The impact of the Internet on the pricing of telecommunication services Dr Tim Kelly (ITU), Seminar on cost-based tariffing, Delhi, 16-18 February 1999 The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its Membership. Dr Kelly can be contacted by e-mail at [email protected]
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The impact of theInternet on the pricing of
telecommunication servicesDr Tim Kelly (ITU),
Seminar on cost-based tariffing,Delhi, 16-18 February 1999
The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU orits Membership. Dr Kelly can be contacted by e-mail at [email protected]
“We started out running the Neton top of the phone system, and
we’ll end up with telephonyrunning over the Net.”
Eric Schmidt,CEO, Novell,
Quoted inWired, August 1997
The EconomistMay 2nd 1998
AgendaAgendalThe phenomenal growth of the Internetl Internet economicsl Internet telephonylPricing the Internet: What makes it different?ð Retail pricingð Pricing of local callsð Wholesale pricing
lVulnerability of telephone companies tocompetition from the Internet
lCorporate positioning by telephonecompanies
Internet hosts (million) and comparative growth rates, Jan 1991- Jan 1998
Source: ITU “World Telecommunication Development Report, 1998”, Network Wizards.
0.4 0.7 1.3 2.2
5.8
14.4
21.8
29.7
1991 1992 1993 1994 1995 1996 1997 19980
1
2
3
4
5
6Per 1'000 inhabitants
(right scale)
87%
52%
6%Telephone
lines
Cellularsubscribers
Internethosts
Canada & US
64.1%
Europe24.3%
LAC*1.2%
Africa0.5%
Developing Asia-Pacific
2.9%Other4.6%
Australia, Japan & New
Zealand7.0%
Distribution of Internet hosts, Distribution of Internet hosts, January 1998January 1998
Source: ITU “Challenges to the Network: Internet for development, 1999”.
Internet Economics: Internet Economics: Five factorsFive factorsthat make the Internet differentthat make the Internet different
1. Packet-switched network architectureð Connection-less not connection-oriented
2. Pricing independent of distance & durationð Average message covers 15 or more “hops”
3. Peering arrangements, not settlementsð Based on a full-circuit regime, not on half-circuits
4. Traffic flows highly asymmetricð Dominant flow is to terminal that initiates a session
(though this is changing … .)
5. The United States sets the rules!ð There is no “Internet Telecommunication Union”
l Computer to computer Since 1994ð Conversation between two similarly
equipped computer users via Internet
l Computer to telephone Since 1996ð Internet user interconnecting with Public
Telephone Network via an intermediaryservice provider (e.g., call-backcompany) or a service provider’sWebsite
l Telephone to telephone Since 1997ð Telephone carrier routes telephone or
fax message via a data network(Internet, frame relay) rather than viathe Public Telephone Network
Internet telephony:Internet telephony:Different modesDifferent modes
Telephone TelephonePublic Switch
Internet
Phone GatewayComputer
Phone GatewayComputer
Phone Gateway Computer
TelephonePublic Switch
Internet
Internet
Phone GatewayComputer
Phone GatewayComputer
Which would you choose?Which would you choose?Price per minute of a 3 minute internationaltelephone/fax call from US (in US$)
Source: Adapted from data in TeleGeography 1997/98. Original source of AT&T tariff data is Tarifica. AT&Tbasic refers to the peak rate basic offering. “AT&T One” refers to the AT&T One Rate for which a US$3 permonth fee is payable. Internet Telephony tariff data is sourced from Global Exchange Carrier and is relevantfor October 1997.
lPiggybacking on Public Telephone Networkð Much of network investment already amortisedð Telephone network has built-in cross subsidies
lCompetitive network and service provisionlPublic policy subsidies (esp. in US)lNo settlements between operators
Internet, price and serviceInternet, price and servicetrendstrends
lTowards a flat-rate price structureð All you can eat for US$19.95
lTowards lower service qualityð “Best efforts” service delivery at lowest price
lDeath of distanceð Message to other side of earth costs same as a
message sent next door
lTraffic flows are route-independentð Average number of “hops” is more than 15
lEconomics of industry driven by hubbingð >90% of Internet traffic passes through USA
Where does the money go? TypicalWhere does the money go? TypicalInternet Service Provider cash-flowInternet Service Provider cash-flow
$19.95 per monthsubscription
$7.50-$10.50Wholesale PoP Access
$2.00 - $3.00Customer Care
$3.00 amortizedcustomer marketing
$3.50-$7.50 marginper customer
Source: Adapted from Paul Stapleton, ISP$ Market Report, Boardwatch Magazine.
0 20 40 60 80
Japan
Thailand
Philippines
Hongkong
Singapore
India
Indonesia
MalaysiaISP charge
Local calls
Line rental
Asia-Pacific, comparative prices,Asia-Pacific, comparative prices,In US$, based on 20 hours off-peak use per monthIn US$, based on 20 hours off-peak use per month
Source: ITU “Challenges to the Network: Internet for development, 1999”.
When is a local call not a local call?When is a local call not a local call?l Internet usage has grown fastest in countries
which permit “free” or untimed local calls(e.g., USA, Canada, HK, Australia)
lBut, PTOs claim that Internet users and ISPsare “free-riding” the networkð longer average sessionsð asymmetric traffic flows
l In countries where local calls are metered,users complain that Internet is too expensiveð Campaign for unmetered calls in UKð “Strikes” of Internet users in Germany, France
Tariffpolicy
Usagepatterns
Donothing
Introduce usage-based access
charges
Internet Service Providers donot pay usage-based accesscharges:ðaccess charge for telephony= US$0.02 per minðaccess charge for Internet= US$0.0009 per min
Internet users have noincentive to terminate or
shorten calls:ðaverage length of telephony
call = 5-10 minsðaverage length of Internet
call = 20-40 mins
The US Regulators’ dilemmaThe US Regulators’ dilemma