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Open Networks: Is VoIP the Key?

Open Networks: Is VoIP the Key?. Reed Hundt. April 2005. KEY MESSAGES. ~5M H/Hs could adopt VoIP over the next 12-18 months ( up from ~ 0.8 M H/Hs today) growing to ~15M H/Hs by 2009 Up to 40% of cable modem H/Hs are likely to shift to VoIP by 2009

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Open Networks: Is VoIP the Key?

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  1. Open Networks: Is VoIP the Key? Reed Hundt April 2005

  2. KEY MESSAGES • ~5M H/Hs could adopt VoIP over the next 12-18 months ( up from ~ 0.8 M H/Hs today) growing to ~15M H/Hs by 2009 • Up to 40% of cable modem H/Hs are likely to shift to VoIP by 2009 • VoIP will substitute for primary lines for HH with broadband, and … • VoIP can be a catalyst for conversion to broadband. Could increase broadband penetration as high as 60% of HH • ILECs are selling DSL to high-value households, but now these subs wants VoIP, if • VoIP provides a $15 lower monthly bill • Plus, consumers care about upfront charges, but that is okay for • MSOs, who want to use it to battle DBS, and so they will offer • As low as $35 to $40 per month for VoIP service (and win margins of up to 40%), which again shows advantage of fat pipe over • ILEC skinny pipe 11. VoIP is really all about being OPEN

  3. GROWS TO 10+ PERCENT HH BY 2009 • VoIP preference rate • Percent of total U.S. households • Even higher penetration possible as consumers grow more comfortable with VoIP • Preference rates** at various price points in • 2009 • 2005 • Typical price range of current offers • $30 MSO • $15 OTT • $45 MSO • $30 OTT • $55 MSO • $40 OTT • Total monthly bill* * Includes taxes and fees ** 2005 and 2009 modeled for different level of overall broadband penetration (28% in 2005 to 57% in 2009) Source: McKinsey Market Research; team analysis

  4. What is VoIP? • Why the hype? • Why now? VoIP IN A NUTSHELL • Voice traffic transported in data packets over the public Internet or private data networks, rather than “voice signal” over public switched telephone network (PSTN) • Internet Protocol (IP) enables communication between diverse devices by routing data packets without dedicated pathway • Voice over IP (VoIP) is a way to transmit voice conversations over a data network using IP • Internet telephony (or “peer-to-peer” telephony) allows voice calls to be made between PCs over the public Internet using IP • VoIP will bring down industry pricing and change the distribution of value among service providers • VoIP substitutes for standard voice products and services • Service providers and equipment vendors incorporate VoIP into offers Source: Team analysis

  5. Consumer market SME market* Enterprise market* VoIP EVOLUTION OVER THE NEXT 24 MONTHS • MSOs will be big winners • MSO VoIP will be widely available at ~$35/month incremental price by EOY 2006 • ILECs will fight back with their own VoIP offering and targeted retention efforts • Despite the hype, non-facilities players will substitute for a few percent of access lines at most • ILECs will control SME migration to VoIP • ILECs retain effective control of sales channel to SMEs • VoIP offering have weak value proposition for many SMEs • VoIP value proposition not compelling enough for enterprise customers to break from default conservatism and accelerate normal upgrade cycle • Savings available to enterprise enough to drive choice of VoIP for new purchases • Desire for risk-free conversion to VoIP creates long test cycle and slow rollout

  6. INCUMBENTS FACE COMPETITORS ON VoIP BATTLEGROUND • 7 types of players • Fixed (winback from cable) • “Cable” • Strategic product portfolio • Wireless (mobile back to fixed) • Converged (seamless experience) • “OTT” box • Broadband (VoIP as BB Trojan Horse) • Aggressive (Bet the company on NGN) • “OTT” virtual • Network strategy • Migration (Legacy migration) • FTTx (Abundant bandwidth to the premise) • Robust strategy • “P2P” • Aggressive entry • Wholesale strategy • Test the waters (e.g., select LATAs, conservative pricing) • “BB Trojan Horse” • No entry • Access charge reform • Regulatory strategy • Rights and obligations of VoIP providers • “Winback” • Unbundled DSL • Service platforms • “Convergence play” • Other • Device strategy • Billing

  7. Value added services • Value added services • City/local access • City/local access • Transport • Transport • City/local access • City/local access DOES VoIP BREAK VOICE VALUE CHAIN? • Today’s integrated fixed voice value chain • Call origination • Termination • Incumbents • BT • France Telecom • Deutsche Telekom • Possible future “OPEN” value chain • Call origination • Termination • Open Internet Source: McKinsey

  8. WHAT “OPEN” MEANS OPEN to all content • Volume • Speed • Intellectual property rights • Conflict • Point of view OPEN to all networks • Interconnection • Intercarrier compensation • OPEN to all people • Ubiquitous • Mobile • Affordable • Usable (disabled, non-English) • OPEN to all designs • Open protocols

  9. VoIP offers introduced by • Yahoo! BB (2002) • VoIP offers introduced by other competitors (2003) • Future VoIP moves JAPAN HAS SEEN MAJOR BROADBAND AND VoIP TAKEUP Key VoIP moves Description • VoIP introduced by Yahoo!BB as on-net and outgoing calls only to PSTN. (Line sharing allowed incoming calls to be handled by PSTN) • NTT must interconnect with VoIP players meeting quality standard • 2-way interconnection between VoIP and PSTN became available from November 2003 enabled by 050 VoIP prefix • Interconnections between different VoIP providers expand • FTTH-based VoIP being introduced with geographic phone numbers and ability to disconnect primary line VoIP Pricing • VoIP bundled free of charge to DSL service • Free calls on-net • 7.5 yen per 3 minutes to domestic fixed phone • NTT enters VoIP market with 280 yen monthly fee and somewhat lower discounts than Yahoo! • FTTH VoIP is slightly priced higher, but with PSTN equivalent quality • FTTH VoIP players including more VAS features, sometimes for free BB penetration • 7.9% • 19.1% • 45.8%**(End of 05) * Additionally, about 30 thousand fixed wireless access subscribers exist. ** Based on the March 2004 number of total households and forecast by IDC Japan Source: MPHPT; IDC Japan

  10. 10%+ OF JAPANESE HOUSEHOLDS HAVE VoIP SUBSCRIPTIONS • Consumer perception of VoIP quality • Percent • VoIP households • Thousands • Worse than cellular • Better than fixed phone • 45% of BB households • 11% of all households • As good as cellular • 29% of BB households • 8% of all households • Between fixed and cellular phone • As good as fixed phone 01 02 03 04 05 06 07 • The Japanese regulator has created a new area code 050 for VoIP Source: NTT; Yahoo Research Institute; McKinsey market survey

  11. Korea • KT • Hanaro Telecom • Hong Kong • PCCW • Hutchinson • Taiwan • Chunghwa • Seednet • Singapore • SingTel • Starhub ELSEWHERE IN ASIA VoIP IS DEVELOPING ALSO NON-EXHAUSTIVE • Price discount of attacker VoIP versus incumbent voice • Percent • Monthly fee • Local calls • International calls • Country • Incumbent • Attacker • LD calls • On net • Japan • NTT • Yahoo! BB • n.a. • 0 • -60-80 • Free • -81 • -22 • -85 • n.a • Free • 0 • n.a. • -10-20 • Free • n.a. • 0 • Free • n.a. • Free Source: CLSA Asia-Pacific market

  12. FRANCE OVERVIEW • Context • FT response • FT market share • 95% of basic subs • Consumer • VoIP? • Initially (Sept 03) no VoIP response as cannibalization risk greater than potential upside • Launched VoIP in July 2004 • Euro5/month offer on top of BB for unlimited local & LD calls • FT BB share subsequently on the increase again • Broadband penetration • 25%, 6m HH • CAGR 100% 03-04 • Implications • VoIP proving to be a killer differentiator for winning in the BB market. The market reacts quickly to new offers • Pace of offer innovation has accelerated dramatically – challenge given typical inflexibility of incumbent service platforms • Market has split in to 2 types of player: • Price players (Tele 2, 9 Telecom,…) • Feature players (Free, France Telecom) • Reactive and innovative marketing required to win in the Features play • Broadband access • Other DSL, some cable • FT DSL • Lower • PSTN • prices? • Launched July 2004 • Aggressive introduction of unlimited packages • Free • TV/DSL launched 12/03 • Videotelephony launched 08/04 • VAS • Attacker VoIP pricing • On net • Off net local • Off national/LD • Fixed to mobile • International • Free • Free • Free • ~20% discount • ~50% discount • Regulatory offensive? • Re-integrated ISP into Telco to avoid « squeeze test » • Campaign to raise/maintain ULL prices • FTTH? • No, but ADSL2+ yes • Impact of VoIP • 75% of Free BB users use VoIP (i.e., approx. 681k) • Huge marketing value for Free: 60% of of new BB intentionists say their 1st choice would be Free • Bundling? • Yes • VoIP + BB • VoIP+ BB+ TV • Mobile + VoIP being considered

  13. NETHERLANDS OVERVIEW • Context • KPN response • KPN market share • 90% of basic subs • Lessons learned • Broadband penetration • 30% • 40-50% of cable households could be on VoIP in 2 years time • Once they’re gone, they’re not coming back (5% annual churn vs. 15-20% for mobile) • 40% discount to incumbent is sweet spot • Own the marketing space (explicitly choosing customers) • Operational execution often the bottleneck • Consumer VoIP: Imminent VoIP targeted mainly at winback on cable, CPS, and attacker DSL • VAS: Directory services, multiple numbers, residential gateways • Regulatory strategy • Maximum VoIP freedom (price level freedom, price decision freedom, customer specific pricing) • Barriers to VoIP attackers (no geographic numbers, E111 24x7 requirements, no termination fees to VoIP numbers) • Broadband access • Other DSL • KPN DSL • Cable • Attacker VoIP pricing • Subscription • National calls • On-net calls • 20-40% lower • 20-30% lower • 50% lower • Impact of VoIP • Cablecos capturing up to 20% of voice lines in selected regions

  14. VoIP IS ROAD TO DEREGULATION = LOWER FEES • TWC • Charges Detail • Monthly charges • Unlimited LD package $ 44.95 • Features $ 0.00 • Total Monthly Charges $ 44.95 • Other Fees • Other surcharges $ 0.00 • Total Other Fees $ 0.00 • Taxes • State Sales Tax (6%) $ 2.70 • Federal Excise Tax (3%) $ 1.34 • Total Taxes $ 4.04 • Total TWC charges $ 48.99 • MCI Neighborhood • Charges Detail • Monthly charges • Unlimited LD package $ 55.99 • Features $ 0.00 • Total Monthly Charges $ 55.99 • Other Fees • Primary line charge $ 6.00 • LNP $ 0.23 • USF $ 2.20 • Other surcharges $ 1.83 • Total Other Fees $10.26 • Taxes • State Sales Tax (6%) $ 3.03 • Federal Excise Tax (3%) $ 2.00 • Total Taxes $ 5.03 • Total MCI charges $ 71.28 • CableVision • Account Summary • Monthly charges • Unlimited LD package $ 34.95 • Features $ 0.00 • Total Monthly Charges $ 34.95 • Other Fees • Reg Recovery Fee $ 0.00 • Total Other Fees $ 0.00 • Taxes • State Sales Tax (6%) $ 0.00 • Federal Excise Tax (3%) $ 1.05 • Total Taxes $ 1.05 • Total CableVision Charges $ 36.04 • Charges Detail • Monthly charges • Unlimited LD package $ 24.99 • Features $ 0.00 • Total Monthly Charges $ 24.99 • Other Fees • Reg Recovery Fee $ 1.50 • Total Other Fees $ 1.50 • Taxes • State Sales Tax $ 0.00 • Federal Excise Tax (3%) $ 1.05 • Total Taxes $ 1.02 • Total Vonage charges $ 27.51 • Cablevision and Vonage are not certified as telecommunication services and not currently required to pay certain regulatory fees (e.g., USF and 911) • Tine Warner, which is certified as telecommunications provider, absorbs these regulatory expenses (i.e., consumer not billed for these charges) • MCI passes all the telecom charges including surcharges (e.g., primary line and LNP) through to the consumer • Additionally, cost savings from access charge avoidance represent a further $2-3 per sub per month potential advantage for VoIP players Source: Company Web sites; literature search

  15. IS VoIP THE WAY TO OPEN NETWORKS? • Major regulatory issues involving VoIP • Potential impacts on VoIP • Status • Access charge reform • Changes to access charge regime could eliminate VoIP arbitrage opportunity by moving to bill-and-keep • Increased SLC or other per access line charges could increase VoIP price advantage • No consensus proposal after collapse of industry working group • Will regulatory changes that have effect on VoIP be decided and implemented in the next 18-24 months? • ILECs obligation to provide “naked DSL” (DSL without ILEC voice service) • Increases vulnerability of DSL subscribers to attack by OTT VoIP players - Currently, OTT players have weak value proposition for DSL subscribers (who often must purchase ILEC voice service) • Some states require ILEC to offer naked DSL • Rights and obligations of VoIP providers • Potential for VoIP service providers to be obliged to comply with fees and obligations currently avoided (e.g., E911, USF, LNP, CALEA, state taxes) and entitled to resources (e.g., numbers, interconnection agreements) • Multiple VoIP proceedings underway at FCC and in state commissions and Courts that will influence outcomes of these issues

  16. VoIP CAN BUILD BROADBAND USA OPEN VALUE CHAIN = common carrier, interconnection, protocols Transfer revenue from voice to data Transfer consumers from narrowband to broadband Transfer computers into telephones Transfer universal phone into universal broadband

  17. WHAT “OPEN” MEANS OPEN to all content • Volume • Speed • Intellectual property rights • Conflict • Point of view OPEN to all networks • Interconnection • Intercarrier compensation • OPEN to all people • Ubiquitous • Mobile • Affordable • Usable (disabled, non-English) • OPEN to all designs • Open protocols

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