ECONOMICS AND TECHNOLOGY, INC.

THE EFFECT OF INTERNET USE ON THE NATION'S TELEPHONE NETWORK

1. Explosive growth of the Internet

The explosive growth of the Internet and online services has generated considerable public discussion about the need for our national communications infrastructure to adapt to emerging technology so that consumers will have affordable access to new interactive services and technologies as they emerge.

At issue is how best to accommodate increased data traffic on local public networks. Before identifying the most appropriate transmission technologies and deployment plans, it is critical to conduct an objective assessment of the current situation, including the impact that the current level of Internet and other online service traffic is actually having on the telephone network. In making that assessment, this study concludes:

• Data communications traffic poses no significant threat to network integrity at the present time.

• The increase in data communications traffic has produced additional revenues for the local exchange carriers that far exceed their costs in accommodating that traffic.

• The long-term solution for accommodating increased data traffic lies in the stimulation of competition and in the deployment of appropriate data-friendly network technologies, and not in the imposition of per-minute access charges for use of the current voice-oriented circuit-switched network.

Several Bell Operating Companies (BOCs) have recently claimed that the growth of data traffic, mainly calls to Internet Service Providers (ISPs) and other Enhanced Service Providers (ESPs), is clogging the public switched telephone network (PSTN) and is causing service to the public at large to deteriorate. To support these claims, the BOCs and Bellcore, have released studies that purport to quantify the costs and other impacts of ISP/ESP traffic. These studies, however, are not comprehensive assessments of the impact of data traffic on local telephone networks. Rather, they rely on anecdotal evidence drawn from a few unrepresentative central offices, along with some theoretical claims. An examination of these studies reveals that the BOCs' congestion claims are overstated and their assertions that they are inadequately compensated for data traffic ignore substantial revenues attributable to such traffic.

2. Data communications traffic currently poses no significant threat to network integrity

The Study concludes that the Public Switched Telephone Network (PSTN) is capable of accommodating the increasing volume of data communications, including Internet traffic, in the near term. The very few congestion problems that have been identified as affecting the telephone network can be easily corrected. Moreover, the study finds that, on average, Internet users do not impose disproportionate costs on local phone networks. Thus, any predictions that Internet traffic will soon result in a meltdown of the network are greatly exaggerated.

• The specific areas of congestion identified in the BOC studies are not representative of the nation's 23,686 central office switches, the vast majority of which do not carry much data communications traffic. In fact, the BOC studies focus only on a handful of central offices and switching entities (127) that serve ISPs. This study does not suggest that the specific problems that the BOC studies have identified should not be addressed, but that it is wrong to characterize these ad hoc problems as systemic.

• The few PSTN congestion problems that have been identified can be easily corrected. The specific congestion problems identified by the BOC studies are primarily attributable to inadequate planning and/or inefficient engineering, and in any event can be easily addressed and resolved by available service and equipment configurations with little difficulty or cost.

• Any congestion or other problems in the Internet itself, or in a particular ISP's network configuration, pose no cause for concern by the BOCs, since these problems do not significantly affect users of the PSTN.

• The BOCs' own recent efforts to enter the market as ISPs/ESPs undermine their argument that data traffic threatens the PSTN as a whole. If increases in on-line service traffic posed a significant threat to their networks, the BOCs would not be exacerbating the problem by offering unlimited Internet access for a flat rate.

3. The Internet produces net economic gains for local exchange carriers

The growth of Internet and online service providers has generated significant new revenue streams for local exchange carriers. At the same time, because the heaviest Internet traffic is at non-peak times for the PSTN, this traffic is actually lowering the local telephone companies' per-minute cost of providing service by utilizing capacity that would otherwise lie idle. The Study finds that the Bell companies did not consider these significant economic benefits when they claimed that their infrastructure investments for managing increased data communications traffic are uncompensated. The Study concludes that the recent increase in data communications traffic has generated revenues for local exchange carriers that exceed by a factor of six the incremental costs they incur to carry this traffic.

• Internet users already pay for the local phone services they receive. There is no free ride for ISPs/ESPs and their users under the present local rate treatment; local calls placed to ISPs/ESPs are paid for by the calling party and are revenue-producing to the BOC. BOCs receive substantial revenues from users through monthly charges for additional access lines and ISDN lines, and through usage-sensitive fees, as well as from the ISPs/ESPs themselves for the various basic and vertical services and features that they use. This study concludes that, nationally from 1990 through 1995, the local exchange carriers have collected more than $3.5-billion in revenues from additional residential access lines for subscribers who use them solely or primarily for calling ESPs/ISPs.

• In 1995 alone, some 6-million residential subscriber lines were used exclusively or primarily for online access. Total (nationwide) revenues from additional residential access lines whose installation was driven by the subscriber's use of on-line services reached $1.4-billion in that year.

• Compared with the Bellcore study estimate that reinforcing the PSTN will cost some $35-million per year per BOC (for a total of $245-million, nationally), additional residential access line sales stimulated by the growth of on-line services generated revenues that exceed this figure by a factor of six.

4. The Solution: More Data-Friendly Networks

The Study concludes that the growth of the Internet and other on-line services does not present any immediate congestion or revenue problem for the existing telephone networks. At the same time, it should also be clear that the existing PSTN presents formidable technical impediments to the future growth and development of these new services. Continued reliance upon circuit-switched technology is not a satisfactory solution to the needs of ISPs, ESPs and their customers. The long-term solution for accommodating increased data traffic lies in the stimulation of competition and in the deployment of appropriate data-friendly network technologies, and not in the imposition of access charges for use of the current voice-oriented circuit-switched PSTN.

5. Congestion internal to the Internet or to ESP Networks does not significantly impact the Public Switched Telephone Network

This diagram depicts a simplified version of the local telephone network. The public switched network itself consists of Elements 1 through 6. In considering BOC claims, it is particularly important to bear in mind that any problems associated with lines to a particular ESP (Element 6); a particular on-line service provider's internal hardware or software (Element 7); or the Internet or other data network (Element 8), have no significant impact upon users of the local telephone network.

6. Wichtige Abkürzungen der Nachrichtentechnik