Cisco Voice Infrastructure and Applications Solution: The Wholesale Terminating Carrier

Introduction
Voice-over-IP (VoIP) networks are creating new service opportunities in the international transit market. In many parts of the world, current market conditions enable service providers to increase revenue by offering wholesale VoIP services. These companies can fill a unique market niche by partnering with carriers that need to transport international VoIP traffic in their respective geographic regions.

The Cisco Voice Infrastructure and Applications (VIA) solution represents the telecommunication industry's most widely deployed VoIP infrastructure, with the highest voice quality. Using standards-based protocols to enable a broad portfolio of value-added services, the solution has proven benefits to service providers that wish to offer traditional voice services on packet-based networks. The Cisco VIA solution integrates a comprehensive set of existing products to meet the needs of a wide variety of applications and services. For simplicity, this business case focuses on terminating services only.

Defining Terms and Roles
Wholesale termination is a service provided by wholesale carriers to other service providers to augment or extend the reach of their networks. VoIP service providers typically terminate traffic at a lower cost than traditional time-division multiplexing (TDM) routes because of toll arbitrage opportunities, lower startup costs, and lower operational cost.

IP Telephony Services
The basis of a VoIP network is the voice gateway. The gateway converts TDM traffic from the Public Switched Telephone Network (PSTN) into either H.323- or Session Initiation Protocol (SIP)-based VoIP traffic. Considered intelligent endpoints, the gateways can provide billing, alarming, built-in interactive voice response (IVR), routing, digit manipulation, and security. In addition, they can support a wide variety of PSTN protocols, such as foreign exchange office (FXO), foreign exchange station (FXS), Primary Rate Interface (PRI), channel-associated signaling (CAS), R2, Qsig, and Signaling System 7 (SS7). The voice gateways can support both origination and termination. Figure 1 shows a model of a wholesale provider that offers PSTN termination for Internet telephony or application service providers (ITSPs/ASPs).

(Call that Originates as IP Traffic and Terminates as TDM)

Opportunities for Today's Carriers
For VoIP service providers, the opportunity is large. Probe Research forecasts that worldwide VoIP usage (national and international) will grow from 11 billion minutes of use (MOU) in 2000 to 214 billion MOU in 2004 (Figure 2). International VoIP will grow from 6 billion MOU in 2000 to 76 billion MOU in 2004 (Figure 3). The large growth in demand for international VoIP can be attributed to many factors, including:

(Worldwide (National and International) Total Addressable Market (TAM) for VoIP)

(International MOU Total Addressable Market (TAM) for VoIP)

The main growth area for VoIP is toll arbitrage. Toll arbitrage takes advantage of the ambiguous regulations in termination of IP traffic within countries and localities. Because of these regulatory disparities between regulated TDM traffic and typically unregulated VoIP traffic, VoIP can be terminated at a fraction of the cost of TDM traffic (check with local regulation authority for requirements for terminating VoIP traffic).

Toll arbitrage is not the only area of growth in VoIP. Many emerging countries are not building legacy TDM networks and are instead moving to packet-based networks. These countries are favoring VoIP termination since it offers a lower tariff cost than TDM termination. Even though VoIP service may be regulated, many of these countries favor VoIP termination over TDM termination because it provides a lower termination cost than traditional TDM termination.

Services and Pricing
The core offering of wholesale providers is the support of transport and termination of wholesale minutes. Wholesale providers collect traffic from a variety of sources and terminate the traffic within their region at a market-acceptable price. Wholesale providers that focus on international termination (the focus of this business case) can receive traffic from a variety of sources. Traffic can originate from traditional carriers, such as inter-exchange carriers (IXCs), local exchange carriers (LECs), ASPs, or ITSPs. As the network is established, VoIP providers can target other services to increase revenue—services such as prepaid and postpaid calling, unified messaging, IP private branch exchange (PBX) termination, and so on. The opportunities are unlimited.

Wholesale providers generally collect fees for transporting and terminating minutes successfully. The cost is based on transport, equipment, local PSTN fees, and any tariff imposed on the traffic (refer to Figure 4). Pricing is typically driven by cost and market tolerance. Providers that use the public Internet as transport typically can achieve lower cost than facility-based providers, but at an uncertain quality of service (QoS).

Wholesale termination services are a commodity in many markets, with rates typically based on capacity in the region, completion rate, QoS, and cost. Service providers seeking a wholesale carrier have many options for terminating traffic, and they typically choose the carriers that can provide the lowest cost, highest completion rate, and best QoS. Wholesale business can be risky, prices constantly fluctuate, regulations are ambiguous, and competition is tough. At the same time, wholesale call transport services can be rewarding for carriers that are able to react with the market and drive value in their service offerings.

(International Aggregation and Resale Model)

Because the wholesale terminating business is a commodity business, rates are subject to change in accordance with fluctuating costs and overall market demand. Typically, wholesale terminating carriers and service providers enter into contracts with an agreed price per minute for a specific time period. The terminating carrier continually reviews pricing and costs and notifies customers about any rate changes. Price increases generally require advanced notice, whereas rate decreases are implemented in real time.

Another method of pricing is via prepaid contracts in which the service provider pays for minutes in advance. Typically, the price negotiated is based on overall volume. In this case, the prices are fixed and do not change in response to market trends.

For wholesale terminating carriers, settlement with the PSTN and service provider customers is key. Wholesale terminating carriers must ensure that they are paying the PSTN network provider for only the calls that are actually terminated on the PSTN. In turn, they must charge and collect revenue from their service provider customers for their completed calls.

Off-Net Versus On-Net Termination
"Off-net call termination" refers to VoIP long-distance calls that are terminated by the wholesale terminating carrier directly onto the PSTN. The wholesale terminating carrier still needs to pay a local termination fee to the LEC or PSTN network provider.

"On-net call termination" occurs when the wholesale terminating carrier has a relationship with a local Internet service provider (ISP) that terminates long-distance calls by offloading them via TDM circuits to the LEC. Calls appear as local calls, and termination charges are reduced because local TDM carriers often use flat-rate billing to terminate what they perceive as local calls. The local ISP typically charges the wholesale terminating carrier a significantly lower fee for its services than it charges for termination of an off-net call.

In summary, off-net calling provides cost-efficient transport, but includes local access fees. On-net calling avoids local fees. In some countries, on-net call termination is prohibited.

Target Market
The primary service provider customers for wholesale terminating carriers include the following:

These service provider customers typically seek out a wholesale terminating carrier when they want the following:

Cost reduction » Seeking to reduce international termination costs by directing international traffic to the VoIP wholesale provider, Tier 1 providers direct a small percentage of international outbound traffic to ITSPs in order to reduce their liability to the PTT in the country where the call is terminated. Although these carriers have the means to build their own VoIP network, they choose not to in order to maintain their TDM interconnection relationship with the PTT.

Augmentation » Many carriers provision their networks for overflow conditions during the busy hours and use alternate wholesale providers to support overflow traffic. They may sign up several carriers to whom they send the overflow traffic if their network cannot handle the load.

Extension of their network » Rather than hand traffic off to the public TDM network, service providers use wholesale carrier partnerships to extend the reach of their network for lower cost termination.

Wholesale terminating carriers generally try to offer the following features when negotiating partnerships with customers:

Pricing advantage >> Service providers look for lower pricing for VoIP compared to PSTN termination rates. The wholesale terminating carrier should offer fair market pricing for their VoIP services, particularly when competing terminating services are available in the market.

QoS >> Service providers need VoIP termination facilities that provide voice quality comparable to the PSTN. Wholesale terminating carriers should have a disaster recovery plan that includes dynamic routing to alternative networks (including the PSTN).

Network reach and seamless termination >> Service providers look for wholesale terminating carriers that have broad network coverage. Service providers want to have one point of contact so they do not have to create agreements with several terminating carriers.

Completion of service >> Service providers look for wholesale terminating carriers that can provide a high call completion rate.

Benefits to Service Provider Customers
Service provider customers of the wholesale terminating carrier benefit in many ways:

Speed to market - Partnerships with wholesale terminating carriers deliver the ability to offer VoIP services quickly without the responsibility and time constraints that come with building their own VoIP points of presence (POPs).

Cost savings - Minimizing up-front investment allows service provider customers to avoid much of the capital outlay of a VoIP infrastructure.

Acquisition of local knowledge - Wholesale terminating carriers understand local customs, languages, and regulatory issues, and often have valuable relationships and contacts with local carriers to terminate calls.

Key Solution Components
The Cisco VIA solution architecture has four fundamental hardware elements: The gateway, the gatekeeper, the SIP proxy server, and the billing server. The gatekeepers are recommended for H.323 architectures, and the SIP proxy server is recommended for SIP architectures. Cisco gateways support coexistence of both H.323 and SIP on a call-by-call basis, and they use the same billing server for transparency of service, regardless of protocol.

Gateways provide the interface between the TDM (PSTN traffic) and VoIP infrastructure; they support a variety of PSTN signaling types, including PRI, CAS, R2, and SS7. Terminating gateways receive VoIP traffic and convert the packets back to TDM so they can be terminated to the PSTN. Gateways need to support a variety of protocols to support a variety of originating carrier networks. Billing is performed off the gateway via a Remote Access Dial-In User Service (RADIUS) interface. Cisco gateways in the VIA solution include the Cisco AS5000 family of universal gateways and Cisco 2600, 3600, and 7200 series voice gateways.

H.323 gatekeepers allow the network to scale in growth, performance, and dial-plan administration. In addition, the gateways and gatekeepers act together to provide security, resource management, and call routing. The Cisco gatekeepers and directory gatekeepers also reduce the level of provisioning necessary in an H.323 network. Cisco gatekeepers in the VIA solution include the Cisco 3660 multiservice platform and the Cisco 7200 series.

SIP proxy servers manage SIP sessions across the network and can generate billing-related transactions that can be used by third-party billing intermediation partners. Carrier-class scalability is ensured via load balancing and server resource (SRV) record support to eliminate network bottlenecks and single points of failure. SIP proxy servers also enable H.323 and SIP coexistence with resource availability indicator (RAI) functionality. They improve network-wide reliability and lower post-dial delay. Cisco offers the Cisco SIP Proxy Server as part of the VIA solution.

The billing server provides a collection of call detail records (CDRs) generated from the gateway and provides details on call attempts and completions. Cisco relies on third-party partners such as MIND CTI or Primal to provide a complete billing solution to support wholesale and mediation services.

In addition to these network elements, Cisco offers adjunct servers that optimize the network for least-cost, time-of-day, percent allocation, and QoS routing. Although these products are not included in this business analysis, their use can greatly increase margin by performing cost-based routing within the network.