IP Telephony development does not equal Internet development

While “free” Internet Telephony services (see Box 3.1) appear to offer consumers in high-price markets the opportunity to call relatives and business contacts around the world for free, two important caveats must be made. First, such calls are rarely actually free, given the need of the calling party to have an Internet connection, which, if local calls are metered, can accumulate much like long distance calling charges, by the minute. Second, the type of consumer in high-price markets who might choose lower-quality, low-cost

Internet Telephony is unlikely to be the same type of consumer who can afford a multimedia PC and an Internet access link in the first place.

It is very important not to confuse development of IP Telephony with development of the Internet. As demonstrated in Chapter 2, the majority of international IP Telephony traffic is not true Internet Telephony, but rather VoIP (though iBasis appears to be an exception, see Box 4.5). That is, the lines which carry IP Telephony traffic tend to be dedicated, managed IP bandwidth, not public Internet bandwidth, on which congestion and quality are nearly impossible to control. An increase in the amount of incoming IP Telephony traffic coming into a country does not translate into an increase in the availability of outgoing Internet bandwidth. The circuits are closed to public Internet traffic to maintain their performance characteristics. Despite claims to the contrary, IPTSPs do not make the Internet more available in the countries in which they terminate traffic. Rather, they simply bypass the incumbent operator(s) by a method very similar to leased line resale, with the only difference being the use of IP instead of circuit-switched telephony technology. In fact, as opposed to extending Internet infrastructure in high-price markets, VoIP may actually contribute to the decline of the very local access networks which are essential for basic Internet access, by avoiding universal service payments.

A preferential policy towards IP Telephony, therefore, does not necessarily constitute promotion of the Internet in a given country. As suggested above, it may actually be counter-productive if not accompanied by a means of assuring viable funding for local access networks. IPTSPs can be expected to continue describing themselves as Internet Telephony providers (even while their services are more accurately described as VoIP) so long as there are regulatory advantages to being an “Internet company,” as opposed to a telephone company (see, for instance, the case of ITXC in Box 4.6).

One strategy for a liberalizing country to consider might be to impose specific obligations on new entrant IPTSPs to expand the availability of full-fledged Internet access as a condition of licence. The expansion of such access would make PC-to-PC and PC-to-Phone IP Telephony services more available, further increasing consumer welfare, but also applying further pressure on the tariff structure of the PTO. It is not surprising that for this very reason some countries have implemented technical measures to block “free” IP Telephony services like Dialpad and Aplio from operating in their countries.

Just as IP Telephony bypasses the traditional circuit-switched telephone network, VoIP in effect bypasses the public Internet. Ironically, IPTSPs are finding that the Internet is not enough like the telephone network to serve as a telephone network. Call quality tends to be substandard due to the inability to control congestion on public Internet bandwidth, and structures do not exist (yet) to meter and bill for calls without passing them through some kind of clearinghouse at one end. Despite claims that IP Telephony is fundamentally different to circuit-switched telephony, looking a bit deeper reveals network architectures and financial arrangements which are not dramatically different to those found in the PSTN. Circuits carrying IP Telephony have much more in common with regular leased circuits than the public Internet. Given these similarities, and the functional equivalence of phone-to-phone IP Telephony calls with PSTN calls, the basis for treating them differently as a matter of policy becomes more and more difficult to justify.

Box 4.6: ITXC: It’s easy to get started with a SNARC

For a traditional carrier to get into the IP Telephony business, it can be as easy as buying a server and hooking it up. In fact, U.S. IP Telephony service provider ITXC will give you the server if you qualify (by sending a minimum of 400’000 minutes of traffic per month to ITXC). These excerpts from ITXC’s promotional materials for its “SNARC” product explain:

A SNARC is ITXC-owned and operated turnkey equipment that allows qualifying carriers to quickly originate or terminate voice and fax calls over ITXC.net™, the world’s largest Internet telephony network. ITXC.net utilizes patent- pending Best Value Routing™ voice traffic management technology to provide wholesale call completion at exceptional prices and with consistent quality to any phone or fax in the world. SNARCs are co-located behind a facilities based carrier switch. Originating SNARCs provide carriers with access to an instant, world-wide call termination footprint using high quality, low cost Internet telephony routes. Terminating SNARCs generate additional revenues by completing calls from ITXC.

Perhaps the most telling sign that the wind of change is blowing in high-price markets is the steadily increasing number of PTOs using IP Telephony to carry their own international calls. As demonstrated in Table 4.3, even PTOs in countries where IP Telephony is nominally banned are getting involved. The reason is simple – lower international termination costs mean higher profits.

IP Telephony is no longer a fringe service lying outside the traditional telecommunication world. Telstra of Australia and Gambia Telecommunications Company (GamTel) both entered into agreements in 2000 with ITXC, an American IPTSP, to exchange international IP Telephony traffic.3 _{In May 2000, iBasis, another} IPTSP, announced that its network was to be interconnected with that of Concert, owned by British Telecom (BT) and AT&T, allowing the exchange of IP Telephony traffic between customers of the two companies.4 This kind of alliance, between PTOs and IPTSPs, and among IPTSPs themselves, is being announced at a startling pace all over the world and it seems likely that many more remain undisclosed. Clearly, both IP Telephony technology and IP Telephony operators are being embraced by the traditional telecommunication industry worldwide. Whether this is by choice or compulsion is another matter. Some of these arrangements fall within the boundaries of existing telecommunications financial and regulatory structures, but many do not. IP Telephony cannot be ignored and it can almost certainly not be eradicated without employing extremely heavy-handed measures.

Competition is here to stay, and IP Telephony is best viewed as part of this larger trend. Reform of the accounting rate system is continuing and prices must be brought closer to costs in competitive environments. When that happens, the issues of IP Telephony in high-price markets will likely come to resemble the issues observed in falling-price markets, and, in turn, those of low-price markets. In this latter group of economies, IP Telephony is being integrated into telecommunication regulatory regimes as a matter of course.

Box 4.7: Level 3: VoIP is functionally equivalent to circuit-switched voice and should be regulated the same way

Level 3 Communications, Inc. is a U.S. based “next-generation carrier” which is building a global IP-based data network. This network will support Internet-type applications on a managed, end-to-end IP network which can offer much higher quality of service than either the public Internet or hybrid circuit-switched/packet-switched networks. In fact, some of those customers can be expected to be the IPTSPs referred to elsewhere in this report.

In the company’s submission to the French regulator’s public consultation on IP Telephony (see Box 6.2), Level 3 made these comments, indicating its belief that it is time that IP Telephony and PSTN Telephony be treated the same from a regulatory perspective:

As we explained repeatedly, we do not think it is useful to define Internet Telephony in terms of underlying technology, architecture, let alone a coincidental combination of types of terminal equipment. Academic research may have an interest in developing typologies and the like, but from both a policy and strategic point of view, what counts is what counts for the customer, and this,undeniably, refers to quality and functionality, and in this respect there is no single reason to treat VoIP differently from the diverse inhabitants of the circuit switched voice services universe.

Therefore, the one and only approach that makes sense is a definition in relation to the legal, technology-independent definition of voice. In this context, we have, at this stage, no substantial problem with the European Commission’s notice on the “Status of voice communications on Internet.” Since the publication of this notice, VoIP has evolved so far that it satisfies now all relevant criteria to be considered as public voice in the sense of the Services Directive[…]

The Level 3 submission later concludes as follows:

Rather than dealing with all questions in detail, Level 3 has attempted to substantiate the fundamental axiom that VoIP has reached such degree of maturity that it is to be equated to carrier-grade public voice, both from a customer perception and a regulatory point of view. We are convinced that insertion in the existing regulatory framework is the only sensible approach in this context, if the public policy purposes whichunderlie this framework are to survive the arrival of the next generation network.

It is nowhere implied that the regulatory framework is perfect, far from it. The point Level 3 has been making throughout is that the necessary review of the regulatory framework should focus solely on the nature of the services provided and not on the technology supporting those services. To keep on isolating VoIP from the commonregulatory framework for voice services would be tantamount to regulating against the unavoidable evolution of the industry.

Source: Level 3 Communications, “Voice over IP and the Next Generation Network: response to the ART consultation