International Protocol George Vinall April 1, 1998 Economics of Internet Telephony

International Protocol 2 GEORGE VINALL // Discussion Topics Diagrams of IT services Cost vs. Circuit Switching State of the Economics International Settlements Domestic Access Charges Regulation & Public Policy Logical Conclusions The Question Is Internet Telephony a legitimate new industry or a just a passing arbitrage opportunity built on the avoidance of international settlement payments and US access costs?

International Protocol 3 GEORGE VINALL // PC-to-Phone (Same Carrier) Cisco 7513 Router US Calling Party The Internet US ISP PTT Called Party Local Exchange Private Line / Frame Relay US Foreign Call Direction PTT National Network Terminating Gateway Foreign ISP

International Protocol 4 GEORGE VINALL // PC-Phone (Interconnection) CDR Collection & Rating Cisco 7513 Router Optical drive Originating ISP Network US Local Exchange Calling Party PTT National Network Called Party 3rd Party Terminating Gateway Optical drive The Internet

International Protocol 5 GEORGE VINALL // CDR Collection & Rating Class 4 IXC Switch LEC Access Network US Calling Party Network Management ITSP Originating Gateway ITSP Terminating Gateway PTT National Network Private Packet Network over International Private Lines Domestic Private Line Local Exchange Lines US Outside US In-Band CDR Collection In-Band Network Management Call Direction Phone-to-Phone Class 4 International Switch PTT Called Party

International Protocol 6 GEORGE VINALL // VON vs. PSTN Costs IssueVONPSTNAdvantage TransmissionTCP/IPMulitplex/DCSTie CompressionCodexMultiplexingTie Fill RatiosEthernetOverflowTie Edge DeviceGatewayPOP/FXPSTN ScalingServersPort CardsPSTN Call SwitchingRouterSwitchPSTN RedundacyBGP4SONETPSTN SignallingGatewaySS7PSTN FeaturesGatewayCLASSPSTN Public NetInternetDDDVON Private NetIntranetHierarchyPSTN Access Fees-None-FCCVON Intl. Settlement-None-ITUVON Foreign TransportTariff-None-PSTN

International Protocol 7 GEORGE VINALL // Arbitrage Avoidance of ITU/FCC international settlement payments to foreign carriers Avoidance of certain domestic access charges Use of “public” Internet backbones for traffic

International Protocol 8 GEORGE VINALL // Very Wishful Thinking Revenue (US$ in Millions) SOURCE: Frost & Sullivan (Mountain View, CA) Worldwide Forecast of IP Gateway & Software Sales

International Protocol 9 GEORGE VINALL // US Access Charges LEC C.O. LEC C.O. IXC POP IXC POP Long Haul Originating Access Terminating Access IXC Carriage 98% = I-LEC 2% = CAP 2% = CAP 99.8% = I-LEC.2% = CAP.2% = CAP AT&TWorldCom/MCISprintQwestIXCRegionals

International Protocol 10 GEORGE VINALL // US Access Charges LEC C.O. LEC C.O. IXC POP IXC POP Long Haul Originating Access Terminating Access IXC Carriage Year Total Pre / / 3 6 / / / / / / / / 2.5 AT&T/IXC

International Protocol 11 GEORGE VINALL // US Access Charges LEC C.O. LEC C.O. IXC POP IXC POP Long Haul Originating Access Terminating Access IXC Carriage 1998 Total IXC IXC IP Voice n/a 2.0* C-LEC.8* C-LEC.8* *.9.4* 1.7 * estimated cost I-LEC.4* I-LEC.4* Bell Atantic w/ Long Distance

International Protocol 12 GEORGE VINALL // ITU/FCC Settlement Policy Rich Country “A” Poor Country “B”

International Protocol 13 GEORGE VINALL // ITU/FCC Settlement Policy Rich Country “A” Poor Country “B” $ 1 $ 3 Accounting Rate =$ 2 Average of both countries costs becomes the Accounting Rate

International Protocol 14 GEORGE VINALL // ITU/FCC Settlement Policy Rich Country “A” Poor Country “B” $ 1 $ 3 Accounting Rate =$ 2 Half of the Accounting Rate becomes the Settlement Rate Settlement Rate =$ 1

International Protocol 15 GEORGE VINALL // ITU/FCC Settlement Policy Rich Country “A” Poor Country “B” $ 1 $ 3 Accounting Rate =$ 2 Settlement Rate =$ 1 100,000 Calls 30,000 Calls Traffic Ratio 3:1

International Protocol 16 GEORGE VINALL // ITU/FCC Settlement Policy Rich Country “A” Poor Country “B” $ 1 $ 3 Accounting Rate =$ 2 Settlement Rate =$ 1 100,000 Calls 30,000 Calls 100, ,000 70,000 $ 70,000 Traffic Ratio 3:1

International Protocol 17 GEORGE VINALL // Two Calls to Hong Kong Full Scale Traditional Telephony US Land-Side$.044 Intl Transmission$.026 Intl Settlement Cost$.202 Total Cost$.272 Consumer Rate$.65 Gross Margin$.378 Gross Margin58% Internet Telephony * US Land-Side$.075 Intl Transmission$.106 HK Termination Costs$.004 Total Cost$.185 Consumer Rate$.65 Gross Margin$.465 Gross Margin72% * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on HKTI local lines, 10 minute call. See Appendix II

International Protocol 18 GEORGE VINALL // Two Calls to Hong Kong Full Scale Traditional Telephony US Land-Side$.044 Intl Transmission$.026 Intl Settlement Cost$.202 Total Cost$.272 Consumer Rate$.65 Gross Margin$.378 Gross Margin58% Internet Telephony * US Land-Side$.075 Intl Transmission$.106 HK Termination Costs$.004 Total Cost$.185 Consumer Rate$.65 Gross Margin$.465 Gross Margin72% * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on HKTI local lines, 10 minute call. See Appendix II

International Protocol 19 GEORGE VINALL // Two Calls to Lucerne, Switzerland Full Scale Traditional Telephony US Land-Side$.044 Intl Transmission$.016 Intl Settlement Cost$.047 Total Cost$.107 Consumer Rate$.40 Gross Margin$.293 Gross Margin%73 % Internet Telephony * US Land-Side$.075 Intl Transmission$.069 Swiss Termination Cost$.276 Total Cost$.420 Consumer Rate$.40 Gross Margin($.02) Gross Margin%0 % * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on Swiss PTT, 10 minute call See Appendix III

International Protocol 20 GEORGE VINALL // Two Calls to Lucerne, Switzerland Full Scale Traditional Telephony US Land-Side$.044 Intl Transmission$.016 Intl Settlement Cost$.047 Total Cost$.107 Consumer Rate$.40 Gross Margin$.293 Gross Margin%73 % Internet Telephony * US Land-Side$.075 Intl Transmission$.069 Swiss Termination Cost$.276 Total Cost$.420 Consumer Rate$.40 Gross Margin($.02) Gross Margin%0 % * Phone-to-Phone IT call from any US locations with T1/E1 gateway 35% fill factor, day rate, termination on Swiss PTT, 10 minute call See Appendix III

International Protocol 21 GEORGE VINALL // Clever Pricing Formats Good News: –Real rates are mixed, some higher than IDDD –IT from US Gateways just resold IDDD bought at carrier rates –Hybrid IT, resale per route –Postalized international pricing (with sever restrictions) Bad News: –Change customer behavior –PC - to - PC captures low-end –Phone-to-Phone facilities costs are higher –Phone-to-Phone pricing requires scale, terminating facilities

International Protocol 22 GEORGE VINALL // State of the Regulations History of Computer III Is Phone-to-Phone exempt? IVANs General US policy –FCC, White House, Congress General International policy –ITU, WTO Accord Reciprocal Compensation for CLECs

International Protocol 23 GEORGE VINALL // Logical Conclusions Internet technology is a not an immediate treat to “carrier” grade service Cost savings is solely based on avoidance of US domestic access fees and international settlement payments PC-to-PC best cost service, but relies on spotty quality of the public Internet Inherent efficiencies require scale, technological development, bandwidth management tools If traffic grows, regulators will start changing rules, charging IT carriers The Bottom Line Internet Telephone both benefits from and suffers from a similar cost/service structure as line-side dialing (Feature Group “A”) telephone service did between

International Protocol 24 GEORGE VINALL // International Protocol, LLC Questions ?

Appendix II US-HK Costs

Appendix III US-Swiss