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. Taking the long-term view Fixed voice, Mobile voice and Internet users worldwide (millions) 0 10 1'000 19102030405060708090200010 Fixed voice Internet 1910-2010, Logarithmic scale Mobile voice Source: ITU.

4. Relative bandwidth requirements (highly approximate!) Typical usage Duration and volume Bandwidth per month Relative size Voice telephone user 6 hours per month: 8 kbit/s duplex 350 Mb Current Internet user 30 hours per month: 56 kbit/s downstream, 4 kbit/s upstream 6.5 Gb Future Internet user (streaming media) 50 hours per month: 1 Mbit/s downstream, 56 kbit/s upstream 190 Gb

5. Market capitalization driven by market expectations: Top 6 firms in US$bn 0100200300400500600 Vodafone AirTouch NTT DoCoMo Intel General Electric Microsoft Cisco 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. Minutes of use by month, Hongkong SAR ('000s) Source: OFTA (www.ofta.gov.hk)

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

9. Dial-up Internet traffic as % of total traffic minutes 38% 27% 19.5% 8.5% 18% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 19981999 Telia (Sweden) Telecom Portugal Telenor (Norway) 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. 0 100 200 300 400 500 600 700 800 900 1000 90919293949596979899000102 Service revenue (US$ bn) ActualProjected Domestic Telephone/fax Int'l Mobile Other: Data, Internet, Leased lines, telex, etc Projection of revenue growth (US$bn) Source: ITU World Telecommunication Development Report 1999: Mobile cellular

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

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 Intl Private Line Insufficient demand to force down prices

14. Inter-regional Internet backbone 152 Mbit/s 5916 Mbit/s Asia- Pacific Latin America & Caribbean 949 Mbit/s 63 Mbit/s Arab States, Africa 170 Mbit/s 69 Mbit/s Source: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 1999. Europe 13258 Mbit/s USA & Canada

15. Number of intl circuits in use, worldwide, and by region 1998 (in thousands) 0 50 100 150 200 250 300 1995199619971998 PSTN circuits International Private Lines (Internet) IPL, 68% PSTN, 32% IPL, 59% PSTN, 41% IPL, 18% PSTN, 82% Western Europe Asia Caribbean 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. Infrastructure capacity and costs, TransAtlantic cables, 1988-2001 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. 1 10 100 1'000 10'000 TAT-8 1988 PTAT-1 1989 TAT-10 1992 TAT- 12/13 1996 AC-1 1999 TAT-14 2000 Flag Atlantic 2001 Circuit cost p.a. (US$) 1 10 100 1'000 10'000 100'000 Circuit capacity (64 kbit/s, 000s) Circuit capacity, rising by 89% p.a. Circuit costs, falling by 72% p.a.

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