Note: This document is copyright © Steve Jenkin 1997, 1998. It may not be reproduced, modified or distributed in any way without the explicit permission of the author.
Click, Click, You're on the Net

Telco Service Provider Sales Pitch

Computer & Communications are merging forming a new industry, Informatics.

It is the combination of network, client (eg PC), servers, and content. "Content" is becoming text, e-mail, pictures, sound, and video.

Competition for the domestic network connection - the digital subscriber loop - is skyrocketing. Only the savvy players will survive.

In the long term, dense populations areas will be connected by fibre optics and have mobile digital wireless access through tiered services - fast wireless data, GSM (mobile phone), and digital satellite phone. Low density areas will have to rely on existing cable plant or a combination of broadcast and point-to-point services.

The network providers that can offer consumers graduated connection choices, single point billing and support, and affordable pre-paid connection plans will reap immediate sales and future upgrades.

National voice traffic is currently carried on 64kbps duplex circuits and is digitised at the local exchange. Pushing the digitisation of voice into the subscriber premises, and getting the subscriber to bear the capital cost of their in-house equipment, radically lowers the cost of the local switch, network switches and infrastructure.

Even using 16kbps encoding, the use of silence compression, such as used for overseas calls, means the calls consume on average only 7kbps duplex bandwidth. About one-tenth the current PSTN rate. This translates into sizing the whole network ten times smaller - everything can be shrunk tenfold, whilst maintaining current quality of service levels. Plus, the switches used, standard routers, are much cheaper per-bps capacity than current telephone exchanges and bandwidth aggregation equipment.

All the benefits of ATM [Asynchronous Transfer Mode or "broadband ISDN"] can be realised today using the IP [Internet] protocols. With the added benefit, the subscribers bear all the capital costs and existing cable can be used. This frees Telco & ISP capital for better uses, rather than being sunk into outmoded technologies.

A major Telco growth area - additional lines 'for internet access' - will die away. Subscribers will have multiple telephone services and permanent internet connectivity.

Another major bottleneck, exhausting cable space - especially in old, established suburbs, is avoided entirely. Only one pair is need usually - two pairs gives 2Mbps - or enough for 300 phone circuits.

Existing field proven, volume products give graduated service levels for basic access to home and small/medium businesses:-

  • modems, 1 pair 33.6 and 56kbps (~A$120)
  • digital line drivers, 1 pair, 160kbps
  • digital line drivers, 2 pair, 2Mbps
  • ADSL, 1 pair, 5/8Mbps forward, 160kbps back
  • The BIG question

    How do Telco service providers maintain their profitability whilst apparently cannabilising their own market?

  • By dropping telephone call prices 5-fold, whilst achieving 10-fold cost reductions
  • having subscribers bear the full capital cost of conversion or attachment
  • Moving to a pre-paid, not post-fact, charging model
  • Unused portions are pure profit. [As seen with calling cards, these residuals are extremely significant]
  • Billing systems become trivial. 50%- 60% traditional billing costs evaporate
  • Cash flow moves from lagging, to leading. Telco's stop being Credit Providers.
  • Bad debts evaporate
  • "Spot price" bidding wars are gone. Everything is pre-paid.
  • This is moving back to the "full service" paradigm where subscriber loyalty is built by proven technical competence, responsivness, and quality of service.

    Call Pricing

    Dropping call prices 5-fold sounds dramatic. How do you keep total revenues at reasonable levels?

    By charging about the same average yearly amount and providing inceased functionality with cheaper equipment.

    Total volume of digital traffic on the backbone network will steadily increase, even as volume of digital voice traffic decreases. July 1997 marked the overtaking of voice traffic by digital traffic.

    $60/month ($720/yr) + line rental - for 6.5M domestic lines in Australia is ~$6B/yr. Very similar to current revenue levels - but with higher profit margins from the residuals, smaller network, pre-paid calls, and subscriber funded capital costs.

    Existing billing regimes soak up 60% - 80% of call costs. National call costs are dominated by providing the local loop and billing.

    These two most expensive line items can be collapsed by pre-payment - a single customer transaction per billing period, and direct subscriber funded attachment or conversion.


    Page Last Updated 07-Apr-98