1. Market Potential of Next Generation Networks Jaroslaw K. Ponder Strategy and Policy Unit International Telecommunication Union Presentation prepared for the IIR Conference on “Strategies of Fixed Telecommunication Operators” 7 March 2006, Warsaw, Poland Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU. Jaroslaw K. Ponder can be contacted at Jaroslaw.Ponder@itu.intJaroslaw.Ponder@itu.int

2. 7 March 2006Jaroslaw.Ponder@itu.int2 ITU - International Telecommunication Union The oldest specialized UN agency with more than 140 years of experience in communication sector Headquarters in Geneva and Regional Offices 189 member states, more than 640 sector members Structure of the ITU  ITU-T – Telecom Standardization  ITU-D – Development Bureau  ITU-R – Radio-communications http://www.itu.int/spu

3. 7 March 2006Jaroslaw.Ponder@itu.int3 ITU’s Strategy and Policy Unit (SPU) New Initiatives Programme  Digital Bridges (2005)  Ubiquitous Network Societies (2005)  Today’s Networks Tomorrow (2005)  What Rules for IP-enabled NGNs? (2006)  Digital Transformations in the Information Society (2006)  Regulatory Environment for Future Mobile Multimedia Services (2006) http://www.itu.int/spu

4. Market Potential of Next Generation Networks Jaroslaw K. Ponder Strategy and Policy Unit International Telecommunication Union Presentation prepared for the IIR Conference on “Strategies of Fixed Telecommunications Operators” 7 March 2006, Warsaw, Poland Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU. Jaroslaw K. Ponder can be contacted at Jaroslaw.Ponder@itu.intJaroslaw.Ponder@itu.int

5. 7 March 2006Jaroslaw.Ponder@itu.int5Agenda Far vision or near future? Migration strategies of fixed telecommunication operators New business models for ICT sector stakeholders Consistent changes in the ICT sector Role of state in promotion of the Next Generation Networks

6. Far vision or near future? We all build the global knowledge- based information society!

7. 7 March 2006Jaroslaw.Ponder@itu.int7 Next Generation Networks… Different visions – Common goals  A broad concept  encompasses the whole development of new network technologies, new access infrastructures, new services…  Focused concept  Specific network architecture and related equipments, with one common IP core network deployed for all the legacy, current and future access networks Standardization Process Regulatory environenment

8. 7 March 2006Jaroslaw.Ponder@itu.int8 Next Generation Networks… ITU definition: ITU-T SG 13 Rec. Y.2001 packet-based network multiple broadbandQoS-enabled service-relatedfunctions independenttransport-related technologies  A NGN is a packet-based network able to provide telecommunication services and able to make use of multiple broadband, QoS-enabled transport technologies and in which service-related functions are independent from underlying transport-related technologies. unfettered access  It enables unfettered access for users to networks and to competing service providers and/or services of their choice. generalized mobility  It supports generalized mobility which will allow consistent and ubiquitous provision of services to users.

9. 7 March 2006Jaroslaw.Ponder@itu.int9 Next Generation Networks… NGN characteristics  Packet-based transfer  Separation of control functions among bearer capabilities, call/session, and application/service  Decoupling of service provision from network, and provision of open interfaces  Support for a wide range of services, applications and mechanisms based on service building blocks (including real time/ streaming/ non-real time services and multi-media services)  Broadband capabilities with end-to-end QoS

10. 7 March 2006Jaroslaw.Ponder@itu.int10 NGN: What is different? Multimedia  NGN should enable provision of wide range of services including: data transmission, voice services, video services Generalized mobility  NGN should enable provision of communication services regardless of place Convergence  Network should enable provision of diverse services that nowadays are provided thanks to different networks, e.g. data transmission networks, fixed and mobile telecommunication networks Integrity  Network should integrate all existing communication networks Multi-layer orientation  Networks should be multilayer, where steering, management and service provision functions are independent from transport and access Open character  Network layers should communicate through open interfaces enabling use of different equipment from diverse hardware producers

11. 7 March 2006Jaroslaw.Ponder@itu.int11 Consistent changes CurrentFuture Source: Shaw, R. (2005) Service A Service B Service C Network A Network B Network C Services A, B, C IP platform (supporting QoS) Backbone Networks

12. Migration strategies of fixed telecommunication operators We all build the global knowledge- based information society!

13. 7 March 2006Jaroslaw.Ponder@itu.int13 What drives NGN development? Better financial performance  Revenue growth  Margin protection  Reduced OPEX and CAPEX Operational issues  Obsolescence & modernization  Reliability, resilience & quality  Capacity & scalability  Simpler and faster provision of service Competitive issues  New service roll-out/substitution & service differentiation  Market share growth & protection  Convergence of voice, data and IT enables provision of new offerings in packages

14. 7 March 2006Jaroslaw.Ponder@itu.int14 Economic Implications Savings in CAPEX and OPEX  Network consolidation requires less physical assets (e.g. real estate, about 40% savings)  Fewer network elements and interfaces required  Standardization of NGN networking equipment triggers competition and consequently fall of prices  Economies coming from IP  Network maintenance (savings about 30%)  Personnel (savings around 30-40%)  IT costs (savings around 40%)  Power consumption (savings around 40%)

15. 7 March 2006Jaroslaw.Ponder@itu.int15 Business opportunities and risks Business Opportunities  Service providers, network operators, content developers, manufacturers  High investment required Existing Risks  Financial difficulties of telecom operators may slaw down migration to NGN  Uncertainty about business model  Demand for new multi-media, value-added and content-based services still remains unknown  Openness of services to third party suppliers may diminish incumbents’ revenues  Technical challenges  end-to-end Quality of Services, congestion management, network security, interoperability, network reliability and management, user mobility  Regulatory environment

16. 7 March 2006Jaroslaw.Ponder@itu.int16 Business opportunities and risks Possible strategies mitigating investment risk and fostering success of NGN  Simultaneous investment in next generation networks in mobile and fixed  Investment in deployment of fixed broadband connectivity leading to provision of cheaper and richer service packages  Fostering content development  Acceleration of standardisation process  Work on regulatory environment that would give investment incentives  Return on investment has to be assured

17. 7 March 2006Jaroslaw.Ponder@itu.int17 Migration to NGN Source: CSFB, 2005 2009 / British Telecom: BT aims to move majority of its subscriber base to “broadband dial tone” by 2009. Aims for annualized cost savings of £ 1bn pa from 21 st century network Capex in medium term likely to be below current £ 3bn pa level once network migration completed. 2012 / Deutsche Telekom: Company has completed an NGN overlay backbone network, voice/data integration to be driven by customer demand, company has suggested by 2012. Core network already IP-MPLS, carriers traffic for both fixed and mobile business. 2009 / KPN : Company is in “first phase” of move to an IP everywhere environment for corporate customers. KPN aims to move to an all IP core backbone by 2007, with Ethernet in the access network by 2009. ATM and SDH to be phased out of network by 2010, completing move to IP. Cost savings targeted at 150 M Euro pa from 2005, rising to 2000 m EURO pa from 2008. Headcount to fall by equivalent of 8000 by 2009. Network transformation programme means capex at 1-2 bn Euro pa from 2006 onwards.

18. 7 March 2006Jaroslaw.Ponder@itu.int18 Case Study: Slovak Telecom 56 Exchanges PSTN/ISDNAnalogue 372 Exchanges  FRLLATMMPLS 1.0 mil. Customers200,000 Customers Voice Data Core 6.500 Accesses IP/ eNGine - Fully integrated IP Company by 2008 Source : Slovak Telecom 2005

19. 7 March 2006Jaroslaw.Ponder@itu.int19 Case Study: Slovak Telecom eNGine - Fully integrated IP Company by 2008 Source : Slovak Telecom 2005 NGN 1+1 Softswitch + 24 Trunking GW + 310 Access GW 56 Exchanges PSTN/ISDN 1st Phase IP/MPLS Core 6.500 Accesses FRLLATMMPLS IP/ 2nd Phase Migration 1 Softswitch NGN Enterprise Solution

20. New business models for ICT sector stakeholders We all build the global knowledge- based information society!

21. 7 March 2006Jaroslaw.Ponder@itu.int21 NGN: Business models Access IP-based Networks Applications Source : Telefonica 2005

22. 7 March 2006Jaroslaw.Ponder@itu.int22 NGN Implications for Sector NGN accelerates process of convergence  Market structure  Institutional changes  Consolidation Changed role of network operators Many newcomers: electricity companies, cable companies and mobile operators Changed business models  New sources of revenue  Bundling offerings more popular Revision of regulatory policy reqiured NGN should increase economic meaning of ICT sector

23. 7 March 2006Jaroslaw.Ponder@itu.int23 NGN Implications for consumers New quality of service  Enhanced Efficiency  automatic network monitoring and fault management  Self configuration of voice applications via web interface  reduction of activation time Flexible addition of new voice applications and customer locations via central network management No own investment in PBX necessary Full cost transparency through flexible and simple pricing New price strategies bundling offerings

24. 7 March 2006Jaroslaw.Ponder@itu.int24 N-play economics… NGNs facilitate product differentiation and bundling strategies To be considered by service providers  first, find out which products are proper to be bundled and therefore answer the question if the bundled goods should be complementary, substitutive or neutral;  second, set the price for the new package taking into consideration the reservation prices for each product separately and package  third, decide if the introduction of bundle excludes the possibility of obtaining the bundled products separately i.e. pure versus mixed bundling strategy.

25. 7 March 2006Jaroslaw.Ponder@itu.int25 N-play economics… Demand side related conditions Products Complementarity  Bundling complementary goods - Reservation prices for such package become much more higher then for the separated products. In this way the willingness to pay increases and the company is able to benefit from this behavior (e.g. mobile telephone together with provision of mobile telecommunications services).  Reservation prices for the bundle products are negatively correlated - Putting together fixed access with mobile telephone contracts for young people - demonstrating the highest inclination to substitute this two communication technologies - is good example  The more products are combined into the package, the smaller is the probability, that the individual estimations of the value of the bundle will differ from the from the mean value. Through such reduction of the heterogeneity of customers the enterprise is able to sell more as in case of separated offerings.

26. 7 March 2006Jaroslaw.Ponder@itu.int26 N-play economics… Supply side related conditions Exclusion of rivals  The bundling strategy can be competition diminishing. In case the monopolistic company bundles the monopoly product with the product that is sold in the competitive markets the transfer of the market power from one market to the other occurs. Cross-Selling  The putting different products into one packet allows the companies to sell under the new label also the products which did not found the interest of the customers. In this way the enterprises using out the existing differences in reference prices for the products A and B. Putting together product A and B and selling them in packages it becomes possible to transfer the possessing surplus from product B to A. Product differentiation  Through applying of price bungling the enterprise differentiate its products in comparison to the rivals on the same market. The price can be maintained in a higher level than in case of the single products what can cause that the competitor will behave less aggressively.

27. 7 March 2006Jaroslaw.Ponder@itu.int27 N-play economics… Supply side related conditions Market barriers  Implementation of the bundling strategy can become one of the effective measures in creation of the market entrance barriers. From the perspective of competitors it can be quite complicated in financial, market power as well as first mover advantage terms to enter the market and to be able to compete with the similar offer. Especially in case of the strong asymmetric market structure, high vertical and horizontal integration as well as with significant market power the market (see ex-monopolistic telcom operators) the entrance of the newcomers can be out of the question. Market Structure  From the strategic point of view tendency to use price bundling encourages the process of horizontal and vertical integration. It stimulates the market players to narrow cooperation or merging. Because of bundling the increase of mergers and acquisitions on the market is more often to expect. From the perspective of the sector of information and communication technologies the bundling strategy will encourage the process of convergence.

28. 7 March 2006Jaroslaw.Ponder@itu.int28 N-play economics… NGNs leads to n-play services  There is only one step from n-play to use of the bundling strategies Bundling  reduces the costs  increases demand  locks in customers  improves product performance  differentiates the product offerings What with regulation...

29. Role of state in promoting the Next Generation Networks We all build the global knowledge- based information society!

30. 7 March 2006Jaroslaw.Ponder@itu.int30 NGN: Regulatory challenges Migration from vertical to horizontal approach Phone PSTN Internet IP-Net M-Ph Mobile Pol. A Reg. a Current Policy  Regulation Environment (Vertical) Pol. B Reg. b Pol. C Reg. c Resource-based Pol./Reg. Video NGN VoiceInternet IP (Future Packet ?) Platform xDSL/Optic based Fixed-Mobile MM Pol. Reg. Pol. X Reg. x New Policy  Regulation Environment (Horizontal) Service-based Pol./Reg. Source: ITU

31. 7 March 2006Jaroslaw.Ponder@itu.int31 International Proceedings Diverse proceedings facilitating migration to IP environment  Australia  Consultation on Next Generation Services  Japan  New Generation Networks Promotion Forum  United Kingdom  Consultation on interconnection rules for NGNs  Germany  Consultation group on rules for interconnection in IP environment  India  Consultation on regulation for NGN  United States  Public hearing on network neutrality

32. 7 March 2006Jaroslaw.Ponder@itu.int32 Possible regulatory objectives Competition Investment in infrastructure Innovation Public needs Socio-economic aspects

33. 7 March 2006Jaroslaw.Ponder@itu.int33 NGN: Regulatory Challenges NGN requires creation of incentives to invest (for both new entrants and incumbents)  NGN is still seen as risky investment  Nowadays most of investment will be done by incubents  Broadband policies facilitate migration to the Internet  NGN still requires high R&D expenditures that nowadays are mostly covered by hardware vendors  Regulatory uncertainty negativly impacts NGN expansion NGN strengths competition, but….  NGN creates new entrance opportunities for operating companies as well as newcomers  NGN creates new markets and reinforce position of some market players  Significant market power approach and promotion of fair competition; new definition of relevant markets  Balance between ex-ante regulations and ex post remedies  Effectiveness of self correcting forces in a competitive marketplace

34. 7 March 2006Jaroslaw.Ponder@itu.int34 NGN: Regulatory Challenges NGN requires broad debate on interconnection and pricing  Confrontation of two existing models  Internet model versus circuit-switched one  Cost models: Will it be possible to separate connectivity and services?  Outcome of CEPT consultations give impression that nothing is going to change in the future –Operators are aiming for NGNs to be no more than a complete re-building of PSTN on top of a new IP sub- structure –Business models may not be changed  Will NGN be more then PSTN on IP?

35. 7 March 2006Jaroslaw.Ponder@itu.int35 NGN: Regulatory Challenges NGN character requires intensified efforts in field of consumer interests protection  Universal Service  Access to the communications infrastructure or provision of telephone services (mobile telecommunications and broadband)  Any location including access while on the move or geographic restrictions  Funding  Consumer emergency calls (E112/E911)  Consumer protection and privacy (e.g. SPAM, SPIM)  Quality of services  Authenticated caller or sender identification  Disability assistance  Data protection and privacy issues

36. 7 March 2006Jaroslaw.Ponder@itu.int36 NGN: Regulatory Challenges National Security and Critical Infrastructure Protection  Network attack mitigation  Public safety emergency and law enforcement assistance  Priority access during or after disasters  Service restoration  Analysis and reporting of network metrics and outages NGN attaches great importance to wireless technologies.  The optimal spectrum management should become objective of all regulators NGN triggers discussion on Quality of Service

37. Conclusions We all build the global knowledge- based information society!

38. 7 March 2006Jaroslaw.Ponder@itu.int38Conclusions NGN still in a seed stadium NGN is an evolution and revolution in the same time NGN changes traditional paradigm of telecommunication sector Technological developments are important but not enough to create new sustainable environment  Some regulation and policy oriented considerations have to be taken into consideration Competition is key to NGN; on the other hand NGN fosters competition

39. 7 March 2006Jaroslaw.Ponder@itu.int39Conclusions NGN creates incentives to invest for both new entrants and incumbents For incumbents NGN remains the only way to preserve gradually declining revenues (competition from mobile and VoIP) NGN protects consumer interests, but… NGN fosters innovation dynamics NGN may contribute to diminished digital divide What about future regulatory paradigme for NGNs. It is important to motivate policy makers to think about ?

40. 7 March 2006Jaroslaw.Ponder@itu.int40 Thank you very much for your attention! Jaroslaw K. Ponder International Telecommunication Union Strategy and Policy Unit E-mail: Jaroslaw.Ponder@itu.intJaroslaw.Ponder@itu.int http://www.itu.int/spu Tel: 00 41 22 730 60 65 We all build the global knowledge- based information society!