VoIP: more of the same, or a new regulatory paradigm? Will VoIP change the regulatory landscape?

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1 VoIP: more of the same, or a new regulatory paradigm? Will VoIP change the regulatory landscape?

2 About ECTA European Competitive Telecommunication Association represents some 150 operators across Europe Aims to drive forward liberalisation and competition across the telecoms sector Our operator members are diverse pan- European & national, consumer & business - most have made substantial investments in infrastructure

3 Contents Regulation of PSTN voice vs VoIP in practice When is VoIP a substitute? Promoting competition in VoIP service offerings Will the termination bottleneck remain? Potential pricing models for VoIP interconnection VoIP and NGNs Managing the tradition to all IP Relevance to Net Neutrality

4 Regulation of PSTN voice Competition in PSTN voice markets currently supported by action on dominant operators: Retail level: price controls still common prohibitions on anti-competitive bundling Wholesale level: Any-to-any connectivity Call origination carrier selection, carrier preselection wholesale line rental Call termination (single network bottleneck)

5 Regulation of VoIP? VoIP is already offered in the EU including by incumbents But framework for economic regulation still unclear Some NRAs consider it a substitute for PSTN voice (in same economic market), others not Often portrayed as a disruptive technology or an emerging service Default position is caution and light touch approach wait and see But is it really an emerging service? What would happen if VoIP were left unregulated?

6 When is VoIP a PSTN substitute? Substitutability depends on customer perceptions and supply routes However ability to provide quality and reliability guarantees provides rough distinction Voice over Broadband (VoB): Offered over private IP access (not over public Internet) with similar quality levels as PSTN. Providers include Neuf Cegetel, Fastweb, business service providers. Usually substitute for PSTN service, sometimes with additional features Voice over Internet: Offered as an application over the public Internet with or without accompanying hardware. Quality variable. Providers include Skype, Vonage. Usually not substitutable to the extent of providing overall pricing constraint Regulatory focus on VoB Not emerging, as service is familiar

7 Promoting competition in VoB origination Incumbents retain 90% of all direct access lines used for originating and terminating telephony In PSTN world, competitive drivers are cable, Wholesale Line Rental (WLR) and call origination In VoB world, competition in broadband origination determines the level of consumer choice. Drivers are cable, full LLU and naked DSL bitstream VoB provision today typically limited to businesses and early adopter customers through triple-play NGN transition will widen customer-base Elevates significance of broadband competition + new questions raised: is LLU and/or existing bitstream offers cost-effective for supplying voice alone? If not, why not? What is needed to address?

8 Will termination bottleneck remain? In PSTN, service and network are clearly associated and termination considered a single network bottleneck all operators required to charge at cost PSTN conclusion based on assumption that no real demand substitutes for termination to a high-quality fixed voice service and alternative supply not possible With VoB, key question is whether access to the end-customer is controlled, and by whom? Implications for nomadic services?

9 Will termination bottleneck remain? Assuming that access to the customer is controlled for VoB and practical substitutes are absent, club effect likely to drive behaviour, absent regulation Operators with control over largest customer base relative to competitors have most valuable asset and greatest bargaining power. Likely behaviour is: Refusal to supply (actual or constructive) Excessive pricing of termination by provider with control over termination to largest customer base Margin-squeeze whereby retail tariffs are set close to or even below termination charge Operators of similar size may conversely agree to interconnect or peer. Instant Messaging possible comparison

10 VoB termination: appropriate remedies? With the current imbalances in customer-base, unlikely that the market will function efficiently for consumers absent regulation eg telephone services early 20C Significant incentive for incumbents to use transition to regain market share lost in PSTN environment through refusal to supply VoB termination and margin squeeze Controls to prevent discrimination and excessive pricing by dominant players essential, but how will this work in VoB world? Need also to ensure that other non-price mechanisms eg standards, interconnection points are not used anti-competitively Transition to VoB from PSTN should not undermine competition

11 VoB termination: pricing Capacity relevant to costing of all telecoms services, but some intrinsic differences between PSTN and IP For PSTN networks focus on call duration Users historically billed on time/distance basis Capacity used for full call duration For IP networks, focus on quality and capacity More efficient less capacity-intensive transmission of data Maintaining voice quality requires quality management (eg maximum delay between packets)

12 VoB termination: pricing option 1 Use the existing schema (time/distance-based) PROs Conceptually easy Consistent with PSTN approach. Smoother transition Discrimination measurable CONs Inconsistent with trend to flat-rate retail pricing Not coherent with IP network economics Each service variety would require own price per minute depending on bandwidth requirements (eg video streams)

13 VoB termination: pricing option 2 Capacity based eg FRIACO charging model? PROs Supports retail flat-rate charging Some experience based on FRIACO model Discrimination should be measurable given right parameters CONs Difficult to define price (no proxy as in FRIACO case available) Could disadvantage operators with variable traffic profiles Previous experience: Spain?

14 VoB termination: pricing option 3 Bill and keep PROs Supports innovative retail charging Would remove need for explicit regulation of termination - reduction of regulatory burden Could facilitate efficiency/technology based cost-reductions being passed onto consumers CONs Difficult to measure discrimination Need to ensure solution allows cost recovery Other experience: Hong Kong?

15 VoB termination: pricing option 4 End-to-end QoS-based VoB termination pricing PROs Would entice terminating operators to deliver a high-quality Voice over Broadband termination service CONs Requires interconnect engineering & experimental work to incorporate QoS measurement

16 VoB and NGNs VoB and NGNs in principle unrelated Possible to have IP interconnection between operators supporting SIP for VoB without an NGN Two operators with NGN may decide to interconnect using traditional protocols But many incumbents deploying NGNs by end decade. Could offer framework for VoB interconnection and helps to: Avoid non-standard agreements Guarantee better service uniformity Define regulatory obligations for dominant providers Risk of fragmented approach without central guidance

17 Managing the transition to all-voip The incumbent implementation timeline must be known in advance by competitors (not less than months) Incumbents networks toponomy must be transparent Permanent working group should be established with participation from the Regulator to assist during transition phase. Discussion and decisions needed regarding: Fair timescale for switching, so as not to disadvantage competitors, with both interconnection alternatives available during transition Compensation for altnet sunk costs (eg build-out to incumbent sites) where appropriate

18 Is this relevant to net neutrality? Likely that VoB (transport layer) interconnects will be offered at different QoS to reflect the needs of different service types Does not imply that application-based voice providers (Voice over Internet) will be required pay for guaranteed QoS different issue Explicit regulation of net neutrality for voice over Internet unnecessary if broadband markets sufficiently competitive to respond to consumer demand Market players would have incentive to deliver unrestricted access to capture market share. Walled garden approach for Internet access ultimately failed!

19 Conclusions VoIP not a magic bullet for voice competition. Risk as great as opportunity. Regulation will be key deciding factor Effective broadband competition (through full LLU and naked DSL) needed to drive VoIP service provision Termination bottlenecks based on control over large customer-base likely to persist Transition to all-ip could also be used by powerful players to design-out competitors Regulators cannot afford to be complacent!

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