Overview Size of Market. The Demand for VoIP. Simulations/Results Discussion/Cautions. What is VoIP?

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1 The Demand for Residential VoIP Services: Summary of Recent Research James Alleman, University of Colorado Paul Rappoport, Temple University Lester Taylor, University of Arizona International Symposium On Advanced Radio Technologies Boulder, Colorado 1-3 March 2005 Agenda Size of Market Demand for VoIP Simulations/Results Copyright 2005 Paul Rappoport, Lester Taylor, & James Alleman. All Rights Reserved. ƒwhat it is not. ƒpacket switching What it is not Circuit Switching ƒdirect connection, opening a circuit. ƒhang up, circuit is closed ƒten minute conversation 9.4 Megabytes Transmitted data wasted -- over 75% One talks the other listens Packet switching - VoIP Voice over IP (VoIP) ƒprotocols that transport real-time voice and signaling via Internet Protocol (IP) ƒallows the user to place a call over IP networks

2 to IP & IP 1984 to Includes PC-to- and Device-to- Long-distance Business Competition VOICE POTS Local One provider PSTN VoIP Gateway 1994 to Long-distance 100s of providers VOICE Local One provider IP Internet IP CPE Gateway 2004 VOICE DATA VoIP Gateway IP to IP competition has picked Includes PC-to-PC up and Device-to-Device considerably in the existing voice market and in the new data LD: 100smarket. Local: POTS 6* PSTN POTS Mobile: 6 nat l : Up to 3 Dial-up: 1,000s Mobile: 6 nat l ƒforrester Research Consumer Panel, 10 January 2005 Circuit Switched / TDM Packet Switched Data Circuit Switched / TDM VoIP Market Off to a Slow Start VoIP Market Off to a Slow Start Adoption limited ƒonly 23% of HH aware of VoIP ƒless than 1% pay for VoIP Weak Interest ƒless than 10% interested in VoIP Forrester Research Consumer Panel, 10 January 2005 Traditional Service ƒsatisfies most consumer s price & quality needs ƒmost consumers are using local and LD enough to realize savings using VoIP ƒconsumers are not willing to give up their phone company Forrester Research Consumer Panel 10 January 2005 Profile of Current Users Technically Proficient Users Users Younger & Mobile Users Bargain Hunters ƒrelatively small market Forrester Research Consumer Panel 10 January 2005

3 Size of VoIP Market? VoIP "Drivers" Internet Households High Speed 62 M 23 M Telephone Bill Penetration Size of the Telephone Bill and High Speed Internet Access WTP > 0 6 M $42 (23-24)% WTP > Total Telephone Bill smaller Average local & LD bill % of households ƒrelatively small market ƒdistribution of Telephone Bills The Higher the Bill, the Larger the VoIP Benefit Percent of Households Distribution of Telephone Bills Target population when Cost = $60 (VoIP + ) >100 Local and Long Distance Bill Key Driver: Growth ƒrelatively small market ƒdistribution of Telephone Bills The Higher the Bill, the Larger the VoIP Benefit ƒkey Driver: Growth Availability ƒonly for Best Practice VoIP

4 Key Driver: Growth Availability ƒonly for Best Practice VoIP Growth Drivers? ƒcontent Gaming Entertainment Shopping ƒmultimedia and video Key Driver: Growth Availability Growth Drivers? Price ƒdiscounting ƒbundles Triple Play (Voice Video Data) Multimedia + Call Management Distribution of Income & Outline Modeling Demand for VoIP ƒwillingness to pay Modeling Demand for VoIP Focus on the Price ƒeconomic value bounded Estimation of Price Elasticities Lognormal Demand Curves ƒlet: p oi be the tolerance price of the i th. household p be the actual market price ƒthen q i = 1 if p io > p q i = 0 otherwise ƒassuming that p io is distributed as a lognormal with parameters µ p & σ p 2

5 Lognormal Demand We have: P(q i = 1 p) = P(p io > p) = 1 - Λ(p; µ p, σ p2 ) Let Q represent the proportion of buyers we have: Q(p) = 1 - Λ(p; µ p, σ p2 ) = Λ(1/p; µ p, σ p2 ) Data Sample of over 50,000 households from March, 2004 Centris random digit dialing (RDD) omnibus survey Incorporated Willingness to Pay questions Willingness to Pay for Voice-Over-IP Households with Households with Dial-Up Access WTP (Price) WTP $1-$10 $11-$20 $21-$30 $31-$40 $41-$50 Elasticities Households Non Households* Agenda Size of Market Demand for VoIP Simulations/Results $51-$ * Assuming $20 month for broadband

6 Market Potential I Market Potential II 8,952,000 Market Potential III Agenda 2,300,000 Size of Market Demand for VoIP Simulations/Results Discussion Price Matters Penetration Matters Price Matters Penetration Matters ƒfocusing simply on "interest in VoIP" leads to significant over estimation of market size

7 Price Matters Penetration Matters ƒ"interest in VoIP" leads to over estimation of market size ƒrelationships between price & the distribution of telephone bills & between price & the distribution of Rappoport, income Taylor, & important Alleman ƒfocus only on VoIP delivered over the Internet ƒfocus only on VoIP delivered over the Internet ƒrboc responses not incorporated (e.g. Verizon s Freedom plan) ƒfocus only on VoIP delivered over the Internet ƒrboc responses not incorporated (e.g. Verizon s Freedom plan) ƒall OF WHICH WILL LEAD TO LOWER ESTIMATES