World Telecommunications Markets: International Handbook of Telecommunications Economics Volume III – Gary Madden (Editor), Edward Elgar, 2003.

Preparing the Information Infrastructure for the Network Economy[1]

William H. Melody

LIRNE.NET and Delft University of Technology

INTRODUCTION

The reform of the telecommunication sector began as a process of restructuring the telecom services industry. It has since been expanded to encompass the transformation of the traditional voice telecom network into an expanded and enhanced information infrastructure capable of communicating all forms of information content. This new infrastructure is expected to provide the foundation for new network economies and information societies.

Until the turn of the 21st century, telecom reforms were directed primarily toward market liberalisation and the extension of telecom networks to previously unserved regions and people. New services, such as mobile and Internet, were seen as niche markets that were complementary additions to traditional telephone services. National telecom regulatory agencies (NRAs) have been the major vehicle for promoting liberalisation and the extension of networks to meet universal service objectives.

Progress in this effort has been measured in terms of benchmark indicators such as number of competitors, market shares, universal service penetration, interconnection and consumer service options and prices. Data measuring these indicators have been gathered and published by the International Telecommunication Union (ITU), Organization for Economic Cooperation and Development (OECD), European Commission (EC) and other organisations. These indicators provide useful comparisons of progress over time in individual countries, and for identifying the leaders and laggard countries in implementing various telecom reforms. As this basic reform process is far from complete, these benchmark indicators will be useful to identify and stimulate progress for some time yet.

In recent years, the most developed countries have been looking beyond the conventional telecom network and services, and its benchmark indicators. They are developing and applying additional indicators of progress in information infrastructure development, such as broadband access to the network, Internet penetration and usage. In this area of information infrastructure development, reform is much less a program to achieve a fixed set of targets, and much more a process of continuous stimulation of expansion and growth of the new information infrastructure network for the foreseeable future.

This chapter provides a review of progress in telecom reform and information infrastructure development by focusing on indicators in the two main categories: (1) traditional indicators of telecom reform – network access and service development, and competition in fixed network and mobile markets; (2) information infrastructure development for the future network economy – network investment; availability and use of new access technologies; internet market development. The countries selected for these comparisons are the leading countries in the world as identified by each of the indicators selected, presumably those countries at the frontier of development of new information infrastructure networks.

For each indicator the top ranked countries are listed, thereby permitting a general assessment of relative strengths and weaknesses of different countries in the telecom reform process. Some countries rank high by some indicators and are not ranked at all by others. Some countries have grown very rapidly in one segment of information infrastructure development, but more slowly in another. However, readers are cautioned that the quality of the data used for these indicators varies substantially among the different indicators. The traditional telecom reform indicators have been used for some time and have a reasonably sound foundation for drawing comparative conclusions. The indicators for information infrastructure and network economy development are both newer, and therefore not fully tested yet, and attempting to measure progress at a much earlier stage of network development. Therefore, they can present only a partial picture in the very early phase of information infrastructure network evolution that will be underway for a long time.

It should also be noted that this paper is only examining countries with the most developed telecom and information infrastructures in the world. In the developing countries, the majority of the population has never made a phone call and does not have access to a telephone. That is a very different problem of telecom reform requiring a very different analysis.

STAGES OF INSTITUTIONAL REFORM

The telecom reform and information infrastructure development process can be broken down into five distinguishable steps:

1.  telecom liberalization to allow participation and competition so as to facilitate improved efficiency, new services development and an extension of the basic telecom network to improve universal service coverage;

2.  expanding network capacity from voice-grade narrowband connections (64 kb/sec) to broadband Internet capacity connection (128 kb to 2 Mb or more);

3.  preparing the raw network capacity with the necessary technical administrative and management capabilities to provide communication services, e.g., activating connections, routing, billing, quality control, etc.;

4.  developing new “value-added” communication/information services that will make people need and want broadband connections in order to access these services;

5.  applying these new services productively throughout the economy and society.

The implementation of step one reforms has already brought significant productivity improvements within the telecom sector in many countries. Step 2 & 3 developments involve the convergence of telecom with the highly productive information technology and consumer electronic sectors, portending an extension of productivity benefits in a new information/communication technologies (ICT) sector of the economy. Step 4 provides further integration with the information content sectors promising to spread productivity benefits further. Finally step 5 offers the potential of productivity improvements spreading throughout the whole economy as these new information/communication services are applied in innovative ways in all sectors.

Yet, it is evident in 2001 that even the leading developed countries are still very much involved with the issues in step one, and particularly the issue of developing effective competition in telecom services markets. The issues in steps 2, 3 & 4 are being actively discussed everywhere in the most glowing terms (e.g., the Next-Generation Internet), but they are at a very early stage of development in practice. With respect to step 5, although illustrations of productive applications can be found, significant and widespread applications of new services productively in manufacturing, health, education, banking, retailing, agriculture, etc., must wait for the new information infrastructure (steps 2, 3 & 4) to be much more fully developed.

Figure 1 provides an illustration of the transformation processes in the development of the information infrastructure described above. The major forces driving technological change have been the IT hardware and software, and the telecom equipment sectors. These new technologies are being installed in the telecom facilities network so as to transform it into the world’s largest digital computer, sometimes called the information superhighway. Telecom liberalization also has opened up new markets in selling equipment directly to business and residential users, giving them greater control over their own communication.

Figure 1 identifies the unbundling of telecom facilities and services that has made possible the independent supply of electronic services over the network, including digitized content of all kinds, new forms of communication interactivity and the explosion of the Internet. This is the information infrastructure now at an early stage in its development. The anticipated payoff for the economy will come when there are widespread productive applications that bring order of magnitude efficiency improvements in sector after sector. Only then will the network economy have arrived.

TELECOM NETWORK DEVELOPMENT

Network Access and Service Growth

Figure 2 shows the penetration rate per 100 inhabitants of network connection access paths, as measured by main telephone line connections to the fixed network and by mobile subscriptions. The data is for the year 2000, with reference to an earlier year to provide an indication of growth rates.

A fixed line penetration rate of 50 or more is considered generally to be a high level of universal service. All these countries would be considered to have a universal service. Yet the penetration in most of these countries continues to grow as additional lines are added to homes and businesses for improve service, including Internet access. The quality of universal service coverage evidently continues to improve even in those countries that think they already have a universal service.

The leading countries in terms of fixed network coverage have always been countries with relatively low population densities, and often difficult and hostile terrain, countries where universal service coverage may be a higher priority, but which one would expect would also be more expensive and less profitable to provide. The Nordic countries, US, Canada and Australia have had high fixed line penetration rates for many years.

But this long established and generally accepted network coverage indicator is being affected by the new Internet and mobile services. So far, Internet growth has provided a relatively small, but noticeable increase in fixed line penetration rates in some leading countries. But the explosion in mobile phone connections, particularly in Europe and Asia, has led to some subscribers replacing their fixed line connections with mobile phones. Finland used to be ranked among the leaders in fixed line network penetration, and was the leader in mobile penetration throughout the 1990s. But as mobile coverage became universal in Finland, and users acquired experience, Finland’s fixed line penetration has been declining since 1998. So the fixed line penetration indicator data can no longer be interpreted fully without examining the mobile penetration data along with it.

Figure 2 exhibits the dramatic growth in mobile subscription penetration in leading countries between 1998 and 2000. In several countries the penetration rate was increased by more than 40 subscriptions per 100 inhabitants in two years, and the mobile penetration rate now exceeds the fixed line penetration rate for many countries. The leading mobile penetration countries include some that are also leaders in fixed network penetration, and some new countries, e.g., Austria, Ireland, Italy, Portugal, where the mobile growth has been stimulated in part by relatively poor fixed network services and coverage. Notably absent from the mobile rankings are the US, Canada and Japan. Mobile service penetration in North America is only about one-third the penetration in Europe. The major growth spurt in mobiles in Japan has been a little later than other countries, and will be evident in the 2001 statistics.

Recognizing the rapid growth in mobile penetration in many countries in recent years, the leading countries are subject to significant change from year to year. Rankings depend significantly on when mobile service licenses were granted, and when mobile service price competition became effective. For the future, the mobile penetration indicator will be increasingly difficult to measure as the most significant growth in most countries is now with prepaid, rather than subscription service. In a prepaid mobile market, estimates of active subscribers are imprecise and definitions vary widely among companies and countries.

Competition in Basic Telecom Markets
The liberalization of telecom markets started at different times in different countries. In the US, it began in the late 1960s with decisions by the national telecom regulatory authority (NRA), the Federal Communications Commission (FCC), to approve specific applications for entry to specific telecom markets. It was expanded with the break up of AT&T in 1984 and the new Telecommunications Act in 1996 which declared all telecom markets to be open to competition. In the UK, liberalization began with the privatization of British Telecom in 1984. The European Union and many other countries around the world have gone through a gradual liberalization process throughout the 1990s, involving privatization of the incumbent national operator, the establishment of a NRA and the licensing of alternative operators, usually mobile operators initially. In the late 1990s, more than 100 countries made commitments to telecom sector liberalization programs under a World Trade Organization (WTO) agreement. By the turn of the century about half the countries in the world supplying more than 80% of the world’s telecom traffic had committed themselves to telecom liberalization programs and established NRAs to oversee the implementation of these programs.
For the leading reform countries, then, it is informative to see how the liberalization process is proceeding, and the extent to which telecom markets are becoming competitive. One indicator is the market share still held by the incumbent national operators, which had a near 100% share in all major services markets at the beginning of the liberalization process. Figure 3 provides evidence for the leading liberalization countries for international public voice services, where competition has been most intensified, and for national long distance services, the second most attractive market for competitors to enter.
With respect to international services, the significant impact of competition can be clearly seen. Consumers have seen it also in the significant reductions in international calling prices that have taken place during the 1990s. Yet the incumbent operators continue to dominate the markets even in the countries where competition is strongest. Only in the US and the UK have the market shares of the dominant operators fallen below 50%, and across the 15 countries, the incumbent operators have maintained about two-thirds of the market, although this share is steadily eroding. Taken in light of the fact that the remainder of these markets in most countries are split among a number of operators with relatively small market shares, this data suggests that, as of 1999, the international services market is still dominated by incumbent operators. Available information on the rapidly declining costs of providing international services suggests there are still very large profit margins in this market waiting for competition to drive prices down significantly further.
The data for national long distance services also shows evidence of some competitive impact, although not nearly as significant as it has been in the international services markets. Here also, consumers in many of these countries have seen significant price reductions during the 1990s. The US is the only country where the incumbent’s market share has fallen below 65%, with AT&T’s market share now below 40%. This is not only due to the early adoption of competitive policies in the US, but also to the fact that national long distance represents a far larger market in the US than other countries due to the size and geographical distribution of the US economy. The data for Finland and Japan cannot be interpreted as indicative of the state of long distance market competition in these countries, as the existence of regional operators that do not compete for the same long distance markets tends to reduce the national share of the largest incumbent operator even in the absence of significant competition. Overall, although competition is clearly present in most of these national long distance services markets, there is a long way to go before economists would call them effectively competitive.

Figure 3 does not contain comparable data for local services markets because it would show that, in all the leading countries, the incumbent’s market share for local public telephone service is between 95 and 100%. Local competition is inconsequential everywhere, despite attempts in a number of countries to introduce local competition. The construction of local telecom facility networks is extremely capital intensive and requires a substantial amount of time to deal with right of way and other local administrative matters. So construction has been generally limited to fibre rings around the business districts of larger cities. As a result, when it comes to the basic local connection to the fixed telecom network, all but a very small percentage of subscribers still have no real choice. They are dependent entirely on the local incumbent operator.