Implementation of Bill and Keep and Transitioning to it

1
Implementation of Bill and Keep and
Transitioning to it
Ingo Vogelsang, Boston University WIK Conference
on Bill and Keep A New Model for Intercarrier
Compensation Arrangements? Königswinter, April
5, 2006
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BK Yes, but how?

• BK is elegant and simple. It has nice efficiency
  properties.
• Yet, it may be hard to implement The FCC has
  been sitting on a proceeding for BK for five
  years already.
• Why is it hard?
• Rent transfers Asymmetric traffic and asymmetric
  networks
• Uncertainty of large institutional change
• Opportunity and Challenge
• VoIP has been creating a mess through arbitrage
  caused by inconsistent interconnection regimes.
• IP networks are often interconnected on BK basis
  (between core network and clients). Will this
  differ for NGN?
• Standardization problem Regulation or voluntary
  transition?

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BK as an Interconnection Regime

• Characterization
• No payment of origination and termination charges
  to other networks
• Does not mean Interconnection at zero price
• Barter between participating networks, but not
  necessarily balanced traffic
• Requires agreement on
• topology of PoI ? Emphasis on network planning of
  participating networks
• depth of networks
• quality aspects (protocols etc.)
• Advantages
• No inevitable termination monopoly
• No transactions costs for wholesale pricing and
  billing, no need for price regulation
• No tariff arbitration
• Internalization of (positive) call externalities
• Very flexible end-user pricing, no price squeezes
• Drawbacks
• Topology of PoI and required network depth could
  increase market concentration.
• Potentially inefficient investments in parallel
  networks
• Tradeoff between hot potato problem and too many
  PoI

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Overview

• Implementation Issues
• PoI and Network Properties
• BK CPP vs. RPP
• Service and Quality Differentiation (VoIP)
• Transitioning to BK
• Dual Regimes
• Sliding Path
• Conclusions

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PoI and Network Properties

• Should BK hold
• only for local exchange carriers or also for
  pre-selection carriers? What about call-by-call
  carriers?
• only for termination or also for origination?
• Where should the relevant PoI be located?
• In Deutsche Telekoms network, there are about
  8,000 concentrators, 1,622 central offices and
  474 local PoI with call-by-call and pre-selection
  carriers. There are substantially fewer (about
  70) interconnection points with IP-networks. The
  same will hold for NGN. Thus, BK could start on
  the user side of 474 or fewer PoI.
• Inefficient network duplication
• Hot potato problem
• QoS problem

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Overview

• Implementation Issues
• PoI and Network Properties
• BK CPP vs. RPP
• Service and Quality Differentiation (VoIP)
• Transitioning to BK
• Dual Regimes
• Sliding Path
• Conclusions

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BK CPP vs. RPP

• CPNP ? CPP and BK ? RPP?
• More specifically Does BK imply a move from CPP
  to RPP?
• There exist no clear cut causalities between
  interconnection regimes and payment systems for
  end-users.
• Small differences in market situations can have
  large effects on outcomes and
• The same market situations can yield a large
  range of outcomes (Folk Theorem).
• Nevertheless, the long-run limits to market
  outcomes are determined by the firms costs and
  the consumers willingness to pay.
• Special issues of interconnection
• 2-sided utilities Caller demand and receiver
  demand
• Correlation between outgoing and incoming calls
  Number and composition of users drive traffic and
  size of access networks.

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BK CPP vs. RPP
Compatibility between interconnection regimes and
end-user payment systems
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BK CPP vs. RPP

• Introduction of BK does not require switch from
  CPP to RPP if
• traffic is sufficiently balanced
• incoming and outgoing calls are highly correlated
• Likely move to higher monthly charges and lower
  call charges (buckets and flat rates)
• Nevertheless, at least some competitors will want
  to move to RPP, because BK increases pricing
  flexibility.
• Regulators resist RPP, because they fear that
  consumer have an aversion to it. This is not an
  issue if regulators allow but not prescribe RPP.
  In that case competitors will only be successful
  with RPP if consumers accept that payment system.
  
• Having parallel systems can be cumbersome,
  though.

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Overview

• Implementation Issues
• PoI and Network Properties
• BK CPP vs. RPP
• Service and Quality Differentiation (VoIP)
• Transitioning to BK
• Dual Regimes
• Sliding Path
• Conclusions

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Service and Quality Differentiation (VoIP)

• Two types of quality are relevant for
  interconnection
• Type 1
• QoS A?B minQoS Network A, QoS Network B
• Examples Security, privacy, emergency calling
• Interconnection can only reduce this QoS.
• No free riding, because Network A cannot benefit
  from higher QoS of Network B
• Could enhance market power
• Type 2
• QoS A?B ØQoS Network A, QoS Network B
  or QoS A?B maxQoS Network A, QoS
  Network B
• Examples Latency, clarity and error rates
• Interconnection can increase this QoS.
• Free riding an issue

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Service and Quality Differentiation (VoIP)

• QoS is possible under BK, but there may be free
  rider problems
• Type 1 QoS is achieved by standardization
  agreements and by the type of interconnection.
• Type 2 QoS is hard to guarantee and monitor.
• This could suggest a restriction of BK to access
  networks (like COBAK), while leaving transit
  networks to the market. Competition between
  transit networks should be sufficient to
  guarantee QoS.
• If a network wants to guarantee type 1 and type 2
  QoS to its customers it would have to provide its
  own origination and transit (possibly via a
  transit agreement), and the terminating carrier
  has to provide type 1 QoS. If the terminating
  carrier cannot do this the guarantee breaks down
  (VoIP call).
• This is not just a problem of BK!

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Overview

• Implementation Issues
• PoI and Network Properties
• BK CPP vs. RPP
• Service and Quality Differentiation (VoIP)
• Transitioning to BK
• Dual Regimes
• Sliding Path
• Conclusions

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Dual Interconnection Regimes

• Three Types of Dual Regimes
• Different regimes for different services on the
  same network level in the same type of network
• Example EBC for voice and BK for data services
• Different regimes on the same network level in
  different networks
• Example The current VoIP Dilemma with EBC in the
  traditional network and BK for broadband access
  (origination and termination)
• Different regimes on different network levels
  (Two-level regime)
• BK between Meet Point and user, EBC for transit
  between two Meet Points
• Can facilitate introduction of BK and prevent
  duplicative investments.

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Dual Interconnection Regimes Type 1

• Dual regime BK for low-quality VoIP and EBC for
  high-quality POTS in IP-based networks
• Major adjustments for EBC in IP-based networks
• Adverse Selection und Moral Hazard Problems
  Arbitrage and free-riding opportunities
• Avoidance of arbitrage through separate tunnels
  at high costs
• ? Dual Regimes on the same network level
  appropriate only if arbitrage can be prevented

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Dual Interconnection Regimes Type 2

• Dual regime of EBC in PSTN and BK in NGN during
  transition
• No major adjustments for IP-based networks on the
  way to NGN
• Large compatibility and arbitrage problems
  between PSTN and IP-based networks on the way
  there
• Gradual replacement of old regime through
  decreasing demand and vanishing SMP

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Dual Interconnection Regimes Type 3

• Dual two-level regime of EBC und BK (Type 3
  regime)
• BK for access networks
• EBC for transit (core) networks
• Enables phasing out of regulation
• Implementing dual two-level regime
• In NGN only
• Already in PSTN

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Overview

• Implementation Issues
• PoI and Network Properties
• BK CPP vs. RPP
• Service and Quality Differentiation (VoIP)
• Transitioning to BK
• Dual Regimes
• Sliding Path
• Conclusions

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Sliding Path

• Implementing BK in PSTN before completion of NGN
• Potentially disruptive change
• Transactions costs of regime change in PSTN may
  be high if NGN comes quickly.
• Sliding path as alternative (? holistic approach
  by Ofcom)

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Sliding Path

• Linear combination of EBC and BK
• EBC with interconnection charges that move
  towards BK over time
• Gains properties of BK over time at the expense
  of additional transactions costs
• No need to adjust network structures and PoI in
  PSTN
• In Germany question of compatibility with legal
  standards (efficient LRAIC)
• Justification with
• Sunk costs of PSTN with no replacement planned
• Replacement of PSTN by NGN
• Holistic approach by Ofcom
• Based on EBC only

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Overview

• Introduction
• BK CPP vs. RPP
• Service and Quality Differentiation (VoIP)
• Transitioning to BK
• Dual Regimes
• Sliding Path
• Conclusions

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Conclusions

• Which is going to be the best interconnection
  regime for NGNs?
• In the absence of costs of regime change, BK
  dominates EBC and CBC
• What steps are necessary for implementing BK?
• Agreement on topology of PoI and on scope of BK
• Agreement on QoS differentiation
• No agreement on end-user pricing necessary
• Are intermediate steps needed for the PSTN?
• How can the costs of a regime change from EBC to
  BK in the PSTN be lowered?