Archive for April, 2001

LATIN AMERICA HEAVEN FOR VOIP – APRIL 2001

Sunday, April 1st, 2001

VoIP is about to explode in corporate Virtual Private Networks (VPN’s) and in small and medium sized businesses as access to broadband connections expands.

VoIP is best known in long-distance application but long-distance within countries and corporate VPN’s is also a big growth area.

There has been a sharp rise in VoIP traffic during 2000 with 39% of world VoIP traffic being terminated in Latin America.

The cost of transport will drop dramatically as increased capacity with new fibre systems becomes available. IP telephony will be the primary mode of transport.

Regulation with regard to VoIP in most Latin American countries has not been addressed but as Latin American countries deregulate, agreements are being signed and companies are pursuing licenses in these areas.

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ANALYSIS OF THE BROADBAND MARKET – APRIL 2001

Sunday, April 1st, 2001

THE LONG WAIT FOR BROADBAND

In spite of current problems with the development of broadband, we remain optimistic about this market.

The main reason for this is the fact that in every area that affordable broadband has been rolled out large numbers of residential users and SMEs are desperately waiting to be connected. No advertising or marketing is needed – the simple fact that such a service has become available in a city of suburb is often enough to create a waiting list.

Very few carriers, however, are able to roll out their services quickly enough to satisfy the demand, and, as Stephen McClelland recently wrote in Telecommunication International:

Consumers blame the operators, Competitive carriers blame the incumbents. Incumbents blame the regulators. Investors blame the markets. Media commentators blame the government and regulators bemoan the state of the industry.

As we said only recently, it is quite amazing that the telco market is growing at such a phenomenal rate, and it is certainly no thanks to the industry. There is no recession in the telco market from a demand perspective – it is the supply side that is unable to get its act together. A very sad story indeed.

OVER-PROMISED AND UNDER-DELIVERED FORECASTS

At no stage have we been prepared to subscribe to the ridiculous figures that were put about in the USA – that within a few years the majority of people would be using broadband. The issue is far too complex. Similar broad-brush predictions are being made regarding mobile Internet (WAP and GPRS), m-commerce and 3G.

If only it were that simple. But unfortunately it is not sufficient just to invent a new technology and wait for the stampede.

Our forecasts regarding broadband are based on Internet users. After two years of usage these customers are very much aware of what the Internet can do for them. There is no single killer app. Some people use it for banking; others for research; games is another popular application; but many more people use it for very personal purposes, based on their hobbies, work or lifestyle. After 2-3 years these users are becoming frustrated with the fact that they constantly have to dial up to check their e-mails or to have quick access to information. What should be a 5-minute search can easily turn into a 15-minute source of frustration. As a result, they limit their access as much as possible to once a day, at the office, or during the weekend.

These users are more than ready for broadband.

THE PRICE HAS TO BE RIGHT

However, the price has to be right There is no way that households will spend hundreds of dollars on communications. They already run up large bills – for example, an average telephone bill is at least $60 per month. Their mobile bill also comes close to this amount; ISP charges are around $25; and some users have pay TV and so add another $50 a month to their bill.

This adds up to well over $150 per month, and there is little likelihood that they will be willing to pay a large sum on top of that for broadband access. As soon as the total of these costs hits the $100-plus the ‘ouch’ factor cuts in. People are becoming acutely aware of costs and $125 is the ceiling for most households.

USER DEMAND OR INDUSTRY PRESCRIPTION

So, people are going to make choices, and in Internet households pay TV is usually the first casualty. The mobile bill is the next item to be scrutinised and users begin to shop around for combinations of fixed telephone charges, Internet and broadband. While the industry would love to pile all these charges on top of each other, customers are not about to accept this.

As long ago as 1998 we predicted that the ‘magic number’ for broadband in Australia would be A$50 per month (in the USA – US$25). Once this subscription level becomes available widespread deployment will follow. At this stage pent-up demand, based on that amount, sits at around 20%-25% of all Internet users. As Internet usage further matures a 75% penetration could be reached amongst Internet households, over a 5 year period.

Access providers who are aware of this pattern could tap into this market and make value-added offers to customers who are seeking a total package.

AND THE LEADERS ARE:

Very few telcos, however, possess the internal marketing and sales capabilities to develop the necessary business models. So the easy way out is simply to say that there is no business model for broadband.

We argue that new models, such as permission-based marketing, will provide a better framework in the near future – once data centres and customer relation management have become an integral part of the business world. However, such models will have to be based on open networks, and most telcos are not yet ready to embark on this, and so they limit broadband access.

Broadband access amongst Internet households 2001

Country Internet HH penetration

Korea 57%

USA 11%

Hong Kong 8%

Singapore 7%

Taiwan, France, Denmark 6%

Germany 5%

Spain, UK 3%

Australia, New Zealand 1.5%

China 0.4%

(Source: Paul Budde Communication, based on NetValua and industry data)

A substitution effect is also increasingly creating more bandwidth penetration in countries that have a high ISDN penetration. Germany, in particular, is experiencing a rapid conversion from ISDN to ADSL. This country leads the world in ISDN. It has a penetration of 38% of online households, and is followed by Denmark (20%), Hong Kong (5%) and China (4%). In Taiwan, the USA, Singapore, Australia and New Zealand less than 1% of e-households use ISDN.

Paul Budde

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HIGH-SPEED BROADBAND IN EUROPE 2000 – APRIL 2001

Sunday, April 1st, 2001

By mid-2000, many experts were predicting that by 2005 more than 200 million Europeans will be online and that the demand for high-speed connections will greatly exceed that of dial-up modems. DSL and cable modem penetration in Europe was very low at the start of 2000, and by the middle of the year a mere 1% of Internet connections in Western Europe were via broadband infrastructure.

One of Europe’s largest markets, Germany, also started slow, but International Data Corp expected that the number of Internet users connected via broadband would surge from just 75,000 at the end of 1999 to over 5 million in 2003.

Chello, a subsidiary of Dutch cable TV operator United Pan-Europe Communications, was rolling out its version of high-speed access, primarily via cable modems throughout 2000. According to analysts, Chello was adding around 5,000 customers a week on average to their services and had captured over 180,000 as the end of the first half of 2000 neared.

Other existing European telecom companies were planning to roll out or had commenced roll outs of DSL or cable modem services, including France Telecom, British Telecom and Deutsche Telekom.

A report on DSL by The Strategis Group, found that DSL would challenge cable modems for the residential high-speed Internet access market outside the US. The report, ‘International High-Speed Access: The Residential Marketplace 1999’, estimated that combined DSL and cable modem penetration of total households would reach 10 to 30% by 2003 in several markets, including Australia, Canada, The Netherlands, Singapore, Sweden, and the US.

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DSL DILEMMAS – APRIL 2001

Sunday, April 1st, 2001

High-speed access via cable modems and DSL offer download speeds that are measured in terms of megabits per second (Mb/s) in comparison to today’s dial-up modems, which top out at 56 kilobits per second (kb/s). Those faster speeds mean users could enjoy both the rich multimedia content offered on the Internet that dial-up modems only hint at and the always-on Internet access offered by cable and DSL.

Much of the delay in deployment of these services is due to regulatory issues, technical limitations and the lack of cable network penetration in many European nations.

DSL is a technology that allows digital data to be sent at high speed over existing copper phone lines. Most versions of DSL only allow users to send and receive data from 144 Kbps to 1.5 Mbps, but the line is a dedicated line that is not shared. DSL’s biggest limitation is distance as users must be in relatively close proximity of the telephone company’s exchange to qualify for DSL access.

For Internet service providers to offer DSL, they require access to the existing phone networks. Giving that access is known as local loop unbundling – the opening up of the incumbent telecom’s copper networks to full competition. Even by the start of 2001, unbundling is moving at a slow pace throughout Europe.

In Finland and Germany, where unbundling has been under way since the late 1990s, Forrester research notes that less than 1% of lines were actually unbundled by mid-2000. Forrester predicts that between 0.5 and 3% of Europe’s local loops will be unbundled by 2004.

The Gartner Europe research group notes that one way incumbents can hinder access is to complicate the co-location of equipment by competing companies at relevant exchanges. Co-location is necessary to upgrade existing lines to DSL services from one proprietary network to another.

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INTERNET-LED RECOVERY – APRIL 2001

Sunday, April 1st, 2001

It is fair to say that there have been quite a few cowboys in the Internet industry. However, these companies didn’t become involved in the market for business reasons. They only had a financial interest in the market for as long as the investors were prepared to blindly deliver the millions of dollars that they wanted for their penthouses and sport cars. A few of the clever ones took the goodies and ran – the not so clever ones simply went under.

But what we need to realise is that the majority of the companies that entered the Internet arena have done very well and are still flourishing. Very few of these companies captured the headlines; very few listed their companies on the stock market; most of them simply adopted the Internet as a new business tool.

Well over $5 billion dollars will be traded over the Internet in various B2B activities that are taking place at this very moment. And we are just talking about Australia here; globally the figures are in the hundreds of billions of dollars.

True, some of the financial value of the industry leaders, such as Cisco, has disappeared, but their business value is still there and will only increase. The doom and gloom has more to do with the investors than with the industry. The panicky attitude of the investors has certainly forced many companies to tighten their belts, but this is not necessarily a bad thing. It compels those companies to refocus, cut some of the waste and sharpen their collective minds to develop better products and services.

The actual effect of the downturn will be that the growth in the global telecommunications industry will drop from around 14% to just under 12% – and I am sure that most other industries are consumed with envy, even by this lower figure.

In the end, it is not shareholders value that will drive the business, but customer value. The good thing is that, unlike shareholders, customers love our industry. Broadband penetration in the USA is now creeping towards 10% of all Internet subscribers, up from 5% a year ago and 2% two years ago. Australia is not even at the stage that the USA had reached in 1999.

In the USA they no longer talk about the digital divide – now it’s all about the connectivity divide. It is mind-boggling to contemplate what these networks are going to do for our society and for our economy. And it is disappointing to hear Telstra say it can’t find a business case for its broadband roll-out. The rest of the world apparently can, and Telstra’s deficiency could very well impede the Australian economic recovery.

Under the right conditions the Internet can play a key role in reviving the economy and both the USA and Australia could profit from this. The Internet is bringing change to nearly every industry, but each industry is changing at a different speed, depending on how the Internet (which, more than anything else, is a tool for speeding the exchange of information) fits that industry. For example, financial services have embraced the Internet wholeheartedly because they trade in facts and figures rather than in physical objects. By way of contrast, the entertainment industry has yet to catch fire, as few consumers have the high-speed connections that make watching programs or listening to music online worthwhile.

The manufacturing industry has already benefited tremendously from the Internet – reducing inventories and making supply chains more efficient – but the Internet will not change the fact that manufacturers must still produce physical items, a process that remains time- and labour-intensive.

The retail industry has also learned that the Internet will not take the place of bricks-and-mortar business models. Those companies that rushed to make thousands of goods available for purchase online, but spent little on warehousing or distribution, gained a lot of early press but, for the most part, were spectacular failures. Those that invested in infrastructure rather than flashy Web sites have made progress, even if they have yet to make a profit.

We must give the Internet time to grow, until people become comfortable with it as a very powerful – but not the only – tool for doing business.

Paul Budde

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