All-IP and the implications for voice regulation. J. Scott Marcus

Transcription

1 All-IP and the implications for voice regulation J. Scott Marcus 0

2 PSTN and IP Interconnection and Two-sided Markets Traditional PSTN/PLMN interconnection IP-based data interconnection IP-based voice interconnection Implications of IP-based voice interconnection for market analysis Observations 1

3 Interconnection in an evolving world Switched fixed and mobile networks - Termination fees in the absence of regulation will tend to be very high, for both large and small operators. Internet - Peering: two providers exchange traffic only for their respective customers, often (but not always) with no explicit charges. - In most countries, no regulation of peering. What happens when worlds collide? 2

4 Traditional interconnection vs IP interconnection 3

5 Economic background: Traditional Fixed and Mobile Interconnection Models Calling Party's Network Pays (CPNP) wholesale arrangements Call placed Call received Retail CPP Payment Originating Network Terminating Network Wholesale CPNP Payment An alternative (United States) is to have negotiated arrangements under obligations of reciprocity, often resulting in no wholesale charges (Bill and Keep). Variants have been used in Canada, Hong Kong, Singapore,... 4

6 Economic background: Wholesale and retail In an unregulated CPNP system, carriers will tend to establish very high termination charge levels (the termination monopoly). - Smaller operators will be motivated to set termination fees even higher than large operators. - The problem is addressed in the EU by regulating all rates. Several factors contribute to the termination monopoly. - Since the charges are ultimately borne by another operator s customers, normal market forces do not adequately constrain them. - Customers have no visibility into termination fees. Termination charges at the wholesale level interact with retail pricing arrangements. - The termination fee generally sets a floor on the retail price. - Where termination fees are high, they generally limit the applicability of flat rate or buckets of minutes plans. 5

7 Economic background: Wholesale and retail Region Arrangements Results US Europe before 2003 Europe today No fixed MTR, but obligations of symmetry and reciprocity No regulation at all for mobile Cost based MTRs on an accelerated glide path MTRs are zero, and FTRs are low. MTRs averaged 0.20 MTRs dropping, heading toward perhaps

8 Two-Sided Markets A relatively new branch of economics deals with two-sided markets. In a two-sided market, a platform provider somehow benefits by bringing the sides of the market together. Payment could come from either side of the market; thus, relationships between price and cost that would be irrational in a conventional market might be reasonable in a two-sided market. Examples include broadcast television, and singles bars. Rochet, Jean-Charles/ Tirole, Jean (2004): Two Sided Markets : An Overview, March

9 Two-sided markets with apologies to John Tenniel and Charles Lutwidge Dodgson. 8

10 Voice call termination as a two-sided market Some have argued based on two-sided market theory that a decline in TRs should lead to an increase in retail price. This is plausible, but other factors appear to dominate. Wholesale revenues represent only 15% of total mobile revenues (BoAML), so the direct impact is relatively small. This limits the magnitude of any two-sided market effects. For Mobile-to-Mobile (M2M) calls, the termination rate is a cost. Lowering the cost of calls in a competitive market tends to reduce the price, not to increase it. The fraction of calls that are M2M is increasing. Lowering MTRs limits the ability of large MNOs to prevent small ones from competing on price through on-net off-net price discrimination, thus enhancing competition. 9

11 $ (US) Voice call termination and retail revenues Service-Based Revenue per MoU vs MTRs in Europe $0.30 $0.25 $0.20 $0.15 SBR/MOU MTR (PPP corrected) $0.10 $0.05 $

12 Voice call termination and retail revenues Q2006 3Q2006 4Q2006 1Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 MTR Voice SBR / orig MOU Subscription fees / orig MOU Traffic SBR / orig MOU Source: Spanish CMT (data), WIK calculations 11

13 Peering, transit, and Internet access Transit - The customer pays the transit provider to provide connectivity to substantially all of the Internet. - Essentially the same service is provided to consumers, enterprises, ISPs, content provider or application service providers. Peering - Two ISPs exchange traffic of their customers (and customers of their customers). - Often, but not always, done without charge. Variants of both exist. 12

14 Peering, transit, and Internet access Peering Peering ISP A ISP B ISP C 3 ISP A1 ISP A2 ISP B1 ISP C1 ISP C2 ISP A1a ISP C1b ISP A1b ISP A2 ISP C1a Possibly becoming less hierarchical over time 13

15 Observations Migration of networks to IP is a global trend. IP interconnection for Internet traffic is well understood. As traditional voice services migrate to IP, there are good technical reasons to implement interconnection using IP. There is movement in this direction, and it is accelerating, but even in the most developed countries it is not as advanced as one might expect. 14

16 Voice interconnection via IP Different levels of IP-based voice interconnection are visible in different countries. Little or no implementation, little discussion: most of the world. Active discussion, implementation only among competitors and/or cable operators: US (but possibly about to accelerate), Canada, Spain, New Zealand, many more. Active incumbent implementation plans: Germany, Norway. Implemented by the incumbent: Denmark, Italy. Implementations in South Africa, ongoing work in Namibia!? This is not as far advanced overall as you might think! 15

17 Voice interconnection: Denmark TDC currently offers both TDM and IP interconnection to alternative operators. Alternative operators that have a PSTN gateway can connect to TDC either using IP or with traditional interconnection. TDC network structure Source: TDC, SIP Connect, Bilag 1b. Tekniske Specifikationer; Legend: MGW = Media Gateway; PGW = PSTN Gateway; PSTN = Public Switched Telephone Network; RTP = Real Time Transport Protocol; SS7 = Signaling System No. 7; SIP = Session Initiation Protocol. 16

18 Voice interconnection: Denmark NITA decision (2011)* - Obligation for TDC to offer IP-IC (from January 1, 2012) - Later obligation also for Colt, Hi3G, Telenor and Telia (from January 21, 2013) DBA (2013)** market 3 decision - Obligation to terminate voice calls to PSTN-, ISDN- and VoIP subscribers (SS7- and IP-based) imposed on TDC and 36 other SMP operators - Specification of 6 PoIs for IP-termination on TDC s network - No obligation regarding TDM-IP conversion, rather subject to negotiations of market participants; costs of conversion are not part of the regulated prices DBA cost models rest solely on IP technology IT- & Telestyrelsen (2011): Markedsafgørelse over for TDC A/S på engrosmar-kedet for fastnetterminering (marked 3); in particular section 7.5; 20. januar * DBA (2013): Engrosmarkedet for fastnetterminering (marked 3) - Markedsafgørelse over for TDC samt markedsafgrænsning og -analyse; 18 december; available at: 17

19 Voice interconnection: Italy AGCOM has put regulations in place (already in 2011). Ministry Economic Dev has developed technical standards (2012). Telecom Italia has published: - Reference Offer 2013 for IP interconnection on October 31, A manual of procedures for IP interconnection - AGCOM has put revised 2013 Reference Offer for public consultation; final adoption likely end of TI plan based on 16 VoIP Gateway Areas each of which is characterized by two PoIs (geographical redundancy). Price regulation: Glide path until 2015 (prices for TDM-IC only regulated until mid of 2015) Currently IP-IC related tests underway between TI and other network operators; limited implementation to date (mostly Fastweb); significant increase to be expected in 2015 and beyond. 18

20 Voice interconnection: Norway Telenor published plans to offer IP interconnection for voice into their service portfolio in All connect on SIP interface - Termination (POTS, VoIP, Mobil) - Transit (SIP-SIP, SIP-SS7) - PSTN Gateway (translation between SIP and SS7). Implementation of the project has been postponed several times: up until today no SIP-Interconnect offer in the market, rather, market launch likely mid of 2015 at the earliest. Price regulation: NPT s cost model assumes full migration from PSTN/ISDN to NGN between ; however, in practice network operators are only obliged to interconnect on the basis of TDM as long as IP-IC obligation is introduced. 19

21 Voice interconnection: Germany Technologically conformant interconnection Technologically non-conformant interconnection 20

22 Voice interconnection: Germany No real deployment to date, but DTAG plans announced. Phase 1 Introduction (end mid 2013): - Introduction of NGN-IC - Test with every interconnection partner (ongoing!) - Parallel operation of PSTN-IC and NGN-IC - Market driven migration - PSTN continues to be in full operation Phase 2 Migration (mid 2013 beginning 2015): - Tests with all interconnection partners must be completed before launch - Parallel operation of PSTN-IC and NGN-IC - Market-driven migration - Initiation of dismantling of PSTN Phase 3 Finalisation (beginning 2015 end 2016). - Parallel operation of PSTN-IC and NGN-IC - PSTN products no longer marketed by Telekom Deutschland - PSTN Interconnection Points removed 21

23 Voice interconnection: United States An ongoing discussion for many years. Cable companies routinely exchange voice traffic via IP. Trials between larger telecommunications firms have been a hot topic for years. In the U.S., where regulation is not technologically neutral, migration to IP might enable incumbents to achieve even greater deregulation. - Regulatory discussion of IP interconnection issue intertwined with discussion of phasing-out the PSTN. - Links as well to the telephone numbering database, and to VoIP caller ID spoofing. AT&T and Verizon just announced that they will enable direct Voice over LTE (VoLTE) to VoLTE connections in

24 IP migration and the termination monopoly In WIK (2008), The Future of IP Interconnection, we considered claims that the migration to IP would open up connectivity and end the termination monopoly forever. We concluded that the termination monopoly stemmed from the fact that only a single network operator could complete a call to a single telephone number, and existed independent of whether PSTN versus IP was used to complete the call. Evolving technology still does not seem to have provided alternatives at wholesale level. The Commission has however observed that there may be an effective retail constraint for termination of calls to nongeographic numbers for the provision of value added services. (Explanatory Memorandum (2014)) 23

25 Termination services are the least replicable input for retail voice services! - Commission, Explanatory Memorandum 24

26 Observations Among conventional PSTN/PLMN networks: - TRs would be very high absent regulation. - Regulated TRs should approximate long run incremental costs. Among Internet networks: - Transit prices are generally set by the competitive market. - Peering charges, if any, are set by commercial negotiations. - Probably the best way to do it (but not everyone agrees). As voice moves to IP: - The termination monopoly is still relevant, at least for now. - TRs would be very high absent regulation. - Basing the TR on the IP-based cost seems to make sense. The termination monopoly will be with us for a while! 25

27 References Marcus, Dieter Elixmann, et al., The Future of IP Interconnection: Technical, Economic, and Public Policy Aspects, a study prepared for the European Commission, available at: s/future_ip_intercon/ip_intercon_study_final.pdf. European Commission (2014), Explanatory note accompanying the document Commission Recommendation on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation Rochet, Jean-Charles/ Tirole, Jean (2004): Two Sided Markets : An Overview, March 2004, at: Laffont, Marcus, Rey and Tirole (2003), Internet Interconnection and the offnet Cost Pricing Principle, RAND Journal of Economics. 26

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