Introduction

The financial markets have created a bubble, and that bubble seems to envelop nearly every initial public offering (IPO) of an Internet-related business. And though that bubble will burst, it is nevertheless apparent that the public Internet is the new engine of telecommunications that will initially augment, and later supplant, the circuit-switched, public switched telephone network (PSTN). The word “Internet” today conjures up new concepts of what constitutes a telecom service and a new delivery system for those services, thereby creating a new foundation for new business development. Using Internet protocol (IP) to build a telecom service, carriers can for the first time establish tiers or grades of service and create variable pricing to reflect real marketplace conditions.

Insight’s research suggests that at least for the next few years, billing for these new IP-based services will be an element of a convergent billing operation. Mediation is the process of taking switch outputs and converting them into billable events. Much like their circuit-switched predecessors, the mediation function for an IP billing system will format switch output into billable event detail records. The big difference between the circuit and the IP model is that the IP billing system must be able to handle many more variables, and these variables must be reflected in the packet headers.

IP-based billing is derived from Internet usage records (IURs), which are similar to the call detail records (CDRs) of circuit switched billing. The IUR utilizes fields and functions from the traditional CDR and extends it to monitor a broader range of parameters encompassing:

• Session length,
• Packet,
• Transaction,
• Service level, or
• CPU usage.

The converged bill of today will evolve over time to a new paradigm of real-time, usage-based billing based on session length in an all-packet network. The future of IP billing systems centers on the benefits that flow to carriers and users:

• Increased customer satisfaction through the immediate delivery of value-added information and services. Real-time billing supports the provision of value-added information services to customers in real time, even if bills are generated only once a month. Customers can sign up, be registered online, and begin accessing and adding services immediately. For example, users of online games can purchase additional game resources while immersed in play.
  
• Increased revenue for carriers through more accurate and more timely billing cycles and collections.
  
• Rapid product deployment. Real-time capabilities allow providers to rollout a service right away, a crucial capability in today's markets.
  
• Enhanced target marketing. An Internet telephony service provider can target promotions to customers based on calling patterns and can deliver the promotions in real time, while the customers are online.
  
• Reduced fraud, through real-time detection. Real-time systems protect against fraud by allowing the network provider to check the user’s available credit while online. These systems can detect in real time whether a customer’s ID is being used in more than one place in the network at the same time, and services can be canceled immediately.

Defining IP Telephony and IP Billing

IP telephony utilizes IP protocol to transmit voice calls. The voice calls operate as any voice call made over a circuit-switched network, except they are transmitted over a packet switched infrastructure; they are made on a timed session basis and generate CDRs for billing purposes. The growth market for IP telephony is in the emerging phone-to-phone area which will move IP telephony away from the PC users and into the mainstream of telephone users.

IP billing systems, as we use the term in this study, are required to bill for any packet-based service including IP telephony, traditional packet data, voice, video, games or any content transmitted over the network in packets.

Challenges of IP Billing

One of the greatest challenges in IP billing is validating a personal PC IP address. Validation today is difficult because IP addresses are assigned dynamically within an IP network and do not necessarily correspond to a telephone number or customer identity.

Today's settlement process for IP-based services is another area that is very dynamic. The settlement process is similar to a bank clearinghouse, since settlement has to occur between different orders of network nodes. This process involves a number of companies that must cooperate for the process to be completed and the companies paid.

And while standards for developing IP-based services are being formulated, the undeveloped nature of converged network operations means that many key areas needed to build services are really only beginning to be addressed.

Standards for interoperability are usually the first to be adopted in any telecom segment, and while products based on H.323 products are emerging, they are just now starting to be tested. Within the IP network, terminals, gateways, and routers support the H.323 protocol.

H.323 is a standard which has been widely adopted for IP telephony; it is the International Telecommunications Union (ITU) umbrella specification for multimedia communications over data networks that do not mandate a quality of service (QoS) level. H.323 provides standards for the set-up and the negotiation of calls between gateways using any kind of computer on the Internet.

The gateway is the bridge between the regular telephone network and the H.323 IP world. The gateway maps call signaling, call control, and media mapping between the circuit and packet networks.

The next level up the hierarchy is the gatekeeper. It controls many terminals and gateways and provides a routing function according to the QoS level or other features indicated in the header. In addition to network management functions, the gatekeepers create IUR records and forwards them to the accounting server.

QoS and Billing

There is considerable debate about how to provide quality of service (QoS) guarantees when packet traffic hits the Internet. Resource reservation protocol (RSVP) is one very controversial QoS proposal since it intends to reserve dedicated channels within a public IP network, setting up a point-to-point connection. This design works against the concept of connectionless router networks because its bandwidth reservations break down the routing options for other rerouted traffic.

Two other sets of networking protocols are also under consideration this year to meet goals of enabling class-based services and scaleable traffic management. DiffServ provides routing mechanisms designed to manage various QoS profiles or performance parameters. Multi-protocol label switching (MPLS) is another routing mechanism designed to group all packets within an IP session into a single flow at the networking layer (Layer 3), and tag each session for expedited passage through router hops.

The entire issue of QoS is joined at the hip with the ability to bill customers for usage-based services in all packet environments. There are currently two basic types of billing: one is called packet tracking, known as billing according to QoS, which is often tied to a pre-determined service level agreement (SLA). The other, simpler type tracks the beginning and ending times of sessions, and the locations of the session endpoints.

Either type of IP billing system allows carriers to get more capabilities from their network usage information and event records. Such systems will allow carriers to bill for specific network resource usage and thus become more profitable, but it is the real-time nature of the IP billing system that is its particular strength compared to batch-based circuit billing systems.

IP-based real-time systems offer many benefits to carriers. Real-time systems are good at provisioning pre-paid services, at monitoring credit levels, at performing enhanced target marketing, and at detecting fraud. Real-time capabilities allow providers to rollout a service immediately, which is very important in today's markets. These systems can detect in real time if a customer ID is being used more than once in the network at or about the same time, or if a customer's credit limit drops too low. Warnings or service cancellations can be triggered immediately. Real-time responses also increase revenue by meeting customers immediate needs and by allowing customers to register for and purchase services at their convenience.

It is too early to say if one type of pricing scheme is going to be dominant in the future, but the future direction for IP billing is clearly towards usage-based services. Most likely, different types of pricing models will be used to match customer value for the services. The nature of interactive services requires the utmost flexibility. Carriers therefore need to implement the most flexible billing system that can accommodate any type of pricing model. This reduces their risk and insulates them against uncertainty in the future.

Market Forecast

It is important to note that the IP billing market today is still in its infancy. The market for IP billing is a small portion of the total billing software market. In this market forecast INSIGHT is projecting only that discrete portion of the total billing software market which collects and performs the primary processing, or mediation, of IP packets. Once this process has been performed, the rest of the billing and customer care process is identical to any other service that can be billed.

IP billing expenditures in this report include the software which runs on the IP and network gateways as well as the billing platforms purchased in conjunction with these specialized billing systems. Expenditures do not include the gateways themselves because they perform other functions as well as billing in an IP network. IP billing expenditures do include hardware and software maintenance, updates, and any professional services provided by IP billing vendors.

The total market for true IP billing accounted for no more than $110 million in 1998. We project that it will increase to top several billion dollars in revenues by 2004.

In markets in the Asian Pacific and Latin America, where the networks are newer or not yet built, the transition will be easier. Many countries will start from the ground up with IP networks. Others who have more recently built their networks will find the transition from broadband to IP-based networks not that difficult to do. The only exception to this may be in Latin America where the infrastructure replacement plan seems to lag other areas. This explains why the Asian Pacific, European, Middle Eastern and north American lines have the steepest slope in this chart. The Asian Pacific region is one of the fastest growing regions in the world, while the European market is the largest telecommunications market, with the US following close behind.

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