“the internet changes everything” - itu · 1999-06-01 · internet economics: five factors that...
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“The Internet changeseverything”
Dr Tim Kelly, ITUSession 3: Course on
Telecom Policy, Regulationand Management,
University of Witwatersrand,6-7 May, 1999
* The views expressed in this presentation are those of the author, and do not necessarily reflect the opinions of the ITU or itsmembership. Dr Kelly can be reached by e-mail at [email protected]
“We started out running the Neton top of the phone system, and
we’ll end up with telephonyrunning over the Net.”
Eric Schmidt,CEO, Novell,
Quoted inWired, August 1997
The EconomistMay 2nd 1998
“The Internet changes“The Internet changeseverything”everything”
l The Internet in Africað High growth, but small share of pie
l The Challengeð Network architecturesð Retail pricing structuresð Wholesale pricing structures
l Threats and opportunitiesð Who wins, who loses?
l Scenariosð How will African Telcos fare?
Internet hosts (million) and growth rates,Internet hosts (million) and growth rates,1990-19981990-1998
Source: ITU “World Telecommunication Development Report, 1998”, Network Wizards.
0.4 0.7 1.3 2.34.7
9.4
29.7
43.5
16.1
0
10
20
30
40
50
90 91 92 93 94 95 96 97 98
87%
52%
6%Telephone
lines
Cellularsubscribers
Internethosts
Canada & US
64.1%
Europe, 24.3%
LAC*1.2%
Africa0.5%
Developing Asia-Pacific
2.9%Other4.6%
Australia, Japan & New
Zealand7.0%
Distribution of Internet hosts, Distribution of Internet hosts, January 1998January 1998
Source: ITU “Challenges to the Network: Internet for development, 1999”.
Internet hosts (thousands) in AfricaInternet hosts (thousands) in Africa1994-19991994-1999
Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards.
11.629.0
53.2
109.9
144.4
182.9
Jan-94 Jan-95 Jan-96 Jan-97 Jan-98* Jan-99*
Compound AnnualGrowth Rate = 73.5 %
2.4 9.1
132.9
362.1 363.1
Africa Asia Europe Americas Oceania
Internet host density by region, JanuaryInternet host density by region, January1999, 1999, Per 10’000 inhabitantsPer 10’000 inhabitants
Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards.
Internet hosts0 = No registered
0
0
0
0
0 0
00
0
0 0
0
00
0
Internet host densityper 100'000 people
3 or more (7)2 to 3 (2)1 to 2 (6)0 to 1 (39)
Internet host density by country,Internet host density by country,January 1998, January 1998, Per 100’000 inhabitantsPer 100’000 inhabitants
1'805
1'405
640
599
550
458
330
253
252
South Africa
Egypt
Morocco
Namibia
Zimbabwe
Botswana
Kenya
Swaziland
Côte d'Ivoire
Ghana
122'025
Internet hosts, top 10 AfricanInternet hosts, top 10 Africancountries, January 1998countries, January 1998
Multimedia ranking of selected AfricanMultimedia ranking of selected Africancountries, 1997/98countries, 1997/98
WorldRank
Country Teledensity(97)
TV density(97)
IP host per10’000 (98)
91st Mauritius 19.52 22.05 1.7794th South Africa 10.72 12.46 31.36128th Namibia 6.25 3.17 3.98140th Botswana 4.83 2.69 3.63153rd Zambia 0.94 7.98 0.21155th Zimbabwe 1.72 2.94 0.49159th Ghana 0.44 10.91 0.14169th Kenya 0.81 1.87 0.14179th Nigeria 0.36 6.09 0.00185th Tanzania 0.30 2.06 0.01187th Mozambique 0.36 0.39 0.04197th Ethiopia 0.26 0.51 0.01
Source: ITU “Challenges to the Network: Internet for Development, 1999”, Network Wizards.
Internet Economics: Internet Economics: Five factorsFive factorsthat make the Internet differentthat make the Internet different
1. Packet-switched network architectureð Connection-less not connection-oriented
2. Pricing independent of distance & durationð Average message covers 15 or more “hops”
3. Peering arrangements, not settlementsð Based on a full-circuit regime, not on half-circuits
4. Traffic flows highly asymmetricð Dominant flow is to terminal that initiates a session
(though this is changing ….)
5. The United States sets the rules!ð There is no “Internet Telecommunication Union”
Internet, price and serviceInternet, price and servicetrends: trends: Retail marketRetail market
l Until recently, flat-rate pricing dominantð All you can eat for US$19.95
l Now, “Free Internet” becoming highly popularð Price of Internet access cross-subsidised by cost of
local calls plus revenue drawn from advertising
l Towards lower service qualityð “Best efforts” service delivery at lowest price
l Cross-promotion of Internet and other servicesð “Free PC” with three year’s ISP subscription
l Tendency towards industry concentrationð AOL’s subscriber base > next ten ISPs added together
Where does the money go? TypicalWhere does the money go? TypicalInternet Service Provider cash-flowInternet Service Provider cash-flow
$19.95 per monthsubscription
$7.50-$10.50Wholesale PoP Access
$2.00 - $3.00Customer Care
$3.00 amortisedcustomer marketing
$3.50-$7.50 marginper customer
Source: Adapted from Paul Stapleton, ISP$ Market Report, Boardwatch Magazine.
0 20 40 60 80
Japan
Thailand
Philippines
Hongkong
Singapore
India
Indonesia
MalaysiaISP charge
Local calls
Line rental
Asia-Pacific, comparative prices,Asia-Pacific, comparative prices,In US$, based on 20 hours off-peak use per monthIn US$, based on 20 hours off-peak use per month
Source: ITU “Challenges to the Network: Internet for development, 1999”.
When is a local call not a local call?When is a local call not a local call?l Internet usage has grown fastest in countries
which permit “free” or untimed local calls(e.g., USA, Canada, HK, Australia)
l But, PTOs claim that Internet users and ISPsare “free-riding” the networkð longer average sessionsð asymmetric traffic flows
l In countries where local calls are metered,users complain that Internet is too expensiveð “Strikes” of Internet users in Germany, France
l Rapid take-off of “Free Internet”ð Free monthly Internet access in return for loyalty
to dial-up local loop service provider
Internet, price and serviceInternet, price and servicetrends: trends: Wholesale marketWholesale market
l Tendency towards industry concentrationð Top 3 backbone service providers control > 70% of
the market (measured by ISP connections)
l Economics of industry driven by hubbingð > 90% of Internet traffic still passes through USA
l Peering arrangements being replaced withcapacity-based transit paymentsð Economies of scale forces smaller ISPs to
concentrate traffic or surrender independence
l Leased line prices are critical to price variationsð Full-circuit regime replaces half-circuit telephony
regime
0%
5%
10%
15%
20%
25%
30%
1 2 3 4 5 6 7 8 9 10
Rank of company
Sh
are
of
mar
ket
Internet backboneproviders
Top 3 companies control 73%of marketInt'l
PTOs
But, Internet backbone market is moreBut, Internet backbone market is moreconcentrated than int’l telephone trafficconcentrated than int’l telephone traffic
Top 3 control28% of market
C&W USA
WorldComSprint
AT&TMCI/WorldCom
DT
Sizing the marketSizing the market
Domestic -Telephony/faxUS$435 billion
worldwide, 1997
International -Telephony/fax
US$65 billion worldwide,1997
Internet Services<US$2 billion worldwide,
1997
Source: ITU World Telecommunication Indicators Database, and ITU estimates
Assessing the risk to theAssessing the risk to the Telcos TelcosWhere are they most vulnerable?Where are they most vulnerable?
High risk Moderate risk Low risk
Fax traffic
Datacommunications
Public Packet-switched DataNetworks
Proprietary e-mail
Electronic newsservices
International voice
Mobile dataservices
Managed DataServices
Virtual PrivateNetworks
Paging services
Freephone
National and localvoice traffic
Leased circuits
Mobile voiceservices
Public SwitchedNetwork
Maintenance
Local loop
Who gets what …. ?Who gets what …. ?
l International telephone call @ $3 per 3 minsð Telco which “owns” customer gets a fractional share
of line rental (<US$0.01)ð Telco originating call gets int’l call charge (US$2.00)ð Telco terminating call gets net settlement (US$1.00)
l Internet telephony call (dial-up) @ $1 per callð Telco which “owns” customer gets fractional share of
line rental plus local call charge (<US$0.10)ð ISP which “owns” customer or Inet telephony provider
gets fractional share of subscription charge (<US$0.10)ð Internet telephony provider gets profit (>US$0.70)ð Telco terminating call gets interconnect fee (<US$0.10)
NB: Settlement payment = 10-100x interconnect fee
Gains and Gains and losses ...losses ...
Gains /opportunities
Losses / Threats
DevelopedcountryTelcos
• Increased demandfor leased lines
• Additionalsubscriber lines
• Higher valueservices / e-commerce
• Lower internationalfax and voice callcharges
• Markets for e-mailand content lost
• Multiple new marketentrants
DevelopingcountryTelcos
• As above, pluslower barriers toentry todevelopedcountry markets
• As above, plussignificant reductionin net settlements
• Requirement to payfull-circuit costs
Winners and Winners and loserslosers ......Factor Winners Losers
Erosion ofsettlementssystem
Telcos with bigdeficits (e.g.,AT&T, Sprint,MCI/WorldCom)
Telcos with bigsurpluses (e.g.,Nitel, Telkom SA,KPTC)
Increaseddemand forleased lines
Infrastructuresuppliers (e.g.,Project Oxygen,INTELSAT)
Developing countryTelcos locked intolong-term supplyagreements
“All calls arelocal calls”
Telcos withmeasured localservice
Telcos with “free”local calls
“Own” thecustomer
Local loopproviders
Long-distanceservice providers
Possible scenariosPossible scenariosl African Telcos win locally, but lose globallyð Small, start-up ISPs are acquired or put out of
business by African Telcos. However, on the globalscale, voice migrates to IP and no new arrangementsare realised for more equitable IPL cost-sharing
l African Telcos win locally, and win globallyð As above, but more equitable arrangements are
reached for carriage and termination of IP traffic, andvoice stays on circuit-switched networks
l Africa Telcos lose locally, but win globallyð African Telcos lose local ISP market permanently but
retain most international voice traffic
l African Telcos lose locally and globallyð Both local and international traffic is lost to ISPs