INTERNATIONALTELECOMMUNICATIONUNION World TelecommunicationPolicy Forum (WTPF 2001) 31 January 2001Final report GENEVA — 7 – 9 MARCH 2001 Report of the Secretary-General on IP Telephony PREAMBLE i) The ITU World Telecommunication Policy Forum (WTPF) was established by Resolution 2 of the 1994 Kyoto Plenipotentiary Conference and was confirmed by Resolution 2 of the 1998 Minneapolis Plenipotentiary Conference. The purpose is to provide a forum where ITU Member States and Sector Members can discuss and exchange views and information on emerging telecommunication policy and regulatory matters arising from the changing telecommunication environment. Although the WTPF shall not produce prescriptive regulatory outcomes or outputs with binding force, it shall prepare reports and, where appropriate, opinions for consideration by Member States, Sector Members and relevant ITU meetings.ii) By Decision 498 (attached as Annex A), the 2000 session of the ITU Council decided to convene the third World Telecommunication Policy Forum (WTPF-01) in Geneva, from 7 to 9 March 2001, in order to discuss and exchange views on the theme of Internet Protocol (IP) Telephony, with the following agenda:the general implications of IP Telephony for the ITU membership with respect to: (a) the telecommunications policies and regulations of ITU Member States; (b) the implications of IP Telephony for developing countries, particularly with respect to policies and regulatory frameworks, as well as technical and economic aspects; (c) the impact of IP Telephony on the operations of Sector Members, notably in terms of the financial challenges and commercial opportunities it presents;actions to assist Member States and Sector Members in adapting to the changes in the telecommunication environment due to the emergence of IP Telephony, including analysing the current situation (e.g., by case studies) and formulating possible cooperative actions involving ITU Member States and Sector Members to facilitate adaptation to the new environment;actions to assist Member States and Sector Members in meeting the human resource development challenges presented by new telecommunication technologies such as IP Telephony, in particular, skills shortages and the need for education, and technology transfer.iii) In accordance with Decision 498 of the Council, and in keeping with past practice, discussions at WTPF-01 shall be based on a report from the Secretary-General, incorporating the contributions of ITU Member States and Sector Members, which will serve as the sole working document of the Forum, and which shall focus on key issues on which it would be desirable to reach conclusions. iv) Pursuant to the Council's Decision, the arrangements for the third Forum were similar to those for the first two. To give the Membership as much opportunity as possible for contributing to the preparations for this important event, and pursuant to Decision 498 of the Council, the Report of the Secretary-General was prepared according to the following timetable: 1 November 2000: the first draft was circulated with an invitation to comment, drawn up on the basis of available material (notably, the Strategic Planning Workshop on IP Telephony1); 1 December 2000: deadline for receipt of membership comments on the first draft; 15 December 2000: the second draft was circulated, incorporating comments received and with an invitation for further comments; 10 January 2001: deadline for receipt of membership comments on the second draft.The ^ Final Report was circulated at the end of January 2001. Written comments from the ITU membership, as well as comments from other entities, have been posted on the website for the Forum at http://www.itu.int/wtpf/.v) Council Decision 498 also required that the Secretary General convene a balanced, informal group of experts (IEG)—who were active in preparing for the Forum in their own country—to assist in the successive stages of the preparatory process. This group met twice during the consultation process, in November 2000 and January 2001. Invitations to participate in the IEG were sent out by the Secretary-General to those who contributed to the consultation process plus others who could make significant contributions and could assist in achieving the desired balance.vi) This final report has been revised to incorporate the views expressed by the Membership in written comments. In addition, this draft reflects the discussions that took place in the IEG. The report contains three draft opinions that were drafted by members of the IEG. The Report is designed as well to address the issues raised in Council Decision 498. Annex B contains tables and information on the regulatory status of IP Telephony in some ITU Member States.vii) In addition to this Report, other background information relating to WTPF-01, as well as the case studies which have been commissioned and materials on the general topic of IP Telephony, are being posted on the ITU website, also at: http://www.itu.int/wtpf/. They will also appear on the CD-ROM prepared for the Information Session of the Forum, to be held on 6 March 2001.* * * * * *1. SUMMARY 1.1 The increasing use of Internet Protocol (IP) networks for communication services, including applications such as telephony, has become a pivotal issue for the telecommunications industry worldwide. The possibility of transmitting voice over IP-based networks, with all its challenges and associated opportunities, such as voice and data integration, constitutes a milestone in the convergence of the communications sector. It also reflects a convergence between two network types that have emerged under very different policy and regulatory circumstances: the Public Switched Telephone Network (PSTN)2, based largely on circuit-switched technology, which has been fairly extensively regulated by most countries (until recently);the Internet, which is based on packet-switched technology, and which has evolved as a data network subject to few, if any, controls.Working definitions1.2 The term “IP Telephony” can mean different things to an engineer or policy-maker and there is no consensus at this point on its exact definition. However, for purposes of discussion, it is necessary to provide some delineation of the various forms that IP Telephony can take. Accordingly, as a working definition and for the purposes of this Report, “IP Telephony” is used as a generic term for the conveyance of voice, fax and related services, partially or wholly over packet-switched IP-based networks. IP Telephony may also include applications that integrate/embed the transmission of voice and fax with other media such as text and images. In this report, the term IP Telephony used interchangeably with VoIP (Voice over Internet Protocol). A third term, Internet Telephony, is also used in the report when referring to IP Telephony or VOIP conveyed partially or wholly over the Internet.^ Growth of IP Telephony1.3 One key issue that has gained the attention of policy-makers, regulators, and industry alike is the fact that the Internet, and other IP-based networks, are increasingly being used in combination with and as alternatives to, circuit-switched telephone networks. To some extent they are becoming the technology of choice as new infrastructure is deployed.1.4 Several major international Public Telecommunication Operators (PTOs) have announced that they will migrate all their international traffic onto IP platforms and have committed substantial investment sums to make that transition. One reason for this transition is the apparently lower cost of moving traffic over IP-based networks; one company estimates that this technology will allow it to carry traffic at a quarter of the cost of doing so over a conventional, circuit-switched network. Liberalization of markets is also contributing to this migration to IP-based networks. As of late 2000, more than three-quarters of all international traffic originated in countries in which the provision of IP Telephony is liberalised. Furthermore, the majority of IP Telephony now travels over managed IP-based networks, as opposed to the Internet.1.5 While there are a range of views as to the pace at which IP Telephony will grow in the coming years, it is commonly believed that it will increase fairly rapidly. IP Telephony is already believed to account for more than 3 per cent of international voice traffic. Worldwide, the volume of traffic on IP-based and data networks already exceeds the volume of voice traffic that travels over the PSTN. Consequently, few countries can ignore IP Telephony. 1.6 The growth of IP-based networks around the globe has profound and broad implications for societies, including consumers, industry, and national administrations. In part, this is because telecommunications infrastructure is increasingly being viewed as a fundamental element of national competitiveness in the age of the Information Society. Improvements to communications networks may serve as a dynamic stimulus to economic growth. In competitive markets, established PTOs are evolving their networks towards IP not necessarily to provide cheaper voice services (competition has already forced down prices of traditional circuit switched services) but to offer a much wider and diverse range of multimedia services and innovative applications and particularly to be able to compete effectively in future e-commerce markets.1.7 IP Telephony is an important part of this picture. For consumers, Internet Telephony offers potentially much cheaper long-distance and international telephone calls compared with the alternative of using a circuit-switched, fixed-line or mobile network. These cost savings may, at least partially, offset any possible loss of quality. IP Telephony also offers consumers advanced services, integrating voice and data, such as merged World Wide Web and voice services (e.g., “click-to-talk”) or integrated messaging. Adding voice to traffic on IP-based networks further raises issues of substitution for circuit-switched services and strategies for network transition.^ Policy approaches to IP Telephony1.8 Notwithstanding the growth of the Internet, most analysts expect the PSTN to remain robust for the foreseeable future. An important issue for policy-makers will be the co existence of the two network technologies and, increasingly, combinations of the two. For PTOs, the potential financial implications of IP Telephony are complex to calculate. That is because incumbent PTOs have existing revenue streams and technologies that may be adversely affected if customers shift to other services, or other companies, that offer lower-priced IP Telephony. However, such concerns may be viewed in the context of national policy objectives designed to improve the performance, cost and range of services offered by telecommunication networks.1.9 As IP networks become more widespread, policy-makers also face a challenge in determining whether the regulatory frameworks they have in place, and which were developed initially for circuit-based networks, are relevant and appropriate for IP-based networks given the technological and other differences between IP-based and circuit-based networks. The regulatory approach to IP Telephony varies significantly among ITU Member States and reflects the different interests involved. In some countries, governments have defined IP Telephony services in such a way as to permit the delivery of this service to the public, despite the existence of market exclusivity of the incumbent over basic voice telephony. In others, the service is prohibited, while in others it is licensed and promoted. In some countries, IP is treated as just another technology that can be adopted by PTOs, or is not regulated at all.1.10 Given that IP Telephony calls have, up to now, been mainly carried outside of the PSTN—and hence outside the regulatory and financial structures which have grown up around the PSTN—it is the view of some that, for incumbent PTOs in developing countries, IP Telephony may undermine not only their current revenue streams but also existing universal service programmes aimed at extending networks and services in unserved or underserved areas. In other countries, IP Telephony, and particularly the roll-out of IP networks, is viewed as a means to offer and encourage new and cheaper services, and thus to exert downward pressure on the price of telephone calls.1.11 This Report seeks to provide background for the key issues that are posed by IP Telephony. Section 2 of the Report looks at technical and operational aspects of IP Telephony. Section 3 deals with the economic aspects of IP Telephony and its impact on Member States and Sector Members. Section 4 discusses the different policy and regulatory approaches that Member States have taken to IP Telephony, and its significance for universal service schemes and convergence. Section 5 examines the relationship between IP Telephony and Human Resource Development and also discusses the particular concerns of developing countries.* * * * * * * * 2. Technical and Operational aspectsof IP networksIntroduction2.1 A fundamental paradigm shift has been underway in the telecommunications industry—a shift that has arguably brought about as dramatic a change in personal communications as the telephone did compared to the telegram. That change is a shift from traditional PSTN circuit-switched voice networks to packet-switched data networks, using Internet Protocol (IP) technology. This Section discusses the technical and operational aspects of IP Telephony. Since transmitting voice over IP networks is just one of many possible IP-based applications, the discussion is framed within the broader context of IP networking technologies.2.2 The PSTN was developed and extended globally with one prime service in mind, public voice telephony. The basic network features of the PSTN (circuit-switching and real-time transmission) are particularly suited to this application. The PSTN supplies voice telephony (voice-grade sound transmission) if suitable terminals (telephones) are attached to the network termination points. Such a network can also support other services (e.g., facsimile and data transmission) through use of appropriate alternative terminals (e.g., fax machines and modems).2.3 IP-based networks have been developed over the past few decades with a particular set of services in mind, such as e-mail, file transfer, and database searching. The largest (and most well known) IP network in the world is “the Internet”; referred to by many as the “public Internet”. There are many definitions for the Internet but simply put, it is a globally connected set of computer networks, using the Internet Protocol, sharing a common IP address space. Computers connected to the Internet use software that “serves” or provides interchange of information using widely available standard applications. The popularity of the Internet grew tremendously in the 1990s with the deployment of World Wide Web technology—allowing users facilitated access to hyperlinked information around the globe. 2.4 Internet technology and its related applications can also be used in private networks based on the Internet Protocol (including “Intranets” or Local Area Networks (LANs). Internet applications or services, including IP Telephony, can be deployed on either the Internet or private IP-based networks—or across a combination of both. 2.5 Technological innovation means that IP-based networks will continue to evolve and provide increasingly sophisticated services and applications on top of basic Internet data communications. Despite being originally designed for not real-time, asynchronous communications, extensions to the Internet Protocol are currently under development to support application services that require “real time” transport such as audio and video streams. IP Telephony can be viewed as one example of interactive, real time audio between users. 2.6 The term “IP Telephony” can mean different things to an engineer or policy-maker and there is no consensus at this point on its exact definition. As a working definition, and for the purposes of this Report, “IP Telephony” is used as a generic term for the conveyance of voice, fax and related services, partially or wholly over packet-switched IP-based networks. IP Telephony may also include applications that integrate/embed the transmission of voice and fax with other media such as text and images. In this report, the term IP Telephony can be used interchangeably with “VoIP” (Voice over Internet Protocol). IP Telephony can be of three broad kinds: PC-PC, PC-phone and phone-phone depending on the terminal equipment. Finally, a third term, “Internet Telephony”, is used in this report when referring to IP Telephony or VoIP conveyed partially or wholly over the Internet. 2.7 IP Telephony technology, particularly when integrated with data applications, offers the potential for new, multifunctional, end-user portable consumer devices which may be much more user-friendly, interactive, and personal than traditional telephones or personal computers. For example, such devices may include services linked to a user’s current physical location. These new modes of access and related services will spawn new applications, which in turn will drive further evolution of global telecommunication network infrastructures. ^ Evolution in Network Infrastructures2.8 For most of the last century, voice traffic was the predominant use of telecommunications networks. While voice traffic continues to grow, it represents a decreasing percentage of overall telecommunications traffic when compared to data. The result is that support for IP related technologies is now a strategic element in the design, development and use of telecommunication networks. 2.9 Architectural differences between circuit-switched and IP-based networks are rooted in their origins. IP networks were originally designed for two-way, not real-time, or asynchronous communication, typically referred to as “connectionless” or “stateless”. In other words, no unique end-to-end circuit is created and held for the duration of a particular session. On the other hand, telephone networks have been engineered to provide real-time or synchronous, two-way voice conversations possible between almost any two points on earth, using circuits created as necessary and held for the duration of the call. 2.10 IP technology chops up electronic transmissions into packets of varying numbers of bytes. Each packet is given a “header” or address label, and forwarded from one router to another, armed at each “hop” with enough information to get it to the next, where the process is repeated. As a result, each “voice packet” of an IP Telephony call does not completely tie up any given circuit and may travel very different routes between callers before being re packaged. By contrast, on circuit-switched networks, using protocols such as Signalling System 7 (SS7), a call is typically routed through a hierarchy of local, inter-urban and international switches to establish an end-to-end circuit between caller and called party. 2.11 In general, telecommunication vendors and operators are transforming themselves from voice-centric, circuit-switched providers to data-centric, IP-based solution providers. Therefore, deployment of core networks solely for the delivery of voice services is increasingly uncommon. As a consequence, there are enormous efforts underway to support real-time applications and carrier grade quality with IP technologies. Many operators, both wireline and wireless, have begun investing in upgrading their entire networks towards a more flexible “all IP” architecture. For example, 3rd generation (i.e., IMT-2000) mobile network vendors and operators plan to migrate core networks to IP technologies, thus improving integration of mobile telephony and Internet services. These and many other technological innovations made possible by IP Telephony are further eroding the traditional distinction between voice and data services.2.12 It should be recognized that there are several technological scenarios under which voice is carried on IP networks—often involving different treatment from a policy or regulatory perspective. One scenario is where IP Telephony is carried solely across the Internet between computers. Another scenario is where IP is just used as an underlying transport technology for networks that provide PSTN services. In this scheme, signalling and network intelligence still use the Signalling System Seven (SS7) protocol widely used on the PSTN and users may also access a service by using a traditional telephone or some other IP device. A third scenario is where IP Telephony is based on full end-to-end IP technology (e.g., on private IP networks or next generation “greenfield” mobile networks). This scenario does not use SS7 signalling but may use new “soft switch” technology to manage network call control and provide intelligent network management—including well-known telephony network features such as busy tone, call forwarding, call data records for billing, etc. Finally, there may also be use of gateways or interconnection between the Internet or private IP networks and the PSTN.3^ IP Telephony Standards Activities2.13 Of course, most telephones are—and for several years to come will continue to be—connected to traditional circuit-switched telephone networks. IP Telephony services must be able therefore to accept calls originating on the PSTN, to terminate calls on the PSTN, and to do it all seamlessly. The first generation IP Telephony services that linked to the PSTN via gateways were not capable of Intelligent Network (IN) functionality, such as calling party identification, nor could they interface with PSTN signalling systems such as Signalling System 7. In order to address these requirements, the latest standardization activities have focused on the distributed architecture of gateways linking PSTN and IP networks. These gateways convert and forward calls in one direction or another as well as provide call management functionality. 2.14 Technical standardization for IP Telephony is underway in many industry and regional entities, as well as in standardization bodies such as the ITU Telecommunication Standardization Sector (ITU-T), the ITU Radiocommunication Sector (ITU R), the European Telecommunications Standards Institute (ETSI) and the Internet Engineering Task Force (IETF). 2.15 One example of ITU standardization is the H.323 series of Recommendations from ITU-T Study Group 16. The scope of the H.323 series is very broad and supports both audio and video multimedia conferencing, call setup and control, bandwidth management, as well as interfaces between different network architectures. Also notable is the IETF’s Session Initiation Protocol (SIP), a protocol for conferencing, telephony, presence detection, events notification and instant messaging. More closely related to web technology, SIP can enable developers to create advanced telephony and multimedia applications using familiar Internet protocols and web tools. In some circumstances, the IETF and ITU-T have cooperated directly on IP Telephony standardization—producing the joint protocol called H.248 (ITU T name)4 and Megaco (IETF name). H.248/Megaco defines a master/slave protocol to control media gateways that can pass voice, video, facsimile and data traffic between PSTN and IP based networks. The ITU R is also involved in standardization related to fixed and mobile wireless access using IP networks. Many other industry bodies and consortia are also carrying out important related standards activities.^ Quality of service (QoS) and Capacity2.16 Quality of Service and a related topic, network capacity, is at the core of voice telephony and, as such, is often the focal point of the IP Telephony debate, particularly as it is sometimes used in determining regulatory classifications. There are many aspects to quality, including reliability, throughput and security. Generally, the basic IP network architecture results in variable transmission times, particularly when traffic is intense. As an example, because there is no total control of traffic management on the Internet, end-to-end quality cannot be guaranteed and typically provides only “best effort” packet delivery. For this reason, the Internet is generally not particularly well suited to carry a voice telephony service, which cannot tolerate more than minimal transmission delays. A desire to overcome this limitation has prompted the establishment of separate dedicated managed IP networks of global reach, where the network operator has the possibility of controlling quality over large distances.2.17 There are, in general, two ways in which this quality can be improved—implementing quality of service support and increasing available capacity. Some argue that the latter may be easier to achieve because it requires less coordinated action across Internet Service Providers (ISPs). However, others argue that simply increasing capacity would still require co-ordinated action across ISPs since calls are likely to be routed across separate provider networks—and if any of these were congested, the end-to-end call quality would still be degraded. 2.18 Generally, end-to-end call quality is less of an issue when, instead of the Internet, dedicated managed IP networks are used to provide VoIP. In the latter, more capacity, faster transmission, and better voice quality combine to produce better results. Privately operated capacity is therefore typically a key component today in commercially viable IP Telephony, and much more so at present than implementation of QoS. ^ Numbering and Addressing2.19 One of the technical challenges raised by the ever-closer integration between circuit switched and packet-switched networks is how to address calls that pass from one network service to another. Generally, it is assumed to be desirable that an integrated global subscriber access plan exists. For example, the same ITU-T E.164 telephone number would reach a subscriber regardless of whether IP-based or PSTN network technologies are used. 2.20 It is now widely possible to originate calls from IP address-based networks to other networks, but it is uncommon to terminate calls from other networks to IP address-based networks. Rather, calls are generally terminated on the PSTN, so the called party can only use a terminal device connected to those networks. In order to access a subscriber on an IP address-based network from the PSTN, some sort of global numbering/addressing scheme across both PSTN and IP address-based networks needs to be developed and implemented.2.21 ITU-T Study Group 2 (SG2) is currently studying a number of possible options whereby users in IP address-based networks can be accessed from/to PSTN users. One option is the assignment of E.164 numbering resources to IP devices. Another approach is to support service interworking between different subscriber addressing systems in the PSTN and IP networks; for example, using the IETF’s ENUM protocol. ENUM5 defines a Domain Name System (DNS)-based architecture and protocol for mapping an E.164 telephone number6 to what are known as Uniform Resource Identifiers (URIs)7. URIs are strings of characters that identify resources such as documents, images, files, databases, and email addresses. For example, http://www.itu.int/infocom/enum/ is the URI for the ITU website providing an overview of ENUM activities. 2.22 During the last year, SG2, responsible for E.164, and the IETF, have held discussions and collaborative activities related to the deployment of ENUM services, including a recent workshop intended to assist Administrations in their consideration of national ENUM operational and administrative issues.8 Since E.164 numbers may be inserted into the DNS, the ENUM protocol would appear to have important implications for national Administrations responsible for numbering policies under “country codes”. Generally, it is accepted that, to be useful, ENUM domain names must accurately reflect the assignment of E.164 resources. If not, ENUM would lose its core advantage, which is the utilization of a widely used numbering system to which the general public is accustomed. 2.23 The view of SG2, Working Party 1/2, is that administrative entities, including DNS administrators, should adhere to the applicable tenets of existing pertinent ITU T Recommendations9 with regard to the inclusion of E.164 resource information in the DNS. Specifically, in a recent liaison statement10 to the IETF, Study Group 2, Working Party 1/2, has noted that since most E.164 resources are utilized nationally, ENUM service and administrative decisions are primarily national issues within the purview of ITU Member States. 2.24 At the same time, the appropriate neutral international management of the root of the ENUM DNS structure is of direct relevance to ITU Member States. In order to guarantee an accurate reflection of ENUM domain names with the E.164 numbering plan, it is widely accepted that one guiding principle is that ENUM domain names management strictly reflect the current integrity of international E.164 numbers management. To safeguard this, it has been suggested that the responsibility for the root of the ENUM DNS structure also be assigned to the management body of the E.164 numbering system: the ITU. This would ensure that entry of “country codes” in the ENUM DNS root is performed only at the express instructions of ITU Member States. National regulatory authorities and/or policy makers may wish to consider, their appropriate level of involvement in ENUM related activities taking place in ITU-T SG2. 2.25 IP Telephony may have an impact on IP address management. It could indeed stress the growing lack of IPv4 addresses. Current solutions deployed to minimize IPv4 address allocation could act as a barrier to widespread development of IP Telephony and may encourage more rapid deployment of IPv6. The rules of assignment of the remaining IPv4 addresses and of IPv6 addresses should be determined on a fair basis and not discriminate any operator or country.^ Interoperability Considerations2.26 Interoperability of IP Telephony with the international telephone service currently provided by circuit switched international telecommunication networks, according to text prepared by the Informal Experts Group (IEG), requires consideration of the following principle:Interoperability should require backward compatibility of IP Telephony with the existing international telephone service and not require burdens to be imposed on existing circuit switched international telecommunication networks. Backward compatibility should include, but not be limited to, aspects of performance metrics, and other aspects as detailed in the relevant ITU Recommendations.2.27 In considering the aspects of interoperability outlined in the principle outlined above, the appropriate sectors of the ITU will consider that the associated service, operational and technical aspects are reviewed and where appropriate revised, to enable successful interoperability. ^ ITU Study Group Activities2.28 In general, all ITU-T and ITU-R Study Groups have included in their activities IP related standardization. For example, ITU-related IP Telephony standardization includes, inter alia, work on differentiated QoS IP services, interworking between PSTN and IP networks, numbering, naming and addressing, support for charging and settlements, integrated network management of telecom and IP-based networks, IP signalling, routing principles, traffic management, network integrity and reliability (e.g., important for emergency services), optical networks, and fixed and mobile wireless systems (e.g., IMT 2000). 2.29 Specific ITU-T Study Group (SG) activities include ITU-T SG2 (numbering, naming and addressing, routing and interworking, service principles, traffic engineering, network management, quality of service), SG3 (charging and settlements), SG4 (network management), SG7 (Frame Relay Interworking with IP), SG9 (cable network services including IP Telephony support), SG11 (signalling), SG12 (end-to-end performance), SG13 (ITU-T lead SG on IP), SG15 (VoIP gateways, optical networks), SG16 (H.323, H.248 and related Recommendations), and the recently established Special Study Group on “IMT 2000 and beyond”. Concerning ITU-R, relevant Study Groups include SG6 (broadcasting, terrestrial and satellite), SG8 (mobile, terrestrial and satellite, IMT-2000 included) and SG9 (terrestrial fixed service), all dealing with wireless access to IP networks. More detailed information on specific ITU Study Group IP activities can be found in a report to the 2000 ITU Council11 and on the ITU-T and ITU-R web pages.12^ * * * * * * ** 3. ECONOMIC ASPECTS OF IP TELEPHONY AND ITS IMPACT ON member states and sector members The IP opportunity 3.1 Throughout the world, enormous sums are being invested to establish IP-based networks, both for creating new capacity and for enabling existing narrowband networks and future broadband ones to run IP-based services. It is in this broader context that any consideration of the economic aspects of IP Telephony should be rooted. The initial driving force behind this investment has been the desire to widen and improve access to communications networks. There are now more than 300 million Internet users worldwide. While for many, the Internet is primarily a source for information and entertainment; it also brings significant opportunities for economic and social development:By using IP-based networks for electronic commerce, firms can widen their potential customer base and reduce transaction costs, while national economies can benefit from new trade opportunities;By using IP-based networks to retrieve information, health care professionals can keep up-to-date with developments in specialist areas and can pass on their own knowledge to others;By using IP-based networks as research media, schools and universities can greatly expand the range of information services available to their students and ensure that teachers remain abreast of the latest developments in their field;By using IP-based networks as communications tools, governments can make their services more accessible to their citizens and can establish websites to promote events or provide information.These are just a few of the endless possibilities opened up by IP-based technologies for both fixed-line and mobile networks. Even though the Internet is still at the start of its growth cycle, already the number of emails sent each year exceeds the number of fax messages and the volume of data and text transmitted exceeds the volume of international telephone calls.3.2 Most countries have adopted a supportive attitude to the Internet, and are taking steps so that all citizens have access to the possibilities it brings for commerce, communication, education and entertainment. ITU research carried out for the 2001 edition of the World Telecommunication Development Report shows how governments in different countries have adopted policies to promote the development of the Internet13:In Egypt, the Government’s Information and Decision Support Centre played a critical role in introducing the Internet into the country by investing in international connectivity and establishing websites for the tourism and healthcare sectors;In Hungary, the Hungarnet academic network provides free Internet access to 400’000 or so of the nation’s higher education students and professors;In Singapore, the government modified its telecommunications licensing regime in April 2000, to foster more investment in telecommunications and the Internet. The modifications included provisions that eased and streamlined licensing for IP Telephony Service Providers (IPTSPs);In Nepal, a government task force is examining ways to promote electronic commerce to market the nation’s handicrafts, tourist potential and software expertise.3.3 But IP-based networks can be used for much more than just text messaging and data communications. As capacity expands, new and innovative multimedia applications become possible. One of these is the facility for carrying voice, both in real-time and stored form, over IP-based networks. Packetised voice communications can attain levels of quality that are as high as, if not higher than, that carried over more conventional circuit-switched networks, especially where bandwidth is plentiful. In most cases, IP Telephony can be offered to customers at prices that are significantly below those offered over circuit-switched networks. This is partly because call origination and termination costs may be lower, but mainly because of savings in the long-distance transmission component of the call. Traditionally, pricing of calls on circuit-switched networks has been distance sensitive, with profits made on long-distance and international calls being used, in part, to cross-subsidise subscriber access and local call costs. But pricing of traffic on IP-based networks is largely independent of distance.^ Markets, services and players3.4 Projections vary widely as to the economic market opportunity that IP Telephony creates. TeleGeography Inc. estimates that some 3.7 billion minutes of international traffic were carried over IP-based networks in 2000, or just over 3 per cent of the global total, but the market is growing fast. Most studies show that the main use of IP Telephony at present is for international traffic. In the longer term, there is a market opportunity for IP Telephony also in long-distance and local networks, especially if the transition of prices towards costs is delayed.3.5 The IP Telephony marketplace, its products and players, differs considerably from the traditional PSTN telephony market, which even today, is dominated by incumbent national operators. The main focus of the operations of IPTSPs is global rather than national, and they often work in partnership with incumbent PTOs, bringing training and expertise as well as revenue-generating opportunities, for instance in attracting new traffic and providing value-added services. 3.6 The market can be segmented in several different ways, for instance:by types of applications, including (in the approximate order in which they have appeared): PC-to-PC; PC-to-Phone; Phone-to-Phone and value-added services;between wholesale and retail operations; between those IPTSPs that offer priced services and those which offer applications which are free-of-charge to the end-user, funded by advertising revenue; according to the ways in which IP is used to carry voice, for instance: in the networks of incumbent carriers migrating to IP; in the networks of newer PTOs without direct connection to customers; in managed IP-based networks offering multimedia services; or via ISPs (Internet Service Providers) which interconnect the Internet with the PSTN. The mainstay of the business, for the moment at least, is price arbitrage, but this is evolving over time as value-added applications provide an increasing share of revenue. Value-added applications include, for instance, click-to-talk (placing a call by clicking on an icon in a web page), unified communications (making voicemail, email, and fax messages accessible from any device), speech-enabled access to Internet content (giving telephone users access to web-based content and transactions via auditory commands), and presence management (“find me, follow me”). Operators that begin using IP to carry basic voice may “learn by doing” and go on to develop more sophisticated applications later. ^ Costs and prices 3.7 While the long-term potential for IP Telephony lies in the new functions and applications it makes available, the short-term advantage lies in cost-savings compared with conventional circuit-switched telephony. For consumers, IP Telephony is invariably cheaper than a circuit-switched call, especially for calls originating in non-liberalised markets, that are carried over the Internet and/or which generate advertising revenue. For instance, in Hungary, where consumers have had a choice of using IP Telephony since 1999, the price advantage over standard PSTN calls ranges between 20 and 50 per cent per minute, though consumers have reported some quality problems. If all other factors—quality, convenience, reliability, etc.—are equal, the choice to use IP Telephony is an economically rational one. But current IP Telephony offerings do not always match up to consumer expectations. At present, consumers must generally make a trade-off between price and quality. Willingness to make that trade off will generally depend on price sensitivity, the perception of the quality of service (e.g., transmission quality, user-friendliness, convenience) as well as the interest of consumers in using some of the more advanced IP Telephony services. 3.8 For ^ Public Telecommunication Operators, the potential cost advantages of IP Telephony are more complex to calculate. That is because incumbent PTOs have existing revenue streams that may be affected by a shift to lower-priced IP Telephony. The impact on the PTO will differ according to whether it is a supplier of either an access network or a core network, or both, and whether the network is radio-based or fixed-line. In the case of Hungary quoted above, the initial pressure to offer IP Telephony came from mobile service providers that saw the opportunity to bypass Matav’s monopoly on carrying international calls. Matav itself is now an IPTSP. 3.9 A number of studies have found that the cost of building and using IP networks are significantly lower than those of circuit-based networks However, the precise nature of the cost advantage to PTOs offered by IP networks is still the subject of much debate. It will depend, for instance, on:Whether a particular investment in IP is as a new-build network, or as an upgrade or overlay to an existing network. The incentive to choose IP will be greater for new, or substantially new, networks. For instance, in Senegal, where existing networks serve only just over 1 per cent of the population, Sonatel plans to migrate its existing core network to an IP backbone by 2004 and to offer both voice and data services over the same integrated IP network. Whether a particular carrier is an incumbent or a new market entrant. New market entrants, with no legacy network to defend, are likely to be the first movers towards IP Telephony. In China, for instance, China Netcom, a new market entrant which is based upon the Ministry of Railway’s network, is building a voice over IP network which was planned to cover 15 cities and to include some 9’600 kilometres of fibre optic cable by the end of 2000. The use of IP has allowed China Netcom an earlier, and lower cost, entry into the market than might otherwise have been the case.The extent to which value-added services are being offered. In economies such as Hongkong SAR and Singapore, where local call charges are free (bundled into the access charge), new market entrants are offering value added services that allow, for instance, voice users to retrieve their email (e.g., T2mail.com) or the provision of voicemail and fax communication services (e.g., 2Bsure.com) over an IP platform.The costs of international IP connectivity. Some countries have argued that the costs of international leased lines used to establish IP connectivity are too high and the costs are unequally shared. This issue is current being discussed within ITU-T Study Group 3.3.10 In reviewing these factors, it seems likely that the pressures and incentives to shift towards IP Telephony will vary among economies at different states of development and with differing degrees of market competition.In countries where prices for international traffic are high, the main opportunity for IP Telephony will be for price arbitrage of simple voice transmission, albeit possibly at a lower quality of service. In many of these countries, however, outgoing IP Telephony is banned. Thus, the main form of IP Telephony is for incoming traffic. Even though the use of IP Telephony for incoming traffic may be no more legal than for outgoing traffic, it is harder to detect and block.In countries where prices for international traffic are falling—for both retail (consumer) and wholesale (settlement) rates—IP Telephony traffic may already be playing a role in promoting price competition (as, for instance, in Hungary or Thailand) or in providing an alternative to the services of the fixed-line incumbent (as, for instance, in Colombia). However, a critical factor is how easy it is for subscribers to use the service. In Peru, for instance, the success of IP Telephony was partly based on the availability of a telephone-like device (Aplio) that could use either IP-based networks or the PSTN for establishing calls.In countries where prices for international traffic are already low, due to the effects of competition, IP Telephony is likely to be important for reasons other than price arbitrage. The market opportunity for IP Telephony is likely to lie, on the one hand, in the prospects of value-added integrated services for users and, on the other hand, cost reductions for PTOs.3.11 To understand the interplay of these factors better, it could be of assistance to Member States and Sector Members to develop a reliable empirical, analysis of the current price advantage that IP Telephony may enjoy over PSTN services, including an analysis of the cost structure aspects of IP-based and traditional telecommunications networks. There may also be a need for a better understanding of some of the more innovative IP Telephony services. ^ Substitutability and traffic migration 3.12 A further economic issue raised by IP Telephony is that of substitutability between services. Clearly, much of the traffic carried over PC-to-PC Internet Telephony will be “new” traffic, which would not otherwise have existed on the PSTN. Much of the discount traffic generated over PC-to-Phone services is also likely to be new traffic, especially that which is offered “free of charge”, for instance by companies such as DialPad.com or phonefree.com. But some of this traffic, and the majority of calls carried over Phone-to-Phone services, might otherwise have been made over the PSTN, and could therefore be regarded as substitute traffic. The cheaper prices generally available for IP Telephony may spur higher growth rates in traffic, where demand is elastic. IP Telephony will also spur additional traffic on local and long-distance networks. In the longer-term, as PTOs move their backbone networks to an IP based platform, the issue will become one of traffic migration, rather than substitution. Thus, some countries consider that the development of common strategies for migration from circuit-switched to IP-based networks would be of assistance to Member States and Sector Members, especially for developing countries. Moreover, new multimedia services using IP Telephony could generate new voice traffic that does not exist for the time being. ^ Impact on Member States and Sector Members 3.13 Investment in IP-based networks may be regarded as an investment in the future, irrespective of the state of economic development of a particular Member State. The business case for investment in IP would rarely be based on the potential of IP Telephony alone, but rather on the wider potential of IP-based networks to carry data, text and video traffic as well as voice. Future third-generation mobile networks, like fixed-line networks, are likely to be based on IP technology. 3.14 Some Member States have chosen to promote the Internet for text and data services, but not for voice. Their objective may be to protect the incumbent operators from potential competition. The risk in such an approach however, lies in the fact that those operators may be ill-prepared for operating in the future global environment. 3.15 While some developing countries have chosen to limit outgoing IP Telephony calls, and the advertising of those services, they have often been unable to limit incoming IP Telephony calls. One of the main motivations for PTOs to route traffic via IP-based networks is to reduce the level of settlements that are due to partner PTOs. Under the international settlements system, the PTO(s) in the country where a call is originated make a compensatory payment to the PTO(s) in the country where the call is terminated. Payments are made when traffic in one direction is greater than traffic in the return direction. The level of payment is based on bilaterally negotiated “accounting rates”. A net settlement payment is usually made on the basis of excess traffic minutes, multiplied by half the accounting rate (the accounting rate share, or settlement rate). The accounting rate system is undergoing reform, and new systems for the settlement of traffic accounts are being developed. Nevertheless, accounting rate traffic still accounts for a considerable proportion of the 20 per cent or so of international traffic that either originates or terminates in a country that retains a monopoly.3.16 Net settlement payments grew progressively larger until the mid-1990s, as traffic flows became less balanced. PTOs that send more traffic than they receive have an incentive to develop alternative routing procedures. They do this to avoid having to make settlements based on above-cost accounting rates and instead pay interconnection fees, based on local call rates. Some developing countries fear that, if an increasing share of their incoming traffic is routed over IP-based networks, then settlement payments will be reduced. They are concerned that reduced settlement revenues will endanger their ability to roll-out the basic telecommunications infrastructure, and hence to narrow the digital divide.3.17 Net settlement payments have been declining worldwide since the mid-1990s, and arguably this would have happened even without IP Telephony. This trend is principally the result of increased competition and pressure from countries that make net settlements. As retail prices fall and more traffic is routed via least cost routes, settlement rates are forced downwards. This market change is particularly affecting those PTOs that have traditionally relied upon revenues from international service to cross-subsidise their local access networks. It is forcing the pace of tariff rebalancing. 3.18 The PTO of the future may “own” the customer, in terms of providing billing and customer care support, and may “own” the local network, in terms of providing origination and termination of calls. However, it is unlikely to be able to “own” or control the types of application that the customer chooses. IP Telephony might be better viewed as one of those applications rather than as a service. 3.19 Operators have traditionally used profitable long-distance and international services to cross-subsidise in part the functions of network access and local calling. In increasingly competitive markets, such hidden cross-subsidies can no longer be sustained. In the future, operators will need, instead, to address new challenges that may require substantial tariff rebalancing and a greater reliance on locally generated revenues. 3.20 While IPTSPs may bypass certain parts of an incumbent operator’s network, they will not eliminate the need for local networks. Indeed, insofar as Internet Telephony is a new “killer application” and makes access to the Internet even more popular, it may actually increase the volume of local calls. Already, in some Member States, as much as a third of all local calls are to the Internet, though IP Telephony represents only a small proportion of this demand. Furthermore, dial-up Internet access is on a steeply rising curve while international traffic growth is slowing down. Competition will drive prices closer to costs and, where IP Telephony offers the lowest cost alternative; it may be the preferred solution.3.21 For Sector Members that are equipment vendors, the development of new IP-based product lines is likely to be essential to future growth and profitability. In developed country markets, demand for circuit-switched network technology has declined steeply and although demand in developing countries remains strong, this cannot be expected to continue indefinitely. Third generation mobile networks (IMT-2000), which will also be IP-based, offer vendors additional opportunities to offer new products including customized and personalised location-based information services that will most likely resemble the Internet client/server model rather than the traditional telecommunications model. 3.22 It is also important to consider the impact IP Telephony is having on build out of the global Internet infrastructure and on traffic patterns, issues that are of great interest to ITU Members. Initially, when most of the IP Telephony gateways were deployed in the United States, the IP Telephony traffic patterns probably mirrored in some ways the traffic patterns of the rest of the Internet—i.e. it was US-centric because of the lack of advanced IP Telephony infrastructure outside of the United States. As a growing number of IP Telephony gateways, and especially more advanced gateways, are deployed outside of the United States, the traffic patterns are likely to become less US-centric and the percentage of IP Telephony traffic that transits through the United States may fall. * * * * * * * * ^ 4. POLICY AND REGULATORY ISSUES FOR IP TELEPHONY Introduction 4.1 This section discusses the different policy and regulatory approaches that Member States have taken to IP Telephony, and the methods used to categorize it within those frameworks. The significance of IP Telephony for convergence, universal service schemes, and cross-border issues is also considered.4.2 IP Telephony is treated in a range of different ways within ITU Member States. Some allow or do not regulate it, others prohibit it, while some apply a range of controls and restrictions, either through licensing or other regulatory tools. It should be noted as well that this issue arises within the context of a period when many Member States are lightening their regulatory regimes for telecommunications and moving to a greater reliance on competition policy to ensure a level playing field in telecommunications markets, as opposed to sector-specific regulation.4.3 Within these broad policy frameworks, IP Telephony raises a number of specific questions for policymakers and regulators that require a careful and informed balancing of different and sometimes competing interests. Where does IP Telephony “fit” within telecommunication regulatory regimes, if at all? How should the rights and obligations of IPTSPs compare with those of traditional telephony providers, many of whom are subject to common carriage regulations and universal service commitments? Should Internet Telephony, VoIP, and PSTN voice-traffic be treated the same way, or differently? Should IPTSPs be required to hold a license as most traditional voice telephony carriers do? Or should IP Telephony be viewed as an emerging technology offering new services and applications that could best develop with minimal or no governmental regulation? 4.4 As a threshold matter, it is useful to set forth possible government policy objectives for IP Telephony that could form the basis for any regulatory approach that is adopted and, in particular, in determining whether to apply legacy telecommunications frameworks. These objectives, which could also form the parameters for a cost/benefit analysis of any policy, may include: Universal Service/Universal Access Affordable telecommunications services Tariff re-balancing Ensuring a level-playing field for competitors and new entrants Promotion of new technologies and services Stimulating investment in network build-out and new services Impact on revenue streams of incumbent operators Technology transfer Human resource development Economic growth as a whole and in particular in the communications sector.4.5 To explore these issues, this section attempts an approximate categorization of the different ways in which IP Telephony is presently treated in many Member States and the factors that have been considered by national policy-makers. It provides illustrative examples of some of the different national approaches. As background, the tables in Annex B classify the approach to IP Telephony taken by certain Member States, based on their responses to a recent ITU regulatory questionnaire.^ The general picture 4.6 At present, several broad national policy approaches emerge: First, there are countries that include some or all forms of IP Telephony within their regulatory system ; Second, there are countries that prohibit IP Telephony; Third, there are countries that do not regulate IP Telephony Lastly, there are countries where the situation is uncertain or the issue remains to be formally addressed.4.7 This latter group of countries, where there is no specific policy on IP Telephony, constitutes the majority of ITU Member States. As can be seen from Annex B, countries have taken widely differing regulatory approaches, which may be related to different prevailing market conditions or degrees of liberalization. It is important to note that it is the service component, i.e., voice telephony service delivered by means of the Internet or IP-based networks, which is most frequently the subject of policy, not the use of IP technology itself.4.8 Prohibitions on IP Telephony are mostly found in developing countries and this may be linked to concerns that this service or application can divert revenues from the incumbent operator, as also discussed in sections three and five. In some cases, ISPs have been requested to block access to specific websites, based in other countries, which offer free-of-charge IP Telephony calls. Nevertheless, PTOs in some developing countries are embracing IP Telephony, and bearing the consequences of reduced per-minutes revenue from long-distance and international services, rather than risk missing the opportunity to generate revenues in future IP-related growth areas.14 Many countries that have retained telecommunication monopolies do not specifically prohibit IP Telephony. However, it is likely that they would not allow any company other than the incumbent PTO to provide it. It is possible, nonetheless, as a practical matter, that IP Telephony (or at least PC-to-Phone services) may be permitted in these countries because it is not considered voice telephony at all, and therefore not a competing service.15 Further, reliable, reasonably high-speed access to the Internet is required for tolerable outgoing PC-to-Phone service, and this is often not widely available in developing countries. Consequently the issue of termination of incoming international calls is the more significant aspect of IP Telephony for many developing countries.4.9 There are different rationales underlying the policies of those countries that either do not regulate IP Telephony or have chosen to include it in a positive manner within their regulatory framework for telecommunications. First, they may be motivated by a desire to encourage and stimulate emerging technologies linked to concerns about imposing regulations on technologies that are not fully mature. IP Telephony may be viewed as exerting downward competitive pressures on telephone tariffs and thus consistent with consumer welfare. Secodn, limitations placed on IP Telephony may also be seen as inconsistent with approaches designed to stimulate the deployment and migration to IP-based networks. Lastly, regulators in these countries may be hesitant to intervene in new markets unless there is evidence of a market failure.^ License restrictions 4.10 Licensing is one of the principal means by which telecommunications authorities address the question of IP Telephony. Terms and conditions in existing licenses can be interpreted as either prohibiting or permitting such service offerings by new market entrants. Indeed, in non-competitive markets, the license of the incumbent operator may be viewed as precluding new market entrants from offering IP Telephony. On the other hand, a few countries expressly license PTOs to provide IP Telephony. Licensing of third generation (e.g. IMT-2000) wireless systems has generally proceeded on the basis of a voice-centric model. However, IMT-2000 systems will deliver to the subscriber converged voice/data multimedia services using end-to-end IP networks, with “always on” Internet access being a key service feature. As a result, re-evaluation of present licensing regimes may be required, since such systems may have data, rather than voice, as the key defining characteristics.^ Regulatory distinctions 4.11 In countries that have policies on IP Telephony, it is possible to identify a number of factors which are used to distinguish IP Telephony from other, usually reserved or licensed, telecommunication services. In making the determination as to whether a particular service constitutes, or should be classified as traditional voice telephony, a number of different regulatory distinctions are employed, alone or in combination, by many countries. Among the most commonly used distinctions are types of services, voice versus data, mode of transmission, facilities-based operators versus resale and quality of service. Because IP Telephony service providers do not need to have their own network facilities, frameworks applied to traditional telephony that is based on network facilities may not be appropriate and new approaches may be called for. These, and other distinctions, are discussed below. Type of service 4.12 In countries that have IP Telephony policies, some regulators draw distinctions, explicitly or implicitly, between PC-to-PC, PC-to-Phone and Phone-to-Phone services. Most national IP Telephony policies typically refer to Phone-to-Phone services. PC-to-Phone services tend to be prohibited in those countries that prohibit IP Telephony generally, while they tend to be permitted without condition in countries that permit some or all forms of IP Telephony. Generally, calling-card services are rarely treated separately in policies. Rather, they are rolled in with other forms of Phone-to-Phone service, since the difference is largely one of marketing and billing, rather than technology. It should also be noted that, for many countries, information simply is not available as to whether or not incumbent PTOs are employing IP Telephony and if so, whether by right of their existing licenses, or under special authorization. Some PTOs may simply assume that their international franchise allows them to offer IP Telephony, should they decide to pursue it, as a cost-saving measure or as a separate discounted service.164.13 Another aspect of type of service is the target audience for the service. Some regulators allow IP Telephony providers to be treated differently depending on whether or not they provide the