This chapter presents a cost model for ISPs and Internet telephony and assesses its business and policy implications.1 The term "Internet telephony" has been used broadly to refer to a family of applications that typically include (real-time) voice communications, at at least partially over a network using Internet protocols. However, the distinction between Internet telephony and traditional telephony becomes less clear when considering telephony services that bridge the gap between packet-switched and circuit-switched networks. The type of Internet telephony analyzed in this model is what Clark calls "Class 3" Internet telephony: computer-to-computer Internet telephony in which two computers communicate over the Internet via a modem connection or a direct network connection.2.
It has been proven that moderate use of computer-to-computer Internet telephony can double the costs of an Internet service provider. This chapter also briefly discusses pricing and policy issues arising from Internet telephony services. The model quantifies the impact on ISP costs due to increased use of Internet telephony.
Two scenarios are modeled: a baseline scenario representing current ISPs in which the primary use of the network is for Internet browsing and essentially no Internet telephony; and an Internet telephony (IT) scenario in which the ISP sees a significant increase in the use of computer-to-computer Internet telephony by its subscribers.4. It is estimated that Internet telephony is used 33% of the time in the IT scenario.
Other Expenses
Network operation and maintenance costs include the costs of maintaining the network's hardware and software, as well as the personnel required to perform these tasks. The value for the percentage is based on figures taken from annual reports of internet service providers and other telecommunications providers. General and administrative costs (G&A) primarily consist of salaries and occupancy costs for administrative, executive, legal, accounting and finance staff.
Similar to sales and marketing costs, G&A costs are based on a percentage of total costs.
Cost Model Analysis and Interpretation
Baseline Scenario Results
As described earlier, the basic scenario represents an ISP whose users primarily browse the web. The distribution of costs and revenues by subscriber base shows that no type of subscriber is significantly subsidized.15 This shows that the market for the provision of Internet access services is relatively efficient and competitive. Viewed from another perspective, all cost categories play an important role in determining ISP costs.
For example, transport represents only a small part of the cost for dial-up subscribers, but a large part of the cost for T1 subscribers. The ISP's total cost distribution will vary with the subscriber mix and the individual cost distribution 17.
Internet Telephony Scenario Results
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Internet Telephony Pricing
To a lesser extent, they also face cost pressures due to the access tariff reform, discussed in the next section. ReSerVation Protocol (RSVP), developed by the Internet Engineering Task Force (IETF), could be used as a mechanism for implementing usage-sensitive pricing to recover those costs.25 But if and where the current. Clearly, RSVP alone cannot solve the many network architecture and Quality of Service limitations on Internet pricing models.
When developing pricing schemes, service providers will need to look beyond the Internet telephony service and consider how to price differentiated and/or price. We argue elsewhere that an integrated regulatory framework will be required to allow the provision of such integrated services (Neuman, McKnight and Solomon, 1997). In the next few years, we anticipate experimenting with a variety of pricing models that allow service guarantees for multiple qualities of service, including guarantees for both real-time multimedia and multicast conferencing.
A fundamental principle of yield management is that different classes of service, be it Internet access or Internet telephony, are defined and that only high priority classes are serviced during periods of peak demand. During periods of low demand, discount classes are intended to attract increased demand. The result of such techniques is that the capacity of the system is on average more filled and the revenues are higher.
Usage-sensitive pricing will not be an option until protocols that monitor Internet telephony usage are widely deployed.
Internet Telephony Policy
- Access Charge Reform
- European Internet Telephony Policymaking
Under FCC rules (specifically the Computer II Inquiry), ISPs, which are classified as enhanced service providers, are exempt from regulations imposed on carriers such as long-distance telephone companies.28 These providers must pay per minute for “access charges” on the order of $0.06 per minute to the local telephone companies that terminate each end of a long distance call. ACTA argued that ISPs providing Internet telephony services should pay access fees to local telephone companies, just like other long-distance service providers. Under the new rules, ISPs will see an increase in the cost of their analog dial-up lines.
Using average costs, the effect on ISPs (or any multi-line business) will be an increase of $4.23 per month for each analog line.31 When these updated costs are incorporated into the ISP cost model, there is an increase of analog call subscribers. cost for basic and IT scenario. An alternative method of access reform could be to introduce per-minute access charges for ISPs, as proposed in the ACTA petition. The monthly costs of the calling subscriber are shown because the price of access per minute varies.
The result is that access charges quickly become the dominant cost element for a telephone subscriber. ISPs would likely have to pass this cost increase on to the end user, which would have the effect of greatly inhibiting continued growth in dial-up Internet services. While no cost increase is beneficial to ISPs, the FCC's recent actions should be considered far less threatening than the potential impact of Internet telephony or per-minute access rates.
As we noted above, perhaps the biggest challenge for Internet telephony is how governments will handle it. In particular, the European Commission's approach to determining Internet telephony policy deserves attention because of the clear impact such policies can have in enabling or hindering the continued growth of a global market for advanced Internet services. As discussed in [SH97], the European Commission has established a number of criteria that Internet telephony must meet before it is subject to regulation.
Based on these criteria, Internet telephony is not considered voice telephony because Internet telephony does not meet the "real time" criterion.
Conclusions
Such communications are to and from publicly switched network termination points on a fixed telephony network. So far, a relatively hands-off policy approach has been taken by the Federal Communications Commission (FCC) in the US. Despite misguided attempts in some countries to ban Internet telephony, we believe the real challenge is how to align the costs, technologies, prices and policies to enable a rich new class of.
The rapid growth of new IP-based infrastructure, services and applications resulting from these trends should benefit both consumers and producers worldwide, while accelerating the "creative destruction" of outdated regulatory regimes, operating structures and business practices. The model places the ISP's costs into five categories: capital equipment, transportation, customer service, operations, and other expenses (sales/marketing and . general/administrative). Internet telephony scenario where the ISP sees a significant increase in the use of PC-to-PC Internet telephony.
This scenario is in contrast to another potential Internet telephony scenario where a telephone provider wants to replicate the PSTN using Internet telephony technology. It was shown that with moderate use of Internet telephony, the increase in total ISP costs is almost double the increase in revenue. Therefore, ISPs, many of which are currently operating at unprofitable levels, will lose even more money if they fail to adopt new business models and change pricing policies to recover.
Alternatives to cost recovery include various pricing and yield management techniques, some of which have been explored elsewhere (McKnight and Bailey, 1997; Leida, 1997).
An Internet Telephony Cost Model for Regulatory Decision Making, in the matter of "Provision of Interstate and International Interexchange Telecommunications Services via the 'Internet' by Non-Tariff, Non-Certified Entities." TPP91, MIT. Digital Tornado: Internet and Telecommunications Policy, Federal Communications Commission Office of Plans and Policy, OPP Working Paper No.
Authors’ Contact Information
1 Support for this research from the MIT Internet Telephony Consortium (http://itel.mit.edu) is gratefully acknowledged. The authors would like to thank ITC staff and companies for providing valuable feedback through five conference calls in March-April 1997, ITC meetings in May 1996, and January and June 1997. They would also like to thank NMIS for partial support, NSF Grant NCR- 9307548; and the students of the MIT Telecommunications Modeling and Policy Analysis Seminar (TPP91) for an initial model presented to the FCC in May 1996 (Students, 1996).
This paper slightly extends the model in (Leida, 1998) to explore the impact of FCC policy decisions on costs. 2 Ongoing work within the MIT Internet Telephony Consortium models Internet telephony across gateways, both within the company's intranet and over extranets. However, the results of this work are not yet available as of the date of this writing.
Residential subscribers are assumed to require access mainly in the evening and business subscribers during the day. 10 Because leased line subscriber users are "always on" the network, the concept of calling does not apply to them. 15 This is in contrast to the PSTN, for example, where, based on government wishes, business subscribers subsidize residential subscribers.
16 However, this only applies to the mix of subscribers used in the base scenario. 17 If the subscriber composition changes, the ISP's cost distribution will therefore be weighted by the number of each type of subscriber. For example, if the ISP only had T1 subscribers, its costs would be distributed just as the T1 subscribers' costs are distributed.