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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.
October 30, 2003 3Copyright 2003 Global Insight, Inc.
A systematic, comprehensive, and consistent approach provides economic, industry, and market insights.
Market DataMarket Data
SolutionsSolutions
Research and Research and AnalysisAnalysis
Information, Answers, Success
October 30, 2003 4Copyright 2003 Global Insight, Inc.
Unique Telecom and IT Modeling Framework
HardwareHardware
Information TechnologyInformation Technology
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SoftwareSoftware ServicesServices
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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 practice
Chris Swann, PhD, Economist, Global Insight Paul Rappoport, PhD, Economist and
Associate Professor of Economics, Temple University
Mark Lowenstein, Managing Director, Mobile Ecosystem
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 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?
October 30, 2003 9Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 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 13
Copyright 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 14
Copyright 2003 Global Insight, Inc.
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
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 15
Copyright 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 16
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
Linking Changes Across Markets
ILEC-CLECWireless
Voice/Data DSL/CABLE
TOTAL COMMUNICATIONS
Wireline Wireless Broadband
October 30, 2003 18
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
Broadband:Stimulating Growth and Its Impact
on Traditional Telephony
Paul Rappoport
October 30, 2003 21
Copyright 2003 Global Insight, Inc.
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?
October 30, 2003 23
Copyright 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 24
Copyright 2003 Global Insight, Inc.
Knowledge of and Interest in VOIP (Voice over IP)
0
20
40
60
80
Heard
Very Interested
Interested
Very Uninterested
Pe
rce
nt
of
ho
us
eh
old
s w
ith
bro
ad
ba
nd
se
rvic
e
Heard Very Interested Interested Very Uninterested
October 30, 2003 25
Copyright 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
hous
ehol
ds
Dropped Plan to Drop
October 30, 2003 27
Copyright 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
Pe
rce
nt
of
Ho
us
eh
old
s
October 30, 2003 28
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
Factors that Could Negatively Affect Growth
Imposition of taxes on Internet transactions
Spam Viruses Identity theft Regulation and regulatory uncertainty
October 30, 2003 33
Copyright 2003 Global Insight, Inc.
0 20 40 60 80 100
3 or more
4 or more
5 or more
6 or more
7 or more
# o
f C
om
pe
tito
rs
% of Population Covered
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Ind
ex
: 1
997
=1
00
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
MO
U/M
o.
Usage
October 30, 2003 34
Copyright 2003 Global Insight, Inc.
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
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Cu
mu
lati
ve
Ca
pe
x/T
ota
l S
ub
s
Capex/Sub
October 30, 2003 35
Copyright 2003 Global Insight, Inc.
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
USA
Canad
aUK
Germ
any
Italy
Franc
e
Finlan
dJa
pan
South
Kor
ea
Austra
lia
Mo
nth
ly M
OU
$-
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
Car
rier
Rev
enu
e p
er M
inu
te
October 30, 2003 36
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
Implications of Wireless Substitution
Landline service proposition and priorities Capital expenditure Economics Spectrum Industry structure Regulation
October 30, 2003 38
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
Technology and Substitution:The End of Boundaries in Telecommunications
A Multi-Client Study
October 30, 2003 40
Copyright 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 41
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
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
Copyright 2003 Global Insight, Inc.
User-Friendly Simulator for Telecom Industry
October 30, 2003 46
Copyright 2003 Global Insight, Inc.
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
Copyright 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