Internet telephony: Costs, pricing, and policy

Telecommunications Policy

Volumn 22, Issue 7, 1998, Pages 555-569

  McKnight, Lee W ^a   Leida, Brett ^b  

^a MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

^b MIT Internet Telephony Consortium

Author keywords

[No Author keywords available]

Indexed keywords

COSTS; INDUSTRIAL ECONOMICS; LAWS AND LEGISLATION; MARKETING; MULTIMEDIA SYSTEMS; PUBLIC POLICY; TELECOMMUNICATION CONTROL; TELECOMMUNICATION SERVICES;

INTERNET SERVICE PROVIDERS (ISP);

INTERNET TELEPHONY;

EID: 0032139946     PISSN: 03085961     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0308-5961(98)00035-4     Document Type: Article

References (49)

1. Support for this research from the MIT Internet Telephony Consortium (http:// itel.mit.edu) is gratefully acknowledged. This paper is based upon Brett Leida's S.M. thesis: Leida, B., A cost model of Internet service providers: implications for Internet telephony and yield management. MIT S.M. thesis, 1998. The authors would like to thank ITC staff members and companies for providing valuable feedback via five conference calls in March-April 1997, ITC meetings in May 1996, and January and June 1997. They would also like to credit 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 which was presented to the FCC in May 1996 [Students of the MIT Telecommunications Modeling and Policy Analysis Seminar, A cost model of Internet telephony for regulatory decision-making. In the Matter of The Provision of Interstate and International Interexchange Telecommunications Service via the 'Internet' by Non-Tariffed, Uncertified Entities. TPP91, MIT, 1996. (http://itel.mit.edu/itel/docs/ACTA/ /TPP91.htm).] This paper extends slightly the model in (Leida, 1998) to explore the impact of FCC policy decisions on costs.
2. Clark, D., a Taxonomy of Internet telephony applications. Paper presented at the 1997 Telecommunications Policy Research Conference, Alexandria, Virginia, 1997.
3. Ongoing work within the MIT Internet Telephony Consortium models Internet telephony across gateways, both within corporate intranets and over extranets. Results of this work, however, are not yet available, as of the date of this writing.
4. As noted in footnote 3, the issue of gateway traffic, i.e. phone-gateway-phone, is not modeled here. Other work in the ITC is analyzing gateway issues.
5. For a more detailed description of each model parameter see (Leida, 1998).
6. Further discussion about ISP architecture is found in (Leida, 1998).
7. The sole distinction between residential and business dial-in subscribers is varying access patterns. Residential subscribers are assumed to request access primarily in the evening and business subscribers during the day. See op. cit Ref. 1. Leida, (1998) for more details on access patterns.
8. Sources include: (1) FIND/SVP. (1996). Home Use of the Internet and Commercial Online Services (http://etrg.findsvp.com/financial/homeuse.html);
9. (2) Forrester Research Inc. Telecom Strategies Group. (1996). Sizing Internet Services. Cambridge, Mass.;
10. (3) Morgan Stanley (Technology/New Media). (1996). The Internet Report, (http://www.ms.com/),
11. (4) Boardwatch Magazine Directory of Internet Service Providers. (Winter 1997).
12. 1.66 = 300%*33% + 100%*67%.
13. Because the leased-line subscribers' users are "always on" the network, the concept of dialing-in does not apply to them.
14. ISP capital equipment considered in the model are: analog modems, content housing server, 56 kb CSU/DSU, Cisco 7513 serial port card, Fore 4 port DS3 card; ISDN access router, LAN-10Mbps ethernet, T1 CSU/DSU, Cisco 7513 ATM card, Fore 4 port OC-3 card; POP server, LAN-100Mbps ethernet, Cisco 2500 router, Cisco 7513 router chassis, and a Fore ASX-200BX ATM switch chassis.
15. See op. cit Ref. 1 (Leida, 1998) for details.
16. Leida(1998) opt cit Ref. 1.
17. This is in contrast to the PSTN, for example, where, based on government desires, the business subscribers subsidize the residential subscribers.
18. Leida (1998) opt cit Ref. 1.
19. However, this is only true for the mix of subscribers used in the baseline scenario. Other mixes of subscribers would yield different results.
20. Hence, if the subscriber mix changed, the ISP's cost distribution would be weighted by the number of each type of subscriber. For example, if the ISP had only T1 subscribers, its cost would be distributed just as the T1 subscribers' cost is distributed.
21. Leida, (1998) opt cit Ref. 1.
22. Leida, (1998) opt cit Ref. 1.
23. Leida, (1998) opt cit Ref. 1.
24. Leida, (1998) opt cit Ref. 1.
25. Leida, (1998) opt cit Ref. 1.
26. The cost increase is relative to that of the baseline scenario. Because all other costs are held constant (such as customer service, sales and marketing) the cost increase shown in this figure will not be the same as for the Internet telephony scenario where other costs were assumed to increase.
27. See Leida, (1998) opt cit Ref. 1. for further sensitivity analysis.
28. IETF rfc2205 (http://reference.nrcs.usda. gov/ietf/rfc2300/rfc2205.txt).
29. Neuman, W.R., McKnight, L. and Solomon, R.J. The Gordien Knot: Political Gridlock on the Information Highway. MIT Press, Cambridge, MA, (http://www-mitpress.mit.edu/book-home.tcl? isbn = 0262140616).
30. McKnight, L. and Bailey, J.P. (Eds.), Internet Economics. MIT Press, Cambridge, MA, 1997 (http://www-mitpress.mit.edu/ book-home.tcl? isbn = 0262133369).
31. Bailey, J.P. and McKnight, L.W., Scalable Internet interconnection agreements and integrated services. In Coordinating the Internet, eds B. Kahin and J.H. Keller. (Eds.), MIT Press, Cambridge, MA, 1997.
32. The announcement by America Online (AOL), in January 1998, that it was raising the price for its service to $21.95/month from S19.95/month suggests that at least one major ISP recognizes that the revenue/cost equation must be brought into balance, as we argue here.
33. Paschalidis, I., Kavassalis, P. and Tsitsiklis, J., Efficient resource allocation and yield Management in Internet Services. ITC Technical Report, MIT. Ideally, a company using yield management wants to maximize its profit, not just its revenue. However, in most cases where yield management is currently used, the marginal cost of providing service is very small vis-a-vis fixed costs; hence, maximizing revenue is essentially the same as maximizing profit.
34. Op cit Ref 27.
35. In its Computer II Inquiry [Federal Communications Commission. (1980). Amendment of §64.702 of the Commission's Rules and Regulations, Final decision, 77 FCC 2d 384 (Second Computer Inquiry)], the FCC established the definition of (basic and) enhanced service providers and chose not to regulate them for reasons of public interest. Based on this definition, ISPs have always been classified as enhanced service providers (see Werbach, 1997).
36. Werbach, K., Digital Tornado: The Internet and Telecommunications Policy. Federal Communications Commission, Office of Plans and Policy, OPP Working Paper No. 29, 1997.
37. America's Carriers Telecommunication Association (ACTA), Petition for declaratory ruling, special relief, and institution of rulemaking against Vocaltec, Inc.; Internet Telephone Company; Third Planet Publishing, Inc.; Camelot Corporation; Quarterdeck Corporation; and other providers of non-tariffed, and uncertified interexchange telecommunications services. In the Matter of The Provision of Interstate and International Interexchange Telecommunications Service via the 'Internet' by Non-Tariffed, Uncertified Entities'. TPP91, MIT, 1996. (http://itel.mit.edu/itel/docs/ACTA /TPP91.htm).
38. See Federal Communications Commission, (rel. May 8, 1997). Federal-State Board on Universal Service, CC Docket No. 96-45, First Report and Order, FCC 97-157 (Universal Service Order).
39. Also, see Federal Communications Commission (rel. May 16, 1997). Price Cap Performance Review for Local Exchange Carriers and Access Charge Reform, CC Docket Nos. 94-1 and 96-262, Fourth Report and Order in CC Docket No. 94-1 and Second Report and Order in CC Docket No. 96-262, FCC 97-159 (Access Reform Second Report and Order).
40. More generally, the FCC is trying to move away from the per-minute charges that were developed in the 1980s when telephone service was generally a monopoly to a system of flat-rate charges that will be more compatible with a competitive market.
41. Federal Communications Commission. (May 7, 1997). Commission Reforms Interstate Access Charge System, Report No. CC-97-23.
42. ($7.61 - $5.60) + ($2.75 - $0.53) = $4. 23.
43. Leida (1998) opt cit Ref. 1.
44. Leida (1998) opt cit Ref. 1.
45. Short, K.I., Towards integrated Intranet services: modeling the costs of corporate IP telephony. MIT S.M. thesis, 1997.
46. European Commission Directorate-General for Competition (DGIV). (July 5, 1997). Notice by the Commission concerning the status of voice on the Internet under Directive 90/388/EEC, OJ C 140_(p. 8). See http://www.europa.eu.int/en/comm/dg04/ lawliber/en/97c140.htm.
47. Notice by the Commission concerning the status of voice on the Internet under Directive 90/388/EEC, opt cit Ref. 42.
48. Notice by the Commission concerning the status of voice on the Internet under Directive 90/388/EEC, opt cit Ref. 42.
49. See Op cit Refs 28 and 1.