Internet Telephony: Costs, Pricing, and Policy

Lee McKnight and Brett Leida
Internet Telephony Interoperability Consortium
Center for Technology, Policy, and Industrial Development
Massachusetts Institute of Technology

Analysis of the regulatory and policy issues raised by Internet telephony
is aided by identification of the costs and architectural trade-offs for
the provision of Internet telephony services. This paper summarizes the
conclusions and analysis of an Internet Telephony cost model developed by
Brett Leida of the Internet Telephony Interoperability Consortium. The
analysis shows that an important issue is the costs and trade-offs for an
Internet Service Provider to support such services as Internet voice and
multimedia conferencing. Some elements are difficult to model at this
time, e.g., the cost of supporting RSVP and other mechanisms to enhance
Quality of Service by prioritizing in the network the use of bandwidth
resources, as well as the costs of alternative network architectures which
might employ a variety of Internet telephony gateways. Current cost
elements for provision of Internet telephony services are concentrated in
the modem banks and transport services.

Pricing models supporting Internet voice services might be employed for
pricing other Internet integrated services. The implications of
convergence are that an integrated regulatory framework will be required to
formulate policies for multimedia services. It would be desirable if
governments could study these issues and develp appropriate policies
without introducing economic and technical distortions into the nascent
Internet telephony market. Techniques such as yield management may be
useful to support price discrimination for alternative Internet integrated
service bundles. This may enable costs to be recovered without rate and
tarriff regulation through a competitive market offering hetergeneous
services to diverse user communities, we conclude.

From this analysis it is evident that the regulatory issues raised by
Internet telephony are also not unique but must be addressed independent of
the application whether the Internet is used to send faxes, do
conferencing, or distribute networked multimedia services. Regulation
affecting one Internet application will affect the development of other
integrated services. This paper will address these issues and place them
in the context of the Federal Communications Commission's consideration of
the ACTA petition to reguate Internet telephony software providers, and the
ongoing reconsideration of access charges. The approaches being considered
in other nations will also be analyzed. The paper will conclude by
addressing the role and mission of the Internet Telephony Interoperability
Consortium.