1、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,Interconnection in an IP-Based NGN Environment,Introduction The economics of interconnection Fixed, mobile, Internet Retail and wholesale arrangem
2、ents Quality of Service Market power and interconnection Interconnection and universal service Billing and accounting challenges A hypothetical scenario Summary,Introduction,IP-based NGNs represent the “marriage” of the Public Switched Telephone Network (PSTN) with the world of the Internet Very dif
3、ferent interconnection arrangements prevail in these two worlds. Different technology. Different regulatory history. Different industry structure. What should happen “when worlds collide?”,Introduction,Why do we regulate? Market failures: Market power Market failures: Desirable capabilities that wou
4、ld not deploy without help (some of which constitute “public goods”) Manage limited resources (spectrum, numbers),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 in
5、centive 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 n
6、ecessary 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,Introduction,NGN access versus NGN core (source: ECTA) NGN acce
7、ss: “the deployment of fibre into the local loop, either to the incumbents 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 technolo
8、gy 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 inte
9、ract with these issues.,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 e
10、ngineering.,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):
11、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 m
12、inutes” 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”.,The economics of interconnection retail,CPP arrangements reflected the historical perception that the caller is the primary be
13、neficiary 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) partner
14、s 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),The economics of interconnection retail,Consumers tend to grealy prefer flat rate (or “buckets”) plans over usage-based plans (Cf. Odlyzko) AT&
15、T Wirelesss offer of Digital One Rate (1998) America Onlines 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,The economics of interconnection wholesale,Cal
16、ling Partys Network Pays (CPNP): the calling partys network (the originating operator) makes a wholesale payment to the receiving partys 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.,The eco
17、nomics 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 carriers custo
18、mer. 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 motivate
19、d 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.,The economics of interconnection,Ter
20、mination 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 operator
21、s 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 ris
22、ks attracting customers who place disproportionately many calls to customers of other providers (“adverse selection”).,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 monthl
23、y 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
24、adoption of the mobile service in CPP/CPNP systems, but much lower rates of utilization.,The economics of interconnection,Source of data: U.S. FCC, 10th CMRS Report, July 2005, Table 10, based on Glen Campbell et al., Global Wireless Matrix 4Q04, Merrill Lynch, Apr. 13, 2005.,The economics of interc
25、onnection,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 FCCs sense has been that: Bill and Keep simplifies regulatory rate-setting or avoids it altoge
26、ther. 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.,Peering economic models,An extensive economics literature
27、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.,Peering and Transit,“Peering is an agreement between ISPs to carry traffic for ea
28、ch 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 anothers customers (and thus from thei
29、r 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 tr
30、ansit 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 trans
31、it 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 providers customers. Transit, by contrast, usually pro
32、vides 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 typicall
33、y used where both parties perceive a roughly equal exchange of value. Peering therefore is fundamentally a barter relationship.”- NRIC V (advisory council to FCC),Peering and Transit,Regional or Local ISP,Many remote locations connect to a regional or local ISP with individual, low bandwidth connect
34、ions,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,Peering and Transit,Regional or Local ISP,Larger ISP or Backbone,Transit Connection,Regional or Local ISP,Larger ISP or Bac
35、kbone,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.,Peering and Transit,In general, money flows upstream, while obligations flow downstream. Transit agreements are vastly simpl
36、er than peering agreements. In general, peering is a bilateral technical and commercial arrangement.,Cf. Lixin Gao (2000),Peering economic models,Define: co as cost of origination ct as cost of termination a as an access charge levied on the sender Due to shortest exit, ct co Then cost for the origi
37、nating network is co + a cost for the terminating network is ct aThe 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”,Peering economic mode
38、ls,“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 cha
39、rge 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, fo
40、r 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
41、and reception.”,Source: Laffont et. al., “Internet Interconnection and the Off-Net-Cost Pricing Principle”,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
42、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.,Market power and interconnection,Network neutrality means
43、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 fe
44、ar 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 ce
45、rtain 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 prov
46、iders who need to reach the integrated ISPs customers.,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 bandw
47、idth they use. “What they would like to do is use my pipes free, but I aint 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,Market power and interconnection,Many of the concerns that have been raised in regard to net
48、work 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
49、 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 Shapir
50、o (1985). The degree to which this issue has heated up recently in the U.S. probably reflects increasing concentration in the relevant markets.,Market power and interconnection,Trying to address these network neutrality challenges through regulation ex ante (in advance) is likely to prove extremely
51、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.,
