The InternationalTelecommunications Market in 2005

Dr Tim Kelly, ITUCourse on

Telecom Policy, Regulationand Management,

University ofWitwatersrand,6-7 May, 1999

The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU orits membership. Dr Kelly can be contacted at Tim.Kelly@itu.int.

AgendaAgendal The current international telecoms marketl Forecasting by projection of current trendsð Market trendsð Price trendsð Infrastructure trends

l Forecasting by identifying discontinuitiesð Rise of the Internetð Mobile / Fixed substitutionð Erosion of the accounting rate system

l The international telecoms market in 2005

Europe, 43.0%

North America, 32.6%

Asia-Pacific,18.5%

LAC, 4.1% Africa, 1.9%

International traffic by origin, 1997International traffic by origin, 1997Global total, 81.8 billion minutesGlobal total, 81.8 billion minutes

Note: “LAC” = Latin America & Caribbean. Source: ITU/TeleGeography “Direction of Traffic” Database.

Top ten international telecomTop ten international telecomcarriers, 1997 (billions of minutes)carriers, 1997 (billions of minutes)

AT&T US 10.3MCI / WorldCom US 7.3Deutsche Telekom Germany 5.3BT UK 3.7France Telecom France 3.5Sprint US 2.8Telecom Italia Italy 2.4Swisscom Switz. 1.9C&W Comms UK 2.1Stentor Canada 1.8

Source: ITU/TeleGeography Inc.

AT&T/BT DT/TI/Sprint

MCI/WorldCom

Unisource C&W(UK)/HKTI

14.0

10.4

7.3

4.43.8

Major alliances, ranked by billions ofMajor alliances, ranked by billions ofminutes of outgoing int’l traffic, 1997minutes of outgoing int’l traffic, 1997

Source: ITU/TeleGeography Inc.

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, 1996/97Top 8 international carriers, 1996/97

Growth in traffic Change 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.

0

250

500

750

1'000

1'250

1'500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Su

bsc

rib

ers

(mill

ion

)

0

50

100

150

200

250

300

Bill

ion

s o

f m

inu

tes

of

int’l

tra

ffic

Fixed main lines

Mobile subscribers

Total int'l traffic

Projection of growth trends, Projection of growth trends, fixed andfixed andcellular subscribers and int’l traffic, 1995-2005cellular subscribers and int’l traffic, 1995-2005

Source: ITU.

0

100

200

300

400

500

600

700

800

900

1000

90 91 92 93 94 95 96 97 98 99 00 01 02

Ser

vice

rev

enu

e (U

S$

bn)

Actual Projected

Domestic Telephone/fax

Int'l

Mobile

Other: Data, Internet, Leased lines, telex, etc

Projection of revenue growth (US$Projection of revenue growth (US$bnbn))

Source: ITU.

35%46%

74% 85%

1990 1995 1998 2005

Mono-poly

Compe-tition

4 14 29 48Number ofcountriespermittingmore thanone operatorforinternationaltelephony

Percentage of outgoing internationalPercentage of outgoing internationaltraffic open to competitiontraffic open to competition

Note: Analysis is based on WTO Basic Telecommunications Commitments and thus presents a minimum levelof traffic likely to be open to competitive service provision. Source: ITU, WTO.

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

(U

S$)

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, 1983-2000 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

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

TransAtlantic

TransPacific

Actual Projected

Bandwidth glut

Bandwidth shortage

Bandwidth glut?

Infrastructure capacity,Infrastructure capacity, TransAtlanticTransAtlantic & &TransPacificTransPacific, in millions of voice-paths, 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.

0

0.2

0.4

0.6

0.8

1

1.2

90 92 94 96 98 00 02 04

Actual Projected

Retail price

Wholesale price

Price projections: Price projections: price per minute ofprice per minute ofinternational call from US (in US$)international call from US (in US$)

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.

Discontinuity 1: The InternetDiscontinuity 1: The InternetInternet hosts (million)Internet hosts (million)

Source: ITU “Challenges to the Network: Internet for Development, 1999”, 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

“IP is to communications whatthe PC was to computing … it’s

that fundamental a shift”

Dan Schulman,AT&T WorldNet Services,

Quoted inTele.Com, May 1998

The EconomistMay 2nd 1998

Discontinuity 2: Mobile / FixedDiscontinuity 2: Mobile / FixedSubstitutionSubstitution

Most mobile users currently also have a fixedline telephone. But, in the longer term:

l Substitution of trafficð Users making calls from mobile instead of from

fixed-line telephoneð Mobile users making calls to other mobile users

l Substitution of subscriber baseð New users (e.g., teenagers) choosing mobile

connection without buying fixed lineð 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?

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1990 1991 1992 1993 1994 1995 1996 1997 1998

Su

bsc

rib

ers,

th

ou

san

ds Fixed line network

Mobile network

Cross-over point. Cross-over point. Fixed lines and mobileFixed lines and mobilesubscribers in Finland, 1990-98subscribers in Finland, 1990-98

Source: ITU “World Telecommunication Indicators Database”.

August1998

Discontinuity 3: Erosion of theDiscontinuity 3: Erosion of theaccounting rate systemaccounting rate system

l Accounting rate system has prevailed for morethan 100 yearsð Based on revenue-sharing between operators

l New market entrants prefer to pay domesticinterconnect chargesð Pressure towards cost-oriented ratesð Internet has no end-to-end settlements

l BUT, developing countries highly dependenton net settlement paymentsð Transfers worth some US$7-10 billion per year,

much of which is used for equipment purchases

Two alternative scenarios:Two alternative scenarios:

T < 1 1<T<5 5<T<10 10<T<20 20<T<35 35<T<50 T>50

$0.45 $0.35 $0.29 $0.23 $0.16 $0.12 $0.06

Source: ITU Focus Group Report, FCC.

ITU Focus Group targets, byITU Focus Group targets, by teledensity teledensity(T), to be achieved by 2001 (2004)(T), to be achieved by 2001 (2004)

FCC Benchmarks, by income groupFCC Benchmarks, by income groupLow income,

T<1Low

incomeLow-midincome

Upper-mid

income

Highincome

$0.23 $0.23 $0.19 $0.19 $0.15

2002 2001 2000 1999 1998

Forecasting to 2005 by Forecasting to 2005 by projectingprojectingforward current trendsforward current trends

l By 2005, there could be:ð 1.4 billion telephone linesð 950 million cellular telephone subscribersð 400-500 million Internet users

l These could account for:ð 250 billion minutes of int’l voice/fax trafficð 2.5 trillion minutes of total voice/fax trafficð 1’000’000 Gigabits per second of Internet trafficð Services market of around US$1.1 trillionð Equipment market of around US$400 billion

Forecasting to 2005 byForecasting to 2005 byidentifying discontinuitiesidentifying discontinuities

l By 2001, less than 10% of int’l traffic will useaccounting rate systemð Domestic interconnect fees will be dominant mode

l Major price cuts in international calls after2002/2003ð Availability of new infrastructuresð Impact of Internet pricing model (distance and

duration independent)

l Mobiles exceed fixed-line phones in OECDcountries by 2004/2005ð Introduction of “third generation” mobiles after 2000ð Generational shift, as new users reject fixed-lines

The int’lThe int’l telecoms telecoms market in market in2005: 2005: Some educated guessesSome educated guesses

l The premium of an international call over adomestic call (currently >300%) will be <20%ð Internet-like pricing structure

l Traffic flows will be dictated by a small number ofhubs connected to multiple fat pipesð Major hubs in New York, London and Hong Kong?

l Major alliances will own a smaller share of themarket as infrastructure owners resell capacityð Market significantly bigger by volume, but only

slightly bigger by revenue

l Telecom development gap will growð Gap between middle income countries and LDCs