When and where will IP overtake voice?

1. When and where will IP overtake voice? Dr Tim Kelly, Co-ordinator, Strategies and Policy Unit, International Telecommunication Union,TeleNor Carrier Event, Lofoten, Norway, 29 Aug – 1 Sept 2000 The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. The author can be contacted at tim.kelly@itu.int.

2. When and where will IP overtake voice? • Why is the question important? • Investment in networks • Investment in companies • Different dimensions of the question • IP overtaking voice, by volume • IP overtaking voice, by value • The Geography of IP • Accelerating returns to scale • Cross-overs at global, regional and national levels • Implications …. • … for network provisioning • … for bandwidth pricing

3. Normal scale 1910-2010, Logarithmic scale 2'000 Mobile voice 1'000 1'500 Fixed voice Fixed voice 1'000 10 Mobile 500 voice Internet Internet 0 0 1990 2000 2010 1910 20 30 40 50 60 70 80 90 2000 10 Source: ITU. Taking the long-term viewFixed voice, Mobile voice and Internet users worldwide (millions)

4. Relative bandwidth requirements (highly approximate!)

5. Market capitalization driven by market expectations: Top 6 firms in US$bn Cisco Microsoft General Electric Intel NTT DoCoMo Vodafone AirTouch 0 100 200 300 400 500 600 Source: Primark Datastream, valid at 27 March 2000.

6. When will IP overtake voice (1):By volume? • Measured by traffic: • Around 105 billion minutes of international PSTN traffic in 1999 (mainly voice and fax) • Around 5 trillion minutes of total PSTN traffic • Global quantity of data traffic not known, but growing exponentially (doubling every 100 days?) • Comparable data available for individual countries (e.g. Hongkong SAR, Germany, Portugal, Sweden) • Measured by circuits: • Data available for US carriers, broken down by PSTN, IPL and other • Crossover between PSTN and IPL in 1998

7. 1'500 1'250 Dial-up Internet 1'000 (via PSTN) 750 500 250 International voice (incoming and outgoing) 0 4 6 8 10 12 2 4 6 8 10 12 02 98 98 98 98 98 99 99 99 99 99 99 00 Minutes of use by month, Hongkong SAR ('000s) Source: OFTA (www.ofta.gov.hk)

8. 86.3% 36.0% 7.2% -7.1% -2.1% Domestic Int'l Local calls Calls to Calls to long- outgoing mobile Internet (T- distance calls networks Online) Deutsche TelekomPercentage change in call volume (minutes) 1998/99 Source: Deutsche Telekom annual report.

9. Dial-up Internet traffic as % of total traffic minutes 40% 35% Telia (Sweden) 38% 30% 25% 27% 19.5% 20% Telenor (Norway) 12% 15% 18% 10% Telecom Portugal 8.5% 5% 0% 1998 1999 Source: PTO annual reports. Note: For Telia, Internet traffic as % of local minutes. For others, as % of total

10. When will IP overtake voice (2): By value? • Paradigm shift postponed • Most Public Telecommunication Operators still heavily dependent on voice revenues • Mobile revenues (largely voice) represent main current area of growth • Price erosion of Internet revenues is offsetting volume gains (e.g., falling leased line prices) • Paradigm shift regained • Mobile Internet is likely to be a major area of future revenue growth • Possible future shift of broadcast entertainment (TV, music, pay-per-view) onto telecom-type networks (broadband Internet) • PSTN voice traffic shifting to IP-based networks

11. Projection of revenue growth (US$bn) 1000 Actual Projected 900 800 Other: Data, Internet, Leased lines, telex, etc 700 600 Mobile 500 Int'l Service revenue (US$ bn) 400 300 200 Domestic Telephone/fax 100 0 90 91 92 93 94 95 96 97 98 99 00 01 02 Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

12. “Web Talk” revenues, US$bn Source: IDC. The influence of Voice over IP • IDC forecasts that “Web Talk” revenues will reach US$16.5 bn by 2004 with 135 billion mins of traffic • Gartner Group forecast that voice over IP and competition in Europe will reduce prices by 75% by 2002 • IP Telephony as % of all int’l calls in 2004 • Tarifica forecast 40% • Analysys forecast 25% • In developing countries, the majority of IP Telephony calls are incoming

13. The Geography of IP • Investment in IP networks is still highly US-centric • More than 95 per cent of inter-regional IP bandwidth connectivity is to/from North America • Accelerating returns to scale means that big get bigger • Europe catching up fast • Major investment in fibre-based networks since opening up of EU markets in late 1990s • Asia-Pacific lagging behind • Top European city (Geneva) has 50 times more connectivity per inhabitant than top Asian city (Japan) • Latecomers disadvantaged by high prices • Non-liberalised telecom markets and obligation to pay both cost of both half-circuits of Int’l Private Line • Insufficient demand to force down prices

14. 152 Mbit/s USA &Canada 13’258 Mbit/s 5’916 Mbit/s Asia-Pacific Europe 949 Mbit/s 170 Mbit/s 69 Mbit/s LatinAmerica & Caribbean Arab States, Africa 63 Mbit/s Source: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 1999. Inter-regional Internet backbone

15. Number of int’l circuits in use, worldwide, and by region 1998(in thousands) Western Europe 300 PSTN, 32% IPL, 250 68% Asia 200 PSTN circuits PSTN, 150 IPL, 41% 59% 100 Caribbean International Private Lines 50 IPL, (Internet) 18% PSTN, 0 82% 1995 1996 1997 1998 Source: FCC. Applies to US carriers only.

16. Implications for network provisioning • Internet is likely to be the main demand driver • World Wide Web • Company Intranets • Managed IP-based networks • Streaming media • Voice growth may nevertheless be significant • International voice growing by around 15% p.a. • Demand for digitized voice in unified messaging applications • Voice demand will be more geographically dispersed than data demand

17. TAT-8 PTAT-1 TAT-10 TAT- TAT-14 Flag 1988 1989 1992 12/13 2000 Atlantic 1996 2001 Infrastructure capacity and costs, TransAtlantic cables, 1988-2001 10'000 100'000 Circuit costs, falling by 72% p.a . 10'000 1'000 1'000 100 Circuit capacity (64 kbit/s, 000s) Circuit cost p.a. (US$) 100 10 10 Circuit capacity, rising by 89% p.a . 1 1 AC-1 1999 Source: ITU, adapted from FCC. Note: Circuit costs assume a usage level of 18%, a compression level of 5:1 and a life-time of 20 years.

18. Implications for bandwidth pricing • “Cost-oriented” pricing may be unsustainable • Customer perception is that voice has more “value” than data • Narrow-bandwidth services, such as voice, might otherwise be “too cheap to meter” • Pricing for access more significant than pricing for usage • Price of link to fat pipe would cost more than share of fat pipe • Internet-style flat-rate, distance-insensitive tariffing of capacity likely to be dominant mode • Key to success will be managing transition to lower prices