A report for dti john Horrocks Horrocks Technology Limited with David Lewin Peter Hall Ovum Limited

5.2 Internet access

Internet dial-up access is estimated from the June Oftel figures as some 20% of all traffic minutes originated from fixed lines and over 30% of all residential traffic, if most dial-up traffic originates from residential lines,. With the current growth rates of the order of 100% pa, the proportion of residential traffic generated by Internet use at end 2000 may be approaching 50%.

This rapidly growing Internet access traffic is putting extreme pressure on the dimensioning of the circuit switched networks giving operators a strong incentive to segregate this traffic and move it off the main PSTN as early as possible.

There are two ways in which this may be done:

• 
  By replacing the modem by ADSL access so that the Internet traffic is kept completely separate from PSTN traffic. This technique also provides much higher speed access than is possible with dial-up modems and provides “always-on” connection to the Internet.
  
• 
  By segregating Internet access traffic at the local exchange by analysing the called number and routeing the traffic direct to a modem bank.
  

The following are typical retail rates for different forms of Internet access:

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  ADSL: £40 per month
  
• 
  Dial-up access:
  
  • 
    1p/min all day every day via an indirect operator
    
  • 
    3-4p/min peak with unlimited use during evenings and weekends for £6 per month
    
  • 
    unlimited use for £13-15 per month
    

We think that the price of ADSL will drop to the range £15-20 per month within 2 years because:

• 
  the price of modems and line cards will drop as sales volumes increase
  
• 
  the initial price is probably set high as demand is exceeding supply
  

There are also developments at the wholesale level in delivery of access services.

The huge rise in Internet access traffic has led to the introduction of Flat Rate Internet Access Call Origination (FRIACO) charges which Oftel has determined.

Oftel has recently determined a rental charge of £122 pa with an £88 connection charge and a £29 disconnection charge for a complete (analogue access plus ADSL) unbundled local loop. This charge is thought to be compatible with allowing other operators to offer ADSL on unbundled loops at prices commensurate with BT’s £40/month.

Oftel has also required BT to offer shared access from end 2000, where BT continues to provide the analogue telephony access but another operator provides the ADSL facility.

5.3 Commercial models

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  Most traffic being telephony
  
• 
  Nearly all revenue being from telephony
  
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  Calls being charged per minute
  
• 
  Prices being strongly dependent on distance
  
• 
  International calls subsidising national and local calls
  

• 
  Most traffic being data
  
• 
  Significantly reducing revenue and profits from telephony
  
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  Prices being distance independent and fixed network call charges being replaced by subscription (calls to and from mobiles will probably continue to be charged per minute because of the relatively high economic cost of radio capacity)
  

These changes raise the question of where the profit in telecommunications is going to come from as this economic change progresses. There are three potential sources:

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  Cost savings in network technology and reduced staffing levels
  
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  Increased subscriptions
  
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  New income streams such as advertising
  

It its work on new services in the mid 1990s, Oftel identified the need for both the technical and commercial aspects of interconnection to change in line with those aspects of the services offered to users, and it seems that the interconnection charges for local access, which are determined by Oftel, will inevitably be a key factor in the market.

5.4 Implications for new forms of telephony

There are two motivators for users to change their service providers:

• 
  Cost savings
  
• 
  Functionality and ease of use
  

When prices were high, cost savings were the main issue for users and this created a strong bypass market for calls, but as prices drop, cost savings will be less of an issue leaving functionality and ease of use as the main driver for users.

In the area of functionality, the Internet culture is almost certain to lead the telco culture until the market has established a new general understanding of the needs of the users and the telcos can catch up.

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