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pages. Chapter: 4: Module 3: Interconnection  |
Lesson 1: Introduction to Interconnection
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Discussion 6 Consider these review questions as you read through this lesson. Post your response in the discussions area. 1. Discuss some of the reasons that make interconnection important 2. What is the relationship between competition and interconnection? 3. Discuss what bearing the recent increase in digital subscriber lines |
In the telecommunications industry, interconnection refers to the establishment of electronic linkages between service providers so that they can conduct business transactions electronically. In short, interconnection is e-commerce or business-to-business trading between and among carriers.
Consider these other definitions of interconnection:
"This section applies to linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier, where specific commitments are undertaken"
(The Reference Paper related to the Basic Telecommunications Agreement of the General Agreement on Trade in Services)."While definitions cannot encompass the complexity of the matter, loosely speaking interconnection comprises the commercial and technical arrangements under which service providers connect their equipment, networks and services to enable customers to have access to the customers, services and networks of other service providers"
(International Telecommunication Union, The Changing Role of Government in an Era of Telecom Deregulation - Interconnection: Regulatory Issues, Report of the Fourth Regulatory Colloquium held at the ITU Headquarters (1995))"The physical connection of separate telephone networks to allow users of those networks to communicate with each other. Interconnection ensures interoperability of services and increases end users' choice of network operators and service providers"
(International Telecommunication Union, Trends in Telecommunication Reform 2000-2001 - Interconnection Regulation (2001)
When you look closely at the definitions above, there are similarities in the use of expressions like linking networks, connect their networks and physical connection of telephone networks. The emphasis is on a way two or more networks seamlessly link to each other. This in essence makes interconnection a very vital issue in telecommunications as it can be used as a tool to enhance universal service.
In a competitive marketplace, there are a number of reasons why service providers need to interconnect with each other:
Thus, in the telecom industry, interconnection or e-commerce is not just a way to make business relations easier. It is, literally, the key to competition. Without those linkages, competition would simply not be possible.
On a national level, interconnection is complicated enough, involving a tangled web of relationships among different types of providers. Interconnection on a global scale is further complicated by diverse languages, cultures, markets, regulatory environments, and technical idiosyncrasies. That's why the "technique" used to achieve interconnection is all-important. That technique becomes either the facilitator of or obstacle to competition and the spread of communications services around the world.
Figure 3-1 below illustrates the answer to the problem of nationwide and global interconnection that has emerged in the form of the interconnection application service provider (ASP). The interconnection ASP serves as a centralized, automated clearinghouse for carrier communications and transactions.
This type of electronic clearinghouse is a market-tested concept that has proven invaluable to other industries. For example, in the banking industry, it has accelerated and simplified the processing of billions of checks, which must be received from and routed to thousands of different banks. Similarly, in the telecom industry, service providers of all types and sizes need just one link into the clearinghouse, rather than multiple links to each of their trading partners. The clearinghouse or ASP receives all messages and order and pre-order information, automatically translates them to the right protocols, and directs them to the appropriate carriers.
The business rules of all participating trading partners are programmed into the clearinghouse, where they are updated as soon as a carrier's issue changes. Service providers can access the ASP via traditional gateways or the Internet.
There is nothing theoretical about this type of service. It is already operating in the United States, where it has made nationwide interconnection simple, efficient, and virtually error-free. Check the links below for more information on the Globalization of Interconnection
http://www2.itu.or.th/coe/document/IEC_tutorial.pdf
http://www.internetpolicy.net/telco/interconnection.shtml
| Figure 3-1: Interconnection Application Service Provider and the Trading Partners |
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While there are regional variations in timetables, specific regulatory directives, and technological penetration, communications and interconnection around the world are, for the most part, being driven by four universal trends.
Countries on every continent are abandoning the old models in which communications were controlled by state-run monopolies. Instead, markets are being opened to competitive carriers—throughout Europe they are known as other licensed operators (OLOs)—and incumbents are being forced to modernize, compete for customers based on price and service quality, and grant network access to competitors.
To support competition; voice, video, and data convergence; and broad access to advanced services, regulatory bodies are issuing mandates directing carriers to participate in number portability, carrier pre-selection, emergency services such as enhanced 911, and network unbundling—all of which require carrier-to-carrier interaction.
Skyrocketing demand for data and Internet access is a global phenomenon that is driving the adoption of DSL technology (see Table 3-1), which turns traditional voice networks into data highways. It has also spawned a new industry of data local-exchange carriers (DLECs)—another segment of competitors needing "last mile" access to end users. [1]
Table 3-1: Installed Base of DSL Access Network Lines for Beginning of Each Year Shown
(in thousands) 1999 2000 2001 2002 2003 2004 2005 World Totals 76 1,136 6,757 14,449 22,528 36,963 65,529 Total of U.S. and Canada 38 608 2,839 8,993 12,938 18,926 31,108 Total of Europe 29 354 1,411 2,804 5,343 8,723 12,773 Total of South America, Central America,
and the Caribbean0 0 40 141 311 1,096 2,869 Total of Central Asia 0 28 147 181 328 628 1,424 Total of Asia-Pacific 9 146 1,314 2,266 3,436 6,723 14,047 Total of Middle East and Africa 0 0 6 64 172 867 3,309 Source: OVUM Ltd. & Yankee Group
The available and predicted estimates running from 1999 to 2005 show an upward trend in the numbers of base access Network lines for all continents.
The plot of the numbers in Table 3-1, which is shown in Figure 3-2, indicates a clear representation of the increase and estimated increase in the base of access network lines across the world.
Figure 3-2: Installed Base of Access Network Lines 
These drivers do not just make an airtight case for interconnection. But just as we have seen in the United States, they also make the case for an approach to interconnection that can handle a multitude of diverse players operating on national, regional, and global levels.
The telecom industry is no longer populated by a homogeneous community of voice carriers. Carriers today represent a mix of players that grows bigger and more diverse every day thanks to the demand for and advances in wireless technologies and data services.
Through interconnection, users can achieve interoperability of their applications. Interoperability has been defined as:
"The ability of two or more systems (such as devices, databases, networks, or technologies) to interact in concert with one another, in accordance with a prescribed method, to achieve a predictable result; the ability of diverse systems made by different vendors to communicate with each other so that users do not have to make major adjustments to account for differences in products or services; and compatibility among systems at specified levels of interaction, including physical compatibility."
Interoperability allows heterogeneity of technologies while allowing users to work together (as the definition suggests). The difficulty of interoperability with respect to interconnection agreements is that different interconnection architectures may affect interoperability differently.
The implication of the importance of interoperability is that interconnection agreements may be application driven. Therefore, when designing network protocols, engineers must consider the interoperability implications at the application layer. Furthermore, by taking an application view of interoperability, economists, who traditionally have looked at applications and their effect on economic measures such as productivity, may be able to study the cost and benefits of the Internet. The difficulty with designing interconnection agreements is that applications on the Internet are dynamic--new applications are constantly being developed.
[Joseph P. Bailey, Economics and Internet Interconnection Agreements, Presented at MIT Workshop on Internet Economics March 1995]
Apart from the other problems that come in with the competitive industry, the telecommunications industry is subject to other teething problems like the settling in of competitors. This is mainly due to the entry barriers that may be posed by the other companies already established in the market. It can be said these barriers are premeditated to block the new entrants from entering markets profitably.
Joseph Sigler, the economist, defines entry barriers as a cost of producing (at some or every rate of output) which must be borne by a firm that seeks to enter an industry but is not borne by firms already in the industry.
The costs stated in the definition above for sure indicate the imbalance between the already established operator and the one vying for entry. The already established company may use its sufficient knowledge and base of the market to exploit these barriers to market entry. One of the most common tactics used is where the incumbent lowers its prices when a new entrant comes in making it impossible for the new entrant to make a profit. Examples of barriers to market entry are: advertising and marketing, cost advantages, international trade restrictions, limit pricing, patents, presence of sunk costs, research and development expenditure.
As these barriers to market entry are defined, reflect on how they relate to the telecommunications market in your country.
Some firms develop consumer loyalty by providing services that are totally unique. These services may be attached to a specific brand of product or a way of operation. This may provide a big challenge to new firms entering the market and in return making the entry expensive
Companies that have been long in the market may lower costs using the acquired experience of being long in the market. These lower costs allows these companies to cut prices and still win price wars
Some of the international trade restrictions such as tariffs and quotas have been used in certain markets as a barrier to the entry of international competition in protected domestic markets
Apart from providing different kinds of services, it is a common fact that companies get into business to make profits. When competition comes into play, some firms adopt predatory pricing policies in order to kill competition by lowering prices to a level that would force any new entrants to operate at a loss
This refers to a case where a company is given legal protection to produce a patented product and cannot be produced by another company for a number of years. This may as well refer to a case where a company is given total exclusivity to producing some kind of service
Sunk costs are defined as costs that cannot be recovered if a business decides to leave an industry. These may involve capital inputs that are specific to a particular industry and which have little or no resale value such as money spent on advertising, marketing and research.
High start-up costs or a high ratio of fixed to variable costs in some industries act as a deterrent to market entry. There are cases when a new entrant decides to leave the market due to various reasons and such costs may not be recoverable. When a new entrant takes this into consideration it may stop them from venturing into such a market.
Research always results in better products and services. Some monopolistic companies have used this as a deterrent to new entrants in the market. The company which is always improving its products and services by investing heavily in research prevents the potential entrants as it creates very dynamic competition to cope with.
In the mobile industry, there are a lot of technical factors that impede or disrupt optimum interconnectivity. These may be due to:
1.6 Learning Activity
a) Compare the definitions of interconnection cited in the lesson and discuss them in one or two pages.
b) One definition referred to interconnection as e-business; justify this.
c) List some of the noticeable barriers of entry in your country as regards the telecommunications industry and point out what effects they have on the development of the telecommunications industry in your country.
d) Can all barriers to entry be justified? Discuss.
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