Terrence P. McGarty, Lisbon February 15, 2003 Peering, Transit, Interconnection: Access Regulation and Legislation Lisbon February 15, 2003.

Terrence P. McGarty, Lisbon February 15, 2003

Peering, Transit, Interconnection: Access Regulation and Legislation

Lisbon

February 15, 2003


Telecom Market Structure


Interdependencies

ILEC RevenueCellular

Revenue

CATV RevenueIBB Revenue

ILEC RevenueperSub

$21.00

CellularRevenueper Sub$52.00

IBBRevenueper Mbps

CATV ContentRevenueper sub$42.00

Cellular AccessFee

LocalAccess

IBBTransit

$50/Mbps

ContentProvision25-40%

CATV ISPRevenueper sub$50.00

BackboneAccess

IECRevenue

IEC Revenueper Sub$50.00

IECAccess Fee

CLEC Revenue

CLEC Revenueper Sub$25.00

LocalAccess

UNEs


EconomySinglePlayer

DemandFunction

Cost of Sales Cost of New Customer Cost to Replace Churn= +

Cost of Service UNE Costs Access Costs= +

p

q

pILECpCLEC

Churn

ILEC Delay

Net Income

CAPEX

Debt Service

Net Cash Flow

Net Cash

Less Cost of Sales

Less Costof

Service

Initial Cash


Wireline MarketWireline Share

SBC31%

Verizon35%

Bell South15%

Others19%


Wireless MarketWireless Share

SBC18%

Verizon23%

Bell South7%

Others52%


Market Share

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Series2 53,250,000 61,000,000 25,138,000 31,881,468

Series1 31.1% 35.6% 14.7% 18.6%

SBC Verizon Bell South Others


Wireless v WirelineRatio of Wireless to Wireline

SBCVerizon

Bell South

Others

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

SBC Verizon Bell South Others


GrowthGrowth Statistics

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

Wireline 61,000,00 59,780,00 58,584,40 57,412,71 56,264,45 55,139,16 54,036,38 52,955,65 51,896,54 50,858,61 49,841,44 48,844,61 47,867,72 46,910,36 45,972,15 45,052,71

Wireless 29,295,00 30,759,75 32,297,73 33,912,62 35,608,25 37,388,66 39,258,10 41,221,00 43,282,05 45,446,16 47,718,46 50,104,39 52,609,61 55,240,09 58,002,09 60,902,20

Q1 2002 Q2 Q3 Q4 Q1 2003 Q2 Q3 Q4 Q1 2004 Q2 Q3 Q4 Q1 2005 Q2 Q3 Q4


InternetEuropean Internet Use vs US

100

105

110

115

120

125

Sep-01 Dec-01 Mar-02 Jun-02

Europe US


Verizon 1Summary for Q1 and Q2 2002 (See Verizon 10Q, August 2002, $000,000)

Wireline Wireline per AL

per month Wireless Wireless per

Sub Total

Access Lines

61.0

27.9

88.9

Gross Revenue

Local Service

Local Exchange, plus UNEs, CLEC, and wireless carriers $10,465 $28.59 $9,112 $54.43 $19,577

Network Access Services

Inter Exchange Carriers, data services $6,875 $6,875

LD Services In region LD services $1,556 $4.25 $1,556

Other

Billing and collections for other carriers, coin, cpe, and other services $2,046 $2,046

Total Gross Revenue $20,942 $9,112 $30,054


Verizon 2

Adjustments

Wireless Access

Includes access fees from Verizon wireless representing less than 20% and remaining access fees from other carriers. $4,406 $502 $4,909

UNE Fees

UNE and co lo fees are based upon CLEC penetration and gross margin of CLEC revenues allocated to UNEs $582 $582

Local Service

Cost of CLEC access plus UNE overcharge plus wireless interconnect $4,988 $13.63 $502 $5,491

Network Access Services

IEC Fees based upon the $0.0055 per min charge and typical usage per month per subscriber. $1,208 $1,208

LD Services $0 $0.00 $0

Other $0 $0


Verizon 3

Effective Revenue

Local Service $5,477 $14.96 $8,610 $51.43 $14,086 Network Access Services $5,667 $5,667

LD Services $1,556 $4.25 $1,556

Other $2,046 $2,046 Total Effective Revenue $14,746 $8,610 $23,356

Operating Expenses

For the wireless company the interconnect fee is netted out of the expenses since it was netted out of the revenue $11,170 $30.52 $5,865 $35.04 $17,035

Depreciation and Amort $4,758 $13.00 $1,566 $9.35 $6,324

Interest

Interest is grouped together. It has been allocated to wireline because there is no clear way to allocate at this time. $1,612 $0 $1,612

CAPEX or Debt

The CAPEX is covered by Debt issued by subs. Only a few are listed. There is no clear way to see new CAPEX from the stats for each unit. Clearly it is even greater than this number. If one assumes a 5 million sub growth and a $500 incremental CAPEX per sub this is an incremental CAPEX of $2.5 B. Assume it is just half of that for wireless since they may have had inventory. $4,416 $12.07 $1,250 $5,666

Cash Flow ($2,452) ($6.70) $1,495 $8.93 ($957)


Fiber Capacity

McGarty, in a 1990 Harvard paper, stated:

“Fiber has revolutionized the data networks in the United States. A single strand of fiber can transmit 1012 bits per second of data. If we allocate each home, 100 million residences, with 100 Kbps of full time data, that is 1013 bits per second if everyone in the US is talking simultaneously in this high speed data fashion. That is the capacity of just a single strand of fiber. A typical bundle of fiber has 25 to 50 strands and these are connected to other such bundles. The current fiber network is structured like past voice networks, and generally does not take advantage of the bandwidth of the fiber. Albeit the technology is not yet totally operationally capable, the world view of the system designers is one that is to use fiber as copper. Use it for one voice circuit after another.”


Reasons for Telecom Collapse1. Overcapacity on backbone

2. Excess Debt

3. Excess Vendor Financing

4. Regulatory Confusion

5. Inexperienced Management

6. Pricing Suicide:

7. Monopolistic Practices:

• 7.1 Access and Interconnection Fees

• 7.2 Unbundled Network Elements (UNEs)

8. Litigation Excess:

• 8.1 Iowa Utilities Board v FCC et al, US 8th Circuit Court, July 17, 1997

• 8.2 AT&T et al v Iowa Utilities Board, US Supreme Court, January 1999

• 8.3 Verizon et al v FCC, US Supreme Court May 13, 2002

• 8.4 US Telecom Association (USTA) v FCC, Bell Atlantic as Intervenor, US Court Appeals, District of Columbia, May 24, 2002

• 8.5 Trinko v Bell Atlantic, US Court of Appeals, 2nd Circuit, June 2002


Access and Interconnection


Network and Service Interconnections

Local Exchange CarrierLocal Exchange Carrier

Wireless CarrierWireless CarrierIP CarrierIP Carrier

CATV NetworkCATV Network

Meet PointMeet Point


Interconnection

Incumbent Carrier Incumbent Carrier

Incumbent Carrier

C1, P1

New Entrant

C2, P2

From: Laffont & Tirole, p 101


Service Provision Elements

Element 1Element 1

Element 2Element 2

Element N-1Element N-1

Element NElement N MeetPoint

MeetPoint

Third PartyPeer

Networks

Third PartyPeer

Networks


Interconnection Costs

C o n s id e r th e c a s e o f a n I E C . T h e I E C c h a r g e s a r a te R p e r m in u te th a t i s b a s e d u p o n c o m p e t i t iv e fa c t o r s . I t c o s ts th e I E C a r a te R IEC to p r o v id e th e s e r v ic e a n d i t p a y s th e L E C th e a m o u n t T RIEC LEC LEC, , w h e r e T is

th e p e r c e n t o f th e c o s ts o f th e L E C a l lo c a te d to p r o v id e th e s e r v ic e . T h u s th e to ta l I E C r a te i s ;

R R T RIEC IEC LEC LEC ,

T h e I E C th e n c a r r ie s th e L E C c o s ts th r o u g h th e a c c e s s f e e . N o w c o n s id e r th e c a s e o f tw o c o m p e t in g L E C s u s in g th e s a m e fo r m u la . L e t th e r a te s b e d e f in e d a s fo l lo w s :

R A C T C

and

R A C T C

LEC LEC LEC LEC LEC LEC

LEC LEC LEC LEC LEC LEC

, , , , ,

, , , , ,

;1 1 1 1 2 2

2 2 2 2 1 1


Interconnection Costs Effects

Cost, Inefficient

Cost to Customer

$0

$5

$10

$15

$20

$25

$30

$35

$40

$10 $20 $20 $40

Cost (Efficient)

Cost (Inefficient)

Cost (Eff, No Access)

Cost (Ineff, No Access)


Baulmol & Willig

),,(,,,

max2102100

210

pppppSpSppp

0,, 220 ppp


Economic Models

D e f i n i t i o n : L e t q b e a n y p r o d u c t , a n d l e t x x x n 1 , . . . , b e t h e s e t o f i n p u t s n e c e s s a r y t o p r o d u c e q . L e t ;

q f x x n 1 , . . .

w e c a l l q t h e p r o d u c t i o n f u n c t i o n b a s e d o n t h e r e s o u r c e s p r o v i d e d . D e f i n i t i o n : T h e u n i t m a r k e t p r i c e o f x k i s p k , a n d t h i s p r i c e s i s b a s e d o n o b t a i n i n g t h e u n i t i n p u t f r o m a t o t a l l y c o m p e t i t i v e m a r k e t w h e r e s u c h a n i n p u t i s g e n e r a l l y p r o v i d e d . D e f i n i t i o n : T h e c o s t o f t h e p r o d u c t o b t a i n i n g t h e u n i t i n p u t s f r o m a c o m p e t i t i v e m a r k e t i s g i v e n b y :

C q x x p p b bn n n( ) , . . . ; , . . . ; , . . . 1 1 1

w h e r e x i s t h e u n i t i n p u t , p t h e c o m p e t i t i v e m a r k e t p r i c e , a n d b t h e f i x e d c o s t s a s s o c i a t e d w i t h e a c h u n i t i n p u t . D e f i n i t i o n : A p r o v i d e r o f s e r v i c e s i s s a i d t o d e l i v e r t h o s e s e r v i c e i n a p r o f i t m a x i m i z e d f a s h i o n i f ;

Profit pq C i s m a x i m i z e d b y t h e c h o i c e o f x .


Cost FunctionsT h e o r e m : L e t f , a p r o d u c t i o n f u n c t i o n b e d e p e n d e n t o n a s e t o f i n p u t s , x , a n d l e t t h e c o s t o f t h e q u a n t i t y p r o d u c e d b e a l i n e a r s u m o f t h e i n p u t s p r i c e d i n d e p e n d e n t l y a t p r i c e s p w h i c h a r e o b t a i n e d i n a c o m p e t i t i v e f a s h i o n o n t h e o p e n m a r k e t , a n d l e t t h e c o s t f u n c t i o n b e m i n i m i z e d c o n s t r a i n e d b y t h e p r o d u c t i o n f u n c t i o n , s p e c i f i c a l l y , l e t ;

C q x x p p b bn n n( ) , . . . ; , . . . ; , . . . 1 1 1

a n d ,

C p q bk kk

n

1

a n d c h o o s e x t o m i n i m i z e ;

x x x x V p q b q f x xn n k k nk

n

1 1 11

* *, . . . , . . . : _ m i n ( ( ( , . . . , ) )

t h e n , t h e r e e x i s t a n e x p a n s i o n p a t h ;

g x x n( , . . . , )1 0 s u c h t h a t t h e s e t o f p r o d u c t i o n f u n c t i o n s , a n d c o s t f u n c t i o n , c a n y i e l d t h e r e l a t i o n s h i p f o r c o s t ;

C q q bS h o rtTerm ( ) ( ) w h i c h i s t h e s h o r t t e r m c o s t f u n c t i o n .


Cost ModelsC RD PF UCk k k k

T h e n t h e t o t a l o p e r a t i o n s c o s t s a r e ;

C RD PF UCk k kk

K

1

T h e n w e h a v e f o r t h e t o t a l c o s t f u n c t i o n t h e f o l l o w i n g , w h e r e w e h a v e p a r a m e t e r i z e d i t o n t i m e u n i t s , k , a n d h a v e f u r t h e r i n c l u d e d a l l c o s t e l e m e n t ;

C q C C C C CCapi t al Cost of Goods Servi ce Sal es Operat i ons( ) _ _

W e c a n s i m p l i f y t h i s a s :

C RD PF UC where

n Capital n N Oper ations

kn

kn

kn

k

K

n

N

11

1

; ;

, . . . , .

w h i c h c a n b e p l a c e d i n t h e g e n e r a l c o s t f o r m a s ;

C q C q x x b bNK NK( ) ( ; , . . . ; , . . . ) 1 1


Cost Models

C RD PF UCk k k k T h e n t h e t o t a l o p e r a t i o n s c o s t s a r e ;

K

kkkk UCPFRDC

1

T h e n w e h a v e f o r t h e t o t a l c o s t f u n c t i o n t h e f o l l o w i n g , w h e r e w e h a v e p a r a m e t e r i z e d i t o n t i m e u n i t s , k , a n d h a v e f u r t h e r i n c l u d e d a l l c o s t e l e m e n t ;

OperationsSalesServiceGoodsofCostCapital CCCCCqC __)(

W e c a n s i m p l i f y t h i s a s :

C RD PF UC where

n Capital n N Operations

kn

kn

kn

k

K

n

N

11

1

; ;

, . . . , .


Expense Models

nnn bbppxxqC ,...;,...;,...)( 111

a n d ,

n

kkk bqpC

1

a n d c h o o s e x t o m i n i m i z e ;

n

knkkn

n

xxfqbqpVxx

xx

111

**1

)), . . . ,((min(_:, . . .

, . . .

t h e n , t h e r e e x i s t a n e x p a n s i o n p a t h ;

g x x n( , . . . , )1 0

bqqC ShortTerm )()(

w h i c h i s t h e s h o r t t e r m c o s t f u n c t i o n .


Scale EconomiesD e f i n i t i o n : A n e c o n o m i c e n t i t y , , h a s e c o n o m i e s o f s c a l e , i f f o r a n y , t h e r e e x i s t s a , s u c h t h a t ,

)()( qCqC L o n g Ru nL o n g Ru n

T h e o r e m : I f t h e C o s t F u n c t i o n , C qL o n g Ru n ( ) , i s c o n c a v e , n a m e l y :

))1(()()1()(

;10_;_,_,,...,1,_

qqfqfqf

thatsuchandnkqif k

w h e r e :

nqqtobelongandqq ,...:___ 1

P r o o f : T h e p r o o f o f t h i s f o l l o w s d i r e c t l y f r o m t h e c o n t i n u i t y o f f u n c t i o n s . C o r o l l a r y : A n e c o n o m i c e n t i t y , , h a s e c o n o m i e s o f s c a l e , i f ;

.____;__0)(

qeappropria tallo fsetwhereqq

qC


Value and Monopoly Issues

V NR n E n C n T n

m nn

N

* ( )( ) ( ) ( ) ( )

( )

10

N o w w e c a n f u r t h e r a d d t o t h e t a x , t h e a c c e s s f e e . L e t A b e t h e a c c e s s f e e . T h e n t h e P C S c a r r i e r f a c e s t h e f o l l o w i n g N P V f u n c t i o n ;

V NR n E n C n T n A n

mP C S nn

N

( )( ) ( ) ( ) ( ) ( )

( )

10

I n C o n t r a s t t h e L E C h a s t h e v a l u e ;

V NR n E n C n

mL E C nn

N

( )( ) ( ) ( )

( )

10


Monopoly Rents

LEC

N

nn

LECLEC MR

m

nCnEnRNV

0 )1(

)()()()(

N

nn

PCSPCS m

nAnTnCnEnRNV

0 )1(

)()()()()()(

>>


Cost Models

Revenue Driver, R: The revenue drive may be as simple as the number of customers or the number of new customers. Clearly the customer service and billing functions are driven by the number of customers. The sales effort is driven by the number of new customers. The cell maintenance function is driven by the number of cell sites which in turn is driven by the number of customers.

Productivity Factor, P: The productivity factor reflects how the operations reflects revenue drivers into human resources. For example in customer service it is in terms of the calls per customer per day, the holding time per call, the hours per day per customer service representative. This results in the number of customer service representatives per unit revenue driver.

Unit Costs; U: The unit costs are the costs associated with the labor and other units of production used in the operations model. This then yields a cost for unit k as:


Microeconomic Factors

D e f i n i t i o n : T h e M a r g i n a l C o s t i s d e f i n e d a s ;

qdq

dCMC

D e f i n i t i o n : T h e l o n g r u n c o s t i s d e f i n e d a s t h e c o s t s g e n e r a t e d b y t h e s y s t e m a s f o l l o w s :

q f x x k

C p x k

g x x k

k kk

n

n

( , . . . , ; )

( )

( , . . . , ; )

1

10

w h e r e w e h a v e d e f i n e d t h e v a r i a b l e l o n g r u n f a c t o r k . R e d u c e d t h e l o n g r u n c o s t i s :

)(),( kkqC


Cost Curves

D e fin itio n : T h e lo n g ru n co s t cu rve is th e e n ve lo p e o f th e s h o rt ru n co s t cu rve s . S p e c ifica lly :

)( qC LongRun

D e fin itio n : T h e L o n g R u n A ve ra g e T o ta l C o s t is :

q

qAC

)(

D e fin itio n : T h e L o n g R u n M a rg in a l C o s t is :

qMC


Valuation

LEC

N

nn

LECLEC MR

m

nCnEnRNV

0 )1(

)()()()(

N

nn

PCSPCS m

nAnTnCnEnRNV

0 )1(

)()()()()()(


Scale & Scope

SCALE: THERE ARE ESSENTIALLY NO SCALE ECONOMIES IN

Telecom IF NEW TECHNOLOGY IS DEPLOYED.. SCOPE: SCOPE EXISTS IF AND ONLY IF THERE ARE NON-

DISAGRATEABLE ELEMENTS. OUTSOURCING AND USE OF DISTRIBUTED DATA BASES REDUCES SCOPE. SCOPE EXISTS FOR LEC AS A BOTTLENECK ONLY IN TERMS OF LOCAL SWITCH ACCESS.


Access and Interconnect

LECLECIECIEC RTRR ,

1,1,22,2,2,

2,2,11,1,1,

;

LECLECLECLECLECLEC

LECLECLECLECLECLEC

CTCAR

and

CTCAR


Access Implications

T

A

where

CT

ATR

T

AR

yielding

TCACR

and

TCACR

LECLECLEC

LECLECLEC

LECLECLEC

1

;

1

;

;

22

2

21

1,2,2,

2,1,1,


Microeconomics: Monopoly v Competition

q

p

MC

P(q)

MR

p

p

c

m

qm

MC=D

MC=MR

qc


Competitive Technologies

q

p

MC

P(q)

MR

p

p

c

m

qm

MC=D

MC=MR

MC new

pPCS

qPCS

qc


Technology & Access Fees

q

p

MC

P(q)

MR

p

p

c

m

q

m

MC=D

MC=MR

MC new

p

PCS

q

c q

r

q

PCS

MC access


Cross Payment

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

Cost Base Carrier 2

Co

st t

o C

ust

om

er

Cost per Sub 1 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00

Allocated Cost per Sub 1 $6.00 $7.50 $9.00 $10.50 $12.00 $13.50

Cost per Sub 2 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00

Allocated Cost per Sub 2 $4.00 $7.50 $11.00 $14.50 $18.00 $21.50

$5.00 $10.00 $15.00 $20.00 $25.00 $30.00


Subsidy versus Tax

($10.00)

($8.00)

($6.00)

($4.00)

($2.00)

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

Cost of Carrier 2

Net

Cis

t to

Su

b

Net Cost to 1 $1.00 $2.50 $4.00 $5.50 $7.00 $8.50

Net Cost to 2 ($1.00) ($2.50) ($4.00) ($5.50) ($7.00) ($8.50)

$5.00 $10.00 $15.00 $20.00 $25.00 $30.00


European Internet


Central Europe

Baltic to Balkans


Local Carrier

Local Carrier

Local Carrier

Local Carrier

Local Carrier

Local Carrier

LDCarrier

LDCarrier

InternationalCarrier


LD Carrier

LD Carrier

LocalCarrier

LocalCarrier



Local ISP

Local ISP

BackboneISP

BackboneISP

LocalISP

LocalISP

BackboneISP

BackboneISP

TandemSwitch

TandemSwitch

GatewaySwitch

GatewaySwitch Gateway

Switch

GatewaySwitch

TandemSwitch

TandemSwitch

SettlementAgreement

Now Defunct

SettlementAgreement

Now Defunct

Tier 1Peering

Tier 1Peering

TransitNAP orOther

TransitNAP orOther

TransitNAP orOther

TransitNAP orOther


Frankfurt

Prague

Warsaw

New York

ATM Switch

DNS Server

RouterMAE East

MAE East

GenuityGenuity

UUNetUUNet

CZ TelCZ Tel

TPSATPSA

OTEOTE


Global Interconnection

Genuity

UUNet

AT&T

C&W

Genuity

UUNet

AT&T

C&W

ZNAP

NAP

NAP

NAP

NAP


Minimum Cost

)()()1()(1 1

,,, MbpsTpCMbpsTpCMbpsTpCCN

k

N

kk

TransitMbpskkk

ortPeerTranspMbpskkk

sportExcessTranMbpskk

N

iiTransitTransportNew CCC

1,

)(,, mbpsTCC iMbpsiiTransit


Central Europe Growth

0

20

40

60

80

100

120

140

160

180

200

Num

ber

ST

M-1

s

Czech & Slovakia 16 19 21 25 28 32 37 42 47 53 60 68

Poland 15 17 20 22 26 29 33 38 43 48 54 61

Greece. Italy & Balkans 10 12 13 15 17 19 21 24 27 30 34 38

Other MAE 1 1 1 1 2 2 2 3 3 4 4 5

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12


Central Europe Fees

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Rev

enu

e p

er Q

uar

ter

($00

0)

Czech, Slovakia, Hungary $1,134 $1,268 $1,403 $1,558 $1,715 $1,886 $2,071 $2,266 $2,470 $2,690 $2,926 $3,178

Poland $1,042 $1,159 $1,288 $1,416 $1,565 $1,714 $1,876 $2,052 $2,236 $2,428 $2,634 $2,855

Greece, Romania, Bulgaria $840 $930 $1,016 $1,113 $1,215 $1,320 $1,431 $1,553 $1,679 $1,812 $1,956 $2,106

Other $8 $7 $7 $7 $64 $72 $80 $95 $106 $122 $132 $149

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12


Typical Network

Leipzig

Frankfurt

Nurnberg

Berlin

Strasbourg(Kehl)

Dusseldorf

Munich

Stuttgart

Bremen

Hanover

Zurich

Milan

Geneva

Lyons

Paris

Rotterdam

Antw erp

Brussels

London

Hamburg

Amsterdam

Prague

Brno

ViennaBratislava

Gyor Budapest

Katow ice

Warsaw

Zephyr Fiber Network

Zephyr Swap Network

MAE East

New York


NAP

ATM Switch

DNS Server

Router

Frankfurt

GenuityGenuity

UUNetUUNet


NIX

ATM Switch

DNS Server

Router

Prague

ISP 2ISP 2

ISP 1ISP 1

ISP 3ISP 3


Peering and Transit• Peering is usually a bilateral business and technical arrangement,

where two providers agree to accept traffic from one another, and from one another’s customers (and thus from their customers’ customers). Peering does not include the obligation to carry traffic to third parties.

• Transit is usually a bilateral business and technical arrangement, where one provider (the transit provider ) agrees to carry traffic to third parties on behalf of another provider or an end user (the customer ). In most cases, the transit provider carries traffic to and from its other customers, and to and from every destination on the Internet, as part of the transit arrangement.

• Peering thus offers a provider access only to a single provider’s customers; transit, by contrast, usually provides access at a defined price to the entire Internet.

• Peering is done on a bill- and- keep basis, without cash payments, where both parties perceive roughly equal exchange of value; however, there is often an element of barter.


Shared & Direct Peering

• A few shared global traffic exchange points.• Smaller domestic shared traffic exchange points for

regional concentration and exchange of traffic.• Direct traffic exchange carries most Internet backbone

traffic. Even though shared traffic exchange points are losing market share, their traffic is likely to continue to grow in absolute terms.

• Carrier hotels and fiber interconnects - an emerging trend that seeks to provide the best of both worlds.

• Whether shared or direct, the prevailing pattern is shortest exit routing - the sending provider hands off traffic at the point most convenient to the sender.


Shared & Direct Peering

Direct

Shared


Issues Driving Change

• Decline in “street price” of circuits within Europe

• due to deregulation.

• Declining cost of transoceanic capacity.

• Increased number and density of customers and content (and caching).

• Improved number and distribution of shared peering points.

• Deregulation of European telecoms, and recognition of the need to minimize regulatory barriers to Internet growth.

• New transit services terminated in Europe and elsewhere.

• Perception that U. S.- based backbones discriminate against overseas providers in interconnection policies.

• Dissatisfaction with allocation of transoceanic circuit costs, which often are fully carried by the non- U. S.- based provider.


UUNet Guidelines1. Geographic Scope. The Requester shall operate facilities capable of terminating customer

leased line IP connections onto a router in at least 50% of the geographic region in which the WorldCom Internet Network with which it desires to interconnect operates such facilities. This currently equates to 8 countries in Europe,. The Requester also must have a geographically-dispersed network.

2. Traffic Exchange Ratio. The ratio of the aggregate amount of traffic exchanged between the Requester and the WorldCom Internet Network with which it seeks to interconnect shall be roughly balanced and shall not exceed 1.5:1.

3. Backbone Capacity. The Requester shall have a fully redundant backbone network, in which the majority of its inter-hub trunking links shall have a capacity of at least 45 Mbps (DS-3) for interconnection with WorldCom-Europe,

4. Traffic Volume. The aggregate amount of traffic exchanged in each direction over all interconnection links between the Requester and the WorldCom Internet Network with which it desires to interconnect shall equal or exceed 30 Mbps of traffic for WorldCom-Europe,

5. Each Internet Network must operate a fully functional 24x7 Network Operations Center. Each Internet Network must operate a fully redundant network, capable of handling a simultaneous single-node outage in each network without significantly affecting the performance of the traffic being exchanged.

6. Each Internet Network must set next hop to be itself, the advertising router of the network. Each Internet Network will propagate such routes to its transit customers with its own router as next hop. Each Internet Network shall implement "shortest exit routing" and advertise routes consistent with that policy, unless both Internet Networks mutually agree otherwise based on special circumstances.


Telephony Internet End User Frequently a person. Same End User Control or Choices Significant span of choice. Limited control or visibility. Pricing Visibility to service elements. Bundled prices. End User Interconnection Device This is the simple telephone. This is a PC or similar device Local Interconnection Carrier ILEC in almost all cases Dial up, CATV , or a DSL Backhaul Interconnection Carrier Interexchange carrier. Tier 1 carriers International Carrier PTTs to IP Telephony Tier 1 ISPs Switching Hierarchical with SS-7. Distributed. In reality hierarchical Architecture Hierarchical Generally very distributed. Control Centralized and intercarrier Tier 1 carriers via SLA Billing Disaggregatable billing. Bundled billing. Meet Points Well defined They are not supposed to exist Transit or Access Peering or Bill and Keep.

Access fees to all but monopolists. Bill and keep by FCC.

Transit fees by Tier 1 oligopolists. Peering by FCC.

Pricing Pricing being reduced Local pricing rising. Legal Underpinnings State run monopoly structure None Regulator FCC or the State PUC. None. Regulatory Theory Extensive None Place for Remedy Administrative FCC or PUC Antitrust and tort issues. Security High physical and network Highly insecure.

Comparisons


Game Theory in Telecommunications


Market Size

)()(1 kNkNkNkN CG

w h e r e ;

kGNComponentGrowthkN G _)(

w h e r e G i s t h e g r o w t h r a t e . A n d t h e n e w c u s t o m e r s t o b e r e p l a c e d d u e t o c h u r n a r e ;

)(_ kCNComponentChurnN C

H o w e v e r , t h e g r o w t h c o m p o n e n t i s r e l a t e d t o t h e p r i c e o f t h e s p e c i f i c c a r r i e r w i t h r e s p e c t t o t h e p r i c e s o f a l l o t h e r c a r r i e r s . N a m e l y w e c a n s t a t e ;

N

jkkkki PPfgGR

,1

)(


Price Dynamics

N

ijjjj kPkPkPkP

,1

)()()()1(


Cost Model

)()()()(

)()()()()()1(

KPRINkINTkCAPEXkO PEX

kG AkCo S akCo S vkRkCkC

w h e r e t h e s e a r e r e v e n u e , c o s t s o f s e r v i c e , c o s t o f s a l e s , G & A , O p e r a t i n g E x p e n s e s , C a p i t a l , I n t e r e s t , P r i n c i p a l . C l e a r l y :

)()()( kNkPkR

N o w w e c a n t a k e e a c h o f t h e s e s e p a r a t e l y t o s h o w :

)()()(

)()()()(

kNCkNCkNC

kO CCSkACCkU NEkCo S c

OCCSACCUNE

T h i s s h o w s t h a t t h e r e a r e c o n s t a n t s w h i c h r e l a t e c o s t o f s e r v i c e t o U N E c o s t s , a c c e s s c o s t s a n d o t h e r c o s t s o f s e r v i c e . T h e r e m a y a l s o b e f i x e d a m o u n t s b u t w e h a v e a l r e a d y r e m o v e d t h e m f r o m c a s h a v a i l a b l e . T h e u n i t s a r e c o s t s p e r c o s t e l e m e n t p e r u n i t t i m e . F o r C o s t o f S a l e s w e h a v e :

ta inNew CkNkNCkCo S a Re)()1()(

F o r t h e o p e r a t i n g e x p e n s e s w e h a v e :

)()()()(

)(&)()()()(

& kNCkNCkNCkNC

kOEkCS RkNO CkBILLkO PEX

OECS RNOCBill


Time Analysis

NitNCHtNGRd t

td Nii

i ...1);()()(

r e m e m b e r t h a t w e h a v e :

)()()()(

,1

tNCHtNPPfgd t

td Niii

N

jkkkk

i

T h e w e h a v e :

N

ijjjjii

i tPtPd t

td P

:1

)()()(

a n d f o r t h e c a s h n u m b e r w e h a v e :

f i xedi

newenexiii C

d t

td NCtNCtNCtNtP

d t

td C

)()()()()(

)(

w e c a n u s e t h e a b o v e t o s u b s t i t u t e :

if i xediiiinewiieniexiii CtNCHGRCtNCtNCtNtP

d t

td C,,,, )()()()()()(

)(


Two Player Market

L e t u s c o n s i d e r a t w o p l a y e r m a r k e t . T h e p l a y e r s w i l l b e a n I L E C a n d a C L E C . L e t u s a s s u m e t h e C L E C t o b e m o r e e f f i c i e n t t h a n t h e I L E C . W e h a v e t h e f o l l o w i n g s i x e q u a t i o n s :

)()())()(()(

tNCHtNtPtPgdt

tdNILECILECILECCLECILECILEC

ILEC

)()())()(()(

tNCHtNtPtPgdt

tdNCLECCLECCLECILECCLECCLEC

CLEC

)()(

tPdt

tdPILECILEC

ILEC

)()(

tPdt

tdPCLECCLEC

CLEC

ILECfixedILECILECILECILECnew

ILECILECenILECILECexILECILECILEC

CtNCHGRC

tNCtNCtNtPdt

tdC

,,

,,

)()(

)()()()()(

CLECfixedCLECCLECCLECCLECnew

CLECCLECenCLECCLECexCLECCLECCLEC

CtNCHGRC

tNCtNCtNtPdt

tdC

,,

,,

)()(

)()()()()(


DynamicsIL E CfixedIL E CIL E CenC L E CC L E CexIL E CIL E C

IL E C CtNCtNCtNtPdt

tdC,,, )()()()(

)(

C L E CfixedC L E CC L E CC L E CC L E Cn ew

C L E CC L E CenC L E CC L E CexC L E CC L E CC L E C

CtNCHGRC

tNCtNCtNtPdt

tdC

,,

,,

)()(

)()()()()(

N o t e t h a t t h e I L E C h a s n o e x o g e n o u s c o s t s , m o r e o v e r t h e y b e c o m e r e v e n u e f o r t h e I L E C f r o m t h e C L E C . A l s o t h e I L E C o w n s a l l t h e c u s t o m e r s s o t h e y w i l l j u s t l o o s e c u s t o m e r s i n t h i s s i m p l e a n a l y s i s . L e t u s f u r t h e r a s s u m e t h a t t h e I L E C d o e s n o t c h a n g e p r i c e s b u t t h a t t h e C L E C c o n t i n u e s t o d r o p p r i c e s . L e t u s f u r t h e r a s s u m e t h a t t h e t o t a l m a r k e t i s f i x e d . T h e w e h a v e :

IL E CIL E C PP ,0

a n d

C L E Ct

C L E CC L E C PePtP C L E C,0,0)(

W e a s s u m e t h a t t h e C L E C i n i t i a l p r i c e i s l e s s t h a n t h a t o f t h e I L E C . W e c a n f u r t h e r s i m p l i f y i t b y a s s u m i n g t h a t i f t h e I L E C d o e s n o t c h a n g e p r i c e s , t h e C L E C t h e n j u s t h a s t o p r i c e b e l o w t h e I L E C , s o t h a t c o n t i n u o u s

d e c r e a s e i s n o t n e c e s s a r y , t h u s 0C L E C i s t h e w o r k i n g a s s u m p t i o n .

D e f i n e :

0 C L E CIL E CP PP

T h e n w e h a v e :

tgIL E C

PeNN 0

a n d

)1(0tg

C L E CPeNN

T h u s f o r t h e I L E C w e h a v e :

IL E CfixedC L E Cextg

IL E CenC L E CexIL E CIL E C CCNeNCCP

dt

tdCP

,,00,, )()(


Optimal Solution

0,

,,00,, )()1)(/)(()(

ILEC

ILECfixedCLECexTg

PILECenCLECexILECILEC

C

TCCNegNCCPTC P

a n d f o r t h e C L E C w e r e a d i l y o b t a i n :

TCdttNCHgCCCPTC CLECfixed

T

CLECCLECPCLECnewCLECenCLECexCLECCLEC ,0,,, )())(()( o r w h e n i n t e g r a t e d :

0,,0,

,,

)1)(/))((

()(

CLECCLECfixedTg

PPCLECPCLECnew

CLECenCLECexCLECCLEC

CTCeTggNCHgC

CCPTC

P


Access Fees Plus Excess UNE Costs

($4,000,000)

($2,000,000)

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

CI(k), 000 CC(k), 000


No Access and UNE at Market

($400,000)

($350,000)

($300,000)

($250,000)

($200,000)

($150,000)

($100,000)

($50,000)

$0

$50,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

IncCF I (k) Inc CF C(k)

Terrence P. McGarty, Lisbon February 15, 2003 Peering, Transit, Interconnection: Access Regulation and Legislation Lisbon February 15, 2003.

Documents