Forum on ICT and business performance
Policies for Stimulating ICT Supply and Demand
1 October 2003 Ewan Sutherland
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Organisation for Economic
Cooperation and Development - OECD Forum on ICT and business performance Policies for Stimulating ICT Supply and Demand 1 October 2003 Ewan Sutherland |
| Introduction |
Thank you very much for the invitation
to speak today. It is always a pleasure to come to the OECD, to
be in an institution with which we have so much agreement, where
the views of users are so much in sympathy with the prevailing ethos.
It is nice not to have to argue in favour of competition and liberalisation,
but to be able to take that as a starting point from which to benchmark
the performance of the member states. INTUG is not quite as old as the OECD, though we will be thirty next year. I can only claim to have been involved with INTUG for half of that time and only four years as Executive Director. Our aims are:
INTUG was very appreciative of the of OECD reports to the annual Ministerial conferences in 2001 and in 2002 on The new economy: beyond the hype and Seizing the Benefits of ICT in a Digital Economy. The OECD Economic Outlook (Number 73) After the Telecoms bubble put things nicely in perspective. There is no reason to panic, the crisis was one of confidence, rather than something more profound. Bubbles happen in financial markets, but business goes on. We continue to hope that the distaste of the financial markets for investment in telecommunications will end. We would like to see a little more capital for market entry. However, we would be very concerned to see a return to the the irrational exuberance, the feeding frenzy and the day traders of the recent past. We have enough distortions in telecommunications markets without having to worry about distortions caused by speculators. We also hope that the long delays in the privatisation process are now ending. We were pleased to see the recent sale by the government of the Netherlands of a substantial part of its remaining stake in KPN. More governments should follow its example, as it would remove an enormous shadow over the regulation of telecommunications. Two questions are posed for this forum that can both be answered in the affirmative:
Timing in a technology adoption cycle tells us a lot about how to devise polices for demand and supply. The philosophy that if you build it they will come, has been shown not to work in all cases. It requires much more sophisticated policies and more robust thinking by the suppliers, operators and service providers. The extreme position is that of the United Kingdom where to get broadband Internet access you have to get your friends and neighbours to write begging letters to British Telecom. It really should not be necessary to grovel to get new technology, those are the policies of Ebenezer Scrooge, before he saw the ghost of Christopher Marley. It is too much like the man who this summer received his telephone in Bangladesh, after a wait of twenty-seven years. There is an old argument dating back to the era of mini-computers that says that certain companies performed better than their rivals because they had more innovative customers. The manufacturer learned from the customer how to develop the next product. The same case can be made for many ICTs, where the supplier attracting the most innovative customers not only builds a critical mass but learns from the customers the real use for the ICT and so is able to develop new and better applications for the future. |
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| Productivity gains |
A significant part of the productivity
gains in the US "new economy" of the 1990s has been shown to come
from within the telecommunication sector. This was the result of competition
between the operators, they began to compete and to do so had to become
more efficient. That there was less prominent progress elsewhere
was due to slower adoption of competition. When network operators can be persuaded or are obliged to compete, rather than to collude or to lobby for regulatory preference, then the economic rewards are clear, both for the operators and for the rest of the economy. Too many operators continue to believe that a level playing is one under which competitors lie buried. Communications Outlook 2003 showed some rather striking differences in the productivity of mobile network operators. These arise in part from the use of pre-paid cards, where much of the activity is handled in the distribution chain, rather than by the operator. Another difference comes from the extent to which operators have outsourced their business activities. Many mobile network operators do not face sufficient competition to drive them to world class levels of efficiency. The other side of improved efficiency is that the surviving operators have grown bigger and have squeezed out rivals. Consequently, we need to be on our guard to ensure that the competitive check on the incumbents will remain in place. However, there are much greater gains in productivity from the use of ICTs in the economy as whole, if the barriers can be overcome. |
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| Barriers to adoption & diffusion |
There are many barriers to the
diffusion of new technologies but few are unavoidable. Where the barriers are not immediately susceptible to regulation or the marketing efforts of suppliers, then governments have, within their national ICT policies a role and a duty to act. In telecommunications some barriers have been erected by those market players who resist historical and technological inevitability, those who have failed to realise that their business models have already been been consigned to the dustbin on history. Of course, if the companies do not adopt new business models, they may not themselves survive. Telephone companies have fought lng and bloody-minded campaigns of resistance against the introduction of competition. The operators opposed the end of the monopoly on the sale of hand-sets, claiming that the networks would crash and burn if people could attach their own devices. They opposed the introduction of accounting separation as an evil intrusion into their business practices. They opposed carrier selection and mobile number portability. In the last few days we have seen a surge of competitive offers in the USA as cellular operators gear up to retain their existing customers and to tempt customers away from rivals, as mobile number portability becomes mandatory. The consistent theme is that the operators have put their own short term interests first and last, they have no other priorities. The price that the rest of the economy has to pay for this is delay in the adoption of new technologies. INTUG has been busy working on obtaining regulatory certainty for corporate networks. Corporations are rapidly adopting integrated voice and data networks, with savings on equipment and on networks, plus considerable gains in flexibility and functionality. Faced with interesting Cost-Benefit Analysis (CBA) issues. It creates for me difficulties in determining what is and is not permitted by the various regulations. A very global initiative, so need not to know if it is legal in France or in the Slovak Republic, but also in Fiji and in South Africa. Finding such information is not easy. |
| Fixed mobile convergence |
Once upon a time people forecast fixed-mobile
convergence, that these networks would meld into a single seamless entity.
This did not happen, largely because of the financial markers. Mobile
telecommunications was seen as exciting and dynamic, while fixed telecommunications
was boring and stagnant. So much so that some companies span off their
mobile operators into separate entities. Only now are the fixed operators
become attractive again with the growth of broadband, especially when
compared to the questions over the future of the third generation mobile
telecommunications. Mobile telecommunications is rife with market failures and abuses, one worse than the other. Perhaps the most remarkable achievement of the wireless operators has been to charge for signalling, otherwise known as text messaging or SMS. They have been very successful in driving up prices where the incremental cost of a message is very close to zero. It is a great way to fleece teenagers and by extension their parents. An abuse that causes our members the most concern is the excessive charging for fixed-to-mobile. Companies here in Paris have higher bills for fixed-to-mobile than for fixed-to-fixed domestic or for international telephony. International calls to mobile phones are typically 15 to 20% of call volumes for a given company, but 40 to 60 per cent of international call expenditure to any country. The cartel behind international mobile roaming is too well known to need me to say very much. I will only note that flying to New Zealand there were adverts in the London Heathrow Airport departures area from Vodafone telling me to call home, that it was not as expensive as I thought. A business customer would pay STG 2.10 per minute to call the United Kingdom from New Zealand. To be fair, in Wellington airport there was a Vodafone sign telling me to hire a local phone in order to avoid expensive international roaming charges. With such charges it is no surprise that companies issue instructions not to use mobile phones when abroad and take away mobile phones. The future of mobile was once to have been an implausibly lucrative third generation, in which per capita spending was to rise to be a massive part of GDP per capita. 3G has been explained as games, gambling and girls or, a little more analytically, as greed, gullibility and grief. The future of mobile is now very much less exciting and much more precarious, especially as long running abuses are finally being eliminated. Faced with the excessive prices of 2G, users are turning to Wi-Fi as an inexpensive alternative, especially for GPRS. It is important that barriers to the introduction of new technologies are removed, to allow the proponents of Wi-Fi, WiMax and UWB to have a fair chance at commercial success. The future may well be a fixed network, with wireless edges to it. |
| Broadband Internet access |
At the 2003 OECD ministerial conference
in Seizing the benefits of ICT in a digital economy stated
that:Unbundling of the local loop is particularly important to accelerate the development and diffusion of broadband Internet services. It is already having positive benefits, although its full impact may only become clear once effective competition has been established. In many countries, however, broadband uptake is still weak, mainly because of insufficient competitive pressure on the incumbent. This affects both the roll-out of broadband technologies and prices. The barrier is partly the result of the absence of certain players from the market and also the dominance of the incumbent operators that allows them to maintain their out-dated business models. They continue to contrive to defend revenue streams developed in previous decades from:
Where broadband is available, where the price is at or below USD 30 per month (allowing for purchasing power parity) and the offer is comprehensible to a typical purchaser, there seems to be strong take up. A low price drives demand. If that price is not in itself able to pay for the service, then the operators will build new business models, with a mixture of revenues from access, equipment rental and services. It is equally clear that the economies of scale are considerable favouring the larger operator. In most OECD countries the first economic contribution of unbundling the local loop has to been to soak up any existing unemployment in legal and regulatory services. Some countries are still at that stage. Unbundling, sends a message to the incumbent operator sufficiently clearly to get a commercial reaction in the provision of retail and wholesale ADSL services. The decision to unbundle, of itself, creates a dynamism that would otherwise not be there. INTUG was recently called upon to throw its weight into the debate in New Zealand, a late adopter of unbundling. There was a mysterious proliferation of new broadband offers in the days before the Commerce Commission published its report on unbundling. Lower prices and much higher line speeds suddenly appeared on the market. While New Zealand still has a long way to go, we can already see the logjam breaking. Local Loop Unbundling works in Japan, over the last two years it has allowed, each month, over 200,000 lines to be provided to non-incumbent operators for high-speed broadband. It has driven ADSL speeds up to levels not seen in North America or Europe, at 10, 12 and 26Mbits/s, while not holding back Fibre To The Home which is growing at 100,000 lines per month. While it is easy to dismiss certain broadband activities as non-economic or even immoral (I am not sure that morality is a concept that is well developed in economics), they may have significant economic effects. The computer games business has a turnover of many billions of dollars and is a significant cultural force, especially amongst certain age groups. It is clear, for example, that Korea would like to take a substantial share of the games market, both equipment and software, at the expense of Japan and the USA. It is a reasonable economic goal. However, the economic effects of playing computer games are poorly understood. Pornography has not been the subject of much professional attention from economists and statisticians. Consequently, it is difficult to tell how significant it is for the global economy. Reputedly it was an important factor in the introduction of many new telecommunications services, notably Minitel with its infamous messagerie rose. N2H2 recently found that the number of pornography related Internet pages had grown from 14 million in 1998 to 260 million by 2003 and on top of that there are 2.5 billion pornographic mail messages every day. It may be a factor in kick-starting broadband adoption. Despite the detractors who claim that broadband Internet access is frivolous or just unprofitable, it remains a significant factor for economic growth and its successful adoption is an indicator that national ICT policies and telecommunications regulations are working. |
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| Economic growth |
INTUG is very conscious of the
need for economic growth in all countries. Whether in France to help
pay for pension reforms, in South Africa to pay for medicines for HIV/AIDS,
or in Colombia to help lift people out of the grinding poverty of favelas,
the need for economic growth is paramount. ICTs are an important contributor to that growth, both within the sector and more especially in the wider economy. The adoption and adaptation of new technologies helps to boost the productivity of the economy as a whole. If INTUG has a trump card is arguing its case it not repeating the argument that something is a market abuse, it is that wiping out the market abuse or eliminating the market failure will lead to greater economic growth. That should be and must be the decider, even against the vested interests of incumbent monopolists and oligolopolists. The Enterprise Directorate-General of the European Commission, in comparing economic growth between the European Union and the USA, argues that Europe lost about 0.5% per annum in the 1990s because of barriers in the adoption of new technologies. That sort of loss of growth simply cannot be afforded. |
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| Conclusions |
INTUG is always appreciative of
the work of the OECD. We use its reports in the submissions we make
with member states and beyond, for example, at APECTEL and in CITEL.
It has a solidity and authority to its message on liberalisation that
we warmly welcome. We are always happy that someone else is encouraging
governments to resist the temptation to pander to the incumbent fixed
and mobile operators, to give competition a little longer to work its
peculiar magic. We strongly believe that governments must persist with existing policies to open markets, to remove technology specific regulation, to impose regulatory remedies in order to eliminate the market failures and abuses. Most of all they must ensure easy and effective market entry. (I might suggest that Wi-Fi in the OECD meeting rooms would be not be thought too frivolous or too precipitate a decision.) We know there are many more technologies and applications emerging from the laboratories and from incubators, aided by venture capitalists. These are often going to be disruptive to established business models and this we welcome. We need to ensure these services, applications and technologies can reach the market and that the benefits are passed on to the end consumers. Government induced economic incentives include: reduction/elimination of withholding taxes and excessive import duties licensing new operators and tilting the playing field to allow survival removal of economic disincentives like windfall and stealth taxes for social purposes tax allowances for e-Government service usage. One of my colleagues would like a 10% discount for the electronic submission of his tax return. Where such supply policies are not sufficient for the goals of economic policies to be achieved, then demand policies may be needed. However, a justifiable case must be made. The most obvious example being the slow adoption of new technologies by SMEs, what might be called "least developed companies". Here governments are entirely correct in supporting the education of SMEs in order to stimulate their demand for ICTs. Policies for supply should never be about substituting for the marketing departments for network operators. It should be about removing barriers to competition, about allowing in new players and about educating potential customers. Where that will not suffice, then demand policies can be a useful tool. Aggregation of demand. The supply and demand policies should be in balance, since it requires both. The "Field of Dreams" philosophy, that is "you build it they will come" works in some areas better than in others. The trick is anticipation so that you supply just at the point where demand materialises - just-in-time innovation. |
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| INTUG |
INTUG, the International Telecommunications
Users Group (INTUG) is an association of national telecommunications users
associations and multinational companies. INTUG was founded in 1974 to act as a single voice for users of telecommunications. The mission of INTUG is to ensure that users have access to affordable, interoperable telecommunications services and that their voice is heard wherever telecommunications policy is decided. For almost thirty years INTUG has argued for the introduction of competition in telecommunications and that all users must have access to the benefits of such competition. |
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