| TeleGeography 2004 Executive
Summary |
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If something cannot go on forever, it will stop. -Stein's Law
Plummeting prices and surging traffic volumes were the hallmarks of the
late 1990s international long-distance market. Market liberalization and
competition caused prices to tumble, encouraging individuals to place far
more calls than ever. For several consecutive years, carriers enjoyed
double-digit annual volume growth, and revenues soared. As the economist
Herbert Stein noted, however, markets must return to equilibrium eventually.
The decade-long market expansion finally came to an end in 2000. Annual call
volume growth crested at 25 percent, as did carrier revenues, which peaked
at $72 billion.
Since its zenith in 2000, the international carrier market has turned
decidedly sour. Despite four years of aggressive price cuts by carriers,
call minute growth rates have slowed, sending revenues spiraling downward.
With some currently questioning whether the international voice sector is
altogether doomed, now may be the time to recall Stein's Law. Call volume
growth stabilized in 2002, and the relentless price decreases showed signs
of possibly slowing.
Traffic
International switched traffic increased just over six percent in 2002 to
155.2 billion minutes (see Figure 1. Call Volumes and Growth Rates,
1984-2002). Growth was particularly slow in Europe and North America, the
two regions where international carrier markets liberalized earliest and
matured most quickly. Europe and North America generate 75 percent of the
world's international traffic and, thus, drive global trends (see Figure 2.
International Traffic Volumes and Growth by Region). Consequently, sluggish
growth in these markets led to the single-digit annual increase in worldwide
switched traffic.
VoIP
Examining only switched traffic volumes provides a partial picture of the
international voice sector. Voice-over-Internet-Protocol (VoIP) traffic
surged 80 percent in 2002 to 18.7 billion minutes, accounting for almost 11
percent of international traffic. The growth in VoIP traffic—and its
substitution for switched calls—has contributed considerably to anemic
switched traffic growth. VoIP appears to have had a particularly notable
impact in Latin America, where switched traffic volumes decreased in 2002.
Including traffic transmitted via Voice-over-Internet Protocol, aggregate
international minutes growth reached approximately 11.3 percent, slightly
higher than in 2001.
Despite its recent growth, VoIP is still primarily used to bypass high
settlement rates in developing countries. However, industry acceptance of
VoIP is increasing. Incumbent carriers in a growing number of developing
countries now accept and terminate incoming VoIP traffic. The VoIP sector
received a significant vote of confidence in November 2003, when Teleglobe,
the former monopoly incumbent of Canada, announced that it was acquiring
ITXC, the largest VoIP wholesale carrier.
Mobiles
Mobile-originated international traffic surged upward by approximately 19
percent in 2002 to 27.9 billion minutes. As a result, calls from mobile
phones accounted for 17.4 percent of the world's international traffic. Few
mobile carriers operate their own international links, making them a crucial
contributor to wholesale carriers' revenues from outgoing international
calls. However, persistently high mobile termination costs make mobile
growth a mixed blessing. In Europe, for example, mobile-terminated calls
accounted for 32 percent of incoming international traffic but over 70
percent of international carriers' estimated termination costs. These cost
differentials have prompted regulatory investigations from both European and
U.S. authorities.
RBOC Entry into Long-Distance
Regulatory shackles have historically prevented the four U.S. Regional
Bell Operating Companies (RBOC) from competing effectively in the
long-distance market. While the four former Bell companies accounted for 87
percent of local access lines in the U.S., TeleGeography estimates that they
carried only one percent of U.S. outgoing international traffic in 2002.
Over the course of 2002 and 2003, authorities eliminated most of these
regulatory constraints. The Bells have launched a ferocious assault on both
the domestic and international long-distance market. The RBOCs' initial
success has been resounding. Qwest's long-distance subscriber base more than
doubled in the second quarter of 2003, and BellSouth's long-distance
revenues surged 70 percent between the third quarters of 2002 and 2003. As
of late 2003, however, the Bells' impact in the international long-distance
market has been mixed. While their retail traffic volume is growing
dramatically, some RBOCs are relying almost completely on wholesale carriers
to deliver their international traffic. Consequently, the RBOCs may prove to
be fierce rivals of established retail long-distance carriers, but major
customers of wholesale international carriers.
Revenues
During the boom years of the late 1990s, optimists predicted that traffic
growth would more than offset falling prices. Unfortunately, the opposite
turned out to be true. Price declines have outpaced traffic growth in the
past two years, causing retail revenues from international traffic to
decline from $72 billion in 2000 to $53 billion in 2002. Between 1999 and
year-end 2003, TeleGeography estimates that average price decreases of 17.2
percent per year will have undermined annual call volume increases of 11.9
percent, with net revenue growth spiraling downward by an annual global
average of 7.3 percent.
Carriers suffering in this multi-year market adjustment may be consoled
by a few hopeful signs. First, the pace of retail rate decreases appears to
have slackened. Prices for many of the world's highest-volume routes (e.g.,
U.S.-to-Canada) have already reached their floor and will likely stabilize
or, at worst, drift slowly downward. Second, despite the surge of
international VoIP traffic, cheap VoIP calls have not undermined
international call revenues as much as feared. Evidence suggests that the
substitution of inexpensive VoIP calls for higher-priced switched calls
dragged down international service revenue by just two cents per minute in
2002, to 32 cents. Finally, plunging settlement outpayments have cushioned
the decline in gross revenues. In fact, U.S. international carriers enjoyed
the highest average margins (revenues net of settlement outpayments) in 20
years (see Figure 3. U.S. Carrier International Call Prices and Margins,
1982-2002).
Measuring Change
For beleaguered international carriers, 2002 offered some encouraging
signals. Though call volume growth remained anemic, the rate of price
decreases gave some indication of abating. However, further turbulence is
projected. Technologically, VoIP is emerging as a legitimate substitute for
the switched network. Consumer migration from fixed-line phones to mobile
handsets have created a new set of problems and possibilities for
international carriers. Regulatory developments—VoIP, mobile termination,
and the emergence of RBOCs as a force in the ILD market—continue to shape
the international carrier market.
This year's edition of TeleGeography—the twelfth of our annual
series—offers a comprehensive picture of an industry in flux. The report's
call volume data set of over 3,000 international routes in 116 countries
remains the principal tool for gauging change. In addition, TeleGeography
2004 presents detailed analysis on traffic, prices, revenues, and technology
trends for the international long-distance sector. To place this analysis in
context of the industry at large, the report also incorporates over 30 pages
of charts and tables from TeleGeography's original research on long-haul
terrestrial networks, undersea cables, and international Internet backbones. |
