Estimating demand curve in the Korean VoIP telecommunications market

Technological Forecasting & Social Change 78 (2011) 713–728

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Technological Forecasting & Social Change

Estimating demand curve in the Korean VoIP telecommunications market Jeong Ho Kwak a, Bong Gyou Lee b,⁎ a b

Korea Information Society Development Institute, Gyeonngi-do, Republic of Korea Graduate School of Information, Yonsei University, Seoul, Republic of Korea

a r t i c l e

i n f o

Article history: Received 25 December 2009 Received in revised form 11 September 2010 Accepted 19 September 2010 Available online 5 November 2010 Keywords: Korean VoIP market Telephone call demand curve Rate elasticity Cross elasticity Price index

a b s t r a c t The VoIP (Voice over Internet Protocol) market in Korea is showing rapid growth since domestic carriers initiated the service in 2006. These carriers are now seeking new revenue sources from various convergence services and are increasing investment into VoIP. In particular, local exchange carriers (LECs), formerly reluctant to invest in technologies that would cannibalize their local telephone revenue, have started to invest in VoIP, in recognition of the current convergence of media and the telecommunications industry, as well as in the face of intensifying competition. In this study, we determined that VoIP call rates and landline telephony call rates were the most important factors affecting VoIP call demand, in addition to network externality. We also verified that landline telephony is no longer a supplement to VoIP, but rather, a substitute that has considerable influence on VoIP call demand. Empirical evidence is expected to be considered in policy decision making on current issues in the IT industry, such as access prices or competitiveness assessment. The current empirical analysis on the Korean VoIP industry and the adherence to lessons learned from policy enforcement should provide valuable information to countries seeking to develop their own VoIP industries, as well as to businesses developing new strategies based on the VoIP market. © 2010 Elsevier Inc. All rights reserved.

1. Introduction Voice over Internet Protocol (VoIP) service is provided through computer software and a computer equipped with a headset or through dedicated equipment which sends and receives voice data over an IP (Internet Protocol) packet switched network. VoIP is expected to play a central role as the media and telecommunications technologies converge. [7] Recently, the economic profitability and growth potential of VoIP has improved, leading to an increase in stakeholder (i.e., the government, service providers, and users) interest in the development of the VoIP market. In 2000, when VoIP was initially introduced in Korea, it was expected to replace the local telephone market, based on its low costs and supplementary services. However, due to the low quality of service (QoS) and inability to receive calls through a VoIP phone, it failed to show significant growth [4]. Since 2003, the quality of service has improved as a result of VoIP technological breakthroughs. In addition, the government implemented policies favoring the VoIP market, including the issuing of 070 telephone numbers, mandatory requirements of VoIP interconnection, and inducing lease cost cuts. As a result, the Korean VoIP market began a period of rapid growth. While observing the stable growth of this market, many local telephone service providers decided to participate in the VoIP market. As of the end of 2008, the Korean VoIP market had 2.21 million subscribers and recorded annual revenue of KRW 233.5 billion, exhibiting a 150% year-on-year growth. VoIP service, which was formerly mostly provided by specialized telecommunications operators, is now increasingly available from common domestic carriers. Notably, late movers such as LG Dacom and SK Broadband have significantly increased VoIP-related investments. ⁎ Corresponding author. Tel.: + 82 10 3090 7008; fax: + 82 2 2123 8654. E-mail addresses: [email protected] (J.H. Kwak), [email protected] (B.G. Lee). 0040-1625/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.techfore.2010.09.007

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Table 1 Number of VoIP subscribers. Source: submitted reports of VoIP service providers. Service provider KT LG dacom SK broadband Onse SK telink Samsung networks KCT Sejong Solborn SKN Montista Total

Dec. 2006 23,222 2754 – 2445 23,000 53,192 – – 316 10,714 – 115,643

Dec. 2007

Dec. 2008

37,744 212,393 8600 7624 42,000 97,003 8927 724 517 28,076 3311 446,919

323,611 1,198,145 118,007 13,739 72,958 152,706 238,421 1408 633 63,372 31,826 2,214,826

Table 2 Market share of VoIP service providers. Source: submitted reports of VoIP service providers. Market share based on number of subscribers

KT SK broadband LG dacom SK networks SK telink Dreamline Sejong Onse KCT Samsung networks Total

2006

2007

2008

19.8% 4.0% 9.9% 12.0% 0.0% 3.7% 0.5% 1.4% 0.0% 48.7% 100.0%

17.8% 3.8% 27.8% 10.7% 0.0% 2.6% 0.3% 2.9% 0.1% 33.9% 100.0%

24.0% 7.9% 43.9% 2.8% 9.1% 0.8% 0.1% 1.0% 032% 10.2% 100.0%

Growth in this market has coincided with the government policies favoring the VoIP industry. Number portability of VoIP phones has now been approved and the NGN (Next Generation Network) is currently expanding. In October 2008, the KCC (Korea Communication Commission), which is the regulatory authority governing media and communications, introduced number portability, allowing VoIP subscription using local phone numbers. (KCC, 2008.10) The KCC also agreed to apply local phone numbers to Wibro, under the assumption that VoIP will become the future core application where all media and communications networks converge on the basis of Internet Protocol. (KCC, 2008.12) As a result of technological breakthrough and government backing, the VoIP industry is expected to grow in accordance with the All-IP transformation of the media and communications network. An increased level of convergence of media and communications is expected to promote the use of mobile VoIP based on Wibro technology. Due to the increased interest in VoIP as a key convergence service, the need for a quantitative analysis regarding the growth of the VoIP market and its effect on local and mobile phone markets has become apparent. Both government and service providers have called for an empirical analysis of VoIP call demand—the government to set sound policies on VoIP and the service providers to derive an efficient business strategy. However, a time-series analysis on VoIP call demand has not been addressed for the Korean market. An estimated demand curve can be applied to future empirical studies regarding VoIP call demand, in addition to being used in policy-making and in developing business strategies. Lastly, this empirical analysis of the Korean VoIP industry and the lessons learned from policy enforcement will provide a valuable resource for countries seeking to develop their own VoIP industries, as well as for businesses developing new strategies based on the VoIP market. 2. The Korean VoIP Market 2.1. Concept and characteristics 2.1.1. What is VoIP? According to Article 7 of the Korean Telecommunications Business Act, VoIP has been classified as a common carrier1 (2005.10.21 revision). Specifically, VoIP has been defined as an electronic communications service that can send and receive voice 1 An electronic communications service is recognized as a common carrier service by the Chairman of the KCC when the stable supply of service is essential to or has significant influence on the public good and the national economy.

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Fig. 1. VoIP hierarchy and network structure.

data through the Internet regardless of the calling area. However, this has not included voice transmission over the Internet between registered members of a specific Internet site. [4] Recently, the Korean government, in an effort to introduce the horizontal regulation system of the EU, has redefined the types of common carrier services from Article 7 of the Telecommunications Business Act. According to the new definition, common carrier services have been classified into three different types: transmission services,2 services providing allocated bandwidth, and electronic communications line and equipment lease services. Among the three, VoIP has been classified as a transmission service (Fig. 1). VoIP service providers have been classified into common carriers and specialized telecommunications operators. Specialized telecommunications operators have again been divided into special category 1 and special category 2, depending on ownership of equipment. VoIP common carriers3 are service providers who install electronic communications equipment (i.e., internet networks such as backbone network and subscriber network and VoIP equipment such as servers, routers, G/W, and G/K) and provide service based on customer-owned equipment. VoIP special category telecommunications operators have been divided into special category 1 and special category 2. Special category 1 operators4 have their own equipment and provide common carrier services over a common carrier. Special category 2 operators provide VoIP services using not only common carriers but also the common carriers’ exchange system. 2.1.2. Characteristics of VoIP VoIP has unique features that differ from other telephone calls. First, regular telephony is dependent on a material network in its mobility and call area. Since VoIP is serviced through the IP network, it has unlimited mobility, and given that VoIP uses an open network it is geographically unrestricted. Second, VoIP is perceived as a substitute to existing landline and wireless telecommunications services. [8] VoIP services provide the identical telecommunications service over the IP network that was previously provided through PSTN networks. Further, while in the past VoIP had been merely an additional option of telecommunications, a partial substitute to voice telephony, recent trends indicate that VoIP services have become a near perfect substitute for voice telephony as subscribers move to VoIP. In fact, following the approval of number portability in October 2008, VoIP is expected to become a better substitute to existing voice telephony subscribers. Third, VoIP is closely related to broadband penetration rates. ([4]; Kim et al., [15]) VoIP services are provided over the subscriber and backbone IP networks and therefore, the broadband Internet network is, in essence, the basis of VoIP. Consequently, the national broadband penetration rates may show a high correlation with the number of VoIP subscribers. 2 Transmission services is an electronic communications service regarding the transmission of voice, data, video and other electronic signals without signal type conversion. 3 KT, Hanaro Telecom, LG Dacom, SK Telink, SK Networks, Dreamline, Sejong Telecom, Onse Telecom, and KCT. 4 Special category 1 operators are service providers who own gateways (G/W), gatekeepers (G/K), proxy servers, and softswitchs (SSW) that are accessible or interconnectable to PSTN networks.

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Fourth, as a result of government policies favoring VoIP, existing voice telephony service providers have increasingly shown interest in VoIP services. Existing telecommunications service providers, such as KT, Hanaro Telecom, and LG Dacom, who have local, long-distance, and international telephone businesses, are investing in VoIP. Of note are late movers such as LG Dacom which has boosted its efforts to provide VoIP services. Fifth, VoIP may be applied to various bundling packages. (Kim et al., [15]) Late movers in the telecommunications industry and MSOs in the media sector are currently considering bundling products, including VoIP instead of landline telephones. VoIP is expected to be provided in various types of bundling packages in the relatively near future. Sixth, sunk costs of investing in VoIP are relatively low since VoIP utilizes preexisting subscriber and backbone networks previously installed for broadband Internet. Service providers need not invest in equipment other than softswitchs and trunk gateways. In contrast, common carriers may require significant amounts of investment to register 070 numbers and attract subscribers, whereas special category telecommunications operators lease the network and thus, may incur more variable costs5 compared to fixed costs. Seventh, there is no substantial switching barrier in areas with pre-installed broadband networks. [9] Since August 2008, the government has considered number portability between local numbers and VoIP numbers and in the event that the number portability is approved, switching barrier related to late movers will become significantly lower. 2.2. The Korean VoIP market and competition 2.2.1. Market overview The Korean VoIP market has grown rapidly since 2008 with subscribers numbering 110,000 in 2006, 440,000 in 2007, and 2,210,000 as of December 2008. This growth can be partially attributed to policy efforts, including the designation of VoIP as a common carrier service, the issuance of 070 numbers, and the approval of number portability, as well as partially attributed to local telephone service providers, who were not specialized telecommunications operators, entering the VoIP market (Table 2). The rapid increase in VoIP subscribers is expected to continue as common carriers maintain their focus on the VoIP market. In the early stages of development, late movers to the voice telephony market led the introduction of VoIP. In particular, LG Dacom secured a subscriber base in the voice telephony market and aggressively promoted VoIP services through bundled products with broadband Internet services. Since the government approval of number portability for VoIP in October 2008, first movers to the voice telephony market have also been participating in the VoIP market. For example, KT, following the merger with KTF and management change, has shown unprecedented active competition by launching a VoIP-exclusive phone (Style Phone) and by providing a differentiated service called SoIP (Service over Internet Protocol). As a result of new competition, the VoIP market share of local telephone service providers has recorded rapid growth. Currently, LG Dacom leads the market with 43.9%, with KT and SK Broadband trailing with 24.0% and 7.9%, respectively (Table 1). 2.2.2. Revenue In 2008, total VoIP revenue reached approximately KRW 233.5 billion, which is a 150.2% increase compared to KRW 93.3 billion for 2007. Considering that the local telephone market revenue for 2008 was KRW 4097.9 billion, the VoIP market is still in its infancy; however, revenue is increasing rapidly as a result of increase in subscribers and VoIP services (Table 7). 2.2.3. Rates VoIP rates consist of basic and usage fees, with some service providers offering discounts on the basic fee or offering fixed usage fee packages. Service providers are required to report their fee structures but are not subject to fee regulation, and thus, service providers may autonomously decide their rates and compete over prices. The typical household standard rates as of March 2009 are indicated in Table 3. The voice telephony service rates for KT are KRW 39 per 180 s on Land to Land (LL), KRW 49 per 180 s on Land to VoIP (LV), and KRW 14.5 per 10 s on Land to Mobile (LM). The corresponding rates of VoIP are KRW 39 on LL, KRW 30 on LV, and KRW 13.0 on LM. While VL and LL rates are set at similar levels for voice telephony and VoIP, VM and VV rates are set at significantly lower levels compared to LM and LV rates. LG Dacom and SK Broadband also have set similar rates to that of KT, but are only slightly lower rates with respect to LM. Most research on VoIP rates has found that although standard rates are set at different levels among service providers, on average, VoIP rates on long-distance and international calls are 70% – 80% lower than those for landline telephones. In particular, the rates of special category telecommunications operators are typically lower than those of common carriers. This can be interpreted as a cost differentiation strategy of players with a disadvantage in terms of brand power and reputation. 2.2.4. Call usage As in other measures of VoIP performance, call usage has also shown rapid growth. In the period from 2007 to 2008, VoIP usage increased in all service sectors. As Fig. 2 indicates, in 2008 the total call usage was 3.78 billion min, which represented a 338.09% increase from 2007. Notably, LV and MV usage recorded growth of 779.13% and 492.33%, respectively. Analyzing the VoIP market share by service, VM calls captured the largest proportion of total usage at 44.50% and 43.62% in 2007 and 2008, respectively. VL calls accounted for the next largest proportion with 36.43% and 30.34% in 2007 and 2008, 5

For example, the lease fee for Internet-only lines is KRW 1500 per subscriber.

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Table 3 VoIP revenue trend. Source: submitted reports of VoIP service providers. (In KRW 100 million)

2006

2007

2008

VoIP revenue

235

933

2335

respectively. In total, VM and VL calls made up approximately 80% of total VoIP usage, which was attributed to the small number of subscribers. VV calls were 6.05% of the total usage and calls to VoIP phones, LV calls, and MV calls were 14.26% and 5.73% of total usage, respectively.

3. Literature review Research estimating the demand function for telecommunication services has proceeded in various fields. There have been a particularly high number of studies on the voice telephony demand function. Through a generalized least square regression of the call demand function for local, long-distance, and international calls, Sung [14] found that local call demand was indifferent to price change while long-distance and international call demand was sensitive to it. Ahn[1]) predicted the subscription demand in individual countries under the assumption that the subscription rate of mobile phones would be affected by country-specific factors. This study found empirical evidence that mobile phone subscription rates have a non-linear relationship with GDP and that the number of landline phone lines and mobile phone subscription rates have positive relations. Further, DotEcon [3] estimated the price elasticity of mobile telephony by using a simple static model, a dynamic model, and an error correction model. The study verified that the short- and long-term price elasticity of mobile telephony is inelastic. Alternatively, Jeong and Cho [6] used a generalized method of moments model to estimate the price elasticity of mobile telephony. Secondly, there have been many studies that have found empirical evidence of fixed-to-mobile substitution. Murphy [12], Horváth and Maldoom [5], Moon [11], Park et al. [13], and others examined fixed-to-mobile substitution using time-series call usage data. Murphy [12] argued that the bundling of minutes according to usage minutes had the most significant effect on call usage, while Horváth and Maldoom [5] claimed that landline and wireless telephony turned into substitutes and not supplements from the change in landline telephony expenses. Moon [11] analyzed the cross elasticity and elasticity of fixed-to-mobile substitution and Park et al. [13] found evidence of fixed-to-mobile substitution at a small scale as the mobile communications market reached maturity. Lastly, we noted that studies estimating VoIP call demand function were relatively rare when compared to estimations of landline and wireless call demand functions and also when compared to empirical studies on fixed-to-mobile substitution. Kim [8] surveyed VoIP subscribers to analyze the intention of subscription from a demographic perspective; however, this study did not attempt a macroeconomic time-series analysis. The lack of such an analysis on the VoIP market could have been attributed to an insufficiency of reliable data sources on call usage and the existence of various types of VoIP. A report by Chung [2] represents the only paper that attempted to estimate the VoIP call demand curve. This paper estimated a demand function based on a general least squares model using rates of VoIP, rates of landline telephony, rates of mobile telephony, per capita GDP, and VoIP quality of service, and concluded that VoIP and voice telephony have a supplementary relationship. However, even this paper was limited in its findings, given their use of estimated data for KT rather than actual call usage data and their failure to control for endogeneity among variables such as price index, number of subscribers, and lagged call usage.

Fig. 2. Call usage of VoIP by Service (2007 to 2008 quarterly data).

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4. Empirical analysis of VoIP call demand function 4.1. Hypothesis development This study estimated the call demand function of VoIP based on previous literature. As previously explained, a general call demand function includes explanatory variables on price elasticity, income elasticity, and cross elasticity, among others. Following from previous studies, we used a general model to estimate the VoIP call demand function. In doing so, we developed five hypotheses and provided supportive empirical evidence for them. These hypotheses are as follows: (1) Hypothesis 1: VoIP call demand is elastic to VoIP rates and the price elasticity of VoIP call demand will be larger than 1. We hypothesize this will be valid considering that there is price competition among VoIP service providers in the early stage of market growth and that most early subscribers are sensitive to rates. H0 : jα1 j N 1 VoIP call demand is elastic to VoIP rates. H1 : jα1 j≤1 VoIP call demand is inelastic to VoIP rates. (2) Hypothesis 2: VoIP will be a supplement or substitute to other telecommunications services. First, we assume that VoIP is a substitute to landline and mobile telephony. Since VoIP has both calling and receiving functions and the gap with landline telephony (LL, LM, and LV) and mobile telephony (ML, MM, and MV) has narrowed, it is natural to assume substitution. H0 : α2 N 0 VoIP is a substitute to landline telephony. H1 : α2 b 0 VoIP is a supplement to landline telephony. H0 : α3 N 0 VoIP is a substitute to mobile telephony. H1 : α3 b 0 VoIP is a supplement to mobile telephony. (3) Hypothesis 3: VoIP call demand will be inelastic to income level. VoIP is expected to be a necessary good, as with other landline and wireless telecommunications services, thus being inelastic to income. H0 : jα4 j N 1 VoIP call demand is elastic to income level. H1 : jα4 j≤1 VoIP call demand is inelastic to income level. (4) Hypothesis 4: VoIP call demand will be affected by network externality. Increase in new subscribers provides benefits to existing subscribers by increasing the possibilities of calls. This network externality increases individual and social benefits. H0 : jα5 j N 1 VoIP call demand is affected by network externality. H1 : jα5 j≤1 VoIP call demand is not affected by network externality. (5) Hypothesis 5: VoIP call demand will be affected by lagged variables given that new subscribers require time to perfectly adapt to VoIP. This hypothesis reflects the durability of user habits, adjustment costs, and inaccurate expectations. 4.2. Research method and results 4.2.1. Estimation model for rate elasticity Similar to other telephone call demand functions, the demand for VoIP subscription and the demand for call usage can be distinguished; however, the two demand functions are correlated. Under this condition, VoIP call demand is determined by VoIP rates, rates of other telephony, income level, and the number of subscribers. Other factors, such as registration fee or phone price, which are factors determining subscription demand, can affect VoIP call demand. This is due to the correlation between subscription demand and call demand. However, due to the limitations in available data, we estimated VoIP call demand without considering subscription demand.6 Estimation of a demand curve in consideration of registration fees should therefore be a subject of future research. We used the E-VIEWS package to estimate the model. In this model, variables included in the VoIP call demand function were as indicated below. VoIP call demand7 (denoted (Q *t, q*t )) was expressed as a function of these variables.

Qt = QðPVt ; PMt ; PLt ; Yt ; Nt Þ

Total amount of calls from a VoIP phone Qt Pt = (PVt, PMt, and PLt) VoIP call rate index, mobile call rate index, land call rate index Nt number of VoIP subscribers Yt income level Call rate indexes were adjusted by the consumer price index to reflect real prices. Rates consisted of VoIP call rate indexes, land call rate indexes, and mobile call rate indexes, denoted by V, L, and M, respectively.8 We derived cross elasticity and price elasticity by estimating a demand function using these explanatory variables. The number of VoIP subscribers was included to reflect 6 7 8

This requires reliable data on prices of VoIP phones and amounts of subsidies—data which is currently unavailable. VoIP call demand includes all calls from a VoIP phone. Data has been verified by the Korean government. V, L, and M stand for VoIP, Land, and Mobile, respectively. A call from VoIP can be classified as VV call, VL call, and VM call, according to the receiver.

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network externality. An increase in new subscribers provided benefits to existing subscribers by increasing the possibilities of connections. This network externality increased individual and social benefits. Individual benefits are those benefits for the new subscriber, while social benefits represent the sum of individual benefits and the benefits to the existing subscriber. [10] Real GDP was used as a proxy for income level. We have considered adding a dummy variable to reflect number portability in the model since it has great effects on the growth of the Korean VoIP market in terms of policy in the process of developing a model, but the analysis results showed that it has little or no statistical significance. The results of analysis including number portability as a dummy variable are described in Appendix (a). It was analyzed that the value achieved in the analysis including number portability as a dummy variable is insignificant because implementing number portability has greater effects on subscription demand than on call demand. It can indirectly affect call demand through network externality, but the data used in this paper was last updated in June 2009 and having only six samples since the implementation of number portability was another factor. Therefore estimating call demand curve while reflecting subscription demand including number portability belongs in the scope of the next research study for which enough data is accumulated. We employed a log-linear model, using a two-stage least squares method (2-SLS), to estimate the elasticity of the VoIP call demand function. In most previous studies, on call demand estimation of communications services used an ordinary least squares method (OLS); however, in this paper, we applied the 2-SLS method, which was used on regressions with endogenous variables as explanatory variables. From an econometric standpoint, the 2-SLS was a more reliable method of estimation when explanatory variables, such as rates, income, and number of subscribers, were regressed on VoIP call demand. Additionally, we tabulated the results from the OLS regression for comparison. For this, a constant, lnPVt − 1, lnPLt − 1, lnPMt − 1, lnNt − 1, lnYt, was used as an instrumental variable to compute efficient estimators. The regression model used to estimate VoIP call demand is displayed below. lnQ t = α0 + α1 lnPVt + α2 lnPLt + α3 lnPMt + α4 lnNt + α5 lnYt + εt

(2) Instrumental variables: constant, lnPVt−1 ; lnPLt−1 ; lnPMt−1 ; lnNt−1 ; lnYt ; lnQ t−1

ð3Þ

Total amount of calls from a VoIP phone Qt Pt = (PVt, PMt, and PLt) VoIP call rate index, mobile call rate index, land call rate index Nt number of VoIP subscribers Yt income level

4.2.2. Sample selection 4.2.2.1. Overview. We used monthly VoIP call rates for the 42 months from January 2006, the point at which Korean VoIP market participants initiated competition, to June 2009. Monthly VoIP subscribers of Korean VoIP service from providers such as KT, LG Dacom, and SK Broadband, as well as total V calls, were used to estimate call demand. V call, L call, and M call rates were used to estimate rate index and real GDP was used to proxy for income level. To check whether the time-series variables were stationary, we conducted a seasonal unit root test.9 All variables except income levels had a unit root and all unit roots from the sample were eliminated by differentiation. Further, we conducted an ADF test (augmented Dickey-Fuller test) and applied only the first differentiation (Table 4). We conducted a cointegration test to check for a long-term relationship among variables in the model. After a least squares estimation, we conducted a unit root test on the residual errors. Cointegration existed when the linear combination of variables were stationary, even though individual variables were non-stationary (i.e., an individual time-series data may have had unit roots due to its cumulative nature, but a linear combination that generated a stationary time-series variable may have existed). The cointegration test found a condition whereby individual time-series variables did not have a spurious correlation, despite the existence of unit roots, allowing the regression results to become meaningful. The multivariate Johansen conintegration technique was applied broadly due to its superiority over other cointegration tests. We applied this test in this study and the results are reported in (Table 5). The null hypothesis that posits the variables have no cointegration was rejected at the 1% and 5% levels and thus, the results suggest that a long-term relationship existed among all variables in the model. The results of a regression test were not meaningful when non-stationary time-series variables formed a non-stationary linear combination. However, when cointegration existed, the model converged to equilibrium in the long-run and the results of a regression were then interpreted as meaningful. 9

The augmented Dickey–Fuller test was used as a unit root test.

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Table 4 Comparison of logarithmic unit root test. Source: statistical analysis. Variable

ADF test statistic

lnQ t lnPVt lnPLt lnPMt lnNt lnYt

Level variable

Difference variable

7.2800 − 0.7463 − 0.4513 − 0.9578 11.9435 − 0.2723

− 3.6397⁎⁎⁎ − 9.2481⁎⁎⁎ − 11.0444⁎⁎⁎ − 10.4567⁎⁎⁎ − 1.6986⁎ − 10.1334⁎⁎⁎

Note: ⁎ Significant at the 10% level; ⁎⁎⁎ Significant at the 1% level.

Table 5 Cointegration test results. Source: statistical analysis. Test

Trace statistic

Johansen cointegration test

130.3643

Critical value

Hypothesized no. of CE(s)

5%

1%

94.15

103.18

None a

Model: lnQt, lnPVt, lnPLt, lnPMt, lnNt, lnYt. a Denotes rejection of the hypothesis at 5% (or 1%) significance level.

4.2.2.2. Call demand (Qt). Call demand (Qt) was calculated as the total VoIP call usage computed monthly as the sum of V calls (VL calls + VM calls + VV calls) measured by minutes. Call demand was proxied by call usage; VL calls were calls made by VoIP phones and received by land (landline phone), VM calls were calls made by VoIP phones and received by mobile phone, and VV calls were calls made by VoIP phones and received by VoIP phone. The total V call usage has exhibited a rapidly increasing trend which can be attributed to an increase in VoIP subscribers as common carriers have started promoting their VoIP business. We applied a seasonal adjustment on VoIP usage data to control for the seasonality in the monthly change. An X11-ARIMA method was used for seasonal adjustment. V call usage has recorded annual growth of 197.02% and 295.35% in 2007 and 2008, respectively. Monthly VoIP call usage is illustrated in Fig. 3. 4.2.2.3. Rates10. Recently, the standard rates of VoIP service providers in the Korean telecommunications market have been fairly stable; however, their rate policies tend to differ in detail, such as within-network discounts, package product discounts, and basic fee discounts. For example, the mobile communications market offers discounted rates on specific time slots, such as daytime or late-night; however, landline telephony and VoIP rates are mostly indifferent, except for some basic fee discounts. 4.2.2.4. V call rate index. To estimate the V call rate index, we collected monthly data on the basic fee and usage fee of VoIP service providers, which was then estimated based on the minutes of user (MOU), which was calculated using the number of VoIP subscribers. The basic fee was summed up with the usage fee of each service provider. Next, we reflected the level of rate discounts for each service provider based on various discount policies. The composite rate index was then computed by applying the weight of the market share on each service providers' rate levels. Finally, we reflected the consumer price index on the composite rate index to generate the VoIP V call index. 4.2.2.4.1. L call rate index. The L call rate was estimated by collecting monthly data on basic and usage fees for each service provider. The basic fee of each service provider was estimated based on the MOU, which was calculated using the number of landline telephony (L) subscribers. The sum of the basic fee and usage fee was the total rate for each service provider. L call rates were set at KRW 39 for the first 3 min (KT standard rate); however, since the usage time varied from 0 to 180 s, we calculated the average usage time based on a sample test. The rate index was estimated on the assumption that the average usage time was 90 s. For discount time slots, when rates are set at KRW 39 for the first 258 s, we assumed that the average usage time was 129 s. Next, we estimated the basic fee by reflecting information on the various basic fee rates and the corresponding subscriber ratio. The weights on various products were based on statistics provided by KT. We reflected the package discount rates of individual service providers and computed a weighted average rate index based on market share. Finally, we reflected the consumer price index on the composite rate index to generate the VoIP L call index. 4.2.2.4.2. M Call rate index. The M call rate index was computed in a similar process to that of the M call and L call rate indexes. First, we analyzed the basic and usage fees for the three major mobile telecommunications providers. Each company's weighted 10 VoIP rates were estimated using the rate index. The rate index of each communication type was computed by applying weights according to usage on the rates of each service provider and including information on within-network discounts, package product subscribers, and other discount rates.

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Fig. 3. Monthly VoIP call and receive usage.

average basic fee was computed reflecting the usage data according to time slot and usage time. The weighted average basic fee was scaled by monthly MOU to compute the basic fee per minute. Since M calls rates were based on 10 s, we converted the unit of measurement to minutes for comparison with other types of communication. A mobile phone rate index was then computed by applying the weighted average of the usage fee level for each service provider, reflecting their average fee level and monthly usage time. We reflected the package discount rates of individual service providers and computed a weighted average rate index based on market share. Finally, we reflected the consumer price index on the composite rate index to generate the VoIP M call index. 4.2.2.4.3. Rate index. Fig. 4 presents the rate index for V, L, and M calls. M calls were the most expensive, followed by L and V call rates. These results imply that VoIP has cost competency over landline telephony. Also, the rate levels for each V, L, and M calls were all significantly different over the entire time frame. A trend was also observable from the rate indexes. The M call rate index exhibited a persistent decline, while L and V call rates were relatively stable. This result can be interpreted as the effect of continuous discount policies, such as bundled products, within-network discount, and flat rate products, by the mobile communications service providers, which have occurred since 2006 when excessive mobile phone expenditures became a nationwide issue. On the contrary, L calls were priced close to their cost and thus, had minimal room for discounts. The price for landline phone calls even had reasons to be raised, due to the fixed-to-mobile substitutions; however, the surrounding conditions did not allow for price raises and landline telephony therefore provides services lower than its cost as a universal service. V calls have been offered at prices lower than L calls and maintained a stable level, due to the stable prices of L calls; however, the recent competition among VoIP service providers has led to the introduction of new bundled products at discounted prices. 4.2.2.5. Number of subscribers. The number of subscribers is a proxy for the magnitude of impact of network externality on call demand. An increase in the number of subscribers should increase call demand and therefore, the elasticity is predicted to be positive. In other words, an increase in the total number of subscribers increases the value offered to an existing subscriber of the network. Another factor to consider in regard to subscriber numbers is the registration fee. The number of VoIP subscribers in Korea has increased rapidly from 110,000 in 2006, to 440,000 in 2007, to 221,000 in 2008, and finally, to 429,000 as of June 2009. The sudden increase in VoIP subscribers can be attributed to the low cost, improvement in the quality of service, and the approval of number portability.

Fig. 4. Call rates of landline telephony (L), mobile phone (M) and VoIP (V) (Unit: KRW).

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4.2.2.6. Income level. An individual's income level is predicted to have a positive impact on call demand. Subscribers of any telecommunications service should have more disposable income to purchase additional goods when his/her income level increases (other factors being equal). In other words, if telecommunication services are considered normal goods, call demand should increase as income level increases. Income level can be proxied by various economic indicators; however, we employed real GDP data from the Korean National Statistics Office, which is most widely used in studies. 4.2.3. Estimation results of rate elasticity and hypothesis testing 4.2.3.1. Estimation results of rate elasticity. We assumed a log-linear function of the VoIP call demand and used the 2-SLS method for estimation. We confirmed that the time-series data was stationary by testing the model with unit root and cointegration tests. We applied both 2-SLS and OLS methods for estimation, and after finding seasonality in call demand, we applied a seasonal adjustment on the affected variables. E-VIEWS, a widely used tool in time-series analyses, was used in this study, the results of which are presented in Table 6. 4.2.3.2. Hypothesis testing. The VoIP call demand estimations in Model I (2-SLS) and Model II (LS) indicated statistically significant results. In Model I, the coefficients on the variables' VoIP price elasticity, cross elasticity (with landline telephony), and network externality were significant. In Model II, the coefficients on all variables except income effect were significant. First, the coefficient on lnPVt, which implied the elasticity of VoIP call demand to price (rates), was negative and the elasticity coefficient was −5.04 (−2.15), which was statistically significant at the 5% level. The test results clearly showed the relationship between price and demand. When VoIP rates increased, subscribers reduced the amount of VoIP usage. To elaborate the magnitude of change, a 1% reduction in VoIP rates was associated with a 5.22% increase in VoIP usage, which implied the high price elasticity of VoIP call demand. Second, the coefficient on lnPLt, which indicates the cross elasticity between landline telephony rates and VoIP call demand, was positive, which was consistent with our prediction. The elasticity coefficient was 10.07 (3.01). Taken together, the results provided empirical evidence against the previous study by Chung [2], which claimed that “VoIP, with only call function, is used only as a supplement to landline telephony.” We found VoIP to have been increasingly perceived as a substitute, not simply a supplement, to landline telephony and to have very high cross elasticity. Therefore, we can conclude that landline telephony rates have had a significant impact on VoIP call demand, and, in particular, we can easily assume that landline telephones and VoIP prices have critical influence on the demand for each other given that the type of calls performed is similar. Third, the coefficient on lnPMt, which represented the cross elasticity between mobile phone rates and VoIP call demand, was positive. In addition, the elasticity coefficient was 3.33 (0.49) and had a t-value of 0.49 in Model I and was insignificant. In contract, it had a t-value of −2.87 in Model II and was significant at the 1% level. Fourth, the coefficient on lnYt, which implied the relationship between income level and VoIP call demand, was positive at 0.35 (0.34). The results weakly suggested an income effect, but were not significant. Intuitively, increased income should have led to an increased use of telecommunications services. Given this, the low elasticity coefficient may be interpreted that VoIP call demand increases were affected not by income increase, but by the aggressive marketing activities of service providers in their efforts to increase the number of subscribers. Fifth, the coefficient on lnNt, which showed the association between network externality and VoIP call demand, was positive, as predicted, at 1.18 (5.39). It was significant at the 1% level, suggesting that VoIP call demand, similar to that of other telecommunications services, was influenced by network externality.

Table 6 Results on the elasticity estimation on VoIP call demand.

Variable C ln(PV) ln(PL) ln(PM) ln(real GDP) ln(VoIP subscribers) R2 Adj-R2 S.E. of regression D–W stat

Model I (2-SLS: 2 stage least squares)

Model II (LS: least squares)

Coefficient − 40.46 (− 1.11) − 5.04 (− 2.15) ⁎⁎ 10.07 (3.01) ⁎⁎⁎

Coefficient 8.52 (1.03) − 2.73 (− 5.33) ⁎⁎⁎ 6.52 (4.31) ⁎⁎⁎ − 4.03 (− 2.87) ⁎⁎⁎ 0.18 (0.37) 0.88 (21.25) ⁎⁎⁎

3.33 (0.49) 0.35 (0.34) 1.18 (5.39) ⁎⁎⁎ 0.978 0.975 0.196 1.947

Dependent variable: VoIP usage ln(V) Instrumental variable: lnpv(− 1) lnpl(− 1) lnpm(− 1) ln real gdp lnVoIP subscribers(− 1) lnVoIP usage(− 1) Note: T-statistics are reported in the parentheses. ⁎⁎ Significant at the 5% level. ⁎⁎⁎ Significant at the 1% level.

0.992 0.991 0.119 0.976

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Fig. 5. Conducting the in-depth interview.

5. Results of VoIP analysis and policy implications 5.1. In-depth interview This study collected data after conducting an in-depth interview with senior officials in charge and experts on the condition of Korean VoIP service market. In-depth interview technique is widely used in the qualitative analysis, and it can collect detailed data, and easily control the areas of interest by interviewees. Given that the target of this study are groups of experts with conflicting interests in the VoIP service market, it will be useful to conduct a group or one-to-one in-depth interview according to the characteristics of a group. Interview was conducted from May 17, 2010 to June 9, 2010, and the interviewees are 20 persons from 4 groups made up of VoIP service provider, landline service provider, mobile service operator, a national research institute under a government department and government officials. The organizations to which interviewees belong are shown in the below Appendix (b). There are VoIP service provider including SKTL, Onse, KCT (2 persons per company), landline service provider including KT, SKB (2 persons per company), mobile service operator including SKT, KTF, and LGT (1 persons per company), national research institutes including ETRI and KISDI (total 5 persons), government officials (2 persons). In-depth interview adopted Kvale's [16] seven stages like (Fig. 5) and the 3-stage interviews were gradually conducted according to the characteristics of groups to boost its response rate and the efficiency of products. The first interview was a group open-ended interview with the form of pre-planned semi-structured questionnaire for Group II–III made up of landline service providers, mobile service providers. The interview helped to understand the operators' different perspectives and competition structure in the telecommunication market. The second interview was conducted with communication policy makers and researchers in Group IV. The in-depth interview was conducted by telephoning and visiting interviewees. the interview with 2 interviewees from SKTL, Onse, KCT were included. The results of this in-depth interview with four groups in the Appendix(b) are analyzed as follows Table 8. i) VoIP service providers The phenomenon of the transition from fixed line phone to VoIP phone is determined to lead to a conversion to call subscription by consumers who are sensitive to call rates and service quality. In particular, VoIP phones are recognized to have a higher price elasticity, and business strategies aimed at increasing call demand through price reduction are being reviewed in order to compete with fixed line phones. However, there is a possibility that price reduction aimed at increasing call demand can lead to reducing profitability, so business strategies for reducing the prices of bundling packages with other telecommunications services providers are being implemented rather than direct rate reduction, and there is also the need to expand the method of rate reduction to include the provision of unlimited free calls when calls are made between the subscribers of the same service provider. Although VoIP service providers predict that VoIP call demand won't be decreased in a short period of time after reducing the rates of fixed line phones, they expect that rate reduction will eventually affect VoIP call demand in the long-distance telephone market. Meanwhile, VoIP service providers are seeking to develop various IP-based supplementary services in order to use different strategies than fixed line telephone while also continuously fighting the price war. Also, the quality of VoIP calls has Table 7 Rate comparison of VoIP and local phone services. Source: user agreements (as of March 2009). Call

Receive

Local

KT LG Dacom SK Broadband KT LG Dacom SK Broadband SK Telink Samsung Networks

VoIP

LL (VL)

LV (VV)

LM (VM)

Rate (KRW)

Per seconds

Rate (KRW)

Per seconds

Rate (KRW)

Per seconds

39 39 39 39 38 38 39 39

180 180 180 180 180 180 180 180

49 47 47 39 38 38 39 39

180 180 180 180 180 180 180 180

14.5 14.6 14.5 13.0 11.7 11.7 13.0 11.9

10 10 10 10 10 10 10 10

Note: This table includes rates of the most frequently used rate plans from respective service providers.

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Table 8 Summary of in-depth interviews. Market analysis VoIP service providers

- Low prices and improvement in quality of service have led to the growth of the VoIP industry - Mobile VoIP services are regulated and have limited impact on the VoIP industry - Number portability and bundled product offerings have led to increase in subscription Landline phone - Increased substitution of landline by service providers VoIP due to lower prices and improved quality of service - Regret not having cut prices in response to VoIP in its early stage of development - Number portability is the most important factor in the growth of the VoIP industry Mobile phone - The growth of the VoIP industry has service providers limited impact of mobile phone call demand - No reason to change business strategies as a response to VoIP Government and - Landline and VoIP have become research institutions substitutes - Number portability is the most important factor in the growth of the VoIP industry

Business strategy / policy directions

Future prospects

- Considering lower prices to increase VoIP call demand - Indirect discount policy by offering bundled products since price cuts may damage profitability - Developing IP-based services to differentiate from landline phones - Lobbying for higher VoIP connection fees and lower landline connection fees - Aggressive marketing by emphasizing the advantages of landline phones - Price competition with VoIP

- Continued growth of the VoIP industry would result in becoming a direct competitor to landline phones - Expansion into mobile VoIP businesses

- Lobbying to prevent deregulation of mobile VoIP and issuance of phone numbers to mobile VoIP handsets - Allowing internet-based mobile data service but not voice transmissions - Considering policies to preserve landline phones - Deregulation of landline phone prices to be determined based on quantitative analysis of VoIP call demand - Giving same market definition to landline and VoIP

- Mobile VoIP will substitute for mobile phone call demand in the long-term

- Long-term plans to enter the VoIP industry by initiating business projects and making network investments

- Increased competition between landline and VoIP - Considering deregulation of mobile VoIP to increase competition in the mobile communications industry

significantly improved since the initial phase of the market rollout, so quality is not a major negative factor for VoIP phones in competing with fixed line phones. VoIP service providers recognize that competition with mobile phones in the VoIP market is insignificant since mobile VoIP is not yet allowed by law. In addition, when asked about the influence of VoIP number portability on their business strategies, they replied that VoIP number portability has greatly increased subscription demand by reducing conversion cost according to their analysis, and they recognize that increased subscription demand has also indirectly influenced the rise of call demand. Of note, VoIP service providers have changed their strategies for the competition right before and after the implementation of number portability. Prior to the implementation, they carried out their business activities by focusing on securing a new market rather than competing with voice telephones, but initiated direct marketing competition after recognizing the market as the same as that of voice telephone. Finally, VoIP service providers in Korea recognize securing a stable source of revenue is a very important business goal, and place emphasis on ensuring profitability when developing directions to cope with the government policies. More specifically, VoIP access rate increase, demand for reduction in fixed line call rates, business diversification through the implementation of mobile VoIP, and implementation of number portability for promotion of VoIP phones were reviewed. ii) Landline service providers Just like VoIP service providers, landline service providers have also judged that the speed of fixed line phones being replaced by VoIP phones will accelerate. In particular, they see low rates as a strong advantage for VoIP phones, and recognize that accelerated replacement of landline phones by VoIP phones was a major factor in closing the gap between VoIP and landline phones in terms of QoS and overall level of quality. It's obvious that consumers prefer low rates. VoIP service providers are in an advantageous position in terms of call rates, and therefore they're concentrating their efforts on attracting new subscribers by telling them their rates are lower that those of landline service providers. Landline service providers are making strenuous efforts to come up with measures to prevent the transitional phenomenon and minimize the reduction of their sales. One of the direct methods of preventing the transitional phenomenon is to lower the landline call rates to the level where they can slow down the transition. In this case, they can stop people from subscribing and replacing their phone service, but their sales volume will be drastically decreased especially since they have more subscribers than VoIP service providers. They can slow down subscription and call replacement by highlighting the advantages of using landline phones. They are still able to slow down the transition by advertising the higher quality of service and emergency call availability than VoIP phones, but predict that there is a limit for the functionality of landline phones to stop the transition due to the mobility and versatility of more widely used mobile phones.

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When asked about the influence of VoIP number portability on their business strategies, their response was the same as that of VoIP service providers. In short, they have analyzed that VoIP number portability has reduced the conversion cost and significantly increased subscription demand, and they also recognize that the increase in subscription demand had indirect effects on increasing call demand. Landline service providers also started reducing call rates and marketing competition after the implementation of number portability. In conclusion, landline service providers are actively planning to participate in long-term VoIP projects and invest in network. Of note, the results of the interview showed that while landline service providers acknowledged that rate reduction is an effective strategy for competing with VoIP phones, they also said that progressive reduction of call rates from the initial growth stage of VoIP phones would be a suitable timing. iii) Mobile Service Providers Mobile service providers evaluated that the growth of the VoIP market still has only limited influence on mobile phone call demand. In short, they replied that there is no need to change their business strategies in the mobile telecommunications market just because the VoIP market is growing. However, they acknowledged that once m-VoIP is implemented, there is a high probability of mobile phone call demand being replaced by it based on low rates. On this background and in principle, mobile service providers oppose the implementation of mobile VoIP phone services and issuing of numbers. In the case of smart phones such as iPhone in particular, they can tolerate the introduction of mobile internet services in the market, but their point of view is that they will try to stop the introduction of voice phones since they are their main source of revenue. iv) Government and research institutes The Korean government and research institutes view VoIP as a new market as the cross elasticity of landline and VoIP phones are being substituted, and they're promoting VoIP in their actively promoted policies while considering the competitive structure with landline phone. In particular, they recognize the need for a preliminary analysis of the effects of reduction of landline phones on communication laws since most of the regulations in the area of communication became laws centered on landline phones. More specifically, the emergence of VoIP as an alternative mean has called for the need to lift or change some of the restrictions on call rates that have been applied in landline phones, and it's reasonable to determine VoIP call demand in consideration of a quantitative analysis when reducing local and long-distance call rates. Furthermore, it's also necessary to determine the need to analyze the landline and VoIP phone services as the same market when demarcating the market in the process of analyzing the competition status to evaluate effective competition in the communications market. Meanwhile, both the government and research institutes have evaluated that the implementation of number portability has extended the transition to VoIP subscription. The plan to reflect the empirical analysis results of VoIP call demand curve in improving universal services and calculating the future-oriented access fees since fierce competition between VoIP and landline phone service providers will lead to reducing the number of landline phones in the near future. 5.2. Key findings In this research study, a quantitative estimation of VoIP call demand curve in the initial stage of landline phone replacement by VoIP phones as well as a reevaluation of the feasibility of the empirical analysis results were gathered from an interview experts from each respective field. The analysis findings included effective business strategies of major service providers in the face of the growth of the VoIP market and implications of government's policy directions as follows: 5.2.1. Finding 1: from the initial stage of marketing, VoIP service providers need to maintain their low call rates and implement multilateral package discount strategies as part of their business strategy to promote VoIP services The fact that VoIP has a high price elasticity was shown in the results of the empirical analysis as well as in the business strategies of VoIP service providers mentioned in the interview. VoIP service providers in Korea continued to reduce their VoIP call rates in order to gain a more competitive position for their VoIP services from the initial stage, and it was analyzed that this is closely related to the results of the empirical analysis that showed the high price elasticity of VoIP phones. In short, the finding showed that VoIP service providers in Korea have implemented strategies aimed at replacing landline call demand with low call rates. More specifically, the analysis showed that the aggressive marketing and price competition between Korean VoIP service providers such as SKTL, Onse, and KCT have drastically reduced the call demand of KT, which is a pioneer company in the market, and this led KT, which is also a market dominating company in the landline service market, to change its business strategies to become more active in providing VoIP phone services and improve the quality of its services. Accordingly, VoIP service providers in foreign countries with a telecommunications infrastructure similar to that of Korea need to develop business strategies encompassing call rate reduction from the very outset in order to promote their business. In the case of Korea, VoIP call rates are almost as low as the prime cost, so it was analyzed that pricing strategy aimed at bundling packages or specific consumer groups rather than direct rate reduction is more effective. 5.2.2. Finding 2: it is important for landline phone service providers to reduce strategy as their counter-strategy, and the timing of price reduction can have an important effect on the success of the strategy It was effective for landline phone service providers to lower call rates in order to minimize the call demand replacement caused by the increased penetration of VoIP services, but the timing of rate reduction has proven to be just as important. In short, it

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was analyzed that implementing a strategy to reduce rates prior to subscription replacement with VoIP takes place in full swing. Landline service providers in Korea used the strategy of reducing call rates when the number of VoIP phones rose rapidly, and such business strategy seems to be in concurrence with the empirical analysis that showed the cross elasticity of VoIP and landline phones is high. However, the results of the interview also showed that all landline phone service providers agreed that their counter-strategy for rate reduction would have been more effective if it was implemented earlier. There was also a limit to reduce landline phone call rates since the government wants to promote VoIP phone services. 5.2.3. Finding 3: the rapid growth of the VoIP phone service doesn't have great effects on the mobile telecommunications market, and the implementation of mobile VoIP services can be a major issue The proliferation of VoIP phones is shown to have a little effect on the Korean mobile telecommunications market. In short, it was analyzed that VoIP phones don't have any relation with mobile phones that usually replace landline phones. In an in-depth interview, people also answered that there is no need for mobile service providers to change their business strategies in regards to the growth of the VoIP market. However, they see the implementation of m-VoIP as an important variable that can replace the call demand of mobile telephony. 5.2.4. Finding 4: in terms of policy, number portability can reduce the conversion cost of VoIP phones and have a great effect on the promotion of VoIP phone services Telecommunications services providers evaluated that along with low call rates, the implementation of number portability has contributed to promoting VoIP phone services. In short, they claim that number portability has contributed to increasing the number of users in the VoIP market by lowering the conversion cost necessary to enter the market. The results of the interview showed that VoIP service providers regard number portability as the most effective government policy, and their competitors, namely landline service providers, have answered the same way. However, an empirical analysis in which number portability was included as a dummy variable in the call demand curve yield statistically significant results. Such result was largely because subscription demand was not considered in estimating the call demand curve of VoIP phone services in this research study and also because of the lack of enough samples since the implementation of number portability. Furthermore, it could also be because the implementation of number portability has induced the increase of VoIP service subscribers and indirectly increased the number of call by increasing the number of subscribers. In this research study, the number of VoIP service subscribers was used as an explanatory factor in estimating network externality. 5.2.5. Finding 5: there is a need to supplement the policy centered on voice phones while considering competition with VoIP services when landline phones are replaced by VoIP phones In Korea, the size of the landline phone market has greatly reduced with the rapid growth of the VoIP market. This led to drastically reducing the sales volume of KT, which is the largest landline phone service provider in Korea, while the prime cost only showed a moderate reduction. Such change in the prime cost structure caused chaos in the regulatory system centered on landline phones. More specifically, the amount of loss in universal service which is compensated by government funding has greatly increased, and reduced number of landline calls has created the problem of drastically increasing landline call rates. Accordingly, the overall regulatory system centered on landline phones needs to be reevaluated in advance at this point when landline phones are being replaced by VoIP phones. In Korea, efforts are being made to solve the problems caused in the process of replacing landline phones with VoIP phones, more specifically in policy issues regarding access prices, universal services, wholesale prices, competition status assessment, and implementation of mobile VoIP phones. 5.2.6. Finding 6: the results of VoIP call demand curve estimation and prediction can be used in developing policies on setting futureoriented access rates and analyzing economic conditions Korea's policy on ubiquitous access is centered on future-oriented LRIC (Long-Run Incremental Cost) and it sets standards for calculating access prices. More specifically, call volume is estimated based on the call demand curve in setting landline and mobile call rates, while VoIP call rates are calculated at about 80% of the voice calls. The results of the estimation and prediction of VoIP call demand curve in this research study were directly used in calculating the VoIP call rates in Korea based on the prime cost. In addition, it is important to determine a related market in order to evaluate the competitive environment of the communications market, and the main point at issue in the evaluation of Korea's economic conditions is the market segmentation of landline and VoIP phone services. In other words, the issue at hand is to whether VoIP and landline phone services can be considered the same market, and so far only qualitative analyses are being performed. The results of the empirical analysis in this research study showed that landline phones can be replaced by VoIP phones, and they can be used as policy data for having VoIP and landline phone services segmented in the same market. 6. Conclusion and limitations In conclusion, the findings of this research study showed that VoIP and landline call rates are the most influential variables in VoIP call demand, and that network externality is another variable that has substantial influence. In particular, landline call rates are no longer a complementary factor but a replacement factor that can have intricate effects on VoIP call demand. At the same time, the results of such empirical analysis and interview can influence or be reflected on various policies for ensuring sustainable

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growth of the telecommunications market, and I think it can contribute to developing effective business strategies for telecommunications services providers as well. In particular, I hope this could be an important lesson for countries wishing to promote competition in the landline phone market by implementing VoIP phones as a convergence service as well as telecommunications services providers that are seeking to develop new business strategies in such an environment. Unfortunately, this research study has certain limits in that factors excluding subscription demand were used to estimate the price elasticity of VoIP call demand because of limited data and that we weren't able to reflect the effects of empirical analysis following the implementation of number portability due to lack of samples. It's forecasted that there is a need to estimate the call demand curve while considering the characteristics of the VoIP market where dynamic changes of conditions such as rapid technological advancement and growth trend are expected to take place. Acknowledgement This research was supported by the KCC (Korea Communications Commission), Korea, under the CPRC (Communications Policy Research Center) support program supervised by the IITA (Institute for Information Technology Advancement) (IITA-2009-C10910901-0007). Appendix (a) The estimated elasticity of VoIP calls including a dummy variable Model I (2-SLS: 2 Stage least squares) Variable C ln(PV) ln(PL) ln(PM) ln(Popolation) ln(real GDP) Dummy R2 Adj-R2 S.E. of regression D-W stat

Coefficient −30.48(− 1.00) − 5.94(− 2.28)** 8.99(2.51)*** 3.98(0.57) 1.25(4.92)*** − 0.16(− 0.16) − 0.22(− 1.17) 0.979 0.975 0.195 1.79

Note: T-statistics are reported in the parentheses. * Significant at the 10% level; ** Significant at the 5% level; *** Significant at the 1% level.

(b) Interviewee list Group

Person

Organization

Task

Position

GroupI: VoIP service provider

2

SKTL

2

Onse telecom

2

KCT

2

KT

2

SKB

1 1 1 2

SKT KTF LGT ETRI

3

KISDI

2

KCC

Carrier and public relations team Carrier and public relations team Marketing strategy division Marketing strategy division Management support team Management support team Corporate relations department Corporate relations department Business cooperation team Business cooperation team Business cooperation team Corporate relations department Government affairs team IT strategy research group IT strategy research group Telecommunications policy division Telecommunications policy division Telecommunications policy division Competition and investigation Competition and Investigation

Team head Senior manager Team head Manager Team head Manager Team head Senior manager Senior manager Manager Manager Senior manager Senior manager Senior researcher Researcher Senior researcher Senior researcher Researcher Director KICPA

Group II: landline service provider

Group III: mobile service operator

GroupIV: national research institute and government officials

References [1] H.T. Ahn, An Analysis of the Demand for Mobile Telephone Networks, The Korean Association for Telecommunication Policies, 7, 2000. [2] S.Y. Chung, A study on the VoIP traffic demand function in Korea, Kyung-Won University doctoral dissertation, 2005. [3] DotEcon., Estimation of Fixed to Mobile Price Elasticities, paper prepared for BT (2001).

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[4] C.Y. Ham, et al., Study on the VoIP Service Market in and out of Korea, KISDI Issue Report, 2007, pp. 07–13. [5] R. Horváth, D. Maldoom, Fixed-mobile substitution: a simultaneous equation model with qualitative and limited dependent variables, DotEcon Discussion paper DB No.02/02, 2002. [6] W.S. Jeong, B.S. Cho, A study on price elasticities of mobile telephone demand in Korea, Korea Information and communications society, Information and Communications Magazine 32 (6) (2007). [7] D.H. Kim, Voice over IP, Its visions and market analysis, The Korean Association for Information Society, Information and Society, 12, 2007. [8] H. Kim, Subscription to the internet telephony: an econometric analysis of stated-preference data, The Korean Operations Research and Management Science Society, Spring Semiannual Conferences, working paper, 2005. [9] H.S. Kim, Competition report for the Korean Telecom Market, Korea Information Society Development Institute, Research Report, R-08-17, 2008. [10] Lester D. Taylor, Telecommunications Demand in Theory and Practice, 2000. [11] S.D. Moon, Estimation of demand system for telecommunications services and welfare evaluation for pricing structure, Seoul National University Doctoral Dissertation, 2003. [12] Eddie Murphy, The Future of Fixed Mobile Substitution: Choices of Fixed and Mobile Operators, Analysis, 2002. [13] M.S. Park, et al., A study on the determinants of demand behavior and demand intention for telecommunications services, Korea Information Society Development Institute, Research Report, R-07-05, 2007. [14] N.I. Sung, Price and income elasticities of telephone demand revisited, The Korean Association for Telecommunication Policies, Korean Telecommunications Policy Review, 6, 1999. [15] H.S. Kim, et al., Competition report for the Korean Telecom Market, Korea Information Society Development Institute, Research Report, R-09-62, 2009. [16] S. Kvale, Interviews—An introduction to qualitative research interviewing. London: Sage, 1996. Jeong Ho Kwak is a senior researcher of Korean Information Society Development Institute (KISDI). He received his Ph.D degree in Information Systems at Yonsei University. He received his B.A and M.A degree from Sogang University. His current focus is on developing sector-specific competition policy in the new media industry. He also serves on the telecommunication policy division in KISDI. Bong Gyou Lee is an Associate Dean and Professor at the Graduate School of Information in Yonsei University. He received his BA Degree from Yonsei in 1988 and his MS Degree in 1992 and PhD in 1994 from Cornell University. He was a commissioner of Korea Communications Commission in 2007 and 2008.