Towards the future: What next for Telecom Businesses?

Dr Tim Kelly, ITUWednesday Session 1

CTO Senior management seminar: Telecoms

restructuring and business change

Malta, 17-21 May, 1999

The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Kelly can be contacted at Tim.Kelly@itu.int.

AgendaAgendaThe current international telecoms market Forecasting by projection of current trends

Market trends Price trends Infrastructure trends

Forecasting by identifying discontinuities Rise of the Internet Mobile / Fixed substitution Erosion of the accounting rate system

The international telecoms market in 2005

Europe, 43.0%

North America, 32.6%

Asia-Pacific, 18.5%

LAC, 4.1% Africa, 1.9%

International traffic by origin, 1997International traffic by origin, 1997Global total, 81.8 billion minutesGlobal total, 81.8 billion minutes

Note: “LAC” = Latin America & Caribbean. Source: ITU/TeleGeography “Direction of Traffic” Database.

Top ten international telecom Top ten international telecom carriers, 1997 (billions of minutes)carriers, 1997 (billions of minutes)

AT&T US 10.3MCI / WorldCom US 7.3Deutsche Telekom Germany 5.3BT UK 3.7France Telecom France 3.5Sprint US 2.8Telecom Italia Italy 2.4Swisscom Switz. 1.9C&W Comms UK 2.1Stentor Canada 1.8

Source: ITU/TeleGeography Inc.

AT&T/BT DT/TI/Sprint

MCI/WorldCom

Unisource C&W(UK)/HKTI

14.0

10.4

7.3

4.43.8

Major alliances, ranked by billions of Major alliances, ranked by billions of minutes of outgoing int’l traffic, 1997minutes of outgoing int’l traffic, 1997

Source: ITU/TeleGeography Inc.

AT&T

MCI

DT

BT

FT

Sprint

T. Italia

SwissCom

8.8%

10.3%

4.6%

13.8%

11.2%

7.7%

11.8%

18.3%

-10.6%

0.8%

5.0%

-14.3%

1.3%

12.5%

-19.0%

-39.7%

Top 8 international carriers, 1996/97Top 8 international carriers, 1996/97

Growth in traffic Change in int’l revenue

Source: ITU, TeleGeography Inc.Note: Revenue change is based on dollar figures and may be different if expressed in local currency.

0

250

500

750

1'000

1'250

1'500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Su

bsc

rib

ers

(mil

lio

n)

0

50

100

150

200

250

300

Bil

lio

ns

of

min

ute

s o

f in

t’l

traf

fic

Fixed main lines

Mobile subscribers

Total int'l traffic

Projection of growth trends, Projection of growth trends, fixed and fixed and cellular subscribers and int’l traffic, 1995-2005cellular subscribers and int’l traffic, 1995-2005

Source: ITU.

0

100

200

300

400

500

600

700

800

900

1000

90 91 92 93 94 95 96 97 98 99 00 01 02

Ser

vice

rev

enu

e (U

S$

bn

)

Actual Projected

Domestic Telephone/fax

Int'l

Mobile

Other: Data, Internet, Leased lines, telex, etc

Projection of revenue growth (US$bn)Projection of revenue growth (US$bn)

Source: ITU.

35%46%

74% 85%

1990 1995 1998 2005

Mono-poly

Compe-tition

4 14 29 48

Number of countries permitting more than one operator for international

telephony

Percentage of outgoing international Percentage of outgoing international traffic open to competitiontraffic open to competition

Note: Analysis is based on WTO Basic Telecommunications Commitments and thus presents a minimum level of traffic likely to be open to competitive service provision. Source: ITU, WTO.

1

10

100

1'000

10'000

100'000

TAT-7

1983

TAT-8

1988

TAT-9

1991

TAT-10

1992

T-11

1993

T-12/13

1995

Gemini

1998

TAT-14

2000

Co

st p

er v

oic

e p

ath

(U

S$)

1

10

100

1'000

10'000

100'000

1'000'000

100'000'000

Cap

acit

y (v

oic

e p

ath

s)

Cost per voice path (US$), declining by

41% p.a.

Infrastructure capacity and costs, Infrastructure capacity and costs, TransAtlantic cables, 1983-2000TransAtlantic cables, 1983-2000

Source: ITU, TeleGeography Inc., FCC.Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

10'000'000

Capacity (voice

64% p.a.paths), growing by

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

TransAtlantic

TransPacific

Actual Projected

Bandwidth glut

Bandwidth shortage

Bandwidth glut?

Infrastructure capacity, Infrastructure capacity, TransAtlantic & TransAtlantic & TransPacific, in millions of voice-pathsTransPacific, in millions of voice-paths

Source: ITU, TeleGeography Inc., FCC.Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

0

0.2

0.4

0.6

0.8

1

1.2

90 92 94 96 98 00 02 04

Actual Projected

Retail price

Wholesale price

Price projections: Price projections: price per minute of price per minute of international call from US (in US$)international call from US (in US$)

Source: ITU, FCC. Note: “Retail price” calculated as actual revenue per billed minute of international traffic. “Wholesale price” calculated as weighted average of settlement rate to all US destinations.

Discontinuity 1: The Internet Discontinuity 1: The Internet Internet hosts (million)Internet hosts (million)

Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards.

0.4 0.7 1.3 2.34.7

9.4

29.7

43.5

16.1

0

10

20

30

40

50

90 91 92 93 94 95 96 97 98

87%

52%

6%Telephone

lines

Cellularsubscribers

Internethosts

Canada & US

64.1%

Europe24.3%

LAC*1.2%

Africa0.5%

Developing Asia-Pacific

2.9%Other4.6%

Australia, Japan & New

Zealand7.0%

Distribution of Internet hosts, Distribution of Internet hosts, January 1998January 1998

Source: ITU “Challenges to the Network: Internet for development, 1999”.

“IP is to communications what the PC was to computing … it’s

that fundamental a shift”

Dan Schulman,AT&T WorldNet Services,

Quoted in Tele.Com, May 1998

The EconomistMay 2nd 1998

Computer to computer Since 1994 Conversation between two similarly

equipped computer users via Internet

Computer to telephone Since 1996 Internet user interconnecting with Public

Telephone Network via an intermediaryservice provider (e.g., call-back company) or a service provider’s Website

Telephone to telephone Since 1997 Telephone carrier routes telephone or

fax message via a data network (Internet, frame relay) rather than viathe Public Telephone Network

Internet telephony:Internet telephony:Different modesDifferent modes

Telephone TelephonePublic Switch

Internet

Phone Gateway Computer

Phone Gateway Computer

Phone Gateway Computer

TelephonePublic Switch

Internet

Internet

Phone Gateway Computer

Phone Gateway Computer

Discontinuity 2: Mobile / Fixed Discontinuity 2: Mobile / Fixed SubstitutionSubstitution

Most mobile users currently also have a fixed line telephone. But, in the longer term:

Substitution of traffic Users making calls from mobile instead of from fixed-line

telephone Mobile users making calls to other mobile users

Substitution of subscriber base New users (e.g., teenagers) choosing mobile connection without

buying fixed line Users with both mobile and fixed line giving up fixed line to save

on monthly costs

When will mobile calls be cheaper than fixed-line?

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1990 1991 1992 1993 1994 1995 1996 1997 1998

Su

bsc

rib

ers,

th

ou

san

ds Fixed line network

Mobile network

Cross-over point. Cross-over point. Fixed lines and mobile Fixed lines and mobile subscribers in Finland, 1990-98subscribers in Finland, 1990-98

Source: ITU “World Telecommunication Indicators Database”.

August 1998

Mobile/fixed line substitutionMobile/fixed line substitution

In some countries, wireless is already substituting for wired service

Characterised by low levels of fixed-line density with competitive wireless markets

Also where fixed-line network damaged

0

5

10

15

20

25

30

35

0 10 20 30 40 50 60

Main lines per 100 inhabitants

Cellular subscribers as % of total telephone subscribers

Philippines Finland

ThailandLebanon Israel Japan

Jamaica

SUBSTITUTE

Venezuela

South Africa

IcelandN. Zealand

Colombia

Gabon

France

Germany

ItalySri Lanka

Uganda

Korea (Rep.)

Greece

SUPPLEMENT

Discontinuity 3: Erosion of the Discontinuity 3: Erosion of the accounting rate systemaccounting rate system

Accounting rate system has prevailed for more than 100 years Based on revenue-sharing between operators

New market entrants prefer to pay domestic interconnect charges Pressure towards cost-oriented rates Internet has no end-to-end settlements

BUT, developing countries highly dependent on net settlement payments Transfers worth some US$7-10 billion per year, much of

which is used for equipment purchases

Two alternative scenarios:Two alternative scenarios:

T < 1 1<T<5 5<T<10 10<T<20 20<T<35 35<T<50 T>50

$0.45 $0.35 $0.29 $0.23 $0.16 $0.12 $0.06

Source: ITU Focus Group Report, FCC.

ITU Focus Group targets, by teledensity ITU Focus Group targets, by teledensity (T), to be achieved by 2001 (2004)(T), to be achieved by 2001 (2004)

FCC Benchmarks, by income groupFCC Benchmarks, by income groupLow income,

T<1Low

incomeLow-midincome

Upper-mid

income

Highincome

$0.23 $0.23 $0.19 $0.19 $0.15

2002 2001 2000 1999 1998

Traffic already shifting to the Internet. Traffic already shifting to the Internet. Usage of int’l circuits between US & UK, 1995-Usage of int’l circuits between US & UK, 1995-9797

Source: ITU, adapted from TeleGeography, FCC.

0

10'000

20'000

30'000

40'000

50'000

60'000

1995 1996 1997

International private lines (mainly Internet)

Public telephone

Idle circuits

Forecasting to 2005 by Forecasting to 2005 by projecting projecting forward current trendsforward current trends

By 2005, there could be: 1.4 billion telephone lines 950 million cellular telephone subscribers 400-500 million Internet users

These could account for: 250 billion minutes of int’l voice/fax traffic 2.5 trillion minutes of total voice/fax traffic 1’000’000 Gigabits (1 Petabit) per second of Internet traffic Services market of around US$1.1 trillion Equipment market of around US$400 billion

““The death of distance The death of distance as a determinant of the as a determinant of the cost of communicating cost of communicating

will probably be the will probably be the single most important single most important factor shaping society factor shaping society in the first half of the in the first half of the

next century.”next century.”

Frances Cairncross, “The Death of Distance”, 1997

Forecasting to 2005 by Forecasting to 2005 by identifying discontinuitiesidentifying discontinuities

By 2001, less than 10% of int’l traffic will use accounting rate system Domestic interconnect fees will be dominant mode

Major price cuts in international calls after 2002/2003 Availability of new infrastructures Impact of Internet pricing model (distance and duration

independent)

Mobiles exceed fixed-line phones in OECD countries by 2004/2005 Introduction of “third generation” mobiles after 2000 Generational shift, as new users reject fixed-lines

The int’l telecoms market in The int’l telecoms market in 2005: 2005: Some educated guessesSome educated guesses

The premium of an international call over a domestic call (currently >300%) will be <20% Internet-like pricing structure

Traffic flows will be dictated by a small number of hubs connected to multiple fat pipes Major hubs in New York, London and Hong Kong?

Major alliances will own a smaller share of the market as infrastructure owners resell capacity Market significantly bigger by volume, but only slightly bigger by

revenue

Telecom development gap will grow Gap between middle income countries and LDCs