AN OVERVIEW OF VoIP REGULATION IN AFRICA

AN OVERVIEW OF VoIP REGULATION IN AFRICA: POLICY RESPONSES AND PROPOSALS FOR THE COMMONWEALTH TELECOMMUNICATIONS ORGANISATION

BY TRACY COHEN AND RUSSELL SOUTHWOOD

2004

04

Important: This document is an output from a project funded by the UK Department of International Development (DFID) for the benefit of developing countries. The views expressed are not necessarily those of DFID. The views expressed in this report are those of the authors and do not necessarily reflect those of CTO. Copyrights of this publication are the property of Commonwealth Telecommunications Organisation (CTO). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of CTO.

05 TABLE OF CONTENTS

1 1.1 1.2 1.3 1.4 1.5

Acronyms & abbreviations Overview

06 07

Technology: What is VoIP and what does it do? How the technology works VoIP applications VoIP and converged communications African telecommunications and Internet indicators VoIP deployment to advance communications access

08 08 09 11 12 13

2 The market for VoIP calling – Who’s using it and why? 15 2.1 The gap between licensed retail international rates and the underling wholesale rates – exploiting the difference 15 2.2 VoIP companies in Africa 16 2.3 VoIP use by licensed telcos: efficiency and competitiveness 18 2.4 Grey market use – undercutting the monopoly providers 19 2.5 Retail or wholesale VoIP? 22 The opportunity VoIP offers Africa Cost advantages of the technology Ability to handle network congestion Advantages of a ‘richer voice’ environment, convergence and interconnectedness 3.4 Disadvantages of VoIP 3.4.1 Quality of service and mission critical issues 3.4.2 Proprietary vs. open software

24 24 24

4 4.1 4.2 4.3 4.4

Current approaches to regulating VoIP in Africa and elsewhere Overview of regulation in Africa Countries seeking to adopt VoIP Countries opposing VoIP adoption International experience 4.4.1 Canada 4.4.2 USA 4.4.3 EU and UK 4.5 Why some countries lead and others follow

29 29 29 31 31 32 32 33 33

5 5.1 5.2 5.3

Approaches to VoIP regulation – recommendations and research Impact on markets of VoIP from a regulatory standpoint Regulatory approaches to VoIP – Technology-neutral? Further research Business case Regional and international Regulatory

36 36 36 37 37 37 38

6

Conclusion

39

Appendix A

40

Appendix B

41

3 3.1 3.2 3.3

25 26 26 27

06 LIST OF GRAPHS & TABLES

Graph 1: Graph 2: Graph 3: Graph 4: Graph 5: Table 1: Table 2: Table 3:

How VoIP works Carriers with VoIP networks African termination destination of international VoIP traffic International VoIP traffic – Growth per region Telco ownership in Africa

09 16

African telecommunications indicators Summary of VoIP adoption and use in Africa Summary of Telco ownership status and independent regulators in Africa

12 30

18 19 29

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07 OVERVIEW

The past two decades have seen enormous change in telecommunications markets worldwide. This change is characterised by a number of discernable trends reflecting the challenges posed by technological advances, privatisation, liberalisation and efforts to ensure effective regulation in both developed and developing countries1. Developing countries have only more recently begun to initiate telecom liberalisation programs and following what they believe to be international best practice and benchmarking methodologies generally model their reform efforts on experiences of developed countries. As a result, many more countries around the world have introduced varying levels of competition in the domestic supply of telephony services. The number of countries allowing some competition in their domestic markets grew between 1995 and 2001 from fewer than twenty to almost eighty2. The advent of the General Agreement on Trade in Services (GATS)3, notably the Basic Telecommunications Pact or Fourth Protocol4, has done much to ensure that all signatory countries, at the very least, make future commitments to market liberalisation5. Yet, despite these developments, structural market change is slower than technological progress: most countries on the African continent still limit competition in both fixed and mobile markets, and by and large, endorse monopoly supply in fixed line telephony, seeking to maximise the revenues from state-owned assets6. While mobile service is clearly the ‘killer application’ in Africa and has eclipsed the growth of fixed line services, affordability and access still remain the two biggest interrelated factors to increased teledensity in Africa7. Yet, there is a consistent failure at the policy level to seek out and utilise a range of technologies and regulatory options that combined, would greatly contribute to addressing the disparities in access to telecoms services and vastly reduce the costs. Specifically, policy failures to liberalise the enhanced services markets and legalise the provision of Voice over IP (VoIP) - a technology that enables transmission of voice and data over packet switched, IP-based networks - which remains illegal in many African countries. Where VoIP is being utilised it is usually by the monopoly providers in each country and by individual users seeking to bypass expensive fixed line systems. Although limited, this trend is however growing: the ITU estimate that outbound VoIP surged to 2.06 billion minutes last year compared to 1.34 billion minutes in the previous year, indicating unmet demand for affordable telephone services.

“Effective regulation” is assumed to be that which meets statutory goals with the least amount of interference in private markets. 2 International Telecommunications Union, Effective Regulation: Trends in Telecommunications Reform 2002 (Geneva: ITU, 2002), p. 6. 3 WTO, General Agreement on Trade in Services, contained as Annex 1B to the Agreement Establishing the World Trade Organization, 15 April 1994, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Legal Instruments – Results of the Uruguay Round, 33 I.L.M. 1143, 1168 [GATS]. 4 Fourth Protocol to the Basic Agreement on Trade in Services, 30 April 1996, WTO Doc. S/L/20. 5 As of 23 April 2004, the current membership of the WTO is 147, of which over 100 are developing countries or 1

The potential for VoIP growth in Africa is significant. Current market indicators suggest that 11 per cent of all international traffic is voice-over IP. Popular predictions suggest VoIP traffic will eventually account for 75 per cent of global services by 2007. Triggered by the decay of many fixed line telephone systems, and challenged by the growth of mobile services in Africa, VoIP remains an increasingly attractive competitive option. The market entry costs are significantly lower than traditional fixed line and mobile networks; and the cost to consumer well below traditional rates on other networks. This paper seeks to explore the dimensions of these claims and understand the approach by African governments in delaying widespread use of VoIP technology. To that end, it is divided into 5 sections. Part 1 will outline the technological aspects of VoIP, draw the necessary distinctions in terminology and outline its uses and applications. A brief overview of technology indicators on the African continent is also provided. Part 2 examines the business case for VoIP in Africa by describing the market; the user base; service providers and the emergence of an illegal or ‘grey’ market in VoIP services which, it is often claimed by operators, serves to undercut incumbent long-distance rates and bypass international settlement agreements. There are studies that suggest however that the international accounting rate and settlement system is under threat because the context in which it was developed – that of monopoly supply – is no longer relevant. VoIP is only one, but certainly not the most significant threat to undermining its continued existence8. Part 3 then explores whether, on the basis of the business case provided, there is indeed an opportunity offered by VoIP technology to the African continent. This is examined with reference to cost advantages, traffic loads, interconnection and how VoIP has been deployed as a means to advance communications access. The shortfalls of the technology are also outlined. Part 4 describes international efforts in regulating VoIP technology; the approach of African governments that have to date, enacted measures in this regard and why certain countries lead in communication innovation and others follow. Part 5 concludes by outlining a series of recommendations to facilitate further adoption of VoIP on the continent and where necessary, to undertake further research.

countries in transition. 37 African countries, including Mauritius and Mauritiana are members. 6 See ITU, World Telecommunication Indicators Database, 2003. 7 There is debate over the most accurate way to measure ‘teledensity’ and ‘teleaccessibility’ in developing countries. The term is used here to refer to total fixed and mobile lines per 100 inhabitants, unless otherwise specified. 8 See for example, Robin Mason, “Internet telephony and the International Accounting Rate System” Telecommunications Policy (1988) 22:11, p. 931-944, where it is argued that call-back and resale pose a more significant threat of bypass because they approximate PSTN service quality more closely than VoIP.

08 1. TECHNOLOGY WHAT IS VoIP AND WHAT DOES IT DO?

“Voice over Internet Protocol” (VoIP) is a generic term which refers to a technical standard that enables the transmission of voice traffic in whole or in part, over one or more networks, which uses the Internet Protocol (IP). VoIP traffic can be carried on a private managed network or the public Internet or a combination of both. VoIP technology supports a wide range of applications and services from traditional telephone services to interactive games (Ofcom). It has its roots in a 1997 “Request for Comment” (RFC) paper outlining the development of the Network Voice Protocol, by which voice could be digitised and transmitted over the Internet’s predecessor, ARPANET9. The development of standards or ‘protocols’ for VoIP is still evolving. However, two main open protocols among a number, enable VoIP in addition to a number of proprietary vendor protocols. • “H. 323” is the most widely adopted protocol for the transmission of VoIP. It is an International Telecommunication Union (ITU) legacy standard, which builds on earlier protocols for the transmission of voice and video over analogue PSTN, ISDN and ATM. H.323, originally developed for videoconferencing however, does not encompass all aspects of VoIP communications and each technology vendor can have their own variations of the overall network architecture and speech compression algorithms10. • “Session Initiation Protocol” (SIP) is an application-layer control protocol, which is an end-to-end signalling protocol. SIP merely facilitates communication between two or more SIP supported devices, but it is not the only protocol required to make VoIP calls, which takes place via additional protocols11.

public switched telephone network (PSTN), a dedicated 64 kilobits per second (kbps) end-to-end circuit is allocated for each call. In a VoIP network, digitised voice data is highly compressed into packets carried over the IP network. Other examples include G711alaw 64k; ILBC -15k; GSM -13k and G729 8k. Using the same bandwidth, a VoIP network can carry many times the number of voice calls as a switched circuit network. Therefore transport cost per bit of information is lower of packet switched networks12. VoIP software enables the reconstruction of the voice signals at their destination, compensating for echoes made audible due to the endto-end delay, for jitter (variability) and for dropped packets. This usually requires a broadband connection or high speed service such as ADSL or a local area network, but dial-up access to the Internet does not preclude access to VoIP applications, albeit, may affect the quality of the communication. That said, an important caveat regarding call quality is warranted: while VoIP call quality is still inferior to analogue or circuit switched systems, most (but not all) PSTNs in Africa offer call quality below that experienced in developed countries. In this light, ‘quality’ must bee seen as a relative concept, where VoIP-enabled calls are not necessarily much different from their PSTN counterparts on many African networks. One example of a VoIP-enabled telephone call would involve the use of a regular phone to dial a subscriber number, using an adapter that connects to an existing high-speed Internet connection, or directly to the phone. The call goes through a local telephone company to a VoIP provider and travels over the Internet to the called party's local telephone company for the completion of the call. Another way to make a call is to utilise a microphone headset plugged into a computer. The number is placed using the keyboard and is routed through an attached modem.

1.1 How the technology works VoIP technology works by digitalizing, converting and compressing data into packets. Voice (or data) is converted into digital signals that travel over the Internet, or a private network utilizing VoIP and then converts it back at the other end enabling voice communication. The data packets are non-isochronous and may take many different and independent paths to the intended destination, arriving out of sequence or with different end-to-end delays. It thus makes much more efficient use of bandwidth and voice is transmitted on IP-based networks at considerably lower cost than circuit-switched networks which require a dedicated connection for the entire duration of a ‘call’. For example, on a

9 RFC’s are the Internet’s basic set of standards. A full list is available on the Internet Engineering Task Force (IETF) Website http://www.ietf.org/rfc.html and the Internet RFC/STD/FYI/BCP Archive at http://www.faqs.org/rfcs 10 Speech compression can reduce the required bandwidth by a factor of 8 or more. See InnoMedia Solutions, at http://.innomedia.com/ip_telephony.voip/index.htm 11 See Webopedia at http://www.webopedia.com/TERM/I/Internet_telephony.html

The IP network used to support IP telephony can be a proprietary network, a network of leased facilities or the public Internet, which is the cheapest, but because it is largely decentralised can suffer from congestion and uncontrollable packet delays, as well as temporary outages. More reliable VoIP communications are secured on private, dedicated networks, although at a higher cost to consumer. This option guarantees bandwidth, some level of service quality and is thus more stable.

12

Mason, p. 936

09

Graph 1: How VoIP works

1.2 VoIP applications It is important to point out that the term “VoIP” is used frequently and generically with others that denote a combination of three concepts: ‘voice’, ‘communication’ and ‘network’ – often the Internet. However, there remain significant differences between the collective terminologies. While these variances may be marginal from a technological and user perspective, there are important regulatory implications, which flow from the differences. The terms are distinguished here in the context of some of the main applications offered by the technology. 1. As noted above, “Voice over Internet Protocol” (VoIP) is the standard that enables the transmission of voice over a public or private network and over the Internet. It is not dependent on an Internet connection as voice can be carried on any network, including private networks that use the TCP/IP protocol.

Graphic: Federal

The above graphic illustrates the various components comprise a VoIP system. A VoIP network requires a terminal or communication end-point, which can be a phone, PC or even a software programme (“soft phone”). Terminals are identified by at least one IP address (e.g. [email protected]) and are registered with a server, which stores IP addresses and can map an address to a terminal. The server might also store locational, identifying and traffic data. Finally, gateways act as bridges between the local PSTN and IP network to allow calls between different networks so that the signalling protocol can be understood between networks and so that IP addresses and regular PSTN numbers are recognisable between networks. Signalling data is exchanged between switched circuit telephone networks and VoIP networks. This information is used to setup, manage and release voice calls, and support telephony services such as caller ID, toll-free calling, and mobile authentication and roaming services. In spite of the additional connections required through the gateways on both the originating and terminating ends of a call, the overall call set up time is not significantly longer than a regular PSTN call. To work, the gateways must use a common protocol like H.323 or one of the proprietary ones available13.

13 Bretton Vine and Anthony Brooks, Internet Policy Handbook for Regulators and Policy-Makers (London: CTO, 2004, forthcoming).

2. “Voice over the Internet” or ”Internet voice” refers to voice traffic, uni- or bi-directional, whether in real time or not, that passes over the global Internet. For example, any two users of any software, such as Yahoo! Instant Messenger’s ‘chat’ function who can communicate using a microphone and speakers plugged into their PC’s, which are in turn connected to the Internet. (Also known as Class 3, or PC-to-PC services). Other examples include Microsoft Messenger, AOL Messenger and ICQ. This was the first generation of IP telephony (see below) but required that people wishing to communicate had the same hardware (PC, microphone, speakers, etc.) and software. The voice signals transmitted are not switched across a PSTN at all. Sound quality is limited for users on dial-up access, and is markedly better for broadband and high bandwidth connections. 3. “Internet telephony” or “IP Telephony” is essentially the same as (2) above, but denotes real time communication akin to standard telephony. That is, the provision of voice and fax services, partially or wholly over “packet switched” IP-based networks rather than circuit switched telephone networks14. What is also known as second generation IP telephony involved the use of a computer attached to the local telephone network on the terminating end to convert the calls and send them onto the called party as a regular telephone call. An example is a call originating from a subscriber on the PSTS and terminating on the Internet. Alternatively, where a call originating on a PC connected to the Internet is received

14

Michael Minges and Tim Kelly, “Around the World” IP Telephony in ITU News 2/2001, p. 14.

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and terminates on the PSTN through the handset of a subscriber. (Also known Class 2 or as PC-to-Phone services). Examples include Dialpad, Net2Phone or Go2Call15. Attaching hardware at the originating end of a call resulted in a third generation of Internet telephony which denotes Phone-to-Phone access (Class 1)16, using regular telephones at both the originating and terminating ends of a call, but routing the call over an IP packet-switched (public or private), rather than traditional circuit switched network. In both cases, a service provider offering a ‘gateway’ between the Internet user and the telephone network is required17. A subscriber joins a service provider who connects the Internet-based portion of the call to a PSTN subscriber, using the PSTN. The first subscriber is then charged a fee for this portion of the call. Standard or ‘soft’ phones are now available which act as a regular phone connecting through an adaptor to the PSTN or the IP network. Examples include x-lite (windows) and Lipz (Linux). There are many Internet telephony applications available. Some, like CoolTalk and NetMeeting, come bundled with standard web browsers and others are stand-alone products18. While (2) and (3) above are essentially the same, subject to minor qualifications, the main distinction needs to be drawn between the latter two and (1), above. Other applications enabled by VoIP are for example Internet Fax and Audio/Video Transport facilities. Where VoIP is also increasingly being utilised is within corporate networks, where large companies transmit voice over an IP backbone without the use of a service provider. This application merely requires that various office branches that wish to be connected have broadband connections, which then connect the PABX systems of both to the Internet. The PABX will continue to connect most calls to the PSTN, but calls to numbers at other branch offices are channelled over the Internet using a Virtual Private Network connection (VPN). It should be noted however, that in June 2004, the ITU approved a set of global industry standards for Ethernet to link any number of endpoints in a wide area network (WAN). This elevates LAN connectivity technology to a carrier class service delivery technology allowing operators to offer considerably improved flexibility to customers through a much simpler and lower cost interface. In countries where VoIP applications are legal such as the US and Canada, there are various models of service: some VoIP providers

See respectively, http://www.Net2Phone.com and http://www.Go2Call.com Class 0 is phone-to-phone over the PSTN. This is David Clarke’s classification system (MIT). 17 A signalling gateway provides transparent interworking of signaling between switched circuit (PSTN) and IP networks. Because of its critical role in integrated voice networks, signalling gateways are often deployed in groups of two or more to ensure high availability. See Performance Technologies, “IP Telephony Tutorial”, at 15 16

offer their services for free usually to other subscribers to their service. Others charge for long distance calls, similar to traditional fixed line telephone services. Other VoIP providers permit flat rate calling regardless of distance.

Summary VoIP enables the use of IP-based, data networks to communicate in real time. The technology enables standard telephone calls using a broadband Internet connection instead of an analogue phone line. Some services using VoIP may only allow you to call other people using the same service, (PC-toPC) but others allow calls to any regular (PSTN) telephone number (PC-to-Phone) including local, long distance, mobile, and international numbers. While some services only work over a PC computer or a special VoIP phone, other services enable the use of a traditional phone through an adaptor (Phone-to-Phone). Regardless of the generation of IP telephony, enabled by VoIP, the use of an IP network to transmit the call is rarely perceptible to the user who, outside of call quality concerns in certain cases, experiences seamless connectivity.

1.3 VoIP and converged communications It is apparent from the above that VoIP technology promotes the possibility of truly converged communications services, facilitating multiple services from one delivery platform. This essentially means that because Internet voice is digital, and can offer services unavailable on a traditional PSTN phone, computers can be used to make telephone calls, and the need for a fixed line traditionally required for this service can decrease in certain, evolved data markets. However, converged services offer more than mere convenience and also create significant arbitrage opportunities for carrying telephone traffic to countries that have high termination costs due to the accounting rate regime - the per-minute charges that telco’s19 negotiate and agree upon for carrying and terminating one another’s international traffic. This is evident in the use of an IP network to make a long distance or international call appear as a local call. ISPs do not pay settlement costs to foreign telcos. At most, the ISP will

http://www.pt.com/tutorials/iptelephony/ 18 See Webopedia at http://www.webopedia.com/TERM/I/Internet_telephony.html 19 The term “telco” is used as the standard abbreviation for “telephone company or operator”. It is used interchangeably with “PTT/PTO”.

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pay a national interconnect fee plus the local call charge when delivering traffic for termination in a foreign country20.

VoIP calls are cheaper than calls on the PSTN?

In countries dominated by monopoly operators, usually with full or majority state ownership, rates remain high and tend to be above the real costs of call termination. Because the revenue derived from the international settlement system is significant, and is ostensibly needed to reinvest into the national network, the advent of IP telephony is often perceived as a threat. For example, a business PABX can be configured so that all international direct dialled calls are transparently routed to the nearest gateway. Or, an access number might be dialled (usually local or toll-free) to access the nearest gateway and a PIN is entered following the desired destination number. These calls, being historically the most expensive on a network are then supported by VoIP to obtain the lowest cost. As services and technologies increasingly converge, voice-over-IP functionality is becoming a standard for PABXs, and entirely software-based PABXs are now available in both proprietary and open source versions21.

Cost savings exist because calls made using VoIP technology are not subject to the same call cost structure as those made on a PSTN, namely access charges, transmission costs and termination or settlement rates. Transmission costs are dramatically reduced because using voice compression algorithms and packet-switching technology reduces the amount of actual bandwidth required. A PSTN call requires an end-toend circuit for the full duration of a call, which has various costs associated. A call using VoIP technology involved the transmission of disparate packets over the network and depends in part on the number and size of packets being sent. Speech compression reduces the amount of bandwidth required which can further reduced through technology recognizing and not transmitting the silences that naturally occur in human speech. Reductions in bandwidth translate into a direct reduction in cost22.

As the cost structure of an IP network differs so markedly from the PSTN, long distance and international calls are much less expensive as there are no access charges (imposed by a local Telco to allow long distance carriers to originate/terminate the local portion of a call), transmission costs and termination or settlement charges. These cost advantages have prompted conventional PSTN operators to start using IP backbone networks where the transmission of long distance voice traffic goes via data links that operate seamlessly in the PSTN environment. From a subscriber perspective, for those Internet users who have free, or flat-rate Internet access, rarely available in Africa, IP telephony provides free telephone calls anywhere in the world. Beyond cheaper calling rates, a converged telecoms environment supporting VoIP technology also suggests cheaper technology options for rolling out infrastructure. VoIP technology however, as far as IP voice is concerned is not however a panacea in and of itself for Africa’s connectivity problems. Some IP telephony applications, such as PC-to-PC for example, cannot work without electricity, and end users and service providers would need to have an independent power source, unless the call was being made with third generation VoIP technology such as a phone and adaptor. Moreover, directory and emergency services are not yet part of Internet voice offerings and while constantly evolving. These limitations are discussed further in Part 3 below.

20 21

Mason, p. 937. Vine and Brooks.

1.4 African telecommunication and Internet indicators The business case for wider VoIP adoption in Africa is a compelling argument in its own right, for both incumbents and competitive suppliers. However, there are also public policy arguments for its adoption, which crystallise around the ongoing challenges of cost and access. While VoIP itself is not an access solution in and of itself, it is certainly a dynamic technology that should be considered by policy-makers as part of any approach to addressing both problems, which remain severe all over the African continent. While cellular/mobile technology is doing much to address the lack of access to fixed line telephony in Africa, and its meteoric growth has exceeded expectations in every market it has entered on the continent, it is not likely on its own, to fully answer the matter of affordability in the near future. This is because the dominant revenue model for mobile in Africa is emerging as pre-paid services, with less and less post paid or contract subscribers. Pre-paid rates remain above those of post-paid, and until they are closer to parity, will fail to address universal service gaps and total consumer costs. Even when rates reach parity with post-paid, the costs will remain beyond the affordability of millions. Other technologies and options need to

22

Summarized from InnoMedia, above.

12

be explored and brought into a holistic approach to addressing access, especially in public telephony services. The table below offers an outline of continental telecoms and Internet indicators to underscore these statements. Teledensity in Africa, namely, the number of telephone lines per 100 inhabitants measures on average 3.00 for fixed and double that number for mobile at approximately 6.00 per cent. Also important to examine is the compounded annual growth rate for a period, in this case measured between 1998-2003, which reflects the actual rate of growth. In the case of fixed lines in Africa, this is low at 5.9. This situation is exacerbated by the poor penetration rate of public telephone services. In countries like Malawi, this is as low as 0.06 and 1.30 in Botswana. Namibia reflects a higher rate at 2.98 and South Africa has the highest public payphone access (fixed line) on the continent at 3.94 per cent. (Per 1000 inhabitants). Within Africa, South Africa has one of the highest teledensity rates

(40.80 for fixed and mobile combined) along with the island areas of Reunion and Mauritius and parts of North Africa. In many parts of central and west Africa, fixed line teledensity rates plummet to as low as 0.33 in Niger, and 0.55 in the Central African Republic. East Africa tends to suggest higher penetration levels of 4.91 in Ghana; Nigeria 3.25 and Tanzania 2.95. The number of mobile subscribers passed the number of fixed lines in Africa in 2001. By 2003 almost 70 per cent of all African telephone subscribers used mobile; the figure was even higher in Sub-Sahara, where three out of four telephone subscribers used a mobile. The ITU has noted that this is the highest ratio of mobile-tototal-telephone-subscribers of any region in the world23. Concomitant with this growth, there has been a significant surge in pre-paid subscriptions, which now account for 69 per cent of all mobile customers in Africa. Overall, the average spend rate on mobile services in Africa remains extremely high, relative to income: average expenditure for mobile amounts to $27 (USD) per month

Table 1: African telecommunications indicators (2003) Teledensity (mobile & fixed per 100 inhabitants)

8.60

% of households with a fixed line

13.1

Total Fixed lines per 100 inhabitants

3.00

Public pay phones

0.61 (per 100 inhabitants)

2.03 (as % of main lines)

Waiting time to installation

4.5 years

Tariffs (residential)

USD $50 (connection) USD $4.3 (monthly)

11.6 (as % of GDP per capita)

per 100 subscribers

6.12

Tariffs

USD $28.32 (connection)

Prepaid

85.3%

% of telephone subscribers

65.1%

Hosts per 100 inhabitants

0.04

Tariffs (20 hours/month includes monthly subscription and telephone usage)

$60.09 total

31.69 (total ISP charge)

International bandwidth (total Mbps)

2,419.1

2.9 (bits per inhabitant)

FIXED

MOBILE

INTERNET Users per 100 inhabitants

Broadband (as % of total subscribers)

1.48

1.6

Source: International Telecommunications Union, 2004

23

ITU, Telecommunications Indicators for 2003, forthcoming 2004.

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which as the ITU points out, is more than half the official average African per capita income. While affordability remains a crucial issue with respect to both fixed and mobile services, mobile has still not addressed population coverage concerns all over the continent. The ITU estimates that by the end of 2003, less than half the sub–Saharan region was covered by a mobile cellular signal. It is important to note that getting mobile penetration rates higher implies extending coverage to unserved rural areas where installation costs are high, incomes low and uncertain demand remains a concern24. However, as teledensity per 100 subscribers fails to recognise various forms of community access, more accurate indicators of access to communications is reflected in the percentage of households that have a fixed line installed. Again, these figures vary considerably, reflecting 48 in Egypt and 1.3 and 1.1 in Ethiopia and Rwanda, respectively. To compound the severe lack of fixed line access, waiting lists are long and average waiting periods to line installation are measured in years. For example, a subscriber in Mozambique will wait approximately 6.7 years for a fixed line installation and in Zimbabwe, an even longer period of 9.7 years. Similar low Internet indicators present with a continental average of 6.82 (users per 100 inhabitants). Many of that average are concentrated in South Africa with a national average of 6.37. Togo and Zimbabwe for example reflect approximately 4.20 and 4.30 respectively and Ethiopia and Nigeria’s Internet penetration rates bear testimony to the severe digital divide facing most parts of Africa at 0.11 and 0.61 per cent, respectively. One of the largest barriers to Internet access on the continent links to pricing and the presence of monopoly fixed line operators. As the bulk of the costs remain those pertaining to line rental, and flat rate pricing is a rarity on the continent, ISP costs for Internet access tend to make up only a third of total costs on average. Based on the above information, it is not surprising that broadband deployment in Africa is minimal. While continent wide CAGR rates for Africa show an increase of 255.3 per cent, such high growth is simply reflective of practically no build out of the service in previous years. Although the following figures are not fixed and are constantly changing, most of this growth has occurred in South Africa (12.4%), some countries in Northern Africa (Tunisia 12.7%) and the Island states off east Africa. For example, Mauritius (28.1) and the

24

ITU, above.

Seychelles (74.2). This can be compared with almost zero broadband growth in CAR, Ethiopia, Malawi and Sierra Leone, for example, but signs are emerging that this is also beginning to change.

1.5 VoIP deployment to advance communications access African countries can deploy VoIP to meet a number of different objectives, both social and economic. Two examples will serve to illustrate these economic and social objectives: • Mauritius wants to become a “cyber-island” capable of attracting a range of outsourcing work. A clear part of the strategy has been the realisation that in order to achieve this objective it needs to be as competitive as possible globally in terms of international calling costs. From this starting point, the government and regulator have driven forward a competitive regime on international calling, allowing a number of organisations to compete with the incumbent telco, Mauritius Telecom. An element of this competition has come from licensed VoIP services and how this was brought about is described in section 2 below. • South Africa is currently in the process of licensing a class of under-serviced area licensees to attempt to address some of the above problems. In a 2001 amendment to the Telecommunications Act, the government introduced this class of licenses to operate in geographic areas where teledensity is less than 5 per cent. The licensees are limited to small business enterprises, precluding established operators from accessing this market segment. Specifically, these licensees are mandated to provide any telecommunication services including VoIP, fixed-mobile and public telephone services in the licensed area. Although there have been some delays in the licensing of these entities, the government has recognised the role that VoIP can play in delivering cheaper voice services to rural and under-served communities. To date, only four such licenses have been recently granted, and it is too early to assess their successes as none are yet up and running25. VoIP is a tool that African governments and regulators could use in a number of ways to address a wide range of pressing issues and it is therefore something that needs to be understood rather than feared.

25 A discussion of the viability of the business models is provided in Alison Gillwald, “Under-serviced Area Licences in South Africa: Steps to Achieving Viable Operators”, LINK Centre Policy Research Paper No 3, Graduate School of Public and Development Management, University of Witwatersrand, January 2003 at http://link.wits.ac.za/research/usal.htm

14 2. THE MARKET FOR VoIP CALLING WHO’S USING IT AND WHY?  In Africa, digitally based calling technology using VoIP has effectively acted as a can-opener on many issues that have nothing directly to do with the technology. It has focused attention on the high international rates being charged by monopoly, incumbent telcos and driven the creation of a large grey market in VoIP-based calling. This section examines why this has happened with such speed and on such a large-scale in Africa. 2.1 The gap between licensed retail international rates and the underling wholesale rates – exploiting the difference In May 2004 it was estimated that Senegal’s incumbent Sonatel was buying international outgoing minutes at approximately US$1112 cents but selling the same minutes to its customer for US$2933 cents a minute (off-peak/peak) from 1 June, having just made a 33 per cent price cut on its international rates. Earlier in the year Nigeria’s incumbent Nitel was charging US76 cents a minute for calls to Europe and the USA and as its CEO told Balancing Act’s News Update: ”You could buy the same calls on any street corner for US15 cents a minute.” Like Sonatel, Nitel reduced its rates, in this case to between US26-30 cents a minute to Europe and the USA. Three years ago the gap between the cost of buying wholesale minutes and the retail price to the customer was even larger. This gap has offered an “arbitrage” opportunity. Arbitrage is an American term that was originally used to describe the buying and selling of stocks to take advantage of varying prices in different markets. In this context, people have been able to buy minutes (from either the USA or Europe) and sell them more cheaply to the African consumer. And by doing so, they have undercut the incumbent telco’s prices and taken significant amounts of this business away from them. Individuals looking for a good deal or a cyber-café or call-centre owner looking to add income in what is undoubtedly a tough market, can approach any one of any number of sites and get both the equipment and service to supply VoIP calls all over the world. This can be done from a residential home or from a cyber-café or call-centre. While it is not quite “plug-and-play” technology, VoIP application is not so complicated as to deter the determined user. For example, US-based Net2Phone is one of the leaders in the field. A brief scan of its website will show that it is offering international calls for as low as US 3 cents a minute and the sending of faxes for US10 cents a minute. For customers using a dial-up connection (as most African users probably are), Net2Phone offers web links to suppliers who provide a choice of equipment: with or without a PC. With a PC, PCI Hotline costs US$75 (excluding shipping and the headset to receive the calls). Without a PC, a cyber-café or call-centre can buy Yap Jack Pro for US$150 (excluding shipping). In the case of two other US operators, Delta Three and Dial Pad, the user is merely required to download a free “soft-phone” onto their PC and use a headset. All operators mix low monthly charges with discounts for volume. A ‘call’ made on a PC will obviously appear different to the user as

this is not the traditional way of making calls. However, if the call is placed using third generation VoIP technology, namely a phone, it is not patent that the service provider is selling VoIP calls. A year ago, VoIP-enabled phones used to sell for US$100 plus per handset but have now reduced in price to US$25. These handsets simply plug into the socket in the wall and require no special equipment or access number codes. As the user requires no special skills to use it, subscribers are not concerned with how the call is made and whether the service is illegal, given the consumer and cost benefits of calling his or her relatives in the diaspora using this service. Although not an exhaustive list, this price gap between VoIP enabled calls and those offered by PTTs in Africa has arisen for three primary reasons: 1. The introduction of international competition: When state-owned monopoly supply was the dominant model, their accounting rates were set through the ITU and agreed bilaterally between carriers. For developing world carriers from Africa, highly lucrative international traffic was seen as the “cream” that facilitated cross-subsidisation of domestic rates and rollout to underserved areas. This in effect was a wealth re-distribution scheme, with those more able to pay supposedly subsidising those less well resourced: the Commonwealth Telecommunications Organisation (CTO) for example, ran a scheme that allowed Commonwealth carriers to charge slightly more in order to allow them to invest in their networks. However, the sad reality was that most African carriers failed to reinvest this income to meet the unmet demand that mobile operators subsequently showed existed. In the 1980s, following the push to deregulation and the dual effect of the World Trade Organisation’s GATS Agreement, European and US telecoms markets were liberalised and rates between these countries fell significantly. Perfect competition was not achieved (and probably never is) but wherever it did exist, international telecoms rates declined. In the first instance, African monopoly telco’s reaped a considerable dividend from this change. They continued to offer high prices to their customers and simultaneously, were able to buy more cheaply in the newly liberalised international markets. The arrival of “callback” (which was followed by relatively cheap VoIP technology) meant that the incumbent telcos found themselves competing with a burgeoning number of grey market operators. Both technologies allowed customers access to the cheaper call rates that could be found in competitive markets. 2. The shift to cheaper calling using data networks: As explained in Chapter 1, VoIP can deliver more calls using less bandwidth than plain old telephony (TDM-based). However, traditional phone

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companies had made large investments in upgrading their networks requiring a 10-20 year cycle to generate a full return. Thus, although there were obvious cost advantages with VoIP, carriers were initially slow to adopt it. They were understandably cautious about what the growth of the Internet might mean for their businesses. Nevertheless, a number of international VoIP-based carriers were launched (see 2.2 below) and the technologies have been adopted by almost all the major international carriers. With the collapse of the Internet investment bubble, there was also a considerable amount of fibre networks (particularly across the North Atlantic) where the initial investment had been written off. This meant that the cost of international bandwidth fell to low levels and this in turn encouraged the growth of international VoIP calling. 3. A shift in business strategy: While demand for corporate international calling has historically been viewed as inelastic, residential international call demand, like air travel, exhibits elasticities. Calling overseas relatives is limited to an occasional basis if costs are high. However, the number of people travelling internationally has expanded enormously, and alongside this trend, there has been a growth of diaspora communities in Europe and North America. For example cities like London, New York and Toronto boast large communities from almost every country in Africa, who have a need to communicate with friends and family back home. In the jargon of business strategy, what was once a low use but high margin business has now become a high use but low margin business. In future successful African telcos will carry more traffic (probably making the same or more money) but be making a great deal less on each call made. The more successful African telcos have understood this shift and are making plans to meet the challenge. Their less successful counterparts are trying to preserve high prices but are seeing revenues slide through their fingers as they do so. Competition within countries – particularly where Second National Operators (SNOs) have been licensed – will only accelerate the need to bring down international prices.

2.2 VoIP companies in Africa VoIP accounted for 12 per cent of all international traffic in 2003 and continues to grow at a rapid rate. There are fierce arguments in the industry as to when VoIP international traffic will overtake

fixed line traffic, but few doubt that it will. Almost all the major international carriers are now involved in carrying VoIP traffic, including carriers with worldwide reputations like AT&T, NTT and Sprint. However, the largest carriers with purpose-built VoIP networks are iBasis and ITXC, both of whom have developed a presence in Africa working largely with incumbent telcos. Between them these companies carry 30 per cent of all international VoIP traffic. Both claim to be achieving the same or better than carrier quality service.

Graph 2: Carriers with VoIP networks 25

20

15

iBasics ITXC

10

Other 5

0 2000

2001

2002

2003

Source: Telegeography, 2004

IBasis lays claim to having the largest network for Internet telephony. The company’s customers include many of the largest carriers in the world, such as AT&T, Cable & Wireless, China Mobile, China Unicom, NTT, Sprint, Telecom Argentina, Telefonica, Telenor, Telstra, and WorldCom. Over the last two years it has announced signed agreements with a range of carriers in developing countries including: Malaysia (Telekom Malaysia), Cambodia, India (Vebtel), Venezuela (Cantv), Taiwan (Sparq), Brazil (Intelig), Colombia (Colombia Telecom), Vietnam. The company has achieved significant market share on a number of its routes and carries approximately 20 per cent of all US voice traffic to Argentina, China and Russia. Currently it has an announced network presence in 10 African countries and is believed to be working with several more that are unannounced. According to Gordon VanderBrug, iBasis executive vice president. “IP is more robust than the circuit-switched network, accommodates application development and deployment, and is more efficient for transporting international traffic.”

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Mawuli Tse, Director of International Sales for Africa, iBasis is keen to stress that quality is no longer an issue: “Initially, quality problems meant that Internet telephone calls were only made by a few adventurous users, but over time the quality of calls has improved to the point where leading companies like iBasis carry international traffic for major global telephone companies. Users cannot tell the difference between a call delivered over the Internet and one which came over a traditional circuit”. Its network is used to offer carriers a range of different services including: wholesale services for international call completion; an IP CallCard for preand post-paid calling with billing; and a backhaul service for providers of enhanced services.

(usually the PTO itself) to a satellite, which is then downlinked through one of its multiple teleports in the UK to its POP in London Telehouse, where it is interconnected to Tier 1 carriers. Gateway Communications currently terminates minutes in more than 30 countries across Africa and the Middle East, and estimate that its traffic is doubling every month. Gateway’s largest customers are international carriers in London, which send traffic to Africa and the Middle East, behind which are PTOs, competitive fixed-line carriers (such as second national operators) and cellular operators. However, the company frequently works inside monopolies with the PTO, says Peter Gbedemah. For monopoly PTOs, using VoIP simply offers a more cost-effective means of carrying international traffic.

ITXC was launched by Tom Evslin who had previously worked for AT&T. It has built and manages what it also claims is the largest international VoIP network, delivering calls across the world through its direct relationships with carriers in 175 different countries. These include incumbents, alternative carriers and mobile operators.

Major international carriers are all making a fairly rapid transition to VoIP considering their existing investment in TDM networks. AT&T has said that it wants to be 100 per cent VoIP by 2010. MCI will have 25 per cent of its traffic going by VoIP at the end of this year and wants to reach 100 per cent by 2005. European carrier Telecom Italia has made significant investments in VoIP networks and 80 per cent of its traffic was carried by VoIP at the end of 2003. Whether VoIP is provided by traditional international carriers or VoIP-network operators like iBasis and ITXC, it is clearly a technology that is just emerging, and is here to stay. As the following section will suggest, VoIP is already being widely used by licensed, African incumbent telcos.

According to TeleGeography 2004, ITXC holds approximately 20 per cent of the international VoIP calling market. ITXC claims that its merger with Canadian-based carrier Teleglobe, will make it the third largest international carrier. According to Annelise Berendt, Senior Analyst of Ovum: “ITXC will give what is still essentially a telco of the “old school” circuit-switched world a jump start towards integrating its three separate networks towards a converged IP infrastructure.” Carriers can connect to ITXC in a number of different ways. In broad terms, they can connect directly using a VoIP gateway or using TDM circuits via key regional “meet-me” points. It also offers software that can make “least-cost routing”26 choices for carriers. According to Yaw Osei Amoako, Sales DirectorAfrica, ITXC: “The large telcos only give you minutes from the country they are in. With ITXC, you can compare switch and IP and get better quality, cheaper. In two to three years time, this kind of IP telephony will be used in every country in Africa.”

Graph 3: African termination destinations of international VoIP traffic Egypt

Morocco

Cameroon Senegal

Ghana South Africa Cote d'Ivoire

There are of course, many other providers of VoIP calling for Africa. Many of the major international carriers offer these services and there are a number of smaller companies with a regional focus who can also provide them. For example, unlike these global wholesale providers, Gateway Communications carries VoIP over its own private network rather than the public Internet. Using this network, it typically uplinks traffic through the licensed service provider

Zimbabwe

Gambia

Kenya

Source: Telegeography, 2004

26 ‘Least cost routing’ (LCR) is a method of automatically selecting the least costly facility for transmission of a call or fax. LCR is present in deregulated markets where subscribers have a choice in selecting a long distance carrier. Many companies use special hardware in conjunction with their PABX equipment to Least Cost Route calls by the cheapest carrier.

Nigeria

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2.3 VoIP use by licensed telcos: efficiency and competitiveness Although African incumbent telcos have been slow to respond to the impact of VoIP on their markets, somewhere between a fifth and a quarter of them have signed agreements with either both iBasis and ITXC or other smaller operators. So whilst many of the incumbents complain loudly of the impact of the technology, a significant number have adopted a “if you can’t beat them, join them” attitude. In some cases they have passed on part of the savings made by lowering international rates but in other cases they have simply kept the savings. As a result, VoIP traffic grew fastest in Africa as a region, going up 240 per cent between 2001 and 2002. (see Graph 4, below). In 2004, VoIP in two of Africa’s major telecoms markets – Nigeria and Senegal represented over half the terminated inbound traffic on the continent. A strange pattern began to emerge in the traffic growth of some incumbents two to three years ago. Instead of showing steady upward growth, their annual international traffic figures actually began to decline as traffic went into the grey market. Therefore, African incumbent telcos have been faced with a much starker choice than their developed world counterparts: they have an option to watch their traffic disappear into the grey market or devise a strategy for attracting it back. Both iBasis and ITXC use the proactive argument that it is better to be responding to this market than letting things simply happen. The VoIP carriers suggest that collaboration between themselves and incumbent telcos can bring down the cost of international calls. In this way, the African incumbent telcos can win back some of its lost traffic. The argument is that it allows a measure of control, over a ‘disruptive technology’27 in what has the potential to become a growing, chaotic grey market – at least from the incumbent’s perspective. However, as illustrated by Sonatel in Senegal, the strategic issue is not fundamentally one about technologies, but rather pricing in a monopoly market. Sonatel discovered that it was losing traffic to grey market operators. Knowing who most of them were, Sonatel called them in and offered these providers a deal, whereby Sonatel would allow continued trading by these providers if they received an agreed rate from them. This in effect, set up what was probably the first VoIP wholesale arrangement on the continent. As a result, a whole new set of operators stepped into the gap and offered even cheaper prices. Currently Sonatel is the monopoly operator and

claims that VoIP is about 25 per cent of its international traffic. It is clear however, that the grey market still exists and therefore the overall figure is probably larger. Signing a VoIP agreement as an incumbent also strengthens their negotiating hand with the traditional carriers. If the company is offering minutes to a destination more cheaply than the traditional carrier who supplies minutes, some leverage in negotiations exists. Although Africa is not as competitive as places like Mexico and Hong Kong, the VoIP suppliers often have at least three suppliers for most African countries: more choice usually means better prices. For example, Chad’s incumbent Société des Télécommunications Internationales du Tchad (SotelTchad) signed an agreement to originate and terminate international long distance traffic in Chad in 2001. "Connecting to ITXC.net enables us to gain traffic that comes from competitive carriers around the world that we were not previously receiving," stated the Director-General of SotelTchad, Ali Mahamat Zene. "That additional traffic will provide us with muchneeded revenue we can use to increase teledensity here at home." Previously, Chad’s main international carrier had been France Telecom, a relationship it had inherited from imperial times.

Graph 4: International VoIP traffic growth per region, 2001-2002 250% 2001 2002 200%

150%

100%

50%

0% Africa Source: Telegeogrpahy, 2003

“Disruptive technologies” are those that allow companies to satisfy exiting customer needs at a drastically lower cost. These products are cheaper, simpler and easier to use than previous ones, but cannot at the point they are introduced into the market, compete against the traditional products such that they can acquire a large market share. The seminal work on disruptive technology is by Clayton Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (New York: Harper Business, 1997).

27

Latin America

Asia

Europe

Middle East

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For some operators like Telkom South Africa and Sonatel, the development of regional VoIP gateways looks set to become a significant part of their post-monopoly business strategies. In partnership with Clarent and Grintek, Telkom South Africa has built a regional VoIP gateway that it is offering across the continent: it has already attracted a significant number of countries to use it. In Sonatel’s case, it is now connecting a number of West African Countries by fibre (Mauritania, Mali, Gambia) and in due course others will join them (Burkina Faso, Guinea). It also has fibre connections direct to Europe and to North America via Brazil. Using these fibre connections, it can aggregate calls and route them via its VoIP gateway to obtain better prices on a larger volume of calls. The business strategy for both Sonatel and Telkom is in some ways a regional version of that being offered by iBasis and ITXC. These carriers can aggregate traffic from across their sub-regions and therefore have a better negotiating hand when buying bandwidth or minutes internationally. If international calling has become a high-volume, low-margin business then the lower the price achievable, the better the margins will be. Others like Telkom Kenya are at the beginning of this cycle and have only just begun to tender for VoIP equipment. Again, it is well placed to act as an East African hub for VoIP traffic. Nitel is also on the verge of starting VoIP services for international calling and will be offering significantly cheaper prices, passing on some of the savings made directly to its customers.

2.4 Grey market use – undercutting the monopoly providers It is impossible to make authoritative estimates of the size of the grey market for VoIP in Africa. The illegal or prohibited nature of the service in Africa precludes easy collection of reliable data. However, in most markets where international calling rates remain high, estimates suggest that VoIP traffic constitutes approximately 10-20 per cent of the overall market. The size of the market also depends very much on attitudes within a country to the breaking of regulations and laws and the degree to which prohibitions are enforced. Whilst it is hard to generalise about a continent as large as Africa with so many different cultures and traditions of governance, it would be fair to observe that the laws and regulations around VoIP are often regarded as a misguided attempt to defend the national, monopoly telco. Citizens in many countries are simply more interested in being able to make cheaper calls. For regulations and law to be effective they must have the support of those who they are designed to protect. This is clearly not the case with VoIP as individual citizens do not

appear to shun cheaper calling services in order to protect incumbent telco revenues. If however, a government exerts a high degree of control over the country and attitudes to these types of laws are different, then the grey market is often much smaller. For example in Egypt, selling VoIP is regarded as something akin to drug dealing and is dealt with through jail sentences. This does not mean that there is no grey market only that because it is riskier, the scale is much smaller. Some incumbents have come out publicly and identified the amount of traffic that they are losing to the grey market. In both cases the figures are higher than the estimate above. Rein Zwolsman, CEO of Nigeria’s Nitel estimated that before he put in place cuts in international calling rates, that a staggering 90 per cent of international calls were in the grey market. Oystein Bjorge, CEO of Ghana Telecom put the value of the grey market in Ghana at somewhere between US$15-25 million a year in 2003:”(These are) ball park figures. It depends on the rates you apply and the volumes. There are some who have ISP licences who are bypassing us. We have just identified (for the regulator, the NCA) 32 companies who don’t have licences”. There is no data on users of the VoIP grey market. However, by far the largest number are those using traditional telephone call centres or Internet cafes. Users will be drawn from a wide range of socio-demographic backgrounds and in the main, will be using these calls to contact family and friends in the diaspora. Informal interviews suggest that users will include a much smaller group of “briefcase businessmen” and traders who are probably involved in some aspect of the import/export business. VoIP is also employed by multinational businesses that have VPNs that allow them to make VoIP calls between the different parts of their company’s operations spread out across the continent. It will also enable them to communicate directly with the company headquarters in Europe or North America. There have been a number of different responses and approaches by key stakeholders and government to the existence of the grey VoIP market. These include: using the full force of law to crack down on suppliers; attempting to block VoIP traffic; negotiating cooperation between the grey market suppliers and the incumbent telco; or in rare cases, legalising a number of VoIP-call-based suppliers. A number of African countries have used a combination of threatening letters and equipment seizures. Instructed by either the regulator or the incumbent telco, the police go into grey market operators’ premises and seize the equipment responsible for

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international VoIP calling. In the most notorious case, a number of ISP owners were actually jailed in Ghana but this is now widely seen in that country as having been somewhat heavy-handed. Countries as diverse as Côte d’Ivoire, Ethiopia, Kenya, Mauritius (before VoIP services were legalised) and many more all adopted this approach. However it is noticeable that in each case the grey market operators absorb their equipment losses and come back or are replaced by others. No country seems able to maintain a permanent crackdown on a trade as lucrative as this one. For things to be illegal in francophone countries, they must be specified in both law and regulations. For a period in Côte d’Ivoire, international VoIP calling was not specifically covered by the regulatory framework and the grey market flourished. However the regulator closed this loophole and a number of equipment seizures by the police followed. The same confusion over the legality of VoIP because it has not been specifically mentioned in the regulatory framework can be found in a number of francophone countries. Often the very organisation that would like to crack down – the incumbent telco – cannot do so because of internal corruption amongst its staff as Oystein Bjorge of Ghana Telecom found:” We have applied primitive ways to stop the traffic, restricting ISPs so that they can only download traffic. Nevertheless GT employees have helped them reconnect so it’s not an efficient approach. It’s hard (to detect) if it’s not in big volumes. If you suspect certain companies, you can set up continuous monitoring”. Despite a drive against internal corruption by its new management, Telkom Kenya has experienced some of the same problems. An ISP (that is not actually responsible for VoIP calling) told one of the authors that he was approached by an employee of Telkom Kenya with the following proposition:’ I can set you up the lines you need and we can share the revenue.’ A number of incumbent telcos have attempted to use filtering and other forms of traffic restriction to stop VoIP traffic. But as Ghana Telecom and Telkom Kenya both discovered, this is a blunt instrument that can cause other problems. Early in 2003 Ghana Telecom put all the country’s ISPs on one-way circuits so that they could only receive incoming calls. Some indication of the kind of chaos that can be caused can seen from the rather desperate message on a mail-list from a Ghanaian Internet user below:

“Is Ghana Telecom cutting off ISPs??????????? Dial up to your ISP and u get beep beep beep. If it was one ISP it could be the usual lack of QOS (Quality of Service). But if it’s all of them. IS GHANA TELECOM CUTTING OFF THE ISPs?" In due course service was resumed but not before there was considerable disruption for individual and business users of the Internet. Francis Quartey of Ghanaian ISP, IDN, remarked in an interview with Balancing Act’s News Update that the Director General of the NCA which is the regulating body of communications in the country as well as the Minister of Communication have both publicly stated their readiness to license VoIP operators. In any case, I do not believe VoIP is illegal in Ghana- at least not in the eyes of the rule of law of the land. When will VOIP be legalised in Ghana? I suppose when we gather the political will". Ghana has yet to legalise VoIP services. Telkom Kenya used a ‘packet sniffer’28 to identify what it believed was voice traffic going via the Internet. In its definition, it included applications such as Net Meeting and iChat that can be identified as having multimedia protocols: for example, the camera uses the easily identifiable H.323 protocol. These types of programmes are widely used by multinational companies who have been trying to cut down on air travel post 9/11. This is significant because Telkom Kenya has already identified voice traffic through one set of ports and moved to close them. After this happened, those offering grey market VoIP services simply disguised the traffic using multimedia protocols and port 1723 (for Windows VPN). Following an offer to ISPs that was rejected (see below), it said it would only prioritise web, e-mail and FTP traffic. Thus, on 13 February 2004 Telkom Kenya installed bandwidth management that reduced the priority for multimedia and VPN traffic. It has also cut DNS access and as a result, large numbers of websites were no longer available for a period. Again chaos ensued for Internet users, particularly multinational customers whose business is key to the local economy. For example, an organisation called Phoenix that organises international exchange transactions on behalf of local banks, was unable for two days to transact business worth US$10 million. Eventually the regulator, CCK had to write to the company asking it to remove the filtering and traffic management measures. Ernest Ndukwe, Chief Executive of the Nigerian Communications

28 A dedicated device designed for the purpose of monitoring network traffic in order to recognize and decode certain packets of interest.

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Commission strongly believes that it is not the technology that should be made illegal. Regulation should be “technology-agnostic” and allow new developments to contribute to cost-cutting and wider access. However, he is very clear that if you want to offer services (VoIP or otherwise) you need to be licensed to do so. And if you want to offer international VoIP calling then you have to connect to the backbone of Nitel or the SNO, Globacom. Launched in August 2000, Adesemi Nigeria has invested US$7-8 million (raised locally through bank loans) to set up a VoIP-based telephone and Internet services company. It chose to focus its first phase of coverage in eastern Nigeria, opening POPs in Aba, Owerri, Port Harcourt and Calabar. It now has six cities and will roll out in two more (Abuja and Onitsha) in the next 2-3 months. Its network combines local wireless loop and VSAT with the infrastructure of all the major fixed and mobile operators who they now have interconnect agreements with, including all the major network operators: Nitel, MTN and Econet. Ndukwe Kalu says: “On most of the long distance trunk routes for telephone calls we’re the same as NITEL and on some routes we’re lower, between 15-20 per cent lower.” Other countries have been inching towards this position with varying degrees of success. In Kenya, the incumbent itself has tried to negotiate agreements (unsuccessfully) with both the ISPs and local cyber-cafes. With cyber-cafes, it discussed them being able to offer rates as low as KS5 per minute. Unfortunately the confidential negotiations were announced to the press by a lawyer from The Cyber-Café Owners Association of Kenya (CCOAK) and Telkom Kenya withdrew from the discussions. Later (as part of the row over filtering), it said to the ISPs that if they paid double for all the data traffic that Kenya Telkom said it could identify as voice, they could reach agreement. The ISPs felt that it was not Telkom Kenya’s role to be “legalising” VoIP via the back door and that the regulator should set the terms. In a similar “under-the-counter” way, Mali’s Sotelma has made VoIP agreements with four local companies. However there was no clear selection process and many local companies were annoyed not to have the opportunity to win the business. The agreements make the four companies in effect retail VoIP sellers, using Sotelma for their bandwidth at an agreed rate. In a more open fashion, the Algerian regulator authorised VoIP use by ISPs on an experimental basis. The aim had been to allow these operators to work with the proposed SNO to offer an entirely legal service. Sadly for a number of other reasons, no bidders for the SNO licence emerged. Others have allowed VoIP calling in very

particular circumstances. For example Ghana granted an exemption to a new call centre start-up called Rising Data to allow it to compete effectively at an international level. A VoIP call-centre in Togo was launched by Café Informatique but it foundered due to lack of initial investment capital. It should be noted that depending on the regulatory framework adopted, incumbent telcos are usually not empowered to take regulatory matters into their own hands, and filter or block traffic, where they perceive alleged illegal services to be emerging. In such situations, usually where an independent regulator has been established, telcos have to go through regulatory channels to take action against alleged illegal operators. While cumbersome for the telco, this is essential in all markets moving towards even a minimum level of competition.

2.5 Retail or wholesale VoIP? The key issue in regulatory terms is whether to open up the monopoly on international calling to enable everyone to take advantage of the lower prices now available. In essence, this can happen either by legalising VoIP at retail and/or wholesale level. If it is only legalised at a retail level – for example, through ISPs and cyber-cafés offering it to customers – then those who are allowed to offer the service will still need to go through the licensed international carriers: either the incumbent or in some cases the SNO. Both will therefore maintain some degree of price control and will inevitably not pass on the full level of savings to the customer. However if it is made legal at both wholesale and retail levels, the licensed operators will be able to deal directly with international suppliers and pass on the savings to the customers. Once the prices are sufficiently low, there will cease to be a significant grey market because the rewards will not be there for the small, cyber-café grey operator. Mauritius has adopted this rather more liberal approach to VoIP licensing. Two categories of licence allow operators to conduct international business using VoIP: a straightforward International Long Distance Licence (ILD), of which there are currently seven; and Internet Telephony Service Licence, of which there is one. This now means that there are six organisations offering different versions of VoIP international calling. When launched at the beginning of the year, there were three main services: Paging Services (the Internet Telephony Service Provider); Data Communications Ltd (an ILD operator) and Mauritius Telecom, the incumbent (also an ILD operator). The impact on price was

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fairly immediate. Through an agreement with DataAccess Telecommunications Limited, Paging Services were able to use its gateway to connect to more than 110 international carriers worldwide. Its WorldCard offered international calls for between US$ 23-38 cents per minute. Mauritius Telecom also started a similar service called ‘Sesame’, offering calls at between US27-38 cents a minute. In order to differentiate this service from its lucrative fixed line international calls, it is arguing that the service does not offer the same degree of quality and is aimed at those wanting to communicate with their family overseas.

22 3. THE OPPORTUNITY VoIP OFFERS AFRICA  Africa sits in an unusual position in relation to VoIP. Its use in the grey market in a number of countries has resulted in almost outlawed legal use of the technology, whilst at the same time incumbent telcos in those same countries have sought to implement it for international calling. As incumbent telcos increasingly face a competitive market, they will need to find every way possible for making themselves more productive and lowering the cost of operating both domestic and international connections.

For any incumbent telco or SNO, VoIP can offer significant advantages for both national and international networks. The equipment is physically smaller (requiring less telephone exchange real estate) and less costly than its TDM equivalent of the same capacity. It can be rolled-out reasonably quickly and it is easily scaleable, allowing capacity investment to grow with traffic rather than installing capacity well ahead of traffic. As Tim Parsonson, Director of Storm, a company with international IP agreements with South Africa’s Telkom puts it: “An IP gateway can offer both solutions for both international voice compression and rural, prepaid telephony for a PTT”. One of the main arguments for in favour of investing in VoIP-based networks is that it reduces the need for two networks – one for voice and the other for data. A VoIP based network facilitates investment in a single network with adequate capacity to deal with both. There are however, certainly limits to how far that argument can be extended and these are explored in the last section of this paper. However, VoIP – like many other new technologies including Wi-Fi – undoubtedly offers Africa the cost advantages of next generation technologies. Any change of this sort comes with a range of issues that will need to be addressed. Traditional TDM-based telcos have tended to keep their data operations separate from their telephone operations. Two entirely different sets of skills and expertise are required for which there will need to be extensive retraining. Already this separation is beginning to cause practical problems for African telcos. The example of one francophone telco is illustrative. This entity has separate departments as described and when there is a breakdown in its Internet operations, the diagnosis of the problem (or the blame for it) shuttles between the two departments until it is solved. The lack of an integrated approach slows up finding the solution to the problem. One pressing question that then remains, and this is not limited to VoIP alone, is how quickly a company can integrate separate technical and sales teams. Telephony has developed its own business practices since its earliest days. The Internet has a completely different set of business practices and these have not really begun to merge or reach a position where one set of practices takes over from the other. In simple terms, Internet operators bill for the capacity of the “pipe” whereas telephone companies bill by minutes. This simple difference extends all the way through different levels of the respective industries. For example, albeit simply stated, at an international level, the telephone company charges for a half circuit whereas the Internet operator charges for the equivalent of a full-circuit. Stranger still, there are major international carriers with feet in

both sides of the business, operating two completely different terms of trade. These however are issues that will need to be dealt with on an industry-wide basis and should not deter those who wish to start making this change. Despite these larger issues, VoIP technology still offers considerable advantages to African telcos in three areas which are described below: cost, handling network congestion and the richer voice environment of an interconnected network.

3.1 Cost advantages of the technology Many of the cost advantages of VoIP flow from its ability to compress a voice call so that it uses less bandwidth than its TDM equivalent. There are VoIP CODECs that can deliver compression from just below 64k to 5k and lower to carry a call. GSM which is widely familiar on the continent for mobile, uses 13k and whilst there are very real complaints about quality, it is arguably the standard on which telephony is based on the continent and therefore experienced daily by millions of Africans. On this basis, the key investment decision for African telcos is how far to implement VoIP use within an existing operation. For international operations, African telcos can simply install a gateway and connect to IP-specific carriers or international carriers offering IP. Many offering these connections will underwrite the cost of the gateway against securing the international traffic that flows from it. At the next level, telcos can look at trunking traffic and backhaul between major centres. Putting backhaul traffic over an IP network makes good business sense for mobile operators. Handset manufacturer Nokia claims that an IP solution can reduce the operational and capital expenditures of an operator by 30 per cent compared to existing switching and transmission solutions. The real figure could be even higher as some operators continue to use expensive and low bandwidth leased lines from fixed operators. One vendor – Seranoa Networks – claims its IP technology can increase access bandwidth efficiency two-to-five fold, making it possible “to have a Return-On-Investment in months, not years.” Even allowing for some degree of vendor hyperbole, these kinds of savings must be fundamental to increasing the productivity of African telcos. VoIP network deployment costs often come in increments of $50,000 - $100,000, rather than the $1 million plus increments of telco switching facilities and dedicated circuits. As a result, it is possible to add capacity in smaller steps that will begin to make return more quickly rather than the multi-million traditional

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telecom equipment investments that require many years before they fill up and make a return over much longer periods. Smaller investments can often be financed out of cash flow rather than requiring major external borrowing. Also depending on the structure of national trunk traffic tariffs, sending calls by a data network may also make significant savings. With these savings, an African telco may be able to consider connecting a range of places that with full TDM network investment might simply not have been viable. In certain circumstances, it may also be possible to connect remoter locations through the use of wireless technologies (wi-fi and wi-max). For a telco needing to meet regulatory roll-out obligations, it enables them to offer both phone and Internet to a growing number of people who might previously have been thought of as beyond the range of coverage within existing incumbent business models. At the customer level, it is probably feasible to offer customers a choice of either VoIP-enabled phones or ‘soft phones’ software. In the USA, for large-scale purchases, the cost of VoIP-enabled phones is reported to be between US$20-30 per user. Soft phones are a piece of software that sits on the user’s computer and works with a simple headset. Licences for soft phones in the USA are reported to cost about US$80 per user, for a 50-user pack but would probably fall to the equivalent of the hardware IPphone quoted above if bought in volume. Telcos wanting to go this route could offer this equipment in one of two tried and tested ways. They could either offer the customer a package of calls (pre or post-paid) on a monthly basis and offer the equipment on a subsidised basis to attract the traffic. Or, they could offer it as a high-value, add-on piece of equipment that would buy cheaper calls on a per-minute basis. An SNO or niche operator in Africa, could combine all of these advantages whilst making use of the existing incumbent’s network where necessary. A VoIP-based offering would allow this type of carrier to have a distinctive product in the market. Any assertion however of cost-savings, must come with the standard disclaimer. Most of those involved in VoIP implementation recommend a comprehensive study of the voice traffic that will be changed over. Because carrying voice as data is different from traditional switches, there are a number of cost extras that vendors do not always point out at the beginning of the process. As the deployment of the technology is still in a

relatively early stage, potential investors and operators should be well advised to practice good commercial sense and do their own research to probe the accuracy of these claims.

3.2 Ability to handle network congestion Another persuasive argument for Africa’s incumbent telcos to adopt VoIP, is the ability to deal with network congestion on their international gateways. For many African telcos, there comes a point in the day – especially during the working week - where the demand for international calling simply exceeds available capacity. Putting in an additional way of routing calls enables them to use cheaper Internet routing to overcome these traffic “spikes”. If a telco already has plenty of data bandwidth – fat pipes that are not usually full with data – it is likely that the operator will be able to fit in VoIP calls without adding more bandwidth. This is particularly true for those African carriers that have access to capacity on the SAT3 fibre cable. However, for many African telcos, this argument is somewhat of a two-edged sword. Some may have spare data capacity whilst having telephone capacity shortage at the international level. For others, there is a shortage of capacity in both directions. Yet, taking the argument advanced in the section above, it is likely to be cheaper to build out a reasonable level of capacity using fibre cabling, particularly for the larger trunk routes within a country. Also increasingly, power, transport and oil companies are laying “dark” fibre that can be used. These fibre routes quite often go to parts of a country that a telco might not see as economically feasible in their own right. Managing network congestion then becomes a function of appropriate software. Voice and data traffic sharing a path through a network can interact with one another in ways that affect the application performance of each, sometimes resulting in network congestion and packet loss. If there is a continuous overload of traffic, then as with any data network, performance will decline but with voice on the network, there will be packet loss. At this point, the quality of voice calls will decline to an unacceptable level. However, there are a number of queuing softwares29 that address congestion. When voice traffic is to be carried on data networks, queuing can be used to give voice priority over data traffic. In

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Weighted Fair Queuing (WFQ), Class-Based WFQ, Priority Queuing and Low Latency Queuing.

24 "Clearly, IP telephony presents opportunities and challenges. Along with lower costs, IP-based networks can facilitate the introduction of innovative technologies and applications and improve the chances for underserved communities to join the information society." Yoshio Utsumi, ITU Secretary-General

addition, traffic shaping can limit the transmission rate of traffic through an interface (port) to a specified peak/average value that is less than the link speed. The worst-case scenario for the African telco consumer would be to exchange one under-invested telco network that suffered from congestion, for a newer version in data form where capacity lagged behind traffic levels. However, with a proper business strategy there is no reason why African telcos cannot use VoIP-based networks to address overall congestion issues rather than become the victim of them.

3.3 Advantages of a ‘richer voice’ environment, convergence and interconnectedness VoIP has number of advantages based on the nature of the way in which the service is delivered digitally. It can offer voice users a range of features that are driven through software rather than needing to be in-built in hardware. These features include number and line portability, unified messaging and call screening. Hard or soft IP phones let users roam while retaining their phone numbers, internal extensions and calling configurations (speed dials, transfer, conferencing functions). Soft phones are responsible for many of the worker productivity gains commonly associated with VoIP. Convergence of voice and data allows users to be able to combine these two applications and do everything from retrieving textbased messages like e-mail to calling-up specialist information for service visits. Call-centre software can include a range of features including: productivity management, real-time database access and cost-effective call routing. Convergence also blurs the line between voice, data and video. For example, Senegal’s Sonatel will be testing the delivery of audio-visual services and video “ondemand” by the end of this year. This form of delivery begins to open up televisions as a point of delivery for a far wider range of rich, multimedia services to some extent overcoming the lack of installed, Internet-connected computers on the continent. This may not be tomorrow’s market but it is almost certainly going to be relevant in the medium-term. In the same time frame, there are now a number of VoIP crossover technologies for use with mobiles that are currently in a trial phase, or beginning rollout. “Push-to-talk” is the term used to describe what most people would understand as “walkie-talkies”:

instantaneous, direct two-way conversations between two individuals based on IP software that sits on a mobile phone. USbased Nextel and others started offering the service last year. Orange debuted the product in Europe with its Talk Now offering. Although it requires users to be subscribers to a data service from one of the major carriers and has a number of quality issues, there has been significant take-up. It is seen as sufficiently threatening to the traditional “walkie-talkie” market for Motorola to have produced at the beginning of this year, specifically designed, rugged “push-to-talk” phones. This is not just a developed world application. Two of India’s mobile providers – Hutchison Essar and Tata Indicom – also launched “push-to-talk” services in May 2004. Again this is a technology that has many clear applications in Africa where “walkie-talkies” are a distinct sector of the market. With mobile users pushing on towards 75-80 per cent coverage of total populations, the potential is very clear. It can offer the same functions as “walkie-talkie” without some of the expense. For African mobile telcos looking for new products this may well become an area of new business. Another area of relevance for African telcos will be the current testing of products that integrate cellular and WLAN networks and provide voice from a WLAN device30. As with most technical advances, it can go in several directions. It is possible to use fibre and co-axial cable to distribute a wireless signal throughout a large area like a hospital, government ministry or a university. The wireless signal can then deliver VoIP calling and access to the Internet at broadband speeds without the same interference problems that are usually caused by walls. It will then for example allow doctors and nurses to have conference calls about patients and in more developed versions, offer the opportunity to show video or images for discussion. Ericsson has trialled a health project, called Guardian Angel, using IPv6 and roaming between 2G, 3G and WLANs. It was part of the EU-project IPv6 Wireless Internet Initiative (6WINIT). IPv6 has many advantages over the current IPv4, in that it provides a virtually infinite number of addresses allowing more opportunities to personalise services. The demonstration carried voice, data and video traffic. Whilst this demonstration was clearly designed to show “state-of-the-art” technologies working together, there are now products on sale that offer many of the same features based

30 A WLAN is a type of local-area network that uses high-frequency radio waves rather than wires to communicate between nodes.

25 "A fundamental paradigm shift has been underway in the telecommunications industry – a shift that has arguably brought about as dramatic a change in personal communications as the telephone did compared to the telegram. That change is a shift from traditional PSTN circuit -switched voice networks to packet-switched data networks, using Internet Protocol (IP) technology." Report of the ITU Secretary-General on IP Telephony, Geneva, 2001

on technologies that exist in Africa. Although the applications described above are used in large building complexes for internal use within organisations, they clearly have wider uses in terms of pushing the boundaries of both service and coverage. Mobile carriers in both the USA and Europe are already rolling out networks that offer 11-Mbit/second 802.11 WLAN access. Their fear is that it will eat into their existing data business (and perhaps even undercut the rationale for 3G) but they know they cannot be in a position where they fail to offer these advantages and they lose out to a competitor. Again these VoIP based WLAN voice and data services offer interesting service developments for African mobile carriers. And they will meet the needs of the next generation of African mobile users who will be looking at devices that are increasingly complex and blur the line between phone, PDA and camera.

3.4 Disadvantages of VoIP There are many negatives that affect the implementation of VoIP and understandably the more conservative elements of the traditional telecoms industry have not been slow to emphasise many of them. Implementing VoIP is not a simple “magic bullet” that will eliminate all the problems a telco network might suffer from, nor address Africa’s lack of connectivity. The following suggests some of the concerns and issues that might need to be addressed at a commercial and policy level.

3.4.1 Quality of service and mission critical issues Broadly speaking, the greater the level of compression on calls, the lower the quality of the final call. There are instances where end-to-end software or technologies overcome this difficulty but in general there is going to be some quality loss with compression. For most African telcos the questions must surely be whether they deliver the same or better quality calling to subscribers. As we mentioned in Part 1, this entails as a start, an assessment of the (relative) quality threshold that they start from. The answer to this question for most African telco consumers will be based upon their existing experience of mobile calling. For those calling from a fixed line, the overall quality varies enormously depending upon the level of investment made in the network. Call quality in places as diverse as Nigeria, Ghana, Kenya and Zambia is at best variable and at worst barely acceptable. Whereas in places like South Africa and Senegal the quality threshold is set much higher.

As suggested in section 3.2, it will be important to ensure that Quality of Service (QoS) techniques that prioritise voice traffic are put in place that ensures two things. First, that voice traffic is conveyed without significant packet loss, and second, that voice traffic is sufficiently predictable (variability that is called jitter) and that there are no significant delays. Voice traffic, which is time sensitive and often mission-critical, requires higher QoS guarantees than data traffic, such as e-mail. And these Quality of Service procedures need to be implemented throughout the network, not just in those areas that are seen to be network bottlenecks. VoIP does not work well on congested networks. If the data network is fairly busy, it will discard packets, which will have an impact on voice quality. Data retransmits (being based on TCP); voice (being based on UDP/RTP) does not. Voice responds negatively to delay, creating gaps in the transmission that are then heard by the receiver. Conversely VoIP traffic can crowd out data if it is a large part of the traffic on a given link. These differences between voice and data require careful management if they are to co-exist harmoniously on the same network. The understandable concern of the traditional telecom engineer is that however this process is managed, that it matches the traffic engineering standards that have been established since telephony was invented. To an telephone engineer in developed countries, this would include an assessment of whether the network is capable of linking two points during the busiest period with only a 1% chance of the call getting blocked. On Telefonica‘s VoIP network in Spain, end-to-end delays are closely monitored by a real-time Network Management System (NMS). For 95 per cent of calls, it was specified by the regulator that the delay should be less than 125 microseconds and in no case allowed to exceed 150 microseconds. To meet these requirements, it is used as an exclusive voice network as data flooding can have a devastating effect on voice quality. The Telecom Regulatory Authority of India (TRAI), has recommended that the one way end-to-end delay should in no case exceed 150 microseconds; that variability (jitter) should be less than 5 per cent; and that packet loss should not exceed 1 per cent. However many African telcos can only aspire to meet these standards. And indeed, with a well-planned VoIP network might get to it more quickly than their developed world counterparts. TRAI has also recommended two different types of services that might be offered by long distance operators: one is of toll quality service and the other of less than toll quality service, based upon

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the scoring system used by the carriers themselves. Few African regulators actually set a quality threshold for calling and doing so would be a step forward. The creation of two levels of call standard perhaps suggests a way of improving current standards in Africa, whilst acknowledging simultaneously that there is a better standard that can be achieved.

3.4.2 Proprietary vs. open software Unlike traditional telephony, VoIP calling requires high levels of “intelligence” in the network and these are provided by software. As in other fields of software applications, the purchaser is faced with an immediate choice between proprietary and open software. The most obvious proprietary VoIP solution is provided by Cisco, which provides end-to-end solutions for both telcos (notably the major IP carriers) and corporates. Cisco is also one of the largest suppliers of VoIP equipment. It even has its own proprietary CODEC, the Skinny Client Control Protocol. On the upside, the equipment and software all comes from a single source, which should make it much easier when addressing downtime and maintenance issues. On the downside, the buyer is then locked into buying upgrades and patches without a competitive alternative and needing higher-labour cost (but highquality) engineers. By contrast there are a number of VoIP software and equipment suppliers that offer open standard software. One example is Nortel Networks, which offers solutions it describes as “open, industrystandards based solutions”. In this instance, the user can choose which type of switches to buy and adopt a “mix-and-match” approach to putting solutions together. There is no requirement to buy proprietary hardware like handsets and generic digital phones or soft-phones can be purchased instead. While there are undoubted cost-savings on both software and hardware acquisition, keeping a voice network running that has many different software and hardware components may require a far higher level of engineering expertise to be employed by the user company. Single vendor technical support probably provides some level of cost-saving, although there is no consensus amongst the experts on this issue. Many African incumbent telcos are already full of equipment that was often purchased through vendor-financing deals. One of the issues they face is whether these different sets of equipment work well together and the level of engineering expertise required to

keep all the different elements of the telephone network running. Thus, whatever route is taken with VoIP implementation, it will be important to ensure that the company builds a sufficient skills base to be able to operate and manage the network once it has been installed.

27 4. CURRENT APPROACHES TO REGULATING VOIP IN AFRICA AND ELSEWHERE  Despite the opportunities VoIP technology offers, it has not yet revolutionised calling patterns. It does however present significant challenges for global telecommunications policy. The approach to VoIP regulation around the world takes the following forms: outright ban; laissez faire operation based either on existing legislation or through there being no policy at all.

From the preceding sections it is apparent that use of VoIP networks has the potential to bypass existing carriers and the financial structures, which have been established around traditional operators. It also facilitates easier access for new entrants, allowing them to reduce both transmission costs and the costs of entry imposed by traditional PSTN operators through termination charges or those imposed by regulation in the form of universal service contributions. This has raised concerns by regulators and policy makers that as more voice traffic flows onto the Internet, there will be less funding for public services paid for by taxes on traditional phone companies. While problematic, this is not an insurmountable issue. Yet, it is largely as a result of this problem that almost all governments in Africa continue to prohibit VoIP adoption except by monopoly incumbents. More to the point, they view this technology as a serious threat to incumbent revenue. In some countries, VoIP and Internet telephony are subject to no regulatory oversight at all, or are very minimally regulated. These include Belgium, Denmark, Canada, USA, Finland, Greece, Germany, Ireland, Italy, Mexico, the Netherlands, New Zealand and Spain. Hungary for example, in its effort to promote the Internet and to spread its benefits has used definitional tools or the argument of regulatory deficiency either explicitly to allow the service or to avoid prosecuting those that are providing the service. Where only minimally regulated, restrictions generally subject the provider or operator to recording and reporting traffic volume and enabling interception or complying with data retention rules. Yet, even in some of these countries, specifically the USA and Canada, processes are now underway to consider regulation of VoIP and Internet telephony, for QoS reasons and to ensure, where applicable that operators continue to contribute to universal service mechanisms. In countries where VoIP is regulated or prohibited, responses include measures that range from legal prohibition with criminal sanction attaching, to technology solutions like the installation of technical filters to stop VoIP services from functioning, as in the case of Panama, or blocking Internet traffic to IP telephony sites. In South Africa, there is a specific prohibition on ISPs and VANS or enhanced services providers utilizing their networks for the carriage of voice.

Other approaches include licensing requirements; equipment approval and authorizing certain technologies to certain operators. The Indian regulator, TRAI, allows VoIP without licensing, considering it licensed under the existing licensing framework, which covers the provision of VoIP as well. Some countries, restrict the volume of voice traffic carried on a data line, and Finland for example allows VoIP services, provided they do not form a significant portion of the Internet services offered. Other countries, which have minimal legislative restrictions, include Australia, the Czech Republic, France, Japan, Korea, Norway, Sweden, Switzerland and the UK. This section reviews the state of play in Africa and selected jurisdictions around the world.

4.1 Overview of regulation in Africa A cursory continent scan of regulation and regulatory approaches to VoIP in Africa reflects two basic facts: the first is that the continent is still dominated by monopoly supply models for fixed line service, with substantial or total state ownership (See Graph 5, below). The second is that almost every country bans VoIP or prohibits in some way. These facts notwithstanding, there is a groundswell push towards liberalisation of markets generally, as well as in Africa. By the end of 2002, the ITU recorded that amongst its 188 members, 113 incumbents were at least partially privatised31, accounting for 85 per cent of the world market when measured by revenue32. Yet, given that worldwide, telecoms services revenue for 2002 was in excess of USD 1.455 billion,33 it is clear that while countries are swept up in reform efforts, pursuing the attendant benefits of competition, increased service access and quality, decreased tariffs, and the availability of capital and management skills, there is an understandable reluctance, evidenced where both public and private monopolies exist, to part with national telcos/PTOs entities that are still viewed as extremely viable revenue sources for governments. Yet, in most cases and particularly in developing countries, national PTTs suffer from a number of deficiencies that handicap their viability and require more than just capital infusions to remedy: they tend to be debt-ridden, inefficient, overstaffed organisations with politically entrenched unions, and offer poor or limited connectivity and service quality at high cost. Coupled with a lack of capital, network expansions and upgrades to effectuate technological changes are precluded.

31 Only 39 members remain fully state-owned. ITU, World Telecommunication Development Report, 2002 (Geneva: ITU, 2002), p. 5. 32 Above, p. 4. 33 Including both services and equipment. ITU, Key Global Telecom Indicators for the World Telecommunication Service Sector, online: International Telecommunications Union

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As international markets for telecoms competition under the GATS emerge at a more rapid rate than options under bilateral agreements falling under the auspices of the ITU, governments are equally attracted by the potential to raise capital from privatisations and to garner the benefits of foreign expertise and management. Because so many privatisations are partial in nature, this inevitably creates a tension manifested in the question of how best to manage liberalisation efforts while the state retains often substantial or majority ownership in a partially privatised operator, usually the sole incumbent, at least in fixed line services. The approach by African governments to VoIP falls squarely into this tension. This general approach is that of prohibition. Where state-owned monopoly operators are the norm, this is based on the premise that IP telephony is a voice service and hence the exclusive right of the incumbent telephone operators, rather than a data service or application. Although as the ITU also points out, this premise is becoming hard to sustain, particularly as voice functions become integrated into other web-based applications such as e-mail and “click-to-talk” websites34. The following lists some of the efforts underway in Africa to introduce VoIP at the operator level.

Graph 5: Telco ownership in Africa

Partially Privatised or in Process State-owned

embrace this technology to gain long-term benefits, even if this implies a short-term loss in revenue as incumbent telecommunications providers restructure their approaches. Algeria has shown a leaning towards liberalisation of VoIP, but at this stage, it appears to be only experimental in nature. The country has been allowing VoIP (PC-to-Phone) by ISPs on an experimental basis since January 2003. Full legalisation, should it eventuate will include Phone-to-Phone public services. In Mali, Sotelma has signed “back door deals” with four companies to offer VoIP services, without regulatory sanction and Mauritius has authorised the provision of three IP Telephony/VoIP services, and moved towards a licensing regime. The technology itself was not prohibited, even prior to this move. Two types of licences for operators exist in Mauritius - a fixed line license and a VoIP operator license. Operators are allowed to charge different rates for the connection and users are often willing to pay premium rates for fixed line calls, which are perceived to be of a better quality. Telkom Kenya is also in the process of examining ways to set up VoIP services with cyber-cafes and ISPs in the cities. In Egypt and Uganda, licensed telcos are authorised to provide IP telephony on the basis that it is a voice service for which incumbent operators have an exclusive license. In Egypt, the incumbent also has an agreement to deal with US IP telephony carriers to provide voice through a direct private IP link with the US. There is a PC-to-Phone service provided through Telecom Egypt’s website www.support.idsc.gov.eg at a rate equivalent to 20 US cents per minute. In addition, incoming IP telephony traffic is terminated by Telecom Egypt at a lower settlement rate than for PSTN calls.

Fully Privatised

Source: Derived from ITU Telecoms Indicators Database, 2003

4.2. Countries seeking to adopt VoIP Mauritius and Nigeria are the only two countries to have legalised VoIP and Wi-Fi. It appears that these governments are motivated to

34

ITU, 2001, p. 20.

While there are rumoured to be franchisee options for US IP telephony companies active in Uganda, no Ugandan ISP has admitted to using IP telephony and the regulator has not appeared to be taking an active stance against VoIP services and IP Telephony. To the contrary, the Ugandan Communications Commission (UCC) is working with the ITU who recently approved a project to extend Multipurpose Community Telecentres in Uganda into rural and remote areas by testing the use of packet-based wireless IP technology. UCC is testing the use of VoIP as a precursor to possible regulatory reform leading to more cost effective telephone services35. Another part of the reason why VoIP is often not strictly policed is

35

ITU, African Telecommunications Indicators, 2004.

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that, as was mentioned in Part 2 and 3 above, it is extremely difficult to do so because of the nature of the technology. For example, in countries where VSAT data services are liberalised, it is quite easy for incoming traffic to be IP telephony (where more than 5Mbit/s of international Internet capacity is available to ISPs). International voice traffic comes in over the Internet and the breaks out into the PSTN locally. The lines leased by ISPs from the incumbent are likely to show extremely high volumes of incoming traffic, and mixed in with incoming data and fax traffic it is relatively easy to hide voice traffic (worth 100 times more per minute). Thus the official position of banning IP telephony becomes hard to justify – consumers are prevented from enjoying the cost benefits of cheaper outgoing calls and the incumbent also loses out on the valuable termination rates.

suggested, IP telephony and call back does not have an effect on infrastructure development and that any effect on operators is gradual. Moreover, further studies suggest that call back and international resale as well as the effect of the WTO Basic Telecoms Agreement have already reduced revenues from international traffic close to real costs38. This should serve to encourage regulators to enable the development of these technologies, rather than prohibit them39. Thus commentators have argued that Internet telephony is unlikely to be the main threat to the international accounting rate system40. It is one arbitrage mechanism amongst several including resale and call-back and it is also probably not the most effective for bypassing the high settlement payments required on licensed international circuits41. This is a debatable point that will require more in-depth assessment.

Even where banned outright, it is apparent that IP telephony takes place to varying degrees either through calls made, or received using a PC-to-Phone service like Dialpad or Net2phone. The majority of IP-based traffic, is however, inbound. The ITU notes that this occurs because offshore IP telephony companies can negotiate with domestic ISPs who have their own international gateways, for instance over VSAT satellite dishes. The IP telephony companies provide ISPs assistance for purchasing equipment, allowing them to route international calls coming in over the Internet to the public telephone network36.

In the interim, it is crucial to understand some of the drivers behind efforts to resist VoIP. This is largely due to the influence of monopoly incumbents. In developing countries where competition is not allowed, or is limited, incumbent operators have been extremely active in blocking efforts to legalise VoIP services, for example, Peru and South Africa.

4.3 Countries opposing VoIP adoption

• In South Africa, concerned that enhanced service operators were using their networks for the provision of voice services in 1999, the incumbent operator, Telkom, required all VANS providers to sign letters acknowledging Telkom’s exclusive right to provide PSTN services and confirming that VANS providers were not using their facilities for the provision of any service in violation of this exclusivity.42

• In Peru this took the form of Telefonica del Peru’s Internet service not allowing access to the extremely popular Net2Phone website. In Ethiopia there are periodic shutdowns of VoIP operators whose equipment is confiscated.

The table above summarises the position on VoIP adoption on the continent and reflects that very few countries have embraced VoIP outside of a general concession to allow incumbents to utilise the technology. ITU studies done from 1999 onwards show that a large number of countries, even outside Africa, either banned the provision of IP telephony or have pre-existing legislation that prohibits the service from anyone other than those with a license to provide voice services – which in most countries are the incumbent carriers, often with exclusive licenses37. As discussed earlier, regardless of the merits of the claim, the main reason behind this approach is the perceived revenue depletion from the incumbent. This is specifically acute in developing countries or those with low levels of infrastructure who believe that permitting VoIP adoption will dissipate the operator’s incentive for further infrastructure investment. As Part 2 and 3 have argued, and various studies have

These examples are included to reflect the enormous strength that a state-owned telco can wield in a monopoly or limited competition environment. Any approach to ensuring widespread adoption of innovative technologies like VoIP must include consideration of

ITU, ITU Internet Reports, IP Telephony 2001, p. 16. Garcia-Murillo, Martha. “Assessing the impact of Internet telephony on the Deployment of telecommunications Infrastructure”, NET Institute Working Paper #03-04. October 2003, p. 3. 38 These studies are cited in Garcia-Murillo, above. For example Bernard, Ke “New Global Network Arrangements – Regulatory and Trade Considerations” (1994) Telecommunications Policy, 18:5, pp. 378-396, and Frieden, Robert, “Falling through the Cracks – International Accounting rate Reform at the ITU and WTO” (1998)

Telecommunications Policy 22: 11, pp. 963-975. Garcia-Murillo, above. 40 Mason, Robin, “Internet Telephony and the Accounting Rate System” (1988) Telecommunications Policy 22:11, pp. 931-933. 41 Above, p. 931. 42 Jennigay Coetzer, “VAN Service Providers Complain of Pressure” World Reporter (6 October 1999).

36 37

• In Kenya, Telkom Kenya has tried to use “packet-sniffers” to identify the ports by VoIP traffic so that they can close them. This filtering disrupted normal use of the Internet for a wide number of users.

39

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regulatory mechanisms to limit this power. A brief discussion of selective approaches to regulating VoIP elsewhere follows.

4.4 International experience As is evident from the above, in countries where VoIP is regulated or prohibited, responses include measures that range from outright bans with criminal sanction attaching, to technology solutions like the installation of technical filters to stop VoIP services from functioning, as in the case of Panama. Other approaches include licensing requirements; equipment approval and authorising certain technologies to certain operators. The Indian regulator, TRAI, allows VoIP without licensing, and considers the service licensed under the existing licensing mechanism, which covers the provision of VoIP as well. Some countries, restrict the volume of voice traffic carried on a data line, and Finland for example allows VoIP services provided they do not form a significant portion of the Internet services offered. As mentioned above, in South Africa, there is a specific prohibition on ISPs and VANS or enhanced services providers utilising their networks for the carriage of voice. Other countries, which have minimal legislative restrictions, include Australia, the Czech Republic, France, Japan, Korea, Norway, Sweden, Switzerland and the UK. In most competitive telecoms environments, IP telephony has historically been unregulated as it has the potential to exert downward pressure on large telco’s call costs.

4.4.1 Canada Canada was the first country to consider VoIP and specifically Internet telephony at a regulatory level. The Canadian Radiotelevision and Telecommunications Commission (CRTC) devised two classes of IP Telephony, namely “PC Voice” and “PSTN Voice”. As it currently stands, IP telephony providers require a license to offer PSTN voice services to the public and remain eligible to make contributions to universal service, provided there is some conversion in the network from circuit to packet switched form or vice versa43. The main concern in Canada with regard to VoIP was that packetswitching technology might allow operators to bypass the universal service funding scheme, (contribution regime), which used to require that per-minute charges be paid by carriers in respect of their long distance and international traffic. Under a new collection mechanism, all “telecommunications service providers” with annual revenues of CA$10 million or more must pay a certain percentage of their gross revenues into a national fund to subsidise basic telephone service in high-cost areas. If it meets the minimum annual threshold, this includes Canadian revenues from Phone-toPhone IP telephony services (e.g. calls that go to or from the PSTN). All other VoIP retail services remain contribution-exempt44. This includes first and second generation IP Telephony services (“PC-to-PC” and “PC-to-Phone”). They are considered to be closer in nature to “retail Internet” yet, “Phone-to-Phone” services are classified as “PSTN Voice” and regulated like traditional voice service. In Canada, IP telephony service providers have historically been

Table 2: Summary of VoIP adoption and use in Africa VoIP provided only by licensed telcos (IPbased Network or Public Internet)

Egypt; Uganda; Botswana; Burundi; Cape Verdi; Chad; Guinea-Bissau; Lesotho; Madagascar and Mozambique (IP-based networks only); Malawi; Mali; Namibia; Nigeria; Sierra Leone; South Africa; Senegal; Seychelles and Swaziland (IP-based network only); Swaziland; Togo; DRC (only IP-Public Internet)

VoIP provided by others

Togo; Uganda; Lesotho; Guinea-Bissau; Cape Verde (public Internet only); DRC (public Internet only)

VoIP Prohibited

Eritrea, Liberia, Kenya, Ethiopia, Seychelles, Benin, Nigeria, Mozambique, Guinea, CAR, Benin, Senegal, Côte d' Ivore; Cameroon; Comoros; Namibia; Swaziland; Botswana; Gabon; Seychelles

ISPS own/lease international data gateways

Guinea Bissau; Lesotho (domestically); Malawi; Togo; Uganda

Source: ITU Telecommunications Indicators, 2004 (unpublished).

See CRTC Order 97-590 (17 May 1999); Order 98-28 (23 January 1998), Order 98-929 (17 December 1998) For an account of the policy approach until 2001, see Craig McTaggart, “IP Telephony and Canada's Telecommunications Regulatory Regime” (2000-01) 2 Internet and E-commerce Law in Canada 49. 43 44

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perceived as Interexchange (IXC) providers, and as such are not required to register as Competitive Local Exchange Carriers (CLECs) and take on the associated responsibilities (including E911 and lawful access, for example). While the collective CRTC VoIP decisions also reflected a relatively low uptake of VoIP PSTN voice services, the CRTC provided itself with a backdoor to further regulate VoIP in the future, should the need become evident – specifically, to include more VoIP services within the contribution regime.

4.4.2 USA In February 2004, the Federal Communications Commission (FCC) announced in a Notice of Proposed Rulemaking (NPRM) on IPbased services to examine if it has any particular role in regulating Internet telephony, with a view to ensuring the public interest and increased consumer choice. In essence, the review will assess the extent to which VoIP services should be regulated as “common carriers”. The United States has historically avoided any regulation of the Internet or what they deem ‘information services’45, which includes VoIP applications including Internet telephony. The FCC is seeking to ascertain the correct regulatory approach to differentiate between Internet services and traditional telephone services and to distinguish among different classes of Internet services. Specifically, which regulatory requirements relating to, for example, E911, disability accessibility, access charges and universal service, should be extended to different types of Internet services. This NPRM includes an inquiry to determine and classify when access and universal service charges should be paid. This will only affect access charges to local telcos for long-distance calls made using IP networks. Companies that offer VoIP call services strictly over the Internet (‘pure’ VoIP or first-generation) are exempt from traditional telephony rules and regulations, but those companies, like Vonage and 8x8 which offer VoIP services which offer calls to traditional phones are the services under discussion. This follows a petition by AT&T almost 18 months ago, requesting the FCC to exempt their IP-based traffic from access (interconnection) charges, applying them only to traditional circuitswitched networks. AT&T uses its IP network to transport a significant amount of long-distance traffic and is seeking to reduce its US$ 9 billion per annum paid in access charges. AT&T claim that if exempt, they will reinvest a saving of approximately $10 billion back into their network.

For regulatory purposes, the FCC distinguishes between ‘basic’ (pure transmission) and ‘enhanced’ or ‘information’ services, the latter falling beyond their regulatory remit. (Second Computer Inquiry, 77 FCC 384 (1980), 47 U.S.C. §153(20).) A “basic transmission service” is “the common carrier offering of transmission capacity for the movement of information between two or more points.” “Enhanced services” are defined as those “offered over common carrier transmission facilities…which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber’s transmitted information;

45

The Notice recognises that Internet services should continue to be subject to minimal regulation, and that mechanisms should only be adopted to implement emergency 911, law enforcement access, consumer protections and disability access which may all change as communications increasingly migrate to Internetenabled services46. In the interim it has also passed a declaratory ruling that individual state’s attempts to assume jurisdiction over IP services should be reversed. Various US states have assumed jurisdiction over any Internet phone call that connects with traditional telephone networks. For example, regulators in Minnesota attempted to make VoIP provider, Vonage follow state telephone rules. This was later overruled by a district court. Verizon has also announced its intention to shift a large amount of its long-distance call traffic to its newer IP network by late 2005. VoIP regulation falls to be decided as part of a larger issue in which the US 1996 Telecommunications Act cannot adequately deal with new and innovative services. As such, definitional issues have plagued the question of whether broadband can be classified as an ‘information service’ (and not subject to regulation) or whether it is a telecoms service, or both. In 2003, the FCC classified cable broadband under the former, a decision which was overturned by an appeals court and is now subject to further appeal by the FCC. The court had argued that cable broadband has elements of both telecoms and information services and have requested the FCC to modify its classification to reflect the hybrid nature of cable broadband. In February 2004, the FCC ruled that PC-to-PC (“first-generation") IP telephony is an information service and not a telecommunications service and that any “entirely Internet-based VoIP service is an unregulated information service, thus exempting PC-PC IP telephony from PSTN regulations. The FCC has also established an Internet Policy Working Group to identify, evaluate and address policy issues that might arise as telecommunications services move to Internet-based platforms.47

4.4.3 EU and UK The EU and UK permit the provision of electronic communication networks and services including VoIP and the regulatory regime for communications across the EU aims to be technology neutral48.

provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information. (47 C.F.R. §64.702(a)) 46 FCC News, 12 February 2004. 47 For more information on the Internet Policy Working Group, see http://www.fcc.gov/ipwg

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In 1997, the European Commission’s Directorate General for Competition provided a series of guidelines to determine if IP telephony should be regulated, which resulted in a decision not to regulate IP telephony. The main factor behind this decision was a specification regarding quality: for a service to be regarded as voice telephony it had to be in real time. At the time of this review, IP telephony experienced substantial delay and therefore did not meet the criterion, which would have allowed for more significant oversight49. The EC has since held regional consultations on the future regulation of VoIP, in response to a document commissioned by the Information Society Directorate of the European Commission, produced by Analysys. The Report’s key findings include an acknowledgment that the New Regulatory framework is suitable for handling the transition to VoIP, but a number of important issues will need to be addressed before they become significant blocks to future market development. The main issue is “whether – and under what circumstances – VoIP is classified as Publicly Available Telephony Service (PATS) with all the attendant obligations, of which the most important are access to emergency services and network integrity).” Numbering policy will also have to be carefully examined and VoIP considered in long-term planning. There is no specific licensing for VoIP services in the UK. Under the general authorisation regime, service licences are not required for the provision of electronic communications networks and services. The UK regulator, Ofcom has acknowledged the consumer benefits that VoIP can bring to the market and is considering the steps that need to be taken to ensure that VoIP providers can enter the market on a fair basis whilst also ensuring that consumers are adequately protected. Like the US and Canada, the UK is also attempting to identify, prioritise and review regulatory issues relating to VoIP (also called Voice over Broadband) and is expected to make a statement on policy in mid- 2004.

4.5 Why some countries lead and others follow It is clear that in Africa, there are few leaders in the VoIP policy realm. Clearly, a desire to protect incumbent revenue is the main driver behind the refusal by African governments to embrace the cost benefits of VoIP. While monopoly rents/profits certainly remain a clear motivation on the part of policy-makers, this does not fully

48 This regime is based on five EU Directives that cover the overall structure for the new regulatory regime (The Framework Directive (Directive 2002/21/EC)); Interconnection and Access (Directive 2002/19/EC)); Data Protection (Directive 2002/58/EC)); Universal Service (Directive 2002/22/EC)) and the Authorisation of electronic communications networks and services (Directive 2002/20/EC)). Four of the five directives have been implemented in the UK via the 2003 Communications Act 2003. 49 EC DG Competition, Status of voice on the Internet under Directive 90/388/EEC, 1997. See also Analysys,

explain the approach. Other explanations can be found in the design of the legal and regulatory framework. For example, new entrants and especially ISPs (which is usually a competitive market sector) generally evidence a keen interest in providing IP telephony and usually have the capability and financial and technical competence to do so. Also, in many cases, incumbents control both the main national backbone and the retail ISP market, as in Asia and Latin America. Often however, as is the case in SA, regulatory restrictions specified in law prior to the advent of this technology, or market structure (a sole supplier who competes vertically with enhanced service suppliers and also provides them facilities), constrains the ability of these companies to provide services, even if incumbents have no interest in promoting it themselves. As Gillwald and Kane summarise the problem, At the heart of the regulatory challenge facing South Africa is the market design…structured around a vertically integrated national company, from whom rival firms, with whom the integrated company competes downstream, are required to acquire their non-competitive facilities in order to operate or with whom other networks have to interconnect in order for their customers to access the historically larger number of subscribers on the incumbent’s network. This structure creates anti-competitive incentives for the incumbent to deny access to its network to rival firms, whether through delays or pricing strategies.50 This problem however, goes to the nature of privatisations and raising the capital required to effect network upgrades. In many of the African country reforms, deals were struck with incumbents exchanging limited monopoly periods and exclusivity for universal service requirements. Subsequent to this, technology like VoIP developed that is of benefit to consumers and operators alike, but is viewed as a threat to those guarantees. Concretised in licenses, it remains difficult to negotiate changes to those agreements without such changes being perceived as a contractual breach. Moreover, certainly in the South African case, there remain conflicting roles in licensing and regulation-making between the regulator and the Minister. This has on occasion led to delays in licensing; finalizing interconnection policy and universal service contributions. In that country, the Minister has discretion to liberalise the carriage of voice over VANS networks, without reverting to legislative amendment. To date, this has discretion has

“Final Report for the European Commission – IP Voice and Associated Convergent Services” Contract 02/48582, 28 January 2004. 50 Alison Gillwald and Sean Kane, South African Telecommunications Sector Performance Review, LINK Centre Public Policy Research Paper, No. 5, 2003, pp. 4-5.

33

not been exercised. While there is much divergence in regulatory approaches, the ITU suggests that evidence gathered from a number of studies indicates that pre-existing national legislation and regulation is a strong determinant of the evolution of IP telephony in each country51. It was mentioned in Part 1 that while technical differences between the different VOIP applications remain marginal, the regulatory implications are significant. However, another factor resulting in slower development by countries is the unintended consequences of shortsighted regulation. In keeping with the idea that technology is not necessarily neutral and policy that is often adopted or devised in technological neutral manners may have unintended consequences52, an effort to regulate IP telephony may well extend beyond its intention and also strike corporate networks which use VoIP internally as part of their PABX systems. It thus remains crucial for legislators to keep the technological differences very distinct in devising regulatory objectives. For example, many countries license international carriers who transmit voice packets over the Internet and interconnect with traditional telephone networks. If voice over the Internet is confused with voice over IP, policy makers may unwittingly create a situation where corporate networks using voice over IP as part of their PABX system, where there is no bypass or connection to the PSTN, must also obtain a license53. An ITU Internet Report from 2001 evaluated the pace and evolution of IP Telephony in a few countries. It found that while there were distinct differences, some commonalities and lessons were already evident54. (Paraphrased below)

differentiate between IP telephony and PSTN telephony can be of great assistance. Analysys studies also suggest that existing regulation, such as PSTN interconnect arrangements will have substantial effects on the pace of adoption of IP technology, as for example, in the USA55. 2. The prosecution of ‘illegal’ IP telephony operations should be avoided, as it sends an extremely negative message to the market and constrains growth. 3. The regulatory approach taken by governments towards IP telephony often hinges on the degree of state involvement in the incumbent operator and who takes the decisions. The ITU cases reflect that where such decisions are taken by the courts or by a regulatory agency that is completely independent of government and the incumbent, the outcome is more likely to be favourable to IP telephony companies than if a decision is taken by a policy making body which retains links with the incumbent operator. 4. The rise of IP telephony services and VoIP technology generally has exerted considerable pressure on current market arrangements and has in many cases facilitated the pace of the liberalisation process underway in many countries. VoIP technologies and IP telephony in particular can offer enormous cost savings for consumers, especially in markets where there is little competition or where prices for international calls are kept high to generate revenues to cross subsidise local calls and subscription charges. 5. In some cases, IP telephony networks can be established relatively quickly, allowing for accelerated market entry.

1. Rather than supporting the view that new technologies and services cannot be regulated, evidence indicates that pre-existing and newly crafted laws and regulations can have an extremely positive or negative effect on the pace and direction that new services and technology take in the marketplace. The ITU case studies examined (none of which at that time included any in Africa) showed that the degree of government support for IP telephony is as (if not more) important for the future of the service as the existence of restrictive or permissive legislation. Supportive governments can interpret restrictive legislation – such as the one outlined above in South Africa - in ways that provide incentives for IP telephony services to develop, in sheltered market niches. In this context, definitional tools that

ITU, ITU Internet Reports, IP Telephony 2001, p. 1. Escudero-Pascual, Alberto, and Hosein, I “Questioning Lawful Access to Traffic Data” (2004) Communications of the ACM 47: 3, pp. 77-82. 53 Bretton Vine and Anthony Brooks, Internet Policy handbook for Regulators and Policy-Makers (London: CTO, 2004, forthcoming) 54 ITU, Internet Reports, IP Telephony 2001, p. 11. 51 52

55

Analysys, “IP Voice and Convergent Services” Final Report for the European Commission, 28 January 2004.

34 5. APPROACHES TO VoIP REGULATION RECOMMENDATIONS AND RESEARCH

5.1 Impact on markets of VoIP from a regulatory standpoint The challenge for African governments in this arena is a difficult one. On the one hand they must find a balance between retaining the asset value of their state-owned monopoly carriers, and at the same time, creating a fair policy environment to stimulate innovation and new technologies. These may in turn, threaten the very value of the incumbents they seek also to protect. In the near term however, widespread proliferation of IP Telephony is limited practically by the lack of comprehensive technical standards; undefined financial relationships among carriers and public resistance to lower-quality packet-switched alternatives when traditional telephone service offers reliably high quality at low prices. However, networking experts continue to predict that someday, telephone, cable, and data networks will be replaced by broadband, multi-service IP networks which will ‘do it all.’56

5.2 Regulatory approaches to VoIP – Technology-neutral? Regulators in different countries have adopted different approaches to VoIP but it is worth identifying an overall approach that can bring benefits in the African context. There is often a tendency to want to regulate widely and in great detail whatever the issue being addressed. If possible, African regulators should seek to apply a “light touch”, focusing attention on those issues that will make a significant difference. It makes little sense to create regulation based on technology: in this instance the issue is VoIP but it could be any technology. If regulation seeks to describe and regulate technologies, every time a new piece of technology appears there will be a need for new regulations to describe it. A better approach is to describe categories of service and allow those granted licences to deliver them through the means of their choice. In this way, choice of technology becomes a commercial decision driven by a desire to reduce business costs. While light-touch and minimal regulation is clearly indicated, there are a few regulatory matters that potentially justify some regulatory oversight. These include QoS issues; the responsibilities and obligations of operators; interconnection and where relevant, bypass of the international settlement system. Moreover, Internet telephony does not comply with emergency service routing, nor offers any

56 Craig McTaggart, IP Telephony and the Internet: Canada Case Study (International Telecommunications Union; Geneva, 2001).

directory services or access for the disabled, at present. In addition, guaranteed minimum standards of network resilience and network integrity require attention. It is however important to retain a distinction between issues of technology, such as mission-critical calls (emergency calls that cannot be dropped during their duration) and regulating or devising policy for social benefit. The first is a question of technology, and the latter, a question of law or regulation. Surveillance of communications is increasingly becoming a matter falling into regulatory remit as more and more countries begin to condition licensing and authorisations for service on the ability of networks to be capable of effecting surveillance. Few, if any VoIP providers can effectively monitor voice communications, which are digitised and broken up for carriage in packets. Providers cannot access the content of these ‘calls’ nor is there a standardised way to distinguish voice calls from other data on the Internet. There is therefore, some rationalisation for regulators and policy makers to be assessing their roles in developing a framework for VoIP to flourish, and also to ensure that important public policy objectives continued to be served, regardless of the technology adopted. While this is a subject for other research, some of these issues are outlined further below. Number portability: Regulatory concern in this area is complex and requires further study. It would include an assessment of issues around switching costs between networks. Finding technical solutions is unlikely to be problematic, but coordination efforts over policy, including for example, ENUM remain57. With the commercial provision of VoIP services, there may be concerns of providers trying to tie in customers to their service but as competition increases and technology choice stabilises this will become less relevant. Number portability and coordinated emergency services will also require policy attention. Emergency services: Most jurisdictions only require access to emergency services for operators providing public access telephony. Proposals have been mooted that this category of service provider should be defined widely and that all public telephony services – including VoIP - must provide reliable access to emergency services. The EC has raised potential solutions in this regard, but they remain premature to discuss at this time given the current position in Africa on VoIP. This area however will require further attention when there is significant policy progress on VoIP. It may also not be possible to

57 This is the IETF protocol that takes a complete, international telephone number and resolves it to a series of URLs using a Domain Name System (DNS)-based architecture. Because ENUM puts telephone numbers into the DNS, it allows for a wide range of applications based solely on a phone number.).

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provide the location of a caller making an emergency call using VoIP; how users are made aware of this or what other steps are needed to provide such location information are matters that merit further consideration. Definitional Issues: Another potentially regulatory question is overcoming difficulties in defining who a VoIP provider is: The USbased National Cable and Telecommunications Association (NTCA) is lobbying the FCC to develop a test proposing three criteria before an entity can be defined a VoIP provider: • that the operator provides customers a 10 digit telephone number (and uses the North American Numbering Plan); • allows customers to make calls to and from the regular phone network, and; • has an IP-based service. This would include PC-to-Phone companies, but not providers and users of second generation IP telephony (PC-to-PC). This is similar to the Canadian regulator’s approach. The CRTC have suggested that voice communication services using IP that utilise telephone numbers based on the North American Numbering Plan and provide universal access to and/or from the Public Switched Telephone Network (PSTN) have functional characteristics that are the same as circuit-switched voice telecommunications services, and as such should be subject to the existing regulatory framework. African regulators will also have to consider the development of a threshold or test to ensure that regulation is correctly targeted. That said, it is arguable that many of the definitional issues are potentially avoidable, if VoIP is defined as a ‘service’ regardless of who provides it and how it is provided.

lobbying for the widespread introduction of VoIP on the African continent. We propose 10 possible research studies, grouped into three main areas, which could be considered further for research, assistance and lobbying within the CTO membership. These could be collapsed or expanded as required.

Business case 1. Undertaking risk assessment studies of VoIP seriously draining incumbent international traffic revenue. This would encompass a study over the true extent to which VoIP is truly disrupting incumbents. This research could be of benefit to telcos in Africa in facilitating VoIP being viewed as a business case, and to regulators as well, focusing on the factors that would be necessary to create an enabling environment for VoIP to develop; 2. Working with African governments and telcos to develop strategies to harness and utilise VoIP technology on incumbent networks and to build alliances and business opportunities with competitive suppliers; 3. International service is often the focus of such research, but price distortions in other markets may drive IP telephony uptake, for example, the costs of calls from fixed to mobile and domestic long distance. Tariff rebalancing can also serve to reduce the growth of VoIP, but will also impact on increased local call costs and affect the costs of dial up access. Further study should examine where the real need for reduced calling costs is.

Regional and international Network Standards: VoIP services may not be as robust as the existing PSTN (Public Switched Telephone Network) voice service. The degree to which a network carrying voice calls is expected to be available may need further consideration, especially as any relaxation of requirements could have greater implications in the long run, as more and more voice is carried over IP networks. For example, the Indian regulator TRAI has also recommended two different types of services that might be offered by long distance operators: one is of toll quality service and the other of less than toll quality service, based upon the scoring system used by the carriers themselves.

5.3 Further research It is proposed that further research on the VoIP situation in Africa is required to assist industry and non-governmental organisations

4. IP telephony will be constrained as long as the cost of international bandwidth remains high. This is worst for countries outside the US who have to pay the full cost of the connection. Work should be undertaken to assess how African governments could work to reduce these costs.

Regulatory 5. Research needs to be undertaken into how best to integrate universal service contributions; emergency services; numbering policy and threshold tests defining a VoIP provider to ensure that regulation is no more burdensome than necessary. 6. Support should be offered to membership to lobby for

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revisions/amendments to the law to ensure that competition provisions are strong enough to preclude anti-competitive action like filters and traffic blocking. 7. Assisting African governments to develop broadband policy, where absent. VoIP is likely to have more significant impact on the volumes of PSTN voice traffic in countries with high broadband penetration. In every African country, broadband rollout is far from satisfactory at present58. Countries with competitive markets and limited broadband access networks may see slower growth in VoIP than countries where voice call prices are high and broadband access is being actively exploited, such as Japan. 8. Regulators and governments should be lobbied to review policies at interval periods where contractual obligations to protect incumbents (for example, Strategic Equity partnerships and monopoly periods) appear to stand in the way of reform. 9. VoIP adoption is likely to assist with overall Internet development. ISPs and IP telephony companies in the US get free connections to other countries. If foreign IP telephony companies enter into joint ventures with local ISPs in developing countries that include the provision of Internet backbones and VSATs, this will assist in augmenting the bandwidth of these countries and enable better quality of access generally. Local partners can also benefit from training in the deployment of IP based networks. 10.A further study on what skills and capacity is required within national regulatory authorities to lobby for and assist in developing – and eventually implementing broadband and VoIP policy. In essence, the fundamental regulatory issues are whether and how to regulate services and goods that look like traditional telephony and at the same time, compete with it. On the one hand it is desirable to aim for low barriers to entry, especially for innovative services, on the other hand incumbents have rights; and subscribers have expectations to policy goals such as universal service; directory and emergency services, that should not be set aside. It is important, that regulation does not, even inadvertently, create incentives to distort services or to construct particular network architectures.

58 Beardsley, Scott, et. al., “Towards a New Regulatory Compact” Article contribution to “The Global Information Technology Report 2003-2004: Towards an Equitable Information Society” by the World economic Forum, INSEAD and infoDev, McKinsey&Company, January 2004, p. 72.

37 6. CONCLUSION

In a recent report, consulting firm, McKinsey suggested four trends that that will reshape traditional voice telephony and reduce the importance of traditional incumbent provided service. These are: fixed mobile traffic substitution; broadband penetration; competition on local fixed access or new entrant market share of fixed line access to increase; and VoIP take up59. VoIP is undoubtedly part of the future of communications technology and, whether embraced willingly or not, part of the future of telecoms policy. VoIP is an important technology that has the potential to transform telephony in Africa. Entry of IP telephony service providers whether legal or illegal in domestic markets has facilitated the acceleration of pace of market liberalisation and the introduction of competition in the long-distance and international service markets.

59

Above, p. 73.

The general approach evidenced in Africa of prohibition is at best, short sighted, and at worst, a serious threat to innovation, eventual competition and overall consumer welfare. It is becoming evident that VoIP is certainly not the only threat to telco revenue streams and in competitive environments, pressure for reduced call costs come from many quarters. A robust regulatory framework that protects public policy concerns, while enabling the introduction of new and innovative technologies is central to ICT development on the continent.

39 ACRONYMS & ABBREVIATIONS

ATM GATS HDI/G ICASA ICT IP ISDN ISP IXC ITU LCR POP POTS PIN PSTN/S PTN PTO/PTT QoS SEP SNO TCP/IP TDM USA USAL USF USTR VANS VoIP WLAN WTO

Asynchronous Transfer Mode General Agreement on Trade in Services Historically Disadvantaged Individuals/Groups Independent Communications Authority of South Africa Information Communication Technologies Internet Protocol Integrated Services Digital Network Internet Service Provider Interexchange Carrier International Telecommunication Union Least Cost Routing Point-of-Presence Plain Old Telephony Services Personal Identification Number Public Switched Telecommunications Network/Service Private Telecommunication Network Public Telecommunications Operator Quality of Service Strategic Equity Partner Second Network Operator Transmission Control Protocol/Internet Protocol Time Division Multiplexing Universal Service Agency Under-serviced Area License Universal Service Fund United States Trade Representative Value-added Network Services/Enhanced services Voice over Internet Protocol Wireless Local Area Network World Trade Organisation

40 APPENDIX A SUMMARY OF TELCO OWNERSHIP STATUS AND INDEPENDENT REGULATORS IN AFRICA Table 3: Telco ownership status and independent regulators in Africa and date established Separate Regulator (Collegial)

Separate Regulator (Minister or Director-General)

Fully Privatised

State-owned

Partially Privatised or in the process of privatising

Botswana (1996) Burkina Faso (1998) CAR (1996) Egypt (1998) Ghana (1996) Guinea-Bissau (2000) Kenya (1999) Lesotho (2000) Mauritania (1999) Mauritius (1988) Mozambique (1992) Namibia (1992) Nigeria (1992) South Africa (1997) Sudan (1996) Uganda (1997) Zambia (1994) Zimbabwe (2001) Tanzania (1994)

Angola (1999) Algeria (2001) Burundi (1997) Cameroon (1998) Cape Verde (1992) Côte d ‘Ivore (1995) Eritrea (1998) Ethiopia (1996) Gabon (2000) Guinea (1995) Madagascar (1997) Morocco (1997) Senegal (2002) Togo (1999) Tunisia (2001)

Seychelles Somalia Cape Verde

Algeria Angola Benin Chad Comoros DRC Djibouti Gambia Namibia Papua New Guinea Sierra Leone Swaziland Zimbabwe

Botswana Burkina Faso Burundi Cameroon CAR Congo Côte d' Ivore Egypt Eritrea Ethiopia Equatorial Guinea Ghana Guinea Guinea-Bissau Gabon Kenya Lesotho Madagascar Malawi Mali Maldives Mauritania Mauritius Mozambique Nigeria Rwanda Senegal South Africa Sudan Tanzania Togo Tunisia Uganda Zambia

Source: Derived from ITU, Telecommunications Indicators, 2003

41 APPENDIX B REFERENCES AND SUGGESTED FURTHER READING, WEBSITES AND WORKING GROUPS Books and Articles • Bates, R. J. and Gregory, D. W. (2001) Voice and Data Communications Handbook, McGraw-Hill. • Bellamy, J. C. (2000) Digital Telephony, Wiley Publishers. • Black, U. D. (2002) Voice over IP, 2nd Edition, Prentice Hall. • Black, U. D. (2000) Internet Telephony: Call Processing Protocols, Prentice-Hall. • Clayton, C. (1997) The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, New York, Harper Business. • Davidson, J. et al. (2000) Voice over IP Fundamentals, Cisco Press. • Escudero-Pascual, A. and Hosein I. (2004) Questioning Lawful Access to Traffic Data. Communications of the ACM, Vol. 47 No. 3, pp. 77-82. • Faynberg, I., Gabuzda, L. and Hui-Lan, L. (2000) Converged Networks and Services: Interworking IP and the PSTN, Wiley Publishers. • Garcia-Murillo, M. (2003) Assessing the impact of Internet telephony on the Deployment of telecommunications Infrastructure. NET Institute Working Paper, 03-04, October. • Marcus, G. (1998) Voice over IP Networks, McGraw-Hill. • Mason, R. (1998) Internet telephony and the International Accounting Rate System. Telecommunications Policy 22:11 pp. 931-944. • McKnight, L. W., Lehr, W. and Clark, D. D. (2001) Internet Telephony, MIT Press. • McTaggart, C. (2001) Internet still trying to find its voices. Innovation Law Newsletter, April. • Minges, M. and Kelly, T (2001) Around the World. IP Telephony in ITU News, Issue 2. • Oliver, C. I. (2001) Converged Network Architectures: Delivering Voice and Data Over IP, ATM, and Frame Relay, Wiley Publishers. • Sportack, M (2000) The Concise Guide to Voice over IP, Que. • Wright, D. J. (2001) Voice over Packet Networks, Wiley Publishers.

Websites • An Introduction to IP Telephony, http://www.mockingbirdnetworks.com/pdfs/wp_intro_IPtel.pdf • Applications for Internet Telephony, http://www.dialogic.com/solution/internet/4071web.htm • H.323 - Webopedia Definition and Links, http://webopedia.internet.com/TERM/H/H_323.html • H.323 Protocols, http://www.protocols.com/pbook/h323.htm

• H.323 Standards, http://www.openh323.org/standards.html • IP Telephone Design and Implementation Issues, http://www.telogy.com/our_products/golden_gateway/IPphone.html • IP Telephony Tutorial, http://www.pt.com/tutorials/iptelephony/ • IP telephony, http://www.teledotcom.com/0398/headend/tdc0398headend_voip .html • Internet Technical Resources: Internet Telephony, http://www.cs.columbia.edu/~hgs/internet/internet-telephony.html • Internet Telephony Tutorial, http://www.iec.org/tutorials/int_tele/ • The SIP Center - A comparison between SIP and H.323, http://www.sipcenter.com/aboutsip/siph323.htm • Transporting Voice Over IP, http://www.mockingbirdnetworks.com/pdfs/wp_intro_IPtel.pdf • Understanding the H. 323 Standard, http://www.microsoft.com/windows/NetMeeting/Corp/reskit/Chapte r11/ default.asp • VoIP Gateway Vendors, http://www.cabledatacomnews.com/iptel/voipgateway.html • VoIP How to, http://www.linuxdoc.org/HOWTO/VoIP-HOWTO.html • VoIP in the Enterprise, http://www.networkcomputing.com/918/918f1.html • Voice Over IP (VoIP) Tutorial - Frame Relay Resource Center, http://www.alliancedatacom.com/voice-over-ip-tutorial.htm • Voice Over IP (VoIP) the Internet Telephony Online Resource, http://www.internet-telephony.org/voice_over_ip/ • What is VoIP? http://www.innomedia.com/ip_telephony/voip/index.htm

Selected IETF Working Groups – Internet telephony • IP Telephony (iptel), http://www.ietf.org/html.charters/iptelcharter.html • Session Initiation Protocol (sip), http://www.ietf.org/html.charters/sip-charter.html • Signaling Transport (sigtran) http://www.ietf.org/html.charters/sigtran-charter.html • Media Gateway Control (megaco), http://www.ietf.org/html.charters/megaco-charter.html • Internet Fax (fax), http://www.ietf.org/html.charters/faxcharter.html • PSTN and Internet Interworking (pint), http://www.ietf.org/html.charters/pint-charter.html • Telephone Number Mapping (enum), http://www.ietf.org/html.charters/enum-charter.html

42

Gateway vendors • • • • • • • • • •

3Com Corp., http://www.3com.com/ Ascend Communications Inc., http://www.ascend.com/ Cisco Systems Inc., http://www.cisco.com/ Franklin Telecommunications Corp., http://www.ftel.com/ Lucent Technologies Inc., http://www.lucent.com/ Mitel Corporation, http://www.mitel.com/ Motorola Inc., http://www.mot.com/ Netspeak Corp., http://www.netspeak.com/ Nortel Networks, http://www.nortelnetworks.com/index.html VocalTec Inc., http://www.vocaltec.com/

Reports and Agreements • Analysys (2004) IP Voice and Convergent Services. Final Report for the European Commission, 28 January. http://europa.eu.int/information_society/topics/ecomm/doc/useful _information/library/studies_ext_consult/ip_voice/401_28_ip_voic e_and_associated_convergent_services.pdf • Beardsley, S., von Morgenstern, I. B., Enriquez, L. and Vebeke, W. (2004) Towards a New Regulatory Compact. The Global Information Technology Report. • World Economic Forum, INSEAD, infoDev, McKinsey & Company (2004) Towards an Equitable Information Society • Gillwald, A. and Kane, S. (2003) South African Telecommunications Sector Performance Review, LINK Centre Public Policy Research Paper, No. 5. • Gillwald, A. (2003) Under-serviced Area Licences in South Africa: Steps to Achieving Viable Operators. LINK Centre Policy Research Paper, No 3, Graduate School of Public and Development Management, University of Witwatersrand, http://link.wits.ac.za/research/usal.htm • GIPI Report: Voice over IP The Future of Telecommunications http://www.internetpolicy.net/practices/voip.pdf • International Telecommunications Union (2002) Effective Regulation: Trends in Telecommunications Reform 2002, Geneva. • International Telecommunications Union (2002) World Telecommunication Development Report, Geneva. • International Telecommunications Union (2001) Internet Reports, IP Telephony, http://www.itu.int/ITUD/ict/publications/inet/2000/index.html • Key Global Telecom Indicators for the World Telecommunication Service Sector, http://www.itu.int/ITUD/ict/statistics/at_glance/KeyTelecom99.htm • International Telecommunications Union (2001) Case Studies –

Internet Telephony, January,http://www.itu.int/osg/spu/casestudies/#iptel • Canada, http://www.itu.int/osg/spu/wtpf/wtpf2001/casestudies/canadafinal.pdf • China, http://www.itu.int/osg/spu/wtpf/wtpf2001/casestudies/chinafinal.pdf • Colombia, http://www.itu.int/osg/spu/wtpf/wtpf2001/casestudies/colombiafinal.pdf • Republic of Korea, http://www.itu.int/osg/spu/wtpf/wtpf2001/casestudies/colombiafinal.pdf • Peru, http://www.itu.int/osg/spu/wtpf/wtpf2001/casestudies/peru.pdf • Thailand, http://www.itu.int/osg/spu/wtpf/wtpf2001/casestudies/thailandfinal.pdf • McTaggart, C., (2001) IP Telephony and the Internet: Canada Case Study, Geneva, International Telecommunications Union. • Telkom Annual Report 2003, http://www.telkom.co.za. • WTO, General Agreement on Trade in Services, contained as Annex 1B to the Agreement Establishing the World Trade Organisation, 15 April 1994, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Legal Instruments – Results of the Uruguay Round, 33 I.L.M. 1143, 1168 [GATS]. • WTO, Fourth Protocol to the Basic Agreement on Trade in Services, 30 April 1996, WTO Doc. S/L/20. • Vine B. and Brooks A. (expected 2004) Internet Policy handbook for Regulators and Policy-Makers, London, CTO