international protocol

International Protocol

George Vinall

April 1, 1998

Economics of Internet

Telephony


2GEORGE VINALL // [email protected]

Discussion Topics

• Diagrams of IT services• Cost vs. Circuit Switching • State of the Economics• International Settlements• Domestic Access Charges• Regulation & Public Policy• Logical Conclusions

The QuestionIs Internet Telephony

a legitimate new industryor a just a passing arbitrage

opportunity built on the avoidance of international

settlement payments and US access costs?



PC-to-Phone (Same Carrier)

Cisco 7513Router

US Calling Party

IBM Compatible IBM Compatible IBM Compatible

The Internet

US ISP

PTT Called Party

Local Exchange

Private Line / Frame Relay

US

Foreign

Call Direction

PTT National Network

TerminatingGateway Foreign

ISP



PC-Phone (Interconnection)

CDRCollection& Rating

Sun SPARC

Cisco 7513Router

Optical drive

OriginatingISP Network

US Local Exchange

Calling Party


Called Party

IBM Compatible IBM Compatible IBM Compatible

3rd PartyTerminating

Gateway

Optical drive

Optical drive

Router

Hub

The Internet



CDRCollection& Rating

Class 4 IXC Switch

LEC Access Network

US Calling Party

Sun SPARCNetwork

Management

ITSPOriginatingGateway

ITSPTerminating

Gateway


Private Packet Network over

International Private Lines

DomesticPrivate Line

Local ExchangeLines

USOutside

US

In-BandCDR

Collection

In-BandNetwork

Management

Call Direction

Phone-to-Phone

Class 4 International

Switch

PTT Called Party



VON vs. PSTN Costs

Issue VON PSTN AdvantageTransmission TCP/IP Mulitplex/DCS TieCompression Codex Multiplexing TieFill Ratios Ethernet Overflow Tie Edge Device Gateway POP/FX PSTNScaling Servers Port Cards PSTNCall Switching Router Switch PSTNRedundacy BGP4 SONET PSTNSignalling Gateway SS7 PSTNFeatures Gateway CLASS PSTNPublic Net Internet DDD VONPrivate Net Intranet Hierarchy PSTNAccess Fees -None- FCC VONIntl. Settlement -None- ITU VONForeign Transport Tariff -None- PSTN



Arbitrage

• Avoidance of ITU/FCC international settlement payments to foreign carriers

• Avoidance of certain domestic access charges

• Use of “public” Internet backbones for traffic



Very Wishful Thinking

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1995 1996 1997 1998 1999 2000 2001

Reve

nue

(US$

in M

illion

s)

SOURCE: Frost & Sullivan (Mountain View, CA)

Worldwide Forecast of IP Gateway & Software Sales



US Access Charges

LECC.O.

LECC.O.

IXCPOP

IXCPOPLong Haul

OriginatingAccess

TerminatingAccess

IXC Carriage

98% = I-LEC98% = I-LEC 2% = CAP2% = CAP

99.8% = I-LEC99.8% = I-LEC .2% = CAP.2% = CAP

AT&TAT&TWorldCom/MCIWorldCom/MCI

SprintSprintQwestQwestIXC IXC

RegionalsRegionals



US Access Charges

LECC.O.

LECC.O.

IXCPOP

IXCPOP

Long Haul

OriginatingAccess

TerminatingAccessIXC Carriage

Year Total

Pre-1982 Pre-1982 6 / 3.66 / 3.6 2 / 32 / 3 6 / 3.66 / 3.6 14 / 10.2 14 / 10.2

1984 1984 4.94.9 2.0 2.0 4.94.9 11.8 11.8

1996 1996 2.32.3 .9.9 2.32.3 5.5 5.5

1998 1998 2.12.1 .9.9 1 1 4.0 4.0

2001 2001 .8 / 1.8 / 1 .5.5 .8 / 1.8 / 1 2.1 / 2.5 2.1 / 2.5AT&T/IXC

AT&T/IXCAT&T/IXC

AT&T/IXC AT&T/IXC AT&T/IXC

AT&T/IXC AT&T/IXC



US Access Charges

LECC.O.

LECC.O.

IXCPOP

IXCPOP

Long Haul

OriginatingAccess

TerminatingAccessIXC Carriage

1998 Total

IXC IXC 2.12.1 .9.9 1 1 4.0 4.0

IP Voice IP Voice n/an/a 2.0* 2.0* 1 1 3.0 3.0

C-LEC C-LEC .8*.8* .9 .9 1 1 2.8 2.8

.4*.4* .9 .9 .4*.4* 1.7 1.7

* estimated cost

I-LEC I-LEC .4*.4* .9 .9 1 1 2.3 2.3Bell Atantic w/Bell Atantic w/Long DistanceLong Distance



ITU/FCC Settlement Policy

RichCountry

“A”

PoorCountry

“B”




RichCountry

“A”

PoorCountry

“B”

$ 1

$ 3

Accounting Rate =$ 2

Average of bothcountries costsbecomes the

Accounting Rate




RichCountry

“A”

PoorCountry

“B”

$ 1

$ 3


Half of the Accounting Rate

becomes theSettlement Rate

Settlement Rate =$ 1




RichCountry

“A”

PoorCountry

“B”

$ 1

$ 3



100,000 Calls

30,000 Calls

Traffic Ratio 3:1




RichCountry

“A”

PoorCountry

“B”

$ 1

$ 3



100,000 Calls

30,000 Calls

100,000- 30,000 70,000

$ 70,000

Traffic Ratio 3:1



Two Calls to Hong Kong

Full Scale Traditional Telephony

US Land-Side $.044Intl Transmission$.026Intl Settlement Cost $.202

Total Cost $.272

Consumer Rate $.65Gross Margin $.378

Gross Margin 58%

Internet Telephony *

US Land-Side $.075Intl Transmission$.106HK Termination Costs $.004

Total Cost $.185


Gross Margin 72%* Phone-to-Phone IT call from any US locations with T1/E1 gateway 35%

fill factor, day rate, termination on HKTI local lines, 10 minute call.See Appendix II



Two Calls to Hong Kong



Total Cost $.272


Gross Margin 58%


US Land-Side $.075Intl Transmission$.106HK Termination Costs $.004

Total Cost $.185


Gross Margin 72%* Phone-to-Phone IT call from any US locations with T1/E1 gateway 35%

fill factor, day rate, termination on HKTI local lines, 10 minute call.See Appendix II



Two Calls to Lucerne, Switzerland



Total Cost $.107


Gross Margin%73 %


US Land-Side $.075Intl Transmission$.069Swiss Termination Cost $.276

Total Cost $.420

Consumer Rate $.40Gross Margin ($.02)

Gross Margin%0 %

* Phone-to-Phone IT call from any US locations with T1/E1 gateway35% fill factor, day rate, termination on Swiss PTT, 10 minute call

See Appendix III



Clever Pricing Formats

• Good News:– Real rates are mixed, some higher than IDDD– IT from US Gateways just resold IDDD bought at carrier

rates– Hybrid IT, resale per route– Postalized international pricing (with sever restrictions)

• Bad News:– Change customer behavior– PC - to - PC captures low-end– Phone-to-Phone facilities costs are higher– Phone-to-Phone pricing requires scale, terminating

facilities



State of the Regulations

• History of Computer III• Is Phone-to-Phone exempt?• IVANs• General US policy

– FCC, White House, Congress• General International policy

– ITU, WTO Accord • Reciprocal Compensation for CLECs



Logical Conclusions

• Internet technology is a not an immediate treat to “carrier” grade service

• Cost savings is solely based on avoidance of US domestic access fees and international settlement payments

• PC-to-PC best cost service, but relies on spotty quality of the public Internet

• Inherent efficiencies require scale, technological development, bandwidth management tools

• If traffic grows, regulators will start changing rules, charging IT carriers

The Bottom LineInternet Telephone

both benefits from and suffers from a similarcost/service structureas line-side dialing (Feature Group “A”)

telephone service did between 1980-1984



International Protocol, LLC

Questions ?Questions ?Email:

[email protected]@erols.com

Calls From US To Hong Kong

Traditional Telephony Internet TelephonyPer Minute Costs Incurred by Facilities-Based Provider of IDD Participating in Settlements

Cost Per Minute Costs Incurred by Non Facilities-Based Provider of Internet Telephony

Cost

US Land-Side Cost of Origination or Termination US Land-Side Cost of Origination US Sw itched Access Charges $0.030 Long Distance 800 In-WATs $0.070 Domestic Sw itching $0.002 Internet Telephony Gatew ays & Routers (pair) $0.005 US Transmission to International Gatew ay Sw itch $0.010 International Gatew ay Sw itching $0.002 Total Domestic Land-Side Costs $0.044 Total Domestic Land-Side Costs $0.075

US-HK E1: US 1/2-Ckt US-HK E1: Full Ckt Gatew ay to NMC Backhaul IRU Capital $35,000 US Local Loop Monthly Expense $500 Beach Termination IRU Capital $15,000 US 1/2 Ckt Monthly Expense $29,000 Undersea IRU Capital $500,000 HK 1/2 Ckt Monthly Expense $48,700 Total Capital $550,000 HK Local Loop Monthly Expense $400 Lifetime in Years 7 Interest Rate 9.5% Monthly Depreciation & Interest Expense $7,170 Monthly O&M Expense $2,083 Monthly Dual Landing Expense $500 Total Monthly Expense $9,753 Total Monthly Expense $78,600

Outbound Operating Minutes per E1 Ckt Outbound Operating Minutes per E1 Ckt Theoretical Minutes per DS0 Channel 10,000 Theoretical Minutes per DS0 Channel 10,000 Usable DS0 Channels per E1 31 Usable DS0 Channels per E1 31 Time of Day Fill Factor 30.0% Time of Day Fill Factor 30.0% Voice Codec Compression Ratio 4 : 1 TCP/IP Codec Compression Ratio 8 : 1 Total Inbound & Outbound Minutes 372,000 Total Outbound Minutes 744,000

Cost of International Transmission per Minute $0.026 Cost of International Transmission per Minute $0.106

International Settlement National Termination Accounting Rate $0.790 HK Local Exchange Line $0.004 Settlement Rate $0.395 HK National Usage $0.000 Ratio of Outbound Minutes to Inbound Minutes 3.08 Effective Net Outpayment Ratio 51.0% Effective Settlement Rate for Inbound+Outbound $0.202 Total National Termination Costs $0.004

Total Cost per Minute $0.272 $0.185

Consumer Rate $0.650 $0.650

Gross Margin $ $0.378 $0.465Gross Margin % 58.2% 71.6%

Appendix II US-HK Costs

Calls From US To Lucerne, Switzerland *

Traditional Telephony Internet TelephonyPer Minute Costs Incurred by Facilities-Based Provider of IDD Participating in Settlements

Cost Per Minute Costs Incurred by Non Facilities-Based Provider of Internet Telephony

Cost

US Land-Side Cost of Origination or Termination US Land-Side Cost of Origination US Sw itched Access Charges $0.030 Long Distance 800 In-WATs $0.070 Domestic Sw itching $0.002 Internet Telephony Gatew ays & Routers (pair) $0.005 US Transmission to International Gatew ay Sw itch $0.010 International Gatew ay Sw itching $0.002 Total Domestic Land-Side Costs $0.044 Total Domestic Land-Side Costs $0.075

US-Sw itzerland E1: US 1/2-Ckt US-HK E1: Full Ckt Gatew ay to NMC Backhaul IRU Capital $35,000 US Local Loop Monthly Expense $500 Beach Termination IRU Capital $15,000 US 1/2 Ckt Monthly Expense $23,000 Undersea & Overland DDP IRU Capital $370,000 Sw iss 1/2 Ckt Monthly Expense $45,000 Total Capital $420,000 Sw iss Local Loop Monthly Expense $0 Lifetime in Years 7 Interest Rate 9.5% Monthly Depreciation & Interest Expense $5,475 Monthly O&M Expense $2,083 Monthly Dual Landing Expense $500 Total Monthly Expense $8,058 Total Monthly Expense $68,500

Outbound Operating Minutes per E1 Ckt Outbound Operating Minutes per E1 Ckt Theoretical Minutes per DS0 Channel 10,000 Theoretical Minutes per DS0 Channel 10,000 Usable DS0 Channels per E1 31 Usable DS0 Channels per E1 31 Time of Day Fill Factor 40.0% Time of Day Fill Factor 40.0% Voice Codec Compression Ratio 4 : 1 TCP/IP Codec Compression Ratio 8 : 1 Total Inbound & Outbound Minutes 496,000 Total Outbound Minutes 992,000

Cost of International Transmission per Minute $0.016 Cost of International Transmission per Minute $0.069

International Settlement National Termination Accounting Rate $0.340 Sw iss Local Exchange Line $0.004 Settlement Rate $0.170 Sw iss National Usage $0.272 Ratio of Outbound Minutes to Inbound Minutes 1.75 Effective Net Outpayment Ratio 27.4% Effective Settlement Rate for Inbound+Outbound $0.047 Total National Termination Costs $0.276

Total Cost per Minute $0.107 $0.420

Consumer Rate $0.400 $0.400

Gross Margin $ $0.293 -$0.020Gross Margin % 73.3% -5.0%

Appendix III US-Swiss

international protocol

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