From NTS review to unmetered calls: an Internet company’s perspective Simon Hampton European Public Affairs Director AOL Europe

Overview  Regulating in “Internet time”  The need for unmetered calls  Customer demand  Targeting call origination  BT’s offer

NTS review  A dispute over share of high call prices...  …became liberalisation of call termination  Focused attention on call origination  Prof. Cave:

Regulating in Internet time “although interconnection payments are generally time based … OFTEL does not mandate that charges should be time based.” OFTEL Memo to T&I Cttee, 6/99 “we recommend that OFTEL investigates what, if any, regulatory actions are required to encourage innovative tariff packages being offered to internet users” Commons Trade & Industry Cttee, 7/99 “Recommendation 9.2: telecommunications operators should be encouraged to explore new commercial interconnect arrangements with BT, allowing more flexible retail tariffs. 9/99

Regulating in Internet time “It’s wrong to say that Oftel is standing in the way of unmetered access. We want to see lower prices and more choice... BT could introduce an unmetered tariff right now if it wanted to.” David Edmonds, Director-General, Oftel, November 1999

Per-minute metered calls are the problem Online penetration compared to off-peak telephone charges Source: OECD / Andersen Consulting 1999

“Europe has a usage problem... Metered charges, not total cost, is the culprit.” Analysts say... Jupiter Communications “The cost of Internet access and usage remains a barrier… Call charges are still prohibitive.” Andersen Consulting

The media say... Scan of Times leader column

Consumer demand  AOL 0800 test  Better take up -Secondary market for the disks!  Better retention Source AOL Europe

Targeting call origination  Call set-up  Time of day  Allocation of common costs  Capacity based charging  Get these right and the market will do the rest  Existing massive OLO and ISP competition  Consumers will have more choice  Mandating unmetered price would threaten so- called “free ISPs”

Call set-up  Set-up costs  Processors  Billing  Attribution to per-minute charges  minute call  Possible saving for 1 hour call of 20%  Wholesale set-up: in some member states already  Retail set-up: Nordic region

Time of day

Ramsey pricing  Efficient attribution of common costs  Proportionately less for those customers with the greater elasticity  Internet use elasticity probably higher than for voice -Solitary/group activity -Freeserve growth  Helps promote Internet use  Externality of growing user base  Allowed under competition rules

Capacity based charging  Discussed a few years ago but rejected for voice telephony  Inherently not charged per second  The way to unmetered Internet access?  “In an ideal situation … capacity based charging would be the most efficient interconnect pricing rule.” (European Commission Recommendation 1997)

New BT price  A first “capacity based price”?  Offer a “circuit” to ISP, 8 hours per day for £140 per month for a suggested 14 users per line  “might include unlimited dial-up to the Internet for a single monthly fee”  Unlimited access as long as you limit yourself to 34 minutes per day!  Admitted primarily meets business needs during the day  Bundled with backhaul  Risks all on ISP  Buy too little, pay extra  Buy too much, paid extra  Disrespect traffic profile, pay extra

A bundle of hours?  Corresponds to 0.97p per minute for the ISP (subsequent per minute charge = 0.99p)  More expensive than bundles of hours for the consumer:  France: 20 hours for 100 FF  Spain: 10 hours for 850 Ptas  Ireland: 100 hours for IR£ 20  AOL already 1p / minute for members

Backbone competition  By product of ADSL roll-out  BT monopoly as ULL postponed until July 2001  Harder for alternative operators to recoup the investments from narrowband alone  With only BT modems installed, may have implications for advanced services  Only phased roll-out, yet lower prices already in the market  Where is the wholesale offer for OLOs?  An IP interconnect regime

Conclusions  Public interest reflects consumer demand and clear economic need. E-commerce is being held back  NTS review liberalised termination - call origination costs for the Internet must and can be addressed immediately  BT: closer to the right concept, far from the right price  Must preserve backbone competition