March 2003

Crossing The Chasm: VoIP Opportunities In Asia Pacific

BY STEVE YEO

In his poem �The Ballad of the East and West,� Rudyard Kipling wrote, �East is East and West is West, and never the twain shall meet.� Increasingly, this statement is no longer true. For although there is still a huge chasm culturally between Asia and the West, there is much more cultural diversity within Asia itself than there is in the West. And, from an economic and technological perspective, the world is becoming more uniform at an ever-increasing pace.

Broadly speaking, the same telecommunications technologies that are popular in North America and Europe will dominate in Asia. However, the pace of adoption and the specific services derived from the technologies are different in Asian markets compared to the U.S. market, and this is in large part due to several key market characteristics unique to the Asian markets.

The Asia-Pacific market characteristics can be summarized as follows:

� Asian population demographics are different than those of the U.S. and Western Europe. The percentage of young people under 21 is much higher in Asia, particularly in China, India, Indonesia, Vietnam and Thailand. The percentage of �retired� people over 65 is generally about half of that in the West. Only Japan and Australia have a population demographics profile that is similar to the West. Thus the percentage of young people who increasingly will control the rate of adoption of new technology is much higher in Asia, and this has significant market implications, since younger users are quicker to try new applications and technologies.

� The average Asian economy is a high-growth economy compared to the more mature, slower growing U.S. and European economies. According to a November report to the Chinese National Congress, China�s economy is forecasted to grow at seven percent per annum over the next decade, while the economies of many other Asian economies are growing at an average rate of five to six percent, much higher than the three to four percent average in the West. For these economies to continue to grow at these rates, infrastructure build-out -- of which a key component is telecommunications -- has to proceed at a much faster pace.

� The Asian telecommunications infrastructure build-out will increasingly be based on �newer� wireless and IP-based technologies, as these are perceived to have longer effective lifecycles compared to circuit-based technologies, and are therefore more logical investments. This creates problems somewhat unique to Asia, as most service providers in Asia do not have the resident expertise to implement next-generation services such as VoIP on their own. Thus in Asia, the role of experienced systems integrators will be critical in the build-out and adoption of next generation services such as VoIP. �Compared to the U.S., the role of the system integrator has been much more prominent in Asia, because historically there has been a reduced emphasis from network equipment providers,� said Vincent Lum, Datacraft�s Chief Strategy Officer. Major Asian telecom system integrators can be categorized as those with a services focus, such as Datacraft Asia or AsiaInfo, or those with an equipment and services focus such as IBM, HP, Ericsson, or NTT COMWARE.

In addition to the region-wide market characteristics, within each market there are unique circumstances that need to be understood for VoIP to be successful.

China, because of its sheer size, holds special interest. At a forecasted annual GDP growth of seven percent over the next decade, China will be the economic engine of growth for Asia. So what are the characteristics of China that are likely to influence the adoption of VoIP?

� With the break-up of the �old� China Telecom, there is a new competitive landscape. China Telecom is now the incumbent in 21 provinces, while China Netcom is the incumbent in 10 northern provinces. Together with China Unicom, China Railcom, and China Mobile, there are now five operators licensed to provide services nationally. Almost all operators have either awarded contracts or announced intentions to build IP backbone networks.

� A key aspect of the population demographics in Chinese cities is that a large proportion of city dwellers are not indigenous. This is a result of the government�s past policy of assigning people to jobs throughout the country. It is now exacerbated by the increased mobility due to the market economy. Many Chinese marriages were long-distance based, with parents and in-laws living elsewhere. So the pressure for cheap domestic long-distance services remains huge. A key VoIP application in China may be prepaid domestic long-distance accessible from public phones and Internet cafes as well as private phones.

� More than half of China�s 56 million Internet users access it from Internet Cafes. Indications are that PC penetration will continue to grow, however. Due to the prevalence of one-child families, parents are focused on providing the best education for their only child, and PCs are viewed as a key differentiator for obtaining academic opportunities. So VoIP applications centered on the PC may well take off, particularly if the call rates are cheaper than wireless call rates.

Having said that, cell-phone usage has exploded in China, with wireless penetration keeping pace with wireline penetration. For the professional or the small entrepreneur, the cell-phone is increasingly the voice device of choice. It forms an integral part of the mobile office. Needless to say, every professional or entrepreneur also has a PC as part of his office. What we in the U.S. do not normally realize is that because of the lifestyle differences, the Asian executive/entrepreneur spends much more of his time outside of his office than his counterpart in the West. So VoIP services that enable one to stay connected to the office take on a higher significance than in the U.S.

South Korea is another interesting market. With a population of 47 million and a per capita GDP of nearly U.S. $10,000 growing at six percent annually, the South Korea market is effectively a third of the size of the China market, six times the size of the Hong Kong market, or 10 times the size of the Singapore market. Some characteristics of the South Korean market that make it a unique market for VoIP are:

� A broadband penetration rate of nearly 50 percent of households, largely as a result of government-driven initiatives. South Korea had 10 million broadband connections as of September 2002, of which nearly eight million are DSL connections. This means there are at least 10 million household PCs, and growing. It is interesting to note that 60 percent of South Koreans live in apartments. So VoIP services centered round PCs, possibly a cheap second line service, may well gain traction.

� A wireless penetration of more than 50 percent, with over 60 percent of these cell phones having some sort of data handling capability. This compares with only 15 percent of U.S. cell-phones having data capability. Given these penetration rates, it would be logical to speculate that most South Korean teenagers have a cell phone as well as a PC. Thus VoIP services that integrate PCs with cell phones would make sense.

By contrast, the Japanese market more closely resembles its Western counterparts. It has an older population demographic, a high per capita income of U.S. $36,000, and a more fully built-out telecommunications infrastructure. What has contributed toward Japan�s movement toward VoIP services?

� Incumbent operators have made the commitment to an IP infrastructure. In April of 2002, NTT announced that it was effectively ceasing development of analog phone networks to concentrate on developing IP networks. Incumbent support of VoIP is critical for faster adoption because incumbents have larger capital budgets, and more extensive customer marketing capabilities.

� Smaller competitors, such as Fusion Communications and Yahoo Broadband, also have been offering aggressively priced nationwide VoIP services.

� Finally, there is a cultural fascination with �gadgets� and a bias toward innovation. A case in point is the rapid adoption of the NTT DoCoMo i-mode service. There are 50 million Japanese wireless data service users -- more than in the rest of the world combined. If services can be developed that effectively combine mobility applications with VoIP, it�s reasonable to expect Japanese market adoption.

Japan appears poised to lead in VoIP application deployments, according to Hideki Sasaki, Manager, NTT COMWARE. �We�ve already seen VoIP penetrate the network cores with toll bypass, and now we�re seeing the start of VoIP in access networking, in applications such as IP Centrex, IP PBX, and even as a voice service for DSL and cable operators.�

These examples provide a perspective that success in each market in Asia requires a thorough understanding of the factors unique to that market. VoIP services and applications that achieve traction and success in the U.S. or Europe may not be repeatable in Asian markets. The market in Asia is much more diverse that the U.S. or Europe, and the secret to success lies in taking the time to understand each market, and to develop business strategies specific to that market.

Steve Yeo is Director of Market Development, Asia-Pacific for VocalData, Inc., a leading provider of integrated voice and enhanced network applications that enable service providers to reliably deliver next-generation IP telephony services.

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