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. Europe, 43.0% North America, 32.6% Asia-Pacific, 18.5% LAC, 4.1% Africa, 1.9% International traffic by origin, 1997 Global total, 81.8 billion minutes 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. AT&T/BTDT/TI/ Sprint MCI/ WorldCom UnisourceC&W (UK)/HKTI 14.0 10.4 7.3 4.4 3.8 Major alliances, ranked by billions of minutes of outgoing int’l traffic, 1997 Source: ITU/TeleGeography Inc.

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

7. 0 250 500 750 1'000 1'250 1'500 19951996199719981999200020012002200320042005 Subscribers (million) 0 50 100 150 200 250 300 Billions of minutes of int’l traffic Fixed main lines Mobile subscribers Total int'l traffic Projection of growth trends, fixed and cellular subscribers and int’l traffic, 1995-2005 Source: ITU.

8. 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.

9. 35% 46% 74% 85% 1990199519982005 Mono- poly Compe- tition 4142948 Number of countries permitting more than one operator for international telephony Percentage of outgoing international traffic open to competition 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. 1 10 100 1'000 10'000 100'000 TAT-7 1983 TAT-8 1988 TAT-9 1991 TAT-10 1992 T-11 1993 T-12/13 1995 Gemini 1998 TAT-14 2000 Cost per voice path (US$) 1 10 100 1'000 10'000 100'000 1'000'000 100'000'000 Capacity (voice paths) Cost per voice path (US$), declining by 41% p.a. Infrastructure capacity and costs, TransAtlantic cables, 1983-2000 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

11. 0 10 20 30 40 50 60 19901991199219931994199519961997199819992000 TransAtlantic TransPacific ActualProjected Bandwidth glut Bandwidth shortage Bandwidth glut? Infrastructure capacity, TransAtlantic & TransPacific, in millions of voice-paths Source: ITU, TeleGeography Inc., FCC. Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

12. 0 0.2 0.4 0.6 0.8 1 1.2 9092949698000204 ActualProjected Retail price Wholesale price Price projections: price per minute of international call from US (in US$) 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. Discontinuity 1: The Internet Internet hosts (million) Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards. 0.4 0.7 1.3 2.3 4.7 9.4 29.7 43.5 16.1 0 10 20 30 40 50 909192939495969798 87% 52% 6% Telephone lines Cellular subscribers Internet hosts

14. Canada & US 64.1% Europe 24.3% LAC* 1.2% Africa 0.5% Developing Asia-Pacific 2.9% Other 4.6% Australia, Japan & New Zealand 7.0% Distribution of Internet hosts, January 1998 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. Computer to computerSince 1994  Conversation between two similarly equipped computer users via Internet Computer to telephoneSince 1996  Internet user interconnecting with Public Telephone Network via an intermediary service 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 via the Public Telephone Network Internet telephony: Different modes Phone Gateway Computer TelephonePublic Switch Internet Phone Gateway Computer

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. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 199019911992199319941995199619971998 Subscribers, thousands Fixed line network Mobile network Cross-over point. Fixed lines and mobile subscribers in Finland, 1990-98 Source: ITU “World Telecommunication Indicators Database”. August 1998

19. 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 0 5 10 15 20 25 30 35 0102030405060 Main lines per 100 inhabitants Cellular subscribers as % of total telephone subscribers Philippines Finland Thailand Lebanon Israel Japan Jamaica SUBSTITUTE Venezuela South Africa Iceland N. Zealand Colombia Gabon France Germany Italy Sri Lanka Uganda Korea (Rep.) Greece SUPPLEMENT

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

22. Traffic already shifting to the Internet. Usage of int’l circuits between US & UK, 1995- 97 Source: ITU, adapted from TeleGeography, FCC. 0 10'000 20'000 30'000 40'000 50'000 60'000 199519961997 International private lines (mainly Internet) Public telephone Idle circuits

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