Forecasting demand for Internet services: Willingness-to-pay for VoIP
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Forecasting Demand for internet Services Willingness-to-pay for VoIP Paul Rappoport, Temple University James Alleman, University of Colorado Lester Taylor, University of Arizona Experts Dialogue: Adjusting Forecasting Methods to the Needs of the Telecommunications Sector International Telecommunication Union Geneva, Switzerland 25-26 October 2004 Outline Objectives What is VoIP? Market Size for VoIP Demand for VoIP Discussion Future Research 2 Objectives 1. What is VoIP? 2. Identify “Drivers” of VoIP 3. Use Variation of Contingent-Valuation Procedures to Estimate Demand for VoIP 4. Estimate Elasticities 5. Comment on Market Size and Market Potential 3 Consider Market for VoIP small No Historical Demand or Price Series Business vs Residential Demand Surveys have been used to: Identify level of awareness Identify level of interest Goal – to estimate VoIP price elasticity 4 VoIP – Killer Application? Or, are we simply looking at a phone call? Packet Switching Circuit Switching Connection made between your telephone and the other party’s line, opening the circuit. You talk for a period of time, hang up. At that point the circuit is closed, freeing your line. A 10 minute conversation consumes about 9.4 megabytes. Much of the transmitted data is wasted (one talks the other listens, dead air etc) - over 75% wasted 6 Voice over IP Protocol* “Voice over Internet Protocol (VoIP) is a common term that refers to the different protocols that are used to transport real-time voice and the necessary signaling by means of Internet Protocol (IP). In another word, it allows the user to place a call over IP networks.“ http://www.personal.psu.edu/users/f/x/fxz122/project/voip.html 7 VoIP Forecast Market Size How Large is the VoIP Market? Internet Households 62 M High Speed 23 M Households WTP > 0 WTP > Total Telephone Bill 12 M Smaller 9 VoIP “Drivers” Telephone Bill Broadband Penetration $42 (23-24)% Average local & LD bill Broadband % of households 10 Distribution of Telephone Bill Distribution of Total Telephone Bill - I 0.250 Percent of Households 0.200 0.150 Target population when WTP < $50 0.100 0.050 0.000 1-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 >100 Local and Long Distance Bill 12 Distribution of Total Telephone Bill – II 0.250 Percent of Households 0.200 0.150 Target when WTP < $30 0.100 0.050 0.000 1-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 >100 Local and Long Distance Bill 13 Broadband Demand Key Driver: Broadband Growth Broadband Availability An issue only for Best Practice VoIP What will Drive Broadband Growth? Content – Gaming – Entertainment -- Shopping Multimedia and video Price Discounting Bundles Triple Play (Voice – Video – Data) Multimedia + Call Management 15 Distribution of Income & Broadband 60 0.25 50 0.20 0.15 30 0.10 Precent Percent 40 20 0.05 10 0 0.00 <15 15-25 25-35 35-50 Broadband Penetration 50-75 75-100 >100 Income Distribution 16 Broadband and the Telephone Bill Households (,000) 3500 3000 2500 2000 1500 1000 500 0 > $8 $6 < $5 $7 $3 $2 $4 $1 $2 111111100 0 $1 $8 $6 $5 $7 $4 $3 00 0 0 0 0 0 0 17 Broadband Forecast 70 40 60 35 % of Households 25 40 20 30 15 20 % of Households 30 50 10 10 5 0 0 1999 2000 2001 2002 I-HH 2003 2004 2005 2006 Broadband Source: CentrisPlus 18 The Demand for VoIP Willingness to Pay Demand for VoIP Service Focus is on the price of the service – thus economic value associated with a service is generally bounded Application is directed towards the estimation of price elasticities 20 Lognormal Demand Curves Let poi be the tolerance price of the ith household p be the actual market price Then qi = 1 if poi ≥ p qi = 0 otherwise Assuming that poi is distributed as a lognormal with parameters µ p and σ 2p 21 Lognormal Demand We have: P(qi = 1| p ) = P(poi ≥ p ) = 1 − Λ ( p; µ p , σ 2p ) Let Q represent the expected proportion of buyers we have: Q(p ) = 1 − Λ ( p; µ p , σ 2p ) = Λ (1/ p; − µ p , σ 2p ) 22 Willingness to Pay Given Broadband Households (,000) 1400 1200 1000 800 600 400 200 0 5 $7 > 75 1$5 50 1$4 40 1$3 30 1$2 20 1$1 0 -1 $1 Source: WWW.centris.com 23 24 Willingness to Pay for Voice-Over-IP Households with Broadband Households with Dial-Up Access 0 20 40 60 80 100 120 WTP (Price) 25 Sample 8,000 survey responses for from Q1, 2004 Based on CENTRISSM Omnibus survey National RDD sampling CENTRISSM tracks over 75 communications, entertainment and technology areas on a daily basis, at the household level www.Centris.com 26 VoIP Elasticities WTP $1-$10 Broadband Households -0.20 Non Broadband Households* -0.80 $11-$20 -0.59 -1.12 $21-$30 -0.98 -1.44 $31-$40 -1.37 -1.76 $41-$50 -1.76 -2.08 $51-$75 -2.54 -2.72 * Assuming $20 month for broadband 27 Market Simulations Market Potential - I Telephone bill Price (WTP) <$40 12 million households >$40 about 41 million households Broadband 24 million households 29 Market Potential - II Telephone bill Price (WTP) <$40 12 million households >$40 about 41 million households 8,952,000 Broadband 24 million households 30 Market Potential - III Telephone bill Price (WTP) <$40 12 million households >$40 about 41 million households 2,300,000 Broadband 24 million households 31 Discussion Price clearly matters Broadband penetration matters Focusing simply on “interest in VoIP” leads to significant over estimation of market size Insight requires understanding the relationships between “price” and the distribution of telephone bills and between “price” and the distribution of income 32 Discussion Quality of service not addressed Focus was only on VoIP delivered over the Internet Security: Virus, Trojan Horse, Worms and Spam Competitive RBOC responses not incorporated into the demand model (e.g. Verizon’s Freedom plan) 33 Discussion Regulation Classify VoIP as a telephone service USF obligations Access charges 911 requirement Licensing, taxation policies State and Federal regulation 34 VoIP References Service Providers http://www.voip-calculator.com/directory/search.htx?page=1&category=1 http://www.voip-info.org/wiki-VoIP+Service+Providers FCC http://www.fcc.gov/voip General Reference http://www.voip-info.org/tiki-index.php http://www.voip-info.org/wiki-VOIP+sites Tutorials http://www.iec.org/online/tutorials/vfoip/ http://www.cse.ohio-state.edu/~jain/refs/ref_voip.htm http://computer.howstuffworks.com/ip-telephony5.htm http://www.nact.com/documents/VoIP%20Tutorial.PDF 35 Contact Information Paul Rappoport prapp4@comcast.net James Alleman james.alleman@colorado.edu Lester Taylor ltaylor@bpa.arizona.edu 36
