Center for Information and Communication Technologies

The Cost of Universal Service Obligations in PSTN and VoIP

For further information: www.viskan.net

Bordeaux, December 12, 2005Bordeaux, December 12, 2005

Halldor Matthias Sigurdsson (halldor@cict.dtu.dk)

Center for Information and Communication Technologies

The Cost of Universal Service Oblications Page 2

Research Interest

Next Steps:

Is broadband becoming a commodity which everyone should be entitled to? Should Universal Service Obligations be extended to include broadband? Which methods exist to ensure widespread broadband? What is the cost?

In this paper:

Analysing the current Universal Service Legislation

How does the transformation from PSTN to VoIP affect current or future USO

Estimate the cost and extent of Universal Service Obligations in PSTN

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The Cost of Universal Service Oblications Page 3

Context

Techno-Economic Studies

BREADhttp://www.ist-bread.org

ECOSYShttp://www.celtic-initiative.org/Projects/ECOSYS/default.asp

TONIChttp://www-nrc.nokia.com/tonic/

TETRAhttp://www.telenor.no/fou/prosjekter/tera/

Economic Theory

Laffont and Tirole, 2000Competition in Telecommunication

Bijl and Peitz, 2002Regulation and Entry into Telecommunications Markets

M.Cave et al., 2002Chapter 10, Handbook of Telecommunications Economics

Extending Universal Service

P.Xavier, 2003Should Broadband be part of universal service obligations

García-Murillo and Mckninght,2005Internet Telephony: Effects on the Universal Service Program in the United States

Center for Information andCommunication Technologies

Danish Technical University

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The Cost of Universal Service Oblications Page 4

Paper Structure

PSTN Structure– Cost Components– PSTN in rural areas

VoIP Structure– Cost Components– PSTN in rural areas

Universal Service– Universal Service Obligations– Universal Service Fund

Case Study: Iceland– Cost simulation model– Cost of USO in Iceland

Paper is available on-line at: www.viskan.net/phd/publications.php

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The Cost of Universal Service Oblications Page 5

Universal Service

Universal Service– Availability, Accessibility and Affordability– Currently only basic voice telephony– Implemented differently by each member state– Defined in EU’s New Regulatory Framework from 2002

Universal Service Obligation– Burden, usually put upon incumbent operator

Universal Service Fund– Compensation for fulfilling USO– Different approaches: UK and US

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The Cost of Universal Service Oblications Page 6

VoIP & Universal Service

Literature suggest– Redistribution through taxation rather than subsidies

[Laffont and Tirole, 2002]

– Inefficiency of USF ($1 raised costs $1.8)– [Laffont and Tirole, 2002]

Effect of VoIP on USF– García-Murillo and Mckninght simulate that contributions to the fund be reduced by 45% in the

next 15 years, if VoIP operators are exempted for contributions to the Universal Service Fund– If VoIP operators are demanded to contribute to the Universal Service Fund, contributions will

increase. But this is not enough to meet the increasing demands for its services

Extenstion of Universal Service– Xavier and now EU concludes that there is no need to introduce new legal requirements for

mobile and high-speed internet services under the EU's universal service rules at the moment.

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PSTN

Public Switched Telephone Network

Local LoopRemote Subscriber StagesLocal and Transit ExchangesTransmission SystemControl and signalling systemSwitching system

Internal ServicesHousingSwitching

Transmission

12%

20%

46%

18%

Cost

Com

ponents

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The Cost of Universal Service Oblications Page 8

VoIP

Voice over IP

Softswitch / Gateway

CPE Customer Premises Equipment

ATA- An Analogue Termination Adapter

The InternetATA ATA

Internet

CPE

SoftswitchGateway CPE

PSTN

12%

20%

46%

18%

Internal ServicesHousingSwitching

Transmission

Cost

Com

ponents

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The Cost of Universal Service Oblications Page 9

Comparing the two

Overlay ServiceUses the InternetBroadband = Urban Service10 % Penetration

ATA ATA

Internet

CPE

SoftswitchGateway CPE

PSTN

Infrastructure ServiceCostly TransmissionUSO = Rural Service90% Penetration12%

20%

46%

18%

12%

20%

46%

18%

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The Cost of Universal Service Oblications Page 10

The Case - Iceland

Facts:

Inhabitants: 280.000 Arial: 103.000 km2

70% in capital 92% in towns 2,5 Gb/s fibre ring connecting all

towns

Status:

Not a EU member Member of EEA High broadband penetration 128 Kb/s minimum enjoyed by

all (apart from 72 farms)

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The Cost of Universal Service Oblications Page 11

Hypothesis

No. of users pr. location

Co

st p

r. u

ser

Reference Level

Cost of remote structures and operation is distributed

but related to customer number

The Cost of USO can be calculated and

aggregated

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The Cost of Universal Service Oblications Page 12

Actual Cost

Remote Structures and Operation< 500 customers

R2 = 0,7734

0

5

10

15

20

25

30

35

0 50 100 150 200 250 300 350 400 450 500

Th

ou

san

ds

Number of Customers

Co

st p

r. C

ust

om

er

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The Cost of Universal Service Oblications Page 13

Approach

Pareto Analysis of Total Cost of Operation for Iceland Telecom (the incumbent) for 2002

Chapter 4Problem Analysis

User

User Interface

Program

Algorithms for Optimisation

CORE

Microsoft Excel

VBA ENGINE

Subroutines for constructing reports

Distance Database Feasibilitycalculations

Spreadsheet

Badwidthallocation

Spreadsheet

Operationalcost calculations

Spreadsheet Spreadsheet

Database / Spreadsheets

User

User Interface

Program

Algorithms for Optimisation

CORE

Microsoft Excel

VBA ENGINE

Subroutines for constructing reports

Distance Database Feasibilitycalculations

Spreadsheet

Badwidthallocation

Spreadsheet

Operationalcost calculations

Spreadsheet Spreadsheet

Database / Spreadsheets

User

User Interface

Program

Algorithms for Optimisation

CORE

Microsoft Excel

VBA ENGINE

Subroutines for constructing reports

Distance DatabaseDistance Database FeasibilitycalculationsFeasibility

calculations

Spreadsheet

Badwidthallocation

Spreadsheet

BadwidthallocationBadwidthallocation

Spreadsheet

Operationalcost calculations

Spreadsheet

Operationalcost calculations

Operationalcost calculations

Spreadsheet Spreadsheet

Database / Spreadsheets

VBA Model for cost components that can be

calculated

Remote Structure and Operation< 500 customers

R2 = 0,5526

0

500

1.000

1.500

2.000

2.500

0 50 100 150 200 250 300 350 400 450 500

Th

ou

san

ds

Number of Customers

To

tal

Co

st p

r. l

oca

tio

n

Regression Analysis for fixed cost components

1 2 3

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The Cost of Universal Service Oblications Page 14

The Cost of USO

Remote Structures and Operation< 500 customers

R2 = 0,7734

0

5

10

15

20

25

30

35

0 50 100 150 200 250 300 350 400 450 500

Th

ou

san

ds

Number of Customers

Co

st p

r. C

ust

om

er

Remote Structure and Operation< 500 customers

R2 = 0,5526

0

500

1.000

1.500

2.000

2.500

0 50 100 150 200 250 300 350 400 450 500

Th

ou

san

ds

Number of Customers

To

tal

Co

st p

r. l

oca

tio

n

Level of Urbanisation

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

City Town Rural

Acc

um

ula

ted

nu

mb

er o

f cu

sto

mer

s w

ith

in g

rou

p

0

10

20

30

40

50

60

70

80

90

100

Acc

um

ula

ted

nu

mb

er o

f te

rmin

atio

n p

oin

ts w

ith

in g

rou

pCustomers

Termination Points

Population Sparcity

0

20000

40000

60000

80000

100000

120000

140000

160000

100 200 300 400 500 600 700 800

Distance from Capital [Km]

Acc

um

ula

ted

nu

mb

er o

f cu

ost

mer

s w

ith

in g

rou

p

0

10

20

30

40

50

60

Acc

um

ula

ted

nu

mb

er o

f te

rmin

atio

n p

oin

ts

customers

Number of RSS

Center for Information and Communication Technologies

The Cost of Universal Service Oblications Page 15

Conclusion

VoIP is a disruptive technology, has different cost structures and greatly reduces barrier to entry

Difference between PSTN and VoIP– Infrastructure vs. Overlay– Costly transmission vs. Internet– Rural vs. Urban– 90% penetration vs. 10%

1,5% of customers require 33% of all locations

Loss of € 199 pr. non-profitable users requires € 2,96 subsidy pr. PSTN user

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The Cost of Universal Service Oblications Page 16

Questions ?

For questions or commentsPlease feel free to contact

halldor@cict.dtu.dk

www.viskan.net