Global trends in telecom development & new challenges

for developing countriesSaburo TANAKA

Seminar in Cyberjaya, May 2005

The original document is elaborated by Dr Tim Kelly, ITU/SPU. It has completed by Saburo Tanaka. The views expressed in this presentation are those of the authors, and do not necessarily reflect the opinions of the ITU or its membership. Authors can be contacted by e-mail at: Tim.Kelly@itu.int saburo.tanaka@itu. int

AgendaAgenda

lMarket trendsØNetwork evolution ØParadigm shiftØTariff evolution

lChallenges for developing countriesØIP TelephonyØMobile service ØInternet issue

A Mobile RevolutionA Mobile Revolution

Source: ITU World Telecommunication Indicators Database.

0

200

400

600

800

1'000

1'200

1'400

1993 1995 1997 1999 2001 2003

Mobile Users

Fixed Lines

Fixed Lines vs. Mobile Users, worldwide, Million

Calling opportunities worldwideCalling opportunities worldwide

89.7%

5.0%5.0% 0.3%

1993 52.7%

19.9%

19.9%

7.5%

1998

23.4%

25.0%25.0%

26.7%

2003

Fixed-to-fixed

Fixed-to-mobile

Mobile-to-fixed

Mobile-to-mobile

Source: ITU Fixed-Mobile Interconnect website: http://www.itu.int/interconnect

550

200

400

600

800

1000

1200

1400

1600

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

5

10

15

20

25

Mobile subscribers

Internet subscribers

Mobile penetration

Internet penetration

Impact of new technologiesImpact of new technologies

AsiaAsia--Pacific international Pacific international communications capacity,communications capacity, GbitGbit/s/s

0 0 0 0 0.1 2 38

26

65

8 9 1114 16 18 20

23

30 31

0

10

20

30

40

50

60

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Internet

Telephone

1999 2000 2001 2002 2003

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,00012,00013,00014,00015,00016,00017,00018,00019,00020,000

Growth In DSL Subscribers-Regional Division (000s)1999-2003

Asia-Pacific

North America

Western Europe

South & South East AsiaLatin America

Eastern Europe

Middle East & Africa

International voice traffic International voice traffic (in billions of minutes)(in billions of minutes)

0.01% 0.2% 1.6%

4.8%

7.4%

11.8%13.1%

0

20

40

60

80

100

120

140

160

180

1997 1998 1999 2000 2001 2002 2003

VoIP

PSTN

As % of total

Source: ITU / TeleGeography

99

Changing mix of intChanging mix of int’’l circuitsl circuitsRise of international private linesRise of international private lines

0

1

2

3

4

5

6

7

8

2002 1995

Availability and status of international circuits from the United States (64 kbit/s equivalents, in millions)

Idle circuits

Other

International Private Lines

PSTN circuits

2002, total = 6.7m circuits of which IPL = 29.4%

1995, total = 0.26m circuits of which IPL = 10.6%

Source: ITU, adapted from FCC Circuit Status Report.

1010

International voice traffic trendsInternational voice traffic trendsRevenue (US$bn) and price per min ( cents)Revenue (US$bn) and price per min ( cents)

3339

4451

5863

68

0

10

20

30

40

50

60

70

1997 1998 1999 2000 2001 2002 2003

Revenue (US$bn)

Price per minute (US cents)Source: ITU World Telecom

Indicators Database.

Sources of telecom revenueSources of telecom revenueWorldwide, in US$ billionsWorldwide, in US$ billions

0

200

400

600

800

1'000

1'200

1993 95 97 99 01 2003

Domestic fixed telephone

International fixed telephone

Source: ITU World Telecom

Indicators Database.

Ser

vice

rev

enu

e (U

S$

bn)

Other: Data, Internet, leased line, etc.

Mobile

19%

38%

4.5%

38.5%

1212

Selected rates for call terminationSelected rates for call terminationIn Euro cents per minuteIn Euro cents per minute

0.017

0.017

0.151

0.022

0.08

0.164

0.251

0.138

0.022

0.08

0.016

0.019

0.180

0.140

0.150

France

Germany

India

China

MexicoSettlement/RIO

Skype, Mobile

Skype, Fixed

Note: Mobile and fixed rates are for SkypeOut.Settlement is from US and Reference Interconnect Offer is for double tandem.

Source: Skype, FCC, Analysys.

1313

The The ““third comingthird coming”” of IP Telephonyof IP Telephony

l 1995-1999: Ø “Internet phone”, offered primarily over the public

Internet (e.g. FreeWorld Dial-up, DialPad)l 2000-2002Ø “VoIP”, offered as discounted telephony over IP-based

networks (e.g. Net2Phone, iBasis)Ø Collapse of dot.com bubble left many VoIP companies

struggling as incumbent PTOs also offered VoIP services or acquired VoIP operators (e.g. China Telecom, Teleglobe)

l 2003-presentØ “Voice over broadband”, offered as free or flat-rate chat

plus discounted calls to PSTN/mobile users (e.g. Vonage, Skype)

Ø “Corporate IP”, as users shift both data and voice to a unified IP platform

1414

Annual growth ratesAnnual growth ratesInternational voice traffic, in %International voice traffic, in %

Note: Vertical scale is logarithmic.Source: ITU / TeleGeography 1%

10%

100%

1’000%

10’000%

1998 1999 2000 2001 2002 2003

VoIP

PSTN

Regulatory status of IP Telephony Regulatory status of IP Telephony By region, 2003By region, 2003

146

5

57

8

6

4

4

2

6

4

1

38

9

29

6 21 2

0%

20%

40%

60%

80%

100%

Africa Americas Arab States Asia-Pacific Europe/CIS

No policy forIP Telephony

FullCompetition

PartialCompetition

Prohibited

Restricted

Note: Based on responses from 132 economies. “Prohibited” means no service is possible. “Restricted” means only licensed PTOs can offer the service. “Partial competition” means non-licensed PTOs may use either IP networks or the public Internet. “Full competition” means anyone can use or offer service.Source: ITU (2005, forthcoming): General Trends in Telecom Reform”

Regulatory dilemmasRegulatory dilemmasExamples of regulatory confusion or inconsistency in Examples of regulatory confusion or inconsistency in regulation of IP Telephonyregulation of IP Telephony

Non-licensed PTOs may offer IP Telephony, but not

licensed PTOs

Users are able to make IP phone calls,

but no company is licensed to provide it

Licensed PTOs are allowed to offer IP

Telephony, but users are not allowed to use it

All PTOs are allowed to offer IP Telephony, but users are not allowed

to use itBrazil Barbados Aghanistan Bhutan

Sri Lanka Algeria Congo DRSuriname Antigua & Barbuda Kyrgyzstan

TYFR Macedonia Indonesia TogoMalawi

MaliMoroccoOman

PakistanParaguayRwandaUganda

Note: Based on responses to 2003/04 questionnaire from 132 economies. Only selected responses are shown. “PTO” = Public Telecommunications Operator. Source: ITU World Telecommunication Regulatory Database.

1717

IP Telephony in five yearIP Telephony in five year’’s times timeMajor technological and regulatory trendsMajor technological and regulatory trends

l IP-based traffic indistinguishable from PSTNØ Around 100 bn minutes of IP-based international traffic in

2008, or >50% of totalØ Many carriers will have all IP-networksØ A majority of voice traffic will originate on wireless

networks and much of it will be IP-basedl Numbering convergenceØ ENUM will allow calls to and from IP voice on multiple

different devicesØ Numbering plan will allow for non-geographic and device-

indendent VoIP numbersl Voice over IP over mobileØ Voice will increasingly travel over data channel in mobile

networks to provide discounted calling prices

1818

Mini case study: IP Telephony in Mini case study: IP Telephony in JapanJapan

l In 2000, Japanese Ministry (now MIC) introduced new rules on unbundling local loop and co-locationØ Rapid rise of DSL connectionsØ Very low prices (<US$20 per month)Ø Service speeds in excess of 26 Mbit/s

l Yahoo BB! Entered marked in September 2001 with bundled DSL and VoIPØ MIC defined numbering plan (prefix 050) for VoIP,

allowing calls to be received on PCsØ November 2002, >7m VoIP numbers allocated to ISPsØ VoIP development consortium worked with MIC to

establish standards for QoS, interconnection, tariffs, number allocation etc.

1919

Japanese broadband prices are among the Japanese broadband prices are among the lowest in the worldlowest in the world

32.9731.5031.2130.6130.1229.57

27.7127.7126.9226.6426.0726.0525.3825.3025.0025.0024.7723.9323.58

21.7121.1321.01

19.3918.68

17.4316.78

14.7714.0813.64

9.66

256256

400

256512

1024

1000512

256

512300

512

640256

512256

5122048

256

512

256384

256

1500512

1024

256512

256

512

0 10 20 30 40

Morocco 30Barbados 29

New Zealand 28Mexico 27

French Guiana 26Slovenia 25Germany 24

Netherlands 23Senegal 22Estonia 21

Brazil 20Malaysia 19

Hong Kong, China 18Greece 17Ukraine 16Cyprus 15

Czech Republic 14Korea (Rep.) 13

Israel 12Sri Lanka 11Australia 10

Croatia 9Taiwan, China 8Macao, China 7

Belarus 6Japan 5

Slovak Republic 4Jordan 3

Lithuania 2China 1

0 500 1000 1500 2000 2500Broadband monthly sub. prices, US$, July 2004

Overall subscription charges are important

0.920.860.86

0.550.430.42

0.380.310.290.280.260.24

0.200.180.180.180.170.170.150.13

0.100.090.070.060.060.040.040.020.010.00

Estonia 30Greece 29

Czech Republic 28New Zealand 27

Bahamas 26Ireland 25Iceland 24Austria 23

Slovenia 22Luxembourg 21

United Kingdom 20Israel 19

France 18Italy 17

Australia 16Finland 15

Netherlands 14Norway 13Denmark 12Germany 11

Switzerland 10Singapore 9

Belgium 8Canada 7

United States 6Hong Kong, China

Taiwan, China 4Korea (Rep.) 3

Sweden 2Japan 1

Cost 100 kbit/s as % of monthly income

But factoring in the speed of the connection and income is the more telling story

Source: ITU Internet Reports 2004: The Portable Internet.

X X

Traditional regime:Traditional regime:Joint provision of serviceJoint provision of service

Country A Country B

20

X

Emerging regime:Emerging regime:Market entry and interconnectionMarket entry and interconnection

XXCountry A Country B

Jointly provided circuit

Circuit provided by operator B

21

Country A Country B

Operator A Operator BPSTN

IWF

Interconnect

Leased lines

International simple resale (ISR)International simple resale (ISR)(By(By--passing accounting rate)passing accounting rate)

Once a foreign carrier accepts the benchmark rate, it can negotiate ISR arrangements with US carriers

Country A Country B

Telephone service using data transmissionTelephone service using data transmission(By(By--passing accounting rate)passing accounting rate)

Operator A

PSTN

Voice is packetized = data transmissionTelephone regulations do not apply

VSAT

Inter-connection

É

T 0 2 0 8 5 0 0 - 0 0( 1 0 6 1 4 7 )

I P N e t w o r k

I W F

T e r m i n a t i n gN e t w o r k

L o c a l o r d i s t r i b u t e df u n c t i o n C a l l i n i t i a t e d f r o m P S T N / I S D N / P L M N

t o P S T N / I S D N / P L M N

P S T N / I S D N/ P L M N

IW F

P S T N / I S D N/ P L M N

L o c a l o r d i s t r i b u t e df u n c t i o n

O r i g i n a t i n gN e t w o r k

Call from International Telecommunication Network (ITN) to another ITN via IP-based Network

IP TelephonyIP Telephony

ADSLADSL

Or Call initiated by ADSL

A

C

B

C

B

A

Operator in A sends traffic tooperator in C under anarrangement of exclusivity

• Operator in A is a partnerof operator in C

• Settlement rates A/B > C/B

Origin A

Destination B Origin

C

Destinati

on B

Operator in C declares traffic to B on transit through A

Operator in B receives traffic at settlement rate C/B instead of A/B

Operator in C “re-labels” the traffic as originated in C

1

2

3

4

Refile Refile and other and other practices practices using using accounting accounting rate systemrate system

Mobile Mobile tromboning tromboning & high mobile & high mobile termination chargetermination charge

É ÈCalled BCaller A

Operator A’s national network

Operator B’s mobile network

Operator A’s Int’l facility

Operator B’s Int’l facility

Operator X or Operator A’s facility in another country

International boundary

High Interconnection

charge

Operator B’s fixed network

Operator B’s fixed network

ÉCalled C

12

Origina ting internationalvoice traffic

Traditional bilateralsettlement rate

system

Traditional bilateralsettlement rate

system

Refile via athird countryRefile via a

third country

Sender keeps allexchange of trafficSender keeps all

exchange of traffic

Via a point ofpresence in the

terminating country

Via a point ofpresence in the

terminating country

Via a wholesale

carrier

Via a wholesale

carrier

Direct dealing with the

terminatingcountry

Direct dealing with the

terminatingcountry

30%20%

15%

70%65%

Delivering international voice Delivering international voice traffic in 2002traffic in 2002

Falling prices (1)Falling prices (1)

$0.00

$0.50

$1.00

$1.50

$2.00

90 92 94 96 98 00 02 04

Average retail price of one minute call to USA.

Mark-up

Settlement

Source: ITU adapted from FCC and national data (34 countries).

Forecast

Falling Price (2):Falling Price (2):SwissComSwissCom, price per minute of local call and call to US, price per minute of local call and call to US

57

28

43

5858

74

3444455

95 96 97 98 99 00 2001

Swiss call prices. US cents per minute.

Source: ITU.

Call to USA

Local call

1

10

100

1'000

10'000

100'000

TAT-71983

TAT-81988

TAT-91991

TAT-101992

T-111993

T-12/131995

Gemini1998

TAT-142000

Co

st p

er v

oic

e p

ath

(US

$)

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,TransAtlanticTransAtlantic cables, 1983cables, 1983--20002000

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

If distance is dead, and bandwidth is

infinite …

What do we bill for?

What do we bill for?What do we bill for?l Bill for network connectionØ Increasing integration of monthly telephone

subscription and Internet subscription prices

l Bill for privacy/advertisingØ Privacy-protected customer pays premiumØ Customer agreeing to receive advertising pays less

l Bill for quality of serviceØ Differentiated by transmission quality, waiting time,

bandwidth on demand, value-added secretarial support, mail functions etc.,

l Bill for BillingØ Customising of billing: by service, by user, by site

Internet, price and service trendsInternet, price and service trends

l Towards a flat-rate price structureØ All you can eat for US$20.00

l Towards lower service qualityØ “Best efforts” service delivery at lowest price

l Death of distanceØ Message to other side of earth costs same as a

message sent next door l Cross-promotion of Internet and other servicesØ “Free PC” with three year’s ISP subscription Ø “Free Internet” with residential local loop charges

l Tendency towards industry concentrationØ AOL’s subscriber base > next ten ISPs added together

Challenges for developing countriesChallenges for developing countries

l Service, tariff and technical issuesØAlternative calling proceduresØ Public switched network to IP based networkØChallenges related to mobile service

lRegulatory issuesØ Interconnection rulesØ Implementation of USOØ Tariff Rebalancing

l Internet connectivity in developing countriesØGuideline for negotiating IICØ Traffic based negotiation

Declining prices for mobile access, Declining prices for mobile access, global average, in US$, 1992global average, in US$, 1992--20002000

Note: CAGR = Compound Annual Growth rate.Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

547

410

231

180

86 75

1992 1994 1996 1998 1999 2000

Connection charge, in US$

CAGR, 1992-2000 = -32.1% p.a.44.9

38.134.2

31.3

20.216.6

1992 1994 1996 1998 1999 2000

Monthly subscription, in US$

CAGR, 1992-2000 = -9.2% p.a

14%

22%

24%

40%

53%

36%

8%

3%

Customers

Average revenueper user (ARPU)

Exp

end

itu

re p

er m

on

th

40 per cent of low-spending customers

generate 3% ofrevenue

14 per cent of high-spending customers

generate 53% ofrevenue

Cultivate the highCultivate the high--spendersspenders

Source: Price Waterhouse Coopers, based on Canadian data.

Mobile and Fixed-line ARPU in Japan

278

230

158

878891929496981009998979898

160152141

127134

272284275

265252

0

50

100

150

200

250

300

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Years

Yen 100

Fixed lineMobile

3838

0.00

0.05

0.10

0.15

0.20

0.25

Lith

uani

a

Nor

way

Finla

ndCz

ech

Rep.

Swed

en

Denm

ark

Irel

and

Icel

and

Slov

ak R

ep.

Pola

nd

Spain

Latv

ia

Aus

tria UK

Luxe

mbo

urg

Belg

ium

Hun

gary

Germ

any

Fran

ce

Slov

enia

Ital

yN

ethe

rland

s

Gree

ce

Mal

ta

Esto

nia

Port

ugal

Switz

erlan

d

Countries

Euros

PeakOffpeakTotal

Average Mobile Termination RateAverage Mobile Termination Rate(European countries, July 2004)(European countries, July 2004)

3939

Mobile and fixed Settlement rates, Mobile/Fixed ratioMobile and fixed Settlement rates, Mobile/Fixed ratio

0.0545

0.095

0.062

0.047

0.095

0.1385

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

South Africa Zimbabwe Zambia

2.231.16 1.00

Africa

0.0515

0.0104 0.0125

0.055

0.128

0.159

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Netherlands Germany Russia

Mobile

Fixed

Mobile/Fixed Ratio

15.29

10.24

0.94

Europe

0.085

0.1525

0.0229

0.0624

0.13210.12

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Chile Brazil Jamaica

5.24

1.15

Latin America & the Caribbean

1.36

0.13

0.0295

0.0170.0228 0.025

0.152

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

Australia Japan Malaysia

5.7

1.18

8.94

Asia Pacific

From FCC data

Notice of Inquiry

October 2004

Network ExternalityNetwork Externality

l Universal Service Obligation Fund = Cross SubsidyØ Not recognized as cost

l Network extremity = increase utility of a network to usersØ operators to provide incentives for users to join the

network = this can be added to the usage price or to the monthly subscription fee

l the network externality effect has a solid basis in economic analysis and had successfully – at least with some regulators – been brought to bear by mobile operators on their case for higher termination ratesØ Can be used by the developing countries to enhancing

take-up and roll-out of the network

Country A

(Calling)

International operator A

Country B

(Called)

Access network A2Access network A1

International operator B

Access network B2Access network B1

Customers A

Customers B

Do Customers in A derive benefit from

more Customers in B?

Accounting

rate

How can we be sure that an externality will be passed through to

connect more customers in B?

Is benefit to calling operators in A

enough incentive to agree prices above

cost?

If so, how much?

International externalitiesInternational externalities

InterInter--regional Internet connectivityregional Internet connectivity

Asia /Pacific

LatinAmerica

USA / Canada

Europe

Africa,Arab

162Gbit/s

0.1 Gbit/s

0.77 Gbit /s

Note: Gbit/s = Gigabits (1’000 Mb) per second.Source: ITU adapted from TeleGeography.

41.8Gbit/

s

0.4 Gbit/s

14 G

bit /

s0.4

5 Gbit

/s

4343

IntInt’’l Internet Connectivity (IIC)l Internet Connectivity (IIC)l In 2001, for telephony services, settlement

payment to developing countries amount to around : 5 billion US$lNow with decrease of accounting rates, they

receive less and because of Internet payment developing countries pay some 2 billions US$l SG3 adopted Recommendation D.50 on IICØ Fair sharing of Int’l Internet backbone network

lBarriers to Internet ConnectivityØRegulatory BarriersØ Economic Barriers

lWhat need to do?Ø Internet Exchange Point (IXP)=cost and service gains