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Interconnection in an

IP
-
Based NGN Environment

J. Scott Marcus, Senior Consultant

ITU Workshop: What rules for IP
-
enabled NGNs?

Geneva, March 23
-
24, 2006

1

ITU Workshop: What rules for IP
-
enabled NGNs?

Interconnection in an

IP
-
Based NGN Environment


Introduction


The economics of interconnection

-
Fixed, mobile, Internet

-
Retail and wholesale arrangements

-
Quality of Service

-
Market power and interconnection


Interconnection and universal service


Billing and accounting challenges


A hypothetical scenario


Summary

2

ITU Workshop: What rules for IP
-
enabled NGNs?

Introduction


IP
-
based NGNs represent the “marriage” of the Public Switched
Telephone Network (PSTN) with the world of the Internet


Very different interconnection arrangements prevail in these two
worlds.

-
Different technology.

-
Different regulatory history.

-
Different industry structure.


What should happen “when worlds collide?”

3

ITU Workshop: What rules for IP
-
enabled NGNs?

Introduction


Why do we regulate?

-
Market failures: Market power

-
Market failures: Desirable capabilities that would not deploy
without help (some of which constitute “public goods”)

-
Manage limited resources (spectrum, numbers)

4

ITU Workshop: What rules for IP
-
enabled NGNs?

Introduction


What role for regulation in the world of the IP
-
based NGN?

-
Where service providers possess Significant Market Power
(SMP), they will tend to have both the ability and the incentive to
exploit that market power, to the detriment of consumers. In the
absence of regulation, interconnection often serves as a locus
for the exploitation of SMP.

-
“Coase Theorem” (1959)


private parties can often negotiate
arrangements more efficiently than government regulators,
provided that necessary preconditions have been met.

-
In markets where competition is fully effective (no SMP exists),
competitive forces will generally make regulation unnecessary.


“Things should be as simple as they can be, but no simpler.”
-

EInstein

5

ITU Workshop: What rules for IP
-
enabled NGNs?

Introduction


NGN access versus NGN core (source: ECTA)

-
NGN access: “the deployment of fibre into the local loop, either
to the incumbent’s street cabinet … or the deployment of fibre
all the way to customer premises (typically apartment blocks
rather than individual houses).

-
NGN access: “the replacement of legacy transmission and
switching equipment by IP technology in the core, or
backbone, network. This involves changing telephony
switches and installing routers and Voice over IP equipment.”


Significantly different regulatory implications.


My primary focus in this talk is on the NGN core, but broadband
deployment generally and NGN access in particular interact with
these issues.

6

ITU Workshop: What rules for IP
-
enabled NGNs?

Introduction


My history

-
Senior Consultant, WIK
-
Consult (Germany)

-
Senior Advisor for Internet Technology, FCC (USA)

-
Chief Technology Officer, GTE Internetworking (USA)


Engineer by training


My approach to these interconnection issues is primarily through
economics rather than engineering.

7

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


retail


Calling party pays (CPP): the party that initiates the call pays for the
call, usually based on the duration of the call; generally, the party
that receives (terminates) the call pays nothing.


Receiving party pays (RPP) or Mobile Party Pays (MPP): the
originating and terminating parties each pay a share for the call. In
North America, where this system historically has been used,
mobile receiving parties paid but fixed receiving parties did not.


Flat rate: the consumer pays a fixed (monthly) fee for unlimited
domestic calls.


The “buckets of minutes” plan: the consumer pays a fixed (monthly)
fee for some number of minutes of domestic calls, but pays a per
-
minute fee for minutes in excess of those in the “bucket”.

8

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


retail


CPP arrangements reflected the historical perception that the caller
is the primary beneficiary of the call, and also the main
cost
-
causer
.


This concept has been challenged in recent years

-
Clearly, the receiver also benefits.

-
If the receiver saw no merit in the call, he or she could simply
hang up; thus, after the first minute, caller and called party can
be viewed as (equal) partners in the call. (Cf. Jeon et. al.)

-
In the world of the IP
-
based NGN, origination and termination
are likely to become less relevant over time. (Cf. de Graba)


9

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


retail


Consumers tend to grealy prefer flat rate (or “buckets”) plans over
usage
-
based plans (Cf. Odlyzko)

-
AT&T Wireless’s offer of Digital One Rate (1998)

-
America Online’s flat rate Internet access (1995)


In the United States, flat rate / bucket plans are increasingly
prevalent at all levels

-
Mobile services

-
Fixed services, including long distance

-
Internet access

10

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


wholesale


Calling Party’s Network Pays (CPNP): the calling party’s network (the
originating operator) makes a wholesale payment to the receiving party’s
network (the terminating operator).






“Bill and Keep”: a U.S. term of art denoting the absence of any regulatory
obligation for payments between the networks.

Originating

Operator

Terminating

Operator

Payment

11

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


wholesale


In an unregulated CPNP system, carriers will tend to establish very
high termination charge levels. Normal economic forces provide an
inadequate “brake” on this practice, because the terminating
operator is imposing the charges indirectly on
another carrier’s
customer
. The terminating operator does not bear the full burden of
suppressing demand through a price that is arguably too high.


These high prices impact consumer welfare in a number of ways.
This problem is general referred to as the
termination monopoly
.


Paradoxically, small operators will be motivated to set termination
charges to even higher levels than will larger operators. (Cf. Laffont
and Tirole (2001); Haucap and Dewenter)


Regulatory asymmetries


for example, between regulated fixed
operators and unregulated mobile operators


can exacerbate this
problem.

12

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


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 prevent flat
rate or “buckets” plans from emerging.


This is true even where payments between the operators are in
rough balance, such that little money changes hands.

-
Each operator will tend to view the termination charge as a
component of its marginal cost. (Cf. Laffont and Tirole)

-
If an operator chooses to ignore this wholesale cost in the
hope that the payments will balance anyway, that operator
risks attracting customers who place disproportionately many
calls to customers of other providers (“adverse selection”).

13

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


Mobile operators that implement CPP/CPNP tend to have the
following characteristics at the retail level:

-
Low or zero initial cost

-
Low or zero monthly cost

-
High usage (per minute) cost


Mobile operators (U.S.) that implement “buckets” plans and Bill and
Keep tend to have the following characteristics at the retail level:

-
Higher initial cost

-
Higher monthly cost

-
Low or zero effective usage (per minute) cost


These differences tend to lead to faster adoption of the mobile
service in CPP/CPNP systems, but much lower rates of utilization.

14

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection

Source of data:

U.S. FCC,
10
th

CMRS Report
, July 2005, Table 10,

based on Glen Campbell et al.,
Global Wireless Matrix 4Q04
, Merrill Lynch, Apr. 13, 2005.


15

ITU Workshop: What rules for IP
-
enabled NGNs?

The economics of interconnection


In the U.S., the FCC has been attempting for years to migrate their
interconnection arrangements to a Bill and Keep basis for all
services. (Cf. de Graba (2000), Atkinson and Barnekov (2000)).


The FCC’s sense has been that:

-
Bill and Keep simplifies regulatory rate
-
setting or avoids it
altogether.

-
Bill and Keep already works well in many settings in the U.S.

-
Bill and Keep will be easier to apply to the IP
-
based networks
of the future.


To date, the U.S. has been unable to forge a political consensus to
move forward on this issue.

16

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering


economic models


An extensive economics literature exists about interconnection in
the traditional PSTN world.


An emerging literature deals with interconnection in the world of the
Internet.


We are in the early stages of understanding the relationships
between the two.





17

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering and Transit


“Peering

is

an

agreement

between

ISPs

to

carry

traffic

for

each

other

and

for

their

respective

customers
.

Peering

does

not

include

the

obligation

to

carry

traffic

to

third

parties
.

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)
.




Transit

is

an

agreement

where

an

ISP

agrees

to

carry

traffic

on

behalf

of

another

ISP

or

end

user
.

In

most

cases

transit

will

include

an

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
.

In

a

transit

agreement,

the

ISP

often

also

provides

ancillary

services,

such

as

Service

Level

Agreements,

installation

support,

local

telecom

provisioning,

and

Network

Operations

Center

(NOC)

support
.


Peering

thus

offers

a

provider

access

only

to

a

single

provider’s

customers
.

Transit,

by

contrast,

usually

provides

access

at

a

predictable

price

to

the

entire

Internet
.


Historically,

peering

has

often

been

done

on

a

bill
-
and
-
keep

basis,

without

cash

payments
.

Peering

where

there

is

no

explicit

exchange

of

money

between

parties,

and

where

each

party

supports

part

of

the

cost

of

the

interconnect,



is

typically

used

where

both

parties

perceive

a

roughly

equal

exchange

of

value
.

Peering

therefore

is

fundamentally

a

barter

relationship
.







-

NRIC

V

(advisory

council

to

FCC)

18

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering and Transit

Regional

or Local ISP

Many remote locations

connect to a regional or local

ISP with individual,

low bandwidth connections

Concentration to a larger ISP or

backbone provider with global

connectivity by means of a

concentrated, high bandwidth

connection

Larger ISP or

Backbone

Transit

Connection

19

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering and Transit

Regional

or Local ISP

Larger ISP or

Backbone

Transit

Connection

Regional

or Local ISP

Larger ISP or

Backbone

Transit

Connection

This peering connection

will tend to exist if

the cost of the connection

to each ISP is less than

the money each saves due

to reduced transit traffic.

20

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering and Transit


In general, money flows upstream, while obligations flow downstream.


Transit agreements are vastly simpler than peering agreements.


In general, peering is a bilateral technical and commercial arrangement.

Cf. Lixin Gao (2000)

21

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering


economic models


Define:

c
o

as cost of origination

c
t

as cost of termination

a as an access charge levied on the sender


Due to shortest exit, c
t

> c
o


Then

cost for the originating network is c
o

+ a

cost for the terminating network is c
t



a


The model extends in a straightforward way to accommodate
multiple levels of quality of service (QoS).

Network

i

Network

j

Source: Laffont et. al., “
Internet Interconnection and the Off
-
Net
-
Cost Pricing Principle”

22

ITU Workshop: What rules for IP
-
enabled NGNs?

Peering


economic models

“A key difference with this telecommunications literature is that in the latter
there is a missing price: receivers do not pay for receiving calls; … The
missing price has … important implications:

… The operators’ optimal usage price reflects their
perceived
marginal cost.
But when operators do not charge their customers … for the traffic they
receive, operator
i
’s perceived marginal cost of outgoing … traffic is … the
unit cost of traffic is the on
-
net cost
c
, augmented by the expected off
-
net
“markup”. …

Comparing the two perceived marginal costs of outgoing traffic with and
without receiver charge, for given access charge and market shares, the
price for sending traffic is higher (lower) than in the presence of reception
charges if and only if there is a termination discount (markup).

… In sum, the missing payment affects the backbones’ perceived costs, and it
reallocates costs between origination and reception.”

Source: Laffont et. al., “
Internet Interconnection and the Off
-
Net
-
Cost Pricing Principle”

23

ITU Workshop: What rules for IP
-
enabled NGNs?

Market power and interconnection


Regulators continue to find it necessary to intervene where an
operator has Significant Market Power (SMP).


The migration to NGN will not necessarily eliminate SMP. Notably,
market power associated with last mile bottlenecks will continue to
be a significant regulatory concern for the foreseeable future.


A new market power challenge has appeared, primarily in the U.S.:
the
network neutrality

issue.

24

ITU Workshop: What rules for IP
-
enabled NGNs?

Market power and interconnection


Network neutrality

means different things to different people:

-
The possibility that an integrated ISP might offer better performance to
some Internet sites than to others;

-
The possibility that an integrated ISP might assess a surcharge where
a customer wants better
-
than
-
standard performance to certain Internet
sites;

-
The fear that the integrated ISP might permit access only to affiliated
sites, and block access to unaffiliated sites;

-
The fear that the integrated ISP might assess surcharges for the use
of certain applications, or of certain devices;

-
The fear that the integrated ISP might disallow outright the use of
certain applications, or of certain devices, especially where those
applications or devices compete with services that the integrated ISP
offers and for which it charges; and

-
The fear that the integrated ISP might erect “tollgates” in order to
collect unwarranted charges from unaffiliated content providers who
need to reach the integrated ISP’s customers.

25

ITU Workshop: What rules for IP
-
enabled NGNs?

Market power and interconnection

“The chief executive of AT&T, Edward Whitacre, told Business Week
last year that his company (then called SBC Communications)
wanted some way to charge major Internet concerns like Google
and Vonage for the bandwidth they use. "What they would like to do
is use my pipes free, but I ain't going to let them do that because
we have spent this capital and we have to have a return on it," he
said.”
NY Times
, March 8, 2006


26

ITU Workshop: What rules for IP
-
enabled NGNs?

Market power and interconnection


Many of the concerns that have been raised in regard to network
neutrality relate to behaviors that, in the absence of market power,
would tend to
enhance

consumer welfare.

-
Some would appear to represent legitimate price discrimination.

-
Others enforce the economic property of
excludability

(the ability
to prevent someone from using a service that he did not pay for)
in support of price discrimination.


The form of market power that could potentially be exploited in
anticompetitive ways in connection with network neutrality relates to
network externalities (where the value of a service depends on the
number of users of the service). (Cf. Katz and Shapiro (1985)).


The degree to which this issue has heated up recently in the U.S.
probably reflects increasing concentration in the relevant markets.

27

ITU Workshop: What rules for IP
-
enabled NGNs?

Market power and interconnection


Trying to address these network neutrality challenges through
regulation
ex ante

(in advance) is likely to prove extremely difficult.


A first line of defense for regulatory authorities should instead be to
maintain the competitiveness of the underlying markets, especially
as regards broadband Internet access and as regards high capacity
Internet transit. Service
-
based competition (rather than facilities
-
based competition) would be sufficient for this purpose.


In countries where competition law provides an
ex post

(after the
fact) complement to regulation, it might be most appropriate to deal
with occasional or sporadic problems related to network neutrality
through the exercise of competition law.

28

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


A series of initiatives to implement inter
-
provider QoS on an inter
-
provider basis have generated scant results.

-
Early Nineties


RSVP

-
Late Nineties
-

DiffServ

-
Backbone peering attempts


especially circa 2000
-

2001

29

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


Early Nineties


Integrated Services Architecture (RSVP)

-
Comprehensive system of prioritized delivery.

-
Required significant “soft state” in the routers.


Perceived as too difficult to deploy.


Not entirely true


BBN (my former employer) had working RSVP
-
capable production networks from the mid
-
Nineties.

-
Technical success.

-
Market failure.

-
No customer willingness to pay a significant premium for on
-
net differentiated service.

30

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


Traffic is classified on entry to a network

-
Metered

-
Marked

-
Policed

-
Shaped


Services implemented based on defined Per
-
Hop Behaviors
(PHBs)

-
Queue processing (prioritization)

-
Queue management (drops)

31

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


At a technical level, QoS is not fundamentally hard.

-
DiffServ is technically trivial.

-
MPLS in a single network is technically trivial.

-
Cross
-
provider MPLS is only marginally harder.

-
Even RSVP is not that hard. My company, BBN, had working
production RSVP
-
compliant networks in 1995!


In terms of the basic economics, QoS is not fundamentally hard.


Nonetheless, there is no significant cross
-
provider roll
-
out to date.


WHY NOT?

32

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)

M/G/1 queueing analysis of link performance


(with clocking delay of 50
μ
secs (284 byte packets) and a 155 Mbps link)

33

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


For real time services such as voice telephony traffic, it is important
that mean delay and variability of delay be held to low values.

-
Delay in excess of about 150 milliseconds causes „collisions“.

-
Buffering can address variability as long as the mean and
variance are not too great.

-
The buffer then represents a fixed increment to the
propagation delay.


For circuit speeds of T
-
3 and up, queuing delays in a properly
designed network will generally be less than 1 millisecond per hop
under normal operating conditions.


Propagation delay (speed of light) will tend to dominate any variable
queuing delays under normal operating conditions.

34

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


IMPLICATION: Most of the time, and under normal conditions,
variable delay in the core of the network(s) is unlikely to be
perceptible to the VoIP user
.


FURTHER IMPLICATION:
Consumers will not willingly pay a large
premium for a performance difference that they cannot perceive.


Packet delay is more likely to be an issue:

-
For slower circuits at the edge of the network

-
For shared circuits (e.g. cable modem services)

-
When one or more circuits are saturated

-
When one or more components have failed

-
When a
force majeure

incident has occurred

35

ITU Workshop: What rules for IP
-
enabled NGNs?

Differentiated Quality of Service (QoS)


Technical challenges, or economic challenges?


Revenues

-
Limited customer willingness to pay a substantial premium.

-
Limited benefits until widely deployed (network effects).


Costs

-
Agreements needed with many peering partners.

-
Economic transaction costs to negotiate each agreement.

-
Measurement, management and dispute resolution challenges.


The business case is difficult to “prove in”.


Implies difficulties in getting past the initial adoption hump.

36

ITU Workshop: What rules for IP
-
enabled NGNs?

Interconnection and universal service


Most countries seek to ensure that all can afford basic
communication services. This often implies some degree of subsidy
support to areas that are remote or that have low teledensity.


There is some economic basis for this, grounded again in the
theory of
network externalities
. The communications network is
worth more to everyone if nearly everyone is reachable through it.


At the same time, economists worry about the economic distortions
implicit in any system of universal service. Universal service implies
that service will be deployed to areas where rational economic
judgment alone would not lead to deployment.


In many countries, interconnection charges are used to provide
implicit or explicit funding support for universal service programs.

37

ITU Workshop: What rules for IP
-
enabled NGNs?

Interconnection and universal service


Some developing countries (and also some developed countries,
including the U.S.) permit rural operators to assess higher
termination fees than urban operators, presumably reflecting higher
unit costs (due to lower density of consumers, and possibly to more
challenging geography). This effectively subsidizes the rural
operator. Organizations such as the World Bank have tended to be
supportive of such practices.


International termination charges have also tended to generate
subsidies from developed countries to developing countries, even if
the rates are symmetric. Far more calls are placed from developed
countries to developing countries than vice versa. This asymmetry
generates an effective subsidy to the developing world, which could
be used to support universal service programs.

38

ITU Workshop: What rules for IP
-
enabled NGNs?

Interconnection and universal service


The migration to IP
-
based NGNs will tend to put pressure on any
interconnection arrangements that are widely at variance with cost.
It will, moreover, tend to expand opportunities to bypass inefficient
interconnection arrangements.


There are many, obvious problems associated with using
termination charges to subsidize universal service. Nonetheless,
the concern that must be raised is that it is not clear what
developing countries might do if these subsidies were to disappear
over the next few years.


39

ITU Workshop: What rules for IP
-
enabled NGNs?

Billing and accounting


Billing/accounting systems must enable a service or network
provider to reliably charge for the service.


Both parties must ultimately agree on the correctness of the charge.
To the extent that charges are not predetermined, this implies:

-
Clear documentation of the basis for the bill.

-
Data capture (accounting) to create and substantiate the bill.

-
Dispute resolution / reconciliation procedures.

40

ITU Workshop: What rules for IP
-
enabled NGNs?

Billing and accounting


requirements


In a DiffServ environment, billing and accounting systems would likely need
to:

-
Enable the sending provider to mark the DS codepoint required for a
particular IP datagram.

-
Enable the receiving provider to accept or decline the request,
remarking the IP datagram if necessary.

-
Authorize one provider to apply a surcharge to the other's traffic in
exchange for respecting its request for differentiated handling.


Enable both providers to verify that the service that was delivered
conformed to their service level specification commitments to one
another.


Facilitate trouble
-
shooting across multiple provider networks.


The providers could, instead, choose to waive payments (Bill and Keep).

41

ITU Workshop: What rules for IP
-
enabled NGNs?

Billing and accounting


challenges


In an NGN world, the network service provider (the ISP) will not
necessarily be the application service provider. A VoIP service or
an IPTV provider will not necessarily be a network provider.


The network provider will have only limited visibility into third party
applications running over its network (and the user could further
reduce visibility by encrypting the data).


The unaffiliated application provider may have extensive visibility
into the application that it provides, but only limited visibility into the
use of network resources.


Usage
-
based billing will be possible only to the extent that the
usage can be rigorously and unambiguously measured.

42

ITU Workshop: What rules for IP
-
enabled NGNs?

Billing and accounting


challenges


How will providers and customers ensure that service
commitments are met? Whose statistics will govern?


Competitive providers are reluctant to share statistics about their
respective networks with one another, and peering agreements
typically restrict the ability of the providers to disclose information
about one another‘s networks to third parties. Can sufficient
information be disclosed to customers?


How will responsibility be allocated if a customer’s traffic fails to
achieve its committed service level specification? Traffic data can
legitimately be interpreted in more than one way. Will it be
possible to administer payments and penalties rigorously and
fairly?


How can providers prevent fraud? How can they distinguish
between fraud and legitimate use?

43

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


Consider a migration to an IP
-
based NGN in a European country.


Prior to migration, the country has:

-
an incumbent wired and wireless operator that had previously
been the country’s PTT (
BigCo
), and that still has substantial
market share and market power;

-
various wired and wireless competitive operators;

-
various independent providers of broadband Internet
services, some facilities
-
based, some providing service
competition based on procompetitive regulation (LLU,
bitstream, and shared access);

-
several independent providers of VoIP; and

-
a number of local providers of Internet content, both web and
video.

44

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


BigCo chooses to migrate

-
To achieve economies of scope through improved integration;

-
To achieve faster time
-
to
-
market for new services.


Competitors may feel pressure to migrate to maintain
competitiveness with BigCo.


BigCo would likely continue to be subject to procompetitive
regulatory obligations for competitive access to last mile facilities
(e.g. local loop unbundling [LLU], shared access and bitstream
access), until and unless three or more effective competitors were
to emerge for the last mile.


Interconnection obligations would likely remain in place as long as
traditional interconnection is offered.

45

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


Would it be necessary to impose interconnection obligations for IP
-
based interconnection? Assume
arguendo

that obligations are not
imposed.


Extrapolating from today’s experience, BigCo would likely be
motivated to implemented (settlement
-
free) IP
-
based peering
arrangements with large international operators, and probably with
a small number of its largest domestic competitors.


If BigCo were
not

motivated to peer with any domestic competitors,
regulatory action might possibly be appropriate. (Cf. Telstra in
Australia)


Smaller competitors could purchase transit from BigCo, or from one
or more of its competitors.

46

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario

BigCo

MiddleCo

SmallCo

ForeignCo

ISP

ISP

ISP

ISP

ISP

ISP

ISP

ISP

47

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


Assume that key underlying markets (including broadband access,
and leased lines) are subject either to (1) effective competition, or
(2) effective regulation.


Under these various assumptions, BigCo’s competitors should be
able to reach BigCo customers with unit costs that are not greatly
different from those of BigCo itself. This would appear to imply that
a competitive market should emerge, with prices not greatly in
excess of marginal cost.


ForeignCo would be able to reach BigCo customers with unit costs
that exceed those of BigCo primarily by the incremental costs
imposed by ForeignCo operating from outside the national territory.
If BigCo were to price excessively, doing so might encourage a
ForeignCo to attempt entry. This implicit threat also serves to
constrain BigCo’s behavior.

48

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


BigCo should be able to charge a premium for better
-
than
-
best
efforts service under these assumptions, but its ability to charge a
premium will be limited to the willingness of consumers to pay,
given that they have meaningful competitive alternatives.


BigCo should be able to sell application services (VoIP, IPTV and
more) to its broadband customers, and there is no obvious reason
why this should not be profitable; however, their price will tend to be
constrained by the ability of independent service providers (e.g.
Skype) to offer services directly to BigCo’s broadband customers.


Again, all of this seems to imply the likely emergence of an
appropriately competitive market, as long as underlying facilities
(broadband access, leased lines and so on) are subject either to
effective competition or to effective regulation.

49

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


This scenario did
not

assume a regulatory obligation to interconnect
at the IP level.


The apparent implication is that a Coasian solution


letting the
providers determine their own interconnection arrangements
through private arrangements


should continue to function well in
an NGN world (much as it does today), as long as regulators are
careful to prevent exploitation of market power in regard to
underlying facilities.

50

ITU Workshop: What rules for IP
-
enabled NGNs?

A Hypothetical Scenario


Implementation of differentiated QoS among peers is likely to
develop only slowly, for reasons previously explained.


Differentiated QoS among
transit

customers of BigCo, and those of
its larger competitors, might turn out to be a more tractable
problem. In countries where much of the traffic tends to remain
within the country (e.g. due to language affinity effects), it might be
possible to achieve critical mass in this way, and then to link islands
of QoS
-
capable connectivity.

51

ITU Workshop: What rules for IP
-
enabled NGNs?

Summary


Provided that underlying markets for Internet transit and for
consumer broadband Internet access are effectively competitive (or
effectively regulated), a “Coasian” NGN interconnection regime of
private unregulated arrangements is likely to be more efficient, and
more consistent with consumer welfare, than a regulated regime.


Conversely, where these markets are not effectively competitive,
mandates for interconnection at the IP level and/or network
neutrality may prove to be unavoidable, particularly once existing
PSTN interconnection is withdrawn. The migration to NGN
potentially creates new sources of market power, at the same time
that it creates new possibilities for competition.


Policymakers might consequently be well advised to focus their
attention first on ensuring competitive markets, and only
secondarily on NGN interconnection.

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-
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-
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