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 3 rd 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 integration equals 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