Telecom Outlook 2003

December 5, 2002
Time for strong nerves, long-term approach

GENEVA AND HONG KONG -- Arguably, the most public side of the International Telecommunication Union's (ITU's) work is the organisation of the world and regional ITU Telecom exhibitions and forums. The ITU Telecom events show the industry's latest products and services at the exhibition. They have a unique track record in bringing together governments, industry, operators, investors and other key players in telecommunications to debate, discuss and analyse the latest trends.

The events are of direct benefit to the developing world, since the surplus funds generated by those are used for telecommunication development projects. The forthcoming ITU TELECOM ASIA 2002, to be staged in Hong Kong, China, from December 2-7, will be the ITU's sixth regional event for Asia since the first one in 1986.

When the ITU staged ITU ASIA TELECOM 2000 in Hong Kong two years ago, worldwide interest in Asia Pacific's communications markets saw the event become the most successful regional ITU TELECOM event ever held. Since then, enormous changes have swept across the global telecommunications landscape, resulting in many casualties and creating a climate of uncertainty. While the region has not been immune from problems associated with the current slump in the ICT sector, its huge potential demand for basic and advanced services has helped the region's nations weather the worst of the storm better than most.

This resiliency, which saw Asia Pacific bounce back from the 1997 economic crisis in record time, combined with continuing investment opportunities in just about every segment of the telecoms equipment and services markets, promises to make Asia 2002 another essential, not-to-be-missed event.

As formerly buoyant markets in Europe and North America languish, prospects for telecommunications development in the Asia Pacific region remain extremely good. With governments throughout the region committed to increased access to telecommunications services and the resulting economic and social benefits, it seems highly likely that Asia Pacific will become the world's biggest telecom market, by revenue, as early as the middle of this decade. With its technophile consumer markets, early-adopter culture and increasing levels of prosperity, the Asia Pacific is firmly in the fast lane to becoming the world's communications powerhouse and the driving force behind the evolution of future products and services.

Telecoms and the Internet in Asia Pacific
The year 2003 could well be the period when Asia takes over from North America as the region with the most Internet connections. If it does, the significance will be a lot more than statistical. Despite the ups and downs in the region's economies, the growth of Internet usage has been fairly consistent. According to the ITU, the Asia Pacific region will have 225 million Internet users by the end of the year. This is significantly up from the 122 million estimated Internet users in the region at the end of 2000. This compares with some 177.8 million in North America and an estimated 162.2 million users in Western Europe.

However, the Internet's uptake across Asia is very unevenly distributed. According to ITU statistics, at the end of 2001, Japan had 57.9 million online; China, 33.7 million; the Republic of Korea, 24.4 million; Taiwan, 7.8 million; India, 7 million; Hong Kong, 4.6 million and Singapore, 2.5 million. Reinterpret these figures in terms of online access per 10,000 inhabitants, and the uneven nature of the progress of the Internet in different Asian countries becomes even more obvious. For example, Singapore heads the list with 6,052 out of 10,000 having their own access to online services, followed by the Republic of Korea with 5,107; Hong Kong, 4,186; Japan, 4,547; Taiwan, 3,490; India with just 68. In contrast, the least developed countries of the region trail far behind with Lao PDR, 18; Bangladesh, 11; Cambodia, 7 and Myanmar just 2!

These figures are also very dynamic. China lagged behind Korea in 2000, but by the end of 2001, it had overtaken it in absolute terms. Similarly, at the end of 2001, China lagged behind Japan. It will most probably overtake Japan next year.

Transforming impact
Most governments in the region acknowledge the impact the Internet has or can have on transforming their country's economies and their people's lives. In a village near Pondicherry in South India, a volunteer uses an Internet linkup to read weather forecasts and broadcast them over a loudspeaker. In the Dhar district of Madhya Pradesh, India, the Gyandoot project supports a collection of small telecentres run by local operators offering e-government services to the local citizens.

However, the provision of the necessary telecommunications infrastructure can still remain a problem. Teledensities across the region vary greatly, from less than 1 telephone subscriber (mobile and fixed combined) per 100 inhabitants in Bangladesh (0.8) or Myanmar (0.6) to greatly in excess of 100 in Hong Kong, (143.1), Japan (118.4), Korea (108.4) and Taiwan, (153.9). Two other key areas, for example, where the Asia-Pacific region is not just advanced but clearly a worldwide leader are those of broadband access and the mobile Internet.

AP leads in broadband access
The Asia Pacific region accounted for almost half of the world's ADSL connections as of June 2002. It has a high-level of cable modem deployment with some five million subscribers as well. Five economies in the region -- the Republic of Korea, Hong Kong, Taiwan, Japan and Singapore are driving development and rank in the top fifteen global rankings for broadband penetration.

Developing economies in the region are however far behind the more advanced economies in broadband deployment. Some would argue that broadband is irrelevant for developing nations, as the demand is not there and the focus should be on installing basic telephone infrastructure. This is an unfortunate theory since broadband is probably more relevant for the region's developing nations than its advanced economies. Broadband supports a higher degree of functionality for online services such education and health, areas where developing countries lack the human and physical infrastructure.

Distance education and telemedicine are the two ways in which developing countries can use ICT to overcome these shortages. For these kinds of services to be effective, they require a broadband platform. Further, while demand for individual broadband access may be perceived to be low, demand for shared public access places such as Internet cafés is high. Dishnet DSL, India's leading DSL ISP with some 20,000 subscribers, has established over 100 Internet centers providing high-speed access to the Internet via DSL. Countless user surveys also point to slow speed being a top complaint among Internet users.

Industry analysts are optimistic about the sustained growth in broadband access in the region. It is also the major manufacturer of the products required for broadband access such as hubs and routers, cable and DSL modems. The market is also being fuelled by an exceptionally high degree of innovation. New services are being offered all of the time, such as metro Ethernet Internet access and managed wireless LAN services.

The Republic of Korea may continue to lead the market with over 70 percent of the region's subscribers. However, some analysts predicts that the Chinese market for broadband access will grow at around 80 percent compound aggregate growth rate (CAGR) between 2001 and 2006, with revenue of broadband access services doubling in 2003.

DocoMo leads Asian success in mobile Internet
In the mobile Internet arena, Asia has from the outset been acknowledged as the world leader, partly due to the great success of the i-mode service launched in February 1999 by NTT DoCoMo in Japan. It offers wireless Web browsing and email from mobile phones, which proved immediately popular and by December 2001 had over 30 million subscribers. More than 2,000 companies provide information services through i-mode. A key to its success is that it is based on packet-data transmission. Hence, users do not pay for the time they are connected to a Web site or service but according to the volume of data transmitted.

While Japan is the world leader in terms of the total number of mobile Internet users, Korea is the leader as measured by the percentage of users that have access to high-speed services. Korea's largest carrier, SK Telecom, attributed its profit growth earlier this year to the "impressive take-up" of its mobile Internet services. SK Telecom reported a 48 percent rise in profits to $764 million during the first six months of the year. The number of subscribers opting for faster, advanced 2.5G services increased to 6.7 million compared with 5.1 million three months earlier.

Commentators point out that SK Telecom is using the new data capabilities of 2.5G to sell money-making Internet services, especially picture and ring-tone downloads, much more effectively than many firms operating in other regions. This Asian mobile Internet trend looks set to spread further. It is estimated that by 2006 21 percent of all Asia-Pacific households will own at least one Web-enabled mobile device.

There are other areas as well where Asia's potential to excel is high. For example, the demand for IP-based virtual private network (IP-VPN) services has grown very aggressively in the region in the past 12 months, although the revenue base remains small. Besides taking the lead in developing new technologies, Asia is taking its own path in discovering the best ways to exploit them for its people and circumstances.

Mobile growth and evolution in Asia Pacific
Telecommunications may be in the doldrums in the rest of the world, but there is still something of a boom going on in Asia. Not surprisingly, mobile communications is at the heart of it. In 2001, China became the world's biggest mobile market surpassing the United States. In 2002, China's biggest operator, China Mobile, became the world's largest carrier in subscriber terms.

The rise has been meteoric. Just ten years ago the whole continent had fewer than 20 million subscribers - about half those of Europe or North America at the time. Today, Japan alone boasts twice that figure. During 2002, the Asia Pacific region will overtake Europe as the region of the world with the most mobile phone subscribers. It is also home to the world leader in mobile Internet users (Japan) and in high-speed mobile Internet users (Republic of Korea).

While growth has been rapid, it has not been entirely unexpected. The region's general development is racing ahead by global standards, despite painful economic setbacks of recent years. Asia has, admittedly in pockets, long been a pioneer in mobile. Tokyo was home to one of the world's first cellular radio system back in 1979. Japan has been a pioneer of personal communications (creating the world's first super small handsets and microcellular infrastructures to support them) and non-voice mobile communications (with the i-mode mobile Internet service). The Republic of Korea has been the leader in implementing CDMA as a basis for 3G.

Asia's rise in telecommunications, at least in mobile terms, looks set to continue. By the year 2010, the ITU predicts that there will be over a billion mobile phone users in Asia alone. The growth will not stop there. Only one in ten Asians currently carries a mobile phone. The potential is enormous. Analysts estimate that approximately 40 percent of the global wireless infrastructure spending from 2001 to 2005 will be generated in the region , in particular, from Japan and China. Perhaps, even more interesting than its leadership in the numbers game is the region's technology leadership. With the launch of the world's first 3G cellular systems in Japan and the Republic of Korea, Asia has once again asserted itself as the technology leader in next generation mobile communications.

"The whole world is watching closely to see what it can learn from the pioneers," notes Dr Tim Kelly, Head of the ITU's Strategy and Policy Unit and co-author of Internet for a Mobile Generation - an ITU publication. The report shows that some of these lessons are proving very interesting. Initial experiences with 3G services in Korea and Japan, for instance, indicate that it is teenagers who are driving the market.

In Korea, although teenagers have lower disposable incomes than older age groups, they are spending around three times more per user on mobile data services. In Japan, photo messaging has proved immensely popular among young people and seems to be the "killer application" driving the take-up of 3G. What this suggests, says Kelly, is that younger the user, more likely they are to be comfortable with the intrusive nature of mobile communications. Youngsters also have more time for playing games and sending frivolous or flirtatious messages.

The key question is whether they will continue to use the mobile Internet when they are older and have more spending power. If they do, then the 3G gamble will seem like money well spent for the operators. "If not, then it is time for investors to start worrying," says Kelly.

The Asian experience is also showing that youngsters are not the only group that has not been considered mainstream to date, but which may hold greater potential than at first thought. Japanese operators have discovered that the 'grey market' (senior citizens), for instance, can prove to be a highly profitable one. The Japanese 'Raku-Raku' (Easy-Easy) handset with a bigger keypad and an easier-to-read screen proved to be an instant hit in Japan, selling more than 200,000 units in the first two months.

Unevenness remains in 3G deployment
The major Asian economies are the clear first movers in 3G, with Japan and the Republic of Korea being the first to actually deploy 3G services. The move towards 3G, however, is by no means uniform across the whole continent. Often these differences mirror differences in the economies. China, outside of Hong Kong, is showing little signs of moving to 3G. However, the MII, China, recently allocated 155MHz to TD-SCDMA - a 3G technology jointly developed by Siemens/Datang. Malaysia has given out two 3G licenses but deployment is not going to be anytime soon. The Philippines and Thailand are taking things slowly and have not yet announced plans to award 3G licenses. Singapore may not move to 3G until the end of 2004.

Many operators in countries that have yet to initiate 3G deployment are taking a more gradual or cautious approach, concentrating their efforts on new, multimedia-type applications over the existing 2G platforms. Many are choosing to upgrade their systems to support higher data transmission speeds needed for images using interim technologies 2.5G such as GPRS. This approach may be a useful way to "test the waters" for 3G -- exploiting more fully the potential of 2.5G technologies without the cost of investing heavily in new 3G networks.

Cultural differences have an effect
Cultural differences have an effect on the way mobile is taken up in different Asian countries. For example, limited knowledge of English in Thailand is proving to be an obstacle to SMS usage. This is in contrast to the Philippines and Singapore where SMS usage is very high. On the other hand, efforts to develop Internet content in Hangeul in the Republic of Korea, and the availability of handsets that support the language characters, have contributed significantly to the success of mobile data applications.

There are many other countries where mobile teledensity is under 10 users per hundred inhabitants and where the battle is still concentrated on expanding the market, rather than introducing newer and more sophisticated technologies. Once these markets take off, they have the furthest to go and promise the most spectacular growth rates.

For example, India has a one billion plus population, but nearly 10 million mobile phone users. This figure is likely to rise to 120 million by 2008, according to the Cellular Operators Association of India (COAI). It believes that demand will be driven by the country's low cost of calls, which it claims to be the cheapest in the world. Indian mobile phone users pay just $16 a month for a 300-minute talk time plan compared to $21 in China and $77 in Brazil. The COAI claims, there is still room for further cuts of up to 30 percent.

Driving forces
Mobile communications and the Internet were the two major demand drivers for telecommunication services in the last decade of the twentieth century. Combine the two, mobile Internet and you have one of the major demand drivers of the first decade of the twenty-first century. That's the theory, at least!

Certainly, the convergence of mobile communications and the Internet should produce innovations, new applications and new services that would not otherwise be possible. For instance, the service of knowing the location of a particular mobile user, combined with the service of targeted advertising, should theoretically make it possible for local businesses to attract users that are passing by, within a certain radius. Similarly, multimedia-messaging services (MMS) should open up visual, more exciting person-to-person communications.

However, the history of technological innovation is littered with examples of great ideas that sent their inventors into bankruptcy. The question is less one of whether the mobile Internet will be the next big thing but one of how to manage the transition to it without ruining everyone. Mobile Internet could be the biggest gamble the telecommunication industry has ever taken.

Previous experience of technological innovations such as digital networks or even cellular radio itself, has shown that the commercial fruit of the mobile Internet may be some ten or fifteen years away. The cellular radio based mobile phone itself took over 20 years from the first demonstration systems to the first clear signs of mass-market success. If anything, the Internet took slightly longer to break through. However, they both did, and the wait was worth it!

It could just be that this is the time for strong nerves and a more long-term approach. At least a glance in the direction of Asia's progress so far with next generation mobile should provide some inspiration and perhaps calm a few frayed nerves in the process.