Executive Summary 2015 marked a turning point in the market the first time since the Great Depression that international carrier voice traffic declined. In the 1930s, the decline in traffic was due to macroeconomic circumstances, and growth resumed as the economy recovered. The recent decline in traffic, however, may reflect a permanent, structural shift: the mass adoption of new over-the-top communications services that are reshaping the international communications market. FIGURE 1 International Traffic Growth, 1930-2020 Notes: Traffic data from 1927 to 1964 reflect TeleGeography estimates of U.S. outgoing call volume growth to all destinations except Canada and Mexico. Traffic growth from 1927 to 1964 are estimates based on the reported number of calls to overseas destinations; traffic from 1964 to 1983 reflect FCC-reported traffic data. Traffic from 1983 to present show TeleGeography data on call from all countries of origin. 1
Rise of the Apps The recent decline of international carrier traffic comes at the hands of over-the-top (OTT) communications services. While Skype dominated the OTT market on computers, consumers can now choose from a broad range of smartphone based communications apps, including WhatsApp, Facebook Messenger, WeChat (Weixin), Viber, Line, KakaoTalk, and Apple s Facetime. Both WhatsApp and Facebook Messenger topped 1 billion monthly active users in 2016, and WeChat is not far behind, with 846 million users in September 2016. TeleGeography estimates that six OTT communications applications WhatsApp, Facebook Messenger, WeChat, Viber, Line, and KakaoTalk combined for over 4.4 billion monthly users in June 2016, an increase of 800 million from June 2015, and up nearly threefold from June 2014. FIGURE 2 Monthly Active Users of Major Messaging Applications Notes: Apple (FaceTime), Google (Hangouts, Duo), and Microsoft (Skype) do not release any user metrics. As a result, their apps are excluded from this chart. Source: Company reports and TeleGeography estimates. While it is difficult to precisely quantify the volume of international OTT communications, a simple thought experiment helps to illuminate its likely scale. The experience of the past century has shown that demand for cross-border communications is practically limitless. Between 1983 and 2007, international phone traffic grew at a compounded rate of 15 percent annually, and traffic grew an even faster 21 percent CAGR between 1927 and 1983. Consequently, it is hard to believe that the recent decline in traffic means that people have suddenly begun to lose interest in communicating with friends and family abroad. Rather, it suggests that they are increasingly turning to other means of keeping in touch. TeleGeography has fairly reliable estimates of Skype s traffic through 2013, when the company carried 214 billion minutes of on-net (Skype-to-Skype) international traffic. Telcos terminated 547 billion minutes of international traffic in 2013, and Skype plus carrier traffic totaled 761 billion minutes. If we assume that total (carrier plus OTT) demand for international communications has continued to grow at a relatively modest 13 percent annually since 2013, the combined volume of 2
carrier and OTT international traffic would have expanded to 971 billion minutes in 2015, and to just under 1.1 trillion minutes in 2016 (see Figure International Carrier and OTT Traffic, 2004-2016). As traditional carrier traffic has slumped, OTT traffic has risen to fill the void. This calculation suggests that cross-border OTT traffic grew to 420 billion minutes in 2015, and will reach 552 billion minutes in 2016, exceeding the 546 billion minutes of carrier traffic projected by TeleGeography. FIGURE 3 International Carrier and OTT Traffic, 2004-2016 Notes: OTT traffic reflects in-app cross-border traffic only, and excludes calls originated on apps but terminated to the PSTN. International Wholesale Services Many retail service providers, such as mobile operators, calling-card providers, and new VoIPbased market entrants, rely heavily on wholesale carriers to transport and terminate their customers international calls. Between 2005 and 2015, wholesale traffic grew at a compounded annual rate of 10 percent, while overall traffic grew at a compounded annual rate of 7 percent. Consequently, the ratio of international traffic terminated by wholesale carriers increased from 52 percent in 2005 to approximately 68 percent in 2015. In 2015, traffic terminated by wholesale carriers grew 2 percent to 375 billion minutes. Wholesale traffic and revenues are not distributed evenly around the world; certain regions and countries account for disproportionate shares of traffic and revenues. While more than 80 percent of traffic to Sub-Saharan Africa, Central Asia, and South America was terminated by wholesale carriers, wholesale accounted for just 43 percent of traffic to fixed lines in western Europe. While average prices have been declining globally, rates to a few destinations particularly mobiles in some emerging market countries remain high, bolstering wholesale revenues. A route-by-route comparison of international traffic with international wholesale revenues reveals destinations for which wholesale revenues are disproportionately high (see Figure: The Long Tail: Traffic versus Wholesale Revenues on International Routes). For example, the France to Tunisia route accounts for 1.5 percent of revenues, but only one quarter of one percent of volume. Similarly, The United States 3
to Cuba route accounts for close to 2.6 percent of revenues while making up around 0.15 percent of volume. Africa accounted for approximately 10 percent of wholesale traffic in 2015, but 33 percent of wholesale revenues. FIGURE 4 The Long Tail: Traffic versus Wholesale Revenues on International Routes Notes: Figure illustrates routes with over 115 million minutes per year (a total of 505 routes shown). Carriers Market conditions are difficult for both incumbents and their challengers. Prices are competitive and consistently declining, volume growth is slowing, and routing complexity continues to grow, due to such factors as complex interconnection rate regimes, mobile number portability requirements, and the rollout of IPX services. In response, some carriers, such as Verizon, and, more recently, Deutsche Telekom, deliberately allowed volumes and gross revenues to decline in pursuit of higher-margin traffic. Other carriers carriers pursued a strategy of volume growth, expanding their wholesale operations to increase the scale of their business, and drive down unit costs (see Figure: Traffic Volumes of Top Carriers, 2008-2015). However, as global traffic has slumped slumped, the volumes of leading carriers have followed suit. Among nine leading carriers, only Vodafone and Orange increased their traffic in 2015, while aggregate traffic terminated by the remaining carriers declined 10 percent. 4
FIGURE 5 Traffic Volumes of Major Carriers, 2008-2015 Notes: Pre-2013 data for Vodafone, which reflect the combined traffic of Vodafone and the former Cable & Wireless Communications, are not available. Prices & Revenues Retail call prices on many large international routes have fallen by more than 90 percent over the past 20 years. However, the past two decades have also seen a sweeping shift in international calling patterns, away from calls to advanced economies and fixed lines, to emerging markets and mobiles. Because calls to mobiles and emerging markets generally cost more than calls to fixed lines and advanced economies, the weighted average call prices received by carriers declined far more modestly than the nominal price declines on major routes would suggest. For 25 years, carriers managed to eke out growth from the ILD sector, but that time may finally be at an end. Since 1988, when TeleGeography began to track international carrier revenues, turnover shrank during only one brief period (2001-2002), when strong traffic growth could not quite eclipse the effects of even stronger price decline. Since then, price decreases have moderated, but traffic growth has also slowed (see Figure: Global Traffic Rate of Price Decline versus Volume Growth, 1996-2016). Beginning in 2015 and continuing in 2016, international call revenues declined, pulled down by the combined effects of traffic and price declines. 5
FIGURE 6 Global Traffic Rate of Price Decline versus Volume Growth, 1996-2016 Notes: Data reflect both TDM and VoIP volumes. Periods where volume increases outpace average price declines mark a period of revenue growth. When price declines outpace volume increase, revenue declines. Data for 2016 are projections. 6
The content on the preceding pages is a section from TeleGeography's TeleGeography Report The work is based on sources believed to be reliable, but the publisher does not warrant the accuracy or completeness of any information for any purpose and is not responsible for any errors or omissions. This work is for the confidential use of subscribers. Neither the whole nor any part of this publication may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopied, recorded or otherwise, without prior written consent from PriMetrica, Inc. All rights reserved. TeleGeography A Division of PriMetrica, Inc. Washington, D.C. / San Diego / Exeter U.S. tel: +1 202 741 0020 / U.K. tel: +44 1392 315567. www.telegeography.com 7