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Copyright 2003 Global Insight, Inc.
Telecommunications Industry TeleconferenceTechnology and Substitution:
The End of Boundaries in Telecommunications
October 30, 200311:00 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.
October 30, 2003 3Copyright 2003 Global Insight, Inc.
Information, Answers, Success
A systematic, comprehensive, and consistent approach provides economic, industry, and market insights.
Research and Research and AnalysisAnalysis
Market DataMarket Data
SolutionsSolutions
October 30, 2003 4Copyright 2003 Global Insight, Inc.
Unique Telecom and IT Modeling Framework
HardwareHardware
Information TechnologyInformation Technology
Com
pute
rs
Net
wor
ks
Com
mun
icat
ions
SoftwareSoftware ServicesServices
Pack
aged
Cus
tom
In-H
ouse
Com
pute
r
Info
rmat
ion
Com
mun
icat
ions
Linkages are built in throughout the model.Linkages are built in throughout the model.
October 30, 2003 5Copyright 2003 Global Insight, Inc.
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 practiceChris Swann, PhD, Economist, Global InsightPaul Rappoport, PhD, Economist and Associate Professor of Economics, Temple UniversityMark Lowenstein, Managing Director, Mobile Ecosystem
Copyright 2003 Global Insight, Inc.
Traditional Wireline ServicesChris Swann
October 30, 2003 7Copyright 2003 Global Insight, Inc.
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?
October 30, 2003 8Copyright 2003 Global Insight, Inc.
Overview
What do we mean by substitution?Usage substitution between communications alternativesCompetition and access substitution
Why is it relevant?Changes within markets are linked acrossmarketsDisruption to market positions
How does this project address it and do we have any preliminary results?
October 30, 2003 9Copyright 2003 Global Insight, Inc.
What Do We Mean by Substitution?
Wireline to wirelessShifting usage to mobile wirelessShifting access to mobile wireless
Wireless to wirelessVoice usage to data (e.g., SMS) usage
Wireline to wirelineVoice to data (e.g., e-mail and IM)Secondary lines to broadband/WLANSwitched to special access and IP
October 30, 2003 10Copyright 2003 Global Insight, Inc.
Relevance to the Communications Industry
Traditional boundaries of wireline markets eroded
Technology and cost economiesDeregulation and entry
Value of mobility and wireless competitionIntense competitionExpanded coverage and reduced prices
Portfolio of communications optionsVoice communicationsData communications
October 30, 2003 11Copyright 2003 Global Insight, Inc.
Relevance to the Communications Industry
Loop competition and implications for revenue and facilities planningReductions in total access lines –structural change not just cyclical changeSwitching from additional lines for voice and dial-up to wireless and high-speed service
October 30, 2003 12Copyright 2003 Global Insight, Inc.
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 13Copyright 2003 Global Insight, Inc.
Where Are the Lines Going?
185,000
187,000
189,000
191,000
193,000
195,000
Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02
(000
)
October 30, 2003 14Copyright 2003 Global Insight, Inc.
Trends in Total Communications Access
040,00080,000
120,000160,000200,000240,000280,000320,000360,000400,000
Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02
(000
)
ILEC Lines (L) CLEC Lines (R) Wireless Subs (L) Broadband Lines (R)
October 30, 2003 15Copyright 2003 Global Insight, Inc.
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 16Copyright 2003 Global Insight, Inc.
Think: System
Relative prices and loop competition, age – income demographicsDensity, technologyWireless impact, broadband impact ….
WIRELINE
Relative prices, age – income demographicsDensity, technologyVoice/data usage
WIRELESS
Relative prices, availability, employmentDensity, technologyBROADBAND
October 30, 2003 17Copyright 2003 Global Insight, Inc.
Linking Changes Across Markets
ILEC-CLEC WirelessVoice/Data DSL/CABLE
TOTAL COMMUNICATIONS
Wireline Wireless Broadband
October 30, 2003 18Copyright 2003 Global Insight, Inc.
What Do We Mean By Substitution?
WirelinePrimary lines (ILEC)Additional lines (ILEC)
WirelinePrimary lines (CLEC)
WirelessSubscribersUsage substitution
BroadbandDSLCable modemUsage substitution
October 30, 2003 19Copyright 2003 Global Insight, Inc.
What Do We Mean By Substitution?Preliminary Results
Wireline– Primary lines (ILEC)– Additional lines
(ILEC)
WirelineEvery 10 new CLEC lines reduce ILEC lines by 6
Wireless5% of total lines result exclusively in wireless
BroadbandEvery 10 new DSL lines results in 12 ILEC lines lostEvery 10 new cable modems results in 7 ILEC lines lost
Copyright 2003 Global Insight, Inc.
Broadband:Stimulating Growth and Its Impact
on Traditional Telephony
Paul Rappoport
October 30, 2003 21Copyright 2003 Global Insight, Inc.
Simulating the Impact(s) of Broadband
Growth rate?Role of regulation?Broadband packagingRole of new technologies and applications
How do these factors impact residential access line demand?
Copyright 2003 Global Insight, Inc.
Broadband GrowthFrom New Applications?
October 30, 2003 23Copyright 2003 Global Insight, Inc.
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 24Copyright 2003 Global Insight, Inc.
Knowledge of and Interest in VOIP(Voice over IP)
0
20
40
60
80
Heard
Very Interested
Interested
Very UninterestedPerc
ent o
f hou
seho
lds
with
bro
adba
nd s
ervi
ce
Heard Very Interested Interested Very Uninterested
October 30, 2003 25Copyright 2003 Global Insight, Inc.
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 h
ouse
hold
s
Dropped Plan to Drop
Copyright 2003 Global Insight, Inc.
Price
October 30, 2003 27Copyright 2003 Global Insight, Inc.
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
Perc
ent o
f Hou
seho
lds
October 30, 2003 28Copyright 2003 Global Insight, Inc.
Price
If price of broadband access drops to $25:50% of Internet households would be broadband subscribersThis switch would occur even if there were no new applicationsSwitch occurs even if intellectual property rights are not solved
October 30, 2003 29Copyright 2003 Global Insight, Inc.
Potential Market Size
There are approximately 54 million Internet householdsThere 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 30Copyright 2003 Global Insight, Inc.
Implications
In the short run, the largest impetus for growth in broadband will come from reducing pricesThis growth would be at the expense of second linesDSL and cable modems are substitutes. The choice of type of broadband access is and will continue to be critical to ILEC performanceTo 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 31Copyright 2003 Global Insight, Inc.
Factors that Could Negatively Affect Growth
Imposition of taxes on Internet transactionsSpamVirusesIdentity theftRegulation and regulatory uncertainty
Copyright 2003 Global Insight, Inc.
Impact on Wireless
Mark Lowenstein
October 30, 2003 33Copyright 2003 Global Insight, Inc.
Intense Competition, Rapid Usage Growth
CompetitionMost competitive segment of telecomNetwork investment remainshighPrice erosion has stabilized
0 20 40 60 80 100
3 or more
4 or more
5 or more
6 or more
7 or more
# of
Com
petit
ors
% of Population Covered
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Inde
x: 1
997=
100
CellularLocal TelcoLDOverall CPI
PricingMonthly MOU
0
100
200
300
400
500
600
2000 2001 2002 2003
Avg
MO
U/M
o.
Usage
October 30, 2003 34Copyright 2003 Global Insight, Inc.
Changing Wireless Industry: New Elements
$-$100$200$300$400$500$600$700$800$900
$1,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Cum
ulat
ive
Cap
ex/T
otal
Sub
s
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
Landline displacement is largest growth opportunity for wireless carriers.
$77BMobile11¢ /min
Landline5¢ /min $250B
Capex/Sub
October 30, 2003 35Copyright 2003 Global Insight, Inc.
Relationship Between Price and Usage
During 2003, the number of wireless subscribers exceeded the number of fixed access linesIn developed economies, substitution and wireless data are becoming the growth engines for wirelessThere are important differences between the premiums for wireless-wireline and voice versus data that influence substitution
050
100150200250300350400450500
USACan
ada
UKGerm
any
Italy
France
Finlan
d
Japa
nSou
th Kore
aAus
tralia
Mon
thly
MO
U
$-$0.05$0.10$0.15$0.20$0.25$0.30$0.35
Car
rier R
even
ue p
er M
inut
e
October 30, 2003 36Copyright 2003 Global Insight, Inc.
Product and Service Evolution to Address Substitution
Network solutions- Increase coverage and capacityEquipment solutions- Handoff to LL networkIn-building solutions- Bluetooth/VoWLANBundling
October 30, 2003 37Copyright 2003 Global Insight, Inc.
Implications of Wireless Substitution
Landline service proposition and prioritiesCapital expenditureEconomicsSpectrumIndustry structureRegulation
October 30, 2003 38Copyright 2003 Global Insight, Inc.
Barriers to Substitution
High quality, low price of landlineCoverage, by far the #1Pricing Issue of person, not location specificityBattery lifeData capabilities
Copyright 2003 Global Insight, Inc.
Technology and Substitution:The End of Boundaries in Telecommunications
A Multi-Client Study
October 30, 2003 40Copyright 2003 Global Insight, Inc.
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 41Copyright 2003 Global Insight, Inc.
Objectives and Focus of the Study
User-friendly model for forecasting and simulationAccess substitution, usage shifting, and market outcomesIdentify key drivers of demandTotal market, consumer and business marketsNational and state coverage – drive to MSA
October 30, 2003 42Copyright 2003 Global Insight, Inc.
Deliverables
IndicatorsSwitched lines: total, consumer, businessWireless subscribersDSL/Cable modemExpenditures by marketUsage shifting
Geographic CoverageNationalState MSA
Telecom DriversAccess line pricesWireless pricesDSL and cable modem pricesTechnology changes
Market DriversPopulation demographicsLocation densityEconomic conditions
October 30, 2003 43Copyright 2003 Global Insight, Inc.
Deliverables – Market Simulator
User-friendly interface for forecasting and simulation on wireline/wireless access
Price changesDemographic changesTechnology changes
Scenario planningFinancial planningOperations and cost planningCompetitive analysis
October 30, 2003 44Copyright 2003 Global Insight, Inc.
Market Simulator
Allow user to adjust assumptionsAge/Income demographicsAccess mode price
View effects of changes to access line sharesView effect on usage rates for wireless –both voice and dataView usage and penetration for voice over IP (VOIP)
October 30, 2003 45Copyright 2003 Global Insight, Inc.
User-Friendly Simulator for Telecom Industry
October 30, 2003 46Copyright 2003 Global Insight, Inc.
Future Major Enhancements
Impact of demand on network capacity and cost
Implication of wireline to wireless usage change on network capacityImplication of shifting usage from switched to IP networks
Impact of demand and cost change on industry organization
Winners and losers
October 30, 2003 47Copyright 2003 Global Insight, Inc.
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
