Asia/Pacific VoIP: A Change of Heart Market Analysis Abstract: Voice over IP, which has been struggling to get off the ground for a long time, is beginning to take off in Asia/Pacific, especially in the developing and tightly controlled markets. By To Chee Eng Strategic Market Statements VoIP deployment will continue to grow strongly in Asia, especially in developing countries without legacy PSTN infrastructure. International VoIP wholesale rates will continue to be highly competitive, allowing new retail players to compete with incumbents on pricing. The current difference between switched and VoIP calls will gradually diminish, as switched call prices are coming down dramatically to compete with VoIP pricing. Publication Date: November 7, 2002
2 Asia/Pacific VoIP: A Change of Heart Introduction Business Trend VoIP, which has been struggling to get off the ground for a long time, is beginning to take off in Asia/Pacific. This is especially true in the developing and tightly controlled markets a pleasant surprise considering that many of them have until recently gone out of their way to bar or restrict the use of VoIP to protect their state-owned carriers. Another surprise is that some of the biggest embracers of the technology today are incumbent operators, players who most fear the commoditization and cannibalization of their lucrative telephony services. Why the change of heart? It all boils down to economics. For a start, many developing countries in Asia are still underserved by telecom infrastructure. This is turning out to be a blessing in disguise. Without a legacy network infrastructure, they can easily leapfrog the outdated public switched telephone network (PSTN) technology into VoIP. The cost saving on equipment is substantial. This will reduce costs of entry into the market and speed up the return on investments, both important considerations in today's difficult business climate. Best of all, it provides a migration path to a fully converged backbone network for future voice, video and data services. International telephony prices are still high in many countries, creating an opportunity for alternative carriers to offer low-cost VoIP. Due to limited competition, many incumbent carriers still have high bilateral settlement rates, which can reduce the price competitiveness of traditional international calls significantly. In contrast, VoIP operators because many are smaller players are more aggressive in seeking out better settlement rates and arbitrage opportunities, giving them an edge in terms of pricing, at least for now. A settlement rate is what carriers pay each other to terminate an international phone call. VoIP also offers new entrants the quickest way to enter a liberalized market. International wholesale VoIP players offer very competitive rates, allowing even small local players to immediately compete with incumbents on pricing. This levels the playing field for new players as they often lack the scale to build out an international voice network and the bargaining power to obtain low settlement rates from terminating carriers in other countries. VoIP also benefits incumbent carriers. An increasing number of operators are turning to VoIP wholesale players as a means to bypass their partners and increase their margins. However, the VoIP market in Asia is still in its early days. Growth is led by a handful of countries, in particular China and Singapore. This is just beginning to spill over to other countries, especially developing countries such as Malaysia, Indonesia, Thailand and India. As for developed markets such as Australia, Hong Kong and South Korea, incumbent carriers are taking their time to migrate to VoIP as it does not offer
significant cost savings over PSTN. These carriers have established PSTN networks, and there's no urgent need to replace them. And they are already price competitive because they liberalized their international voice markets early and have driven down their international settlement rates. While an increasing number of countries are lifting restrictions on the use of VoIP, many including China, India, Indonesia and Thailand still limit the number of players to just a few, often favoring the incumbent. Initially, pure-play VoIP operators have the upper hand. But they are being slowly squeezed out of the market when an incumbent starts competing on VoIP or low-priced calls. Incumbents have more traffic, giving them more bargaining power to obtain better termination rates, whichinturnmakesthemmorepricecompetitive.inaddition,incumbent carriers are increasingly striking better deals with each other, leaving third-party wholesale players out in the cold. While VoIP is expected to grow robustly, it may eventually be dominated by incumbent carriers. Nevertheless, our outlook for VoIP in Asia/Pacific is positive. VoIP currently accounts for just 14 percent of total international telephony revenue. This is expected to grow to 40 percent by 2006. In Asia, VoIP is typically labeled as VoIP calls, calling cards or budget calls to provide market differentiation vs. higher-priced PSTN calls. But as the price differential narrows between switched and VoIP calls, this service differentiation is likely to diminish in importance. In competitive markets such as Japan, Hong Kong, South Korea and Australia, VoIP calls are already sold as regular PSTN calls. An increasing number of countries will follow this route as their markets mature. (see Retail VoIP Opportunities in Asia/Pacific, TCPS-WW-FR-0140.) Among the Asian countries, China is the most vibrant VoIP market today, a surprise considering that VoIP was illegal less than three years ago and that the government has always been paranoid over control. To be fair, the government recognized the drawbacks on holding back the technology and took concrete steps to remedy the situation. In late 1999, it issued VoIP licenses to four state carriers, including China Telecom, China Unicom, Ji Tong and China Netcom. The technology and low international wholesale rates allowed the alternative carriers to quickly enter China's international telephony market, grabbing market share from China Telecom and forcing the incumbent to push VoIP as well. Ironically, China Telecom was offering PSTN calls as VoIP as it did not at that time want to invest heavily in new infrastructure. Initially, the alternative carriers combined had more VoIP market share than China Telecom. But today, China Telecom owns 54 percent of the VoIP market, which demonstrates how quickly fortunes can turn if an incumbent carrier decides to compete on pricing. Another interesting development is that VoIP competition has set in strongly in domestic longdistance calls, unlike other countries where VoIP competition is often confined to international calls. That's because the VoIP players have built extensive VoIP backbone networks across China. Unicom alone has a backbone network that connects 320 cities, probably the largest in the world. China has increased the number of VoIP operators to seven. In 3
4 Asia/Pacific VoIP: A Change of Heart addition, it has recently removed controls on pricing, which is likely to drive down the currently low prices even further. Among the developed countries, Singapore has emerged as the most vibrant VoIP market, led by Singapore Telecom. According to the incumbent carrier, 32 percent of its international voice traffic today is VoIP. Why is Singapore different from other developed markets, which have comparatively less VoIP? Part of the reason is that Singapore liberalized its international market relatively late. As such, price competition is not as severe as in other countries. This has allowed Singapore Telecom to offer differentiated services with a tiered pricing structure, thus delaying the commoditization of its PSTN service. Singapore Telecom offers a choice of three services VoIP, budget call and PSTN. While only one is specifically labeled as VoIP, the other two services at times could run on VoIP as well. As VoIP technology has improved dramatically, it's hard to tell if a VoIP call is inferior. Recognizing that it would be increasingly futile to hold back the arrival of VoIP, Asian countries are beginning to embrace it. India, which used to control the voice market very tightly in the past, now permits its international and long-distance operators to offer VoIP. ISPs can also offer Internet telephony. Indonesia has licensed five VoIP operators, among them are state carriers PT Telkom and PT Indosat, after illegal VoIP operators creamed about 8 percent of the international voice traffic last year. The number of VoIP operators in Malaysia has also ballooned to dozens ever since the government relaxed controls on international telephony. VoIP is also beginning to take off in Thailand where the service is now offered by state carriers Telephone Organization of Thailand (TOT) and the Communications Authority of Thailand (CAT). Gartner Dataquest Perspective VoIP deployment in Asia is still in its early days, but it will grow strongly during the next five years, especially in countries with legacy infrastructure. The growth drivers are cost savings in network equipment, competitive international wholesale rates, and a migration path to a fully converged network. Currently, VoIP calls are often perceived to be cheaper and of inferior quality compared with switched calls. But switched call prices are coming down rapidly because of lower bilateral settlement rates. The quality of VoIP calls has also improved dramatically. As such, the price and service differential is quickly diminishing. Carriers, including incumbents, need to take advantage of VoIP to get a competitive edge in the international telephony market. The need is more compelling for new players. Incumbent carriers with an established infrastructure can take a phased approach, but too long a delay in implementation of VoIP may reduce a carrier s competitive edge.
5 Key Issue How will opportunities in the public network service market be affected by competition, technology and evolving user requirements?
6 Asia/Pacific VoIP: A Change of Heart This document has been published to the following Marketplace codes: TELC-WW-DP-0252 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 111077