1. Terrence P. McGarty, Lisbon February 15, 2003 Peering, Transit, Interconnection: Access Regulation and Legislation Lisbon February 15, 2003

2. Terrence P. McGarty, Lisbon February 15, 2003 Telecom Market Structure

3. Terrence P. McGarty, Lisbon February 15, 2003 Interdependencies

4. Terrence P. McGarty, Lisbon February 15, 2003 Economy Single Player

5. Terrence P. McGarty, Lisbon February 15, 2003 Wireline Market

6. Terrence P. McGarty, Lisbon February 15, 2003 Wireless Market

7. Terrence P. McGarty, Lisbon February 15, 2003 Market Share

8. Terrence P. McGarty, Lisbon February 15, 2003 Wireless v Wireline

9. Terrence P. McGarty, Lisbon February 15, 2003 Growth

10. Terrence P. McGarty, Lisbon February 15, 2003 Internet

11. Terrence P. McGarty, Lisbon February 15, 2003 Verizon 1

12. Terrence P. McGarty, Lisbon February 15, 2003 Verizon 2

13. Terrence P. McGarty, Lisbon February 15, 2003 Verizon 3

14. Terrence P. McGarty, Lisbon February 15, 2003 Fiber Capacity McGarty, in a 1990 Harvard paper, stated: “Fiber has revolutionized the data networks in the United States. A single strand of fiber can transmit 10 12 bits per second of data. If we allocate each home, 100 million residences, with 100 Kbps of full time data, that is 10 13 bits per second if everyone in the US is talking simultaneously in this high speed data fashion. That is the capacity of just a single strand of fiber. A typical bundle of fiber has 25 to 50 strands and these are connected to other such bundles. The current fiber network is structured like past voice networks, and generally does not take advantage of the bandwidth of the fiber. Albeit the technology is not yet totally operationally capable, the world view of the system designers is one that is to use fiber as copper. Use it for one voice circuit after another.”

15. Terrence P. McGarty, Lisbon February 15, 2003 Reasons for Telecom Collapse 1. Overcapacity on backbone 2. Excess Debt 3. Excess Vendor Financing 4. Regulatory Confusion 5. Inexperienced Management 6. Pricing Suicide: 7. Monopolistic Practices: 7.1 Access and Interconnection Fees 7.2 Unbundled Network Elements (UNEs) 8. Litigation Excess: 8.1 Iowa Utilities Board v FCC et al, US 8 th Circuit Court, July 17, 1997 8.2 AT&T et al v Iowa Utilities Board, US Supreme Court, January 1999 8.3 Verizon et al v FCC, US Supreme Court May 13, 2002 8.4 US Telecom Association (USTA) v FCC, Bell Atlantic as Intervenor, US Court Appeals, District of Columbia, May 24, 2002 8.5 Trinko v Bell Atlantic, US Court of Appeals, 2 nd Circuit, June 2002

16. Terrence P. McGarty, Lisbon February 15, 2003 Access and Interconnection

17. Terrence P. McGarty, Lisbon February 15, 2003 Network and Service Interconnections Local Exchange Carrier Wireless Carrier IP Carrier CATV Network Meet Point

18. Terrence P. McGarty, Lisbon February 15, 2003 Interconnection

19. Terrence P. McGarty, Lisbon February 15, 2003 Service Provision Elements Element 1 Element 2 Element N-1 Element N Meet Point Meet Point Third Party Peer Networks Third Party Peer Networks

20. Terrence P. McGarty, Lisbon February 15, 2003 Interconnection Costs

21. Terrence P. McGarty, Lisbon February 15, 2003 Interconnection Costs Effects

22. Terrence P. McGarty, Lisbon February 15, 2003 Baulmol & Willig

23. Terrence P. McGarty, Lisbon February 15, 2003 Economic Models

24. Terrence P. McGarty, Lisbon February 15, 2003 Cost Functions

25. Terrence P. McGarty, Lisbon February 15, 2003 Cost Models

26. Terrence P. McGarty, Lisbon February 15, 2003 Cost Models

27. Terrence P. McGarty, Lisbon February 15, 2003 Expense Models

28. Terrence P. McGarty, Lisbon February 15, 2003 Scale Economies

29. Terrence P. McGarty, Lisbon February 15, 2003 Value and Monopoly Issues

30. Terrence P. McGarty, Lisbon February 15, 2003 Monopoly Rents >>

31. Terrence P. McGarty, Lisbon February 15, 2003 Cost Models Revenue Driver, R: The revenue drive may be as simple as the number of customers or the number of new customers. Clearly the customer service and billing functions are driven by the number of customers. The sales effort is driven by the number of new customers. The cell maintenance function is driven by the number of cell sites which in turn is driven by the number of customers. Productivity Factor, P: The productivity factor reflects how the operations reflects revenue drivers into human resources. For example in customer service it is in terms of the calls per customer per day, the holding time per call, the hours per day per customer service representative. This results in the number of customer service representatives per unit revenue driver. Unit Costs; U: The unit costs are the costs associated with the labor and other units of production used in the operations model. This then yields a cost for unit k as:

32. Terrence P. McGarty, Lisbon February 15, 2003 Microeconomic Factors

33. Terrence P. McGarty, Lisbon February 15, 2003 Cost Curves

34. Terrence P. McGarty, Lisbon February 15, 2003 Valuation

35. Terrence P. McGarty, Lisbon February 15, 2003 Scale & Scope SCALE: THERE ARE ESSENTIALLY NO SCALE ECONOMIES IN Telecom IF NEW TECHNOLOGY IS DEPLOYED.. SCOPE: SCOPE EXISTS IF AND ONLY IF THERE ARE NON- DISAGRATEABLE ELEMENTS. OUTSOURCING AND USE OF DISTRIBUTED DATA BASES REDUCES SCOPE. SCOPE EXISTS FOR LEC AS A BOTTLENECK ONLY IN TERMS OF LOCAL SWITCH ACCESS.

36. Terrence P. McGarty, Lisbon February 15, 2003 Access and Interconnect

37. Terrence P. McGarty, Lisbon February 15, 2003 Access Implications

38. Terrence P. McGarty, Lisbon February 15, 2003 Microeconomics: Monopoly v Competition

39. Terrence P. McGarty, Lisbon February 15, 2003 Competitive Technologies

40. Terrence P. McGarty, Lisbon February 15, 2003 Technology & Access Fees

41. Terrence P. McGarty, Lisbon February 15, 2003 Cross Payment

42. Terrence P. McGarty, Lisbon February 15, 2003 Subsidy versus Tax

43. Terrence P. McGarty, Lisbon February 15, 2003 European Internet

44. Terrence P. McGarty, Lisbon February 15, 2003 Central Europe

45. Terrence P. McGarty, Lisbon February 15, 2003 Local Carrier Local Carrier Local Carrier Local Carrier Local Carrier Local Carrier LD Carrier LD Carrier International Carrier International Carrier LD Carrier LD Carrier Local Carrier Local Carrier International Carrier International Carrier Local ISP Local ISP Backbone ISP Backbone ISP Local ISP Local ISP Backbone ISP Backbone ISP Tandem Switch Tandem Switch Gateway Switch Gateway Switch Gateway Switch Gateway Switch Tandem Switch Tandem Switch Settlement Agreement Now Defunct Settlement Agreement Now Defunct Tier 1 Peering Tier 1 Peering Transit NAP or Other Transit NAP or Other Transit NAP or Other Transit NAP or Other

46. Terrence P. McGarty, Lisbon February 15, 2003 Frankfurt Prague Warsaw New York ATM Switch DNS Server Router MAE East Genuity UUNet CZ Tel TPSA OTE

47. Terrence P. McGarty, Lisbon February 15, 2003 Global Interconnection Genuity UUNet AT&T C&W Genuity UUNet AT&T C&W ZNAP

48. Terrence P. McGarty, Lisbon February 15, 2003 Minimum Cost

49. Terrence P. McGarty, Lisbon February 15, 2003 Central Europe Growth

50. Terrence P. McGarty, Lisbon February 15, 2003 Central Europe Fees

51. Terrence P. McGarty, Lisbon February 15, 2003 Typical Network

52. Terrence P. McGarty, Lisbon February 15, 2003 NAP ATM Switch DNS Server Router Frankfurt Genuity UUNet

53. Terrence P. McGarty, Lisbon February 15, 2003 NIX ATM Switch DNS Server Router Prague ISP 2 ISP 1 ISP 3

54. Terrence P. McGarty, Lisbon February 15, 2003 Peering and Transit Peering is usually a bilateral business and technical arrangement, where two providers agree to accept traffic from one another, and from one another’s customers (and thus from their customers’ customers). Peering does not include the obligation to carry traffic to third parties. Transit is usually a bilateral business and technical arrangement, where one provider (the transit provider ) agrees to carry traffic to third parties on behalf of another provider or an end user (the customer ). In most cases, the transit provider carries traffic to and from its other customers, and to and from every destination on the Internet, as part of the transit arrangement. Peering thus offers a provider access only to a single provider’s customers; transit, by contrast, usually provides access at a defined price to the entire Internet. Peering is done on a bill- and- keep basis, without cash payments, where both parties perceive roughly equal exchange of value; however, there is often an element of barter.

55. Terrence P. McGarty, Lisbon February 15, 2003 Shared & Direct Peering A few shared global traffic exchange points. Smaller domestic shared traffic exchange points for regional concentration and exchange of traffic. Direct traffic exchange carries most Internet backbone traffic. Even though shared traffic exchange points are losing market share, their traffic is likely to continue to grow in absolute terms. Carrier hotels and fiber interconnects - an emerging trend that seeks to provide the best of both worlds. Whether shared or direct, the prevailing pattern is shortest exit routing - the sending provider hands off traffic at the point most convenient to the sender.

56. Terrence P. McGarty, Lisbon February 15, 2003 Shared & Direct Peering Direct Shared

57. Terrence P. McGarty, Lisbon February 15, 2003 Issues Driving Change Decline in “street price” of circuits within Europe due to deregulation. Declining cost of transoceanic capacity. Increased number and density of customers and content (and caching). Improved number and distribution of shared peering points. Deregulation of European telecoms, and recognition of the need to minimize regulatory barriers to Internet growth. New transit services terminated in Europe and elsewhere. Perception that U. S.- based backbones discriminate against overseas providers in interconnection policies. Dissatisfaction with allocation of transoceanic circuit costs, which often are fully carried by the non- U. S.- based provider.

58. Terrence P. McGarty, Lisbon February 15, 2003 UUNet Guidelines 1.Geographic Scope. The Requester shall operate facilities capable of terminating customer leased line IP connections onto a router in at least 50% of the geographic region in which the WorldCom Internet Network with which it desires to interconnect operates such facilities. This currently equates to 8 countries in Europe,. The Requester also must have a geographically- dispersed network. 2.Traffic Exchange Ratio. The ratio of the aggregate amount of traffic exchanged between the Requester and the WorldCom Internet Network with which it seeks to interconnect shall be roughly balanced and shall not exceed 1.5:1. 3.Backbone Capacity. The Requester shall have a fully redundant backbone network, in which the majority of its inter-hub trunking links shall have a capacity of at least 45 Mbps (DS-3) for interconnection with WorldCom-Europe, 4.Traffic Volume. The aggregate amount of traffic exchanged in each direction over all interconnection links between the Requester and the WorldCom Internet Network with which it desires to interconnect shall equal or exceed 30 Mbps of traffic for WorldCom-Europe, 5.Each Internet Network must operate a fully functional 24x7 Network Operations Center. Each Internet Network must operate a fully redundant network, capable of handling a simultaneous single-node outage in each network without significantly affecting the performance of the traffic being exchanged. 6.Each Internet Network must set next hop to be itself, the advertising router of the network. Each Internet Network will propagate such routes to its transit customers with its own router as next hop. Each Internet Network shall implement "shortest exit routing" and advertise routes consistent with that policy, unless both Internet Networks mutually agree otherwise based on special circumstances.

59. Terrence P. McGarty, Lisbon February 15, 2003 Comparisons

60. Terrence P. McGarty, Lisbon February 15, 2003 Game Theory in Telecommunications

61. Terrence P. McGarty, Lisbon February 15, 2003 Market Size

62. Terrence P. McGarty, Lisbon February 15, 2003 Price Dynamics

63. Terrence P. McGarty, Lisbon February 15, 2003 Cost Model

64. Terrence P. McGarty, Lisbon February 15, 2003 Time Analysis

65. Terrence P. McGarty, Lisbon February 15, 2003 Two Player Market

66. Terrence P. McGarty, Lisbon February 15, 2003 Dynamics

67. Terrence P. McGarty, Lisbon February 15, 2003 Optimal Solution

68. Terrence P. McGarty, Lisbon February 15, 2003 Access Fees Plus Excess UNE Costs

69. Terrence P. McGarty, Lisbon February 15, 2003 No Access and UNE at Market