Global trends in telecom development and

Int’l Interconnection

Seminar in Arusha, April 2002

The original document is elaborated by Dr Tim Kelly, ITU/SPU. It has completed by Saburo Tanaka and by Pape-Gorgui Toure. 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 gorgui.toure@itu.int.

Global trends in telecom Global trends in telecom developmentdevelopment

l The state of the industryl The state of the marketl Situation in the Regions

l Paradigm shiftl Examining market realityl ITU-T SG3 activities

ð Transitional arrangementsð New remuneration systems

l Int’l Interconnection with mobile networkl Internet Interconnection – IP Telephony

A Mobile RevolutionA Mobile Revolution

Source: ITU World Telecommunication Indicators Database.

0

200

400

600

800

1'000

1'200

1'400

1993 1995 1997 1999 2001 2003

Mobile Users

Fixed Lines

Fixed Lines vs. Mobile Users, worldwide, Million

0

100

200

300

400

500

600

700

800

900

1000

90 91 92 93 94 95 96 97 98 99 00 01 02

Ser

vice

rev

enu

e (U

S$

bn

)Actual

Projected

Domestic Telephone/fax

Int'l

Mobile

Other: Data, Internet, Leased lines, telex, etc

Projection of revenue growth (US$bn)Projection of revenue growth (US$bn)

Source: ITU.

43%

8%

36%

13%

Telecommunications revenue Africa/World (1994, 1996, 1998, 2000)

7'2089'381 12'193

16'391

513'013 620'196 722'548 925'074

1'000

10'000

100'000

1'000'000

1994 1996 1998 2000

(180%)

(227%)

M. US$

Internet users, millionsInternet users, millionsAnnual rate of changeAnnual rate of change

498

311

230

34 5490

149

37%35%

55%

66%67%59%

109%

1995 1996 1997 1998 1999 2000 2001

Change

Source: ITU.

InterInter--regional Internet regional Internet connectivityconnectivity

Asia /Pacific

LatinAmerica

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 G

bit/s

0.45 G

bit/s

The state of the marketThe state of the market

l Increasing competitionð Around two-thirds of telecom subscribers now have a

choice of operatorð More than 99 per cent of mobile and Internet subscribers

now have a choice of operator

l Dominantly private-ownershipð 19 out of top 20 top public telecom operators are partially

or fully private-ownedð Of the top 20 mobile operators, 16 are fully-private, 3 are

partially private, 1 is state-owned

l Independent regulatorsð There are currently 112 independent regulators (only 12 in

1990)

85%

13% 113

49

39

2%

Fully orpartly privateincumbentOther privateoperators(e.g. mobile)No privateoperators

Oth

By telecom revenue

By country

Status oftelecom

privatization2001

Private, competitive, mobile and global

Status of telecommunication privatization , by country and by share of global revenue, 2001

37% 38% 43%

78% 86%

Longdistance

Int'l Local Mobile Internet

MonopolyCompetition

Legal status of telecommunication competition, by country, 2001

Legal status of competitionDistribution by country, 2001

0

500

1'000

1'500

2'000

82 84 86 88 90 92 94 96 98 00 02 04

Telephone subscribers, world,

Fixed

MobileForecast

Mobile as the new global network

Mobile and fixed telephone subscribers worldwide, 1982-2005

More mobile countries

Countries with more mobile than fixed telephones (97), 2001

More mobile countries

Countries with more mobile than fixed telephones (97), 2001

More mobile countries

Countries with more mobile than fixed telephones (97), 2001

Mobile as % of total telephone subscribers, LDCs, 2001

5050.350.75252.453.453.554.255.156.6

59.862.2

65.566.466.767.867.868.6

71.674.275.1

83.58787.2

BurundiBangladesh

MalawiAngola

CARHaiti

ZambiaS.LeoneGambiaBurkinaLesothoSenegal

MozambiqueTogoChad

Eq. GuineaBenin

GuineaMadagascar

TanzaniaRwandaUganda

CambodiaD.R. Congo

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1960 65 70 75 80 85 90 95 2000

Togo

Benin

Uganda

Mada-gascar

It took 35 years to increase telephone density by a factor

of 3.

In just 6 years, telephone density

increased by a factor of 6.

Total telephone users (fixed plus mobile) per 100 inhabitants

0%

20%

40%

60%

80%

100%

Population Telephones Mobile Internet

Low Low er Middle Upper Middle High

Distribution by economic classification, 2001

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

classification, 2001

0

5

10

15

20

25

1986 1988 1990 1992 1994 1996 1998 2000

1988: Privatization and competition in Chile

1990: Privatization w ith 7-year exclusivity in Argentina

Exclusivity extended by 3 years in Argentina

Teledensity, in Chile and Argentina

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

0

10

20

30

40

50

60

70

80

90

1988 1990 1992 1994 1996 1998 2000

Singapore: Mobile

competition delayed until

April 1997

Hongkong SAR: Mobile competition introduced in 1988 for analogue

Additional competition introduced w ith digital mobile in 1993

Six additional PCS licences awarded in 1996

Mobile penetration rate, per 100 inhabitants

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

Teledensity with rising rank

Country 2000 1990Rank 2000

Rank 1990 Change

China 17.8 0.6 95 159 64

V iet Nam 4.2 0.1 141 189 48

Botsw ana 21.6 2.1 91 129 38

El Salvador 21.8 2.4 90 125 35

Jamaica 34.1 4.5 71 106 35

Hungary 67.4 9.6 43 78 35

Mauritius 38.6 5.4 67 100 33

Chile 44.4 6.7 61 93 32

Philippines 12.4 1.0 112 143 31

Morocco 13.3 1.6 107 136 29

Paraguay 20.7 2.7 92 120 28

Cambodia 1.2 0.0 167 194 27

Cape Verde 17.2 2.4 98 125 27

Taiw an, China 137.0 31.4 5 31 26

Poland 45.6 8.6 60 85 25

Teledensity with falling rank

Country 2000 1990Rank 2000

Rank 1990 Change

Armenia 15.6 15.7 102 60 -42

Iraq 2.9 3.9 149 109 -40

Tajikistan 3.6 4.5 143 105 -38

Uzbekistan 6.9 6.9 128 92 -36

Kyrgyzstan 7.9 7.2 125 90 -35

Angola 0.7 0.8 177 146 -31

Liberia 0.2 0.4 190 162 -28

DPR Korea 4.6 3.8 138 111 -27

Canada 96.1 58.6 33 6 -27

Turkmenistan 8.4 6.0 123 97 -26

Cuba 4.4 3.1 140 115 -25

Moldova 16.5 10.6 99 74 -25

Kazakhstan 12.5 8.0 111 87 -24

Comoros 1.0 0.8 171 149 -22

Ukraine 22.7 13.6 87 66 -21

Total (fixed-line + mobile) telephone subscribers per 100 inhabitants, LDCs

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

MobileFixed-lineTotal

Outgoing telephone traffic 1995-2000

160%

211%167%

168%

160%

182%

1

10

100

1,000

10,000

100,000

1,000,000

Africa Americas Asia Europe Oceania World

Regions

Mill

ion

min

utes

19952000

Telephone tariffs (2000)

14.3

9.7

8.0

17.6

5.7

9.8

M. Subscription

8.6

7.8

4.4

8.3

5.0

6.3

M. Subscription

3.70.137955Oceania

1.10.1011784Europe

5.50.04139108Asia

3.10.07134105Americas

12.70.087762Africa

ConnectionConnection

5.7

Subscription as % of GDP per capita

0.07

Local call (US$)

113

Business (US$)

86

Residential (US$)

World

Cellular tariffs (2000)

0.75

0.41

0.32

0.57

0.39

0.42

Off Peak

35.7

13.8

14.9

21

13.3

16.6

M. Subscription

1.4091Oceania

0.5962Europe

0.4783Asia

0.7858Americas

0.5679Africa

PeakConnection

0.62

3 minutes local call

75World

Accounting rates trend

2.122.08

2.042

1.961.9

1.83

1.731.69

1.61

1.34

1.19

0.95

1.161.08

0.25

0.768

0.685

0.855

0.7880.735

1 1

0.90.8

0.750.68

0.61 0.550.5

0.460.39

0.260.31 0.28

0.22

0.338

0

0.5

1

1.5

2

2.5

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Years

Acco

untin

g ra

tes

(in S

DR)

World averageTAF averageUS averageBenchmark LBenchmark H

TelephonyTelephony : : SomeSome DATA(2000)DATA(2000)

Intern’l TelephoneIntern’l Telephone revenue : 54 billion US $revenue : 54 billion US $

Settlement Settlement transaction : transaction : 27 billion US $27 billion US $

Net Net Settlement paymentSettlement payment to to developingdevelopingcountries countries amountamount to to aroundaround : 5 billion US$: 5 billion US$

Int’lInt’l Infrastructure Infrastructure costs reductioncosts reduction: < 20 %: < 20 %

Annual averageAnnual average traffictraffic increaseincrease : 8 %: 8 %

AverageAverage Settlement Settlement rate rate reductionreduction: ? %: ? %

25

Global international telephone callsBillions of minutesand Growth rates

4 5 5 6 8 9 10 11 13 14 16 18 2124

2833

3843

4957

6471

7986

94101

8%8%9%

12%12%12%

15%15%

13%14%

17%17%17%

15%15%

11%11%

13%12%

16%15%

19%18%17%

15%

18%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Annual change

USA Net settlement payments and Average settlement rates movement

(in US$)

0.3650.315

0.270.215

0.160.175

0.4050.4550.48

0.5150.575

0.640.6750.68

0

1

2

3

4

5

6

7

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

.

Years

Ne

t S

ett

lem

en

t P

ay

me

nts

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

US

av

era

ge

se

ttle

me

nt

ra

tes

Net SettlementpaymentsSettlement ratesmovement

Falling prices

$0.00

$0.50

$1.00

$1.50

$2.00

90 92 94 96 98 00 02 04

Average retail price of one minute call to USA.

Mark-up

Settlement

Source: ITU adapted from FCC and national data (34 countries).

Forecast

X X

Traditional regime:Traditional regime:Joint provision of serviceJoint provision of service

Country A Country B

29

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:Emerging regime:Market entry and interconnectionMarket entry and interconnection

XXCountry A Country B

Jointly provided circuit

Circuit provided by operator B

30

Cross border interconnection and the trading of international traffic minutes

A

C

B

C

B

A

Operator in A sends traffic tooperator in C under anarrangement of exclusivity

• Operator in A is a partnerof operator in C

• Settlement rates A/B > C/B

Origin A

Destination B Origin

C

Destinati

on 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

7Alternative calling proceduresAlternative calling procedures

Country A

Country B Country C4.5 $

3.5$

2.0$

Call-Back

1.2$

0.8$1.0$1.5$

Interconnection of two outgoing calls in country A

Call-Back

Using ARCALL BACK using Accounting Rates

Mobile tromboning (using accounting rate)

É ÈCalled 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 A Country B

Operator A Operator BPSTN

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 A Country B

Telephone service using data transmission(By-passing accounting rate)

Operator A

PSTN

Voice is packetized = data transmissionTelephone regulations do not apply

VSAT

Inter-connection

É

T 0 2 0 8 5 0 0 - 0 0( 1 0 6 1 4 7 )

I P N e t w o r k

IW F

T e r m i n a t i n gN e t w o r k

L o c a l o r d i s t r i b u t e df u n c t i o n C a l l i n i t i a t e d f r o m P S T N / I S D N / P L M N

t o P S T N / I S D N / P L M N

P S T N / I S D N/ P L M N

IW F

P S T N / I S D N/ P L M N

L o c a l o r d i s t r i b u t e df u n c t i o n

O r i g i n a t i n gN e t w o r k

Call from International Telecommunication Network (ITN) to another ITN via IP-based Network

IP Telephony (by-passing accounting rate)

ITUITU––T SGT SG--3 Major achievements3 Major achievements

l New Remuneration systemð Termination charge systemð Settlement rate systemð Special arrangement

l Difficulty to quickly implement those systemsð Condition is to reach cost-oriented rate, butð No cost data or model for some administrations Group

3 is developing cost methodologies

l SG3 is now developing cost methodologies l Transitional arrangements

ð To facilitate staged reduction to cost based rateð to avoid sudden fall of revenue (smooth transition)

AnnexAnnex E to E to RecommendationRecommendation D.140 D.140 “indicative “indicative targettarget rates” by rates” by TeledensityTeledensity (T) (T) BandBand, in SDR (, in SDR (andand US cents) US cents) perper minute.minute.

T<1 A

1<T>5 B

5<T<10 C

10<T<20 D

20<T<35 E

35<T<50 F

T>50 G

0.327 SDR

0.251 SDR

0.210 SDR

0.162 SDR

0.118 SDR

0.088 SDR

0.043 SDR

43.7¢ 33.5¢ 28.0¢ 21.6¢ 15.8¢ 11.8¢ 5.7¢

Low income Lower middle Upper middle

High income

Note: The correspondence between teledensity band and income group shown in the bottom row is intended to be approximate, not precise. Source: ITU-T SG3 Report. 1 SDR = US$1.39.

38

FCC : 23 ¢(January2002/2003)

FCC : 19 ¢(January2001) 19 ¢(J.2000)

FCC : 15 ¢(January1999)

(end 2001) (end 2001) (end 2001) (end 2001)

(

end 2001) (end 2001) (end 2001)

Annex E Recommends alsoAnnex E Recommends also

l That transit Administrations move towards the indicative target rate (upper limit) of 0.05SDR (0.07US $) per minute.

l To negotiate asymmetrical accounting rate (other than 50/50) if both administrations agree to move to below the indicative target rate. Example: Operator A belong to teledensity band EOperator B belong to teledensity band FA and B agree to achieve TAR 0.2SDR (<0.118x2)ð A can request settlement rate of 0.09 SDRð B accepts to pay 0.11SDR to A

Termination chargeTermination charge

l Destination operator (or Government) set the chargel Charge should be established based on costsl Termaination Charge includes

ð International exchangeð National extension, including local loopð And if appropriate, international circuitð Other costs imposed on carriers by the national regulation

l Those components should be separately identified (Unbundled)

l Charge applies to all traffic from any sourcel However if significant variation in costs, charge may

vary (volume discount)l Termination charge may be introduced on bilateral

agreement basis

Full-circuit regime (could be unbundled)

Half-circuit regime (would not normally be unbundled)

Non-discriminatory (same rate for all correspondents)

Discriminatory (different rates negotiated with different correspondents)

In theory, set unilaterally (need agreement to implement)

Bilaterally negotiation

Not necessarily symmetric (if cost differ)

Normally symmetric(50/50)

Termination chargeTermination chargeAccounting rateAccounting rate

Accounting rates and Termination ChargesWhat’ s the difference

International call terminating on International call terminating on mobile networkmobile network

l SG3 revised D.93 in year 2000, allowing to negotiateð a separate rate for traffic terminating on a mobile

networkð however, this is by bilateral negotiation and when

the rate is cost orientatedð The difference between the two rates should be as

small as possible

l Many countries now request very high settlement rates (3 – 5 times)ð A review is now going on in the SG3

Fixed-to-mobile interconnect rate

Mobile-to-fixed interconnect rate LOCAL

Mobile-to-fixed interconnect rate SINGLE

TRANSIT

Mobile-to-fixed interconnect rate DOUBLE

TRANSIT

Austria 0.23 0.017 0.017 0.022

Belgium 0.18 0.008 0.014 0.018

Denmark 0.17 0.008 0.011 0.016Finland 0.21 0.013 0.013 0.024

France 0.20 0.006 0.012 0.018

Germany 0.24 0.008 0.017 0.021Greece n.a. 0.018 0.018 0.025

Italy 0.23 0.009 0.015 0.021

Ireland n.a. 0.010 0.015 0.021

Luxembourg n.a. 0.015 0.015 0.015Netherlands 0.18 0.009 0.013 0.016

Portugal n.a. 0.009 0.015 0.024

Spain 0.20 0.009 0.015 0.028

Sw eden 0.22 0.008 0.011 0.015UK 0.16 0.005 0.007 0.016

Switzerland 0.30 n.a n.a 0.020

Norway 0.156 n.a n.a 0.018Average 0.21 0.010 0.014 0.020

Interconnection Rates in selected European countries under CPP (in US $ / minute)

In 2001, there is an estimate indicating that the average of Fixed-mobile decreased to 0.136 and mobile to fixed has not changed

Internet Interconnection Internet Interconnection

l Internet Interconnection has slightly different meaning. Historically Internet interconnection has involved simply different Internet networks.

l This Internet Interconnection policies have proved increasingly inappropriate in a commercial industry.ð Many operator with larger networks often charge smaller ISPs

a traffic-based interconnection feeð Many backbone providers have begun offering transit service

networks.

l Different type of Interconnection Arrangementsð ISP Relationships with customers: usually via a dial-upð ISP-ISP Interconnection: peering or bilateral agreementð Multiple ISP Exchanges when several ISPs need to

interconnect in a same city (use of an IXP)

l International Regulatory Development

Recommendation D.50Recommendation D.50

The ITU-T,recognizingthe sovereign right of each State to regulate its telecommunication, as

reflected in the Preamble to the Constitution,notinga) 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; andc) 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 ofelements such as traffic flow, number of routes, geographical coverage and cost of international transmission amongst others.

Lowinternational

Internetconnectivity

Littleinterest of

privateinvestors

Highconnectivitycharges for

ISPs

Low demandof Internet

services

No growth ininfrastructure,

limitedInternet

connectivity

No exploitation ofeconomies of scale

Low bargainingpower of ISPs

Lack of competition

High end-usercharges

Internet vicious circle

ITU IP Connectivity Project

Liberalisationof the Internetmarket

Market growth

Bargaining powerof ISPs

Economies of scale

Interest in investing Lower costs

Higherdemand

Higherinternational

Internet connectivity

Virtuous circle

IPIP--TelephonyTelephony

Telephone to Telephone to telephone (fax to telephone (fax to fax) via Internetfax) via Internet

l Any telephone/mobile user to any otherl Main motivation: Accounting rate bypass, market

entry for non-facilities-based carriersl Potential service providers include any PTO with

settlement payments deficit (e.g., US = US$5.7bn)

l Market potential: 1.3 billion telephone/mobile users

Telephone TelephonePublic Switch

Internet

Phone Gateway Computer

Phone Gateway Computer

IP TelephonyIP TelephonyOpportunities and challengesOpportunities and challenges

l Opportunities ð Reduce prices to consumers and the costs of market

entry for operators ð In terms of volume of traffic carried and level of

investment committed

l Challenges ð Undermine the pricing structure of the incumbent

Public Telecommunication Operators (PTOs)ð Transition to IP-based networks also poses significant

human ressource development challenges

+0.28 US$

Receives 0.30 US $ for terminating charge

Pays 0.02 US $ for local call.

Retains 0.28 US $

0ISP in

Developing country

-0.53 US$Receives US $ 0.02 local call charge.

Receives US $ 0.55 settlement.

PTO in Developing

country

+0.25 US$

CollectUS$ 1.00 from user

Pays US$ 0.30 to ISP for terminating call.Retains US$ 0.70

Collect US$ 1.00 from user

Pays US $ 0.55 settlement.

Retains US $ 0.45

PTO in Developed

country

DifferenceIP-TelephonyAccounting Rate

ChallengesChallenges

Revenue gain and revenue loss

ISP

PSTNOperator

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

Conclusion and Recommendation Conclusion and Recommendation

l Erosion of traditional system of accounting rates for exchange of international trafficð Domestic interconnect fees will be dominant mode

l Major price cuts in international calls ð Availability of new infrastructuresð Impact of Internet pricing model (distance and duration

independent)

l Mobiles exceed fixed-line phones worldwide ð Introduction of “third generation” mobiles after 2001ð Generational shift, as new users reject fixed-lines

“ Interconnection and tariff rebalancing”