Pragmatism (was Re: [ppml] Re: 2005-1:Multi-national Business Enablement)

Tom Vest tvest at
Thu May 5 05:32:18 EDT 2005

On May 4, 2005, at 7:15 PM, David Conrad wrote:

> My larger worry, however, is that the institution of 
> non-network-topological addressing will lead to a traditional 
> telecoms-like settlement regime for the Internet as geo-* addressing 
> requires (at least in all the proposals I've heard) ISPs provide 
> transit for non-customers/non-peers.  I'm not smart enough to think up 
> a way to do this without some sort of settlement mechanism, but 
> perhaps others are.  Further, while I might think inflicting 
> settlements on the Internet would be an astoundingly bad idea, it is 
> perhaps instructive to note that the PSTN has functioned (more or 
> less) and been economically stable for more than a century.

A big correction is in order here. The international telephony 
settlement system was significantly destabilized in 1996-1997, when the 
US FCC took steps to address an escalating problem with the ITU 
accounting system. To the best of my knowledge, many developed 
countries no longer participate, or participate fully, in this system. 
Apparently this event is still not widely known or well understood; I 
am writing a CircleID article related to this, but will provide a quick 
overview now.

The ITU mediated international telephony settlement system specifies 
that countries (or providers, in competitive markets) set their own 
retail prices for international telephony services, but compensate each 
other for net outbound traffic, at a fixed "accounting rate" per net 
minute (MITT) that is terminated in a particular foreign market. 
Retail-facing prices are expected to follow the normal "subjective 
economics" rule that price is set at whatever the market will bear, 
while the accounting rate is set by multilateral agreement, at a rate 
that is partially based on the old "objective economics" rule that 
value is based on input costs. The international accounting rate was 
not set at "actual" cost of service delivery, but at a cost+ basis, 
with the premium intended to increase the revenue transfer from 
wealthy, large call volume-producing countries to LDCs. The explicit 
goal of this arrangement was to accelerate the rollout of universal 
telecom service in developing countries.

The system was always subject to abuse, as it could create a perverse 
incentive to suppress demand for outbound calls in order to maximize 
inbound settlement revenues. This temptation was/is particularly acute 
for countries with controlled currencies, as telecom settlement 
payments are made in hard currency. In addition, some statistical 
research in the mid-1990s cast some doubt on whether these premium 
payouts had made any difference to the explicit goal of accelerating 
universal service rollout over the preceding decades. No question that 
many LDCs could really use more hard currency anywhere that they can 
get it -- for health, education etc. -- but note that many of the same 
countries that reserve the right to divert these telecom revenues to 
other vital social services are the same countries that complain 
bitterly about the digital divide. Very difficult to have it both ways.

Anyway, this latent risk ultimately came to a head in the mid-1990s 
because of a combination of new technology and asymmetrical market 
liberalization. Technology brought the advent of callback boxes (I 
assume everyone here is familiar with these). Asymmetrical market 
opening made it possible, for example, for entrepreneurial companies to 
put a callback box in a liberalized, low retail cost market, which 
would enable a high-cost economy caller to dial the liberalized 
country, thereby (a) taking advantage of that country's lower retail 
price for international service, while at the same time (b) increasing 
that open, low-cost economy's net outbound payment to the high cost 
economy. International telephony being a very price elastic service, 
the former greatly increased demand for international calling, which 
only increased the punishment inflicted on the low cost operators in 
liberalized markets. Classic telecom arbitrage game. Imagine a scenario 
where the callback box is actually owned by high cost foreign PSTN; 
they could simply "voice spam" the low cost economy and create a 
perpetual money machine. Not a sustainable arrangement.

The FCC responded to this development in 1996-1997 with the 
"Benchmarks" initiative, which sought to put international accounting 
rates back on an "objective economics" footing, i.e., closer to 
estimated cost of service delivery. The idea was to reduce the perverse 
incentives built into the old system without hobbling foreign 
operators. In theory, subsidies that had been previously hidden in the 
accounting rate would be replaced by explicit aid that would be more 
directly tied to telecom infrastructure development. Since that time (I 
believe) international telephony settlements have diversified quite a 
lot, with some now based on various bilateral flat-rate arrangements, 
and some based on the old multilateral net payout system.

First moral of the story: the international settlement system was 
broken well before international data traffic was a big deal.

Bonus observation -- Note 1996-1997 timeline exactly corresponds to the 
institutionalization of the peering hierarchy and the "Great 
Depeering." From 1997-2004, peering requirements between large 
operators explicitly followed the kind of "objective economics" 
cost-of-service-delivery criteria endorsed by out by the FCC for voice 
telephony. Perhaps no coincidence, since many of the early US 
international telephony providers are the same IXCs that we know and 
love as the Tier Ones.

Bonus observation 2 -- The International Charging Arrangements (ICAIS) 
controversy that began almost immediately thereafter is based, if 
somewhat problematically, on the same "objective economics" 
cost-of-service-delivery argument.

Second moral of the story: Always be care what you tug on; you never 
know what it's all connected to...


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