Technological Change, Telecommunications Deregulation, Telecommunications Economics, and Internet Globalization
Jean-Pierre AUFFRET <email@example.com>
Jeffrey H. MATSUURA <firstname.lastname@example.org>
The economic models of both the Internet and international telecommunications have been simultaneously changing, resulting in telecommunications global financial inequities, which in turn have led to inconsistent telecommunications growth. The paper examines the global changes and relationships between the Internet and international telecommunications markets and then highlights and compares service-provider competitions and customer Internet adoption for Europe, Asia Pacific, North America, Latin America, and Africa. These comparisons are overlaid with recent technological changes and regulatory changes to show how economics, regulation, and technology are driving disparate uses of the Internet, resulting in comparative advantages for some countries. Projections are made of future regulation and technological changes and how Internet globalization will progress under different scenarios. A proposal is then made for a true market-based model for the Internet and for international telecommunications that will provide the greatest opportunity for a thriving, global system serving both developed and developing countries.
With rapid deregulation and the increasing pace of technological innovation, the world has embarked upon the long-awaited information age revolution. The economic and business benefits promise to be many, but there are also associated risks as the rate of product and technological adoption varies widely from country to country and from region to region within countries. At its best the revolution may bring much increased prosperity and reduced influence of economic business cycles. At its worst, though, the revolution may foster an increased economic disparity between nations and also an increased economic disparity within nations.
The last ten years have been a time of remarkable change in the telecommunications industry. The marketplace has been transformed by the interweaving of new technology, new products, new customer needs, and deregulation -- all catalyzed to some degree by the success of the Internet and the increasing presence of personal computers. Countries have seen telecommunications deregulation as a requirement for continued and renewed economic success, while at the same time the Internet has moved from a research tool to an incredibly rapidly growing force, with a seemingly endless ability to drive innovation, change consumer patterns, and drive business value. Simultaneously, the increasing market penetration of personal computers has both enabled and reinforced the changes resulting from deregulation and from the Internet.
The major technological telecommunications changes that have occurred, in the great self-reinforcing dance, with regulatory changes and market changes are
The corresponding major telecommunications deregulation changes are
And the concomitant market changes are
With the pace of telecommunications change increasing, the newly formed and vibrant Internet itself is rapidly transforming from one incarnation to another. From its scientific roots, the Internet has progressed, with wider market adoption, to a stage where the primary use is for communications and information retrieval. Now the Internet is transforming further towards major use as a means for transaction systems and electronic commerce. BRG noted the shift in a panel survey of network executives and additionally tabulated the major current Internet uses as information access and research, e-mail and messaging, Web browsing, collaboration, customer support, marketing, communication, internal/intranet information exchange, technical support, and electronic commerce.
The pace of change is furious, but the benefits are potentially great. The final result has unbounded possibilities, many of which are and will be unforeseen. Within this overall environment, though, what are the differences in potential benefit between regions of the world and within countries, and why are there these differences? Also, what are the potential risks, and what are the lessons from the last ten years that might be applied to the next ten years?
As noted in the Overview, the major recent technological changes are
As noted in the Overview, the major worldwide telecommunications deregulation initiatives are
The objectives of these initiatives, as well as other international and domestic deregulation initiatives, are to increase competition, decrease prices, increase bandwidth availability, and increase introduction and availability of new products.
Deregulation itself, though, provides no guarantee of immediately achieving a marketplace without historical memory, where each buying decision is made based upon product attributes and price factors and not upon brand recognition and loyalty to the incumbent monopoly carrier. For example, fourteen years after U.S. deregulation, AT&T still has the predominant position in the U.S. long distance market, as consumers choose to continue using AT&T service, even though its prices are for the most part higher than other carriers' prices. The point is reinforced for Europe by a Price Waterhouse survey that determined that approximately 80% of business users would consider changing telecommunications carriers, while only 40% of residential consumers would consider doing so.
To help ensure success, an important factor is the appointment of an active regulator to oversee deregulation. The regulator, who aims for a balanced public good, as opposed to some regulators, who have moved from the incumbent PTT and sometimes primarily serve PTTs' interests, can see that the benefits of deregulation are achieved.
As noted in the Overview, the major recent market changes are
The effects and impacts of technological change, market change, and deregulation are being felt and acted upon differently from region to region. In some cases the difference is simply due to timing, while in other instances the difference is due to the fact that the starting points of the telecommunications and converging industries, upon which the technological and marketing changes act, are quite different.
Part of the consideration for the European Union deregulation initiative was to further the European Union goal of making Europe more competitive in the international economic marketplace. The goal included the objectives of fostering the telecommunications and computer industries as well as providing a supportive environment for other industries. The relationship between the second objective and corporate economic success is due to the fact that corporate telecommunications users cite telecommunications infrastructure as one of the most important factors in deciding to locate in a particular locale.
The regulatory changes have already resulted in the awarding of licenses to new carriers and the beginning of the construction of pan-European fiber networks. The advantage for Europe compared to Asia Pacific and Latin America, where some countries are deregulating and others are not, is that service and capability will be ubiquitous, while for Asia Pacific and Latin America, investment for network upgrades and expansions will be limited by the regulatory patchwork.
The Asia Pacific markets have started to rapidly introduce Internet and broadband services, having the advantage of strong multinational telecommunications companies, well-funded new entrants, and high potential demand due to relatively high personal income levels and relatively high personal computer market penetration. The interesting point is that in combination with these positive factors, Asia Pacific is entering this arena somewhat later than the United States and Europe, which enables Asia Pacific to provide these services without the worry of the write-off costs of inplace infrastructure. A supplemental point is that the adoption of services in Asia Pacific is being enabled by advances in mobile technology, with the result that over 50% of Asia Pacific traffic is projected to be via mobile in two years.
Countries are taking different approaches to ensure their participation in the ongoing Internet and information revolution. Australia has for the most part deregulated and has the beginnings of competition. Similar to Australia, although following several steps in deregulation, are Hong Kong and Korea. Both have preliminary deregulation and some competition.
Different models are being followed in Singapore and in China. In Singapore, though there is no competition as of yet, Singapore Telecom has a program in place to deliver fiber to all businesses and residences by the year 2005. China also has no competition yet, but the China Ministry of Posts and Telecommunications is nonetheless going to cut Internet service costs to consumers by 50% in order to greatly spur Internet adoption and usage.
Japan has begun to deregulate but within the context that NTT is the world's largest telecommunications company. With its market size and the demand for telecommunications services in Japan, NTT has been able to offer state-of-the-art transmission and data services.
The United States is the most deregulated telecommunications market in the world, with an overlapping patchwork of facilities-based long distance carriers and resellers, heavy competition in the Internet services and ISP markets, and the slow beginnings of competition in the local market. The common thread is that competition has been successful in taking advantage of technological changes to offer new services and drive down prices in each of the telecommunications market segments. The limited competition in local service is due both to the large investment needed to enter the market and to the exceedingly high market power of the incumbents. Only recently has the local access market power of the incumbents been limited by the regulators and the U.S. Congress.
Canada also has competition and high adoption of the Internet and new broadband services. Each of the major Canadian carriers has also linked with international alliances, which has enabled Canadian customers to have access to full end-to-end global services.
High-speed telecommunications services have recently been introduced in Latin America in the six largest countries. Parts of Latin America, though, have limited personal computer market penetration and in fact have significant areas with limited telephone market penetration. In fact, overall, the income differentials within Latin America are such that on average fewer than 15% of residents are potential purchasers of personal computers and Internet services. Of the largest telecommunications markets, Chile is highly deregulated; Venezuela, Mexico, Argentina, and Columbia are deregulated to a somewhat lesser degree; and Brazil has a changing and somewhat uncertain regulatory framework which is to a small degree inhibiting telecommunications investment decision making.
African telecommunications are in many ways similar to Latin American telecommunications, though perhaps in an earlier stage in many countries, due to relatively low incomes, a heavily subsistence industrial base, and limited availability, in some cases, of telephone service. Similar to Asia Pacific, Africa does have the counterintuitive advantage of being able to adopt newer technologies, as there is limited existing infrastructure. With the success of new mobile communications and with planned construction of additional fiber capacity to and from Africa, the positive cycle of new capacity and then deregulation, leading to competition, increasing availability of new services, and decreasing prices may soon begin for Africa.
The major theme of the regional review, though with some variation, is that telecommunications deregulation, coupled with personal computer market penetration, results in competition, new products, and decreasing prices, which then in turn leads to Internet use and adoption and the corresponding economic benefits. These factors then are reinforced as the success of new businesses and the demand for new services lead to new investment which then leads to additional new businesses and services.
Where these factors are not present, national inequities develop which are an extension and are thereby greater than the inequities between having telephone service or not, or having personal computers or not. These inequities, which are also present between regions within countries, can and are leading to greater economic polarization, with less clear and more difficult paths then needed to close the differences.
The Internet outlook for the next ten years foretells incredible technological change which will be reinforced by continuing deregulation and new product introductions. Combined with the more widespread market penetration of personal computers and new integrated circuit devices, the Internet will become a very large-scale self-adaptive system that will be capable of some forms of learning. Not only will there be much more universally available access for today's uses and services, but also the Internet will have a myriad of new uses, many of which will be much more active and dynamic than today's simple information retrieval and e-mail.
The impact resulting from the upcoming widespread technological innovation and market introduction of optical computing and optical telecommunications switching, and then the further processing speed that will be available through quantum computing, may well be as large as, or larger than, the impact of other recent innovations. Not only will processing and transmission speeds increase by many orders of magnitude, but also these innovations will allow a continuing manifold decrease in size of the integrated circuits that provide processing capability. This continuing decrease in size of integrated circuits is going to provide the basis for the development of many new devices that will stand alongside the personal computer as nodes, becoming part of the more tightly meshed self-adaptive Internet network. Similar to the human brain, where the incredibly large number of neural interconnections leads to the complexity that permits thought, the numerical explosion of connection points amongst personal computers and new devices will allow the Internet to become an active system.
Market changes are going to be led by the greatly increasing availability, through multiple transmission means, of telecommunications capacity. With increased capacity demand and deregulation, carriers are investing heavily in transoceanic fiber cables, such as FLAG and Project Oxygen, and in new regional networks such as Hermes in Europe. In fact, Worldcom is the corporate embodiment of the telecommunications future in that they are rapidly building and purchasing capacity worldwide, so that they are able to be a low-cost provider and so that they can also ensure quality of service. Additional capacity is going to be provided by new market entrants providing LEO satellites. These carriers, including Iridium and Globalstar, are introducing a new type of capability in that they plan to have a network of at least 80 satellites orbiting at a height of 400 miles and then use sophisticated computing to pass transmissions from one satellite to another as the earth rotates. This scheme replaces the geostationary satellite approach (in which the satellite orbited the earth at a height of 24,000 miles), thereby eliminating the rotation issue.
A second major market theme is the continuing market convergence (enabled by technical convergence) of voice telecommunications, data telecommunications, mobile telecommunications, multimedia, and computing. The convergence is resulting not only in many new products being brought to the marketplace, but also in increased competition and innovation, as vendors in one industry now find themselves face-to-face with vendors with different insights and backgrounds in the new and larger converged industry.
The third major market theme will be the many product and usage changes resulting from the Internet becoming a self-adaptive system. Though many of the benefits are not foreseeable, at a minimum the change will be towards greater user ability to inject applications into the Internet, which will then be able to utilize the vast number of nodes and connections to develop results that drive the processes of businesses, organizations, and communities. With the many new types of devices connected to the Internet, and with the increased computational power, the Internet will also be able to modify itself as user demand changes and as the local or global network environment changes.
Lastly, the pace of deregulation will increase and spread more comprehensively beyond international services to the access loops where low fixed prices are integral to universal Internet access. Already, as a result of the WTO and European Union initiatives, Europe has started down the path towards deregulation with much of the remainder of the world soon to follow. Even though signatories, some countries may be slow to adopt the WTO goals, thinking that the risk of undercutting the value of their local PTT outweighs the potential benefits. WTO enforcement is in some ways limited, as the sanction of not being allowed to enter a deregulated market may not really spur less developed countries to deregulate their market. Ultimately, the benefit for every country is that competition, low prices, and access will allow them to realize fully the economic and public benefits of the Internet.
As the paper's sections have outlined, the upcoming ten years are going to be a time of even greater change for telecommunications and the Internet than the last ten years have been. The question remains, though, of how best to take advantage of the promise of the Internet, but at the same time maintain the general public good and correspondingly lessen the risk of an increasing economic disparity between nations and within nations.
As noted previously, even before the advent of the Internet, international development was beginning to follow the pattern where centers of technology and economic wealth had more in common with each other, regardless of international borders, than a center of technology might have with a rural region just forty or fifty miles away in the same country. In many countries, a technology center may be economically entering the twenty-first century, while the more rural areas are living in a time many hundreds of years past. This differential can lead to social strife and has in fact been suggested as one cause for the national polarizations that have led to several recent large-scale national revolutions.
Creating a successful Internet market is the key means to ensure Internet availability at low prices, which would in turn ensure that all countries and locales have similar opportunities. Once markets have been deregulated and have a regulator to ensure the success of deregulation; once technological innovation provides products, decreases prices, and increases availability; and once there are many competitors, there is still no guarantee that the market will work effectively towards giving everyone equal access.
In fact, in the recent history of the telecommunications market, there is ample evidence that markets are not always fully effective. For example, in the international voice market, for highly deregulated routes with many competitors, there remains a degree of poor price discovery, widely disparate prices, and high price volatility.
Here the success of the commodity markets provides a possible future path. In these markets, such as the oil market, commodity futures exchanges ensure widely available knowledge of prices and also ensure some consistency of prices for the same product or service. Additionally, commodity exchanges designate specifications for quality standards, and then, through the benefit of price discovery, price consistency, and quality standards, help ensure product availability.
Recently the electrical markets in Sweden, the United States, and the United Kingdom have taken the first fledgling steps towards establishing and developing true electricity commodities exchanges. In all three countries, several futures contracts are being traded for future delivery at designated handover points. The electricity market's parallels with the grain market are striking in that the development of the electricity handover points is similar to the development of grain warehousing and the corresponding railroad systems many years ago.
In the international voice market, too, the initial steps are being taken to develop commodities exchanges. Market participants can now buy and sell international telecommunications voice transport through blind trades in electronic Internet trading floors. Already the benefits are being seen through better price discovery and through the first generally available index of international voice telecommunications prices.
Commodity exchanges can help ensure the success of the Internet also. Currently, the Internet economic model is based upon carrier interconnection agreements which generally fall into two types: bilateral agreements and cooperative agreements. Providers benefit from interconnection by the good that their users derive from being able to connect with additional users of the interconnected provider. For example, the benefit of an information search is enhanced by the number and types of sites that a user can access. Similarly, for e-mail, the benefit is expanded based upon the number of other users that a user can reach. At the same time, connecting additional users may lead to network congestion, but the good of additional users and interconnections outweighs the possible negative impact, and this relationship has in fact been one of the major factors in the Internet's success.
Bilateral agreements are agreements for the exchange of traffic between two carriers, while cooperative agreements are multilateral agreements for multiple carriers exchanging traffic at a single point. In the Internet peering hierarchy, local Internet service providers (ISPs) interconnect with regional providers, who in turn interconnect with international backbone providers. Each of these interconnect points provides the potential for fully traded futures contracts in and between those markets that are competitive and deregulated. The trading of these contracts, in a liquid manner, would ensure price discovery, capacity availability, and quality of service.
The contracts would be straightforward, which would help ensure sufficient trading volumes to bring in the speculators and market makers who are needed to provide the liquidity for a fully flourishing and successful commodity exchange. The three contract parameters would be port speed, committed access rate, and quality of service. The port speed would just be port speed of the interconnect once the contract is "delivered" at the exchange point; the committed access rate would be the assured transmission speed across the port interface; and the quality of service could be the percentage of packet drops. Contracts would be bought and sold, for future delivery, based upon set different permutations of these parameters.
A market at exchange points for these contracts would provide the foundation to ensure that all regions and locales have equal access and ability to use the Internet. Similar to other commodity exchanges, prices would be known and available, and quality of service standards would be established and followed. Through knowledge of prices, new providers would be able to make investment decisions to expand service, and new competitors will be able to enter the market as barriers to entry are lowered.
The exchange would then be able to reinforce the already rapid changes in deregulation, technology, and the marketplace and help ensure that the many public goods promised by the Internet are more equally available internationally and within regions nationally.
The next ten years in Internet development will result in an Internet that is not recognizable today. Through continuing deregulation, amazing technological developments in the telecommunications and related fields, and the increasing pace of new product introduction, the Internet and Internet businesses will provide continuing growth of new business and consumer uses as well as provide a tremendous engine for local, national, and international economic growth.
Deregulation, technological innovation, and market product introductions, as well as personal computer market penetration, are all factors in ensuring that the potential Internet benefits are shared across all regions and countries. Consistent benefit and public good can be further ensured with the establishment and success of a commodity exchange for the Internet which would help guarantee low prices and capacity availability for all.