Open networks: is VoIP the key?
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Open networks: is VoIP the key?

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Open networks: is VoIP the key? Open networks: is VoIP the key? Presentation Transcript

  • Open Networks: Is VoIP the Key? Reed Hundt April 2005
  • KEY MESSAGES
      • ~5M H/Hs could adopt VoIP over the next 12-18 months ( up from ~ 0.8 M H/Hs today) growing to ~15M H/Hs by 2009
      • Up to 40% of cable modem H/Hs are likely to shift to VoIP by 2009
      • VoIP will substitute for primary lines for HH with broadband, and …
      • VoIP can be a catalyst for conversion to broadband. Could increase broadband penetration as high as 60% of HH
      • ILECs are selling DSL to high-value households, but now these subs wants VoIP, if
      • VoIP provides a $15 lower monthly bill
      • Plus, consumers care about upfront charges, but that is okay for
      • MSOs, who want to use it to battle DBS, and so they will offer
      • As low as $35 to $40 per month for VoIP service (and win margins of up to 40%), which again shows advantage of fat pipe over
      • ILEC skinny pipe
      • 11. VoIP is really all about being OPEN
  • GROWS TO 10+ PERCENT HH BY 2009 * Includes taxes and fees ** 2005 and 2009 modeled for different level of overall broadband penetration (28% in 2005 to 57% in 2009) Source: McKinsey Market Research; team analysis Total monthly bill* $30 MSO $15 OTT $45 MSO $30 OTT $55 MSO $40 OTT VoIP preference rate Percent of total U.S. households Typical price range of current offers Even higher penetration possible as consumers grow more comfortable with VoIP 2009 2005 Preference rates** at various price points in
  • VoIP IN A NUTSHELL Source: Team analysis
      • Voice traffic transported in data packets over the public Internet or private data networks, rather than “voice signal” over public switched telephone network (PSTN)
        • Internet Protocol (IP) enables communication between diverse devices by routing data packets without dedicated pathway
        • Voice over IP (VoIP) is a way to transmit voice conversations over a data network using IP
        • Internet telephony (or “peer-to-peer” telephony) allows voice calls to be made between PCs over the public Internet using IP
      • VoIP will bring down industry pricing and change the distribution of value among service providers
      • VoIP substitutes for standard voice products and services
      • Service providers and equipment vendors incorporate VoIP into offers
    What is VoIP? Why the hype? Why now?
  • VoIP EVOLUTION OVER THE NEXT 24 MONTHS
      • VoIP value proposition not compelling enough for enterprise customers to break from default conservatism and accelerate normal upgrade cycle
        • Savings available to enterprise enough to drive choice of VoIP for new purchases
        • Desire for risk-free conversion to VoIP creates long test cycle and slow rollout
      • MSOs will be big winners
        • MSO VoIP will be widely available at ~$35/month incremental price by EOY 2006
        • ILECs will fight back with their own VoIP offering and targeted retention efforts
        • Despite the hype, non-facilities players will substitute for a few percent of access lines at most
      • ILECs will control SME migration to VoIP
        • ILECs retain effective control of sales channel to SMEs
        • VoIP offering have weak value proposition for many SMEs
    Enterprise market* Consumer market SME market*
  • INCUMBENTS FACE COMPETITORS ON VoIP BATTLEGROUND 7 types of players Robust strategy Strategic product portfolio Network strategy Wholesale strategy Fixed (winback from cable) Wireless (mobile back to fixed) Converged (seamless experience) Broadband (VoIP as BB Trojan Horse) Aggressive (Bet the company on NGN) Migration (Legacy migration) FTTx (Abundant bandwidth to the premise) Aggressive entry Test the waters (e.g., select LATAs, conservative pricing) No entry “ Cable” “ OTT” box “ P2P” “ OTT” virtual “ Convergence play” “ Winback” “ BB Trojan Horse” Regulatory strategy Other Access charge reform Unbundled DSL Service platforms Device strategy Billing Rights and obligations of VoIP providers
  • DOES VoIP BREAK VOICE VALUE CHAIN? Possible future “OPEN” value chain Call origination Termination Incumbents Call origination Termination Today’s integrated fixed voice value chain Open Internet France Telecom BT Deutsche Telekom Source: McKinsey Value added services City/local access Transport City/local access Value added services City/local access Transport City/local access
  • WHAT “OPEN” MEANS OPEN to all networks
      • Interconnection
      • Intercarrier compensation
    OPEN to all designs
      • Open protocols
    OPEN to all content
    • Volume
    • Speed
    • Intellectual property rights
    • Conflict
    • Point of view
    OPEN to all people
      • Ubiquitous
      • Mobile
      • Affordable
      • Usable (disabled, non-English)
  • JAPAN HAS SEEN MAJOR BROADBAND AND VoIP TAKEUP * Additionally, about 30 thousand fixed wireless access subscribers exist. ** Based on the March 2004 number of total households and forecast by IDC Japan Source: MPHPT; IDC Japan Key VoIP moves
      • VoIP bundled free of charge to DSL service
      • Free calls on-net
      • 7.5 yen per 3 minutes to domestic fixed phone
    VoIP Pricing
      • NTT enters VoIP market with 280 yen monthly fee and somewhat lower discounts than Yahoo!
      • FTTH VoIP is slightly priced higher, but with PSTN equivalent quality
      • FTTH VoIP players including more VAS features, sometimes for free
      • 7.9%
    BB penetration
      • 19.1%
      • 45.8%**(End of 05)
    Description
      • VoIP introduced by Yahoo!BB as on-net and outgoing calls only to PSTN. (Line sharing allowed incoming calls to be handled by PSTN)
      • NTT must interconnect with VoIP players meeting quality standard
      • Interconnections between different VoIP providers expand
      • FTTH-based VoIP being introduced with geographic phone numbers and ability to disconnect primary line
      • 2-way interconnection between VoIP and PSTN became available from November 2003 enabled by 050 VoIP prefix
    VoIP offers introduced by Yahoo! BB (2002) VoIP offers introduced by other competitors (2003) Future VoIP moves
  • 10%+ OF JAPANESE HOUSEHOLDS HAVE VoIP SUBSCRIPTIONS Source: NTT; Yahoo Research Institute; McKinsey market survey 01 02 03 04 05 The Japanese regulator has created a new area code 050 for VoIP 06 07 VoIP households Thousands Consumer perception of VoIP quality Percent
      • 45% of BB households
      • 11% of all households
      • 29% of BB households
      • 8% of all
      • households
    As good as fixed phone Better than fixed phone Between fixed and cellular phone As good as cellular Worse than cellular
  • ELSEWHERE IN ASIA VoIP IS DEVELOPING ALSO Source: CLSA Asia-Pacific market Japan NTT Yahoo! BB LD calls International calls On net Monthly fee Local calls Price discount of attacker VoIP versus incumbent voice Percent n.a. 0 -60-80 -81 -22 -85 n.a 0 n.a. -10-20 0 n.a. n.a. Free Free Free Free Free Country Incumbent Attacker NON-EXHAUSTIVE Korea KT Hanaro Telecom Hong Kong PCCW Hutchinson Taiwan Chunghwa Seednet Singapore SingTel Starhub
  • FRANCE OVERVIEW Implications Context FT response FT market share 95% of basic subs Broadband penetration 25%, 6m HH CAGR 100% 03-04 Broadband access Free Other DSL, some cable FT DSL
    • Attacker VoIP pricing
      • On net
      • Off net local
      • Off national/LD
      • Fixed to mobile
      • International
      • Free
      • Free
      • Free
      • ~20% discount
      • ~50% discount
    • Impact of VoIP
      • 75% of Free BB users use VoIP (i.e., approx. 681k)
      • Huge marketing value for Free: 60% of of new BB intentionists say their 1st choice would be Free
    Consumer VoIP?
      • Initially (Sept 03) no VoIP response as cannibalization risk greater than potential upside
      • Launched VoIP in July 2004
      • Euro5/month offer on top of BB for unlimited local & LD calls
      • FT BB share subsequently on the increase again
    Lower PSTN prices?
      • Launched July 2004
      • Aggressive introduction of unlimited packages
    Regulatory offensive?
      • Re-integrated ISP into Telco to avoid « squeeze test »
      • Campaign to raise/maintain ULL prices
    Bundling?
    • Yes
      • VoIP + BB
      • VoIP+ BB+ TV
      • Mobile + VoIP being considered
    FTTH?
      • No, but ADSL2+ yes
    • VoIP proving to be a killer differentiator for winning in the BB market. The market reacts quickly to new offers
    • Pace of offer innovation has accelerated dramatically – challenge given typical inflexibility of incumbent service platforms
    • Market has split in to 2 types of player:
      • Price players (Tele 2, 9 Telecom,…)
      • Feature players (Free, France Telecom)
    • Reactive and innovative marketing required to win in the Features play
    VAS
      • TV/DSL launched 12/03
      • Videotelephony launched 08/04
  • NETHERLANDS OVERVIEW Lessons learned Context KPN response KPN market share 90% of basic subs Broadband penetration 30% Broadband access KPN DSL Other DSL Cable
    • Attacker VoIP pricing
      • Subscription
      • National calls
      • On-net calls
      • 20-40% lower
      • 20-30% lower
      • 50% lower
    • Impact of VoIP
      • Cablecos capturing up to 20% of voice lines in selected regions
    • Consumer VoIP: Imminent VoIP targeted mainly at winback on cable, CPS, and attacker DSL
    • VAS: Directory services, multiple numbers, residential gateways
    • Regulatory strategy
      • Maximum VoIP freedom (price level freedom, price decision freedom, customer specific pricing)
      • Barriers to VoIP attackers (no geographic numbers, E111 24x7 requirements, no termination fees to VoIP numbers)
    • 40-50% of cable households could be on VoIP in 2 years time
    • Once they’re gone, they’re not coming back (5% annual churn vs. 15-20% for mobile)
    • 40% discount to incumbent is sweet spot
    • Own the marketing space (explicitly choosing customers)
    • Operational execution often the bottleneck
  • VoIP IS ROAD TO DEREGULATION = LOWER FEES Source: Company Web sites; literature search
    • Charges Detail
    • Monthly charges
      • Unlimited LD package $ 24.99
      • Features $ 0.00
    • Total Monthly Charges $ 24.99
    • Other Fees
      • Reg Recovery Fee $ 1.50
    • Total Other Fees $ 1.50
    • Taxes
      • State Sales Tax $ 0.00
      • Federal Excise Tax (3%) $ 1.05
    • Total Taxes $ 1.02
    • Total Vonage charges $ 27.51
    • TWC
    • Charges Detail
    • Monthly charges
      • Unlimited LD package $ 44.95
      • Features $ 0.00
    • Total Monthly Charges $ 44.95
    • Other Fees
      • Other surcharges $ 0.00
    • Total Other Fees $ 0.00
    • Taxes
      • State Sales Tax (6%) $ 2.70
      • Federal Excise Tax (3%) $ 1.34
    • Total Taxes $ 4.04
    • Total TWC charges $ 48.99
    • CableVision
    • Account Summary
    • Monthly charges
      • Unlimited LD package $ 34.95
      • Features $ 0.00
    • Total Monthly Charges $ 34.95
    • Other Fees
      • Reg Recovery Fee $ 0.00
    • Total Other Fees $ 0.00
    • Taxes
      • State Sales Tax (6%) $ 0.00
      • Federal Excise Tax (3%) $ 1.05
    • Total Taxes $ 1.05
    • Total CableVision Charges $ 36.04
    • MCI Neighborhood
    • Charges Detail
    • Monthly charges
      • Unlimited LD package $ 55.99
      • Features $ 0.00
    • Total Monthly Charges $ 55.99
    • Other Fees
      • Primary line charge $ 6.00
      • LNP $ 0.23
      • USF $ 2.20
      • Other surcharges $ 1.83
    • Total Other Fees $10.26
    • Taxes
      • State Sales Tax (6%) $ 3.03
      • Federal Excise Tax (3%) $ 2.00
    • Total Taxes $ 5.03
    • Total MCI charges $ 71.28
      • Cablevision and Vonage are not certified as telecommunication services and not currently required to pay certain regulatory fees (e.g., USF and 911)
      • Tine Warner, which is certified as telecommunications provider, absorbs these regulatory expenses (i.e., consumer not billed for these charges)
      • MCI passes all the telecom charges including surcharges (e.g., primary line and LNP) through to the consumer
    Additionally, cost savings from access charge avoidance represent a further $2-3 per sub per month potential advantage for VoIP players
  • IS VoIP THE WAY TO OPEN NETWORKS? Major regulatory issues involving VoIP Potential impacts on VoIP Rights and obligations of VoIP providers
    • Potential for VoIP service providers to be obliged to comply with fees and obligations currently avoided (e.g., E911, USF, LNP, CALEA, state taxes) and entitled to resources (e.g., numbers, interconnection agreements)
    • Multiple VoIP proceedings underway at FCC and in state commissions and Courts that will influence outcomes of these issues
    Status Access charge reform
    • Changes to access charge regime could eliminate VoIP arbitrage opportunity by moving to bill-and-keep
    • Increased SLC or other per access line charges could increase VoIP price advantage
    • No consensus proposal after collapse of industry working group
    ILECs obligation to provide “naked DSL” (DSL without ILEC voice service)
    • Increases vulnerability of DSL subscribers to attack by OTT VoIP players
      • - Currently, OTT players have weak value proposition for DSL subscribers (who often must purchase ILEC voice service)
    • Some states require ILEC to offer naked DSL
    Will regulatory changes that have effect on VoIP be decided and implemented in the next 18-24 months?
  • VoIP CAN BUILD BROADBAND USA OPEN VALUE CHAIN = common carrier, interconnection, protocols Transfer revenue from voice to data Transfer consumers from narrowband to broadband Transfer computers into telephones Transfer universal phone into universal broadband
  • WHAT “OPEN” MEANS OPEN to all networks
      • Interconnection
      • Intercarrier compensation
    OPEN to all designs
      • Open protocols
    OPEN to all content
    • Volume
    • Speed
    • Intellectual property rights
    • Conflict
    • Point of view
    OPEN to all people
      • Ubiquitous
      • Mobile
      • Affordable
      • Usable (disabled, non-English)