> Executive Briefing

Dr. Markus Steingröver Martina Haunert

Markus.Steingroever@detecon.com Martina.Haunert@detecon.com

NGN Interconnection
Emerging Strategic
Challenges

www.detecon.com
 Executive Summary
NGN Interconnection – Emerging Strategic Challenges

> Executive Briefing

Executive Summary
In the future, telecommunications networks will be all-over-IP-based NGNs. In this context
Interconnection as one of the most complex and disputed fields in telecommunications has
to be revised. In particular Incumbents are forced to address two major issues in order to
prevent disruptive effects on their established wholesale business: (i) the charging model
applied in the context of NGN Interconnection and (ii) the Quality of Service differentiation
with regard to Voice over Internet.

Charging Model Quality of Service

Detecon recommends for Incumbents: Recommendations for the Industry as a whole:

Q Promote the continued application of the Calling
Network Party Pays regime!
Q Try to avoid Bill & Keep at all cost!
Q Enforce differentiated QoS by introducing
different service classes based on quality
parameters such as latency time, jitter, or the
packet loss rate.
Q Use similar quality parameters collectively in
different networks in order to define
comprehensive Interconnection standards. The
weakest link will determine the entire end-to-end
quality standard.

Figure 1: Summary of recommendations

Why? See our line of argumentation on the following 4 pages.

Detecon International GmbH z 11/2007 2 www.detecon.com

 NGN Interconnection
NGN Interconnection – Emerging Strategic Challenges

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Migration to NGN urges change of interconnection paradigm

Driven by opportunities for significant cost savings and customer satisfaction improvements,
incumbents worldwide are engaged in building up IP factories. Apart from the implications for
operators’ subscribers, the shift from the PSTN to NGN will have a huge impact on network
interconnection and on relations between operators. Interconnection as one of the most
complex and disputed field in telecommunications encompasses technical, commercial
and regulatory aspects. Migration to NGN will lead to a review of all these areas. It is
fundamental for incumbents to preserve the viability of the interconnection business model. It
will require their active participation in the ongoing regulatory discussions and
influencing the emerging regulatory framework with a focus on the two major issues:

(i) the charging model applied in the context of NGN Interconnection

(ii) the Quality of Service differentiation with regard to Voice over Internet.

Charging models and the ‘Bill and Keep’ threat

The most important features of NGN Interconnection business models are payment
arrangements and the corresponding charging models.

The currently applied “Calling network party pays” regime, in which origination and
termination on other networks are paid on a per minute basis, is under forceful attack: The
German regulator BNetzA for example promotes an alternative charging model for NGN
Interconnection by proposing a dual regime. This regime would differentiate between the
transport and the access network. According to BNetzA the ‘Calling Network Party Pays’
regime and hence termination charges shall remain in place in the NGN transport
network, while charges for termination on the local level cease to exist. Hence, BNetzA
suggests applying a ‘Bill and Keep’ model for traffic in the NGN access network.

This change of the charging regime would have tremendous impacts on incumbents’
revenues, since the major part of the interconnection revenues (up to 90%) is generated in
the local network. According to Detecon estimates, this might lead to an overall reduction of
incumbents’ wholesale revenues by as much as 20%. Moreover the decision on the
wholesale level has potentially strong impacts on the retail market which is summarised in
the following figure. Hence the decision whether the ‘Calling Network Party Pays’ principle is
kept or if it is replaced by the ‘Bill and Keep’ principle has got very significant implications for
operators.

Detecon International GmbH z 11/2007 3 www.detecon.com

 NGN Interconnection
NGN Interconnection – Emerging Strategic Challenges

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Relationship between retail and wholesale level

Per-minute usage fee

Initial/fixed per-month fee

Applied IC regime

B&K CPNP

Retail billing structure

Per-minute usage fee NN

Per-minute usage fee

Initial/fixed per-month fee Initial/fixed per-month fee

The UK regulator Ofcom has been engaged in detailed industry consultations related to the
roll-out of BT’s 21CN. Ofcom’s NGN interconnection policy gives clear indications how it
intends to deal with charging, costing and pricing in a NGN world. Contrary to BNetza,
Ofcom proposes keeping PSTN termination charges and lowering them continuously
until NGN cost-based interconnection rates are introduced at a later stage.

The following figure summarizes the different approaches of Ofcom (Option 1) and BNetzA
(Option 2) and introduces an alternative option for a NGN Interconnection charging
regime (Option 3) in which charging depends on the particular service. This is the most
advantageous for operators and requires differentiated Quality of Service.

Opt 1: Different network types Opt 2: Different network levels Opt 3: Different services

Q Independent of network level Q Independent of network type Q Independent of network type

and service
Q Basically represents the status
quo where there is EBC or
CBC for the PSTN and B&K
for the IP network.
Q Can work well as long as
traffic flows exclusively in
PSTN or IP networks. The
VoIP example shows, that
calls often pass through
different types of networks.
Q Not viable in the long run.
and services.
Q Such a “two level” regime
could be implemented as
follows:
O B&K on he
access/backhaul level
between customer and
point of interconnection,
O EBC or CBC for transit in
the core network.
Q Helps to minimize the hot
potato problem in which traffic
is handed over asap.
Q Boundary between backhaul
and core network plays a
crucial role.
and level.
Q Requires
O Possibility to distinguish
between different services,
O Service usage can be
measured.
Q Necessity of marking different
services or transporting them
separately otherwise high risk
of adverse selection, moral
hazard and arbitrage.
Q Assigning different services to
different QoS classes is also
possible instead of
differentiating regimes
according to services.

Detecon International GmbH z 11/2007 4 www.detecon.com

 NGN Interconnection
NGN Interconnection – Emerging Strategic Challenges

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Differentiated QoS

When considering how Interconnection products are to be defined in the NGN, the issue of
QoS or guaranteed end-to-end quality arises. Introducing QoS could be the basis for new
products and services and could enable network operators to counter the challenges faced
in today’s telecommunications markets. In the “Best Effort” Internet world there is no
differentiation between high value services (e.g. voice or IP TV) and low value services
(downloads, file sharing). This leads to capacity bottlenecks and an unnecessary competition
for network resources that creates no further value. The provision of higher value services
with a guaranteed QoS would in contrast generate new revenue potentials.

A QoS differentiation with classes of services is hence a possible solution. A basic

differentiation between four service classes is possible: real time services, streaming
services, data services and best effort services. This difference is based on quality
parameters such as latency time (the delay for end-to-end transmission), Jitter (the deviation
of latency times from the average value), or the packet loss rate. The provision of real time
services depends on these parameters since the delayed arrival of packets leads to
disruption of the entire service.

QoS would enable network operators to develop new wholesale business models. One
of these business models substitutes traditional PSTN voice telephony with a QoS Voice
over Internet. This is a qualitative improvement on the current “Best Effort” Voice over
Internet (Skype) as the voice quality is not noticeably different to that of the PSTN – even
during peak hours. Achieving this vision requires that the same quality parameters are used
in different networks. The weakest link defines quality of the entire service. Each network
operator has to get paid for the quality provided. However, in the “Best Effort” Voice over
Internet case no payment between the different network operators takes place as long as
major part of Internet traffic is routed under free peering arrangements,. This has to change
in case of QoS is guaranteed. As in the current PSTN network, payments have to be made
to those networks which transport the traffic in accordance with the agreed quality standards.
The same argument holds for the wholesale data business. This option guarantees efficient
network dimensioning while ensuring a superior quality of service when – and only when – it
is needed.

Detecon International GmbH z 11/2007 5 www.detecon.com

 NGN Interconnection
NGN Interconnection – Emerging Strategic Challenges

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QoS Voice: Basic Concept

Interconnection Interconnection
Partner 1 Partner 2

Application Plane IP Interconnection Application Plane

VoNGN
Control Plane Control Plane
Difference includes
of VoNGN & call control &
VoInternet media
Transport Plane Transport Plane
(E2E QoS)

Access network Access network

For the definition of interconnection services the entire industry collectively needs to set
quality categories and parameters. This is a prerequisite for providing consumers with
homogenous end-to-end products and services across different networks. But, aren’t the
Internet founding principles being sacrificed for the implementation of QoS? Are NGNs – i.e.
IP-based networks with managed routing and managed quality – really necessary? The
answer is: yes, we need the NGN – at least if we want to avoid economic inefficiencies. QoS
is already provided in the current Internet - but only as long as it continues to be over-
dimensioned. But this does not provide a quality guarantee, nor is the excess capacity
economically efficient. If transmission capacity is reserved exclusively for a particular service
quality is ensured, but at the same time the capacity is blocked and cannot be used for other
services – even if there is no traffic.

In contrast to this the managed NGN fulfils service-specific quality requirements while
maintaining flexibility through the usage of category prioritization. Wholesale carriers hence
should manage quality and should make quality differentiation one of the central
defining characteristics of their NGN interconnection services and related interconnection
business models.

Detecon International GmbH z 11/2007 6 www.detecon.com

 Recommendation
NGN Interconnection – Emerging Strategic Challenges

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Conclusion & Recommendations

There are two possible strategies that incumbents might follow in the light of the upcoming
technological, market and regulatory changes: One approach would be to respond to new
regulatory obligations by sabotage and delaying tactics. In contrast a cooperative wholesale
strategy can transform what is currently perceived as being a disruptive revolution into a
promising level playing field providing new business opportunities.

In a nutshell, Incumbents need to design a defending NGN interconnection strategy with

focus on charging models and QoS-based service portfolios. It will require their active
participation in the ongoing regulatory discussions and influencing the emerging
regulatory framework with a focus on the two major issues:

1. Incumbents should promote the continued existence of the Calling Network

Party Pays (CNPP) regime and should try to avoid Bill and Keep (B&K) at all
cost. Even if it is most probably not possible in the long term, when PSTN is
switched off, it should be a short- and mid-term goal to maintain the CNPP model
and avoid arbitrage.

2. The Industry as a whole should enforce differentiated QoS by introducing

different Service classes based on quality parameters such as latency time,
jitter, or the packet loss rate. Similar quality parameters have to be used
collectively in different networks in order to define comprehensive Interconnection
standards; the weakest link will determine the entire end-to-end quality standard.
QoS based Interconnection services enable network operators to develop new
wholesale business models and revenue streams that partly substitute traditional
PSTN voice telephony.

Detecon International GmbH z 11/2007 7 www.detecon.com