Folks:
Once again, I ask for your indulgence. As a result of excellent feedback
from my previous posting to these two groups, we have developed the
following consultation document which is intended for a non-technical
(managerial) audience. Some of the wording may apprear hauntingly familar
to some of you. It has been sent by snail mail to Vodafone, Telecom, Clear,
Telstra-Saturn and Clear already. We are keen to canvass other feedback,
espacially from the ISPs. Please refer to senior management, or
alternatively, I will snail mail or fax a formatted copy on letterhead etc
in response to email suggestions.
I have attached an rtf format document which can just be printed out and
passed on if necessary (apologies to those objecting to the MS pseudo
standard).
I have asked for feedback by 15 May (contact details at the end).
<<Internet charging.rtf>>
Frank March
Specialist Advisor, IT Policy Group
Ministry of Economic Development, PO Box 1473, Wellington, NZ
Ph: (+64 4) 474 2908; Fax: (+64 4) 471 2658
Consultation on International Charging for Internet Connectivity
Purpose of this Document
In preparation for a meeting of APEC Telecommunications/IT Ministers to be
held 22-26 May, the Ministry of Economic Development wishes to consult with
interested parties in order to help establish a New Zealand Government
position on charging for Internet connectivity across the Pacific. This
question has arisen because the way that Internet charges are settled
between service providers internationally is quite different from the
settlement regime used traditionally for international telephony. The topic
has been under study within the APEC Telecommunications Working Group since
late 1998, with a number of APEC member economies taking the view that the
present charging arrangements are unfair.
New Zealand has not yet taken a formal position on the topic. We have twice
circulated information on the study to the New Zealand Network Operators
group.
The Issue
International telephone traffic charges are settled between national
telecommunications providers on the basis of interconnection agreements
where the carrier terminating a call within its network charges the other.
The costs are met by the subscriber originating the call. This is readily
achieved because the telephone system uses circuit switching where the
originator of the call and its duration are readily determined. Since the
subscriber placing the call chooses to do so, it is assumed that the value
of the transaction is captured by that person.
Internet traffic is quite different in nature. Because it uses packet
switching, neither the source and destination (the end users) of the traffic
flow, nor the duration (or quantity) of traffic within the 'transaction',
can be measured readily. It is also much more difficult to make
assumptions about who obtains the value from the traffic flow.
Charging for Internet traffic is conducted quite differently from
traditional telephone calls. New Zealand ISPs typically rent bandwidth
capacity (a 'pipe') from an international carrier so that a New Zealand
client ends up paying indirectly for the full costs of the international
traffic in both directions. This can be perceived as being a net subsidy by
the New Zealand client to a peer in North America as any benefit to either
party is paid for only by the New Zealand user.
It has been inferred as a result that Internet development is being held
back unfairly in New Zealand (and other non-North American countries)
because users subsidise the US and Canadian costs of connectivity.
(Note, however, that there is no evidence of slow take up of the Internet in
New Zealand which, along with Australia and similarly 'disadvantaged'
nations such as Finland and Sweden, is in the top 10 countries in terms of
Internet use. Most of the other OECD countries are well behind in terms of
Internet take up but, of course, these are well ahead of the 2nd and 3rd
world. Slow take up in these countries may be attributed to other factors,
especially local connection costs and heavily regulated markets, as well as
the availability of content in non-English languages.)
The Question
Does the New Zealand Internet industry perceive there to be a problem over
the present international Internet charging regime, in terms of the current
and future impact on ISPs or their end users?
The arguments outlined below and the tentative conclusions drawn have been
consolidated from feedback received from members of the New Zealand Network
Operators Group and members of the Internet Society of New Zealand. These
groups are taken to include many, if not most, of the technically aware
people in New Zealand who are concerned with Internet issues. This paper is
intended to test the opinions of a wider group in order to better inform New
Zealand Government policy on the matter.
The Arguments
A number of APEC member economies favour a requirement for international
Internet traffic costs to be shared on a negotiated or mandated basis, on
the grounds of 'fairness'. The arguments against and in favour of this
could be summarised as follows.
Against:
Government mandated allocation of costs based on traffic flows would be
potentially detrimental to the growth and functioning of the Internet. There
is no basis for government intervention at this time because:
* International charging arrangements are only one element in the
total costs and value exchange of international Internet interconnection. A
recent APEC study has shown that for the APEC economies costs to Internet
end users are attributed roughly as 90% to the local loop, 7% to national
trunk and only 3% to international trunks. The international trunk costs
for New Zealand end users are not known but are expected to be a much higher
percentage than this because the relative cost of the local loop is less in
New Zealand than in many other APEC economies. The costs to a New Zealand
ISP may be in the region of 30% and those to an end user some fraction of
this.
* There are many factors which impact on growth and take-up of
Internet services, other than the costs of the international element of
carriage. Important among these are: the level of the economy's domestic
telecommunications market liberalisation and competition, foreign investment
restrictions, the effect of local as well as international cost/price
structures on the actual cost to end users, the impact of
compliance/regulatory requirements on the development and availability of
the Internet, roll-out of domestic infrastructures and the availability of
bandwidth, the amount of local Internet content, consumer confidence in the
case of e-commerce, and open market access for ISPs
* The Internet is a new, dynamic industry where business models are
developing rapidly in response to market conditions. Present charging
arrangements have resulted in rapidly falling prices for international
bandwidth.
* The Internet is fundamentally different from traditional telephony
networks. Although gross measurement of Internet traffic is possible, in
general it is much more difficult to attribute use of capacity (and the
value arising from it) to individual users than is the case with voice
telephony. The Internet allows much more varied styles of remote
interaction, which greatly enhances the ability for groups of people to work
together despite being located in different economies.
* Much traffic between non-US countries crosses the US networks. In
the case of Pacific rim countries, this averages 71% of non-US traffic. It
could be argued therefore that non-US countries are benefiting from this
traffic for which the US carriers are not recovering costs.
* There is a high level of competition in the provision of
trans-Pacific telecommunications regardless of present interconnection
arrangements as exemplified by the current Southern Cross project. The
current international Internet market is highly competitive. In nations
where there are high prices for Internet consumers, these appear to be
associated with the comparative lack of competition and the level of pricing
for connection in domestic markets.
* Any intervention by governments to regulate or impose an
international settlements regime will be costly and will introduce
rigidities and restrict service development. The outcome, far from
benefiting the economies affected by the present imbalance of costs, is
likely to increase the costs of Internet access and limit innovation and
opportunities for exploitation of the benefits of electronic commerce.
In Favour:
There is concern that, although the costs to Internet end users may be
relatively small, and the present regime is competitively neutral as far as
ISPs are concerned, overall effects on the economy may be very significant,
especially in the long term.
* The impact of voice over Internet Protocol (VoIP) needs to be taken
into account. Within five years it is expected that international trunks
will be carrying most voice traffic over IP networks. This development will
lead to a much closer balance in net traffic flows than is the case at
present.
* Some Web hosting business is already lost to overseas hosting
companies because of the international traffic costs and some New
Zealand-based ISPs are reluctant to host internationally popular websites
for the same reason.
* The overall concern, from a national perspective, is that we are
subsidising consumers and businesses in North America, not just service
providers and telecommunications carriers, but across the entire economy.
Our Conclusions
* Although we do not know what the optimum growth of the Internet
might be, there seems little if any evidence of market failure to date.
* Even if that were the case, there are many factors which impact on
growth and take-up of Internet services, other than the costs of the
international element of carriage.
* Nevertheless, as international Internet use grows and new services
such as voice over IP become important, we would want to ensure that the New
Zealand economy was not placed at a disadvantage relative to those in North
America because of historical developments in Internet services producing
long term market distortions.
* At the same time, we would not want to see any arrangements that
imposed unjustified compliance costs or that endeavoured to mandate
negotiations that would subject Internet traffic to similar costing regimes
as traditional voice telephony. In particular we would want to avoid
outcomes where the cost of measurement or monitoring exceeds the cost/value
involved.
APEC Recommendations
The present text of the recommendations to be submitted to APEC Ministers
is:
Recommended International Charging Arrangements for Internet
Services
1. Where measurement tools are available and acceptable,
charging arrangements should be based on traffic flow patterns for each type
of service, taking into account which side has generated the traffic.
2. In the absence of efficient measurement tools, charging
arrangements for international links should be based on the ratio of inbound
to outbound traffic flow.
3. Where agreeable to both parties, the cost of international
transport link capacity should be shared on a 50/50 basis.
APEC Principles on Internet Interconnection
1. Internet connectivity is an integrated element of the public
telecommunications infrastructure, including private sector initiatives that
should be encouraged to strengthen the Asia-Pacific Information
Infrastructure.
2. Governments need not intervene in private business
agreements achieved in a competitive environment, but where there are
dominant players or de facto monopolies governments have a role in promoting
the principle of fairness until effective competition can be demonstrated.
3. Internet charging arrangements between providers of network
services should reflect:
a) The contribution of each network to the communication;
and
b) The use by each party of the interconnected network
resources.
4. Sustainable and equitable financing arrangements for the
development of high-bandwidth connectivity will be supported by:
a) Internet charging arrangements that distribute returns on
investment according to fair market principles; and
b) Application of the APEC Principles on Interconnection to
packet-switched data services.
Comment Sought
Your comments on this issue would be welcomed as a contribution towards
establishing a New Zealand position, not only for the APEC
Telecommunications Ministerial meeting, but also for the International
Telecommunications Union's study group which is proposing similarly
prescriptive recommendations on international traffic costs.
Please send your comments to Frank March, Specialist Advisor, IT Policy, by
Monday, 15 May 2000. Contact details as follows: telephone (04) 474 2908;
fax (04) 473 8949 or (preferred) email: frank.march(a)med.govt.nz.
Mike Lear
Deputy Secretary, Resources and Networks
