Global trends in telecom development and Int’l Interconnection The original document was created by Dr Tim Kelly, ITU/SPU. It has been augmented by Saburo Tanaka. The views expressed in this presentation are those of the authors, and do not necessarily reflect the opinions of the ITU or its membership. Authors can be contacted by at: Saud Bin Mohamed Al Tiwaniy Financial Expert Omantel Regional Workshop on COSITU for the Arab Region Cairo – Egypt, 9-13 March 2003

2 Global trends in telecom development Globalization The state of the industry The state of the market Situation in the Regions Paradigm shift Examining market reality Int’l Interconnection with mobile network Internet Interconnection – IP Telephony

3 Globalization What is it? The word is commonly found everywhere now- a-days, in TVs, Internet, political demonstrations etc. It means “The International integration of goods, technology, labour, capital and services.”

4 Globalization Forces FIVE KNOWN MAJOR DRIVERS 1.Political 2.Technological 3.Market 4.Cost 5.Competition

A Mobile Revolution Source: ITU World Telecommunication Indicators Database '000 1'200 1' Mobile Users Fixed Lines Fixed Lines vs. Mobile Users,worldwide, Million

Service revenue (US$ bn) Actual Projected Domestic Telephone/fax Int'l Mobile Other: Data, Internet, Leased lines, telex, etc Projection of revenue growth (US$bn) Source: ITU. 43% 8% 36% 13%

Telecommunications revenue TAS /World (1994, 1996, 1998, 2000) 235' ' ' ' ' ' ' '013 10' '000 1'000' TASWorld 180% 218%

8 0 20,000 40,000 60,000 80, , , , , , Capacity (Mbps) Unused Data Basic voice telephony Source: FCC Use of international circuits from the USA

9 Internet users, millions Annual rate of change Source: ITU.

10 The state of the market Increasing competition  Around two-thirds of telecom subscribers now have a choice of operator  More than 99 per cent of mobile and Internet subscribers now have a choice of operator Dominantly private-ownership  19 out of top 20 public telecom operators are partially or fully private-owned  Of the top 20 mobile operators, 16 are fully-private, 3 are partially private, 1 is state-owned Independent regulators  There are currently 112 independent regulators (only 12 in 1990)

11 Private, competitive, mobile and global Status of telecommunication privatization, by country and by share of global revenue, 2001

12 Legal status of telecommunication competition, by country, 2001 Legal status of competition Distribution by country, 2001

13 Mobile as the new global network Mobile and fixed telephone subscribers worldwide,

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15 Total telephone users (fixed plus mobile) per 100 inhabitants

17 Distribution of population, main telephone lines, mobile cellular subscribers and Internet users by country economic classification, 2001

18 Growth in fixed line teledensity, Chile and Argentina,

19 Growth in mobile teledensity, Hong Kong SAR and Singapore,

Teledensity with rising rank

Teledensity with falling rank

24 Telephone tariffs (2000) Residential (US$)Business (US$) Local call (US$, 3 min) Subscription as % of GDP per capita Connection M. Subscription Connection M. Subscription World Africa Americas Asia Europe Oceania

25 Cellular tariffs (2000) ConnectionM. Subscription 3 minutes local call PeakOff Peak World Africa Americas Asia Europe Oceania

26 Accounting rates trend

Telephony : Some DATA(2000) Intern’l Telephone revenue : 54 billion US $ Settlement transaction : 27 billion US $ Net Settlement payment to developing countries amount to around : 5 billion US$ Int’l Infrastructure costs reduction: < 20 % Annual average traffic increase : 8 % Average Settlement rate reduction: ? % Telephony : Some DATA(2000) Intern’l Telephone revenue : 54 billion US $ Settlement transaction : 27 billion US $ Net Settlement payment to developing countries amount to around : 5 billion US$ Int’l Infrastructure costs reduction: < 20 % Annual average traffic increase : 8 % Average Settlement rate reduction: ? %

Falling prices

X X Traditional regime: Joint provision of service Country ACountry B Two different national operators jointly establish an international circuit and decide the revenue they wish to obtain. They then divide that revenue fifty-fifty split.

X Emerging regime: Market entry and interconnection XX Country A Country B Jointly provided circuit Circuit provided by operator B Cross border interconnection and the trading of international traffic minutes

33 Delivering international voice traffic in 2002

The value chain of the international telecommunications industry

A C B C B A Operator in A sends traffic to operator in C under an arrangement of exclusivity Operator in A is a partner of operator in C Settlement rates A/B > C/B Origin A Destination B Origin C Destination B Operator in C declares traffic to B on transit through A Operator in B receives traffic at settlement rate C/B instead of A/B Operator in C “re-labels” the traffic as originated in C Refile and other practices using accounting rate system

Using AR CALL BACK using Accounting Rates

Mobile tromboning (using accounting rate)   Called BCaller A Operator A’s national network Operator B’s mobile network Operator A’s Int’l facility Operator B’s Int’l facility Operator X or Operator A’s facility in another country International boundary High Interconnection charge

Country ACountry B Operator A Operator B PSTN IWF Interconnect Leased lines International simple resale (ISR) (By-passing accounting rate) Once a foreign carrier accepts the benchmark rate, it can negotiate ISR arrangements with US carriers

Country ACountry B Telephone service using data transmission (By-passing accounting rate) Operator A PSTN Voice is packetized = data transmission Telephone regulations do not apply VSAT Inter- connection 

Call from International Telecommunication Network (ITN) to another ITN via IP-based Network IP Telephony (by-passing accounting rate)

Internet Interconnection Internet Interconnection has slightly different meaning. Historically Internet interconnection has involved simply different Internet networks. This Internet Interconnection policies have proved increasingly inappropriate in a commercial industry.  Many operators with larger networks often charge smaller ISPs a traffic-based interconnection fee  Many backbone providers have begun offering transit service networks. Different type of Interconnection Arrangements  ISP Relationships with customers: usually via a dial-up  ISP-ISP Interconnection: peering or bilateral agreement  Multiple ISP Exchanges when several ISPs need to interconnect in a same city (use of an IXP) International Regulatory Development

42 Inter-regional Internet connectivity Asia / Pacific Latin America USA / Canada Europe Africa, Arab 162Gbit/s 0.1 Gbit/s 0.77 Gbit/s Note: Gbit/s = Gigabits (1’000 Mb) per second. Source: ITU adapted from TeleGeography. 41.8Gbit/s 0.4 Gbit/s 14 Gbit/s 0.45 Gbit/s

Recommendation D.50 The ITU-T, recognizing the sovereign right of each State to regulate its telecommunication, as reflected in the Preamble to the Constitution, noting a)the rapid growth of Internet and Internet protocol-based international services; b)that international Internet connections remain subject to commercial agreements between the parties concerned; and c)that continuing technical and economic developments require ongoing studies in this area, Recommends that administrations involved in the provision of international Internet connections negotiate and agree to bilateral commercial arrangements enabling direct international Internet connections that take into account the possible need for compensation between them for the value of elements such as traffic flow, number of routes, geographical coverage and cost of international transmission amongst others.

44 The SE Asia Digital Divide Source: ITU.

45 Typical ISP cost comparisons Commercial & operational costs National connectivity International connectivity Commercial & operational costs National connectivity International connectivity <<<ASEAN countries OECD countries >>>

46 Internet retail pricing 30 hours of Internet access, US$, October 2001 Source: ITU adapted from ISPs / PTOs OECD average

Competition among ISPs drives down prices No. of ISPs licensed (operational) 3 (3) 2 (2) 5 (4) 150 (50) 150 (60) 18 (18) 18 (?) 44 (?) Source: ITU Internet diffusion case studies.

Internet vicious circle

Virtuous circle

IP-Telephony Telephone to telephone (fax to fax) via Internet Any telephone/mobile user to any other Main motivation: Accounting rate bypass, market entry for non-facilities-based carriers Potential service providers include any PTO with settlement payments deficit (e.g., US = US$5.7bn) Market potential: 1.3 billion telephone/mobile users Telephone Public Switch Internet Phone Gateway Computer

51 IP Telephony Opportunities and challenges Opportunities  Reduce prices to consumers and the costs of market entry for operators  In terms of volume of traffic carried and level of investment committed Challenges  Undermine the pricing structure of the incumbent Public Telecommunication Operators (PTOs)  Transition to IP-based networks also poses significant human ressource development challenges

Accounting RateIP-TelephonyDifference PTO in Developed country Collect US$ 1.00 from user Pays US $ 0.55 settlement. Retains US $ 0.45 Collect US$ 1.00 from user Pays US$ 0.30 to ISP for terminating call. Retains US$ US$ PTO in Developing country Receives US $ 0.55 settlement. Receives US $ 0.02 local call charge US$ ISP in Developing country 0 Receives 0.30 US $ for terminating charge Pays 0.02 US $ for local call. Retains 0.28 US $ US$ Challenges Revenue gain and revenue loss

ISP PSTN Operator Switch How the operators in developping countries stop IP-Telephony Operator check only this line Users can call ISP but ISP is unable to call users

54 Conclusion and Recommendation Erosion of traditional system of accounting rates for exchange of international traffic  Domestic interconnect fees will be dominant mode Major price cuts in international calls  Availability of new infrastructures  Impact of Internet pricing model (distance and duration independent) Mobiles exceed fixed-line phones worldwide  Introduction of “third generation” mobiles after 2001  Generational shift, as new users reject fixed-lines “ Interconnection and tariff rebalancing”