Preparing the Information Infrastructure for the Network Economy 1

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 21 st 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 1 Thanks to Amy Mahan, Delft University of Technology, Netherlands and Soeren Hjarup, Center for Tele- Information, Technical University of Denmark, for research support for the chapter. 1

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 2

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. 3

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 4

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. This is particularly important because, for the vast majority of consumers, the local service connection is their gateway to the network for all services. Competitive international and national long distance service operators must pay a major share of their revenues to the local telecom monopoly for providing the origination and termination interconnections for these services. Similarly, the supply of the newer competitive mobile and Internet services requires interconnection with the local telecom monopoly in order to connect their services to fixed network subscribers. It is apparent that no local telecom monopoly will be interested in providing interconnection to competitive operators supplying services the monopoly could supply. As a result, interconnection issues have been, and continue to be hotly debated and contested throughout the entire history of telecom liberalization. The degree of competition that has developed has been made possible by NRAs requiring that incumbent local telecom monopolies provide interconnection services to their competitors under reasonable prices and conditions. Ironically, in the era of telecom deregulation, NRA regulation of interconnection has been essential for the successful introduction, growth and maintenance of competition. To address this problem of network competition for the future, many national policymakers and regulators are attempting to create a local market environment in which competitors can reach consumers directly, without having to interconnect with the local incumbent operator. They are taking steps to encourage the supply of additional direct connections to business and residential premises (e.g., using the capacity in CATV cables), and to require incumbent local monopoly operators to unbundle the local loop, i.e., lease communication capacity in the wires and cables connecting subscribers to the local switching centre. Then competitors will be able to provide all kinds of services, including local services, directly to customers. 5

Competition in Mobile Service Markets The standard model for licensing mobile telecom operators, applied in nearly all countries, has been to give one license to the incumbent operator and one or more licenses to new operators. Thus a degree of competition was introduced in mobile services from the start. Licenses for first generation mobile service, issued throughout the 1980s, used analogue technology with limited capacity and quality. Mobile was a niche service that in no way could substitute for fixed line service. When second generation digital licenses were awarded in the late 1980s and throughout the 1990s, most countries tried to add at least one additional competitor to the market. These digital services could be provided more efficiently with better quality and capability to carry both voice and data services. With widespread adoption of the GSM technical standard for service provision across Europe and many other countries, international mobile services became popular. Despite these new opportunities, initial development in many countries was restricted by the inability of the new competitive operators to obtain interconnection agreements with the incumbent fixed network operators. However, once NRAs began to require interconnection at cost-oriented prices, competition became more effective and markets began to grow rapidly, as is illustrated in Figure 2. An illustration of the mobile service market structure in many leading countries is provided in Table 1. This presents mobile market share data for different operators in OECD countries for the year 2000. All OECD countries have at least two operators; 70% of the countries have three operators; 30% have four operators; 20% have five. Only the US and Canada have more than 5 operators, but many of them are regional operators. The median market share for the leading firm (usually, but not always the incumbent) is 55%; for the second firm 32%; and for the third firm 12%. The data does not show a clear correlation between market growth and market competitiveness. The US and Canada would appear to have the most competitive mobile markets, but their market development is one-third of that in Europe. Within Europe, the UK is clearly the most competitive market, but its market penetration lags Austria, Finland, Italy, Norway and Sweden, all with apparently less vigorous competition. Although the presence of competition is acknowledged to be providing a strong stimulus for market development within all countries, the market share data does provide a ready explanation for differences among countries. Clearly there are other important factors that must be considered in explaining these differences, especially as the data suggest that mobile services are still far from reaching market saturation. INFORMATION INFRASTRUCTURE DEVELOPMENT The transformation of national and international telecom networks into information infrastructures capable of providing advanced communication/information services is generally associated with two developments: an increasing variety of Internet services; and the supply of increased bandwidth of varying capacity to carry the newer and more sophisticated next generation Internet services. Insufficient bandwidth can be a constraint limiting the access of residence and business customers to certain more advanced services, e.g., interactive video. But a great many Internet services can be supplied effectively at much lower prices over narrowband digital telephone lines. In 2002 the vast majority of Internet use is email and web site access over single or multiple (ISDN) digital telephone lines. But as service opportunities and consumer demand grows, higher bandwidth capacity is needed. The pace of market development is governed by the interaction of these demand and supply factors. 6

Thus, information infrastructure development involves several interdependent components: 1) an expansion of the bandwidth capacity in national and international networks to reduce unit networking costs and provide for higher capacity services; 2) an expansion of bandwidth for local connections to business and residence users to facilitate the increasing demands for higher speed services. 3) Internet services development which helps stimulate demand for new next generation Internet services; 4) the development of innovative applications of new Internet services throughout the economy and society to business, government, education, entertainment, etc.; This evolutionary process of network and market development will proceed faster for certain segments of society than others. The concern of policymakers and regulators is to facilitate the process by preparing an enhanced information network foundation that will foster the development and application of new services. The next section examines some preliminary data on information infrastructure and Internet development during the early stages of this network transformation process. Network Investment and Capacity As the convergence of telecom, computing and media proceeds, increased attention is focused on the capacity of national telecom networks to meet the demands of future multi-media, e- commerce and more advanced Internet services. Capacity requirements concern the bandwidth necessary for local connections to the home, as well as the capacity of national and international networks. Although national network investments are related to network expansion and improvement for all types of telecom services, clearly network preparation for the explosion in mobile services and the next generation Internet can be expected to require significant increases in investment in local, national and international networks. National Network Investment Trends Trends in investment throughout the 1990s in national telecom networks offering public services, for a set of leading countries, are shown in Figure 4. For most countries average investment per capita has increased significantly, particularly during the 1997-99 period. Japan and Switzerland show the most dramatic increases over the decade, reflecting in part the improvement of national networks that were not world leaders at the beginning of the period. The US, Norway, and Australia increased investment dramatically at the end of the decade. The Explosion in International Network Capacity The expansion of capacity in the international telecom network throughout the 1990s can only be characterised as an explosion. Although it included major expansions in satellites, the vast majority of increase was in new higher capacity fibre optic cables laid under the oceans to connect the continents. The following data relates the trans-atlantic traffic, but an analysis of trans-pacific data would show a similar result. Figure 5 gives an overview of all fibre optic communication capacity laid across the Atlantic, compiled from the US Federal Communication Commission (FCC) International Circuit Status Report, with FCC estimates for 2000 2002. Cable AC-1 went into full operation in February 1999 at 40 Gbit/s capacity and was upgraded to 80 Gbit/s at the end of the year. Also during 1999, a similar action was performed on the existing Gemini and TAT-12/13 cable systems that were upgraded to 30 Gbit/s each. TAT-14 was brought into service in 2000 with 640 Gbit/s capacity. This has brought about a jump in total bandwidth capacity in less than two years from slightly more than 160 Gbit/s to more than 800 Gbit/s, a four-fold increase. Although ambitious plans for additional cables and upgrades that would increase 7

transatlantic capacity by 25 times have been scaled back dramatically, one can expect an increase on the order of ten times by 2002, an explosion in capacity that requires use of a logarithmic scale in Figure 5 to present such rapid growth. Figure 6 shows the current cost curve for the supply of a 64 kbit/s transatlantic circuit, as estimated from FCC data. It shows that the investment required for a transatlantic cable is expected to fall from $10,000/circuit in 1995 and $1,000/circuit in 1999 to $41 per circuit for the most advanced cables (FLAG Atlantic-1, Hibernia, Level 3) when they become available at their full capacity in 2001-02. This unit cost decline is also so dramatic it requires a logarithmic scale to present it. The death of distance would seem to be arriving very fast. Internet Development The Internet has grown extremely rapidly during the later half of the 1990s, and is expected to continue growing at a fast pace for the foreseeable future. By 2000 there were more than 200 million Internet users in the world. Indicators of Internet subscription and use provide a measure of potential demand for next-generation higher speed Internet services. Indicators of Internet hosts and web server sites provide data on services availability. Figure 7 shows the penetration of Internet subscribers per 100 inhabitants for the 15 leading OECD countries as of January 2000. Surprisingly Korea leads with a 23% penetration rate, and Japan is not ranked in the top 15 OECD countries. What is most noticeable about this data is that overall Internet penetration is far less than either telecom fixed network or mobile service penetration. This suggests that if Internet access is to become a universal service, there is a long way to go even in the countries where the Internet is most developed. The demand and use of Internet services is directly related to the supply. The special Internet infrastructure components of supply are Internet hosts that provide access to services and content, and web sites that provide an indication of content development. Figure 8 shows Internet host penetration per 1,000 inhabitants for the 15 leading OECD countries in 2000. Unsurprisingly, the US is the clear leader. It is noteworthy that Korea is not ranked in the top 15 countries. As the Internet is a global medium, one might conclude Koreans are active users of the infrastructure and content housed in other countries some of which could be Korean. Nearly all of this Internet infrastructure and content, as of 2000, was being accessed by dialup connections over telephone lines. Very little of the services or content have required a larger connection capacity. Only in 2000 did Internet service supply and demand begin to show signs of beginning to grow beyond the capacity of normal 64kb/s telephone connections. One indication of this development is the early growth in electronic commerce. Secure servers are necessary to conduct secure electronic transactions, and suggest an e- commerce location. Figure 9 shows the number of secure servers per 100,000 inhabitants for leading OECD countries in 2000. Iceland and the US are the leading countries. Those countries that rank high in both Internet hosts and secure servers are likely to be the most active in terms of e-commerce development. Higher Speed Network Access Options It was shown above that the bottleneck in the development of competition for telecom network services of all kinds is direct access to customers. Unbundling access to local loops permits competitive access opportunities for traditional telecom services, and for higher speed services that can be provided using new technologies applied to existing copper subscriber lines. However, competition for the longer term is centred on alternative pipes to the home and the need to supply higher speed access for the more sophisticated Internet services being developed. 8

ISDN The first step up from a standard telephone circuit in terms of improving network access speed for residential customers is ISDN, with an equivalent capacity of 2-4 telephone circuits. In some countries ISDN has been available for many years, but its growth was limited by high cost, low demand and relatively few services requiring it. In the late 1990s, ISDN subscriptions began to grow rapidly in a number of European countries and Japan, as is illustrated in Table 2. It has become especially popular in Norway and Switzerland. However, this demand has been driven primarily by the desire of many Internet users for faster connections, not new services requiring higher bandwidth. However, as service offerings have expanded with rapid Internet growth, and demand has increased, some users are going directly to higher capacity DSL, upgraded CaTV or other technology options with higher capacity. Digital Subscriber Lines (DSL) DSL provide an upgrading of the capacity of customers telephone copper wire connections. DSL can come in varying sizes, usually from 128 kb/s to 2 Mb/s, depending on the quality of the copper wire, the distance from the central office, and other factors. If unbundled local loop access is provided, DSL services can be supplied by competitive operators as well as incumbent telecom operators. In most countries DSL provides immediate opportunities for enhancing local competition for higher speed access to Internet services. DSL services first became significant in the USA and Canada in 1999. Some European and Asian countries introduced it soon thereafter. Figure 11 shows the DSL penetration rate in a number of countries that have been early adopters of this higher speed Internet option. Korea stands out, achieving almost a 6% penetration in its first year, with twice as many DSL connections as the US. Cable Modems In many countries, the best immediate option for competitive access to higher capacity services is via established cable television (CaTV) operators. In entering the markets for broadband Internet access, CaTV operators in countries with high CaTV penetration rates have a head start over other new access technologies. Figure 12 provides data on CaTV Internet penetration in the compared countries. Korea, Canada, and the Netherlands have the greatest penetration at this very early stage of development. Summary The more important issue for high speed access to the next-generation Internet is not so much which access options are most popular, but rather that high speed access be available and used. Figure 10 provides a summary of the penetration rates for ISDN, DSL and CaTV modems in some leading countries being compared here. It is evident that ISDN is by far the most commonly used access option, with Norway leading the way. For the higher speed options, DSL has had a rapid take-off in Korea, but is just getting off the ground elsewhere. Although these are very early days in the development of high speed Internet access, the data suggests that the hype of the last several years has been mostly hot air. The time horizons for the development and application of new high speed Internet access options depends in part on the pace of technological improvements, and the achievement of reductions in bandwidth unit costs and other technical service parameters relating to security, privacy, intellectual property protection, contracts, etc. And it depends heavily on the rate of growth in demand for services that require higher speeds and greater bandwidth. For the near 9

term, new access technologies that are now becoming operational in some countries, in addition to those discussed here, include digital TV and fibre optic cable. Both are extremely expensive except for specific applications. Fibre connections to the business is economical in highly concentrated parts of many cities, but fibre to the home will require significant cost reductions and demand growth before it becomes economical or competitive, except in very special circumstances. Licensing of Fixed Wireless and broadband mobile (UMTS or 3G) networks now in process in many countries are expected to open new possibilities, but not in the short term. New satellite systems offer medium term possibilities for some users. For the longer-term horizon, HIPERACCESS, High Altitude Platform Stations and powerline communication may become possibilities, but they are far from proven technologies. The unresolved question is whether the competition among the different technologies will tend to result in the supply of many pipes to many homes; many pipes, but only one pipe to any one home; or one pipe to the vast majority of homes. CONCLUSION It is apparent that even in the leading countries, information infrastructure development for the 21 st century network economy is at a very early stage. The process of transforming the telecom network into a broadband information infrastructure for e-commerce and other nextgeneration Internet services will be a long and gradual one, comparable perhaps to the gradual penetration of electricity into the industrial economy, which took between one and two generations. Nevertheless the ICT industries involved in building the new infrastructure and developing the new services will be significant growth industries throughout this process. The next major step in this development is forecast to be the convergence of next-generation mobile network capacity and services (3G) with the next-generation Internet. This will make the Internet, and all the new e-commerce services, mobile. This raises an interesting issue for assessing the preparedness of different countries for this possibility. The countries leading in mobile penetration Europe and Japan are not the countries leading in Internet development. The US and Canada are the only countries among the world leaders that have a higher penetration of personal computers (PCs) than mobile phones. They have the lowest mobile phone penetration rates among this group. Figure 13 summarises penetration rates for 2000 in fixed, mobile and Internet access for the leading countries as measured by total access paths (fixed plus mobile). It illustrates how mobile penetration has come to dominate the access statistics. Although the US and Canada have high rates of fixed network and Internet penetration, they are so far behind the leaders in mobile penetration, they are not ranked in the top 15 countries, which are all European and Asian. Clearly the constraining factor in the accessibility to the mobile Internet will be mobile phone penetration. Although Internet-capable mobile handsets have just been introduced in 2001, it is forecast that their numbers will exceed the total number of PCs with browsers before the end of 2002, growing by an order of magnitude faster than PCs with browsers. 2 If this scenario holds true, then next-generation Internet penetration is more likely to follow the trend of mobile phone penetration than PC penetration. Then the Nordic countries would appear to be the best positioned to take advantage of these opportunities. The structure of Internet and information infrastructure development already has raised concerns about a digital divide, between those who have access to these new opportunities and those who are denied now, and are likely to be denied indefinitely. Concerns are raised 2 The Economist, A Survey of the Mobile Internet, 13 October 2001, p 4. 10

about digital divides within countries and among countries. This chapter has examined information infrastructure development in the leading countries. Most countries in the world do not have a national telecom system that can serve even half the inhabitants with basic telephone service. The challenges they face in attempting to develop an information infrastructure are many times greater than those facing the most developed countries. Most developed countries have adopted universal service telecom policies to ensure that a minimum level of basic services is available universally throughout the country. Many countries provide direct and indirect subsidies to ensure the universal service policies are implemented. Already several developed countries have extended the universal service definition to include the opportunity for Internet access at reasonable cost, and others are considering it. If the information infrastructure and the next-generation Internet are as important to the future of commerce and participation in society as is often claimed, then universal Internet access policies may become common. This can solve the digital divide problem within developed countries. However the problem among countries is far more severe than the international telecom divide problem that has existed throughout the telephone era, and will pose a major challenge to international agencies as well as developing countries. Policies that are fashioned to address this issue may determine whether the information infrastructure and the nextgeneration Internet will provide a catalyst to overcome the telecom divide and thereby a foundation for network-based economic, educational, social and other opportunities for developing countries, or whether they will magnify the telecom divide dramatically into an insuperable barrier for those who are not connected. That will be the biggest challenge for the future. References Abramson, B. 2001. Interpreting Current Statistics: Internet Backbone Market Shares, TelecomReform, Volume 1, no. 2. <www.telecomreform.net> Arnbak, J. 2000. Regulation for next-generation technologies and markets. Telecommunications Policy, Volume 24, no 6-7, (477-487). <www.tpeditor.com/contents/2000/arnbak.htm>. The Economist, A Survey of the Mobile Internet, 13 October 2001, p 4. Melody W.H 2001: Regulatory Trends & Developments in European Telecommunications; A Status Report of Progress in Telecom Reform and Information Infrastructure Development. Telestyrelsen, Copenhagen. Melody W.H. 1999: Telecom Reform: Progress and Prospects in Telecommunications Policy, Volume 23, no 1 (7-34). Melody W H. (ed) 1997: Telecom Reform: Principles, Policies and Regulatory Practices. Technical University of Denmark. Lyngby, March. <www.lirne.net>. OECD. 2001. OECD Communications Outlook: Information Society. Paris. 11

ITU. 2000. World Telecommunication Indicators 2000 / 2001. Geneva. ITU. 2001 Statistics: <www.itu.int/itu-d/ict/statistics/> 12

Table 1 Cellular mobile competition in the OECD, 2000 Number Operators of Mobile operator market share according to number of operators (%) 1 2 3 4 5 Other Australia 48 30 17 3 2 Austria 55 34 11 Belgium 65 33 3 Canada 32 26 16 9 8 9 Czech Republic 55 45 Denmark 50 32 12 6 Finland 64 35 1 France 49 35 16 Germany 43 42 8 6 Greece 44 29 26 Hungary 58 42 Iceland 75 25 Ireland 66 34 Italy 61 34 4 Japan 58 15 13 7 7 Korea 45 18 13 13 11 Luxembourg 63 37 Mexico 79 20 2 Netherlands 50 35 6 5 4 New Zealand 67 33 Norway 73 27 Poland 45 39 16 Portugal 40 41 19 Spain 58 36 6 Sweden 51 32 17 Switzerland 72 18 10 Turkey 70 30 UK 32 27 22 19 US 13 11 9 8 7 52 Note: Some countries have regional licences Source: OECD. 13

Table 2 ISDN Subscription (x 1000) 1997 1999 cagr (%) Penetration (1999, %) Australia 488 1049 47 5.5 Austria 244 662 65 8.2 Canada 451 999 49 3.3 Denmark 176 662 94 12.4 Finland 116 467 101 9.0 Iceland 13 41 78 14.7 Japan 4999 13758 66 10.9 Korea 42 640 290 1.4 Netherlands 810 2280 68 14.4 New Zealand 34 72 46 1.9 Norway 410 1262 75 28.3 Sweden 187 645 86 7.3 Switzerland 612 1416 52 19.8 UK 1100 2400 48 4.0 USA* 1554 2016 30 0.7 Source: OECD *) = 1998 and 1999 14

Finance/ Banking Travel & Tourism Health/Medical Regional Development Manufacturing Government Services Disaster Management Media & Cultural Sectors Education/Training Applications Content Broadcast Media Film Libraries Software etc Electronic Services (Pay TV, VAS, Internet) Multimedia, etc. (Public Usergroup Private) Telecommunication Facilities Network (Information Superhighway) Interactivity (Instant & Delayed) Voice Data Sound Graphics Video Computing / Information Technology Telecommunication Equipment Manufacturing INFORMATION INFRASTRUCTURE Figure 1 15

Figure 2 Access Paths Fixed Line 80 70 60 50 40 30 20 10 0 Canada Denmark France Germany Hong Kong Iceland Japan Netherlands Norway Sweden Switzerland Taiwan UK USA 1994 2000 Mobile Subscribers 90 80 70 60 50 40 30 20 10 0 Austria Denmark Finland Hong Kong Iceland Ireland Italy Israel Netherlands Norway Portugal Sweden Switzerland Taiwan UK 1998 2000 Source: ITU. 16

Figure 3 Incumbents Market Share in Public Fixed Voice Telephony Long distance 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Australia Austria Canada Denmark Finland Iceland Japan* Korea Netherlands International New Zealand Norway Sweden Switzerland UK USA 1998 1999 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: OECD. Australia Canada Denmark Finland Iceland Japan Korea Netherlands New Zealand* Norway Sweden Switzerland UK USA* 1998 1999 17

Figure 4 Public telecom investment per capita 300 250 200 150 100 50 0 Australia Austria Canada Denmark Finland Iceland Japan Korea Netherlands New Zealand Norway Sweden Switzerland UK USA Average 1988-90 Average 1991-93 Average 1994-96 Average 1997-99 In USD millions. Source: OECD. 18

Figure 5 Transatlantic submarine cable capacity 1988-2003 10,000 1,000 G bit /s 100 10 1 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Est. 2001 Est. 2002 Est. 19

Figure 6 Cost of newly installed transatlantic circuit capacity is declining $100.000 $10.000 $1.000 Cost of a 64 kbit/s circuit $100 $10 $1 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Est. 2000 Est. 2001 Est. Year Source: Based on 1999 FCC International Circuit Status report data 20

Figure 7 Internet subscribers, 1st January 2000 per 100 inhabitants* 25 20 15 10 5 0 Korea Sweden * Hong Kong, Singapore and Taiwan frequently rank within the top 15 in country comparison. As they are not OECD countries, they are not considered in these rankings. Source: OECD. Denmark Canada Netherlands Iceland Norway New Zealand Australia Switzerland UK Germany Finland US Ireland Belgium Spain Italy Japan Austria France Portugal Czech Republic Greece Mexico Hungary 21

Figure 8 Internet hosts in OECD countries per 1000 inhabitants, October 2000 (gtld adjusted) 160 140 120 100 80 60 40 20 0 Finland Iceland Source: OECD. Canada Norway Sweden New Zealand Netherlands Australia Denmark Switzerland Austria UK Belgium Italy Japan Germany Ireland Luxembourg France Spain Hungary Portugal Greece 22

Figure 9 Secure Servers per 100,000 inhabitants, July 2000 25 20 15 10 5 0 Iceland US Australia Canada New Zealand Switzerland Luxembourg Sweden Source: OECD. UK Finland Ireland Norway Austria Denmark Germany Netherlands Belgium Japan France Spain Czech Republic Italy Portugal Hungary Greece Korea Poland Mexico Turkey 23

Figure 10 Next Generation Internet Connections 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Austria Canada Denmark Finland Iceland Korea Netherlands Norway Sweden UK USA ISDN 1999 xdsl 2000 Cable Modem 2000 Source: OECD. 24

Figure 11 xdsl Subscription 7 6 5 4 3 2 1 0 Austria Canada Denmark Finland Iceland Korea Netherlands Norway Sweden UK USA Connection per 100 persons, December 2000. Source: OECD. 25

Figure 12 Cable Modem Penetration 3.5 3 2.5 2 1.5 1 0.5 0 Austria Canada Denmark Finland Iceland Korea Netherlands Norway Sweden UK USA Connection per 100 persons, December 2000. Source: OECD. 26

Figure 13 Access Paths & Estimated Internet Users 90 80 70 60 50 40 30 20 10 0 Austria Denmark Finland Germany Hong Kong Iceland Italy Japan Netherlands Norway Singapore Sweden Switzerland Taiwan UK Fixed Line Mobile Internet Users Source: ITU; OECD. 27