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VoIP Driving the Restruction of Telecommunications

Explore how VoIP is reshaping telecommunications, impacting telcos and driving vertical integration changes. Prof. Kaili Kan's analysis sheds light on the future of voice services.

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VoIP Driving the Restruction of Telecommunications

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  1. VoIP Driving the Restruction of Telecommunications Prof. Kaili Kan Beijing Univ. of Posts & Telecommunications ITU Future of Voice Workshop Geneva Jan. 16, 2007

  2. Is VoIP Killing Telecom ? Telcos’ claim: • VoIP is IT invading telecom • VoIP robs voice revenue from telcos • VoIP takes a “free ride” of telcos’ hard-built network infrastructure • …… • “The Martians are coming !” Telecom sector in turmoil: WHY ?

  3. Current Structure of Telecom Vertical integration: (OSI 7 layers) Network + Service History background: • Shortage of bandwidth • Single service:voice However, time has changed.

  4. Surplus Optical Bandwidth • Bandwidth — telcos’ core product • Cost of bandwidth: • Infinite bandwidth over fiber • Cost approaches zero: cross-Atlantic < USD$0.0001/min. (ITU 1996) • Price of bandwidth: • Redundancy: Each telco builds its own fiber cables for vertical integration • Price to be driven to zero even faster than cost

  5. The Killer Law of Economics: oversupply kills supplier Telcos killed themselves by oversupplying bandwidth Why blame it on VoIP ? Nothing to do with VoIP, except ……

  6. Telcos’ Options for Survival Option #1: Break “network + service” vertical integration: • Build less, use more: open cable capacity to service providers • Telcos become “hollow pipes” Option #2: Insist on “network + service” vertical integration: squeeze revenue/profit out of inefficient usage of bandwidth, Fact: many telcos chose Option #2.

  7. Telcos’ Strategy to Survive • Voice: transmission (no “service”) • Small bandwidth • Lack of price elasticity • Broadband data/video: • Large bandwidth • High price-elasticity Strategy: high-price for narrow-band voice, low-price for broadband data/video Classical case of 3rd class price-discrimination: Price reversely proportional to elasticity

  8. Conditions for Price-Discrimination • Shortage of supply • True before: copper, 1G, 2G, etc. • NOT true now: fiber, 3G, Wi-Fi/ WiMAX • Insulation of markets: no “cross-border smuggling”

  9. Role of VoIP • Breaks insulation: “Smuggles” voice into low-priced broadband market • Eliminates price-discrimination of voice vs. data/video • Forces telcos to go back to Option #1: • Service providers share telcos’ fiber cable • Telcos become “hollow pipes” • Vertical network-service integration broken • However, with fiber cables already over-built, ……too late.

  10. Future of Telecom Internet/IP technology: • Independent of physical network • Terminator of vertical integration by nature Vertical integration broken: • Networks: bandwidth, access • Services: liberated Telcos: • Fixed network telcos: degenerate into “hollow pipes” • Mobile operators: extinction (VoIP + Wi-Fi/ WiMAX)

  11. Vision • Internet — “Of the people, by the people, for the people” • VoIP — restructuring telecom (a revolution) • Breaking telcos’ “network + service” vertical integrationequals to convergence

  12. China at a Crossroad Background: • Telcos — State Owned Enterprises (SOEs) • “National security” issue VoIP situation: • Officially “illegal” nationwide • 4 “experiments” by Telecom and Netcom in own territory since mid-2005 • Proliferation in underground / gray market VoIP deployment: only a matter of time

  13. Thank You kankaili@gmail.com

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