Oservce Vs. Sannet - Which One is Better?

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1 o rcng n Compettve Telephony Markets Yung-Mng L nsttute of nformaton Management Natonal Chao Tung Unversty, Tawan Ext yml@mal.nctu.edu.tw Shh-Wen Chu nsttute of nformaton Management Natonal Chao Tung Unversty, Tawan Ext fallacy77@gmal.com ABSTRACT As a dsruptve technology, the oce over nternet rotocol (o) servce has a great mpact on telecommuncaton market. Whle o over two end computers s free, o provders generate proft from so-called phone-n and phone-out servces, whch allows the o accessble users to contact conventonal phone numbers. Compared wth conventonal publc swtched telephone network (STN) servce, o servce has the advantage of a lower charge rate. However, t also ncurs more qualty uncertanty and securty rsk concerns. n ths paper, utlzng game theoretc models, we analyze the market nteractons of o-to-stn servce ndustry and prescrbe the optmal prcng strateges wth respect to both types of telephony servces. Several perspectves have been addressed to help clarfy the progress and evoluton of o servces and ntmatons for both STN operators and o servce provders are also represented to develop several manageral mplcatons. Categores and Subject escrptors K.6. [Management of Computng and nformaton Systems]: General economcs; J.4 [Computer Applcatons]: Socal and Behavoral Scences Economcs General Terms Management, Economcs, Human Factors Keywords o, STN, Game Theoretcal Analyss, rcng Strategy, Competton 1. NTROUCTON Snce 1995, ocaltec brng out the frst software of nternet phone [5], o servce has changed the whole telephony world n both technologcal and economcal way. Orgnally, t was bult on C and offered people usng mcrophones to call frends who use the same o software va nternet and thus avod the per-mnute tolls charged by the conventonal telecommuncatons before. Ths servce suts people who travel abroad or those multnatonal companes most due to ts free naton-wde long dstance call servces. Nowadays, wth the progresson of network technology, the coverage of 3/4G or wreless networks and the revoluton of moble devces foster the extenson of o software from C to the onlne Applcaton stores. Snce then, more and more people started to get n touch wth the o servce. Wth the moblty and convenence, o servces renforce ts ablty to replace the conventonal phone. However, o servce provders stll need to seek out the way of proft generatng nstead of just offerng free servces lke chartes. nterconnectng wth the conventonal STN servces s a proper way to charge snce the elmnaton of call-transmttng costs and the strong bargan power comng from the vast number of users can lower the prce of t and so as to gan more compettve advantage aganst the STN operators. Therefore, lots of o servce provders strke ther way out to develop the technque. o phone-out servce appeared frst on the stage. A customer can use hs/her o software to call any landlne or cell phone number from ther C or nternet-based devce at a cheat rate. However, other than the need of contactng people, customers wll also eager to be lased or call back. Therefore, o servce provder also launched the o phone-n servce to deal wth the problem. A customer can subscrbe an nternet number located to hs/her resdence wth a subscrpton fee and whle he/she goes abroad, people n the orgnal area can stll call hm/her wth the number and a local rate rather than expensve nternatonal rate. He/she can also call a conventonal number wth ths number through the nternet and be called back. The two knds of servces mentoned above are the major pay o servces nowadays. Snce o servce s an emergng new technology and comes wth a dsruptve prce, t s not surprsed that the sales of conventonal STN servce provders has been sufferng. Skype, by far the largest provder of nternet-based voce communcatons, was establshed n 3, launched SkypeOut and Skypen servces n 4 and 5 and be purchased by ebay n 5. The two servces become the man majorty of Skype s revenue. By 1, Skype has 663 mllon regstered users and generates total revenue wth US mllon n 1. Accordng to TeleGeography, the growth of nternatonal call traffc has slumped whle nternatonal traffc from Skype users contnues to soar, and that Skype s share of nternatonal callng mnutes has grown to an estmated 4.7% durng 1. The cross-border traffc routed by Skype s projected to grow by an astonshng 45 bllon mnutes n 1 more than twce the volume added by all of the world s phone companes, combned. Ths means that the demand of nternatonal communcaton remans strong, and more and more people gettng to know there s another cheaper alternatve to do ths. There are other o servce provders also exert themselves n ths feld. There are lots of o servces offerng pay o phone-out or phone-n servces, such as Frng and Nmbuzz. They both launched ther own o phone-out servces snce Skype termnated the connecton and support for both frms. oxbone also work hard n buldng a vast network for nbound telephone numbers, so as to enhance the coverage of servce area of o phone-n servces. o servce has been popularly adopted and the o market keeps contnuously ncreasng. However, the mechansm and prcng strategy of o phone-out and phone-n servces reman unclear, especally for the latter due to the complex archtecture of nterconnecton between STN operators and o servce provders. n ths paper, we examne the ssues of the prcng

2 strategy of o servces, consderng the effects of telephony ndustry structure and o qualty of servce by usng game theoretc models wth several mportant market parameters to develop the prcng strateges of both players (o servce provder and STN operator). We derve the optmal solutons and several nterestng propostons whch are useful to support the operaton of telephony busness. The remander of the paper s organzed as follows. n Secton, we revew the related lterature. Secton 3 we descrbe the models of two types of o servces and dscuss the several mplcatons of our analytcal results. Fnally, Secton 4 provdes concludng remarks and offers future research drectons.. RELATE LTERATURE.1 Telecom Servce The tradtonal telecommuncaton servce provder must nvest a large sum of money to buld the nfrastructure, such as base statons. The local STN operators holdng the hgh fxed and sunk cost are sometmes referred to as the essental faclty or the bottleneck [11]. Snce the entrant needs to face the huge obstacles, n the past central government usually had a monopoly on the tradtonal telecommuncaton n many countres [5]. Therefore, the authortes made some regulatons to restrct the ncumbent. For example, the telecommuncatons markets were fully lberalzed n most of the EU n 1998 and delayed n ortugal and Greece untl and 1, respectvely. The EU Lberalzaton drectves requred the removal of exclusve and specal rghts n telecommuncatons servces and equpment markets. A set of harmonzaton drectves lad down detals regardng condtons the member states were requred to put n place regardng regulatory frameworks, lcensng, nterconnecton, leased lnes, unversal servce, tarffs, numberng, frequences and rghts of way [1]. However, later we wll explan that o servce s ndependent wth the nfrastructure, thus can balance the market and make t more compettve wthout regulatons.. o Servce o s the real-tme transmsson of voce sgnals usng the nternet rotocol over the publc or prvate data network, whch means that t converts the voce sgnal from one s phone nto a dgtal sgnal and transmt over the nternet [3, 7]. The most sgnfcant advantage of o servces s that one can make a long dstance wthout payng tolls to the STN operators [5]. There are some researches ndcate that o servce s an outcome from technologcal convergence. The technologcal convergence may be used as a tool n order to create value for ncumbent and servce operators n telecommuncatons [9]. Although there s a sayng that o servce wll take over tradtonal STN servce and hence shake the poston of telecoms [], the new technologes stll comes wth some challenges, such as securty and prvacy ssues lke wretappng [1] and the qualty-of-servces along wth tmng ssue whle voce package transmttng between o network and STN system [6]. We wll consder the qualty of the o servce n the proposed model..3 o Economcs The economc effcency of o servce has been wdely dscussed n the prevous lterature. The potental of o servce s that the o technology makes t possble for small companes to begn voce servces wthout establshng networks or dependng upon other companes exstng nfrastructures [4]. Some studes focused on the regulatory polcy related to the servce based on ts unque characterstcs of a platform ndependent [1]. From the lterature, snce the o servce reles less on nfrastructures for telephone servces, t benefts the provder wth lower costs and technologcal flexblty. We ndcate that o technology can brng the advantage of the reducton of entry costs and lowers the barrers to entry for telephony busness [8]. n ths study, we wll fnd the optmal prcng strategy for o servce provder based on the compettve advantage mentoned above. 3. THE MOELS 3.1 o hone-out Servce We consder a telephony market n whch two types of dstance call servce-, conventonal STN and emergng nternet enabled o are avalable. Generally, the two types of servces are provded by ndependent and competng frms. As the man revenue of o busness comes from phone-out servce. n the research, we assume there are η consumers wth technology capablty to utlze o settng and try to contact a people who are only reachable through a conventonal phone number. n ths case, dependng on ther valuaton of the telecom servce qualty, consumers have three choces: one s to use the legacy STN system, whch provdes hgh qualty of communcatons wth hgh prce; another alternatve s to subscrbe for o phone-out servce, whch s much cheaper but also comes wth some problems, such as the delay and nconsstency of voce and the nformaton securty ssue; the thrd choce s not subscrbng to any of the frms f the cost exceeds the perceved beneft. The market nteractons between o phone-out servce wth the STN dstance call servce s depcted n Fgure 1. Fgure 1. o phone-out servce We use an ndvdual senstveness parameter to measure the degree of how a customer regards the long dstance call servce. s unformly dstrbuted n [,1]. A hgh value of ndcates that a typcal user has hgher attenton on the servce qualty of a dstance call. Whle the beneft of o servce s ts lower cost, ts servce qualty s also lower due to the voce qualty uncertanty and potental securty rsk. The qualty of conventonal (STN) telecommuncaton servce s denoted as Q Q and the qualty of o s denoted as Q Q. arameter represents the qualty downgrade. n addton, to be able use o servces, a user need to setup an nternet connecton access envronment, such as wred or wreless communcaton networks. Here we use parameter to represent an average cost for a user to acheve an avalable nternet access. Then we can deduct the customer utlty functon whch s a concept of

3 measurng the extent to whch a good or servce satsfes a want or need of a customer. Ths functon contans three parts: the beneft form makng a dstant call, the dsadvantage f exsts, and the correspondng cost and prce. Here we use and to represent the prces t takes for STN and o phone-out servces respectvely. The functon can be formulated as below: Q U Q, f ST N call w as chosen, f o call w as chosen, f non of above w as chosen. (1) As customers choose the best frm or none of them to maxmze ther utltes, there exst a customer wth who values ndfferently between STN and o servces and a customer wth value ndfferently between makng a o call and makng no call. The customers wth wll subscrbe for the STN call servce, whle those wth wll subscrbe for the o call servce. For those wth a lower than wll persh the thought of makng a dstant call. Then we can derve those ndfferent ponts from (1) and yeld and Q. Therefore, the demand of the STN call servce and the o call servce s represented as 1 respectvely. and The cost structures of STN and o are dfferentated as follows. f a customer makes a dstance call through STN servce, the phone calls he/she made wll cost the frm both dstant and local operatonal costs. Yet f a customer makes a dstance call through the o phone-out servce, the cost of transmttng the calls form dstant to local area can be gnorable because the call delvered n the publc network, however, the o frm needs to pay a local call fee for accessng the local STN system. Assume o servce provder needs to pay STN servce provder an extra fee f for accessng the STN local call system. The revenue of STN servce provder ncludes both the autotrophc and heterotrophc portons. The former comes from provdng the STN dstance servce, whereas the latter s collected from the local access fee from o users. However, the payoff functon of o servce provder contans only autotrophc revenue porton. enote as the operatonal cost endured n the dstance part and the operatonal cost endured L n the local part. The profts of STN and o can be wrtten as: ( ) ( f ) K ( f ) K L L, () where K s the nfrastructure cost for nstall entre STN servce and K represent R& cost for developng o servce wth qualty level ( K / ). Snce both frms wll choose the best prcng strateges to maxmze ther proft, by solvng and, or * 1 ( f ) and * 1 [ f (1 )], we can derve the optmal prce for Q each type of dstance call servce as: * * roposton 1. Q (3 f ) 3Q Q (3 f ) ( f ) 3Q (1) The prces of both two competng dstance call servces () ncreases wth the local call servce fee f, the operatonal cost of long dstance servce, () decreases wth the qualty of o ( 1/ ), () are not assocated wth the operatonal cost of local call. () Hgher nternet access cost wll ncrease the prce of conventonal (STN) dstance call but decrease the prce of o call. We can further obtan the demands of STN and o phone-out servce as: * [ Q ( ) ( f )] ( 3 Q ). (4) * Q [ Q ( ) ( f )] (3Q Q ) As we can observe, whle the local access fee and the operatonal cost of long dstance servce have the postve effect on the prces of both types of call servces, they effect on the correspondng demands dverge roposton. Hgher operatonal cost of long dstance servce dscourage (encourage) the usage of the STN (o) call servce. However, hgher local access free dscourages adopton of both types of call servces. Endogenous STN local access fee and o qualty. Normally, the local call access fee f s determned before the entry of o call servce. Therefore, t s generally treated as exogenous parameter. f the local access fee becomes endogenzed, the STN telecom provder can further determne the optmal local access fee by solvng / f and yeld f 3 * Q Q Q L L [9 ( ) (1 8 9 ) ( )] Q (9 Q ). (5) L The o provder can also determne ts qualty level (o technology nvestment) by solvng / or / K / R, Q [ Q ( ) ( f )] where R. (6) ( Q )( 3 Q ) (3)

4 3. o hone-n Servce The o phone-n servce s actually a personal phone number regstraton servce. eople can regster an nternet number from o servce provder n a specfc area, yet unlke conventonal phone number, t can transmt ncomng calls va nternet to the users o servce based devces. Whle a customer travelng aboard, hs/her frends n the orgnal place can stll contact hm/her wth a local callng rate. Ths servce s especally sutable for people who often travel to other places for busness affars or students studyng abroad because that they mght be frequently contacted by ther frends or colleagues n stu. As wth the o phone-out servce market, customers who want to keep n touch wth the remote frends or busness partners can decde whether to gve out conventonal phone number, an nternet number, or smply no number. That s, customers face the problem to choose from the STN operator (a conventonal phone number), o servce provder (an nternet phone number) or none of both, whle the STN operator offers a hgh-qualty and hghly-charged servce and o phone-n servces offer relatvely lower qualty and lower prces. f a customer chooses the legacy STN servces, hs/her remote frends wll need to pay for long-dstance calls to contact wth hm/her. However, f he/she chooses the o phone-n servces, he/she only needs to pay for a regstraton fee for the nternet number and helps hs/her frends n stu savng money by turnng the long-dstant call nto a local one whch delvered to customers va the nternet. The market nteractons between o phone-n servce wth STN call servce s depcted n Fgure. Agan, we fnd the two ndfferent ponts by solvng the utlty functon when a customer who perceves ndfferently between r STN and o phone-n servces and between o phone-n servces wth no servce r respectvely. Therefore, the demand of the STN Q call servce and the o call servce s represented as 1 and respectvely. Just lke n the phone-out servce, the payoff functon of the STN operator s conssted of autotrophc and heterotrophc portons. Consderng the opportunty of remote calls α, we calculate the autotrophc porton n two parts and yeld. (8) ( ) (1 )( r ) ( r ) K L L L For the o servce provder, the payoff functon equals the revenue from regstraton fee and subtracts the techncal nvestment and can be wrtten as: K. (9) By solvng and * or r and * r ( 1) Q ( r ) ( Q ), Q we obtan the optmal prcng strateges for both frms as: Fgure. o phone-n servce We assume the probablty that users travel on offcal busness s α, thus for STN servce users, there s α probablty that ther frends or colleagues need to pay a dstant rate,, to reach them, and (1-α) probablty for payng a local rate, r. For the customers who subscrbe to o phone-n servces, no matter stayng n the orgnal area or gong aboard, after subscrbng an nternet number wth a regstraton fee φ, ther frends or colleagues n the same orgnal place can contact them wth a local rate r. However, the beneft for havng the o phone-n servce suffers due to some nherent qualty concerns smlar to the o phone-out servce. Besdes, they need to stay n an nternet-based envronment n order to keep n touch wth frends. enote the cost of envronment settng as Φ. Then we have the ndvdual utlty functon.. (7) Q 1 r, f ST N w as chosen U ( ), f o phone-n was chosen Q r, f none of above w as chosen * Q (3r ) r (1 ) (3 Q ). (9) * Q ( ) ( r ) 3Q roposton 3. The prce of o phone-n servce ncreases wth customer busness travel rate, but decreases wth the local call rate r. However, the prce of STN dstance call rate decreases wth customer busness travel rate, but ncreases (decreases) wth the local call rate r when customer busness travel rate s large (small). The demands of STN and o phone-n servce can be further derved as: * [ Q ( ) ( r )] (3 Q ). (1) * Q [ Q ( ) ( r )] (3Q Q ) Examnng the demands of the two types of telephony servce, we have the followng observaton. roposton 4. As the busness travel rate of customer ncreases, more people wll adopt the o phone-n servce even ts subscrpton fee wll also ncrease. However, hgher local rate wll dscourage hs adopton even ts prce declnes.

5 4. CONCLUSON n ths paper, utlzng game theoretc models, we analyze the prcng strateges for two competng long dstance provders whch offer the conventonal STN dstance call and emergng o phone-out and phone-n servces. Even though o servces has prce advantages, the weak of lmted qualty performance, nternet connecton avalablty and the access fee charged by STN servce provders stll mpose some restrctons to t. Consderng the mportant telecom market parameters, we provde a clear way to look through the mpact of o servces (phone-out and phone-n) on the exstng telephony ndustry and help the frms to make prcng strategy decsons n a compettve envronment. Our model shows that both STN and o servce rate ncreases wth the operatonal cost of long dstance call ncurred n STN but decreases wth the qualty of o. Whle the busness travel rate of customers ncreases, the STN dstance call rate wll decreases but o phone-n subscrpton fee wll ncreases. For future works, t would be more comprehensve to extend the model and nvolve more factors n order to conform to the complex and dversfed telephony market. As more and more people have capablty of nternet connecton and ncreasngly emergng smart phone wth o servces, the mpact of free dstance call over nternet could be further analyzed. Besdes, n the research, we only consder two sgnfcantly dfferentated players n the telephony market. n realty, there may nclude many competng STN and o servce provders and many varous types of value-added servces are offered. The mpact of the number of the telephony provders can be examned. 5. ACKNOWLEGMENTS The authors are grateful for the fnancal support of Natonal Scence Councl (NSC: H-9-35-MY). 6. REFERENCES [1] Chen, S., Wang, X., and Jajoda, S. 6.On the anonymty and traceablty of peer-to-peer vop calls. Network, EEE, (5): p [] Cont, J.. 4. Talk about a change [o replacng STN]. EE Revew, 5(1): p. 7. [3] Edwards, M. 1. telephony ready to explode nto corporate world.(ndustry Trend or Event). Communcatons News, 38: p [4] Graham, T. and Ure, J. 5. telephony and voce over broadband. nfo, 7(4): p. 8-. [5] Hallock, J. 4. A Bref Hstory of o. Evoluton. [6] Hrsekorn, J. 5. Tmng s everythng for o success. EE Tmes Asa. Avalable at [ 79adb3.htm] Access n 11/3/11. [7] Karapantazs, S. and avldou, F.N. 9.o: A comprehensve survey on a promsng technology. Computer Networks, 53(1): p [8] Mesel, J.B. and Needles, M. 5.oce over nternet protocol (o) development and publc polcy mplcatons. nfo, 7(3): p [9] Nystrom, A., Akadem, A., and Hackln, F. 5.Operator value-creaton through technologcal convergence: the case of o. [1] Shn,.H. 6.o: A debate over nformaton servce or telephone applcaton n US: A new perspectve n convergence era. Telematcs and nformatcs, 3(): p [11] Shy, O. 1.The economcs of network ndustres. [1] Waverman, L. and Srel, E European telecommuncatons markets on the verge of full lberalzaton. The Journal of Economc erspectves, 11(4): p