Economic Issues and Market Dynamics
Ike Elliott
Senior Vice President, Global Softswitch
Services
Level 3 Communications
Ike.elliott@Level3.com
• Internet infrastructure costs much less per
bit than circuit switching infrastructure
• With IP Telephony, internet infrastructure
can also serve a nations telephony needs
• Internet telephony is a good investment
– Pay less for your telephone infrastructure, and
– Gain a multi-service data network, and
– Improve national competitiveness
Internet Infrastructure Costs Much Less Than
Circuit Infrastructure
0.008
• Internet bits are 1/8th the
price of circuit bits
• Cost of internet equipment
per bit is halved every 20
months
• Cost of circuit equipment
per bit is halved every 80
months
0.007
0.006
Retail
Price per
Megabit
$US
0.005
0.004
0.003
0.002
0.001
0
Circuit Internet
Switched
Assumptions: 3 cents per minute for a 64 Kpbs
long distance voice call, compared to $40 per
month for 600 Kbps DSL service, used 1
hour per day, 20 days per month
The Technology
Circuit switching was primarily designed for interactive,
two-party continuous voice communications
END
ACCESS
IXC
OFFICE TANDEM INGRESS
SWITCH SWITCH SWITCH
CALLING
PARTY
IXC
ACCESS
EGRESS TANDEM
SWITCH SWITCH
Single-session
Single-service
Communication
END
OFFICE
SWITCH
CALLED
PARTY
All traditional phones are connected directly to a circuit
switch. When you dial a phone, a dedicated, 64 kbps pipe is
set up between your phone and the called party’s phone.
The Technology
Packet switching was primarily designed for interactive,
multi-party, media-independent data communications
Router
Router
Internet Backbone
Router
Router
Simultaneous
Multi-session
Multi-service
Communication
Any party on a common backbone can instantaneously
communicate with any other party, using the medium of
choice, including email, video, audio, instant messaging, file
transfer, etc. Your access line into the network is not
dedicated for any single use, at any single point in time.
National Competitiveness and Economic Health
Depend Upon a Strong Internet Infrastructure
• European and Asian e-commerce
should reach $3.2 trillion by 2004.
2500
(1)
• Internet users could exceed the 1
billion mark by 2005, with 700
million of those located
outside North America. (2)
• The average internet economy
worker earns almost twice the
salary of a non-internet economy
worker (2)
2000
1500
1000
500
0
1998
2000
Growth in Internet Economy Jobs
(thousands)
Source: State of the Internet 2000 Report
(1) Source: Forrester
(2) Source: State of the Internet 2000 Report
Internet Infrastructure Costs Are Declining and
Increasingly Within the Reach Developing Nations
0.006
• Level 3 Communications
estimates IP Voice
Transport costs are
currently 25% lower than
circuit voice
• Switching and
transmission costs for IP
Telephony are
approximately 50% lower
than the costs for current
circuit switching. (Martin Weiss,
0.005
Circuit Voice
0.004
Voice
Transport
Cost per
minute
$US
0.003
IP Telephony
0.002
0.001
0
98
99
00
01
University of Pittsburgh, Sep 1998)
Source: Level 3 Communications Estimates, and
Morgan Stanley Dean Witter Report
02
03
04
05
Internet Telephony Infrastructure Enables
Competition
•
•
•
•
Circuit Switch customers have little
negotiating power
Softswitch IP Telephony places
innovation and negotiating power in
the hands of any software developer
Barrier to entry for softswitch vendors
is much lower than for traditional
circuit switch vendors
IP Telephony allows nations to
leverage the resource all nations have
in common -- our minds.
Committing to a national , multiservice internet infrastructure may
assist in keeping the valuable, but
limited pool of IT workers at home
Softswitch Consortium Membership,
Inception to Date
Number of Members
•
220
200
180
160
140
120
100
80
60
40
20
0
Membership
Jul-99 Jan-00 Jul-00
1-Jan
Source: International Softswitch Consortium
Telephony Settlement Income is Unreliable, Even Without
Internet Telephony Bypass
•
So long as there is a large gap
between the price of a service and
the underlying cost, there is
sufficient incentive for arbitrage,
regardless of available technology.
– International Callback
– IP Telephony
•
•
Despite reduction in accounting
rates, actual settlements income
grew from 1986 to 1996, due to
elasticity effects
Even so, settlements income has
proven to be an unstable income
source, as shown by recent declines
in settlement income
Net Settlement Payout Compared to with Settlement Rates
<Figure 32 here>
Source: FCC International Trends Report, 1999
Creation of a national internet infrastructure is an
excellent investment, even if it causes an erosion of
traditional telephony settlements-based income.
• Internet infrastructure brings:
– Improvements in national competitiveness
– Lower cost telephony infrastructure
– Additional Data Services
• Can not Depend upon accounting based settlements to provide
revenue for internet infrastructure
– An increasing volume of traffic will be routed outside the
accounting rate mechanism, with or without internet telephony.
– Long-term stable revenue solutions, such as data services enabled
by internet infrastructure, must be developed