Inside Info


Direction of traffic

Trading telecom minutes

This is the title of a new major report which the International Telecommunication Union and TeleGeography, Inc. will launch on the occasion of World Telecom 99 + Interactive 99 in October. The 330-page report (1999 edition) looks at the wholesale market for minutes of telecommunications traffic. It examines closely the transition from the traditional revenue-sharing mechanisms of the accounting rate system to newer, cost-orientated mechanisms, principally via domestic interconnect regimes or via the Internet. Country tables show the top 20 incoming and outgoing traffic routes for 1993-1997 for all the major traffic-reporting economies, plus trends in retail and wholesale prices.

"Trading telecom minutes" has at least two meanings in the context of the report.

The first meaning refers to the development of a market for minutes of telecommunications traffic, in terms of capacity, futures and options. It is symbolic of the changing rules of the game in international telecommunications, following the agreement concluded in 1997 by the World Trade Organization (WTO) on basic telecommunications and the emergence of a trading regime.

The second meaning has a much older heritage and refers to trading in the sense of exchanging: "will terminate your minutes if you terminate mine". It is this principle, of fair exchange, which lies at the heart of international cooperation in telecommunications. The telegraph administrations of Europe in the 19th century quickly appreciated that it was to their mutual advantage to terminate each other's traffic because they effectively gained the service of call termination free of charge.

Efforts to reform the accounting rate system, by providing mutually agreed guidelines as to what cost-orientated settlement rates should look like, have moved further in the past twelve months than in the previous twelve years. The report argues that while the benchmarks of the United States Federal Communications Commission (FCC) failed to gain international consensus, the Commission's action nevertheless gave the international community an additional impetus to tackle the accounting rate problem. The work carried out by the Focus Group on Accounting Rate Reform (see ITU News, No. 7/99, page 17) has now put in place a multilateral agreement on an ambitious set of targets which, if implemented, will bring cost-orientation considerably nearer.

The report concludes that neither meaning of "trading telecom minutes" is likely to be adequate to describe the changes taking place in the international environment, because sooner or later, it will no longer be minutes which are traded, but rather megabytes, or some other capacity-based measure.

The following excerpts from the report are intended to provide an overview of the geopolitical dimension of communication and factors having an impact on the international traffic flow and patterns.

Traffic trends

In 1997, the volume of international telephone traffic minutes was just under 82 billion minutes worldwide. On the basis of current trends, and taking into account the accelerated growth in the number of main lines and the continuing rapid expansion of the mobile network, one can reasonably expect that the number of minutes of international traffic will surpass 100 billion during 1999 and will reach 143 billion minutes by 2001 (see Figure 1).

At present, nearly three-quarters of international outgoing traffic is generated in just 23 developed countries*. The rest of the world accounted for the remaining one quarter of traffic. For incoming traffic, however, the story is somewhat different. The same developed countries account for only 57 per cent of international incoming traffic. It is this gap between the distribution of outgoing and incoming traffic which explains the requirement for an international settlements system and which is the main theme underlying this report.

Source: ITU, TeleGeography, Inc.

Figure 1 — International traffic, fixed main lines and mobile subscribers for the period 1990-2001




At the start of 1998, the much-talked about concept of international telecommunications as a competitively traded service finally became a reality, with several major markets permitting competition for the first time. The forerunners were France, Germany, Italy and Switzerland. They were joined by Hongkong-China, Spain and Ireland by year-end 1998. Many other countries are committed to opening up their markets in the first few years of the next decade, Singapore plans to do so in 2000.

A growing share of international traffic, perhaps as high as 30 per cent, now passes outside the traditional accounting rate system, with domestic interconnection becoming the dominant mode of operation, at least in Europe. In addition, as market liberalization spreads (see Table 1), a growing share of traffic is being resold under international simple resale (ISR) arrangements. A vibrant market has grown up for the trading of minutes of telecommunication traffic and options to deliver traffic.

The trading of discounted telecommunication minutes is a sign of an increasing level of price discrimination in the telecommunications sector which is now operating not only at the level of retail minutes but also for wholesale traffic. In other industries, such as airlines, the concept of selling off surplus capacity at discounted rates has long been a familiar practice. It is commonplace to observe that few people travelling on an aeroplane have paid exactly the same price. The price of seats is differentiated in quality according to booking restrictions on the ticket, the quality of the seats and the service, and the extent to which the tickets are bundled with other services, for instance as part of a package holiday. However, all passengers on the plane leave and arrive at the same time.

* For the purposes of the analysis here, the developed countries might be broadly defined as the 15 European Union Member States plus Iceland, Norway, Switzerland, Canada, United States, Australia, Japan and New Zealand.





Table 1 - Changing market structure
Countries permitting competition in international telephony)

1990

1998

1998 (contd.)

Japan

New Zealand

United Kingdom

United States

1995

Australia

Canada (partial)

Chile

Colombia

Denmark

Finland

Japan

Korea (Rep. of)

Malaysia

New Zealand

Philippines

Sweden

United Kingdom

United States

Australia

Austria

Belgium

Brunei Darussalam

Canada

Chile

Colombia

Dem. Rep. of the Congo

Denmark

Dominican Rep.

El Salvador

Finland

France

Germany

Ghana

Guatemala

Hongkong-China

Indonesia

Ireland

Israel

Italy

Japan

Korea (Rep. of)

Malaysia

Mexico

Netherlands

New Zealand

Norway

Peru

Philippines

Russia

Somalia

Spain

Sweden

Switzerland

Uganda

Ukraine

United Kingdom

United States

Source: ITU "Telecommunication Regulatory Database", ITU/TeleGeography, Inc. "Direction of Traffic" Database and WTO.

At what point will the volume of IP traffic overtake voice traffic?

In the telecommunications industry, price differentiation has been slower to develop. After all, PTOs have long prided themselves on achieving a uniform level of quality for call connection and transmission, at a non-discriminatory price.

Today, PTOs face a dilemma. It is widely believed that networks operating under the Internet Protocol (IP) will soon become the public network. Traffic on the public switched telephone network (PSTN) continues to grow, increasing at rates of between 5 and 15 per cent per year on most routes. While hard data is difficult to come by, a useful rule of thumb is that Web-based traffic is doubling in size every 100 days or so. That means that if you begin a service with 100 units of traffic, by the end of one year there will be 1250 units, and by the end of five years there will be more than 30 million units. The problem, therefore, becomes how to scale networks to grow at the same pace as market demand is growing.

A few countries now report Internet usage statistics insofar as the Internet connects with the PSTN. An example of this is KPN of the Netherlands, which has reported that in 1998 some 21 per cent of their local traffic was attributable to the Internet, up from 13 per cent in 1997.

The most dramatic statistics are those published by OFTA, the regulator for Hongkong-China. At the start of 1998, dial-up use of Internet was more or less equal with the volume of international calls from the territory (incoming plus outgoing combined). By the spring of 1999, dial-up Internet use was twice as high as international calls. Indeed, the fact that Hongkong's volume of international calls, which had been growing by 16 per cent per year between 1991 and 1997, actually declined in 1998, suggests that at least a percentage of the growth in Internet traffic is due to IP telephony which is substituting for calls over the fixed network.

The statistics reported by Deutsche Telekom tell a similar story. During 1998, Deutsche Telekom's calls to T-Online, its Internet service provider (ISP), grew by 86 per cent to 7.7 billion minutes overtaking its 4.7 billion minutes of international outgoing traffic. Indeed, Deutsche Telekom's domestic long-distance and international outgoing traffic both declined during that year. If one takes into account calls to other German ISPs as well as Internet traffic generated from leased line users, then Germany's Internet traffic almost certainly exceeds its international traffic (incoming and outgoing) by a comfortable margin, as in Hongkong-China.

The next cross-over point will be when IP traffic overtakes global voice and fax traffic (international plus domestic). The current best guess is that this will happen some time around 2003-2004, though it will happen earlier in some economies. The significance of this date is that once the cross-over is achieved, voice will increasingly become an add-on service, bundled in with data carried over the Internet.





Table 2 - Top 20 developing country public telecommunication operators (Ranked in terms of minutes of outgoing international traffic, 1997)

rank

PTO (economy)

financial year end

minutes of international telecommunication traffic, 1997 (000s)

% change, 1996-1997

revenue from international services 1997 (USD m)

% change 1996-1997

international revenue as % of total telecommunication revenue

1

Hong Kong Telecom International (Hongkong-China)

1 April 1 718.0 -1.2 2 194.9 -2.5 48.5
2

DGT (China)

31 Dec. 1 632.0 13.9 2 107.4 26.3 12.3
3

Telmex (Mexico)

31 Dec. 1 009.0 -5.8 1 446.3 -23.6 18.9
4

MOPTT (Saudi Arabia)

31 Dec. 801.3 37.1 1 174.9 11.7 50.3
5

SingTel (Singapore)

1 April 753.0 21.6 1 377.8 2.6 46.7
6

Chungwa Telecom (Taiwan-China)

30 June 743.1 14.5 797.1 -14.3 15.7
7

Etisalat (United Arab Emirates)

31 Dec. 738.0 25.2 472.9 -9.1 42.0
8

KT (Korea (Rep. of))

31 Dec. 610.0 17.3 1 227.6 8.6 14.4
9

TM (Malaysia)

31 Dec. 589.0 3.2 497.6 -3.5 19.5
10

Türk Telekom (Turkey)

31 Dec. 557.5 17.8 460.9 8.1 12.8
11

TP (Poland)

31 Dec. 529.4 21.1 670.9 6.4 25.2
12

Utel (Ukraine)

31 Dec. 487.0 461.1 172.3 3.5 -
13

EMBRATEL (Brazil)

31 Dec. 477.0 24.6 399.7 9.3 19.9
14

VSNL (India)

1 April 422.0 9.6 1 599.7 9.1 90.8
15

Telkom (South Africa)

1 April 368.8 4.5 652.9 0.6 14.9
16

SPT Telecom (Czech Republic)

31 Dec. 306.1 5.7 240.6 -27.5 19.1
17

Bezeq (Israel)

31 Dec. 300.0 -6.3 428.8 -45.3 16.9
18

Indosat (Indonesia)

31 Dec. 298.1 20.1 443.1 -7.1 88.6
19

Rostelecom (Russia)

31 Dec. 288.5 23.3 279.4 -64.5 17.5
20

HTC (Hungary)

31 Dec. 287.1 7.4 191.4 80.7 14.1
 

average/total

  12 914.8 14.8 16 836.2 3.7 22.7

Source: ITU PTO database.

Implications for developing countries

During the period between 1993 and 1998, a total of around USD 40 billion passed from developed countries to the developing world through the workings of the accounting rate system. The United States alone contributed more than 25 billion to this net transfer. Understandably, developing countries are fearful about what will happen to this source of funds as a result of the changes to the international telecommunications environment described in the report. Many developing countries are vulnerable to sudden changes, particularly small island States and others which derive a large percentage of their total telecommunication revenues from international traffic. The report looks at different scenarios for reform of the accounting rate system, including FCC benchmarks, the "indicative target rates" proposed by the Focus Group on Accounting Rate Reform, termination rates, staged reductions and a move towards sender-keeps-all. Whichever scenario comes to pass, it is likely that the current volume of cross-border financial transfers, particularly from developed to developing countries, will diminish in size and significance.



Note: LAC = Latin America and Caribbean.

Source: ITU/TeleGeography, Inc. "Direction of Traffic" Database.

Figure 2 — The changing pie (regional shares of global international traffic, by origin, in 1983 and in 1997)

Developing countries face a dilemma: do they continue to keep wholesale and retail prices for international traffic high, in order to cross-subsidize access networks, or should they cut prices in order to prevent traffic streams shifting to the Internet? The preliminary 1998 traffic statistics show an appreciable downturn in the rate of growth (falling below 10 per cent for the first time in several decades) and actual decline in outgoing traffic in the case of some economies, such as Hongkong-China (see box). While the downturn in the Asia-Pacific region may be partly a result of the Asian financial crisis, a further explanation is almost certainly due to the loss of accounting rate traffic, especially fax, to the Internet.

Table 2 shows top 20 developing country public telecommunication operators.

Europe's disappearing market share

The report claims that fifteen years ago, Europe enjoyed a share of more than two-thirds of the global market-place. Now that share has slipped below 50 per cent (see Figure 2). By contrast, the North American market, which has experienced competition for all of that period, has grown twice as fast as the rest of the world and consequently its share has doubled to almost one-third of total outgoing international traffic. Other developing regions of the world — Asia-Pacific and Latin America and the Caribbean — have also grown their share of the world market at Europe's expense.

Hard times for international carriers

Will the introduction of competition in Europe reverse the trends towards declining market share? The early signs are that it will, but only at significant cost to the incumbent operators of the region. Several European operators, such as Telefónica and Belgacom, succeeded in growing their international traffic streams at a faster rate than the average for the top 20 operators (see Table 3). But they were only able to do this by cutting prices as they prepared for the introduction of competition. As a result, the overall revenue they derived from international service declined between 1996 and 1997. Overall, the level of revenue from international services of the top 20 developed country operators fell by almost 10 per cent in United States dollar terms in the period 1996-1997. Developing country operators also experienced a fall, though not by so much.

Table 3 - Top 20 developed country public telecommunication operators

(Ranked in terms of minutes of outgoing international traffic, 1997)

rank

PTO (economy)

year end

minutes of international telecommunication traffic, 1997 (000s)

% change, 1996-1997

revenue from international services 1997 (USD m)

% change 1996-1997

international revenue as % of total telecommunication revenue

1

AT&T (United States)

31 Dec. 10 331 8.2 5 786 0.2 11.3
2

MCI WorldCom (United States)

31 Dec. 7 307 17.6 4 743 21.1 17.9
3

Deutsche Telekom (Germany)

31 Dec. 4 813 1.1 3 806 -7.6 9.8
4

France Télécom (France)

31 Dec. 3 100 4.4 2 165 -25.1 8.1
5

Sprint (United States)

31 Dec. 2 759 0.5 1 478 -1.0 9.9
6

BT (United Kingdom)

1 April 2 710 4.5 2 542 -9.9 9.9
7

Telecom Italia (Italy)

31 Dec. 2 209 8.9 1 520 -6.4 8.7
8

Swisscom (Switzerland)

31 Dec. 1 957 6.6 965 -9.9 14.2
9

Telefónica (Spain)

31 Dec. 1 566 31.7 824 -15.2 5.1
10

KPN (Netherlands)

31 Dec. 1 535 0.1 1 072 -17.4 13.5
11

Belgacom (Belgium)

31 Dec. 1 340 14.9 565 -19.1 13.3
12

Teleglobe (Canada)

31 Dec. 1 124 22.9 779 2.4 54.2
13

KDD (Japan)

1 April 1 105 0.2 2 079 -14.5 68.9
14

PTA (Austria)

31 Dec. 996 5.1 492 -11.8 13.2
15

C&W Comms (United Kingdom)

1 April 971 27.3 381 14.8 10.2
16

Telia (Sweden)

31 Dec. 747 5.8 259 -27.0 4.3
17

Pacific Gateway (United States)

- 720 - 173 - -
18

Telstra (Australia)

30 June 700 -0.3 996 -4.9 8.4
19

Telecom Eireann (Ireland)

1 April 635 9.5 606 8.3 29.5
20

OTE (Greece)

31 Dec. 597 15.2 548 -2.9 16.7
 

average/total

  47 323 8.6 31 779 -5.1 11.1

Source: ITU PTO database.

The Internet as the new public telecommunication network

The analysis of traffic trends presented in the report suggests that the Internet will not only be the major demand driver for international traffic growth in the next decade (see box), but it will also be a major influence on the future of more traditional traffic streams, principally voice and fax. Given the economies of scale that Internet traffic will be able to achieve from its volume growth, and the in-built advantages which IP traffic already holds over PSTN traffic in terms of cost effectiveness, it is likely that increasing shares of the voice and fax traffic currently carried on the PSTN will shift to the Internet. The Internet may indeed become the public telecommunication network rather than being simply an adjunct of it. The principal technical difference will be that traffic would be routed rather than switched, but that fact will be irrelevant to the average user who mainly wants lower prices. Ultimately, in a competitive market-place, what the consumer wants, the consumer gets.

ITU and UNDP talk of closer cooperation

The International Telecommunication Union and the United Nations Development Programme have long been partners in the provision of technical cooperation to developing countries. Both organizations are now looking to strengthen their partnership to respond to growing challenges.

The need to strengthen this partnership was discussed on 8 September 1999, when UNDP's Director for the European Bureau, Odile Sorgho-Moulinier, and Deputy Director, John Fabre, paid a courtesy visit to ITU Secretary-General, Yoshio Utsumi.

"The time has come to create a new framework for an even closer relationship", said Mr Utsumi, acknowledging the good relationship that has prevailed over the years. "I am confident that UNDP's European Office will serve as an effective focal point as we look for more formal arrangements", he added.

Ms Sorgho-Moulinier, whose last duty station was Senegal, praised the ITU field office for its commitment to the United Nations Development Assistance Framework (UNDAF). UNDAF is a key part of the reforms announced by the United Nations Secretary-General in 1997.

Odile Sorgho-Moulinier and Yoshio Utsumi




From official sources

NEW MEMBERS

Development Sector

National Telephone Cooperative Association (NTCA) (Arlington, VA), Saudi Logistics and Electronics Company Ltd. (SALEC), (Jeddah, Saudi Arabia) and Vodafone AirTouch International Ltd. (Newbury, United Kingdom) have been admitted to take part in the work of this Sector.

Radiocommunication Sector

New Skies Satellites N.V. (The Hague) and Vodafone AirTouch plc (Newbury, United Kingdom) have been admitted to take part in the work of this Sector.

Standardization Sector

Fujitsu Europe Telecommunications Research and Development Centre Ltd. (FTRC) (Uxbridge, United Kingdom) and Rostelecom (Moscow) have been admitted to take part in the work of this Sector.

New denominations

CaribSpace Limited, which participates in the work of the Development Sector has changed its name. The new denomination is: WorldSpace Caribbean (Port of Spain).

GSM MoU Association which participates in the work of the Radiocommunication Sector has changed its name. The new denomination is: GSM Association (Dublin).

GTE Business Development and Integration, which participates in the work of the Development, Radiocommunication and Standardization Sectors has changed its name. The new denomination is: GTE Service Corporation (Irving, TX).

Hong Kong Telecom International Limited (HKTI), which participates in the work of the Radiocommunication and Standardization Sectors has changed its name. The new denomination is: Cable & Wireless HKT International Limited (Hong Kong).

Measat Global Telecommunications Sdn. Bhd., which participates in the work of the Radiocommunication and Standardization Sectors has changed its name. The new denomination is: Maxis International Sdn. Bhd. (Kuala Lumpur).

o.tel.o communications GmbH & Co., which participates in the work of the Standardization Sector has changed its name. The new denomination is: Mannesmann o.tel.o GmbH (Cologne, Germany).

Sprint Communications, which participates in the work of the Standardization Sector has changed its name. The new denomination is: Sprint Corporation (Westwood, KS).

Telecomunicaciones Internacionales de Argentina, Telintar S.A., which participates in the work of the Development, Radiocommunication and Standardization Sectors has changed its name. The new denomination is: Telefónica Larga Distancia de Argentina S.A. (TLDA) (Buenos Aires).

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