Income, affordable and threshold effects on FMS in the developed and developing economies

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Income, affordable and threshold effects on FMS in the developed

and developing economies

Chun-Mei Chen

a,d,

, Hsiang-Chih Tsai

b

, Chi-Kuo Mao

c a

Department of Business Administration, China University of Technology, Taiwan b

Department of International Business, Ming Hsin University of Science & Technology, Taiwan c

Institute of Business & Management, National Chiao Tung University, Taiwan d

Chunghwa Telecom, Taiwan

a r t i c l e

i n f o

Keywords: FMS Telecom Fixed line Mobile Penetration Substitution G7 NIE ASEAN BRIC

a b s t r a c t

This paper studies the effects on fixed to mobile substitution (FMS) that has evolved into an essential industry trend. Based on data from 1997 through 2005, three kinds of effects, income, affordable and threshold, are derived from various FMS patterns in developed and developing economies. The income effect is the prerequisite for the two other effects. For the G7 and new industry economies (NIE) (Taiwan, Singapore, H.K and S. Korea), the 5% income effect threshold is crossed and the mobile penetration rate climbs up rapidly. However, for Association of Southeast Asian Nations (ASEAN) and Brazil, Russia, India and China (BRIC),1 _{most of these developing economies have} experienced only the income effect. When mobile average revenue per user (ARPU) comes close to or drops lower than fixed line ARPU, the mobile penetration rate begins to increase and the affordable effect appears. As the mobile penetration rate begins to grow, it does not at first affect fixed line growth. The threshold effect happens only when the mobile penetration rate crosses a critical mass threshold; then the growth of fixed line penetration will decline or stop. Once mobile substitution occurs, the traditional paradigm of fixed line as the universal service obligation (USO) is no longer valid and the rules must be changed.

1. Introduction

This article studies the consistent effects of fixed to mobile substitution (FMS) to discover the differences in FMS patterns among countries at different levels of economic development and to attempt to derive some basic rules for the evolution of the industry and markets. FMS occurs in two ways: one is from the shift of traffic from fixed line to mobile; the other is from the growth of mobile subscriptions. These are called traffic substitution and penetration substitution, respectively. Once penetration substitution occurs, the traditional paradigm of fixed line as the universal service obligation (USO) is no longer valid, and the role of mobile communication must be redefined. In this study the rate of fixed penetration is based on households, which reveals a better description than that based on population. It compares global

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Corresponding author at: Department of Business Administration, China University of Technology, Taiwan. Tel.: +886 2 29313416x2252; fax: +886 2 29337543.

E-mail address:doris888@cute.edu.tw (C.-M. Chen).

1

ASEAN was established on 8 August 1967 in Bangkok by the ﬁve original member Countries, namely, Indonesia, Malaysia, Philippines, Singapore and Thailand. Thereafter, Brunei Darussalam, Vietnam, Lao PDR, Myanmar and Cambodia continued to join. BRIC or BRICs are terms for four brick countries used to refer to the combination of Brazil, Russia, India and China.

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relative ﬁxed penetration through 9 years and distinguishes the three continuous effects of penetration substitution on FMS patterns. The results show that ‘income effect’ occurs mainly in Association of Southeast Asian Nations (ASEAN) and Brazil, Russia, India and China (BRIC) that have ﬁxed line household penetration lower than 100%, and ‘affordable effect’ and ‘threshold effect’ occur as a consequence of the income effect.

The objects under study in this article are the four groups of regions/countries, namely, G7 and new industry economies (NIE) representing the developed economies, and ASEAN and BRIC representing the developing economies. Because of its relative lower per capita income Russia has been removed from G8 and reclassified with the BRIC group. Thailand, Malaysia, the Philippines and Indonesia have been selected as examples from among the 10 ASEAN countries, while Singapore has been placed in the NIE group because of its similarities to that group in economic development. The spread of fixed and mobile penetration in the four groups reveals significant differences among them during the period 1997–2005. The growth and decline of fixed household penetration and mobile population penetration among the four groups is shown inFig. 1a and b where the horizontal axis, based on households, represents fixed penetration, and the vertical axis, based on population, represents mobile penetration. The trends are clear; mobile penetration universally increased.

The following studies have examined from diverse viewpoints how mobile penetration, having spread widely over a short period, has affected ﬁxed line service. Gruber, (2001) studied the effect of competition and innovation on the diffusion of mobile communication in the countries of Middle and Eastern Europe. Rodini, Ward, and Woroch, (2003)

investigated fixed line and mobile substitution. He did a market research of American households covering the years 2000–2001 and used cross-price elasticity to prove that mobile and second fixed lines substitute for each other. He indicates that the degree to which mobile substitutes for fixed line has significant implications for the policy of fixed line unbundling, the policy of fixed line and mobile vertical separation and USO.Gary, Grant, and Brain, (2004), basing his study on data from 56 countries worldwide during the period 1995–2000, uses a dynamic demand model to verify the significant substitution effect of mobile phones substituting for fixed telephony, and he proposes that the reduction of fixed service prices can slow the growth of mobile networks. Banerjee and Ros (2004) indicate that, according to International Telecommunication Union (ITU) data, the number of global mobile subscribers (1.15 billion) surpassed the number of fixed subscribers (1.13 billion) in 2002. Using cluster analysis he divided 61 countries into four clusters to show that the expanded model for technology substitution and economic substitution demonstrates that regional connections and economic development will influence the substitution of mobile for fixed telephony.Watanabe, Konda, Ouchi, and Wei,

(2004)indicate that successive innovation and diffusion of technology will bring about complementarities and substitution

between the new technology and the existing technology, and they also propose that the trend from fixed line to mobile phone to mobile internet is the industry macro-evolutionary trend of the telecommunication ecosystem through competition and cooperation.Hodge (2005)examined the difference in tariff structures between fixed line and mobile in South Africa, and found that the balance between fixed monthly and usage fees makes mobile both more affordable and cheaper than fixed line for the bottom 50–60% of households that spend relatively little on communication.Vagliasindi,

Guney, and Taubman, (2006)explored the competition between traditional ﬁxed line and mobile services across Eastern

Europe and the former Soviet Union.Mao, Tsai, and Chen, (2007)studied the issue of FMS patterns of traffic substitution and penetration substitution. They indicate that during 1997–2004, for those countries such as G7 and NIE with fixed line penetration higher than 100%, the FMS is mostly traffic substitution; and for those countries with fixed-line penetration lower than 100% such as ASEAN and BRIC, the FMS is mostly penetration substitution. They also found income effect FMS differences for the developing countries; when disposable income is very limited then telecom penetration will be low. Overall, G7 in 1999 and NIE in 2000 crossed the 5% income effect threshold, and mobile penetration increased rapidly. As for ASEAN and BRIC, the developing economies, except for fixed lines in Russia (1997–2003), all experienced the income effect, but not the affordable and threshold effects, and therefore have little higher telecom penetration.

2005 Fixed Household Penetation (%) 200 100

0

2005 Mobile Population Penetration (%)

120 100 80 60 40 20 0 Category BRIC ASEAN NIE G7 2005

1997 Fixed Household Penetration (%) 200 100

0

1997 Mobile Population Penetation (%)

120 110 100 90 80 70 60 50 40 30 20 10 0 Category BRIC ASEAN NIE G7 1997

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This paper adds the 1-year data of 2005 to follow the research ofMao et al. (2007)to further explore the income effect, and to see more clearly the consistent impact of affordable effect and threshold effect. Four groups of countries, G7, NIE, ASEAN and BRIC, have been chosen for studying the implications of the growth and decline of the following indicators which are penetration, revenue, average revenue per user (ARPU) of the fixed line and mobile services and per capita income, and further to analyze the relationship between per capita income and these indicators. The structure of this paper is as follows. Section 2 defines the data and hypotheses, and three hypotheses are proposed. Section 3 tests the income effect and further analyses the related data during 1997–2004. Section 4 verifies the two hypotheses of affordable effect and threshold effect. Section 5 presents the conclusions.

2. Data, measures and hypotheses

2.1. Data

The study period for this paper covers the years 1997–2005. The related data have been retrieved from telecom regulators as published on their websites (Appendix A), from the telcos’ annual reports and from ITU Telecommunication Indicators 2006, which was published in January 15, 2007 by ITU. The penetration and subscriber data for ﬁxed and mobile cover the years 1997–2005, while the complete revenue and ARPU data for the four groups of countries are at present available only for the period 1997–2004. The per capita GDP from 1997 to 2005 are found in Appendix B. The related data for ﬁxed line and mobile subscribers are in Appendices C and D.

2.2. Measures

To study FMS it is necessary to measure the penetration level of fixed line and mobile services. This study adopts total population, or per capita use, as a basis for measuring the mobile penetration in each country, and the penetration of mobile services into the total population is here called mobile penetration. To measure fixed line penetration households are used as the basis for measuring, and the percentage, or penetration rate, of fixed line service reflects how many fixed lines a household have. This is called fixed line penetration. The number may be higher than the actual number of fixed lines in each household because the fixed lines include a small percentage of business customers.

The fixed line and mobile penetration trends for the USA and the Philippines are illustrated inFig. 2a and b. Their similarities are the fast rise of mobile penetration. On the other hand, fixed line penetration growth in both countries appears to stagnate and even decline. The main difference between them, however, the level at which fixed line penetration does an accelerated change appear. In the USA it is at more than 150%, almost one and a half lines per household, and it shows some decline beginning in 2001. While in the Philippines fixed line penetration is only at 45.2%, and even at this low level of penetration shows some decline beginning in 2000. For details seeFig. 2a and b.

Based on the evolution of mobile penetration substituting ﬁxed line penetration, it is foreseeable that the greater 100% level of ﬁxed line penetration achieved in the developed countries cannot be reached by the developing countries.Mao

et al. (2007) indicate that mobile penetration allows most families to no longer have to depend on ﬁxed lines for

communication, and therefore traditional telephone use stays at the current low penetration level or even experiences further decline. That is, they no longer apply for new lines, or they cancel their fixed line service. Because mobile penetration grows rapidly, fixed line penetration does not change to a higher level. Therefore, in this study it is pertinent to explore the relevant relationships between income level, telecom expenditure and telecom penetration, and how these relationships influence the growth and decline of fixed line and mobile penetration.

156.4 165.1 170.3 175.2 176.4 177.3 178.6 170.9 153.1 20.4 25.2 31.6 38.9 45.1 49.1 54.7 62.0 71.4 0 30 60 90 120 150 180 210 240 1997 Fixed Mobile Penetration (%) U.S.A 39.4 41.3 31.3 36.6 39.9 45.2 44.4 _43.3 38.1 1.9 2.4 3.8 8.4 15.519.1 27.0 39.8 41.3 0 10 20 30 40 50 60 70 Fixed Mobile Penetration (%) Philippines 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 2005

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2.3. Hypotheses to be veriﬁed

In order to establish a basis for cross-country comparison and analysis, this study further converts the absolute value of each country’s ﬁxed line and mobile revenue into ARPU. Fixed line ARPU is calculated by dividing the total annual revenue by total number of ﬁxed lines, and mobile ARPU is calculated by dividing the total annual revenue by total number of mobile users. Because the four groups of countries or regions studied in this paper have great inter-group differences as well as intra-group differences in the level of economic development, the following hypotheses, which are subject to testing, are proposed.

Hypothesis 1. There exists an ‘income effect’ in telecom penetration, i.e., When the ratio of ﬁxed line and mobile expenditure (combined or separate) to annual personal income (abbreviated as the A/I ratio) is high, then ﬁxed line or mobile penetration is not easily increased.

The function of communication satisfies a basic need in people’s daily life, but if the cost of this basic need takes a higher percentage of the users’ disposable income so as to reduce the satisfaction of other basic needs such as food, clothing or housing, then this telecommunication need will not necessarily have a high priority among users. Therefore, when the ratio of the expense of fixed line or mobile communication to annual income (this can be measured by ARPU) is too high, then neither fixed line nor mobile penetration can increase easily.

In addition, mobile service when first available was priced relatively much higher compared to fixed line service, especially for those countries with lower per capita income, and this unavoidably became an obstacle to the growth of telecommunication penetration. A reasonable assumption is that for mobile communication to have penetration substitution the cost of mobile communication must be lower than fixed line service. Unless mobile service becomes more affordable it is difficult to anticipate the obvious effect of penetration substitution. Therefore, Hypothesis 2 is proposed and will be tested.

Hypothesis 2. There exists an ‘affordable effect’ in those countries that have an ‘income effect’, i.e., only when mobile ARPU is close to or lower than ﬁxed line ARPU will mobile penetration grow rapidly and exhibit the penetration substitution effect.

According to the above Hypothesis 2, a further inference may be made: even if the affordable effect of mobile communication is beginning to appear but penetration of mobile communication itself has not reached a certain threshold, then fixed line penetration still has growth opportunities. But when mobile penetration crosses a certain threshold value then the growth of fixed line penetration will decline or even stop. Therefore, Hypothesis 3 is proposed and will be tested. Hypothesis 3. For countries that display the affordable effect there is an additional threshold effect, i.e., when mobile penetration reaches a certain critical mass its substitution effect will cause the growth of fixed line penetration to decline or stop.

3. Income effect

The relative data from the four groups of countries will be used to analyze and verify the above three hypotheses. Because the revenue data for fixed line and mobile services are only available through the end of 2004, therefore, the ARPU to per capita GDP is calculated for the same period. During the above case analysis of ASEAN and BRIC it was mentioned that there are income, affordable and threshold effects that must be studied in order to fully explain the FMS substitution relationship of penetration and traffic volume. The explanation and illustration of these effects and their influence on FMS are given below.

3.1. Deﬁnition of income effect

In economics the concept of disposable income means that for each household the portion of their disposable income that they spend on food, housing, clothing and transportation, the basic needs will normally be adjusted according to the urgency of need and the actual cost. When income level is low and disposable income is limited and there is difficulty in meeting even the basic needs of food, housing, etc., then for the relatively higher cost and lower urgency of telecommunication, the demand for it will be delayed or given up. In other words, when communication expense occupies a high proportion of disposable income then only higher income people will use this modern communication tool. In this circumstance telecommunication penetration will be difficult to expand. Only when the ratio of communication expense to disposable income is lower than a certain threshold will telecommunication service be widely used. This paper uses fixed line and mobile expenditure (excluding data) as a measurement of each individual’s annual fixed line or mobile expenditure (ARPU), then finds the ratio of this to annual per capita income (an individual’s GDP) as the A/I ratio (%) and uses these indicators to analyze the relationship among income level, telecom expenditure and telecom penetration. The effect that only when the A/I ratio (%) is lower than a certain level will telecom penetration start to increase considerably is called the ‘income effect’.

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3.2. Income effect in the developed economies

In G7 and NIE countries each household already had more than one fixed line before 1997; therefore, fixed line for these two groups of countries there was no such thing as an income effect, and mobile markets began to be developed after 1997. For example in G7, the A/I ratio (combined fixed line and mobile expenditure per user to per capita income) dropped from 5.8% in 1997 to 4.6% in 1999 and 3.6% in 2004. For NIE this ratio dropped from 8.6% in 1997 to 4.8% in 2000 and to 4.0% in 2004. Overall, in both G7 and NIE countries, beginning in 1999 and 2000, respectively, the A/I ratio dropped below 5%. Mobile penetration turned around and increased considerably. By 2004 the average mobile penetration in both groups of countries reached 77.3% for G7 and 96.9% for NIE, respectively. Based on these data it can therefore be deduced that for G7 and NIE 5% is the upper threshold for the income effect. In other words, when the A/I ratio is lower than 5% mobile service penetration will rapidly develop significant growth. For details seeTables 1 and 2.

Table 1

G7 penetration vs. A/I ratio (ARPU/per capita income, %)

G7 Service ARPU/GDP/year 1997 1998 1999 2000 2001 2002 2003 2004 2005

France Fixed Penetration (%) 143.8 144.0 141.4 140.5 138.7 138.5 136.7 135.0 133.8

ARPU/GDP (%) 2.1 1.9 1.9 1.8 1.7 1.6 1.6 1.4 – Mobile Penetration (%) 10.0 19.2 35.5 48.9 58.4 61.6 66.5 73.7 79.5 ARPU/GDP (%) 2.6 1.6 1.1 1.1 1.1 1.2 1.2 1.2 – Total ARPU/ GDP 4.7 3.5 3.0 2.9 2.8 2.8 2.8 2.6 – UK Fixed Penetration (%) 135.7 137.4 141.3 144.6 146.1 140.9 138.7 135.2 126.7 ARPU/GDP (%) 2.9 2.6 2.5 2.2 2.0 1.9 2.0 1.9 – Mobile Penetration (%) 15.0 25.1 45.7 72.7 77.2 83.6 90.8 102.2 109.8 ARPU/GDP (%) 2.7 1.8 1.3 0.9 1.0 1.1 1.2 1.4 – Total ARPU/GDP 5.6 4.4 3.8 3.1 3.0 3.0 3.2 3.3 –

Germany Fixed Penetration (%) 120.7 124.0 127.6 131.7 136.4 138.9 139.3 139.5 139.8

ARPU/GDP (%) 2.2 2.1 1.9 1.7 1.6 1.6 1.7 1.7 –

Mobile Penetration (%) 10. 17.0 28.5 58.6 68.1 71.6 78.5 86.4 95.8

ARPU/GDP (%) 4.7 2.9 2.3 1.8 1.6 1.6 1.5 1.2 –

Total ARPU/ GDP 6.9 5.0 4.2 3.5 3.2 3.2 3.2 2.9 –

Canada Fixed Penetration (%) 170.2 173.6 178.1 182.6 177.6 171.5 169.4 166.1 166.3

ARPU/GDP (%) 2.2 2.3 2.1 2.1 2.0 2.0 1.7 1.7 –

Mobile Penetration (%) 14.7 18.3 22.7 28.4 34.3 38.0 42.3 46.7 52.5

ARPU/GDP (%) 2.6 2.7 2.2 2.0 1.8 1.9 1.9 1.9 –

Total ARPU/GDP 4.8 5.0 4.3 4.1 3.8 3.9 3.6 3.6 –

Italy Fixed Penetration (%) 121.3 122.6 125.1 128.9 127.3 126.2 122.0 119.0 109.9

ARPU/GDP (%) 3.3 3.9 3.6 3.1 3.0 2.7 2.6 2.3 –

ARPU/GDP (%) 2.8 2.1 1.5 1.3 1.3 1.3 1.3 1.2 –

Total ARPU/GDP 6.1 6.0 5.1 4.4 4.3 4.0 3.9 3.5 –

USA Fixed Penetration (%) 170.3 175.2 176.4 177.3 178.6 170.9 165.1 156.4 153.1

ARPU/GDP (%) 3.8 3.7 3.6 3.5 3.3 3.1 2.9 2.8 –

ARPU/GDP (%) 2.0 1.7 1.7 1.6 1.6 1.6 1.5 1.4 –

Total ARPU/ GDP 5.8 5.4 5.3 5.1 4.9 4.7 4.4 4.4 –

Japan Fixed Penetration (%) 145.3 147.2 151.9 131.7 127.7 126.3 125.8 123.7 121.9

ARPU/GDP (%) 3.1 3.0 3.0 2.6 2.5 2.3 2.0 1.6 –

ARPU/GDP (%) 3.9 3.6 3.6 3.5 3.4 3.4 3.1 3.0 –

Total ARPU/GDP 7.0 6.6 6.6 6.1 5.9 5.7 5.1 4.6 –

Average Fixed Penetration (%) 143.9 146.3 148.8 148.2 147.5 144.7 142.4 139.3 135.9

ARPU/GDP (%) 2.8 2.8 2.7 2.4 2.3 2.2 2.1 1.9 –

ARPU/GDP (%) 3.0 2.3 2.0 1.7 1.7 1.7 1.7 1.6 –

Total ARPU/ GDP 5.8 5.1 4.6 4.2 4.0 3.9 3.7 3.6 –

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3.2.1. Income effect in G7

In terms of the G7 countries, France in 1997 was the ﬁrst to cross that income effect threshold point, and then mobile penetration began to take off. This was followed by the UK in 1998, Germany and Canada in 1999, Italy in 2000, the USA in 2001, and, ﬁnally, Japan in 2004. In 2004 the total A/I ratio of Japan was 4.6% which was lower than the upper threshold (5%), and mobile penetration increased to 75.3%. One special thing worth noting is that Japan’s mobile A/I ratio at the level of 3.0% was higher than all other G7 countries in 2004; the mobile penetration rate in Japan was lower than the other G7 countries except for the USA and Canada. For details seeTable 1.

3.2.2. Income effect in NIE

For the NIE countries, Taiwan in 1999 was the ﬁrst to cross that threshold point for the income effect and then had the highest mobile penetration in the world during the period of 2000–2003.2 _{The income effect threshold was crossed by}

Singapore and Hong Kong in 2000, and by S. Korea in 2004. In 2003 the total A/I ratio for S. Korea was 5.4%, still slightly higher than the upper threshold (5%). Hence, S. Korea had the lowest mobile penetration of the NIE countries even though the total A/I ratio had decreased to 4.8% in 2004. One special thing worth noting about Hong Kong is that the mobile A/I ratio is very low at the level of 1.0 so that Hong Kong had the worldwide highest mobile penetration of 118.8% in 2004 and 123.5% in 2005. For details seeTable 2.

3.3. Income effect in the developing economies

The aforementioned criteria adopted for G7 and NIE are used to examine the relationship of income level, telecom expenditure and telecom penetrations among the ASEAN and BRIC countries. In 1997 for ASEAN and BRIC only a few households had fixed line services, and mobile communication was even more limited. This situation caused users to make a choice between the two rather than subscribe to both. Therefore, either fixed line ARPU or mobile ARPU can be applied for comparison with per capita income as the reference point for the growth of penetration. Thus the A/I ratio for these countries is either fixed line expenditure to per capita income or mobile expenditure to per capita income. Then this ratio is

Table 2

NIE penetration vs. A/I ratio (ARPU/per capita income, %)

NIE Service ARPU/GDP/year 1997 1998 1999 2000 2001 2002 2003 2004 2005

Taiwan Fixed Penetration (%) 175.1 180.5 184.4 189.2 189.0 189.2 189.5 188.7 186.5

ARPU/GDP (%) 3.1 3.1 2.4 2.3 2.1 1.6 1.5 1.4 –

ARPU/GDP (%) 6.8 5.6 2.3 2.0 1.9 1.8 1.8 2.0 –

Total ARPU/ GDP 9.9 8.7 4.7 4.3 4.0 3.4 3.3 3.4 –

Singapore Fixed Penetration (%) 192.6 196.5 198.0 200.8 198.0 193.2 186.0 180.8 175.8

ARPU/GDP (%) 4.1 3.8 3.4 2.3 2.3 2.3 2.2 3.0 – Mobile Penetration (%) 22.4 27.9 40.9 68.4 72.4 79.6 85.5 95.5 100.8 ARPU/GDP (%) 3.5 3.4 2.2 1.4 1.6 1.7 1.6 1.3 – Total ARPU/ GDP 7.6 7.2 5.6 3.7 3.9 4.0 3.8 4.3 – H.K. Fixed Penetration (%) 185.7 188.0 190.5 191.6 189.1 178.0 171.3 166.1 166.9 ARPU/GDP (%) 3.2 3.8 3.4 2.3 2.3 2.3 2.2 2.3 – Mobile Penetration (%) 34.4 48.5 64.4 78.0 84.4 91.2 105.6 118.8 123.5 ARPU/GDP (%) 4.4 3.0 2.4 2.3 1.6 1.8 1.2 1.0 – Total ARPU/ GDP 7.6 6.8 5.8 4.6 3.9 4.1 3.4 3.3 –

S. Korea Fixed Penetration (%) 151.4 146.0 146.2 153.2 155.7 156.6 152.7 151.7 150.5

ARPU/GDP (%) 2.5 2.4 3.6 3.1 2.8 2.4 2.2 1.8 –

ARPU/GDP (%) 6.6 4.4 3.4 3.5 3.6 3.3 3.2 3.0 –

Total ARPU/ GDP 9.1 6.8 7.0 6.6 6.4 5.7 5.4 4.8 –

ARPU/GDP (%) 3.2 3.3 3.2 2.5 2.4 2.2 2.0 2.1 –

ARPU/GDP (%) 5.3 4.1 2.6 2.3 2.2 2.2 2.0 1.8 –

Total ARPU/ GDP 8.6 7.4 5.8 4.8 4.6 4.3 4.0 4.0 –

Source: statistics data from ITU published in January 2007 (ITU World Telecommunication Indicator, 2006).

2

Taiwan’s mobile penetration rate has declined since 2004 because mobile operators were required to cancel invalid pre-subscribed accounts by the regulator-DGT (NCC, National Communications Committee).

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used to ﬁnd the starting point of the penetration growth, followed by a discussion of the upper threshold of income effect. These data show that during 1997–2005, except for Russia’s ﬁxed line service, and for mobile service in Malaysia, Thailand, Russia and Brazil, other ASEAN and BRIC countries’ A/I ratios are higher than 5%. This study also concludes that for ASEAN and BRIC countries one can use the 5% A/I ratio as an indicator of income effect. For details seeTables 3 and 4.

3.3.1. Income effect in ASEAN

During the period 1997–2005 the ﬁxed line penetration rate for Malaysia, Thailand and the Philippines stagnated and even declined; only Indonesia was still growing. The year 2000 is the point for signiﬁcant decline in the mobile A/I ratio for Malaysia and the Philippines, and then the year 2001 for Thailand and Indonesia. After these years the mobile penetration rate grew considerably. One thing worth noting about Thailand is that the mobile A/I ratio of 4.8% in 2004 had dropped below the upper threshold. The income effect for ASEAN countries is further analyzed below inTable 3:

Malaysia: The fixed line A/I ratio declined from 9.5% in 1999 to 8.9% in 2000, at the same time fixed line penetration grew from 93.4% to 94.2%. Without crossing the income effect threshold, fixed penetration growth already showed a tendency toward stagnation. In 2003 and 2004 the fixed line A/I ratio was even higher than in 1997, and the fixed line penetration rate declined to 80.0% in 2004 and 78.2% in 2005. This conforms to Hypothesis 1. The mobile A/I ratio dropped from 12% in 1999 to 8.3% in 2000 at which time the turn toward mobile growth appeared, and the penetration rate increased from 12% to 21.8%. In 2003 the mobile A/I ratio was 5.5%, which is close to the upper threshold, and the penetration rate grew to 43.9%. In 2004 the mobile A/I ratio was 5.0%, which is equal to the upper threshold, and in 2005 the mobile penetration rate grew considerably from 57.1% to 74.1%. This is the highest penetration rate among ASEAN countries, and it conforms to Hypothesis 1.

Thailand: The ﬁxed line A/I ratio dropped from 15.9% in 2001 to 12.5% in 2002. At the same time ﬁxed line penetration grew from 38.5% to its peak of 41.3%. This conforms to Hypothesis 1. The mobile A/I ratio dropped from 17% in 2000 to 10% in 2001, at which time the growth of mobile penetration appeared to reach a point of acceleration when penetration increased from 4.9% to 12.1%. In 2004 the mobile A/I ratio decreased to 4.8%, which is lower than the upper threshold, and in 2005 the mobile penetration rate grew from 42.8% to 45%. This conforms to Hypothesis 1.

Philippines: The ﬁxed line A/I ratio dropped from 17.2% in 1999 to 13.6% in 2000, and at the same time the ﬁxed line penetration increased from 39.9% to its peak of 45.2%. When the mobile A/I ratio dropped from 11.3% in 2000 to 9.8% in

Table 3

ASEAN penetration vs. A/I ratio (ARPU/per capita income, %)

ASEAN Service ARPU/GDP/year 1997 1998 1999 2000 2001 2002 2003 2004 2005

Malaysia Fixed Penetration (%) 97.5 99.6 93.4 94.2 93.7 87.6 83.9 80.0 78.2

ARPU/GDP (%) 10.7 10.9 9.5 8.9 9.6 9.4 12.3 13.4 –

ARPU/GDP (%) 13.6 13.9 12.0 8.3 7.8 7.0 5.5 5.0 –

Total ARPU/GDP 24.3 24.8 21.5 17.2 17.4 16.4 17.8 18.4 –

Thailand Fixed Penetration (%) 33.5 35.0 33.4 35.7 38.5 41.3 39.6 37.0 37.2

ARPU/GDP (%) 16.4 16.1 18.6 17.4 15.9 12.5 11.3 8.7 –

ARPU/GDP (%) 17.4 17.2 16.8 17.0 10.0 6.4 6.1 4.8 –

Total ARPU/GDP 33.8 33.3 35.4 34.4 25.9 18.9 17.4 13.5 –

Philippines Fixed Penetration (%) 31.3 36.6 39.9 45.2 44.4 43.3 41.3 39.4 38.1

ARPU/GDP (%) 23.4 21.6 17.2 13.6 12.6 11.3 11.2 10.0 –

ARPU/GDP (%) 26.0 23.4 16.6 11.3 9.8 9.0 8.1 6.0 –

Total ARPU/GDP 49.4 45.0 33.8 24.9 22.4 20.3 19.3 16.0 –

Indonesia Fixed Penetration (%) 10.3 11.3 11.9 12.8 13.6 14.4 15.6 18.1 22.8

ARPU/GDP (%) 39.5 27.5 25.9 23.6 21.0 17.0 15.1 13.6 –

ARPU/GDP (%) 30.1 44.2 35.0 30.1 17.3 14.2 12.8 7.8 –

Total ARPU/GDP 69.6 71.7 60.9 53.7 38.3 31.2 27.9 21.4 –

ARPU/GDP (%) 22.5 19.0 17.8 15.9 14.8 12.6 12.5 11.4 –

ARPU/GDP (%) 21.8 24.7 20.1 16.7 11.2 9.2 8.1 5.9 –

Total ARPU/GDP 44.3 43.7 37.9 32.6 26.0 21.7 20.6 17.3 –

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2001, the growth of mobile penetration accelerated and increased from 8.5% to 15.6%. Since 2003 the mobile A/I ratios have been relatively lower than that of ﬁxed line, and therefore mobile penetration increased signiﬁcantly from 27.8% to 39.8% in 2004 and to 41.3% in 2005. This conforms to Hypothesis 1.

Indonesia: The fixed line A/I ratio was 39.5% in 1997 and fixed line penetration only at 10.3%. The fixed line A/I ratio dropped to 27.5% in 1998 and fixed line penetration grew slightly to 11.3%. In 2004 the fixed line A/I ratio dropped to 13.6%, down from 15.1% in 2003, at which time the growth of fixed line turned upward, and the fixed line penetration rate grew from 15.6% to 18.1%. The mobile A/I ratio dropped from 30.1% in 2000 to 17.3% in 2001, and mobile penetration increased from 1.7% to 2.9% in 2001. The mobile A/I ratio significantly decreased from 12.8% in 2003 to 7.8% in 2004, and then the mobile penetration rate grew considerably from 13.5% to 21.1% in 2005. This conforms to Hypothesis 1.

3.3.2. Income effect in BRIC

Between 1997 and 2005 all BRIC countries, except for ﬁxed line in Russia (1997–2004), and mobile in Russia (2004) and Brazil (2004), had ﬁxed or mobile A/I ratios that were above the upper threshold. Each country’s income effect for BRIC is analyzed asTable 4:

Russia: Russia’s fixed line service is the only one in the BRIC countries to have no income effect. During the period 1997–2004 the fixed line A/I ratio was lower than 5%, and fixed line penetration grew from 58.6% in 1997 to 78.9% in 2005. The mobile A/I ratio dropped from 23.8% in 2000 to 11.4% in 2001, at which time mobile growth appeared and mobile penetration grew from 2.4% to 5.5%. Since the mobile A/I ratio was still too high, mobile penetration was correspondingly low during 1997–2001. The mobile A/I ratio declined from 6.9% in 2003 to 4.0% in 2004, which is lower than the upper threshold, and the mobile penetration rate grew considerably from 51.2% in 2004 to 86.9% in 2005.3_This

conforms to Hypothesis 1.

Brazil: The fixed line A/I ratio dropped from 12.6% in 1999 to 11.3% in 2001. During the same period fixed line penetration grew from 58.3% to 68.7%. From 2001 to 2002 instead of declining, the fixed line A/I ratio increased, and fixed line penetration started to decline from 82.2% in 2001 to 81.6% in 2002. The mobile A/I ratio declined from 12.3% in

Table 4

BRIC penetration vs. A/I ratio (ARPU/per capita income, %)

BRIC Service ARPU/GDP/year 1997 1998 1999 2000 2001 2002 2003 2004 2005

Russia Fixed Penetration (%) 58.6 60.8 60.7 61.7 63.5 68.3 71.3 75.2 78.9

ARPU/GDP (%) 1.9 3.1 4.8 3.6 3.6 4.2 4.3 3.9 –

ARPU/GDP (%) 13.7 32.7 49.8 23.8 11.6 7.1 6.9 4.0 –

Total ARPU/GDP 15.6 35.8 54.6 27.4 15.2 11.3 11.2 7.9 –

Brazil Fixed Penetration (%) 41.5 46.9 58.3 68.7 82.2 81.6 78.6 76.4 73.7

ARPU/GDP (%) 12.7 13.3 12.6 11.3 10.7 11.5 10.0 9.8 –

ARPU/GDP (%) 13.2 17.0 12.3 9.2 7.7 6.8 5.3 4.2 –

Total ARPU/GDP 25.9 30.3 24.9 20.5 18.4 18.3 15.3 14.0 –

China Fixed Penetration (%) 21.1 26.1 32.0 41.6 50.8 61.7 72.7 84.1 89.4

ARPU/GDP (%) 26.8 26.7 22.2 14.6 12.1 10.9 9.0 7.3 –

ARPU/GDP (%) 59.0 40.3 27.1 21.4 14.3 12.5 8.9 7.2 –

Total ARPU/GDP 85.8 67.0 49.3 36.0 26.4 23.4 17.9 14.5 –

India Fixed Penetration (%) 10.2 12.1 14.5 17.3 19.7 20.5 21.3 22.5 24.1

ARPU/GDP (%) 64.9 55.6 42.6 36.8 31.6 29.2 28.5 28.1 –

ARPU/GDP (%) 98.3 92.8 63.3 43.9 22.3 19.0 11.8 –

Total ARPU/GDP 64.9 153.9 135.4 100.1 75.5 51.5 47.5 39.9 –

ARPU/GDP (%) 26.6 24.7 20.6 16.6 14.5 14.0 13.0 12.3 –

ARPU/GDP (%) 21.5 47.1 45.5 29.4 19.4 12.2 10.0 6.8 –

Total ARPU/GDP 48.1 71.8 66.1 46.0 33.9 26.1 23.0 19.1 –

Source: statistics data from ITU published in January 2007 (ITU World Telecommunication Indicator, 2006).

3

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1999 to 9.2% in 2000, at which time mobile penetration increased from 9.0% to 13.6%. In 2004 the mobile A/I ratio was 4.2%, which is lower than the upper threshold, and then the mobile penetration rate grew considerably to 35.7% in 2004 and 46.2% in 2005. This conforms to Hypothesis 1.

China: The fixed line A/I ratio dropped from 22.2% in 1999 to 14.6% in 2000. The growth of fixed line service shows that it reached a turning point, and the fixed line penetration rate grew from 32% to 41.6%. The mobile A/I ratio dropped from 21.4% in 2000 to 14.3% in 2001, at which time mobile growth reached a turning point, and its penetration rate grew from 6.7% to 11.3%, still at a low level. The mobile A/I ratio was lower as of 2004, and mobile penetration grew significantly from 25.6% in 2004 to 29.9% in 2005. This conforms to Hypothesis 1.

India: The fixed line A/I ratio was as high as 55.6% in 1998, and fixed line penetration rate was only 12.1%. In 1999 the A/I ratio dropped to 42.6% and penetration grew a little to 14.5%. The mobile A/I ratio dropped from 43.9% in 2001 to 22.3% in 2002, and mobile penetration increased from 0.3% to 0.6%. Because of the income effect it is difficult to grow either fixed line or mobile penetration. This conforms to Hypothesis 1.

In summary, in 1997 mobile business was still in its initial stages globally, and mobile penetration in G7 and NIE, excluding Hong Kong at 34.4% and Japan at 30.3%, was low, ranging between 6.6% (S. Korea) and 22% (Singapore). In 2005 each household in ASEAN and BRIC countries still had less than one ﬁxed line, with the average in ASEAN being 44.1% and in BRIC 66.5%, and mobile penetration was still low, averaging 45.4% in ASEAN and 42.8% in BRIC. In other words, ASEAN people are slightly more dependent on mobile communication than BRIC, and BRIC people are more dependent on ﬁxed line connections than ASEAN. Over time, because of market competition, a decline in services rates, and gradual increases in per capita income, the A/I ratios will gradually fall to less that 5%, and ASEAN and BRIC countries will cross the income effect threshold in the future.

4. Affordable effect vs. threshold effect

The income effect is a prerequisite for the affordable effect and a threshold effect. During the period 1997–2005, G7 and NIE countries crossed the income effect threshold, and both fixed line and mobile penetration were at a high level in 2005. Except for fixed line penetration in Russia, and mobile penetration in Thailand, Russia and Brazil in 2004, ASEAN and BRIC countries have all experienced the phenomenon of income effect. The definitions of affordable effect and threshold effect are given below.

4.1. Deﬁnitions of affordable and threshold effects

4.1.1. Affordable effect

This effect reveals at what time mobile service becomes more attractive to users than fixed line service, thus causing mobile penetration to grow rapidly, faster than fixed line. This study estimates that only when mobile ARPU is close to or lower than fixed line ARPU will mobile become affordable relative to fixed line, and its penetration will begin to grow considerably.

4.1.2. Threshold effect

When mobile penetration begins to grow because of the affordable effect this growth will not necessarily stop the growth of fixed line penetration. There will still be room for fixed line service to grow. It is only after mobile penetration reaches a certain critical mass that fixed line growth will stagnate. In other words, FMS penetration substitution does not immediately appear when mobile communication first enters the market but happens only when mobile penetration reaches a certain threshold level. When mobile penetration substitution reaches that threshold level fixed line penetration will stagnate or even decline.

The affordable effect enables mobile penetration to grow faster than fixed line penetration. But even if the cost of mobile service (ARPU) is lower than that of fixed line, if this cost cannot overcome the income effect threshold then mobile penetration growth still cannot take off. Nevertheless, even if the affordable effect is in play and the threshold of income effect has been crossed, if mobile penetration growth has not reached a critical mass, fixed line penetration growth may continue to grow even if at a slower pace. But once mobile penetration reaches a critical mass threshold, the strong growth of mobile will inhibit the growth of fixed line service, and at this point the threshold effect begins.

4.2. Affordable and threshold effects in ASEAN

Within the ASEAN countries there are differences in the affordable effect and the threshold effect. The mutual inﬂuence of these two effects for each country and the point for accelerated penetration (Fig. 9a–h) are studied below:

(1) Thailand: In 1999 ﬁxed line ARPU increased and ﬁxed line penetration declined slightly from 35% in 1998 to 33.4% in 1999. This shows that when ARPU increases penetration decreases.

In 2000 mobile ARPU dropped below ﬁxed line ARPU. Mobile penetration growth started to accelerate from 4.9% in 2000 to 12.1% in 2001. The affordable effect took hold, and the differences between mobile and ﬁxed line ARPU have

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been widening since 2001. In 2003 mobile ARPU was about one-half of that of ﬁxed line. In 2004 mobile penetration reached 42.8% surpassing the ﬁxed line penetration of 37.0%. This conforms to Hypothesis 2.

In 2002 the mobile penetration rate grew from 12.1% in 2001 to 25.7%. During the same period ﬁxed line penetration grew from 38.5% to 41.3%, but the ﬁxed line growth rate is less than that of mobile.

When the mobile penetration rate reached the critical mass threshold of 25.7% in 2002, fixed line penetration declined from 41.3% in 2002 to 37.1% in 2003. This can be explained by the rapid growth of mobile penetration as fixed line service lost its appeal, but also by some fixed line users canceling their services. Fixed line penetration therefore started to drop below 40% beginning in 2003 (37.1% in 2003, 37.0% in 2004 and 37.2% in 2005). This is the threshold effect and conforms to Hypothesis 3. SeeFig. 3a and b.

(2) The Philippines

Mobile ARPU dropped below ﬁxed line ARPU in 1999. The growth of mobile penetration started to accelerate from 3.8% in 1999 to 8.4% in 2000. The affordable effect is thus shown. This conforms to Hypothesis 2. Meanwhile ﬁxed line penetration grew from 39.9% in 1999 to 45.2% in 2000, but at a slower pace than that of the growth of mobile penetration.

When mobile penetration reached the critical mass threshold of 8.4% in 2000, ﬁxed line penetration began to decline from 45.2% in 2000 to 44.4% in 2001. The threshold effect began to work. Fixed line penetration further declined to 38.1% in 2005. This conforms to Hypothesis 3.

In 2003 when mobile ARPU was about 73% of fixed line ARPU mobile penetration began to grow rapidly and surpassed fixed line penetration in 2004. In 2005 mobile penetration reached 41.3% and surpassed the fixed penetration of 38.1%. The FMS pattern in the Philippines can be said to be the combined action of the affordable effect and the threshold effect. For details seeFig. 3c and d.

(3) Malaysia

Mobile ARPU dropped below ﬁxed line ARPU in 2000, and the growth of mobile penetration accelerated from 21.8% in 2000 to 30.8% in 2001. This is the affordable effect appears, and conforms to Hypothesis 2.

When mobile penetration rapidly increased to the critical mass threshold of 9.7% in 1999, fixed line penetration started to decline from the stagnating level of 99.6% in 1998 to 94.4% in 1999. During 1999–2001 mobile penetration grew from 12.0% to 30.8%, while fixed line penetration stagnated at the level of 93.4% in 1999 to 93.7% in 2001. In 2001 when mobile penetration grew from 30.8% to 36.9% in 2002, the threshold effect came into play and caused fixed line business to significantly decline. This conforms to Hypothesis 3.

The differences between fixed line and mobile ARPU continued to widen after mobile ARPU dropped below fixed line in 2000. Furthermore, fixed line ARPU increased in 2003, in which year mobile ARPU was only about 44.7% of fixed line ARPU. The affordable effect is again shown. Mobile penetration grew from 43.9% in 2003 to 57.1% in 2004 and 74.1% in 2005, while fixed line penetration dropped to 78.2% in 2005. This conforms to Hypothesis 3. For details

seeFig. 3e and f.

(4) Indonesia

Because of the income effect both ﬁxed line and mobile penetration are low. Since 2001 mobile ARPU dropped lower than ﬁxed line ARPU, and the growth of mobile penetration started to accelerate in 2001 rising from 2.9% to 5.0% in 2002 showing that the affordable effect has appeared. This conforms to Hypothesis 2.

In 2003 mobile ARPU was about 84% of fixed line ARPU. Mobile penetration grew from 7.5% in 2003 and 13.5% in 2004 to 21.1% in 2005, and during the same time the growth of fixed penetration was from 15.6% in 2003 and 18.1% in 2004 to 22.8% in 2005. During the years 2003–2005, although mobile penetration growth did not reach the critical mass threshold level to stop the growth of fixed line penetration, the growth rate of mobile penetration exceeded the fixed line growth rate. If this trend continues, the income effect and the affordable effect will come into play and then the threshold effect will occur in the near future, and this will conform to Hypothesis 3.

SeeFig. 3g and h.

4.3. Affordable and threshold effects in BRIC

For BRIC countries, there are also differences in the affordable effect and the threshold effect within the group. The mutual inﬂuence of the two effects is studied below:

(1) Brazil

In 1999 when mobile ARPU dropped below ﬁxed line ARPU, with the additional inﬂuence of the income effect (the mobile A/I ratio declined from 12.3% in 1999 to 9.2% in 2000) the growth of mobile penetration increased in 1999 rising from 9% to 13.6% in 2000 indicating an affordable effect. This conforms to Hypothesis 2.

When mobile penetration grew from 13.6% in 2000 to 16.7% in 2001, at the same time ﬁxed line penetration grew from 68.7% to 82.2%. Fixed line penetration still grew rapidly and at a faster rate than mobile penetration. In 2001 when mobile penetration reached the 16.7% critical mass threshold, ﬁxed line penetration dropped from 82.2% in 2001 to 81.6% in 2002 and further declined to 73.7% in 2005. The threshold effect was at work. This conforms to Hypothesis 3. SeeFig. 4a and b.

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(2) Russia

In 1997 when Russia began its mobile service, the penetration rate was very low at 0.3%. Because mobile ARPU has been considerably higher than ﬁxed line ARPU therefore the FMS threshold is high. As of 2003 mobile ARPU had dropped below ﬁxed ARPU, and the growth of mobile penetration accelerated from 25.2% to 51.2% in 2004. This is the affordable effect and conforms to Hypothesis 2.

The fixed line A/I ratio for Russia has been the lowest among the BRIC countries thus requiring that mobile ARPU decrease further to stop the growth of fixed line penetration. Under the influence of the affordable effect the rise in

220 255 300 352 380 303 422 255 113 447 324 344 343 189 130 130 0 100 200 300 400 500 600 1997 Fixed Mobile Thailand ARPU (US$) 37.0 37.1 33.5 35.0 33.4 35.7 38.5 41.3 37.2 3.4 3.73.84.9 12.1 25.7 36.2 42.8 45.0 0 10 20 30 40 50 60 70 Fixed Mobile Penetration (%) Thailand 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 39.4 41.3 31.3 36.6 39.945.2 44.4 43.3 38.1 1.9 2.4 3.8 8.4 15.5 19.1 27.0 39.8 41.3 0 10 20 30 40 50 60 70 Fixed Mobile Penetration (%) Philippines 105 111 266 193 176 135 116115 63 81 88 90 112 170 209 295 0 50 100 150 200 250 300 350 Fixed Mobile ARPU (US$) Philippines 144 146 146 175 178 128 424 146 83 322 206 241 222 120 122 106 0 110 220 330 440 550 Fixed Mobile ARPU (US$) Indonesia 18.1 15.6 10.3 11.3 11.912.8 13.6 14.4 22.8 0.5 0.5 1.11.7 2.9 _5.0 7.5 13.5 21.1 0 5 10 15 20 25 30 35 Fixed Mobile Penetration (%) Indonesia 550 507 493 363 ₃₄₃ 343 353 362 222 227 270 287 320 436 461 631 0 100 200 300 400 500 600 700 800 Fixed Mobile Malaysia ARPU (US$) 78.2 87.6 93.7 94.2 93.4 99.6 97.5 83.9 80.0 74.1 57.1 43.9 36.9 30.8 21.8 12.0 9.7 9.2 0 20 40 60 80 100 120 140 Fixed Mobile Penetration (%) Malaysia

Fig. 3. (a) Thailand fixed line and mobile ARPU. (b) Thailand fixed line and mobile penetration. (c) The Philippines fixed line and mobile ARPU. (d) The Philippines fixed line and mobile penetration. (e) Malaysia fixed line and mobile ARPU. (f) Malaysia fixed line and mobile penetration. (g) Indonesia fixed line and mobile ARPU. (h) Indonesia fixed line and mobile penetration.

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mobile penetration was very steep, reaching 86.9% in 2005, surpassing ﬁxed line penetration. Nevertheless, from 2001 to 2004 when mobile penetration was growing rapidly ﬁxed line penetration still showed a slight growth, but that slight growth slowed further from 75.2% in 2004 to 78.9% in 2005. It is foreseeable that the trend will continue and then the threshold effect is likely to happen, and that will conform to Hypothesis 3. SeeFig. 4c and d. (3) China

In 1997 mobile ARPU was much higher than ﬁxed line ARPU, and mobile penetration was only at 1.1%. Since 2001, with the deceasing mobile ARPU coming close to the level of ﬁxed line ARPU, the growth of mobile penetration

73.7 81.6 82.2 68.7 58.3 46.9 41.5 78.6 76.4 46.2 35.7 26.2 19.0 16.7 13.6 9.0 4.4 2.8 0 22 44 66 88 110 Fixed Mobile Penetration (%) Brazil 287 639 633405 ₃₉₉ 318 299 328 142 153 176 228 325 394 806 669 0 200 400 600 800 1000 1997 Fixed Mobile ARPU (US$) Brazil 93 99 193 203 175 121 _{110 105} 92 98 120 129 179 214 306 426 0 100 200 300 400 500 Fixed Mobile ARPU (US$) China 84.1 72.7 21.1 26.1 32.041.6 50.8 61.7 89.4 1.1 1.9 3.4 6.7 11.3 16.1 20.9 25.6 29.9 0 22 44 66 88 110 Fixed Mobile Penetration (%) China 163 132 57 58 6061 78 99 104 124 168 245 407 624 617 413 0 160 320 480 640 800 Fixed Mobile ARPU (US$) Russia 78.9 68.3 63.5 61.7 60.7 60.8 58.6 71.3 75.2 86.9 51.2 25.2 12.4 5.5 2.4 0.9 0.5 0.3 0 20 40 60 80 100 120 Fixed Mobile Penetration (%) Russia 85 153 142 147 169 194 241 284 151 0 427 _{568 552} 376 211 141 0 100 200 300 400 500 600 700 800 Fixed Mobile ARPU (US$) India 22.5 21.3 10.2 12.1 14.5 17.3 19.7 20.5 24.1 0.10.10.10.2 0.3 0.6 1.2 4.4 8.2 0 7 14 21 28 35 Fixed Mobile Penetration (%) India 1998 1999 2000 2001 2002 2003 2004 _{1997 1998 1999 2000 2001 2002 2003 2004 2005} 1997 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 1997 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004

Fig. 4. (a) Brazil fixed line and mobile ARPU. (b) Brazil fixed line and mobile penetration. (c) Russia fixed line and mobile ARPU. (d) Russia fixed line and mobile penetration. (e) China fixed line and mobile ARPU. (f) China fixed line and mobile penetration. (g) India fixed line and mobile ARPU. (h) India fixed line and mobile penetration.

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accelerated from 11.3% to 16.1% in 2002. The affordable effect had begun to show. This conforms to Hypothesis 2. Because fixed line ARPU was lower than mobile ARPU during the study period, when mobile ARPU got close to fixed line ARPU beginning in 2003 and the mobile penetration rate showed rapid growth, the fixed line penetration rate also continued to grow.

As of 2004 the threshold effect had not appeared. China is the only BRIC country in which fixed line penetration continues to grow rapidly and mobile penetration has not caught up. The rapid growth of fixed line penetration is related to China’s actively developing broadband xDSL accessibility. For the year 2003–2004 the growth rate of mobile penetration was 24%, which exceeded that of fixed line penetration at 14%. Over time, with the aid of the affordable effect, the threshold effect may then take hold in China. This will conform to Hypothesis 3.

SeeFig. 4e and f.

(4) India

Mobile ARPU had been much higher than fixed line ARPU and therefore there was no significant growth in mobile penetration until 2003. The mobile ARPU was lower than the fixed ARPU in 2004, and then the growth of mobile penetration accelerated, rising from 4.4% in 2004 to 8.2% in 2005. This conforms to Hypothesis 2.

In 2003 when mobile penetration began to show growth, fixed line penetration grew only slightly from 21.3% in 2003 to 22.5% in 2004 and 24.1% in 2005. Although the threshold effect has not yet happened fixed line growth began to slow. It is still too early, however, to know whether there will be a threshold effect. If mobile penetration accelerates and grows faster than fixed line, then the threshold effect will take place and it will conform to Hypothesis 3. SeeFig. 4g and h.

The prerequisite for the threshold effect is that the affordable effect must first happen, and to have an affordable effect there must also be an income effect. The eight countries of ASEAN and BRIC in the study of penetration substitution all exhibit the phenomenon of the affordable effect. Because the introduction of mobile service does not necessarily stop the growth of fixed line service, fixed line penetration still has room to grow. This explains FMS development in Indonesia, Russia, China and India. It is foreseeable that the threshold effect is likely to occur because fixed line growth slowed from 2004 to 2005. When mobile penetration growth reaches a critical mass threshold then fixed line penetration growth will stagnate or even decline. The Philippines, Thailand, Malaysia and Brazil all show this threshold effect. The critical mass value of the mobile penetration threshold effect for these four countries is between 8.4% (the Philippines) and 25.7% (Thailand).

5. Conclusion

FMS patterns in developed and developing economies exhibit significant differences. This article has shown that the income effect is a prerequisite for both an affordable effect and the threshold effect. That is, when disposable income is very limited then telecom penetration will be low. Overall, G7 in 1999 and NIE in 2000 crossed the 5% income effect threshold, and mobile penetration increased rapidly. But for ASEAN and BRIC countries, except for fixed lines in Russia, and mobile in Malaysia, Thailand, Russia and Brazil, all others still had not crossed the 5% income effect threshold in 2004. Therefore, any growth in telecom penetration is difficult to attain. This conforms to Hypothesis 1. When mobile ARPU comes close to or drops lower than fixed line ARPU mobile penetration begins to increase considerably and the affordable effect will appear. This conforms to Hypothesis 2. As mobile penetration begins to grow rapidly, it will not necessarily cause the fixed line growth to stagnate. It is only when the mobile penetration rate crosses a certain critical mass threshold level that the FMS substitution effect will cause fixed line penetration growth to decline or even stop and this phenomenon of the threshold effect conforms to Hypothesis 3.

In addition, this study discovered when observing the four groups of countries that there is a tendency in FMS patterns such that the differences between G7 and NIE countries is slight, and that the basic trends for ASEAN and BRIC countries are essentially the same. Although the FMS differences at inception are large, with a continuing decline in mobile ARPU and increases in per capita income, the relevant FMS effects begin to take hold so that in the long run the matured economic markets will follow the same track. This seems to represent an attractor in a macro system that guides the development of the overall situation and a control factor of this attractor is the three effects (income, affordable and threshold) of penetration substitution. It has been shown from the above description that mobile service in Malaysia, Thailand, Russia and Brazil had crossed the obstacle of the income effect as at 2004. It is foreseeable that this trend will continue with the threshold effect occurring for mobile in Russia in the near future. If telecom businesses take the evolution of the industry into consideration in their strategic planning, they should have excellent opportunities for capturing markets.

Nevertheless, the diminishing price differences between mobile and fixed line services will accelerate the mobile replacement of fixed line service. In G7 and NIE countries the FMS pattern is the substitution of second fixed lines by mobile, unlike ASEAN and BRIC countries in which first fixed lines are being substituted by mobile. Fixed-only operators facing ‘traffic substitution’ may lose some traffic income but may still keep the income from the basic monthly rental. Nevertheless, the fixed-only operators facing penetration substitution will lose both the basic monthly fixed line rental and traffic income to mobile businesses. However, for ASEAN and BRIC countries, which mainly exhibit penetration substitution on FMS, the traditional paradigm of using the fixed line network as the foundation of a national telecom policy has

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changed. The three effects-incomes, affordable and threshold-in association with the penetration substitution effect, illustrate the basic mechanics of mobile substitution of ﬁxed lines.

Appendix A. Referred regulators websites

SeeTable A1.

Appendix B. Per capita GDP for four groups countries (US$)

SeeTable B1.

Table A1

Referred regulators websites

Country Regulator websites

Brazil www.anatel.gov.br Canada www.ic.gc.ca China www.mii.gov.cn Finland www.mintc.ﬁ France www.anfr.fr Germany www.regtp.de H.K www.ofta.gov.hk India www.trai.gov.in Indonesia www.depub.gov.id Italy www.communicazioni.it Japan www.soumu.go.jp Malaysia www.mcmc.gov.my Philippines www.dotcmain.gov.ph Russia www.minsvyaz.ru S. Korea www.kcc.go.kr Singapore www.ida.gov.sg

Taiwan, ROC www.ncc.gov.tw

Thailand www.mict.go.th

UK www.ofcom.org.uk

USA www.fcc.gov

Table B1

Per capita GDP for four groups countries (US$)

Per capita GDP (US$) 1997 1998 1999 2000 2001 2002 2003 2004 2005

G7 USA 30,510 31,834 33,216 34,886 35,562 36,553 37,646 38,917 41,768 France 24,151 24,774 24,591 22,123 21,499 23,560 28,771 33,460 33,967 Japan 34,203 31,179 35,478 37,544 31,636 31,057 33,674 34,323 34,827 Germany 25,626 26,214 25,619 22,640 22,459 24,279 29,170 33,348 33,880 UK 22,343 23,810 23,168 24,094 23,707 26,513 26,936 27,297 32,730 Italy 20,305 20,764 20,504 18,689 19,060 20,823 26,946 28,813 30,379 Canada 21,042 20,106 20,356 20,942 19,955 20,123 22,833 25,174 32,100 NIE H.K 26,763 25,247 24,312 24,814 24,086 23,577 22,801 23,684 24,517 Singapore 24,901 20,966 20,977 23,135 20,735 21,192 22,073 15,199 26,901 Taiwan 11,743 12,659 13,392 13,819 12,121 12,437 12,788 13,362 14,340 S. Korea 11,442 7608 9747 11,127 10,179 11,480 12,687 14,110 16,308 ASEAN Malaysia 4622 3318 3626 3869 3663 3870 4097 4110 4940 Thailand 2570 1885 2043 2018 1849 2022 2147 2535 2869 Philippines 1137 893 1023 992 921 980 980 1045 1168 Indonesia 1071 467 688 738 694 768 844 1059 1094 BRIC Brazil 5052 4750 3203 3544 2957 2632 2865 3343 4274 Russia 3024 1886 1254 1709 2146 2347 3097 4212 5260 China 722 760 788 833 933 985 1093 1269 1717 India 437 434 455 459 474 479 549 577 726

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Appendix C. Fixed domestic exchanged lines (unit: thousand)

SeeTable C1.

Appendix D. Mobile subscriber (unit: thousand)

SeeTable D1.

Table C1

Fixed domestic exchanged lines (unit: thousand)

Fixed DELs (0 0 0) 1997 1998 1999 2000 2001 2002 2003 2004 2005 USA 172,452 179,822 183,521 187,002 190,994 186,232 182,933 177,947 175,350 Japan 65,735 67,488 70,530 61,960 61,330 60,770 60,575 59,610 58,780 Germany 45,200 46,530 48,210 50,220 52,450 53,780 54,233 54,574 55,046 France 33,700 34,099 33,888 34,081 34,084 34,124 33,913 33,703 33,697 Italy 25,698 25,986 26,502 27,300 27,353 27,142 26,596 25,957 25,049 U.K 31,879 32,829 34,021 35,047 35,660 34,517 34,121 33,700 31,796 Canada 18,660 19,294 20,051 20,840 21,126 20,622 20,612 20,563 20,780 Taiwan, ROC 10,862 11,500 12,044 12,642 12,858 13,099 13,355 13,530 13,615 S. Korea 20,422 20,089 25,619 25,863 25,775 25,735 25,128 23,568 23,745 H.K. 3647 3729 3869 3926 3898 3832 3806 3763 3798 Singapore 1685 1778 1851 1936 1948 1927 1890 1857 1844 Malaysia 4223 4384 4423 4628 4710 4670 4572 4446 4366 Thailand 4827 5038 5216 5591 6049 6567 6632 6812 7035 Philippines 4500 5300 5987 6909 6939 6914 6693 6473 6367 Indonesia 4982 5572 6080 6662 7219 7750 8058 9992 12,772 Brazil 17,039 19,987 24,985 30,926 37,430 38,811 39,205 39,579 39,853 China 70,310 87,421 108,715 144,829 180,368 214,222 262,747 311,756 350,445 India 17,802 21,594 26,511 32,436 37,848 39,860 42,090 44,870 48,836 Russia 28,250 29,246 30,949 32,070 33,278 35,500 36,100 38,500 40,100 Table D1

Mobile subscriber (unit: thousand)

Mobile subscribers (0 0 0) 1997 1998 1999 2000 2001 2002 2003 2004 2005 United States 55,312 69,209 86,047 109,478 128,375 140,767 158,722 182,140 213,000 Japan 36,804 46,912 56,799 66,784 74,819 81,118 86,655 91,474 96,484 Germany 8276 13,913 23,446 48,202 55,126 59,128 64,800 71,316 79,200 France 5817 11,210 21,434 29,052 36,997 38,585 41,702 44,544 48,099 Italy 11,738 20,489 30,296 42,246 51,246 53,003 55,918 57,171 60,000 UK 8841 14,878 27,185 43,452 46,283 49,228 54,400 61,091 65,500 Canada 4266 5365 6911 8727 10,862 11,861 13,222 14,984 17,017 Taiwan, ROC 1492 4727 11,235 17,661 21,786 24,391 25,090 22,760 22,171 S. Korea 6879 14,019 23,443 26,816 29,046 32,342 33,592 35,050 38,342 H.K 2230 3174 4275 5234 5702 6219 7349 8214 8693 Singapore 832 1095 1631 2747 2992 3313 3577 3997 4385 Malaysia 2000 2150 2717 5122 7385 9053 11,124 14,611 19,545 Thailand 1977 2204 2339 3056 7550 16,117 22,825 27,248 27,379 Philippines 1344 1734 2850 6454 12,159 15,201 21,860 32,936 34,779 Indonesia 916 1066 2221 3687 6415 11,340 17,888 30,081 46,910 Brazil 4550 7368 15,033 23,188 28,746 34,881 46,373 65,606 86,062 China 13,233 23,863 43,296 85,260 144,820 206,620 269,953 334,824 393,406 India 882 1195 1884 3577 6432 12,688 26,154 47,300 90,000 Russia 485 747 1371 3263 7750 17,609 36,890 74,350 118,980

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