Copyright 2003 Global Insight, Inc. Telecommunications Industry Teleconference Technology and Substitution: The End of Boundaries in Telecommunications

Copyright 2003 Global Insight, Inc.

Telecommunications Industry TeleconferenceTechnology and Substitution:

The End of Boundaries in Telecommunications

October 30, 2003

11:00 a.m. – 12:00 noon

October 30, 2003 2Copyright 2003 Global Insight, Inc.

Overview of Global Insight

Global Insight provides the most comprehensive economic and financial data and forecast coverage of countries, regions, and industries available from any source.

Our economic data, models, analyses, and forecast services help 3,000 organizations worldwide develop business strategies, control for business risks, and make key decisions.

Our custom consulting services leverage a wealth of business, financial, and economic information to analyze real-world problems and provide custom solutions to our clients.


A systematic, comprehensive, and consistent approach provides economic, industry, and market insights.

Market DataMarket Data

SolutionsSolutions

Research and Research and AnalysisAnalysis

Information, Answers, Success


Unique Telecom and IT Modeling Framework

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Information TechnologyInformation Technology

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Linkages are built in throughout the model.Linkages are built in throughout the model.


Today’s Presentation

Topic: Competition and substitution among telecom

technologies in the United States

Participants: Mike Raimondi, Executive Managing Director,

Global Insight’s IT/Telecom Consulting practice

Chris Swann, PhD, Economist, Global Insight Paul Rappoport, PhD, Economist and

Associate Professor of Economics, Temple University

Mark Lowenstein, Managing Director, Mobile Ecosystem


Traditional Wireline Services

Chris Swann


Questions/Issues – Moving Beyond Stovepipes

How will competition affect ILEC-CLEC shares?

What is the impact of wireless substitution on wireline access?

What is the impact of broadband on local wireline markets?

How will price movements in DSL affect penetration? Cable modem share?

How will demographic changes affect wireless and broadband development?


Overview

What do we mean by substitution? Usage substitution between

communications alternatives Competition and access substitution

Why is it relevant? Changes within markets are linked across

markets Disruption to market positions

How does this project address it and do we have any preliminary results?


What Do We Mean by Substitution?

Wireline to wireless Shifting usage to mobile wireless Shifting access to mobile wireless

Wireless to wireless Voice usage to data (e.g., SMS) usage

Wireline to wireline Voice to data (e.g., e-mail and IM) Secondary lines to broadband/WLAN Switched to special access and IP

October 30, 2003 10


Relevance to the Communications Industry

Traditional boundaries of wireline markets eroded Technology and cost economies Deregulation and entry

Value of mobility and wireless competition Intense competition Expanded coverage and reduced prices

Portfolio of communications options Voice communications Data communications

October 30, 2003 11


Relevance to the Communications Industry

Loop competition and implications for revenue and facilities planning

Reductions in total access lines – structural change not just cyclical change

Switching from additional lines for voice and dial-up to wireless and high-speed service

October 30, 2003 12


Local Exchange Competition

130,000

140,000

150,000

160,000

170,000

180,000

190,000

200,000

Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02

(000

)

ILEC Lines CLEC Lines

October 30, 2003 13


Where Are the Lines Going?

185,000

187,000

189,000

191,000

193,000

195,000


(000

)

October 30, 2003 14


Trends in Total Communications Access

0

40,000

80,000

120,000

160,000

200,000

240,000

280,000

320,000

360,000

400,000


(000

)

ILEC Lines (L) CLEC Lines (R) Wireless Subs (L) Broadband Lines (R)

October 30, 2003 15


Revenue Shares in Communications Markets

0%10%20%30%40%50%60%70%80%90%

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Local LD Wireless DSL Cable Modem

October 30, 2003 16


Think: System

WIRELINERelative prices and loop competition, age – income demographicsDensity, technologyWireless impact, broadband impact ….

WIRELESSRelative prices, age – income demographicsDensity, technologyVoice/data usage

BROADBANDRelative prices, availability, employmentDensity, technology

October 30, 2003 17


Linking Changes Across Markets

ILEC-CLECWireless

Voice/Data DSL/CABLE

TOTAL COMMUNICATIONS

Wireline Wireless Broadband

October 30, 2003 18


What Do We Mean By Substitution?

Wireline Primary lines (ILEC) Additional lines

(ILEC)

Wireline Primary lines (CLEC)

Wireless Subscribers Usage substitution

Broadband DSL Cable modem Usage substitution

October 30, 2003 19


What Do We Mean By Substitution?Preliminary Results

Wireline– Primary lines (ILEC)– Additional lines

(ILEC)

Wireline Every 10 new CLEC

lines reduce ILEC lines by 6

Wireless 5% of total lines result

exclusively in wireless

Broadband Every 10 new DSL lines

results in 12 ILEC lines lost

Every 10 new cable modems results in 7 ILEC lines lost


Broadband:Stimulating Growth and Its Impact

on Traditional Telephony

Paul Rappoport

October 30, 2003 21


Simulating the Impact(s) of Broadband

Growth rate? Role of regulation? Broadband packaging Role of new technologies and applications

How do these factors impact residential access line demand?


Broadband GrowthFrom New Applications?

October 30, 2003 23


Consider the Demand for New Applications

Is VOIP the “killer application”?

Will “entertainment” drive new demand? – VOIP– Digital TV and music– New applications and technologies

What is the role of price?

October 30, 2003 24


Knowledge of and Interest in VOIP (Voice over IP)

0

20

40

60

80

Heard

Very Interested

Interested

Very Uninterested

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Heard Very Interested Interested Very Uninterested

October 30, 2003 25


Broadband for Access Line Substitution Is Real

Reasons for dropping a phone

01020304050

Expensive

Moving

Broadband

Don't need it

Wireless

Other

Per

cent

of

hous

ehol

ds

Dropped Plan to Drop


Price

October 30, 2003 27


Preliminary Findings: Demand for Cable Modem Service

Cable Modem Demand

0

10

20

30

40

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100

Price

Pe

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of

Ho

us

eh

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s

October 30, 2003 28


Price

If price of broadband access drops to $25: 50% of Internet households would be

broadband subscribers This switch would occur even if there were

no new applications Switch occurs even if intellectual property

rights are not solved

October 30, 2003 29


Potential Market Size

There are approximately 54 million Internet households

There are approximately 16 million broadband households (~30% of all Internet)

If price drops to $25, the number of broadband households increases to 27 million (~50% of all Internet)

October 30, 2003 30


Implications

In the short run, the largest impetus for growth in broadband will come from reducing prices

This growth would be at the expense of second lines

DSL and cable modems are substitutes. The choice of type of broadband access is and will continue to be critical to ILEC performance

To be sure, there are other avenues of growth (new adoption), such as from household formation, better content, new services, etc.

But these will play a secondary role to changes in price

October 30, 2003 31


Factors that Could Negatively Affect Growth

Imposition of taxes on Internet transactions

Spam Viruses Identity theft Regulation and regulatory uncertainty


Impact on Wireless

Mark Lowenstein

October 30, 2003 33


0 20 40 60 80 100

3 or more

4 or more

5 or more

6 or more

7 or more

# o

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% of Population Covered

0

20

40

60

80

100

120

140

1997 1998 1999 2000 2001 2002

Ind

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997

=1

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Cellular

Local Telco

LD

Overall CPI

Most competitive segment of

telecom

Network investment remains high

Price erosion has stabilized

Intense Competition, Rapid Usage Growth

Pricing

Competition

Monthly MOU

0

100

200

300

400

500

600

2000 2001 2002 2003

Avg

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Usage

October 30, 2003 34


Changing Wireless Industry: New Elements

Landline displacement is largest growth opportunity for wireless carriers.

$77B

Mobile

11¢ /min

Landline5¢ /min

$250B

1. Share of Overall Voice Minutes Pie

Maturing sub and rev. growth, but high cost structure

Substitution a new reality

2. “Battle for the Building”

New in-building strategies for both consumers and business customers

Changes thinking about capex, equipment, and enhanced services

3. Accelerated Switch/Replacement Cycle

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

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2000

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2002

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October 30, 2003 35


Relationship Between Price and Usage

During 2003, the number of wireless subscribers exceeded the number of fixed access lines

In developed economies, substitution and wireless data are becoming the growth engines for wireless

There are important differences between the premiums for wireless-wireline and voice versus data that influence substitution

050

100150200250300350400450500

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October 30, 2003 36


Product and Service Evolution to Address Substitution

Network solutions- Increase coverage and capacity

Equipment solutions- Handoff to LL network

In-building solutions- Bluetooth/VoWLAN

Bundling

October 30, 2003 37


Implications of Wireless Substitution

Landline service proposition and priorities Capital expenditure Economics Spectrum Industry structure Regulation

October 30, 2003 38


Barriers to Substitution

High quality, low price of landline Coverage, by far the #1 Pricing Issue of person, not location specificity Battery life Data capabilities


Technology and Substitution:The End of Boundaries in Telecommunications

A Multi-Client Study

October 30, 2003 40


Study Overview

The rapid adoption of high-speed cable access and DSL services, and the replacement of traditional telephones with mobile service, has caused the demand for landlines to plummet. As a result, we are in the midst of the most significant change in communications since the introduction of services more than 100 years ago.

Technology and Substitution: The End of Boundaries in Telecommunications, a new multi-client study from Global Insight, takes an in-depth look at the issues of technology and wireless substitution. Written by a team of leading telecommunications experts, Global Insight provides a comprehensive review of the industry, including a detailed discussion of the economics, regulatory issues, and technological trends.

October 30, 2003 41


Objectives and Focus of the Study

User-friendly model for forecasting and simulation

Access substitution, usage shifting, and market outcomes

Identify key drivers of demand Total market, consumer and business

markets National and state coverage – drive to

MSA

October 30, 2003 42


Deliverables

Indicators Switched lines: total,

consumer, business Wireless subscribers DSL/Cable modem Expenditures by market Usage shifting

Geographic Coverage National State MSA

Telecom Drivers Access line prices Wireless prices DSL and cable modem

prices Technology changes

Market Drivers Population

demographics Location density Economic conditions

October 30, 2003 43


Deliverables – Market Simulator

User-friendly interface for forecasting and simulation on wireline/wireless access Price changes Demographic changes Technology changes

Scenario planning Financial planning Operations and cost planning Competitive analysis

October 30, 2003 44


Market Simulator

Allow user to adjust assumptions Age/Income demographics Access mode price

View effects of changes to access line shares

View effect on usage rates for wireless –both voice and data

View usage and penetration for voice over IP (VOIP)

October 30, 2003 45


User-Friendly Simulator for Telecom Industry

October 30, 2003 46


Future Major Enhancements

Impact of demand on network capacity and cost Implication of wireline to wireless usage

change on network capacity Implication of shifting usage from switched

to IP networks Impact of demand and cost change on

industry organization Winners and losers

October 30, 2003 47


Contacts

If you have any questions regarding this presentation or our multi-client study Technology and Substitution, please contact:

Mike [email protected]

More information about this study can also be found at:www.globalinsight.com/substitution

Documents

Copyright 2003 Global Insight, Inc. Telecommunications Industry Teleconference Technology and Substitution: The End of Boundaries in Telecommunications