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 [email protected].

When and where will IP overtake voice? l Why is the question important? ð Investment in networks ð Investment in companies

l Different dimensions of the question ð IP overtaking voice, by volume ð IP overtaking voice, by value

l The Geography of IP ð Accelerating returns to scale ð Cross-overs at global, regional and national levels

l Implications …. ð … for network provisioning ð … for bandwidth pricing

Taking the long-term view Fixed voice, Mobile voice and Internet users worldwide (millions) Normal scale

1910-2010, Logarithmic scale

2'000

Mobile voice

1'000 1'500

Fixed voice 1'000 10

Mobile voice

Fixed voice

500

Internet

Internet 0 1910 20

Source: ITU.

30

40

50

60

70

80

90 2000 10

0 1990

2000

2010

Relative bandwidth requirements (highly approximate!) Typical usage

Duration and volume

Bandwidth Relative per month size

Voice telephone user

6 hours per month: 8 kbit/s duplex

350 Mb

Current Internet user

30 hours per 6.5 Gb month: 56 kbit/s downstream, 4 kbit/s upstream 50 hours per 190 Gb month: 1 Mbit/s downstream, 56 kbit/s upstream

Future Internet user (streaming media)

Market capitalization driven by market expectations: Top 6 firms in US$bn Cisco Microsoft General Electric Intel NTT DoCoMo Vodafone AirTouch 0

100 200 300 400 500 600

Source: Primark Datastream, valid at 27 March 2000.

When will IP overtake voice (1): By volume? l Measured by traffic: ð Around 105 billion minutes of international PSTN traffic in 1999 (mainly voice and fax) ð Around 5 trillion minutes of total PSTN traffic ð Global quantity of data traffic not known, but growing exponentially (doubling every 100 days?) ð Comparable data available for individual countries (e.g. Hongkong SAR, Germany, Portugal, Sweden)

l Measured by circuits: ð Data available for US carriers, broken down by PSTN, IPL and other ð Crossover between PSTN and IPL in 1998

Minutes of use by month, Hongkong SAR ('000s) 1'500 1'250 1'000

Dial-up Internet (via PSTN)

750 500 250

International voice (incoming and outgoing) 0 4 6 8 10 12 2 4 6 8 10 12 02 98 98 98 98 98 99 99 99 99 99 99 00

Source: OFTA (www.ofta.gov.hk)

Deutsche Telekom Percentage change in call volume (minutes) 1998/99

86.3%

36.0% -7.1%

-2.1%

Domestic longdistance

Int'l outgoing calls

Source: Deutsche Telekom annual report.

7.2%

Local calls

Calls to mobile networks

Calls to Internet (TOnline)

40% 35%

Dial-up Internet traffic as % of total traffic minutes Telia (Sweden)

38%

30% 25%

27%

19.5%

20% 15%

12%

10% 5% 0%

Telenor (Norway) 18% Telecom Portugal

8.5% 1998

1999

Source: PTO annual reports. Note: For Telia, Internet traffic as % of local minutes. For others, as % of total

When will IP overtake voice (2): By value? l Paradigm shift postponed ð Most Public Telecommunication Operators still heavily dependent on voice revenues ð Mobile revenues (largely voice) represent main current area of growth ð Price erosion of Internet revenues is offsetting volume gains (e.g., falling leased line prices)

l Paradigm shift regained ð Mobile Internet is likely to be a major area of future revenue growth ð Possible future shift of broadcast entertainment (TV, music, pay-per-view) onto telecom-type networks (broadband Internet) ð PSTN voice traffic shifting to IP-based networks

Projection of revenue growth (US$bn) 1000

Actual

Service revenue (US$ bn)

900 800 700

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

600 500

Projected

Mobile Int'l

400 300 200 100

Domestic Telephone/fax

0 90 91 92 93 94 95 96 97 98 99 00 01 02 Source: ITU “World Telecommunication Development Report 1999: Mobile cellular”

The influence of Voice over IP l IDC forecasts that “Web Talk” revenues will reach US$16.5 bn by 2004 with 135 billion mins of traffic l Gartner Group forecast that voice over IP and competition in Europe will reduce prices by 75% by 2002 l IP Telephony as % of all int’l calls in 2004 ð Tarifica forecast 40% ð Analysys forecast 25%

l In developing countries, the majority of IP Telephony calls are incoming

16.5

“Web Talk” revenues, US$bn

0.208 2000

Source: IDC.

2004

The Geography of IP l Investment in IP networks is still highly US-centric ð More than 95 per cent of inter-regional IP bandwidth connectivity is to/from North America ð Accelerating returns to scale means that big get bigger

l Europe catching up fast ð Major investment in fibre-based networks since opening up of EU markets in late 1990s

l Asia-Pacific lagging behind ð Top European city (Geneva) has 50 times more connectivity per inhabitant than top Asian city (Japan)

l Latecomers disadvantaged by high prices ð Non-liberalised telecom markets and obligation to pay both cost of both half-circuits of Int’l Private Line ð Insufficient demand to force down prices

Inter-regional Internet backbone 152 Mbit/s

USA & Canada

13’258 Mbit/s

5’916 Mbit/s

AsiaPacific

949 Mbit/s 170 Mbit/s

Latin America & Caribbean

69 Mbit/s

Europe

Arab States, Africa 63 Mbit/s

Source: TeleGeography Inc., Global Backbone Database. Data valid for Sept. 1999.

Number of int’l circuits in use, worldwide, and by region 1998 (in thousands)

Western Europe

300 IPL, 68%

250 200

Asia

PSTN circuits

PSTN, IPL, 41% 59%

150 100 50

Caribbean

International Private Lines (Internet)

IPL, 18%

0 1995

PSTN, 32%

1996

Source: FCC. Applies to US carriers only.

1997

1998

PSTN, 82%

Implications for network provisioning l Internet is likely to be the main demand driver ð ð ð ð

World Wide Web Company Intranets Managed IP-based networks Streaming media

l Voice growth may nevertheless be significant ð International voice growing by around 15% p.a. ð Demand for digitized voice in unified messaging applications ð Voice demand will be more geographically dispersed than data demand

Infrastructure capacity and costs, TransAtlantic cables, 1988-2001

1'000

Circuit costs, falling by 72% p.a .

10'000 1'000

100 100 10

Circuit capacity, rising by 89% p.a. 1

Source: Note:

100'000

10 1

TAT-8 PTAT-1 TAT-10 TAT- AC-1 TAT-14 Flag 1988 1989 1992 12/13 1999 2000 Atlantic 2001 1996

ITU, adapted from FCC. Circuit costs assume a usage level of 18%, a compression level of 5:1 and a life-time of 20 years.

Circuit capacity (64 kbit/s, 000s)

Circuit cost p.a. (US$)

10'000

Implications for bandwidth pricing l “Cost-oriented” pricing may be unsustainable ð Customer perception is that voice has more “value” than data ð Narrow-bandwidth services, such as voice, might otherwise be “too cheap to meter”

l Pricing for access more significant than pricing for usage ð Price of link to fat pipe would cost more than share of fat pipe ð Internet-style flat-rate, distance-insensitive tariffing of capacity likely to be dominant mode

l Key to success will be managing transition to lower prices