Towards the future: What next for Telecom Businesses?

1. Towards the future: What next for Telecom Businesses? Dr Tim Kelly, ITU Wednesday 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.

2. Agenda • The 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

3. International traffic by origin, 1997Global total, 81.8 billion minutes Africa, 1.9% LAC, 4.1% Europe, 43.0% Asia-Pacific, 18.5% North America, 32.6% Note: “LAC” = Latin America & Caribbean. Source: ITU/TeleGeography “Direction of Traffic” Database.

4. Top ten international telecom carriers, 1997 (billions of minutes) Source: ITU/TeleGeography Inc.

5. Major alliances, ranked by billions of minutes of outgoing int’l traffic, 1997 14.0 10.4 7.3 4.4 3.8 AT&T/BT DT/TI/ MCI/ Unisource C&W Sprint WorldCom (UK)/HKTI Source: ITU/TeleGeography Inc.

6. Top 8 international carriers, 1996/97 Growth in traffic Change in int’l revenue AT&T -10.6% 8.8% MCI 0.8% 10.3% DT 5.0% 4.6% BT -14.3% 18.3% FT -39.7% 13.8% Sprint 1.3% 11.2% T. Italia 12.5% 7.7% SwissCom -19.0% 11.8% Source: ITU, TeleGeography Inc. Note: Revenue change is based on dollar figures and may be different if expressed in local currency.

7. Projection of growth trends, fixed and cellular subscribers and int’l traffic, 1995-2005 1'500 300 Fixed main lines 1'250 250 Mobile subscribers Total int'l traffic 1'000 200 Subscribers (million) Billions of minutes of int’l traffic 750 150 500 100 250 50 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: ITU.

8. 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.

9. Percentage of outgoing international traffic open to competition Mono- poly Compe- 85% 74% tition 46% 35% Number of countries permitting more than one operator for international telephony 4 14 29 48 1990 1995 1998 2005 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.

10. Capacity (voice 64% p.a. TAT-7 TAT-8 TAT-9 TAT-10 T-11 T-12/13 Gemini TAT-14 1983 1988 1991 1992 1993 1995 1998 2000 Infrastructure capacity and costs, TransAtlantic cables, 1983-2000 100'000 100'000'000 paths), growing by 10'000'000 10'000 1'000'000 100'000 1'000 10'000 100 1'000 Cost per voice path (US$) Cost per voice path Capacity (voice paths) 100 10 (US$), declining by 10 41% p.a. 1 1 Source: ITU, TeleGeography Inc., FCC. Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

11. 60 50 40 30 20 10 Infrastructure capacity, TransAtlantic & TransPacific, in millions of voice-paths Actual Projected TransAtlantic Bandwidth glut? TransPacific Bandwidth shortage Bandwidth glut 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: ITU, TeleGeography Inc., FCC. Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

12. Price projections: price per minute of international call from US (in US$) 1.2 Actual Projected 1 0.8 Retail price 0.6 0.4 Wholesale price 0.2 0 90 92 94 96 98 00 02 04 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.

13. 50 43.5 Telephone 6% 40 lines 29.7 30 Cellular 52% subscribers 20 16.1 Internet 87% hosts 9.4 10 4.7 2.3 1.3 0.7 0.4 0 90 91 92 93 94 95 96 97 98 Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards. Discontinuity 1: The Internet Internet hosts (million)

14. Distribution of Internet hosts, January 1998 Australia, Japan & New Zealand 7.0% Developing Canada & Asia-Pacific Other US 2.9% 4.6% 64.1% LAC* Europe 1.2% 24.3% Africa 0.5% Source: ITU “Challenges to the Network: Internet for development, 1999”.

15. “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 Economist May 2nd 1998

16. Internet Phone Gateway Computer Phone Gateway Computer Internet Phone Gateway Computer Public Switch Telephone Internet Phone Gateway Computer Phone Gateway Computer Telephone Public Switch Telephone Internet telephony:Different modes • Computer to computerSince 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

17. Discontinuity 2: Mobile / Fixed Substitution 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?

18. Cross-over point. Fixed lines and mobile subscribers in Finland, 1990-98 3,500 Fixed line network 3,000 2,500 August 1998 Subscribers, thousands 2,000 1,500 Mobile network 1,000 500 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: ITU “World Telecommunication Indicators Database”.

19. Cellular subscribers as % of total telephone subscribers 35 Finland Philippines Japan 30 Lebanon Israel Thailand 25 Iceland Venezuela N. Zealand Sri Lanka 20 Italy South Africa Gabon 15 Korea (Rep.) Germany Jamaica 10 Colombia Greece Uganda France 5 SUPPLEMENT SUBSTITUTE 0 0 10 20 30 40 50 60 Main lines per 100 inhabitants Mobile/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

20. Discontinuity 3: Erosion of the accounting 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

21. Two alternative scenarios: ITU Focus Group targets, by teledensity (T), to be achieved by 2001 (2004) FCC Benchmarks, by income group Source: ITU Focus Group Report, FCC.

22. Traffic already shifting to the Internet. Usage of int’l circuits between US & UK, 1995-97 60'000 50'000 40'000 Idle circuits 30'000 Public telephone 20'000 International private 10'000 lines (mainly Internet) 0 1995 1996 1997 Source: ITU, adapted from TeleGeography, FCC.

23. Forecasting to 2005 by projecting forward 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

24. “The death of distance as a determinant of the cost of communicating will probably be the single most important factor shaping society in the first half of the next century.” Frances Cairncross, “The Death of Distance”, 1997

25. Forecasting to 2005 by identifying 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

26. The int’l telecoms market in 2005: Some 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