 195 This manifests somewhat differently for fixed-to-mobile versus mobile-to-mobile. but we assume that access to the GRX will be limited. For fixed-to-mobile. There has been some discussion that fixed operators might also be allowed to use the GRX system. an answer is emerging. it is clear that mobile operators (and possibly also fixed) will be motivated to maintain separate interconnection arrangements. Carter/Wright (1999) and Carter/Wright (2003).Final Report: The Future of IP Interconnection 107 other network operators through termination fees). The economic literature refers to this as a tacitly collusory outcome. The IPX will include carrier ENUM services that can be used to look up the service provider who serves a particular mobile number.3 Technical evolution of VoIP interconnection arrangements Based on the foregoing section. we merely observe that it is a possible explanation.195 5. 196 See GSM Association (2006). GRX is in the process of being enhanced to become an IP eXchange (IPX). GSM-A specifications make clear that the addresses will not be 194 See Carter/Wright (2000). As networks evolve. and will therefore be motivated to preserve them. Our point in this section is a narrower one – that European mobile operators will tend to view their termination fees as exceeding their costs. it represents direct revenue. Is it possible for mobile or fixed operators to enforce separate interconnection arrangements for voice (as distinct from IP traffic in general) in such a world? In the case of the mobile operators. We infer that SIP servers will also be part of the IPX infrastructure. The GSM Association has developed standards for an interconnection capability for mobile networks (PLMN operators) known as the GPRS Roaming Exchange (GRX)196. The IP exchange clearly has the ability to treat VoIP voice interconnection as something distinct from IP interconnection in general. By default. both consumers and suppliers suffer. Again. . and to prevent (for example) third party VoIP providers from connecting to a mobile operator’s standard voice service. For mobile-to-mobile. but they help to enforce high retail prices for all market players. In a world with number portability. Note.194 Under double marginalisation.
however.” The annex on IPX requirements makes the same point. • The IPX clearly has the ability to treat VoIP voice interconnection as something distinct from IP interconnection in general. We expect that key voice infrastructure. We are not necessarily suggesting that the decision to hide GRX/IPX IP addresses from public view is an inappropriate or malicious design decision. The IPX represents a billing model as much as a technical model. . but perhaps also for retail pricing. rather than individual pairwise contracts with every other VoIP service provider present at the exchange. GSM Association specifications make clear that the addresses will not be reachable from the public Internet. A chain of billing can be established from the application and through each IPX hub to the end user. not only for wholesale pricing. the implications for service interconnection as mobile voice resources migrate to VoIP are clear. Section 4. will be accessible only to mobile network operators and possibly also to other firms that accept MNO pricing and quality arrangements. In oither words [GRX] networks shall be totally separated from public Internet.108 Final Report: The Future of IP Interconnection reachable from the public Internet. and to restrict access to the IPX. as shown in Figure 21. The GRX is in the process of being enhanced to become an IP eXchange (IPX). mobile operators will not need to actively block third party access to their own mobile capabilities – key functionality that third parties would need to access these capabilities will be maintained on networks that are completely blocked from access by organisations other than those that participate in the GRX/IPX (presumably members of the GSM-A and perhaps others by special arrangement). • The GRX/IPX employs a “hubbed” architecture which can afford the advantage of mitigating transaction cost problems in getting QoS-capable services launched among multiple providers. however. It enables cascading billing. At the same time. the hubbing also raises the concern that IPX commercial arrangements might serve in effect to enforce collusion. including carrier ENUM and SIP servers. These arrangements have the positive property that they tend to reduce economic transaction costs by making it possible for a VoIP service provider to conclude a single contract with the IPX hub. [these] networks shall remain invisible and inaccessible to the public Internet. a mobile carrier industry group. these arrangements raise the concern that the IPX might serve to effectively “lock in” existing mobile wholesale charging models at the very moment when changes in network architecture would otherwise be calling them into question. Continued in VoIP Interconnection on page 112.2 is quite clear: “For security reasons. Key Concept Box 18: Mobile IP Interconnection The GSM Association. has developed the model of a GPRS Roaming Exchange (GRX) for an interconnection capability among mobile networks exclusively.197 In other words. Generally Internet routers shouldn’t know how to route to the IP addresses advertised to [GRX] networks. • The IP addresses used in the GRX/IPX are potentially usable worldwide. 197 Ibid. however.
and probably also fixed operators. . except perhaps by special arrangement. until and unless alternative IP-based interconnection is available in a form that meets the needs of competitors.198 The implication would appear to be that mobile operators. This would have similar implications for the fixed network as for the mobile – third party VoIP service providers would not be able to access the standard voice services of fixed operators using IP interconnect. or (2) they are under a regulatory obligation to offer it.Final Report: The Future of IP Interconnection 109 Figure 21: End-to-end SLAs and charging with the GSM-A IPX Source: GSM-A website One knowledgeable interviewee expressed concerns that fixed incumbent operators (and possibly also competitors) would likely also base their own voice services on private (inaccessible) IP resources as they evolve their voice infrastructure from PSTN to VoIP. 198 See Ofcom (2005). Both fixed and mobile SMP operators will presumably continue to be obliged to offer PSTN-based interconnection to their conventional voice services. will not offer IP-based VoIP interconnection to their standard voice services to third parties unless either (1) they believe that migrating to IP-based interconnection will have no negative effect on termination revenues. even where the same end-users have IP data connectivity through the same fixed operator.
inasmuch as it is independent of the network service provider. Clearly. and a broadband Internet connection paid for by the customer in order to provide VoIP for a fee. The column on the right is of particular interest here. Arbitrage often serves to enhance consumer welfare in this way. it would presumably put pressure on the traditional operator to evolve their interconnection arrangements to better accord with the new technical and market realities. but permits a somewhat more integrated offering since the service provider offers both the VoIP service and the broadband access service. Figure 22 categorizes VoIP services according to two major criteria: 1) whether or not the service is self-provisioned by the end-user and 2) whether or not the VoIP service provider is affiliated with the access provider. it is important to remember that there are many different forms of VoIP.110 Final Report: The Future of IP Interconnection 5. This is an important question from a public policy perspective. . This yields three forms of VoIP rather than four. the end-users could potentially achieve an equivalent result in a different way by choosing third party VoIP services themselves.4.1. Skype is a familiar example of a self-provisioned service. since a self-provisioned VoIP is by definition not affiliated with the access provider. thus bypassing the traditional operator. Were this to become widespread. it would tend to generate arbitrage opportunities that would help to correct for market or regulatory failures.4 Competitive alternatives The discussion in the previous section relates to the ability of third party VoIP service providers to access the voice services of traditional mobile operators and fixed incumbents as the traditional switched PSTN/PLMN operators evolve their networks to IP-based NGNs. Solutions provided by a fixed network operator or a cable television provider are conceptually similar. To the extent that third party VoIP is effective. In framing this issue. Commercial VoIP services such as SIPgate (sometimes termed Voice over Internet) typically employ equipment at the customer’s premises.
Third party VoIP service providers like SIPgate and Skype199 provide a reasonably good substitute for fixed voice services. 200 The degree to which this is true varies significantly from on Member State to another. Other than the termination fees that they must pay. manipulate pricing structures so as to make third party VoIP less attractive. the prospects are reasonably good (but by no means certain) that consumers will continue to be able to access third party offerings.Final Report: The Future of IP Interconnection 111 Figure 22: Different Forms of VoIP Implementation Network Service Provider Selfprovisioned Third Party Service Provider N/A Skype Commercially Provisioned Voice over Broadband Voice over Internet SIPgate Vonage Source: wik-Consult For the fixed network in Europe. the ubiquity and mobility offered by mobile operators represents an enormous and legitimate advantage. Third party VoIP services face significantly greater challenges in the mobile environment than in the fixed. mobile operators have considerably more control over their handsets than do fixed counterparts. 199 Also Vonage in the U. In Europe. Second.200 The mobile operator could disable or undermine the effectiveness of VoIP services in the handsets provided to customers. a great many handsets are provided by the mobile operator. usually with substantial subsidies when purchased as part of a new mobile subscription or pre-paid service.S. Third. the mobile operators could. For the mobile network. .S. these third party VoIP operators have very little cost. but it happens. and they price accordingly at retail. than in Europe. This appears to happen more often in the U. First. if they chose to. the analysis is far more complex.
the evolution to IP interconnection for voice could easily be thwarted by economic considerations.112 Final Report: The Future of IP Interconnection If mobile operators are not enthusiastic about VoIP capabilities in the handsets that they provide. NGN on page 117. manufacturers may not be motivated to invest in provide robust capabilities with good user interfaces. how should it be used? Many handsets support WiFi. IP interconnection will clearly be the preferred solution for IP-based voice as well as data. Continued in Internet vs. however. Skype) himself or herself. or a coffee shop where he or she has a subscription to a WiFi service.201 VoIP over WiFi is a solution that is nomadic. It is surely possible. From a technical and an economic perspective. and an additional 11% while travelling. Arbitrage often serves to enhance consumer welfare in this way. Key Concept Box 19: VoIP Interconnection As mobile operators and fixed incumbents evolve their networks to IP-based NGNs. September 2006. TeliaSonera. See Sami Ala-Luukko. taking advantage of the mobile operator’s ubiquity and support for full mobility. this seemingly simple installation can nonetheless require a few hours of work on the part of a fairly sophisticated user. but not truly mobile. Once the VoIP software has been downloaded.g. however. Third party VoIP services could face significantly greater challenges in the mobile environment than in the fixed. it would tend to generate arbitrage opportunities to bypass the traditional operator that would help to correct for market or regulatory failures. This. but it does not appear to represent a mass-market challenge to the mobile operators. consumers on the fixed network are likely to continue to be able to use third party VoIP service providers. . For many of these mobile phones. The mobile operators have a range of tools to try to slow or block take-up of third party VoIP if they choose to do so. Traditional fixed and mobile operators will not wish to evolve their voice services to IP interconnection until and unless they see that change as being neutral or positive to their interconnection revenues. It is less useful for an end-user who is constantly changing locations.. the user could download and install VoIP software (e. compared to 32% placed at home and 24% at work. and it may be appropriate for a conference that the end-user attends. To the extent that third party VoIP is effective. “IPX – A Key Enabler for IP Communication Subsystem”. The alternative is to use the VoIP software over the mobile operator’s own IP service. leaves the end-user entirely at the mercy of the mobile operator’s pricing 201 One source estimates that 14% of mobile calls in Western Europe are placed while in an automobile. VoIP over WiFi is a fine solution for the end-user’s home. Today. and not useful at all for a user who is walking down the street or travelling in a train or automobile. or unless they are required to do so.
1. and also leaves the end-user vulnerable to possible impediments to access. and provides a global service which is extremely pervasive and affordable. or else have to explain a massive loss of revenue to their shareholders.204 The analysis in this section of the report suggests that voice services may evolve in a different direction from IP services in general – indeed. for instance. . 5. but it seems to support pretty close to zero loss. but it appears to routinely be the case in the United States. The 3G service runs at around 384kbps in the UK.5 billion active mobile phone numbers in the world at the time of writing).202 The possibility that mobile operators might intentionally price so as to discourage the use of VoIP cannot be ignored. EDGE and 3G as it happens). The key lesson here is that legacy service providers resist the pressure to become merely bit pipes. even though underlying technical and market drivers will have changed.”203 For all of the reasons noted in this section. we see signs that this is already taking place. It uses around 14kbps to carry voice. • 202 See Wu (2007).4.. but you can see that there are powerful reasons for the cellular network providers to stay in this regime for a while. Key observations are: • Traditional switched PSTN/PLMN operators are likely to have both the incentive and the ability to maintain voice termination arrangements on the current model (or on a model more akin to the current one) for an extended period of time.I do not know the architecture of the backhaul network once the wireless segment of a route is terminated. [emphasis added] This is fairly surreal (in fact. However. This is much more the case for mobile operators than for fixed. I can run Skype or any vanilla VoIP system on this fairly easily. there are more cell phones than Internet Hosts (2. Jon Crowcroft observed: “I have a cell phone. 204 See. the volume and time tariff of the data service is set such that a normal pattern of voice calls made over it would cost more than the GSM service. My cell phone provides data (GPRS.5 Implications going forward A number of previous studies have tended to focus on pure IP connectivity as networks evolve to IP-based NGNs. The risk that the mobile operator might block or degrade access to third party VoIP is perhaps limited in Europe due to the effectiveness of regulation. usually when I read my e-mail via my phone. I 'dial-up' over GSM as it is cheaper). Indeed.Final Report: The Future of IP Interconnection 113 plans for IP packets. Marcus (2006b) and Marcus (2007). 203 See Crowcroft (2007). and seems to have pretty low latency -. In a recent paper. mobile operators are likely to have far more ability than fixed operators to resist changing their business models to conform to new economic and technical realities as the network evolves to an IP-based NGN.
however. the observation that mobile termination fees are too high is a problem.2001 (12/2004) “General overview of NGN”. These specifications primarily address the separation among the service provision. control and bearer transport plane and the ability to support a wide range of services and over a range of access media using standardized (open) interfaces. • • The public policy implications are rich. In this case. as long as market power issues have been addressed. First. From a technical and an economic perspective. the evolution to IP interconnection for voice could easily be thwarted by these economic considerations. The distortion in the pricing structure implies a loss of consumer welfare. and was subsequently promoted by the NGN Focus Group that was created in the middle of 2004 and completed its . What is the proper response? We return to these questions in our recommendations and conclusions in Chapters 6 and 7. the evolution of voice interconnection and data interconnection are already diverging. with or without a migration to IP-based interconnection. They will not choose to evolve their voice services to IP interconnection until and unless they see that change as being neutral or positive to their interconnection revenues (unless they are required to do so). Normally. the principle of technological neutrality would suggest that the regulator should permit network operators to interconnect as they see fit. Second. “General principles and general reference model for next generation networks”. and does not exclude the possibility of a loss of supplier welfare as well. it raises questions as to the proper role of public policy in fostering a migration to IP-based interconnection. and Recommendation Y.2 Technical characteristics of NGN The ITU has specified NGN in two basic Recommendations • • Recommendation Y. 5. IP interconnection is clearly the preferred solution for IP-based voice as well as data. In other words.2011 (10/2004). The work was initiated by the Joint Rapporteur Group. existing regulatory policy may have the unintended consequence of preventing an otherwise cost/benefits-enhancing infrastructure upgrade.114 Final Report: The Future of IP Interconnection • These networks are already providing IP interconnection for their data services.
These changes in the value chain were taking place long before NGNs came on the scene. Resources Transport management functions Transport control functions . 2005. the migration to NGN is accelerating and reinforcing this tendency. Currently. as a result of the migration of global networks to layered network protocols based on IP. ITU standardization work on NGN is under the NGN Global Standards Initiative (NGN-GSI). This vertical layering makes it possible for different market players to participate at different layers in the value chain of service production. for the architectural core of the Internet. application. middleware and baseware services Services NGN service Resources Service management functions Service control functions NGN transport Transfer functional area Source: ITU (2004).Final Report: The Future of IP Interconnection 115 work in November. i.e. The functional architecture of an NGN provides a vertically layered scheme where the application and associated content (“services”) are on the top and the physical transport and access (“transfer”) are on the bottom (see Figure 23). however. Figure 23: The ITU’s layered NGN architectural model Infrastructural. The vertical functional layering reflects the layered model that the Internet Engineering Task Force (IETF) developed for the TCP/IP protocol suite.
but in contrast to the Internet reflects a centralized control platform containing corresponding call agents (soft switches) for the different types of services. or of new software into end systems. the NGN concepts that many incumbent operators are implementing (or propose to implement). based on IP and SIP protocols.2. without making any special arrangements with network operators. This platform contains an IP-based core transport platform. and the management plane. support for different grades of Quality of Service (QoS) – this model of service deployment provides no inherent solution. By contrast.116 Final Report: The Future of IP Interconnection The ITU further divides the layered model of network architecture into three planes: • • • the user information transport plane. At the same time. often by the addition of new servers. IMS is a forward-looking standards-based platform. This is consistent with the Internet philosophy of a “dumb” transport network and an intelligent periphery. services are generally implemented at the edge of the network. VoIP is an obvious example. To the extent that transport services are needed that are not inherently present in the network – for example. This approach can support access by a range of devices and corresponding access networks by means of corresponding access gateways. Thanks to the soft-switch concept. programmable devices for the network periphery that made this approach viable. seek to integrate currently separate networks into a single network and service platform. it can also support the integration of mobile access by means of the IP Multimedia System (IMS). such as BT’s 21CN. reusable modules for commonly used functions. where a service provider might achieve market entry by simply deploying SIP Servers and (for privacy reasons) Session Border Controllers and connecting them to the Internet. as well as a service/application creation environment. the signalling/control plane. . that seeks to employ standard.1 Interconnection at various levels “Telco-style” approaches to the integration of new services into an IP-based platform are significantly different from those that are typical for the Internet today. it is viable only to the extent that the underlying networks already provide the kind of connectivity that is needed. 5. at the same time. For the Internet. It is the emergence of inexpensive intelligent. user access could be contingent on the current load in the IP 205 See Isenberg (1997).205 which enables parties other than the network operator to offer new services.
This section considers first technical standards. The two are now reasonably well integrated. and thus depends on the latter’s willingness to open up the NGN to independent service providers. as is the case with Skype or SIPgate. then implementation of IMS. often by the addition of new servers or software. The architecture of the NGN seeks instead to integrate networks and services that today are often separate into a single network and service platform.Final Report: The Future of IP Interconnection 117 transport layer. This is consistent with the Internet philosophy of a “dumb” transport network and an intelligent periphery. much as in legacy telecom networks. a pure service provider with little or no infrastructure can easily offer services at a national or even international level using the public Internet. and is possible due to the emergence of inexpensive intelligent. thus enabling network design and dimensioning in line with Grade of Service (GoS) and QoS parameters. By contrast.2. For example. The functional architecture of an NGN provides a vertically layered scheme where the application and associated content (“services”) are on the top and the physical transport and access (“transfer”) are on the bottom. This vertical layering potentially enables different market players to participate at different layers in the value chain of service production. on IMS) requires strong coordination with the NGN operator. The two concepts (Internet versus NGN) imply different interconnection strategies. NGN Internet services are generally implemented at the edge of the network. . 5. both at the transport and at the service layer. All of this implies the need to consider not only general technological and economic factors. but also the implications for competition in instances where the NGN operator might have significant market power.2 IMS and NGN – standards and implementation The IP Multimedia System evolved as an attempt by the mobile industry to “bolt on” mobility capabilities into the NGN architecture. for instance. Drawing on TCP/IP. This platform contains an IPbased core transport platform. the integration of new services into an NGN (based. but in contrast to the Internet approach reflects a centralized control platform where call agents (soft switches) provide a service/application creation environment. Continued in Conclusions on page 130. programmable devices. Key Concept Box 20: Internet vs.
as shown in Figure 24 below. p.g. a standards body focused on mobile networks. but only for mobile access. NGN technical standards were developed primarily by the ITU and by ETSI.2. however. finalized in March 2002. IMS was developed primarily in order to provide multimedia services over third generation mobile networks. the IMS is a layered architecture. It thus adds session control functions . Thus. This similarity of structure facilitated the incorporation of IMS into the NGN standards. IMS provides the functions of a SIP-based soft-switch.2. 6. The IP Multimedia Subsystem (IMS). but with some differences (mainly in the QoS provision scheme). originated with the 3GPP.1 IMS Technical Standards The NGN and IMS standards originated independently. the IMS standards are in the process of being incorporated into ITU and ETSI NGN standards. UMTS in Europe. Figure 24: Layered view of the IMS Model Source: Kinder (2005). IMS first appeared in 3GPP release 5 specifications.118 Final Report: The Future of IP Interconnection 5. applications and content. but extends them in order to enable open access to value-added services. the European Telecommunications Standards Institute (ETSI) incorporated IMS into the NGN specifications developed by ETSI Telecoms & Internet converged Services & Protocols for Advanced Networks (TISPAN). Current ITU recommendations for NGN are based on IMS (NGN-IMS) as incorporated into ETSI TISPAN. IMS is based on end to end IP services controlled by the SIP protocol. Later on. Like NGN. but they have largely converged. 3GPP subsequently developed improved versions of IMS in releases 6 (wireless access) and 7 (fixed access). e.
The Network Attachment Subsystem (NASS) which provides the Network Attachment Control Functions (NACF). the interconnection scheme between the IMS 3GPP and the TISPAN IMS is done in both planes. • Figure 25: Functional elements of IMS Source: Knight (2006) In ETSI TISPAN. thus promoting fixed mobile convergence. as shown in Figure 26. and The Resource and Admission Control Subsystem (RACS) which provides the Resource Attachment Control Functions (RACF). including authentication and authorization of the user. both control and transport. and to enable users to enjoy seamless roaming (including fixed-mobile roaming). The internal architectural structure of IMS comprises three major elements. . fixed and mobile.Final Report: The Future of IP Interconnection 119 so as to enable the seamless use of multimedia services from different access technologies. TISPAN defines these elements in order to enable NGN IMS operators to apply control mechanisms at entry to their respective networks. by means of the Interconnection Border Control Function (I-BCF) in the control plane and the Interconnection Border Gateway Function (I-BGF) in the transport plane. as shown in Figure 25 below: • • The IMS core. including resource management and admission control based on the user’s profile and the resources currently available.
Should IPv4-IPv6 translation be necessary. delay or packet loss) could be an issue in the interconnection between the ETSI NGN IMS and 3GPP IMS. Conflicts might arise when a user in the NGN world subscribed to a service with Guaranteed QoS connects to a user/server/service in the 3GPP IMS world with relative QoS. the other is a Relative QoS. one is a Guaranteed QoS (and thus absolute). while NGN IMS supports both versions 6 and 4. The user might not receive the expected QoS.120 Final Report: The Future of IP Interconnection Figure 26: Fixed and mobile interoperability under ETSI TISPAN Source: Moro and Fernandez (2005). 3GPP IMS defines separate QoS traffic classes that are handled according to operator requirements. Provision of QoS (defined in terms of bandwidth. Note that the 3GPP IMS operates (according to the standards) only under IP version 6. . it is the job of the I-BGF. This means that 3GPP provides a relative QoS. The ETSI TISPAN IMS has two approaches for QoS control.
around 2004 they realized that the evolution in the core network of the mobile operator networks. Note that there are three independent paths depending on the starting point of the network operator. . however. The second evolutionary path is driven by mobile operators. would nonetheless leave them in second place in the telecommunications market. pushed by 3GPP in Releases 6 and 7. Figure 27: Evolutionary paths to IMS NGN Source: wik-Consult The first path is associated with both PSTN operators (many of which already provide IP data services).Final Report: The Future of IP Interconnection 121 5.2. and the core network with a unified IMS control platform for service delivery.2. They therefore seek to evolve the access networks using enhanced technologies as High Speed Packet Data Access HSPDA. This led them to charter the ETSI TISPAN working group to adapt the IMS concept to the network architecture of the NGN operators.2 Evolution to IMS/NGN Figure 27 shows likely evolutionary paths for different types of networks. This migration is largely driven by loss of market share to mobile operators and VoIP services. The strategy of the fixed operators was to evolve towards the NGN with the softswitch at the heart of the network. They need to open new business lines because the traditional business model is nearly exhausted as mobile penetration approaches 100% in first world countries.
the third evolutionary path comes from the world of Internet service providers. thus enhancing global competition. The bad news is that service providers who have market power (either in the classic sense or as a function of network externalities) presumably will not want to open their networks to competition at the service level. there will be a smooth evolution. the story is more complex. The good news is that these standard interfaces open a great many new avenues for competition in regard to services offered to end-users. this will not be done all at once. and of IMS in particular.3 NGN/IMS technology and interconnection at the service level and the IP level The introduction of NGN. and generally enhancing consumer benefits. 5. . and less revolutionary. This conclusion follows from the same economic arguments (Katz/Shapiro (1985)) that we have made repeatedly in this report. the migration is generally positive for consumer welfare. 5. The underlying concept is different – it is less centralized. This change may tend to reduce the pricing power of equipment suppliers. It is clear that regulators would hope to see competition at the application layer of the NGN. However. introduces a number of new standards-based compatibility interfaces into the public network. Standard interfaces will tend to increase the ease with which products of one supplier can replace those of another. The implications for consumer welfare are complex. This path is more evolutionary.122 Final Report: The Future of IP Interconnection What is more or less certain at this point is that the evolution of both fixed and mobile operators will pass through the IMS. advancing the Single Market.3. Finally. inasmuch as their infrastructure is already inherently IP-based. but also less standardized. 5. It is not so clear that external access to IMS capabilities is the only acceptable way to achieve that goal.2 Prospects for third party services over NGN Relative to the services offered.1 Implications of standardized NGN equipment Relative to the sale or lease of hardware and software for use in the public network.3. but will correspondingly reduce costs to service providers and should thus increase consumer surplus (assuming that markets are competitive). and therefore are likely to limit the use of these capabilities. rather.
1. If operators choose to. the user’s inherent ability to access a third party VoIP provider (such as SIPgate or Vonage) offers a capability that is functionally equivalent to CPS. Assuming that incumbents cannot intentionally degrade successfully. At this point.g. or could perhaps extract supracompetitive rents from the application service providers. It does not exactly correspond to call-bycall carrier selection (from a single handset). Network operators apparently anticipate that they will have an advantage to the extent that they can provide better QoS to their own applications. best efforts IP service will deliver these services at quite acceptable performance unless IP-based network operators are allowed to intentionally (and perhaps selectively) degrade the performance of their best efforts services (either by intentionally crippling them or equivalently by failing to obtain necessary capacity upgrades). IMS can definitely serve as a gatekeeper relative to applications provider by the network operator. through LLU). 206 Access and Interconnection Directive. However. We return to this point in the discussion of Network Neutrality in Section 4. the migration to an all-IP broadband-based platform may render Carrier Selection (CS) and Carrier Pre-Selection (CPS) remedies206 irrelevant. without incurring the high up-front cost of the local loop (e.2. it is not yet clear whether the incumbent’s integrated IMS/NGN capabilities represent an unacceptably high barrier to entry to independent IP-based providers of applications and services over the network. then it would seem to be premature (and possibly not proportionate) to consider a regulatory intervention to open interfaces such as IMS to third parties.3. this advantage may not be decisive – under most circumstances. Article 19. this is not the only way to provide services in an NGN.4. In an IP-based and undegraded world. including VoIP and IPTV. For reasons noted in Section 4. but with greater flexibility. they can prevent third parties from offering such services. The end-users will presumably still have best efforts IP-based Internet access. European regulators and competition authorities appear to have adequate tools to address intentional degradation were it to emerge. CS and CPS today represent a useful means of opening up the network to competition – they represent a way to get past the incumbent’s switch. Directive 2002/22/EC.Final Report: The Future of IP Interconnection 123 In an IMS system. will be available over best efforts IP. .3 Implications for Carrier Selection and Carrier Pre-Selection As a related matter. but one might reasonably expect technical solutions to emerge if there were customer demand. less complexity and presumably much lower cost. 5. A range of services.
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5.3.4 Related threats to competition
It is worth noting that literal barriers to interconnection at the IP and the service level do not represent the only potential threats to competition as networks evolve in the direction of NGN. The Commission’s 2003 study207, and also Ofcom’s consultations, have explored the possibility that emerging IP-based networks might introduce new “choke points”, new threats to competition. The 2003 study saw location information, as well as customer identity systems, as particularly relevant. As the 2003 study observed, “Essentially, NGN has the potential of providing a more open and competitive service environment. Paradoxically, this potential may also lead to additional sources of market power. Whereas traditionally, all elements of service creation were controlled by a single operator, the NGN environment enables many of these elements to be provided competitively. Where such elements have to be chained together in order to create an end-user service, it follows that control over any single element in the chain would provide control over the whole chain. … the battle for market power will be fought on many different fronts.”
Different market players – different evolutionary paths to NGN
Different service providers, in different countries or competing within the same country, will follow different migration strategies towards NGN. This relates both to the speed of deployment and to the specific architectural and topological changes that will take place in their respective networks. These distinct NGN adoption strategies on the part of different service providers will have an impact on competition and market structure. Service provider migration plans will tend to reflect (1) the nature of their current preNGN business model, and (2) the company’s immediate business realities. Service providers of many different types are all expected to eventually migrate to IP-based NGNs, but not necessarily in the same way or at the same pace. In each case, there is a path dependency: the route that is taken and the final destination both depend somewhat on the point of departure. NGN migration plans are likely to be somewhat different for: • • • • • Fixed incumbents, Competitive fixed operators, Mobile Operators, Internet Service Providers (ISPs), Cable television operators that also offer Internet access and/or telephony services.
207 See Cullen/Devoteam (2003). See also Elixmann et al. (2007).
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5.4.1 Historically a telco, or historically IP-based?
A fixed incumbent without a significant mobile service might tend to favour a rapid NGN migration. They conceivably might not see a compelling need for IMS; however, we expect that most fixed incumbents will nonetheless include ETSI IMS in their NGN migration plans. Interviewees felt that the migration phases might be different across different countries and carriers; however, they consistently saw the ultimate goal of the transition as an integrated NGN/IMS solution. BT was initially unique in proposing a true “fork lift upgrade”, where the traditional PSTN was to be phased out altogether in a small number of years; however, we are seeing similar overtures from KPN, and we can expect to see more from other incumbent operators over time. Fixed incumbents, with or without mobile operations, will tend to replace a centralized PSTN switching environment with a still-somewhat-centralized IP-based server environment. The initial objective will tend to be to change the underlying technology base over which they offer their existing palette of services. To date, the primary drivers seem to be lowering unit costs and improving fixed-mobile integration, with somewhat less emphasis on deploying new services. (The migration to video is a driver, but this migration does not uniquely depend on NGN.) ISPs and cable operators are already evolving in the direction of NGN, but at a somewhat relaxed pace. They already have an IP-based infrastructure, so the changes in their case are gradual and evolutionary. Their evolutionary path tends to be distributed rather than centralized.
5.4.2 Incumbent or competitive entrant?
Competitive fixed operators and non-incumbent mobile operators will tend to follow paths somewhat similar to those of their incumbent counterparts in the countries in which they operate; however, some appear to be under less pressure than the incumbents to migrate their networks. As with incumbents, they will attempt to inject an IP transport beneath their existing services. Mobile operators are likely to emphasize IMS-NGN, while fixed-only competitive operators might not see so strong a need for IMS.
5.4.3 Fixed, mobile or both?
Typical fixed incumbents that also have substantial mobile operations will tend to have a strong preference for an integrated IMS-NGN solution, and might tend to spend more time on the transition due (in part) to the complexity of integrating their fixed and mobile operations.
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5.4.4 Implications of the different migration paths
Among these various plans, some key distinctions are evident: • The degree to which the service provider already possesses SMP that it might seek to leverage into related markets (for example, last mile market power that it might seek to leverage into the market for applications over the NGN), The speed with which the transition takes place, The speed with which the traditional PSTN disappears, especially for the wired incumbent, The degree of centralization or decentralization of the resulting infrastructure, Whether the service-provider is already primarily IP-based, and Whether the transition to NGN is likely to include IMS.
• • •
Firms that are primarily telephony providers are more likely to evolve to centralized NGNs, while IP-based firms and cable operators are more likely to adopt a more gradual evolution and a more decentralized service architecture. The presence or absence of SMP is a central theme in European regulation, and this is likely to continue to be the case as networks evolve to NGNs. The evolution may change the character of market power, but is unlikely to eliminate concerns with SMP. Last mile bottlenecks are likely to remain for some time, as will the call termination monopoly; moreover, new bottlenecks might emerge in the upper layers of the network, even as other SMP manifestations may be ameliorated by new forms of competition. SMP shapes the migration path, and also conditions the corresponding regulatory response. SMP thus represents a common thread through our assessment of regulatory needs during the transition to NGN, which follows in Section 5.5.
Regulation and the transition period to VoIP and NGN
The period of transition to NGN raises many vexing problems for regulators. In many respects, the transition period is likely to be even more difficult than the steady state period that is likely to follow transition.
5.5.1 Traditional remedies versus new remedies
A first question that must be addressed is how long existing regulatory remedies should be maintained. Regulators presumably have to strike a balance. If existing pre-NGN remedies are prematurely lifted, there is the risk that competition as a whole will run
In the case of access. At the same time. In the case of interconnection. however. For peering-based interconnection.2 Number of Points of Interconnection (PoI) A particularly difficult NGN migration challenge flows from the positive opportunity to simplify and collapse the network into a smaller number of geographic locations. Interconnection with the incumbent will presumably be implemented by means of IP-based peering. For most European Member States. or alternatively perhaps by a transit relationship with the incumbent or with some other service provider that has a peering relationship with the incumbent. who should bear the cost of stranded investment associated with competitor build-outs to interconnect locations that are no longer serviced? What kind of notice and consultation mechanisms are appropriate? Much of the discussion to date of the reduction in the number of PoIs as a result of migration to NGN has been in terms of network access. In the NGN world. thus avoiding this problem. the regulator potentially inhibits network modernisation and promotes inefficiency. but even there the largest IP-based operators historically have had on the order of ten POIs for purposes of interconnection. should be) implemented using IP-based interconnection. 5. the United States).Final Report: The Future of IP Interconnection 127 aground. These issues play out a bit differently for interconnection. it is quite possible that the traffic will be “tunnelled”. the operator that provides the IP-based transport service to the end user will not want the operator that provides the physical last-mile IP access to be visible in the IP-level routing. tomorrow.5. Most operators will want a minimum of two or three POIs for reliability and redundancy. In a large country (e. without making the last-mile access provider visible in the end-to-end IP routing. they will not necessarily be implemented using the same points of interconnection. if the regulator appears intent on keeping previous remedies in effect indefinitely. very few POIs are required. traffic is often delivered using ATM as a level 2 transport mechanism. To the extent that the incumbent operator unilaterally reduces the number of Points of Interconnection (PoIs) in order to avoid needless cost. Today. still enabling the service provider to offer an apparently end-to-end service to the end user. propagation delay due to the speed of light is such that a somewhat larger number might be desired. three or four POIs should be technically and . both access and interconnection will be (or rather. both providers will necessarily be visible in the end-toend routing.g.
then no conventional points of interconnection at all to the incumbent are necessary. but there is also the likelihood that operational expense will actually be higher on a unitized basis due to the need to operate the old and new networks in parallel. This substantial reduction raises the concern that most or all competitive operators are likely to have substantial stranded investments in interconnection circuits and equipment to PoIs to the incumbent that will no longer exist in the incumbent’s new network. however. this balance involves proper consultation and notice with competitors. not only is there a need to infuse substantial capital. The reduction in the number of POIs for interconnection could potentially be even greater (in percentage terms) than the reduction in the number of POIs for access.5. It is clear that the incumbent operators need to have the ability and the flexibility to modernize their respective networks. The NRA needs to consider risk. including Ofcom in the UK. 210 Risk was reflected in Ofcom’s calculation of BT’s Weighted Average Cost of Capital.3 The changing average incremental cost of service during the transition period The migration to NGN poses many challenges.210 which is substantial during the migration. a key factor in their permissible rate of return on capital. The roller coaster ride of operating expense potentially represents serious challenges. 208 If an operator chooses to interconnect using a third-party transit arrangement. Balancing risk considerations against operational expense that increases before it declines seems to represent a delicate balancing act. A number of NRAs have looked at this problem. 209 See Ofcom (2005) and OPTA (2006). in the near term. Most regulators appear to be striving to strike some balance so as to preserve competition overall. and thousands for access. .208 By contrast. In the long term. possibly coupled with obligations provide reasonable notice prior to eliminating a PoI. Often.209 5.128 Final Report: The Future of IP Interconnection economically sufficient for purposes of interconnection. This poses serious challenges for the regulator. a large Member State today might have hundreds of PoIs for interconnection. operating expense should be lower than with current networks. It is equally clear that the regulator cannot be in the business of protecting individual competitors.
g.Final Report: The Future of IP Interconnection 129 5. instead. they might find it advantageous to keep termination prices high. Fixed operators may possibly find it difficult to reconcile these low retail prices with current call termination fees. opportunities for arbitrage are likely to be substantial. the regulator’s first response should not be to suppress it. are low. Opportunities for arbitrage usually reflect. and partially correct for. especially for the voice service. and to a lesser extent on mobile voice services. .4 A risk of arbitrage? Interconnection arrangements during the period of transition from today’s network to the IP-based network of tomorrow pose special challenges. irrationalities in the underlying pricing structure. will drive retail prices to much lower levels than we see today. It is conceivable that arbitrage. the low costs will lead to low retail prices for VoIP services that will place downward pressure on the price of conventional fixed voice services. To the extent that interconnection arrangements reflect different prices. and VoIP-VoIP interconnection arrangements. independent of the broadband network that carries the service. especially as regards simultaneous co-existence of PSTN-PSTN. VoIP services from Skype) further complicates the picture. 211 Alternatively. or the expectation of arbitrage. This may imply the need to keep interconnection arrangements consistent for VoIP and for PSTN during the period of migration from the switched PSTN/PLMN to NGN.211 whether this will be the case for mobile is unclear. It is important to note that arbitrage is not necessarily a problem in and of itself. the regulator should first try to understand (and if appropriate to remedy) the root causes of the dislocation that makes the arbitrage profitable. so as to put upward pressure on the prices of their competitors. To the extent that the underlying costs of a third-party VoIP service. If substantial arbitrage were to emerge during the transition to NGN. PSTN-VoIP. The emergence of independent third party providers of services (e.5.
Furthermore. It is probably not appropriate for regulators to force these rates to zero. Voice will be just one of many applications carried on tomorrow’s IP-based networks. even as its fraction of network traffic declines over time. the market power that these network operators possessed in the PSTN/PLMN world will not necessarily diminish when they migrate their networks to IP.130 Final Report: The Future of IP Interconnection 6 Conclusions our Conclusions. Key Concept Box 21: Conclusions The clear trend for conventional telecommunications networks is to evolve into IP-based Next Generation Networks (NGNs). To the extent that call termination were driven to much lower rates prior to the migration to an IP-based NGN. This evolution will significantly change the value chain of electronic communication services. The migration of voice services to IP-based networks poses especially profound challenges for interconnection going forward. and will continue for some time to represent a large fraction of the revenue of network operators. . A major finding of this study is that the termination monopoly problem. but established incumbents and mobile operators may prefer to maintain traditional voice interconnection methods. even as its fraction of network traffic declines over time.1 The evolution of the market There is a clear trend for conventional switched PSTN/PLMN networks to evolve into IP-based NGNs. it would avoid disincentives to migrate to new IP-based interconnection arrangements. The next section provides our This section provides Recommendations. This will be accompanied by significant changes in the value chain of electronic communication services. Concluded in Conclusions cont’d on page 133. Voice will be just one of many applications carried on tomorrow’s IP-based networks – it will no longer be in such a unique position. because the implementation of QoS between network operators may depend on non-zero payments. voice will continue for some time to represent a large fraction of the revenue of network operators. is likely to persist for the foreseeable future. Newer operators and cable operators may move quickly to IP-based interconnection. The evolution to IP-based NGNs will place increasing strain on current interconnection arrangements for traditional telecommunications networks. The basic negotiated arrangements for peering and transit traffic appear to be reasonable and sustainable. Nonetheless. which derives from the fact that only a single operator can complete a call to a given E.164 telephone number. 6.
for British Telecom. In either case. Working back from the termination monopoly. this was a somewhat unexpected finding. Suppose that the IP interconnection facilities were effectively transferred to the access services portion of a functionally separated company. we find a need for regulatory obligations that might otherwise have been unnecessary. We mention this at the outset because it has large implications relative to our conclusions. there has been great interest in Europe (and elsewhere) in functionally separating fixed electronic communications network operators so as to simplify regulation. to the extent that termination needs to remain regulated. might change this in the very long term. It will change somewhat in character as voice telephony becomes de-coupled from the network. Notably. and eircom. In recent years. . Telecom Italia. if the relevant IP interconnection capabilities remain with the retail operation. The termination monopoly derives from the fact that only a single operator can complete a call to a given E.212 it might be easier to enforce non-discrimination provisions (depending on the details of the separation). however. For entities that are subject to some degree of functional separation. the non-discrimination provisions are still necessary. Experience has shown that the termination monopoly applies equally to fixed and mobile telephony. it becomes necessary to ensure that the access at IP level to that termination remains free from anticompetitive restrictions. There are also examples in the cable world. but the termination monopoly will persist as long as Europe remains on CPP/CPNP arrangements. For the study team. The mechanics could 212 This is the case. however. or could soon become the case. then the non-discrimination would be solely a matter for the retail operation. The principle of technological neutrality would appear to apply with full force.164 telephone number. and have paid only limited attention to the termination monopoly in an IP-based world. but the VoIP-based telephony service were to remain with the retail service portion of the company. call termination payments (meant to reflect the use of network facilities) would presumably have to flow to the retail telephony operation – some internal funds transfer would presumably be necessary from the retail voice service to the network operation in order to compensate the functionally separated access network.Final Report: The Future of IP Interconnection 131 6. or that make the telephone number irrelevant altogether. the migration to IP in and of itself will not. and would not be simplified by the functionalseparation. Technology that makes it possible for multiple services to complete voice services to a phone number. however. It would then be easy to implement non-discrimination. Previous studies have tended to focus on bottlenecks in the access network.2 The call termination monopoly A major finding of this study is that the call termination monopoly is likely to persist for the foreseeable future.
214 however. nor even feasible for every IPbased network operator to have direct interconnection with every other. regulators need to be able to intervene where necessary if the minimal conditions are not met. In an IP-based world. To the extent that these service providers have small market share. As long as the IP-based network operator with greatest market power in a Member State has peering agreements under reasonable terms (which typically would reflect low or zero interconnection prices) with at least two or three major competitors. 214 See Section 3. A number of papers suggest that asymmetric regulation of termination (imposition of an obligation to interconnect without a cap on the termination fee) leads smaller players to assess even higher termination fees than they otherwise would.132 Final Report: The Future of IP Interconnection vary greatly from one network operator to the next depending on the nature of the functional separation. An open question is how best to address the terminating monopoly in the case of third party VoIP service providers who do not have a real network of their own. We have seen no indications that their charges are problematic. 213 See Katz/Shapiro (1985). those conditions have been met without regulatory intervention in most cases. it is not necessary.3 Interconnection obligations for data This section deals with interconnection obligations. desirable. In the Internet. conversely. larger operators might not be motivated to interconnect with them in the absence of a regulatory obligation.215 6. . the next deals with the closely related question of the level of charges for interconnection. and on the ultimate decision as to what should be basis for termination payments. the theory suggests that they should be motivated to charge supracompetitive termination fees. they are likely to be highly motivated to interconnect with larger traditional operators. larger operators may have countervailing bargaining power to the extent that they can threaten to refuse to interconnect.1.2. as networks migrate to NGNs.2. however. however. a combined system of peering and transit should generate a good market outcome. 215 See Dewenter/ Haucap (2005). in the absence of a regulatory cap to termination fees.213 Some Member States permit these third party operators to assess termination charges. Small operators should be motivated to charge even higher termination fees than large ones.
Key Concept Box 22: Conclusions cont’d It is clear that current mobile call termination fees are much too high. but a number of Member States are implementing reasonable responses. Mobile operators are likely to try to maintain the current arrangements. # # # In an IP-based world. and thus consumer welfare. Discrimination in this sense means not only among the operator’s competitors. but also comparing the quality of IP interconnection that the operator with significant market power offers for call termination uses for its own IP-based services versus the quality of IP interconnection that it offers to competitors. They depress mobile voice usage. The migration to NGN raises numerous transition questions. the growing complexity of IP routing tables due to an increasing level of multiple paths to connection to a given IP address. and the possibility of improved guidance on quantitative Quality of Service (QoS) standards and measurement. we think that the evolution of IP and NGN standards is proceeding as it should. desirable. this should apply equally to the use of IP to access call termination facilities. This suggests once again that it should not be necessary to mandate any-to-any IP peering interconnection. regulators need to be able to intervene where necessary to ensure that this continues to be the case. it is not necessary. As networks migrate to NGNs. as long as a system reflecting a mix . As long as the IPbased network operator with greatest market power in a Member State has peering agreements at low or zero interconnection prices with at least two to three major competitors. including the likely exhaustion of IPv4 addresses in the 2010-2011 time frame. At the same time. a combined system of peering and transit arrangements should generate a good market outcome overall for IP data interconnection. If each operator that has significant market power for termination were to have IP peering arrangements of good quality with several direct competitors (but not all) in a Member State. They may also depress the mobile operator’s ARPU. because they are highly profitable. It should not necessary be that all have direct physical access (to one another – IP transit arrangements should suffice. This is more akin to equivalence of input than to non-discrimination.Final Report: The Future of IP Interconnection 133 In principle. In most respects. In an IP-based world. and were not permitted to discriminate against those competitors in regard to the quality of IP provided to their voice services. there could be a far greater number of market players. A numbering of issues nonetheless warrant attention. and that no public policy intervention is required. nor even feasible for every IP-based network operator to have direct IP data interconnection with every other. operators that have Significant Market Power with regard to call termination – which effectively includes all operators who terminate calls – can not be permitted to discriminate against competitors in regard to the quality of IP interconnection used to access their call termination facilities. then one could reasonably expect that transit arrangements to other domestic competitors would be available at reasonable price and quality.
6. In principle. we should make some technical observations. . we discussed the presence or absence of an obligation to interconnect. hard-to-detect impairments of service quality. Second. however. these concerns are present whether voice traffic flows over a specific IP-based voice interconnection point. we see the need to ensure that NRAs have any necessary authority to ensure that voice interconnection remains effective as networks migrate to an IP basis. 6. First.134 Final Report: The Future of IP Interconnection of IP peering and transit is effective. that should be a commercial decision. we observe that the migration to IP introduces the possibility of introducing subtle. thus raising the question of how deviations would be detected and demonstrated.1 The level of charges for IP data traffic The future level of interconnection charges for IP data are likely to have more in common with current Internet mechanisms than with current PSTN mechanisms. terms or conditions substantially inferior to those which the SMP operator provides to itself. or over the same interconnection facilities as other IP data.4 The level of charges among IP-based network operators In this section. Based on the principle of proportionality. we consider the level of charges. The new challenges derive primarily from the incorporation of voice into the IP environment. In terms of a policy response. it is appropriate to apply remedies where necessary to address market power. their obligations should be crafted so as to address the harmful effects of that market power but to otherwise impose as few constraints as possible on them. in the previous section. we do not see the need for a new remedy for IP interconnection in support of voice. the NRA (or NCA) might take action ex post if an SMP operator were to fail to do so. Finally. it is possible that regulators would find such a system more difficult to monitor than a set of arrangements with any-to-any peering. For undertakings that have market power only in regard to call termination. not a regulatory decision. This might take the form of requiring ex ante that SMP operators not provide IP-based access to their voice services under quality. alternatively.4. Rather. Basic arrangements for peering and transit traffic appear to be reasonable and sustainable. This still does not necessarily seem to imply the need to impose non-discrimination obligations on all IP traffic.
In terms of consumer welfare. some to the risk that the system will be “gamed”. there is a good likelihood that Network Neutrality will not turn into a noteworthy problem in Europe. who proposed that if regulators were to set broad overall caps on profitability.) Where fixed network operators bilaterally agree on charging for IP data traffic. it is probably not appropriate for regulators to force rates to zero. The violations that are most worrisome are those that imply economic foreclosure: For example. notably including the consumer broadband market such that most European end-users are able to choose among three or more providers. we do not see a need for comprehensive new regulation to address Network Neutrality challenges. pricing structures that reflect the degree to which demand is elastic in response to price] themselves. as already noted in section 6. (This thought is in the spirit of a suggestion of Laffont and Tirole (2000). especially at such time as existing switched voice interconnection is withdrawn. and secondarily on the QoS that has been requested (and delivered). Traffic prioritization per se is not necessarily harmful to consumer welfare. operators would be motivated to implement efficient Ramsey-Boiteux pricing structures [that is.Final Report: The Future of IP Interconnection 135 IP-based operators who agree to peer usually (but not invariably) agree today not to charge one another for peering. regulators may need to have the authority to intervene for certain kinds of violation of neutrality. In any case. There are many open and challenging practical questions regarding charging for QoS. and the minor enhancements that the Commission proposed on 13 November 2007216 further strengthen the hand of the regulators.2. 216 Including changes to Articles 20 and 22 of the Universal Service Directive. preventing the evolution of positive service differentiation. Implementation of QoS between network operators probably depends on non-zero payments. Most likely. if they charge at all. a network operator blocks or degrades the quality of access to some website that competes with a website affiliated with the network. . or blocks access to an independent VoIP service provider who competes with the network operator’s own voice services. As long as European regulators maintain competition in underlying markets. and the ability to mandate a minimum Quality of Service. The one area that we have identified where possible new obligations might prove necessary is in the IP data interconnection used to support voice interconnection. and some to verification that the interconnection partner has in fact delivered the level of QoS that it committed. Moreover. For now. however. an overly stringent obligation of non-discrimination obligations could do more harm than good. Nonetheless. some related to the security. European regulators already have a range of potential remedies that collectively should suffice. it is desirable that wholesale interconnection payments be either low or zero. they will charge for IP data traffic primarily based on traffic volumes. they will necessarily do so on the basis of something that both can measure and verify. which are best determined by the operators themselves.
first.2. and may in some cases also negatively impact the mobile operator’s ARPU and profitability. because their price will be driven by their real costs. They may instead prefer to maintain current termination arrangements. In this scenario. For all of these reasons. but also as a means of keeping costs higher for their competitors and thus reducing the downward pressure on their own retail prices. they depress mobile voice usage. and would reflect the declining role of voice in comparison with data over time. Furthermore. it is not clear that incumbent fixed operators would choose to evolve to such a model. one might hope that current wholesale voice-oriented call termination arrangements in the fixed network would break down. probably in favour or charging arrangements that track more closely to real average incremental costs. What is different in the mobile environment is. voice services drive only a small fraction of the cost of today’s networks. It is even more difficult to predict what will happen for the mobile telephone network.4.2. traditional arrangements will be under progressively increasing pressure in the next few years. because the termination fees that they receive are so much larger than . but these charges should not be materially different from those associated with similar QoS guarantees for other data traffic There are indications that this is already happening among third party VoIP service providers. however. it is clear that current mobile call termination fees are much too high – as noted in Section 3. In terms of consumer welfare. and also among cable operators that offer VoIP services. and this fraction will continue to decline. the mere presence of independent third party VoIP service providers calls into question the relevance of charging arrangements where the voice service seeks to recover the costs of the underlying multiple service network.3. independent third party VoIP service providers will put enormous pressure on retail prices. Minutes of voice telephony use in the fixed network are only weakly correlated with network cost. that the mobile operators will be much more strongly motivated than their fixed counterparts to maintain the current arrangements. and in any case are more appropriately measured by the service provider than by the network operator. More generally. To the extent that voice termination fees are unrelated to real average incremental cost.136 Final Report: The Future of IP Interconnection 6. not only as a direct source of revenue.2 The level of charges for voice The likely evolution in the absence of regulatory intervention might be quite different for the fixed network than for the mobile network. There might be charges for the Quality of Service with which the underlying traffic were carried. For the fixed network. What should ideally happen for the mobile network is not very different than for the fixed network – one would hope that wholesale and retail prices would move much closer to actual cost. the voice service would clearly play a much smaller role than it does today in these charging arrangements for the fixed network. The avoided usage represents a negative impact on consumer welfare.
Final Report: The Future of IP Interconnection 137 those that flow to the fixed operators. may have both the incentive and the ability to sustain current arrangements for some extended period of time. 6. .5 The migration to an IP-based NGN The migration to IP-based NGNs will. however.217 What should happen in the mobile environment is clear enough. 217 See Section 5. Second. To the extent that call termination arrangements based on much lower fees were adopted prior to the migration to an IP-based NGN.1. When and how new SMP obligations tailored to the new IP-based environment should be put in place. which deals with recommendations. they have far greater ability than their fixed counterparts to inhibit or at least to delay the deployment of third party VoIP services onto their mobile networks. Newer operators and cable operators may move quickly to IP-based interconnection. necessitate serious consideration of a number of key challenges: • • How long current SMP obligations should remain in force. Again. it would avoid disincentives to migrate. current interconnection arrangements will come under increasing strain as switched PSTN/PLMN networks evolve into IP-based NGNs. what will happen in the absence of a public policy response is a more complex question. and How to address changes in the number of Points of Interconnection. • We return to these questions in Chapter 7 of this report. but established incumbents may prefer to maintain traditional voice interconnection methods until economic arrangements for IP-based interconnection have been clarified to their satisfaction. Lack of regulatory clarity risks delaying network evolution. as noted repeatedly in this report. We return to these points in Chapter 7. as previously noted.4. the legal and philosophical basis for doing so requires careful consideration. Mobile operators.
and that no public policy intervention is required. and the techniques with which to measure them. but they certainly have the potential to disrupt IP interconnection. identified several potential challenges or opportunities regarding the ongoing evolution of the Internet Protocol (IP) that potentially have direct relevance to the European Commission. and are therefore relevant to this study. we think that the evolution of IP and NGN standards is proceeding as it should. however. The gradual “bloat” of IP routing tables. These issues are reflected in our Recommendations in Chapter 7. . Our interviews also suggested concerns with the difficulties that researchers have in gaining access to data about traffic evolution in the Internet. as noted in Chapter 2.6 Technical considerations in the evolution of the IP protocol In most respects. but we do not have a specific recommendation to offer to address the issue. and The possibility of improved guidance on quantitative Quality of Service (QoS) standards (delay.138 Final Report: The Future of IP Interconnection 6. jitter and loss) to be used. The first two are not specifically interconnection issues. between IP-based networks. either in terms of research or in terms of active policy: • • • The likely exhaustion of IPv4 addresses in roughly the 2010-2011 time frame. we have.
1 and 7. If intervention should prove to be required. sections 7. however. NRAs must be able to intervene if interconnection breaks down. and the price of interconnection. NRAs should however be prepared to intervene where necessary to address market power. the remedies already available under the European regulatory framework are working. primarily related to network addressing and to QoS. and will continue to work.4 consider interconnection obligations and prices for voice. with or without payment – this is the ideal case.6 reviews technical considerations. and we do not see a need to mandate any-to-any peering. We distinguish between the obligation to interconnect. It is not necessary or appropriate for the NRA to mandate any-to-any IP interconnection. 7. To be effective. in light of the possibility of a mix of peering and transit arrangements. and might be disinclined to offer fully effective interconnection in order . The one conspicuous challenge that might emerge going forward is the possibility that an ECN or ECS might have market power by virtue of network externalities rather than according to standard tests of market power in one of the markets susceptible to ex ante regulation. Section 7. Entities without market power will generally choose to have good quality interconnection. might not be motivated to implement fully effective IP interconnection on their own.Final Report: The Future of IP Interconnection 139 7 Recommendations Based on our findings. Entities that have roughly comparable bargaining power will often voluntarily agree to interconnect with one another. Key recommendations are captured in the introductory text to each section.2 consider interconnection obligations and prices for data. this power to intervene must include the ability to cap the price of interconnection. however. Sections 7. while section 7. in which case application of the SMP remedies in the Access and Interconnection Directive (notably the Article 12 obligation to interconnect networks or network facilities) may be appropriate.5 reviews the issue of Network Neutrality. for example in regard to broadband access.1 Interconnection obligations – IP traffic We do not advocate an interconnection obligation as regards IP data traffic in general.3 and 7. Electronic Communication Network (ECN) operators that possess SMP. we make the following recommendations to the Commission for the near to intermediate term. especially where this is a manifestation of some form of market power.
2. It is conceivable that this might lead to manipulation of the prices. then there needs to be some constraint on the price. it means that NRAs must be empowered to ensure that standard interconnection remedies (updated to deal with new technology) are not subverted. or the quality of the IP interconnection that will have become the basis for voice interconnection.218 The European regulatory framework does not provide a comprehensive solution to interconnection problems in the absence of conventional SMP. Cremer/Rey/Tirole (2000). It is 218 See Katz/Shapiro (1985). otherwise the obligation is meaningless. Should interconnection obligations prove necessary as an SMP remedy.4. This enables the operator to choose an appropriate RamseyBoiteux pricing structure (that is. we conclude that the call termination monopoly is surprisingly durable. As noted in Chapter 6. rather. difficult-to-detect ways. and also makes it possible to apply differential network-to-network interconnection prices to reflect different levels of Quality of Service. 7. even in the face of profound changes in the technology and the market. but leave operators free to choose the structure of prices. This is not to suggest that a new remedy is needed. Article 5(1) of the Access and Interconnection Directive provides NRAs with a sufficient tool to take appropriate measures should this still somewhat hypothetical scenario emerge.140 Final Report: The Future of IP Interconnection to exploit its market power. It may be necessary for NRAs to take action from time to time (possibly ex post) to ensure that operators subject to an SMP remedy do not take actions that would render the IP-based voice service interconnection ineffective or unusable. it is possible that some operators would respond by attempting to capture economic rents from other operators in some other way. it should address the aggregate level of prices. the terms and conditions. to implement a pricing structure that reflects the degree to which demand responds to price). It might be sufficient to require that the overall quality of IP-based voice interconnection that an SMP voice operator provides to competitors cannot be unjustifiably inferior to that which it supplies to itself (a condition more akin to equivalence of input than to non-discrimination). however. as we recommend in section 7.2 Wholesale payments for IP traffic interconnection Should intervention related to the price of IP data interconnection prove to be required.3 Interconnection obligations – voice call termination If call termination fees were in fact either eliminated or greatly reduced. It is possible to degrade the quality an IP interconnection in subtle. 7. .
in and of itself. The migration to NGN does not. interconnection obligations are generally in place. for example. an ECSP with a large customer base could. but will prefer to charge even higher termination fees. threaten to refuse to interconnect with an ECSP with a small customer base in order to try to extract higher termination payments. Alternatively. Cremer/Rey/Tirole (2000). In fact. 220 See Katz/Shapiro (1985). rather. ECSPs with large market shares have less incentive to interconnect. The European regulatory framework already provides all necessary tools. ECSPs will generally be motivated to interconnect. that use Bill and Keep arrangements (and thus avoid inflated call termination payments). however. change this market power. This could perhaps change in time. It is important to note that this should not be viewed as a new remedy. it means that NRAs must have the ability to enforce existing remedies.164 telephone number. Even in countries such as the U. NRAs have all the authority they need to impose interconnection obligations as appropriate. 219 For example.219 but assuming that Europe continues to use CPP/CPNP arrangements it will not change in the near or intermediate term. it might be sufficient to deal with problems ex post.220 Paradoxically. Inasmuch as both fixed and mobile operators possess SMP in regard to call termination.Final Report: The Future of IP Interconnection 141 likely to persist as long as only a single ECSP is able to complete calls to a single E. which is a decision best left to the market. or to raise its rivals’ costs. but are also willing to charge somewhat lower termination fees when they do. an operator that does not have a network (to speak of) could still possess termination monopoly power. widespread deployment of user ENUM might make it possible for the caller’s handset to automatically identify the most cost-effective way to reach an end-user. and quality) relative to those that the SMP operator provides itself for its own voice services. All of this is independent of the question of whether IP data traffic uses the same physical interface as voice. In terms of willingness to interconnect. just as would be the case if some SMP operator attempted to vitiate the effectiveness of an SMP remedy in the existing PSTN world. To the extent that IP-based interconnection becomes the basis for all voice interconnection. In a totally unregulated world. ECSPs with small market shares have strong incentives to interconnect. network externalities come into play. conditions. it may become necessary to mandate ex ante that a network operator with SMP for call termination (fixed or mobile) must make IP-based interconnection available to competitors for purposes of voice service interconnection on nondiscriminatory terms (in terms of price. .S.
especially in mobile termination fees.2.4 and 5. ideally zero. or (3) by permitting negotiated termination fees subject to an obligation that the fees be reciprocal (the same in both directions) between each pair of interconnected (fixed or mobile) networks.3. it minimises economic distortions.142 Final Report: The Future of IP Interconnection 7. because (1) it is not clear how it would be justified under the current regulatory framework. • In an ideal world. and were enormously too high.1. inasmuch as the current arrangements greatly complicate the migration to IP-based NGNs. A reduction in termination fees. and preferably no higher than the rates that prevail today for fixed termination rates. the second option would appear to offer many advantages in comparison to the other two. We nonetheless stop short of recommending the second option. could be implemented by (1) accelerating the speed with which the maximum call termination rate declines from year to year under existing CPNP arrangements. termination fees for mobile operators were unregulated. Prior to 2003. we would offer some observations. we think that societal welfare would be substantially enhanced if mobile termination rates were much lower than they are today. Efforts in the European Union since 2003 to float mobile termination fees down to cost-based levels have brought large improvements.2.221 Again. Call termination arrangements in the current voice network are perhaps beyond the remit of our current study. Current arrangements result in mobile termination fees that are inefficiently high. nonetheless. so as to reasonably quickly achieve levels much lower than those that pertain today. but the migration to IP-based NGNs puts the issue in sharper focus. moreover.4 Interconnection payments – voice call termination Independent of the migration to NGN. We expand on the rationale at the end of this section.4. or (2) by requiring all fixed and mobile operators to eliminate call termination fees altogether. but at the cost of a massive regulatory intervention. and (2) a glide path would be necessary in any case in order to enable operators to adjust their retail payment plans over time to match the changing wholesale arrangements. The outright elimination of call termination fees is simple. . termination fees are still much too high in our judgment. • 221 See sections 3. for the reasons previously noted. and it involves the fewest impediments to the evolution over time of interconnection arrangements as networks evolve to an IP basis. this is not specifically an IP issue – it exists independent of IP.
If wholesale call termination rates were to move to sufficiently low levels.S.S. one could reasonably expect that flat rate retail plans would emerge that included off-net calls to mobile phones. We are not indicating exactly what the target levels for fixed and mobile voice termination should be. Recall that. to increased availability and consumer take-up of flat rate and “buckets of minutes” retail plans. in the U. for reasons noted above. Wholesale arrangements do not dictate retail arrangements.Final Report: The Future of IP Interconnection 143 • What we concretely recommend instead is that the Commisson mandate222 that fixed and mobile call termination rates “fast glide” to pre-specfied target levels over a predefined number of years (somewhere between three and five). Those costs then propagate to many other 222 Under the authority provided by Article 19 of the Framework Directive. otherwise. whose costs are in effect assumed to represent a reasonable proxy for those of the rest of the industry. and to substantially increased use (expressed in minutes of use per month) of mobile telephones. except to the extent that high termination fees tend to force CPP plans with still higher retail price per minute. This corresponds to option 1. Reduction in mobile termination rates would tend to lead to a substantial decrease in usage-based retail prices for mobile service. experience suggests that the third option would eventually lead to a positive outcome. Even though U. and allows for mid-course corrections if necessary. the regulator (state public utility commissions with some support by the FCC) does not attempt to track average incremental cost for all operators. they monitor costs only for fixed incumbents. at the expense of a significantly smaller increase in the fixed portion of the retail price of mobile service (the “waterbed effect”). attempts by operators to preserve high rates would tend to distort the migration. we think that it is not ideal. We note that zero is in many respects an ideal number. We have not addressed the question of whether regulators should prefer CPP. RPP. regulators should strongly prefer to apply any remedies that might be required solely at the wholesale level. flat rate or “buckets of minutes” plans because we do not think that regulators need to decide. .. There is a strong argument that this lowering of mobile termination rates should be implemented before the migration to IP-based NGNs. since this is far beyond the scope of this study. Retail regulation would be imposed only as a last resort. were mobile termination fees to be in the same range as current fixed termination fees. the fixed and mobile service providers would be able to freely choose the most appropriate retail plans to offer based on their respective business strategies and on the needs of their respective customers. rather. We also observe that. This fast glide path gives the operators time to adjust their business plans. • • • Consistent with the general philosophy of the European regulatory framework.
”227 223 Reciprocity is different from symmetry. With the cross-subsidies and economic rents at stake the interested parties can be expected to continue to devise new models and to argue their corner. requires reciprocity. but not symmetry. 224 See Marcus (2004b). but none require reciprocity between fixed and mobile operators. who is not only a prominent economist but also an experienced regulator. It should not be viewed as sacrosanct.144 Final Report: The Future of IP Interconnection interconnection arrangements as a result of the obligations of reciprocity.S.S.e. and should therefore play no role whatsoever in the network operator’s recovery of the costs of the call (not even through the monthly subscription fee). i. and ideally to zero. The analysis of two-sided platforms can also shed useful light on the problem. benefits to the call recipient. 226 Notably Armstong and Wright (2007). We think that a U. Littlechild. puts it this way: “The idea of an ‘optimal price’ is a chimera: there are as many optimal prices as there are different specifications of the underlying economic model. Aside from that.224 A migration to reciprocity in the European Union could easily multiply these start-up “growth pains” by 27 Member States.S. Some European Member States require symmetry. They work reasonably well today. We would start by noting that there is no perfect rate. and also Valletti/Cambini (2005). For networks A. and Littlechild (2006). reciprocity means that the termination fee from network A to network B is the same as the termination fee from network B to network A.-inspired system of reciprocity is less desirable for Europe than the fast glide path that we advocate here.225 We expect that some readers will be puzzled by our suggestion that termination rates for calls to fixed phones and to mobile should be set to levels that could be lower than cost. Current arrangements reflect the unrealistic assumption that the call recipient derives no benefit from the call. would imply that aAC = aBC. With the consultancy fees available there is no likelihood of economists running out of ideas or agreeing with each other. the arrangements are difficult to understand (even for experienced U. .4. The U. practitioners). but it took years of fine tuning to get them to that point. and possibly other factors as well. 225 See DeGraba (2000). aAB = aBA. mobile-to-mobile interconnection agreements often are based on termination fees of zero as a purely voluntary outcome.223 Interestingly.S. See Section 3. on the other hand. Regulation of termination charges is a Sisyphean task.1. and have odd side effects.S. arguably far better than their European counterparts. Symmetry. and Atkinson/Barnekov (2000). Current U.226 Given the ambiguities involved. B and C. A number of forward-looking theorists in the U. 227 Littlechild (2006). the regulators challenge is enormous. and would probably reflect network externalities. The notion that the optimal rate should reflect marginal cost (which is not really knowable in any case) was based on earlier theory that ignored network externalities and many other factors. A number of quite credible newer studies suggest that the ideal rate would be quite different. arrangements are complex. have been arguing for years for a migration from their current system to a comprehensive system of pure Bill and Keep arrangements. Valletti and Houpis (2005).
228 See EU-Commission (2007). and competition law provides additional mechanisms. 229 At the same time. it could impede competitive entry. and that they are impacting welfare by depressing use and by introducing economic distortions into the relationship between the mobile network and the fixed. There may also be merit in enabling NRAs to mandate a minimum quality of service. this is a much greater disparity than is present in other regions of the world. especially where there is a risk that an ECN operator or ECSP might leverage market power into an otherwise competitive upstream or downstream segment. we believe that actual costs of mobile service are considerably less than those implied by current termination rates (see Section 5. we do not advocate major regulatory initiatives at this time.5 Network neutrality In regard to network neutrality. regulators will need to take care. however. Current asymmetric termination arrangements were presumably intended to reflect very different costs of fixed versus mobile. we do not see the need for new regulatory remedies.228 It seems to us that mobile termination fees that are no greater than fixed would be significantly closer to real costs than are the current highly asymmetric arrangements. the current termination arrangements represent an economic distortion for all of the reasons noted in previous chapters. Based on ITU research. especially where an element of economic foreclosure appears to be present.Final Report: The Future of IP Interconnection 145 Even if there is no right termination rate. they tend to place the cost burden on a service that represents only a small fraction of capacity demands on the network going forward. the existing regulatory framework for electronic communications probably provides adequate tools. We see merit in the use of Articles 20 and 22 of the Universal Service Directive to require ECSPs to document their practices as regards blocking access to services or degrading the quality of access to services. They impose the total cost of the network on a voice service that will going forward be only one service out of many delivered over that network. The true cost disparity is vastly less than the current 9:1 ratio of mobile termination to fixed (double transit) termination that is present on average in current European termination rates. For reasons that we have made abundantly in earlier chapters. If the minimum quality of service were set too high.4. the model totally disregards the substantial value to the party that receives the call. and would avoid many of the distortions present in the current system. . aside from that. however. 7. page 28. Annex II. Moreover.1. it is clear that current rates are too high.2). In general. Regulators should however be vigilant as regards possible anticompetitive discrimination. there can be a wrong rate. Aside from that.229 NRAs and NCAs need to be prepared to address wilful deviations from network neutrality.
to block denial-of-service attacks).6.230 Furthermore. such as user ENUM (rather than carrier ENUM) or techniques to enable multiple operators to serve calls placed to a single telephone number. jitter and loss. and no public policy response is required. Based on the concerns raised in Section 6. . could help to simplify negotiations among network operators and thus to reduce the economic 230 The NRA should bear in mind. Non-discrimination obligations are already in place on most incumbents. and the NRA has the additional ability to apply Article 5(1) of the Access and Interconnection Directive. we could merit in the Commission’s other proposals in this area. and thus well in advance of the full blown deployment of IPv6. and with defined tools and mechanisms for measuring these attributes. A standardized set of QoS classes with defined quantitative targets for delay.146 Final Report: The Future of IP Interconnection NRAs already have substantial authority to address problematic deviations from Network Neutrality. 7. we think that the kind of QoS standards reflected in MIT’s White Paper represent a promising direction as regards the ongoing evolution of QoS between providers. and (4) research into technologies that could over time ameliorate the termination monopoly. (2) continued research and standards development in regard to classes of service for QoS. (3) research into the longer term issue of unbounded growth (“bloat”) of the BGP global routing table. which (after several false alarms) now seems to be quite likely in the 2010-2011 time frame. and for measurement of compliance to those classes.6 Technical considerations in the evolution of the IP protocol In most respects. NRAs could mandate (pursuant to their authority under Articles 20 and 22 of the Universal Service Directive) that ECN operators and/or ECSPs provide consumers with a public statement as to the circumstances under which they would intentionally block access or degrade the quality of access to a site or a service (for example. including the ability for NRAs to impose carefully crafted minimum quality standards on SMP operators. that Article 5 needs to be used with caution and restraint. harmful leveraging is potentially actionable by the National Competition Authority (NCA) ex post as a competition law violation. inasmuch as it is not linked to a finding of SMP. Aside from that. Four areas where policy initiatives may be appropriate are (1) considering techniques to address or ameliorate the consequences of the exhaustion of IPv4 addresses. Further. First. we see benefit in increased policy focus on a number of emerging issues regarding the technical evolution of the IP protocol. however. it is not altogether clear what specific powers Article 5 confers on the NRA. technology and standards appear to be evolving satisfactorily. The one area where preventive regulatory measures should be considered is in ensuring that consumers have the information they need to make informed choices.
Finally. not to ameliorate it. secondary markets would likely move large quantities of IPv4 addresses to higher valued use.231 thus potentially buying several years in order to enable the IPv6 transition to complete. but it nonetheless now appears that IPv4 addresses are likely to exhaust well before the IPv6 transition is complete. but also into the policy dimensions of what is likely to happen as IPv4 addresses become scarce. One particular aspect that has not been looked at sufficiently to date is the possible use of secondary markets for IPv4 addresses – by forcing firms that currently hold large blocks of inefficiently used IPv4 addresses to confront the opportunity costs associated with holding their address blocks rather than selling them. to its credit. we think that increased research focus is required on the longer term issue of the steady growth in the size and complexity of the IP routing table. not only into technical aspects of IPv6 deployment. Second. The migration to IPv6 is likely to exacerbate the problem. 231 The analogy to secondary markets for spectrum is strong. we think that we have finally reached a point where IPv4 address exhaustion represents an immediate challenge. The European Union. has been advocating IPv6 migration for many years. Research could be helpful. Increased research focus in this area merits consideration.Final Report: The Future of IP Interconnection 147 transaction costs that have slowed take-up to date of differentiated QoS between IPbased networks to date. .
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In this case the access-pricing problem is similar to that of one-way access.232 A body of useful work has emerged in the intervening years. even though traffic is balanced and therefore no net payments are being made. As the other two it extensively treats one-way access and is somewhat shorter on two-way access (i. Because the receiving network (usually) has a monopoly for termination to the subscriber being called. under certain conditions. Armstrong further considers a large incumbent and a small entrant. Economic analysis of IP interconnection was radically transformed by a series of high profile merger cases in the late Nineties. interpreting the entrant’s demand for access as its net demand (or access charge deficit). This implies (with isotropic calling patterns) that the entrant incurs an access charge deficit with the incumbent. the entrant’s market share would vanish. at the same retail prices. it can charge a monopoly price for termination. It is then clear that the entrant can only survive at lower prices. Mark (2002): The Theory of Access Pricing and Interconnection.e. Armstrong terms the problem of monopoly over call termination one of competitive bottlenecks because it can happen under full competition between networks for subscribers. in: Economic Journal. 295-384. when access charges are set according to the collusive equilibrium rule. If callers only have average information about termination charges and do not know which network to which network the receiver subscribes. this book chapter provides the first easily accessible treatment of Armstrong’s competitive bottleneck result. then firms have no incentive to deviate from the collusive retail price because the gain in profits from undercutting the rival is just compensated by the increase in access payments needed for the increased number of calls going to the other network (and the reduced number coming from there). interconnection). .Final Report: The Future of IP Interconnection 153 Annex 1: Survey of recent published work on IP interconnection This annex summarizes key findings of articles and reports relevant to IP interconnection. This paper is famous for deriving the result (independently discovered by Laffont. This is the most technical and most elegant of the three extensive surveys of interconnection pricing.. in: Cave. In contrast to Laffont.): Handbook of Telecommunications Economics. There are also several noteworthy papers that deal with technical aspects of IP peering and transit. In Armstrong’s interpretation. 232 Notably the WorldCom/MCI merger. finds value in cost-based (one-way) access prices. the entrant will prefer lower access charges than the incumbent. the firms can use access charges collusively to achieve maximal profits. pp. Elsevier Publishers. Ingo (eds. Armstrong. Rey and Tirole. The papers on IP-based arrangements are best understood in juxtaposition with the economic literature on PSTN/PLMN interconnection. Martin / Majumdar. Besides deriving a large number of results from the literature in a very coherent fashion. Sumit/ Vogelsang. termination charges in small networks may even exceed monopoly prices. As a result. pp. Rey and Tirole. Mark (1998): Network Interconnection in Telecommunications. 1998a) that under symmetric conditions and reciprocal access pricing. and the attempted WorldCom/Sprint merger. 108. Armstrong. 545–564. including the primary literature on switched PSTN/PLMN interconnection. Vol. Armstrong. using the assumption that consumers prefer the incumbent over the entrant so that.
MPRA Paper Number 4858. Mark/ Wright. and to consider fixed-to-mobile call substitution. comparing the benefits of private peering in relation to being connected only through national access points. 1. competitively neutral regulatory regime for interconnection between telecommunications networks. Two alternative modelling perspectives are used: the stable network is concluded being the complete network. Jay M. Badasyan.wustl. Atkinson. where the fixed operators are distinct firms from the mobile operators. whether peering might threaten its existence. The chances for such a threat will be larger if the cost savings from peering in the ARN are small. Narine/ Chakrabarti. The paper that this default rule is competitively neutral and encourages efficient subscription and interconnection decisions. while in the opposite direction large cost sensitiveness tends to increase the competitor’s network size. where all the backbone providers choose to peer with each other. It shows that certain constellations and conditions are more favourable to peering than others. then combines the models. Thorsten (1999): On the Economics of Internet Peering. the termination rate will tend to be close to the monopoly price. This recent paper expands on previous analytical models of call termination. It proposes a default bill and keep solution under which carriers split equally those costs that are solely incremental to interconnection. available at http://www. The article discusses economic rationales behind peering decisions in the Internet. They then consider reasons why mobile operators seem to set M2M rates equal to F2M. Where operators set a single rate. .pdf. but that they may prefer low M2M rates so as to moderate competition for customer acquisition.gov/osp/workingp. however. while the efficient network is estimated being the one. The latter is organized as club of academics who share the cost of their network. They find that mobile operators are unambiguously motivated to set high termination rates for F2M. absent a regulatory obligation. if the commercial networks gain considerably in size from peering and if their combined size is nevertheless not too large. if there are a large number of operators. Subhadip (2003a): Private Peering Among Internet Backbone Providers. 89-105. Julian (2007): Mobile Call Termination. in: Netnomics Vol./ Barnekov. thus lower than the monopoly price but still well above the efficient price. It expands the discussion to incorporate a comprehensive model of call and network externalities. In the second part of the paper peering between an academic research network (ARN) and commercial ISPs is discussed. and recover all remaining costs from their own customers.edu/eps/mic/papers/0301/0301003. Baake. cost savings raise the chances of peering being profitable. Christopher C. available at: http://econwpa.154 Final Report: The Future of IP Interconnection Armstrong. For the ARN is especially important. This strategic pricing constitutes a stronger threat to the existence of the ARN who should therefore agree to a peering arrangement if that increases its members’ utility. Between commercial ISPs. In the second part we discuss multilateral peering between commercial ISPs and an academic research network (ARN). (2000): A Competitively Neutral Approach to Network Interconnection. Pio/ Wichmann. The paper develops a consistent. The analysis differs from previous work primarily in that it distinguishes the costs incremental to interconnection from those incremental to increased traffic volume. However. The analysis assumes a UK-like context. they suggest that it will tend to be intermediate between these values. a peering agreement decreases the profitability for a commercial ISP of using strategic pricing to win all members of the ARN as customers. In this paper a model is developed in which Internet backbone providers decide on private peering agreements. pp. where the backbone providers are connected to each other only through the national access points.fcc.html. It provides two separate models of Fixed-to-Mobile (F2M) and Mobile-to-Mobile (M2M) call termination.
Carter and Wright recommend . It is shown that with two-part tarifs and discriminatory prices. if call externalities are taken into account. negotiation over access charges leads to collusion that would be forbidden in the retail market. Furthermore. which measures how return traffic is induced by sending calls. Subhadip (2005): A Simple Game Theoretic Analysis of Peering and Transit Contracting among Internet Access Providers. connectivity breakdowns are not interpreted as a major source of concern under a mild form of regulation (reciprocity).pdf. Carpet. in most cases companies would agree on above cost termination rates. 107-112. Cambini.wustl. 2003. The incentive and ability for tacit collusion. Using simulations. derived by Armstrong (1998) and LRT (1998) is maintained if brand loyalty leads to different sized networks.Final Report: The Future of IP Interconnection 155 Badasyan. Carter. In this article a model with two backbones and an infinite number of ISPs connected to the backbones is developed. As evidence points to a positive propagation factor. factors supporting or hindering peering are highlighted. Their results suggest that providers do not necessarily exploit market power when refusing to peer. in: Economics Letters. The paper uses the framework of a simple model where two symmetric networks compete in nonlinear and discriminatory prices in the presence of call externalities. Cambini. The role of the “propagation factor” is highlighted. March 2005. even if a regulator imposes marginal cost pricing at retail but regulates access charges only by requiring reciprocity. In this paper a model of information exchange is developed to analyze competition between network operators. Narine/ Chakrabarti. Badasyan Narine/ Chakrabarti. costbased access pricing can never be optimal from the social viewpoint. and thus. VA. in: Review of Industrial Organisation. Instead. Subhadip (2003b): Intra-backbone and Inter-backbone Peering Among Internet Service Providers. Carlo/ Valletti. Tommaso M. Vol. 14. 86. it is highlighted that from a social viewpoint bill and keep is welfare improving in comparison to cost-based access pricing. Thus. pp. pp. As a consequence. Indeed. 16. Reduced differentiation and the promotion of stiffer price competition are negative consequences. The paper presents a simple game theoretical analysis of two Internet access providers who choose between peering and transit agreements. Their results are in contrast with the findings by Carter/Wright (2003). increasing demand and the ability to increase producer surplus by charging higher prices are highlighted on the positive side. under some circumstances. unpublished paper. The paper studies the impact of reciprocal access charges on the incentives to invest in upgraded networks. Berger. while granting them full pricing flexibility due to the fact that optimal regulation is difficult and costly to achieve. cost-based access pricing revisited. the networks can sustain monopoly profits by agreeing on high access charges (that increase marginal costs for each other). Ulrich (2005): Bill-and-keep vs. Michael/ Wright. It derives one robust result: once investments are endogenized. Also. pp. Vol. Quality improvements. It is argued that the market forces determine the decisions of peering and transit. it is shown that. Tommaso M. They suggest in case of operators with symmetric and balanced calling patterns to allow operators to negotiate over reciprocal access charges. Julian (1999): Interconnection in Network Industries. (2005): Information Exchange and Competition in Communications Networks. who argue that cost oriented prices are likely to emerge in private negotiations.edu/eps/mic/papers/0407/0407006. the industry can self-regulate and achieve first-best allocations via negotiated access charges that internalize externalities. available at: http://econwpa. Carlo/ Valletti. in: Information Economics and Policy. 1-25. Vol. Paper Presented at the TPRC. 391-409. instead the joint profits are maximized under the transit arrangement. there is never an alignment between private and social interests over the setting of reciprocal interconnection charges. (2004): Access charges and quality choice in competing networks. given the current system. no need for regulation on interconnection policies is deduced.
the suggestion no longer achieves the optimal outcome. in: Review of Industrial Organization. Michael/ Wright. Julius (2005): The Effects of Regulating Mobile Termination Rates for Asymmetric Networks. DeGraba. the larger one prefers a lower quality interconnection than the smaller one. Vol. 27-46. available at http://www. Sumit/ Vogelsang. pp. Crémer.” OPP Working Paper Series. The use of two-part tariffs at retail thus could lead to access charges that would sustain welfare optimal usage charges downstream. access charges only affect interconnection profits and not end-user profits.fcc. In the case of two-part tariffs downstream. When two backbones interconnect. It then confirms the theory that smaller operators tend to set higher termination.): Handbook of Telecommunications Economics. D. . the larger network provider will choose access charges equal to marginal costs of call termination. 2000. Vol. It is concluded that despite ups and downs the Internet backbone market has been characterised by robust competition in the past. Ralf/ Haucap. the smaller provider will use a high usage price to end-users to make the dominant carrier incur an access deficit. Holland/Elsevier. 48. Jan H. Carter and Wright maintain that two-part interconnection charges could reinstate the collusive outcome. 20. Morten/ Jensen.html. Ingo/ Cave. In order to avoid free-riding on other networks and to induce optimal network investment. since. pp. Jacques/ Rey. Nicholas (2005): Economics of the Internet Backbone.156 Final Report: The Future of IP Interconnection regulation of access charges rather than regulation of retail prices. The paper uses an extension of the Katz-Shapiro (1985) network model to analyze the strategies that would be used by a firm that dominates the backbone market. No. Torben B (2003): Regulatory Implications of the Introduction of Next Generation Networks and Other New Developments in Electronic Communications. Patrick/ Tirole. The paper develops intuitions about call termination fees based on the established theory. interconnection would become a profitable service for the smaller firm and a loss maker for the larger firm. Washington. Letting the larger firm choose the interconnection charge but impose reciprocity is formally shown to be optimal by Carter and Wright in a non-cooperative model similar to L-R-T (1998a). 2. Ken/ Schultz./ Leeson. the small carrier will charge a low usage price and incur an access deficit.C. in the absence of regulation the collusive outcome is desirable to the extent that it eliminates the double marginalization that characterizes the noncooperative approach. Study for the European Commission. Julian (2003): Asymmetric Network Interconnection. pp. In both cases. Dame. Vol. If termination costs differ between networks. 185-197. while at a lower price. This suggestion also addresses the conjecture that incoming calls are. in Majumdar. 33. Patrick.gov/osp/workingp. DeGraba’s COBAK (central office bill-and-keep) proposal restricts the bill-and-keep portion of a call to the termination of calls from the last central office to the called party. 373-412. However. on average. under two-part tariffs. 22. but with a goodwill advantage for one of the networks. while the sending network would be responsible for transport and switching until that point. Economides. Aurelie/ Guettler.. using regression analysis with country-level European data as a panel data set. 433-472. valued less than outgoing calls. This is all that matters. It analyses the profitability of a “targeted degradation” strategy where a larger backbone would lower the quality of interconnection to its smaller rivals in turn. Martin (eds. in: European Journal of Law and Economics. This contribution gives an overview on different aspects related to the economics of the Internet backbone. Jean (2000) : Connectivity in the Commercial Internet. (2000) Bill and Keep at the Central Office as the Efficient Interconnection Regime. However. DeGraba suggests Bill and Keep with a twist. At a higher price. Dewenter. Vol. in: Journal of Industrial Economics. FCC. while it is undesirable because of the monopoly pricing outcome Carter.
and termination rates in mobile networks. 2006. Gabriele/ Metzler. an enhanced GRX that incorporates Quality of Service arrangements and a cascading billing model. and entry barriers for competitors./ Kulenkampff. Mark with Garcia. It goes on to develop a heuristic inference as to whether a given connection is peering or transit based primarily on the number of connections an operator has. The heuristic was tested on historical routing tables. descriptions and analysis of issues concerned with commercial traffic exchange on the Internet. provides a comprehensive analytic framework for interconnection of telephone networks. transit. Gao. the difference between termination charges and marginal costs is likely to be larger for MTM charges than for FTM charges. An increase in access fees will tend to increase retail prices. pp. Bad Honnef. but also increases the number of outbound calls and thus increases payment to the rival. Vol. to compensate for more intense competition between mobile networks. They argue that on-net and off-net charges should be equal and below marginal costs to correct for the call externality. 2000. Study for the European Commission. On-net/off-net price discrimination (where off-net calls are more costly at retail than on-net calls due to the wholesale termination fees) contributes to higher call charges. with its companion (1998b). softer price competition. GSM Association (2006): Inter-PLMN Backbone Guidelines 3. It emphasizes the benefits of “bill and keep” – bill and keep avoids the access bottleneck problem altogether. they identify key behaviours. especially as far as backbone services are concerned. Laffont. 1-37. Lowering the retail price of calls increases the number of subscribers. 4 April 2006. in: Proceedings of the IEEE Global Internet Symposium. Rand Journal of Economics. however. The paper describes peering. and how to utilise it. network architecture. Santander. and mutual transit arrangements in the Internet in logical and mathematical terms.Final Report: The Future of IP Interconnection 157 Elixmann. Annette/ Kulenkampff. and network interconnection and aims to ascertain the resulting economic and regulatory consequences. but does not necessitate changes to the existing CPP retail pricing regime. which is neutral to traffic balance. The document provides guidelines and recommendations on how to establish inter-provider interconnection. while the . and the emerging IPX. Hackbarth. Two models are described: The GRX. Gabriele (2006): Technical Aspects of Interconnection in IP based Networks with Particular Focus on VoIP. network dimensioning. The socially optimal transport and termination charge is set below marginal cost. It analyzes different features including Quality of Service (QoS). Anette (2002): The Economics of IP Networks – Market. Jean-Jacques/ Rey. Klaus/ Hillebrand. a system that is currently deployed and supports more than 300 attached networks. and also overall revenues and profits unless retail prices are already at of above monopoly prices. Harbord and Pagnozzi show that bill and keep is able to reduce incentives for inefficient price discrimination between on-net and off-net calls. This may be of importance inasmuch as users are not accustomed to paying for incoming calls. Lixin (2000): On inferring autonomous system relationships in the Internet. and the results were verified by a major Internet backbone operator to be generally correct. the authors derive key results in a setting where network operators cannot price discriminate.7. Patrick/ Tirole. Klaus-D. The paper tends to confirm a roughly hierarchical structure for Internet peering and transit relationships overall. Alberto/ Hackbarth. This groundbreaking paper. This study conducted for the European Commission provides data. Overview and Nondiscriminatory Pricing. Dieter/ Scanlan. Report for the Bundesnetzagentur. Jean (1998a): Network Competition: I. This study conducted for the Bundesnetzagentur focuses on technical foundations for realizing VoIP in integrated voice and data networks. Using a discrete choice model with Hotelling preferences. 29. Technical and Public Policy Issues Relating to Internet Traffic Exchange. Harbord Pagnozzi (2007): This paper addresses the relationship between on-net/off-net price discrimination.
This paper extends the work of the (1998a) paper to consider price discrimination. available at http://www. Patrick/ Tirole. in: Telecommunications Policy. Jean-Jacques/ Rey.int/ITU-D/treg/Events/Seminars/GSR/GSR07/discussion_papers/JScott_ Marcus_Interconnection_IP-based. Littlechild.Laffont. 34. Vol. Rey and Tirole papers. presented at the ITU Global Symposium for Regulators. Vol. an analysis which they carry forward in the companion article. The paper develops a framework for Internet backbone competition. 2000. Dubai. This paper expands on Marcus (2006). GSR Discussion Paper. 23. Laffont. pp. CPP). They extend the results to two-part tariffs. Laffont. p. Price discrimination can cause misallocation of resources.sum03. Where the largest operator in a country fails to voluntarily interconnect with at least two or three of its most significant competitors.itu. and also mitigates the risk of double marginalisation. the backbones will (if they can) price discriminate to reflect the difference.pdf. J. For operators to raise each others’ costs through high access charges does not necessarily increase profits. Receiving Party Pays. Price Discrimination. nevertheless an antipathy of CPP customers to the idea of paying for incoming mobile telephone calls has hindered its diffusion yet. Scott (2007): Interconnection in an IP-based NGN Environment. which combines the advantages of RPP while solving its disadvantages at the same time. in: Rand Journal of Economics. pp.e. Jean (2003): Internet Interconnection and the Off-Net-Cost Pricing Principle. In the absence of direct payments between websites and consumers. Jean-Jacques/ Marcus. Laffont. Ian A. the author calls for the application of bill-and-keep. MIT Press. The paper finds that..rje. Scott/ Rey. 2007. Jean (2000): Competition in Telecommunications. This paper pleads for bill-and-keep regimes in mobile termination rates. MacDonald. the access charge allocates communication costs between websites and consumers and affects the volume of traffic. regulators must be equipped to . especially in the sense of different prices for on-net and off-net calls.158 Final Report: The Future of IP Interconnection optimal lease price is equal to marginal cost./ Meriluoto. This is an expanded book-length treatment of the material in various Laffont. Laura (2005): Efficient usage and access pricing in telephone networks. the necessity of regulating termination charges. J. operators set prices for their customers as if their customers’ traffic were entirely off-net. including (1998a) and (1998b). 38-56. in: RAND Journal of Economics. Finally. however. The model extends naturally to multiple classes of service (QoS). Marcus. In a remarkably broad range of environments. This paper analyzes how outgoing and incoming access and call effects can be internalized by efficient pricing in telephone networks.pdf. the paper compares these results to those of the early groundbreaking Armstrong (1998) and LRT(1998) papers and finds that the main difference is that in the telecommunications models there is a “missing price” such that receivers do not pay for calls (i. where different classes of customers are associated with different levels of cost. and the risk of new forms of market power emerging. (2006) Mobile Termination Charges: Calling Party Pays versus. Jean-Jacques/ Tirole. Vol.org/abstracts/abstracts/2003/rje. It argues about the disadvantages of the Calling Party Pays Principle (CPP) in terms of market power and consequently. Changes in the nature of market power. 370-390. The paper goes on to analyse the impact of the access charge on competitive strategies in an unregulated retail environment. Jean (1998b): Network Competition: II. it may increase welfare in the case of competition among equals. in: International Journal of Industrial Organization. pp. The Receiving Party Pays Principle (RPP) is estimated more appropriate. 29. Patrick/ Tirole. are a key theme. available at: http://www. Stephen C. Vol. Therefore. 30. 615-623. 242-277. because it leads to more intense competition for market share.
Report for the Bundesnetzagentur.S. 2006. Marcus contends that PSTN/PLMN interconnection arrangements will become unsustainable as networks evolve to NGNs.1. J. Marcus advocates a migration to U. available at: http://www. Benjamin (eds. Ingo/ Compaine. There is a tendency to dismiss US arrangements merely as a consequence of the use of RPP. Marcus.) The Internet Upheaval. and provides a comprehensive overview of established economic theory for both the PSTN/PLMN and the Internet. The US does not regulate mobile retail arrangements (which are mostly “buckets” plans) at all.and also available as WIK Discussion Paper 274 (see http://www. In terms of policy. Available at: ftp://ftp. J. Paul/ Mitchell. in: Vogelsang. experience with Bill and Keep and with Internet peering is likely to be most satisfactory at such time as networks evolve to NGNs. and in any case never applied to the fixed network. low retail prices and high usage.int/osg/spu/ngn/documents/Papers/Marcus-060323Fin-v2. This reflects experience in India – termination fees of $0. J.zew. Bridger/ Srinagesh. provided that the largest operator in a country interconnects on an IP basis with at least two or three of its most significant competitors. the paper explores the proper role of regulation in the future world of the NGN. but will not necessarily command the price premium that network operators hope for. Padmanabhan (2000): Competitive Effects of Internet Peering Policies. call termination and roaming arrangements comprehensible to Europeans. but the U.S. Current wholesale arrangements are a consequence of a lack of a regulatory obligation to compensate at a rate other than zero. Marcus advocates a move to low or zero termination rates as a means of lowering German mobile retail prices and stimulating use of the service. Marcus. particularly in light of the need for competing operators to share sensitive data. background paper commissioned for the ITU New Initiatives Programme workshop on “What rules for IPenabled Next Generation Networks?” held on 23-24 March 2006 at ITU Headquarters. and consequently suppress use of mobile services.Final Report: The Future of IP Interconnection 159 take action. Milgrom. 2004. outcome. For developing countries. The paper discusses US interconnection arrangements for the Internet and the PSTN and contrasts them with those of Europe.. wholesale arrangements are a voluntarily negotiated outcome subject to these regulatory bounds.bundesnetzagentur. pp. This paper integrates the earlier Marcus papers. Using a non-cooperative bargaining framework to .pdf. A migration to arrangements that reflects U.S. Bad Honnef. Regulation to require interconnection should not be necessary. 175-195. Current arrangements in any case leave much to be desired – they tend to result in elevated prices for mobile services. RPP has practically disappeared in the US. This paper attempts to make the U. he recommends as an interim measure retaining CPNP arrangements but moving to very low termination fees. Mannheim.de/pub/zewdocs/div/IKT04/Paper_Marcus_Parallel_Session. in global perspective. Marcus. and particularly where the mobile network is not yet completely built out.itu. Paper Presented at the 4th ZEW Conference on the Economics of Information and Communication Technologies. MIT Press.de/media/archive/6201. Accounting for use poses many difficult challenges.S. in reality. More generally. Accounting Systems and Interconnection Regimes in the USA and the UK.htm). The study discusses regulatory developments in the UK as BT and Ofcom establish a new relationship (Openreach) in support of NGN deployment. Scott (2006): Framework for Interconnection of IP-Based Networks. Geneva.S. seemingly the best of all worlds.-inspired Coasian interconnection arrangements for developed countries as the migration to NGN gets under way.pdf . however. Scott (2006): Interconnection in an NGN Environment. Obligations of parity and symmetry and an obligation to interconnect appear to be critical to the U.005 US for fixed and mobile have resulted in rapid mobile penetration.pdf.S. Differentiated QoS has merit.org/content_e/diskus/274.wik. available at: http://www. Scott (2004): Call Termination Fees: The U.
Carlo (2005): Investments and Network Competition. with increasing market penetration the larger ISPs gain a bargaining advantage over smaller ones because their own customers value outside communications less highly than before. and Laffont and Tirole. superior coverage or discrimination between on-net and off-net calls can induce the larger network operator to use interconnection for a price squeeze. Jeffrey H. Tommaso/ Cambini. Vol. something worth further research. He also critiques the L-R-T (1998a) and Armstrong (1998) result that reciprocal access charges may be perfect tools for collusion. Examples are drawn from telephony. television. Ingo (2003): Price Regulation of Access to Telecommunications Networks. in: Journal of Economic Literature. 830-862. Ingo (2006). that is. This is a totally non-technical survey of the literature. in the later stage. Several end-regimes are evaluated according to a set of economic criteria that were provided by the BNetzA. the authors hypothesize that in early stages of the Internet network size did not convey a major bargaining advantage so that bill-and-keep arrangements would be likely outcomes independent of relative sizes. Rohlfs did the groundbreaking work in this area of economics many years ago. It concentrates on access price regulation in telephone networks.160 Final Report: The Future of IP Interconnection analyze the negotiations between a core ISP and other ISPs. as long as there are sufficiently many core ISPs. Among these regimes Bill and . VCRs. Due to he problems associated with setting the right level of access costs. Vogelsang. 2002. The book deals with the question of how new technologies overcome the initial adoption hump. how they can be successfully introduced when they have to compete with well established technological offerings. Third. Abrechnungssysteme und Zusammenschaltungsregime aus ökonomischer Sicht (Accounting Systems and Interconnection Regimes from an Economic Perspective). Network effects create an initial adoption hump that make the introduction of new products and services more difficult. This paper analyzes the impact of two-way access charges on the incentives to invest in networks with different levels of quality. the collusion incentive could be reduced if firms subsidized their subscribers for incoming calls (Laffont and Tirole 2000). 2003. and finds it reassuring that several features counterbalance the collusive effects. High substitutability would prevent sustainable collusive equilibria. In contrast. This report for the BNetzA concerns potential interconnection regimes in an NGN environment. On the contrary. (2003): Bandwagon Effects in High Technology Industries. Fourth. the use of two-part tariffs at retail could lead to access charges that would sustain welfare-optimal usage charges downstream. collusion would only occur under mature competition with sufficient heterogeneity between the network services. making calls coming from the other network profitable. 36. 2003). pp. The intuition here is that firms would want to do that if access charges exceeded marginal costs. Different industries solved the problem of the "initial adoption hump" in different ways. Second. MIT Press. XLI. two-part interconnection charges could reinstate the collusive outcome (Carter and Wright. pp. In contrast to the other two extensive surveys (Armstrong. Vol. Its results suggest that private negotiations over reciprocal access charges would not be efficient as firms prefer to set access charges above termination charges. the benefits of “bill-andkeep” regimes are highlighted. However. in order to create investment incentives. This is a concise and very readable summary of the impact that network effects have on technology introduction. It sheds some light on how to regulate termination charges. personal computers. 2000) Vogelsang also treats bill and keep and its relationship to receiver benefits. The resulting peering arrangements (and the lack thereof) are efficient. First. in: RAND Journal of Economics. access charges should be set above termination costs. and many other fields. Rohlfs. Vogelsang. CDs. so that regulatory intervention could be required to attain an equilibrium. Valletti. 446-467.
are hard to implement across networks under any charging regime. such as guarantees on speed and failure rates of messages.Final Report: The Future of IP Interconnection 161 Keep in combination with an agreement about suitable interconnection points emerged as the most appropriate followed by capacity-based interconnection charges. Others. moving toward zero. once NGNs are built. The author maintains that. while transit agreements through core networks should be based entirely on voluntary agreements. The author suggests a gradual move towards Bill and Keep through a sequence of reductions in the element-based interconnection charges. Complications also arise from a number of quality-related issues that the author subsumes under the QoS heading. as long as agreements about standards can be worked out between interconnecting networks. if any. migration problems arise that may influence the choice of the best end-regime. regulation. Since the current interconnection regime in the PSTN uses element-based charges for a prespecified set of interconnection points. should be restricted to access networks. Some of these are compatible with Bill and Keep. .
Client-server: an asymmetric technical implementation involving to computers whose functions are not the same. CPE (Customer Premises Equipment): A terminal device in a computer network. CDMA (Code Division Multiple Access): A set of standards for mobile communications. Bill and Keep: agreements to interconnect and to exchange traffic without payment. CDMA is used in the United States and a number of other countries. CPNP (Calling Party’s Network Pays): an interconnection regime where the network of the party who placed the call (the originating network) makes a payment to the network of the party that received the call (the terminating network). ARPU: Average Revenue per User. CODEC (coder decoder): An encoding or decoding device that enables the digitization and digital transmission of analogue information (such as voice). typically expressed in bits per second. BGP4 (Border Gateway Protocol v4): the inter-domain routing protocol used by the Internet. C CBC (Capacity Based Charging): A wholesale pricing regime reflecting the maximum capacity required. The software running on the customer’s Personal Computer (PC) (often just a web browser) might be the client of software running on a server platform of the service provider. AS (Autonomous System): An independently managed IP-based network with its own IP routing policy. ASN (Autonomous System Number): a unique numeric identifier for an AS. B Bandwidth: The capacity of a channel to carry information. A single server can support a great many clients.162 Final Report: The Future of IP Interconnection Annex 2: Glossary of Terms A Access: Access enables an operator to utilize the facilities of another operator in the furtherance of its own business and in the service of its own customers. a system sometimes referred to as Sender Keeps All. . a telephone network or a telephone system which are at the end-user’s premises.
Final Report: The Future of IP Interconnection 163 CPP (Calling Party Pays): The most common retail payment arrangement. to the extent that they are used for the purpose of transmitting signals. the party that places the call pays a usage-based price for the call. An ECN is a transmission system and. whereby selected packets can be marked as having application requirements other than best efforts. by optical or by other electromagnetic means. The recipient typically pays nothing. Article 2). DNS (Domain Name System): the system of databases which associates various sorts of information with domain names in order to translate hostnames to IP addresses for Internet access. including telecommunications services and transmission . electricity cable systems. CS (Carrier Selection): A set of arrangements where the end-user explicitly selects a telephone service provider (other than the network operator that connects the end-user to the Public Telephone Network) on a call-by-call basis. D DiffServ (Differentiated Services): a IP-based data communications protocol which enables hop-by-hop traffic management. E EBC (Element Based Charging): A wholesale pricing regime reflecting the network elements used. CPS (Carrier Pre-Selection): A set of arrangements where the end-user selects a default telephone service provider (other than the network operator that connects the end-user to the Public Telephone Network) for all calls. switching or routing equipment and other resources which permit the conveyance of signals by wire. (Framework Directive. In a CPP system.and packet-switched. where applicable. typically by dialing a designated prefix. networks used for radio and television broadcasting. ECSP (Electronic Communications Service Provider): a provider of electronic communications service (ECS). irrespective of the type of information conveyed. It also stores other information such as the list of mail exchange servers that accept DWDM (Dense Wave Division Multiplexing): See WDM. including satellite networks. including Internet) and mobile terrestrial networks. and cable television networks. An ECS is a service normally provided for remuneration which consists wholly or mainly in the conveyance of signals on electronic communications networks. ECNP (Electronic Communications Network Provider): a provider of an Electronic Communications Network (ECN). fixed (circuit. by radio.
content transmitted using electronic communications networks and services. reusable modules for commonly used functions. or exercising editorial control over. An increase in prices generally leads to lower demand. as defined in Article 1 of Directive 98/34/EC. based on IP and SIP protocols. FTTN: Fiber-To-The-Node. that seeks to employ common. FTTx: A generic acronym that could for example represent FTTB. GSM (Global Système Mobile or Groupe Speciale Mobile): A set of standards for second generation (2G) mobile communications. Article 2). FTTC: Fiber-To-The-Cabinet or Fiber-To-The-Curb. FTTC. drawing on the technology of the DNS. or FTTH. which can be used to map a telephone number to a ranked list of Internet services. (Framework Directive. G Gbps (Gigabit per second): one billion bits per second. Elasticity: The response of demand to price. FTTP Fiber-To-The-Premises. IMS (IP Multimedia System or Integrated Multimedia System): a standards-based platform. it does not include information society services. but exclude services providing. which do not consist wholly or mainly in the conveyance of signals on electronic communications networks. FTTH: Fiber-To-The-Home. H IETF (Internet Engineering Task Force): the protocol engineering arm of the Internet formally established by the IAB in 1986. other things being equal.164 Final Report: The Future of IP Interconnection services in networks used for broadcasting. ETSI TISPAN (ETSI Telecoms & Internet converged Services & Protocols for Advanced Networks) F FTTB: Fiber-To-The-Building. . ENUM: A mature IETF standards-based mechanism.
M Mbps (Megabit per second): one million bits per second.Final Report: The Future of IP Interconnection 165 Interconnection: Interconnection enables an operator to establish and maintain communications with the customers of another operator. ITU (the International Telecommunications Union): a United Nations agency for information and communication technologies whose mission is to facilitate global communications. IPTV (television over IP): IPTV is the distribution of video programming (one way) by means of the Internet Protocol. J Jitter: Variability of delay. Together with the TCP protocol. IPv6 (Internet Protocol. ISP (Internet Service Provider): An ISP is a firm that enables other organizations to connect to the global Internet. MDF (Main Distribution Frame): A signal distribution frame for connecting equipment (inside plant) to cables and subscriber carrier equipment (outside plant). K Kbps (kilobit per second): One thousand bits per second. version 6): IPv6 is the emerging protocol for transmitting Internet Protocol datagrams over the Internet. . version 4): IPv4 is the current protocol for transmitting Internet Protocol datagrams over the Internet. LLU (Local Loop Unbundling): the regulatory requirement mandating certain telecommunications operators to wholesale to competitors the connections from their telephone exchange's central office to the customer's premises. L Latency: Delay. The MDF is a termination point within the local telephone exchange. IPv4 (Internet Protocol. using a 128-bit address system. IP forms the basis of the Internet. IP (Internet Protocol): The Internet Protocol is a data communications standard that allows computers to communicate with one another over digital networks. using a 32-bit address system.
N NAPs (Network Access Point): A public peering point. the FCC. Net Neutrality or Network Neutrality: A proposed regulatory principle the seeks to limit anticompetitive discrimination by network operators and service providers. MoU (minute of use): A minute of use. It offers unrestricted access by users to different service providers. O optical-electrical-optical (O-E-O) conversion: Conversion of an optical signal to an electrical signal and back again. including authentication and authorization of the user. OSI Reference Model: A layered data communications protocol model.248 and Megaco): A standard data communications protocol for handling VoIP Media Gateways. also known as H. NASS (Network Attachment Subsystem): provides the Network Attachment Control Functions (NACF). It supports generalized mobility which will allow consistent and ubiquitous provision of services to users. regulatory authority.166 Final Report: The Future of IP Interconnection Media Gateway Control Protocol (MGCP. MPLS (Multi Protocol Label Switching): A data communications protocol developed by the Internet Engineering Task Force (IETF). Network Provider: the organization that provides the network connectivity to the Service Platforms. e.g. including signalling and session management. the value of a network to its users is greater as the number of participants in the network increases.S.” NRIC (the Network Reliability and Interoperability Council): The NRIC is an industry advisory council to the U. NGN (Next Generation Network): The ITU defines a Next Generation Network as “… a packet-based network able to provide services including Telecommunication Services and able to make use of multiple broadband. and also to support traffic engineering. for voice telephony. It was originally designed to reduce the complexity and thus to improve the performance of routers in ISP backbones. Network Externality or Network Effect: Where network effects are present. QoS-enabled transport technologies and in which service-related functions are independent from underlying transport-related technologies. .
. Article 2(c). such as the fraction Queuing: the need for one packet of data to wait for another in order to gain access to a shared facility. R RACS (Resource and Admission Control Subsystem): The RACS provides the Resource Attachment Control Functions (RACF). It could also denote other measures of service quality. QoS often denotes measures of delay. variability of delay. This is a function of the distance that the signal must travel. PLMN (Public Land Mobile Network): a network to provide mobile communications services to the public. including resource management and admission control based on the user’s profile and the resources currently available. and the probability of packet loss. These delays can be analysed using a branch of mathematics known as queuing theory. but not for third parties. PoI (points of interconnection): A point at which networks meet for purpose of interconnection. as defined in the Universal Service Directive. Q QoS (Quality of Service). Propagation delay: The time that it takes for light or electricity to reach its destination in a network. P PATS : Publicly Available Telephone Services. Peering is a substantially symmetric form of network interconnection. Peering: the arrangement whereby ISPs exchange traffic for their respective customers (and for customers of their respective customers). and the speed of light in the medium employed (typically wire or fibre). Peer to peer (P2P) – a system where the users typically have a symmetric relationship with one another. In an IP-based environment.Final Report: The Future of IP Interconnection 167 OSS (Operations Support System): A system to support network operations or management. PSTN (Public Switched Telephone Network): the network of the world's public circuitswitched telephone networks.
S Street Cabinet: a cable distribution system located close to customer premises. Sender Keeps All. It can be used to create two-party. SIP is designed to be independent of the underlying transport layer. that is. or between service providers. RPP (Receiving Party Pays): A retail billing arrangement in which the receiving party pays for the call. see Bill and Keep SIP (Session Initiation Protocol): an application-layer data communications control protocol for creating. multimedia distribution. RSVP is the key component of the Integrated Services Architecture (ISA). SLA (Service Level Agreement): a contract between a customers and his or her service provider.” Framework Directive. It is widely used as a signalling protocol for Voice over IP. customers and ultimately consumers. modifying. where high prices will have least effect in diminishing demand. it can run on TCP. which reflects the common understanding about the level of service to be provided. Article 14(2). UDP. T TCP/IP Reference Model: The layered data communications protocol model used by the Internet. and terminating sessions with one or more participants. Reciprocal compensation: Reciprocal compensation fees are two-way termination fees.S. RBOCs (Regional Bell Operating Companies): The former Bell System incumbents providing local telephone service in the U. generally applicable to local interconnection in the United States. that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors. or SCTP. or multicast sessions that include Internet telephone calls. it enjoys a position equivalent to dominance. either individually or jointly with others. RSVP (Resource ReSerVation Protocol): a data communications protocol designed to reserve resources across the Internet so as to assure end-to-end QoS for applications that require such assurances.168 Final Report: The Future of IP Interconnection Ramsey-Boiteux pricing: A pricing principle whereby the service provider takes the highest price mark-ups on those services that have lowest demand elasticity. along with H. and multimedia conferences.323 and others. SMP Significant Market Power: A firm is “… deemed to have significant market power if. . multiparty. typically on a basis reflecting the call duration The calling party typically also pays.
802. Tier 1 ISP: A large. VoIP: (Voice over IP): A set of data communications protocols and technologies to enable voice to be sent over individual IP-based networks or over the Internet.11b. WAN: A Wide Area Network. Transmission Control Protocol (TCP): A data communications protocol used to assure reliable delivery of data in an IP network. Tier 1 ISPs are richly connected to one another by peering. .Final Report: The Future of IP Interconnection 169 Teledensity: The level of deployment and adoption of communications networks in a given geographic area. well-connected Internet Service Providers that has no significant need for a transit provider.11g standards. VoIP Peering: The agreement between VoIP providers to interconnect. 802. to exchange voice traffic. VPN: A virtual private network.11a. U-V VoD (Video on Demand): Video on Demand enables end-users to select and watch video content over a network. It is by far the most widely adopted WLAN standard and includes the 802. either physically or virtually. WDM (Wave(length) Division Multiplexing): A technology that effectively increases the capacity of fibre optic systems by using different wavelengths (colours) of laser light to carry different signals. W-Z Wi-Fi (Wireless Fidelity): Wi-Fi is an IEEE standard adopted in 1999 for short-range wireless digital connectivity.
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