North American Telecom, International Telecom, and VoIP: A Global Market Perspective

VoIP, the new paradigm for low cost communications, is making the existing telecommunications sector business model obsolete and the regulatory framework that supports it irrelevant. In this study, Insight examines the impacts that VoIP has on domestic and international carriers and their equipment vendors.

Insight details the drivers of low-cost IP services worldwide, the status of VoIP as a factor for telecommunications sector change, the inherent opportunities and the potential risks for stakeholders that will accompany this migration on a regional basis. In this study, we analyze switched voice and VoIP traffic trends, developing forecasts models by region and on a global basis. The study will estimate the impact of VoIP on telephone operator/carrier revenues and provide growth estimates for access lines and mobile wireless subscribers. Finally, it examines regional investment trends and growth perspectives and what this means for vendors of mobile and IP equipment in terms of opportunities and risks.

Report Excerpt

In our 1999 study of international calling, IP Telephony, ISR, and Callback: The Deregulated European Market 1998-2003, Insight predicted a short lifespan for many of the rate arbitrage plays then in vogue, and said:� “…if the supposition of some (that IP equipment and transport costs are cheaper than the equivalents in the PSTN) proves to be true, and quality issues can be resolved, then IP telephony will indeed be the wave of the future.”� Today, Voice over Internet Protocol (VoIP) is indeed having a direct and measurable impact on international carrier revenues, just as we predicted.� But VoIP’s near term impact as an international calling rate arbitrage mechanism is a second-order effect.� The impacts we trace on international markets in this study are a precursor, the leading edge, of what telecom carriers will face in their local and long-distance national markets in the near future.�

In its role as a key driver for electronic commerce, as well as a facilitator to the diffusion of the Internet, the telecommunications industry has transformed itself as well as economies worldwide.� The importance of telecommunications is reflected in its growing share of world output, increasing over the last twenty-five years from 1.6 percent of an estimated $20 trillion in 1975 to 2.9 percent of an estimated $40 trillion in global GDP in 2000.� The pace of growth quickened in the last decade of the twentieth century and became a period of unprecedented growth for the telecommunications sector.� This growth came to a screeching halt in 2000.� Since then, the sector has been through a series of shocks whose effects are still being felt.

Troubles for the telecommunications sector began with the bursting of the “dot.com” bubble in 2000 as a result of the exaggerated expectations placed on the Internet phenomenon.� In its wake, many telecommunications companies, either betting on the exponential growth of Internet traffic or having expanded outside their core activities, collapsed.� But perhaps the biggest shock for telecommunications sector stakeholders has been the fact that the industry is witnessing a decline in revenue growth rates, which after a twenty-year uninterrupted growth trajectory of unprecedented magnitude, came as a surprise.��

This study will seek to determine how much of the decline in revenue growth rates is caused by the one-off factors, and how much is precipitated by structural changes affecting the traditional public switched telecommunications network (PSTN) business models of the incumbent telephone operators as the industry moves to VoIP technology.

In the context of this study, “VoIP” is used in a generic sense to indicate the use of packet switching of voice traffic over the Internet.� Hence, VoIP “bypass losses” in this report pertain to that portion of international voice traffic that uses the Internet as a transport vehicle and appears at the termination point as local traffic.� VoIP, as we refer to it in this study, is distinct from the packetizing of voice, which has been used in public networks for years, and is used to transport many type of protocols including voice using Internet protocols, voice over frame relay, and voice over ATM, plus combinations thereof (e.g., IP over ATM transport).

�Insight’s research suggests that the revenue shocks of the last few years were caused by one-off factors, such as a temporary imbalance between bandwidth supply and demand and the financial markets’ over-exuberance related to the rise of the public Internet.� As far as carrier revenue is concerned, however, the downward pressure attributable to VoIP is going to play out over a very long period, and it will be irreversible.� Even more importantly for the incumbent telephone operators, VoIP technology will require drastic cost containment action and the adoption of a “new” business model based on the Web service creation paradigm as VoIP technology gains traction.�

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