e-OTI: Local Access Pricing and the International Digital Divide

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Local Access Pricing and the International Digital Divide
To find out why electronic commerce isn't growing in some countries, look no further than the price and structure of access

By Sam Paltridge
sam.paltridge@oecd.org

There is a growing international digital divide among countries of the Organization for Economic Cooperation and Development (OECD). This is contrary to a widespread view that in the area of development of electronic commerce, the gaps between countries are narrowing. The price of access to the Internet and the structure of this pricing are key factors in explaining the relative development of electronic commerce across the OECD area.

The Issues

The term digital divide refers to the gap between those with and those without access to information and communication technologies, such as the technologies needed to access the Internet and engage in electronic commerce. Access to the information and communication resources that those technologies enable is increasingly viewed as critical for economic and social development. However, the digital divide could also be said to exist between different countries, because the ability of individuals to take advantage of the Internet varies significantly among the member countries of the OECD.

The level and structure of pricing for Internet access are major constraints facing both the users and the potential users. The OECD has undertaken comparisons of Internet access pricing since 1995. The average price to access the Internet-including charges for line rental, local calls, and ISP services-can be plotted against the penetration of Internet hosts (figure 1). The data reflect a strong correlation between the level of access pricing and the rate of Internet development. They also bring home the extent of the international digital divide-even within developed economies.

Figure 1. Internet access pricing (1995-2000) and Internet hosts per 1,000 inhabitants

The penetration rate of Internet hosts for the United States is three times the average for the OECD, seven times that for the European Union, and just over eight times that for Japan. However, those figures reflect only partly the growing international digital divide in terms of electronic commerce. For example, in March 2000, the United States added 3 times as many secure servers as the rest of the OECD combined. This means that, on a per capita basis, the United States added 10 times as many secure servers, for that month, as the rest of the OECD.

At the same time, usage of the Internet in the United States and in a small number of other countries with pricing structures favorable to Internet access is far higher than counterparts in other OECD countries, as reflected in average online times. This is encouraging the development of new content and services-including multimedia services supporting electronic commerce-at a much faster rate than in countries where pricing is not favorable to electronic commerce.

Figure 2. Internet infrastructure development and electronic commerce

When the penetration rate of Internet hosts is plotted against that of secure servers, a clearer picture of the international digital divide emerges (figure 2). Six countries are higher than the OECD average on both scales. Each of them has had a history of relatively inexpensive Internet access. Significantly, four of the countries-Australia, Canada, New Zealand, and the United States-have widespread availability of unmetered Internet access. This suggests that pricing structure is also an important consideration for assessing Internet and electronic commerce developments.

The Players

The major infrastructures currently used to access the Internet at the local level are the public switched telecommunications networks (PSTNs). Other networks are being developed, such as those formerly dedicated to cable television, and PSTNs themselves are being upgraded to provide high-speed options for Internet access. PSTNs are also being modified to bring closer to the user the point of separation between circuit-switched traffic and traffic using the Internet protocol. This process ranges from telecommunication carriers' installing modems at local exchanges to ISPs' colocating equipment and using unbundled local loops. The different methods are leading to different pricing structures for local telephony calls and for Internet access via local loops.

Incumbent telecommunications carriers provide almost all of the local lines used for Internet access-a consequence of more than a century of legal monopolies. These operators have shown a marked reluctance to offer a variety of pricing options, even though there is patently increasing market demand for pricing innovation. Simply put, the absence of competition in the local loop enables dominant operators to disregard or delay meeting the changing needs of business and individual users in relation to electronic commerce. Nevertheless, direct intervention by governments to impose pricing options that appear more favorable to electronic commerce should be avoided, because it runs counter to the practice of allowing telecommunication carriers to manage pricing structures.

For several decades, the OECD has advised governments to disengage themselves from setting telecommunication prices. This is in line with reforms that took the management and operation of telecommunication carriers away from ministries of communication and regulatory authorities. These reforms aimed to effect more efficient management by telecommunication carriers and more transparent government actions in regard to social objectives in the communications field.

For policy makers or regulators, the preferable response to the challenges of the international digital divide is not to mandate particular pricing structures-such as unmetered access-even if the evidence is mounting that such structures are more appropriate for electronic commerce. This would be a retrograde step because it would return policy makers to setting telecommunication prices. Instead, other policy options are available, including:

High-level policy support for a greater range of pricing options, particularly pricing favorable to the always-on capabilities necessary to support electronic commerce
Policy support for infrastructure competition
Policy support for the unbundling of local loops
Policy support for the competitive development of high-speed-access options

These reforms would enable competition to play a greater role in fostering the pricing innovation needed to support electronic commerce and would address the international digital divide.

The Forums

In October 1998 the OECD held a Ministerial Conference in Ottawa, Canada, at which it concluded that the growth of electronic commerce relies on universal and affordable access to an information infrastructure. Ministers agreed that to ensure a sustained long-term trend toward lower costs, increased quality, and expanded access to information infrastructures and services, effective competition in telecommunications markets is required. The OECD provides an ongoing forum to discuss the implementation of those objectives and provides analytic and statistical resources for its 29 member countries.

A coalition of international business organizations-the Alliance for Global Business (AGB)-also participated in Ottawa. The coalition was composed of the Global Information Infrastructure Commission (GIIC), the International Chamber of Commerce (ICC), the World Information Technology and Services Alliance (WITSA), and the International Telecommunication Users Group (INTUG). One of the AGB's key recommendations to the Ottawa conference was that policies that facilitate electronic commerce and the convergence of the telecommunications, information technology, and multimedia industries should be pursued in an open and competitive environment. These business groups, particularly INTUG, continue to monitor communications pricing and its relationship to policy and regulatory frameworks.

In March 2000 the cost of Internet access reached the attention of presidents and prime ministers. The Lisbon Summit of the European Council, a meeting of the leaders of European Union countries, made it a priority to reduce the cost of Internet access at the local level by the end of 2000. The summit was followed by a meeting of European ministers in April 2000-under the Portuguese presidency of the European Union-to coordinate policy in this area. This meeting also had two other major focuses: (1) the difference between Europe and the United States in the pricing of the networks that underlie the Internet and (2) the need for reform.

A range of OECD reports on Internet developments and electronic commerce, including various Internet indicators.
Information on the Alliance for Global Business (AGB) .

The site for the Portuguese Presidency of the European Union.

Information on some of the indicators mentioned in this article was drawn from Telcordia (formerly Bellcore) at and Netcraft.

The Prospects

All but 5 of the 29 OECD countries have liberalized their telecommunications markets. Three of the 5 plan to do so in the next 18 months. Yet, experience has shown that it takes time for local infrastructure competition to develop. That's why the majority of OECD governments are bringing forward plans to unbundle local loops in order to encourage both pricing innovation and the more rapid deployment of high-speed access via DSL. They are also taking initiatives to bring additional players into the Internet access market via new wireless technologies.

What the Private Sector Is Doing

At the local level-where competition is most advanced-the benefits of pricing innovation are increasingly evident. Of the group of countries that inherited a pricing structure most unsuitable to electronic commerce, the United Kingdom is most advanced in addressing these issues. One of the U.K.'s main advantages is that reform is being built on nearly a decade of local infrastructure competition. This means that many millions of households have a choice among local access providers. In 2000, some of the first offers for unmetered Internet access have been from new entrants such as Telewest and NTL, both cable communications companies. Many ISPs are also working with different telecommunication carriers in the U.K. to offer unmetered access. Prompted by this competition, British Telecom-the incumbent telecommunications carrier-is introducing unmetered access as well. Other countries in which communication companies have announced that unmetered access will be available by mid-2000 include Germany, Hungary, Italy, South Korea, Sweden, and Switzerland.

What You Can Do

In competitive markets, users are already voting with their accounts.

About the Author

Sam Paltridge is a communication analyst in the OECD's Division of Information Computer and Communications Policy. His recent work in communications is on infrastructure competition and on Internet issues, including domain names, Webcasting, and traffic exchange. He is a principal author of the 1995, 1997, and 1999 editions of the OECD's Communications Outlook. His most recent reports are on Internet Infrastructure Indicators and leased-line pricing and electronic commerce. His written reports can be freely downloaded from the OECD Web site. The views expressed in this article are those of the author and may not necessarily be those of the OECD and its member countries.