1. 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 e-mail at: Tim.Kelly@itu.int saburo.tanaka@itu.int saudi@omantel.co.omTim.Kelly@itu.intsaburo.tanaka@itu.intsaudi@omantel.co.om Saud Bin Mohamed Al Tiwaniy Financial Expert Omantel Regional Workshop on COSITU for the Arab Region Cairo – Egypt, 9-13 March 2003

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

5. A Mobile Revolution Source: ITU World Telecommunication Indicators Database. 0 200 400 600 800 1'000 1'200 1'400 199319951997199920012003 Mobile Users Fixed Lines Fixed Lines vs. Mobile Users,worldwide, Million

6. 0 100 200 300 400 500 600 700 800 900 1000 90919293949596979899000102 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%

7. Telecommunications revenue TAS /World (1994, 1996, 1998, 2000) 235'089 163'719 159'626 107'991 925'074 722'548 620'196 513'013 10'000 100'000 1'000'000 1994199619982000 TASWorld 180% 218%

8. 8 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 199519961997199819992000 Capacity (Mbps) Unused Data Basic voice telephony Source: FCC Use of international circuits from the USA

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

10. 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. 11 Private, competitive, mobile and global Status of telecommunication privatization, by country and by share of global revenue, 2001

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

13. 13 Mobile as the new global network Mobile and fixed telephone subscribers worldwide, 1982-2005

14. 14

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

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

18. 18 Growth in fixed line teledensity, Chile and Argentina, 1986-2000

19. 19 Growth in mobile teledensity, Hong Kong SAR and Singapore, 1988-2000

20. Teledensity with rising rank

21. Teledensity with falling rank

24. 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 866.31139.80.075.7 Africa 625.0775.70.0812.7 Americas 1058.313417.60.073.1 Asia 1084.41398.00.045.5 Europe 847.81179.70.101.1 Oceania 558.67914.30.133.7

25. 25 Cellular tariffs (2000) ConnectionM. Subscription 3 minutes local call PeakOff Peak World 7516.60.620.42 Africa 7913.30.560.39 Americas 58210.780.57 Asia 8314.90.470.32 Europe 6213.80.590.41 Oceania 9135.71.400.75

26. 26 Accounting rates trend

27. 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: ? %

30. Falling prices

31. 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.

32. 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. 33 Delivering international voice traffic in 2002

34. The value chain of the international telecommunications industry

35. 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 1 2 3 4 Refile and other practices using accounting rate system

36. Using AR CALL BACK using Accounting Rates

37. 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

38. 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

39. 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 

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

41. 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. 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

43. 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. 44 The SE Asia Digital Divide Source: ITU.

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

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

47. 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.

48. Internet vicious circle

49. Virtuous circle

50. 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. 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

52. 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$ 0.70 + 0.25 US$ PTO in Developing country Receives US $ 0.55 settlement. Receives US $ 0.02 local call charge. -0.53 US$ ISP in Developing country 0 Receives 0.30 US $ for terminating charge Pays 0.02 US $ for local call. Retains 0.28 US $ +0.28 US$ Challenges Revenue gain and revenue loss

53. 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. 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”