The end of core:
Should disruptive innovation in telecom invoke
discontinuous regulatory response?
Chintan Vaishnav, ESD, MIT
chintanv@mit.edu
May 31, 2007
Philadelphia, PA
© Chintan Vaishnav, All Rights Reserved
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
VoIP bridges PSTN and the Internet! Should we care?
The PSTN Circuit-Switched
Telephony
Switch
END-DEVICES
CORE
Switch
VoIP -- Packet-Switched
Communication
Regulated
Unregulated
Router
Router
Router
Router
The broad regulatory question: Should VoIP be regulated like the PSTN,
unregulated like the Internet or should there be a third approach?
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
2
Modes of VoIP
Mode
Service Example
Regulatory Term
Phone-to-Phone
VoCable, VoDSL,
Vonage, 8x8
“interconnected” service
(i.e. PSTN interconnection)
PC-to-Phone
SkypeOut,Net2Phone
“interconnected” service
PC-to-PC
Skype, Yahoo, IM,
Google Chat
“unmanaged” service
(i.e. no PSTN
interconnection)
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
3
Regulatory Response PSTN vs. VoIP
US Telecom Regulation
Paradigm
Social
Regulation
Economic
Regulation
Traditional
Regulation
Objective
911/E911
Public Safety
Wiretapping
(CALEA)
Law
Enforcement
Capability
Disability
Access
Equal
Opportunity
Universal
Service
Economic
Development
Access
Charges
Competition
PSTN
PhonetoPhone
VoIP
PC-toPhone
VoIP
PC-toPC VoIP
“Light Touch” Regulation: Traditional 911/E911 and CALEA regulation
extended only to “interconnected” VoIP services
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
4
Why is this Interesting?
Public Safety and Law Enforcement are perceived to be more
relevant today then ever before…
Question:
Is 911/E911 and CALEA regulation of “interconnected” VoIP
service…
- adequate and sustainable?
- mindful of technical and human complexities?
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
5
Observation and Hypothesis
Observation:
Telecommunications regulation assumed a network core that…
- could be engineered to fulfill regulatory objectives
- was controlled by an industry structure that could do the engineering
Argument:
Disruptive trends such as VoIP erode assumed control in the core
Hypothesis:
With eroding control in the core meeting regulatory objectives will
increasingly require discontinuous regulatory responses
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
6
Observing and Conceptualizing The End of Core
Functions of a typical voice call
1
Setup & terminate the call (call signaling)
3
Secure the channel
2
Voice transport (bit transport)
4
Maintain user privacy
5
Billing for
voice service
Communications Value Chain
EQUIPMENT
PROVIDER
PSTN
e.g. Lucent
ACCESS
PROVIDER
VoIP
APPLICATION
PROVIDER
e.g.AT&T, MCI, Sprint
(Circuit-switching)
1
e.g. Cisco
SERVICE
PROVIDER
e.g. municipal
broadband
2
3
4
Core
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
e.g. Uniden
5
e.g. earth link
(Pkt-switching)
2
END-DEVICE
PROVIDER
e.g.SkypeOut,
User-innovator
1
5
e.g. Dell, Palm,
User-innovator
3
4
End
Device
7
The End of Core
Functionality is Dispersing to End-Device
+
The Ownership of the Core is Fragmenting
=
The End of Core
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
8
The implications of the End of Core for Regulation
The End of Core can cause…
Regulatory misalignment (Static Complexity):
Between those who must meet the regulatory requirements versus those
who control the functionality necessary to meet them
Regulatory Misalignment can cause…
• Inefficiency in achieving regulatory compliance
• Regulatory capture by new players
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
may require…
Discontinuing access-centric regulatory
thinking…and understanding the
complexity of the value chain
9
The implications of the End of Core for Regulation
The End of Core can also cause…
Circum-innovation (Dynamic Complexity):
By user-innovators (a customer with the necessary knowledge to
innovate) who can introduce innovations that might, intentionally or
otherwise, circumvent regulatory objectives
Circum-innovation can cause…
• arms race between proponents of compliance
and non-compliance
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
may require…
Discontinuing command-and-control
regulatory thinking…and understanding
a collaborative model of regulation
10
Research Method
System Dynamics Model
• Refine the Causal Structure
• Construct Validity using real-world data
• Analysis
Field Research
• Internal Validity of the Model Causal Structure
• Understanding Circum-Innovation
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
11
Causal Structure of the System Dynamics Model
Desired
Regulatory
Compliance
# - quantitative data
#
#
Functionality
Dispersion to
End-Devices
Ownership
Fragmentation of
the Core
Compliance Gap
B1
-
+
-
+
Regulatory
Misalignment
#
- Field Research
+
+
Regulation
Current Regulatory
Rationale
Deployment of
Compliant
Technology
#
Actual Regulatory
Compliance
+
+
Circum-innovation
Fraction
+
+
#
+
Cost of
Compliance
-
innovation for
R1
+
compliance cost
B2
reduction
Loss of Compliance through
Disincentive for
"Interconnected" Service
Compliance Cost
Reduction
-
R3
"Interconnected"
VoIP Adoption
Attractiveness of
"Interconnected"
VoIP
+
Firms entering
"interconnected"
VoIP market
#
R2
Loss of Compliance through
Incentive for "Unmanaged" Service
+
Firms entering
Attractiveness of
+
"Unmanaged"
"Unmanaged" VoIP
VoIP market
#
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
#
Circum-inn
ovation
Loss of Compliance +
through
Circum-Innovation
"Unmanaged"
VoIP Adoption
+
+
Innovation in
VoIP
+
+
<Functionality
Dispersion to
End-Devices>
12
Summary of Field Research
Field Study 1
Involving: Firms offering “interconnected” and “unmanaged” VoIP service
Investigate:
1. How and why does the regulatory misalignment affect the deployment
of compliant technology?
2. How and why does the compliance cost affect the choice of
technology to develop?
Field Study 2
Involving: Circum-innovations affecting 911/E911 and CALEA Compliance
Investigate:
1. How and why circum-innovations impact the regulatory compliance?
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
13
Description of Data Collection
Quantitative data from FCC, industry reports and trade magazines
Theoretical Construct
Proxy
Type
Functionality Dispersion
% Voice Traffic that is
PC-to-Phone + PC-to-PC
VoIP
Time Series
Ownership Fragmentation
Market share of PC-toPhone + PC-to-PC VoIP
Time Series
Desired Regulatory
Compliance
Number of
“interconnected” VoIP
Firms
Time Series
Actual Regulatory Compliance
Number of 911 and
CALEA compliant
“interconnected” Firms
Quant.
Level of Compliant VoIP Use
% Voice Traffic that is
“interconnected” VoIP
Time Series
Innovation Rate
TBD
Time Series
Compliance Cost
Average Cost of a PSTN
Wiretap
Quant.
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
14
Desired Contribution
ESD / Telecom Policy
1. Explaining dynamic complexity involved in the regulation of VoIP
2. Increasing the ability to communicate risks and opportunities in regulating
the emerging communications technologies from the perspective of
socio-technical systems
Innovation Theory Literature
3. A framing paper on the dynamics of regulation and innovation
Internet Architecture Literature
4. Extending the “tussle in cyberspace” work by one step with a paper on
“tussle for surveillance and its impact on the Internet architecture”
System Dynamics Literature
5. A comprehensive paper on the system dynamics modeling of the
communications industry
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
15
Thank You!
The end of core:
Should disruptive innovation in telecom invoke
discontinuous regulatory response?
Chintan Vaishnav, ESD, MIT
chintanv@mit.edu
Committee:
Prof. Charles Fine (Chair)
Dr. David Clark
Prof. John Sterman
© Chintan Vaishnav, All Rights Reserved
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
System Dynamics Model
Innovation Sector
VoIP Firms
Circum-innovation
Fraction
Innovators in Firm
+
Number of VoIP
Innovators
+
VoIP Users
User-Innovators
+
+
<Price of
Interconnected
VoIP>
+
Attractiveness of
Unmanaged Service
+
+
Price of
Unmanaged VoIP
+
Innovation Rate
Circum-innovaiton
+ Origination Rate
+
Circum-Innovation
Adoption
+
-
Ind. Struct.
Sector
Demand for
Unmanaged VoIP
+
Adoption
Sector +
Unmanaged
Market Entry
+
Unmanaged
VoIP Firms
Adoption
Probability
Unmanaged
Market Exit
Regulatory Compliance Sector
PSTN-Unmanaged
Migration
Unmanaged
VoIP Users
+
+
Actual
Regulatory
Compliance
Compliance Cost
-
PSTN Users
Available
Circum-Inn
ovations
Compliance
Deployment Rate
+
Time to
Compliance
Deploy
Gap
+
+
+
UnmanagedInterconnected Level of Use of
Migration
Compliant VoIP
InterconnectedUnmanaged
Migration
+
+
Interconnected
VoIP Users
Fragmenting
Ownership
Dispersing
Functionality
PSTN-Interconnected
Migration
+
Desired
Regulatory
Compliance
+
Attractiveness of
Interconnected
Service
+
+
-
Demand for
Interconnected
VoIP
Price of
<Price of
Interconnected
VoIP
Unmanaged
VoIP>
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
+
Compliance
Obsolescense Rate
+
Obsolescense
Severity
Ind. Struct.
Sector
Interconnected
VoIP Firms
Interconnected
Interconnected
Market Exit
Market Entry
17
References
VoIP
1. Goode, B. (2002). "Voice over Internet protocol (VoIP)." Proceedings of the IEEE 90(9): 1495-1517.
Technology History
2. Fagen, M. D., A. E. Joel, et al. (1975). A History of engineering and science in the Bell System. [New York], The
Laboratories.
3. Temin, P. and L. Galambos (1987). The fall of the Bell system : a study in prices and politics. Cambridge ; New York,
Cambridge University Press.
4. Abbate, J. (1999). Inventing the Internet. Cambridge, Mass, MIT Press.
Telecommunications Regulation (PSTN and VoIP)
5. (1934). Communications Act of 1934. 47. U.S.C.
6. (1994). Communications Assistance for Law Enforcement Act. 47. U.S.C.
7. (1996). Telecommunications Act of 1996. 47. U.S.C.
8. (2004). Notice of Proposed Rulemaking: Communications Assistance for Law Enforcement Act and Broadband
Access and Services. WC Docket No. 04-295.
9. (2004). Notice of Proposed Rulemaking: IP Enabled Services. WC Docket No. 04-36.
10. (2005). E911 Requirement for IP-Enabled Service Providers. WC Docket No. 05-196.
11. Nuechterlein, J. E. and P. J. Weiser (2005). Digital crossroads : American telecommunications policy in the Internet
age. Cambridge, Mass., MIT Press.
12. Laffont, J.-J. and J. Tirole (2000). Competition in telecommunications. Cambridge, Mass., MIT Press.
The End of Core (Internet Architecture and Industry Structure)
13. Clark, D. D. (1988). "The design philosophy of the DARPA Internet Protocols." SIGCOMM Comput. Commun. Rev.
25(1): 102-111.
14. Saltzer, J. H., D. P. Reed, et al. (1984). "End-to-end arguments in system design." ACM Trans. Comput. Syst. 2(4):
277-288.
15. Blumenthal, M. S. and D. D. Clark (2001). "Rethinking the design of the Internet: the end-to-end arguments vs. the
brave new world." ACM Trans. Inter. Tech. 1(1): 70-109.
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
18
References (Contd.)
16. Clark, D. D., J. Wroclawski, et al. (2002). Tussle in cyberspace: defining tomorrow's Internet. Proceedings of the 2002
conference on Applications, technologies, architectures, and protocols for computer communications. Pittsburgh,
Pennsylvania, USA, ACM Press: 347-356.
17. Clark, D. D., W. Lehr, et al. (2005). The Growth of Internet Overlay Networks: Implications for Architecture, Industry
Structure and Policy. Technology Policy Research Conference, Arlington, VA.
18. Vaishnav, C. (2005). Voice over Internet Protocol (VoIP): The Dynamics of Technology and Regulation. Technology
and Policy Program. Cambridge, Massachusetts Institute of Technology: 166.
19. Vaishnav, C. and C. H. Fine (2006). A dynamic assessment of VoIP innovation, adoption and their interaction with
CALEA regulation. Technology Policy Research Conference, Arlington, VA.
Innovation
20. Utterback, J. M. and W. J. Abernathy (1975). "Dynamic Model of Process and Product Innovation." OmegaInternational Journal of Management Science 3(6): 639-656.
21. Abernathy, W. J. and J. M. Utterback (1978). "Patterns of Industrial Innovation." Technology Review 80(7): 40-47.
22. Dosi, G. (1982). "Technological Paradigms and Technological Trajectories - a Suggested Interpretation of the
Determinants and Directions of Technical Change." Research Policy 11(3): 147-162.
23. Anderson, P. and M. L. Tushman (1990). "Technological Discontinuities and Dominant Designs - a Cyclical Model of
Technological-Change." Administrative Science Quarterly 35(4): 604-633.
24. Henderson, R. M. and K. B. Clark (1990). "Architectural Innovation - the Reconfiguration of Existing Product
Technologies and the Failure of Established Firms." Administrative Science Quarterly 35(1): 9-30.
25. Christensen, C. M. and R. S. Rosenbloom (1995). "Explaining the Attackers Advantage - Technological Paradigms,
Organizational Dynamics, and the Value Network." Research Policy 24(2): 233-257.
Research Methods
26. Sterman, J. (2000). Business dynamics : systems thinking and modeling for a complex world. Boston, Irwin/McGrawHill.
27. Fine, C. H. (1998). Clockspeed : winning industry control in the age of temporary advantage. Reading, Mass.,
Perseus Books.
28. Nelson, R. R. and S. G. Winter (1982). An evolutionary theory of economic change. Cambridge, Mass., Belknap Press
of Harvard University Press.
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
19
Description of Data Collection
Theoretical Construct
Proxy
Data (Unit)
Type
Source
Functionality Dispersion
% Voice Traffic that is
PC-to-Phone + PC-toPC VoIP
• Number of PC-to-Phone Users (Users)
• Number of PC-to-PC Users (Users)
• Number of Phone-to-Phone Users (Users)
• Number of PSTN Users (Users)
• Average PSTN MOU (MOU/Month)
• Average PC-to-PC MOU (MOU/Month)
Time
Series
• Industry Report (triangulation)
• Industry Report (triangulation)
• FCC
• FCC
• FCC
• Industry Report (triangulation)
Ownership Fragmentation
Market share of PC-toPhone + PC-to-PC
VoIP
• Price of PC-to-Phone Service ($/Min)
• Price of PC-to-PC Service ($/Min)
• Price of Phone-to-Phone Service ($/Min)
• Price of PSTN Service ($/Min)
Time
Series
• Industry Report (triangulation)
• Industry Report (triangulation)
• FCC
• FCC
Desired Regulatory
Compliance
Number of
“interconnected” VoIP
Firms
• Number of Phone-to-Phone Firms (Firms)
• Number of PC-to-Phone Firms (Firms)
Time
Series
• Industry Report (triangulation)
+ FCC
Actual Regulatory
Compliance
Number of 911 and
CALEA compliant
“interconnected” Firms
• FCC CALEA Compliance Filings (Firms)
• FCC 911/E911 Compliance Filings (Firms)
• % Authorized Wiretaps Successful (%)
Quant.
• FCC
• FCC
• US Courts
Level of Compliant VoIP
Use
% Voice Traffic that is
“interconnected” VoIP
• Number of PC-to-Phone Users (Users)
• Number of Phone-to-Phone Users (Users)
• Average PSTN MOU (MOU/Month)
Time
Series
• Industry Report (triangulation)
• FCC
• FCC
Innovation Rate
TBD
• VoIP Patents
• VoIP Product Announcements
Time
Series
• USPTO
• Trade Magazines
Compliance Cost
Average Cost of a
PSTN Wiretap
• Average of Cost per Wiretap Order
($/Order)
Quant.
• US Courts
Qualitative Understanding from Case Studies
Compliance Cost
Effect of Regulatory Misalignment on Deployment of Compliant Technology
Effect of Compliance Cost Technology Choice
Effect of Circum-innovation on Compliance
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
20
System Dynamics Model
Innovation Sector
VoIP Firms
Circum-innovation
Fraction
Innovators in Firm
+
Number of VoIP
Innovators
+
VoIP Users
User-Innovators
+
+
<Price of
Interconnected
VoIP>
+
Attractiveness of
Unmanaged Service
+
+
Price of
Unmanaged VoIP
+
Innovation Rate
Circum-innovaiton
+ Origination Rate
+
Circum-Innovation
Adoption
+
-
Ind. Struct.
Sector
Demand for
Unmanaged VoIP
+
Adoption
Sector +
Unmanaged
Market Entry
+
Unmanaged
VoIP Firms
Adoption
Probability
Unmanaged
Market Exit
Regulatory Compliance Sector
PSTN-Unmanaged
Migration
Unmanaged
VoIP Users
+
+
Actual
Regulatory
Compliance
Compliance Cost
-
PSTN Users
Available
Circum-Inn
ovations
Compliance
Deployment Rate
+
Time to
Compliance
Deploy
Gap
+
+
+
UnmanagedInterconnected Level of Use of
Migration
Compliant VoIP
InterconnectedUnmanaged
Migration
+
+
Interconnected
VoIP Users
Fragmenting
Ownership
Dispersing
Functionality
PSTN-Interconnected
Migration
+
Desired
Regulatory
Compliance
+
Attractiveness of
Interconnected
Service
+
+
-
Demand for
Interconnected
VoIP
Price of
<Price of
Interconnected
VoIP
Unmanaged
VoIP>
© 2007 Chintan Vaishnav, Engineering Systems Division, Massachusetts Institute of Technology
+
Compliance
Obsolescense Rate
+
Obsolescense
Severity
Ind. Struct.
Sector
Interconnected
VoIP Firms
Interconnected
Interconnected
Market Exit
Market Entry
21