7.2.2

Implications of technology for the economics of the overall Market Structure

Technology impacts the telecom market in many different ways. A distinction is often made between product innovations and process innovations. Product innovations are innovations creating opportunities for the delivery of new products to the customers, and process innovations creating more efficient and cost effective processes of production. In the telecom sector this distinction may not be as clear as in many other sectors. Innovations in network technologies may be seen as process innovations, as they enable expansion of the network capacity, i.e. more production of the same product, but at cheaper prices. On the other hand, expansion of capacity allows for a wide range of new applications of the network and therefore creates a completely new type of infrastructure. In this context it is therefore more relevant to distinguish between innovations in network technologies and innovations related to service development. Furthermore, it is relevant to study how innovations affect the vertical relationship between networks and services, and horizontal relationships between different sub-sectors of the telecom industry.

This leaves us with four different types of technology implications on market structure:

1) Service innovations

Up to the mid-90’s telephony was the absolute dominating telecommunication service. As late as 1994, the revenue from PSTN constituted more than 75% of the total service revenue, and in developing countries the figure was even higher. Since then, high growth in the demand for Internet and mobile services has contributed to the overall growth and changed the telecom market from a single service to a multi-service market, where fixed telephony contributes less than 40% of the total service revenue.

2) Network innovations

Innovations in network technologies have not only made substantial cost savings possible, but have also created new possible alternatives to the fixed copper based telecom network operated by the incumbent operators. While telecom networks a few decades ago were seen as natural monopolies with a limited scope for competition, it has become feasible to establish competition in most segments of the network. However, regulatory intervention ensuring unbundling and open access to essential facilities may be necessary if this opportunity for real competition is to be realized.

3) Vertical separation

Digitalization of both networks and services has made it easier to separate network and service provision. This enables the development of a market structure with a vertical separation of network operators and service providers. New business models focusing on the provision of a particular service or network component are developed as alternatives to the end to end concept, where all service components are provided by the same operator.

4) Horizontal integration

Both service and network innovations have caused a blurring of the boundaries of the telecom sector. A wide range of new telecom service products have been created. Some of these products incorporate service elements from other sectors, such as IT or broadcasting. At the same time digitalization and expansion of network capacities enables transmission of IT, telecom and broadcasting services on the same networks (network convergence).

These implications correspond to a certain extent to the four technology trends, mobile communication, next generation access networks, IP and other packet switched infrastructures, and convergence. They are however not completely identical. For instance, there are other important service innovations in addition to mobile services, and vertical separation involves packet switched as well as circuit switched networks.

Figure 1: Relation between technology trends and market implications

Like the technology trends, the four implications are interrelated. The horizontal integration and vertical separation affect the boundaries of the telecom market and redefine the boundaries of the sub-sectors within the ICT area. Furthermore, the impact of these implications depends on both capacities and cost profiles for the various ICT infrastructures, while the economic viability of the various networks depends on what types of services they are being used for in the future.

Reference Documents

7.2.2.1 Service innovations

The technology trends described in section 1 of this module include development of a host of new services in addition to fixed telephony (PSTN). In spite of their importance for electronic banking and other business services, none of these services was able to generate revenues comparable with those generated from PSTN before the emergence of mobile communication and the Internet.

Reference Documents

7.2.2.2 Network innovations

Techno-economic characteristics of infrastructures

Network innovations are constantly reducing costs and expanding the capacities of networks. However, innovations do not only affect total cost and capacities in general, they also affect the relative costs of different network technologies and of each network element. Both are affecting the overall trends in the structure of the supply side of the market for provision network access. Cost characteristics of telecom networks are affected by new technologies in two ways:

    • New technologies are being implemented in existing networks, affecting cost structures of these networks
    • New types of networks are being established through the use of new technologies. These networks may be entirely new or based on existing facilities in other networks.

This section provides an overview of trends in the cost structure of existing and new types of communication networks.

Copper

Cable

Optical fibre

Power line

Mobile

Wireless

Satellite

Availability

High

Varies (mainly in cities)

Low

Low

High

Medium/

low

High

Ownership

Incumbent Telco

Telcos/ cable operators/ munici-palities

Telcos/ power companies/ munici-palities

Power companies

Telcos

Often SMEs

Satellite operators

Capacity

Medium/ low

Medium

High

Low

Low

Medium/ high

High

Major Services

POTS

Broadcast

VPN/ Internet

Internet

Mobile com.

Internet/ VoIP.

Broadcast

Costs drivers

Distance/ connections

Distance/ connections

Distance/ connections

Distance

Area/ capacity

Area/ capacity

Capacity

Lifetime

Very long

Long

Long

Short

Short

Short

Medium

Fixed/ variable costs

High fixed costs

High fixed costs

High fixed costs

Low fixed costs

Medium fixed costs

Medium/

low fixed costs

High fixed costs

Share of access costs

Very high

Very high

High

Medium/ high

Low

Low

Very low

Economies of density

High

High

High

Medium/ high

Low/ medium

Low/ medium

Low

Economies of scope (bandwidth)

Medium/ high

Medium/

high

Very high

Low

Low/ medium

Low/ medium

Low

Reference Documents

7.2.2.3 Vertical Separation – the Scope for new Business Models

Vertical separation implies that each layer of the entire service can be provided by different sets of actors. These may be telecom companies, companies from other industry sectors or public organizations. Service providers are able to offer their services to their customers without having their own network facilities, and infrastructure providers do not need to engage in service provision to end-users, but can lease facilities to network operators or service providers. This allows for the use of a wide range of new business models in the telecom sector.

The vertical structure of telecom markets has undergone considerable changes since the 1980s. Before that time the telecom sector was dominated by national or regional monopolies controlling all levels of the value chain and with close ties to the national equipment industry. In some countries the operators even produced parts of their own equipment. Since then the market has become much more disintegrated, and different levels in the value chain may be controlled by different companies.

One reason for this is that the use of digital transmission technologies and of the IP protocol have made it easier to separate the various functions. As it follows from the figure below there, is a certain correspondence between the layers defined in the OSI model and in the TCP/IP protocol, and in the way the market for telecom services has been segmented.

Network layers and Market segmentation

Practice Notes

Reference Documents

7.2.2.4 Horizontal integration

Horizontal integration involves convergence between two or more of the four different branches of the infocom sector: IT, telecom, broadcast and other media (including film, music, newspapers, and other media not being a part of the IT, telecom and broadcasting sectors).

The moving boundaries between telecom and related sectors are best illustrated through the use of the framework depicted below. The table distinguishes among the aforementioned four different branches of the ICT sector. Each of these sub-sectors is divided into three different layers representing different parts of the value-chain: content/services, transport/software and equipment/hardware. The importance of the three layers differs from sector to sector. In the telecom sector the transport layer is the most important, while the content layer is the most important in ‘Other media’. The equipment/hardware layer is most important in the ‘IT sector’, but is also important in the ‘Telecom’ and ‘Broadcasting’ sectors.

Convergence / integration and divergence / disintegration

Source: A. Henten, R. Samarajiva & W.H. Melody: Designing Next Generation Telecom Regulation: ICT Convergence or Multisector Utility? Regulate online.org 2002.

IT

Telecom

Broad-casting

Other media

Content /services

Software based content

Telecom based services and content

Broadcast programs

Film, music, newspapers, etc.

Transport / software

Software

Network services

Transmission

Cinemas, video rentals, etc.

Equipment /hardware

IT hardware

Telecom equipment

Broadcast equipment

Reproduction of films, printing, etc.

Convergence can take place in one or more of these three levels. Although they are interrelated, convergence at the content/service level does necessitate convergence at the transport level (network convergence), and convergence at the transport level does not necessitate convergence of services.

The Internet is the most prominent example of a service combining elements from all of the four sub-sectors. The Internet provides a common platform on which IT services, telecom services, broadcasting and other media services can be provided. Moreover, digitalization of content has made it easier to provide the same content on different platforms.

Mobile services are not convergent services as such, but mobile has created a new sub-sector, which in some respects can be seen as a part of the traditional telecom sub-sector, but in other respects represents an entirely new industry. Moreover, some mobile services, such as SMS and mobile broadcasting services, combine elements from ‘Telecom’ with elements from IT and Broadcasting.

Examples of convergent services

    • Cable telephony
    • Internet via Cable
    • Internet TV and radio
    • VoIP
    • Triple play
    • 3G Broadcast

Digitalization of voice and other communication services implies that it is becoming possible to separate networks and services, and many different services can be handled on the same networks (network convergence).

One of the first examples of this was the provision of telephony sharing infrastructure facilities with cable broadcasting networks. Later on, Internet access and voice telephony via cable modems were also developed. This has led to the introduction of a new business concept, where all fixed residential communication services are provided in the same cable (triple play). Several different kinds of players populate this market: Cable companies upgrade the broadcast networks to include interactive services like voice telephony and Internet, and telecom operators offer broadcast of TV and radio via xDSL broadband connections. In addition to this, optical fiber connections are being offered by electricity companies and other new entrants. This development can be observed in the US, in Europe and in Japan. Later on, it can be expected that triple play services are provided though the use of Wi-Fi or other wireless connections.

The concept of triple play services demands heavy investments in network infrastructures, but other types of convergence are less demanding in this respect. Convergence between radio and the Internet enables an extended reach of both services, even though broadband services are not available.

These trends do not imply an immediate unification of the markets for four different sub-sectors. Different services will be transmitted on a number of competing networks using different technology platforms (e.g. wired and wireless). However, as seen in the section on network innovations, each type of network will have its own comparative advantages in providing particular services in a particular environment. Although a unified pure optical network providing all sorts of communication services may be the optimum solution in the long run, this will not materialize in the immediate future, particularly not in low and middle income countries.

The competition between network types will be shaped by the availability of existing network structures as well as demographic factors such, as density of customers and the demand for particular services. It is a regulatory challenge to ensure a fair competition without favoring particular technologies. If not properly designed, regulation may skew the competition between different networks.

Markets will converge in the sense that different networks will compete in provision of particular services such as Internet provision. In the long term, however, it is possible that at least all fixed services will be transmitted via one unified network.

Practice Notes

Reference Documents

Next: 7.2.2.4 Horizontal integration