The Future of the Telecommunications Industry: Forecasting and Demand Analysis

Topics in Regulatory Economics and Policy Series

Michael A. Crew, Editor Graduate School of Management, Rutgers University Newark, New Jersey, U.S.A.

Previously published books in the series: Oren, S. and S. Smith.: Service Opportunities for Electric Utilities: Creating Differentiated Products

Kolbe, A. L., W. B. Tye, and S. C. Myers: Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines

Pechman, C.: Regulating Power: The Economics of Electricity in the Information Age

Gordon, R. L.: Regulation and Economic Analysis: A Critique Over Two Centuries

Blackmon, G.: Incentive Regulation and the Regulations of Incentives

Crew, M.: Incentive Regulation for Public Utilities

Crew, M.: Commercialization of Postal and Delivery Services

Abbott, T. A.: Health Care Policy and Regulation

Goff,8.: Regulation and Macroeconomic Performance

Coate, M.B. and A.N. Kleit: The Economics of the Antitrust Process

Franz, R. S.: X-Efficiency: Theory, Evidence and Applications (Second Edition)

Crew, M.: Pricing and Regulatory Innovations Under Increasing Competition

Crew, M., and P. Kleindorfer: Managing Change in the Postal Delivery Industries

Awerbuch, S. and A. Preston: The Virtual Utility

Gabel, D. and D. Weiman: Opening Networks to Competition: The Regulation and Pricing of Access

Zaccour, G.: Deregulation of Electric Utilities

Young, W.: Atomic Energy Costing

Crew, M.: Regulation Under Increasing Competition

Crew, M.A. and P.R. Kleindorfer: Emerging Competition in Postal and Delivery Services

Cherry, B.A.: The Crisis in Telecommunications Carrier Liability: Historical Regulatory Flaws and Recommended Reform

The Future of the Telecommunications Industry: Forecasting and Demand Analysis

edited by

David G. Loomis and Lester D. Taylor

..... " Springer Science+Business Media, LLC

Library of Congress Cataloging-in-Publication

The future of Ihe telecommunications industry : foreeasling and demand analysis I edited by David G. Loomis and LeSler D. Taylor.

p. cm . - (Topics in regulatory economics and palicy series) Papers presellled to an international eonference. Includes index ISBN 978-1-4613-7100-7 ISBN 978-1-4615-4643-6 (eBook) DOI 10.1007/978-1-4615-4643-61. Te1ecommunication- Forecasting-Congresses. J. Loomis. David G. II. Taylor, Lester D. HE7631 .F88 1999 384 21-·dc21 99-046057

CIP

Copyright o 1999 Springer Scicnee+Business Media Ncw York. Second Printing 2002. Originally published by Kluwer Academic Publishcrs in 1999 Softcover reprint of the hardeover 1 st edition 1999

This printing is a digila1 duplication of the original edition.

AH rights reserved. No part of this publication may be reproduced, stored in a relrieva1 system or transmitted in any form ar by any means, mechanieal , photo-copying, recording, ar otherwise, wilhout the prior written pennission ofthe publisher. with Ihe exception of any material supplied specîfically for the purpose of being entered aud exccuted an a computer syslem , for exclusive use by Ihe purchaser of Ihe work.

Printed on acid-Iret? paper,

- To Nita, Ethan, Bryan and Katrina

- To my sister, Betty Jean Kvidera

D.GL

L.D.T.

CONTENTS

LIST OF CONTRIBUTORS xi

ACKNOWLEDGEMENTS xv

INTRODUCTION David G. Loomis

Part I DEMAND FOR NEW PRODUCTS AND TRENDS IN DEMAND ANALYSIS 5

2 TELECOMMUNICATIONS DEMAND ANALYSIS IN TRANSITION: AN OVERVIEW OF PART I 7 Lester D. Taylor

3 AN ECONOMETRIC STUDY OF THE DEMAND FOR ACCESS TO THE INTERNET 21 Donald J. Kridel, Paul N. Rappoport, and Lester D. Taylor

4 DEMAND FOR AND USE OF ADDITIONAL LINES BY RESIDENTIAL CUSTOMERS 43 Carol A. Cassel

5 THE CHANGING MARKET FOR INLAND AND INTERNATIONAL CALLS 61 David Cracknell

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6 DEMAND MODELING AT BELL CANADA: A RETROSPECTIVE 83 Chris Dineen and Mohammed Abrar

7 EFFECTS OF LARGE PRICE REDUCTIONS ON TOLL AND CARRIER ACCESS DEMAND IN CALIFORNIA 97 Timothy J. Tardiff

8 SEMI-PARAMETRIC ESTIMATES OF INTRA-LATA DEMAND ELASTICITIES 115 Armando Levy

Part II FORECASTING NEW PRODUCTS AND THE IMPACT OF COMPETITION 125

9 FORECASTING NEW PRODUCTS AND THE IMPACT OF COMPETITION: AN OVERVIEW OF PART II 127 David G. Loomis

10 FORECASTING NEW TELECOMMUNICATION SERVICES AT A "PRE-DEVELOPMENT" PRODUCT STAGE 137 Andreas Taschner

11 ANALYSIS OF CUSTOMER EXPECTATIONS FOR THE INTRODUCTION OF NEW TELECOMMUNICATIONS SERVICES 167 Isabella Maria Palombini and Bartolomeo Sapio

12 LIMITS TO GROWTH IN TELECOM MARKETS? 179 Jan-Petter Saether

13 FORECASTING TELEPHONY DEMAND AGAINST A BACKGROUND OF MAJOR STRUCTURAL CHANGE 203 David Cracknell and Clive Mason

14 161 DAYS OF FULL COMPETITION - SOME OBSERVATIONS FROM THE GERMAN MARKET 217 Ernst-Olav Ruhle

15 COMPETITION IN THE CHINESE CELLULAR MARKET: PROMISE AND PROBLEMATIC Xu Van and Douglas C. Pitt

INDEX

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249

265

LIST OF CONTRIBUTORS

Mohammed Abrar holds a Ph.D. in economics from McMaster University. He taught at Concordia University from 1985 to 1989 and then worked for Bell Canada as a senior analyst until 1997. Currently, he is president of Datatek & Niche Market Consulting, an Ottawa-based market research firm. Dr. Abrar has published in and served as a referee for several economics journals and made numerous presentations on telecommunications related topics at international conferences.

Carol A. Cassel is currently Manager of Research Analysis at PNR and Associates, Inc., an INDETEC International Company. Her current efforts at PNR surround the creation of segmentation schemes and numerous models, speCIfically HomeScores™ for Experian Lists, BusinessScores and GeoScores, related to the telecommunications and utility industries. Other areas of concentration within research and analysis include survey development and administration. Ms. Cassel received a B.A. in Psychology and a M.A. in Industrial and Organizational Psychology from West Chester University of Pennsylvania.

David Cracknell has been Manager of Analysis and Modelling in BT's product management team since 1989. Prior to this, he was actively involved m demand analysis as part of BT's Economics Division. Mr. Cracknell has contributed to all the major UK regulatory debates over price control since BT privatisation in 1984. He holds a first degree and Masters in Economics from the University of London.

xu

Chris Dineen is Senior Consultant, Pricing and Econometrics with Eurodata, a London-based telecommunications consultancy. Before joining Eurodata in 1998, he worked for 11 years in the demand analysis and regulatory areas with Bell Canada and oversaw the development of several of the models described in Chapter 6 of this book. Mr. Dineen received his education in economics and econometrics at Concordia University in Montreal and University of Toronto. He is a member of the Planning Committee of the International Communications Forecasting Conference (ICFC).

Donald J. Kridel is currently Associate Professor of Economics at the University of Missouri-St. Louis. He earned his Ph.D. in economics from the University of Arizona. Prior to joining the faculty at the University of Missouri-St. Louis in 1993, Dr. Kridel held various positions, including DIrector-Strategic Marketing, at Southwestern Bell Corporation (now SBC Communications, Inc.). He has been active in telecommunications demand analysis and pricing research for over 15 years.

Armando Levy received his Ph.D. in Economics from the University of California at Berkeley in 1996, and is currently Assistant Professor of Economics at North Carolina State University. His research interests include applied econometrics, semi-parametric econometric models, telecommunications demand and game theory.

David G. Loomis is Assistant Professor of Economics at Illinois State University where he teaches regulatory economics and the economics of telecommunications. He is also Chair of the International Communications Forecasting Conference (ICFC) and Co-Director of the Institute for Regulatory Policy Studies. Prior to joining the faculty at Illinois State in 1996, Dr. Loomis worked as an economist at Bell Atlantic Corporation for 11 years. He received his Ph.D. in economics from Temple University in 1995.

Clive Mason has been Manager of Forecasting Systems development in BT's product management team since 1993. Prior to this, Mr. Mason spent 12 years as part of BT's demand forecasting team, where he was responsible for producing telephony forecasts constituting over 70% of BT's revenue. He holds a degree in Chemistry from Leicester University.

Isabella Maria Palombini has worked for Fondazione Ugo Bordoni, a research institute on telecommunications connected with the Italian Ministry of Communications, since 1986. She is in the Department of Scenarios and

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Methods for Strategic Planning where she has been studying the diffusion and the evolution of mobile communication services by considering, through methodological approaches, the weight of different aspects, such as regulation, pricing, technological innovation and consumers choices. She has published many articles on such themes.

Douglas C. Pitt is professor of organisational management and Dean of Strathclyde Business School, UK. His major research area is organisational structure and behavior, mainly in the telecommunications sector.

Paul N. Rappoport is Associate Professor of Economics at Temple University. He has over 2S years of experience in data analysis, modeling and statistical assessment, with a specialization in telecommunications demand analysis. He was responsible for the development of Bill Harvesting™, a national database of actual communications bills, a small business panel - which focuses on telecommunications and energy - and a large consumer national telecommunication database. His current research work is focused on modeling Internet demand, network externalities and competitive analysis. He received from his Ph.D. from The Ohio State University in 1974.

Ernst-Olav Ruhle studied economics and graduated from the University of Hannover in 1993. He joined WIK, a research institute for post and telecommunicatIons, where he worked on projects including the mternationalization of Telecom Operations and comparisons of telecom regulation in various countries. From 1996 on, after finishing his Ph.D., he worked for RWE Telliance, one of the mother companies of o.tel.o. and E­plus (entrants in the newly liberalized German market) in the department of strategy and regulatory affairs. Since 1998, he has worked for Telecom Austria in Vienna where he is head of the regulatory department.

Jan-Petter Saether is political economist from the University of Oslo with a specialisation in macroeconomic planning. He has worked at the Norwegian Institute of Transport Research, Norwegian Railways, Telenor Research Department, Telenor Nett and Norwegian Post and Telecommunications Authority. Demand for established and new telecommunication services and growth in bandwidth demand have been his major recent fields of interest.

Bartolomeo Sapio received his Doctor Laurea degree in Electronics Engineering from the University "La Sapienza" of Roma (Italy). He is now a researcher with Fondazioner Ugo Bordoni, in the group "Scenarios and Methods for Strategic Planning" of the FUB Division "Evolution of Telecommunication System". His primary research interests are scenario

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analysis, probability forecasting, strategic planning, multimedia and the Internet. He is a member of the International Institute of Forecasters and of the Institute for Operations Research and the Management Sciences.

Timothy J. Tardiff is a Vice President in the Cambridge office of National Economic Research Associates (NERA). He received a B.S. in mathematics from Caltech and a Ph.D. in Social Science from the University of California, Irvine. At NERA since 1984, he evaluates pricing policies for competitive telecommunications markets, including incentive regulation plans and prices for access services to competitors; studies actual and potential demand for telecommunications services; and develops approaches for measuring incremental costs of telecommunications services.

Andreas Taschner studied business administration in Vienna (Austria) and at the University of Illinois. He received his Ph.D. from the University of Economics and Business Administration Vienna. He joined Alcatel's research division in 1996 and since then has been engaged in demand modelling and service forecasting in the telecommunications industry. His main interests include consumer behavior in telecoms, the application of statistical methods to forecasting problems and the combination of judgmental forecasting approaches with quantitative methods.

Lester D. Taylor is currently Professor of Economics and Professor of Agricultural & Natural Resource Economics at the University of Arizona. He has a Ph.D. in economics from Harvard University, and taught at Harvard and the University of Michigan before taking up residence in Arizona in 1972. During the spring semester of 1996, he taught at Charles University in Prague in the Czech Republic. His research in telecommunications covers more than 20 years, and has published extensively on telecommunications demand, pricing, and costing. His most recent book, Telecommunications Demand in Theory and Practice, was published in 1994.

Xu Van is currently Assistant Professor at the Department of Information and Systems Management, Hong Kong University of Science and Technology. He is currently teaching and conducting research in the area of telecommunications management and policy.

ACKNOWLEDGEMENTS

We would like to thank the planning committee of the International Communications Forecasting Conference for their help and guidance of the conference from which many of the papers in this book were taken. The planning committee consists of Keith Bhatia, ADC NewNet; Kent Bjornstad, Bell Atlantic; Keith Breeden, Bell South; Peter Chung, GTE; Melody Cole, Telcordia Technologies; David Cracknell, British Telecom; Chris Dineen, Eurodata Foundation; Gregory Duncan, NERA; Dieter Elixmann, WIK; Badri Elosta, ICG Telecom Group; George S. Ford, MCI; Bob Jacob, Sprint; Don Kridel, Univ. Mo - St. Louis; Bosang Lee, Korea Telecom; Ron Lugmbill, Ameritech; Bernard Paniak, Lucent Technologies; Rod Richardson, US West; Farhad Sabetan, SBC Communications; John Watters, SBC Communications; Bruce Williamson, TNS Telecom; Deborah Wyght, Cincinnati Bell; Steve Zhang, AT&T; Yun Zhang, Telstra Corporation. We would also like to thank the National Economic Research Associates (NERA) and PNR and Associates for their financial support of the conference.

Finally, we also want to thank Lisa Smith, Joseph Wiedman, and Fang Chen for their research assistance and Ranak Jasani and Lauren Tully of Kluwer for their guidance through the publishing process.