INTUG - International Telecommunications Users Group
KISDI, Seoul, 5 December 2003

a user view of convergence

Ewan Sutherland


Ladies and gentlemen

Thank you very much for the invitation to speak here today. It is always an honour to be invited to speak. It is a double honour to speak in Korea which has taken world leadership in telecommunications so convincingly. It is a challenge to have to offer views in Seoul.

This is the nineteenth country in which I have spoken in this year. I have spoken on each continent, except Antarctica! I am told penguins have  disappointinglylittle interest in telecommunications policy. I can at least claim to have tried to understand global telecommunications.


Introduction

I would like to make some remarks about different parts of the world, I will then come back to the countries that sit on the shores of the East China Sea and the Sea of Japan.

The International Telecommunications Users Group (INTUG) is now twenty-nine years old. It brings together national associations of telecommunications users and multinational corporations. It allows us to share experiences,  aproblemsnd positions on current issues of concern.

We have a set of priorities which we will be reviewing next month:
  1. open access to global mobile networks
  2. regulatory best practice
  3. liberalization
  4. leased lines
  5. IP telephony
  6. digital divide
  7. universal access
  8. numbering
It is a sad to report that some issues have been on our list a long time. A few days ago I presented a 25th anniversary paper to the ITU on leased lines. It was an issue also taken up earlier this week at the OECD. International mobile roaming charges have been an issue for half a decade and show few signs of going away.

Convergence is not a new issue, it has been talked about for a decade or more. However, there has been less progress than had been expected and it is important to understand why that is and whether it is reasonable to expect progress in the remaining years of this decade.

There are four factors to consider in convergence:
A crucial consideration since the 1960s has been the Silicon Valley model, with development of a new technology leading to its rapid adoption and with the rewards for individuals measured in terms of millions and latterly billions of dollars. This has encouraged the proliferation of new technologies including the recent efforts in wireless local area networks. These activities have been supported by venture capitalists backing individual projects, until a very small proportion of successes can be handed over to the larger financial markets.

The financial markets encouraged the separation of fixed and mobile  telecommunications in Europe and in the Americas. For example, because it was held to offer greater potential for profit AT&T was encouraged to spin off AT&T Wireless Services. In Europe rising share prices provoked  a complex game of ever more expensive acquisitions. This ended in the 3G auctions when the operators spent everything they had and everything they could borrow in order to buy air. Today, the financial markets tend to favour fixed broadband and doubt the viability of 3G.

The financial markets do not believe in convergence or at least they do not believe it will be profitable. They like barriers to market entry since they protect profits. 

The idea that everything would be carried in a single stream of IP packets has been a sort of "doctrine" for some years. However, it can hardly be called a "driver". In most countries and in most organisations there have been several fixed networks and additional wireless networks. The economics, from a somewhat abstract point of view, support consolidation onto one network carrying all traffic.

In terms of markets, it has been difficult to know who that network would belong to, since it must be seen in terms of winners and losers amongst the different operators and manufacturers. Within companies there have been different network managers. Convergence requires losers and victims.

There have been constant changes in the relative advantages of fixed and wireless, of copper and optical fibre cable, of circuit-switched and packet-switched.

The venture capitalists and financial markets insist on killer technologies, because they wish to rob the dead of their profits. They have backed 3G and Wi-Fi and want to back the next technology because "creative destruction" in their minds is about the creation of profits. For them, convergence is nothing more than a convenient label for absorbing the business and the customers of companies whose shares they have already sold.

Established market players are no different in wanting to have convergence on their own terms. They want to "converge" the services of others onto their network and to take the associated revenues. In turn, they resist being converged onto the platforms of others.

Verizon killed Wi-Fi stone dead as a vehicle for venture capitalists when it launched a free service in New York City, albeit based on a business model developed by KT. Yet it was far from obvious that Wi-Fi would or should converge with fixed network services.

There are clear limits to convergence in terms of the competences of the operators. Telephone companies know so little about content that it can be dangerous. Mobile Network Operators (MNOs) know only voice, some even believe that SMS is a data service. Going beyond the competene of an operator can be very dangerous.

A major issue in convergence is whether the operators can get away with overcharging for carriage of content. The advantage lies with the content providers who have the brand names and who have the potential to pick from a range of distribution channels. The most obvious example being that to compete with a local VHS/DVD rental shop the price of Video on Demand (VoD) has to fall to a very low level.

 There are also changing regulatory victors, individual battles go to different sides and can be misleading in the outcome of the war. Regulation is much slower to change, sometimes the changes are too slow. Sometimes, regulated operators benefit from the existing regulations and from arbitrage between regulated environments.
User requirements

Users are looking for real and effective competition in markets. Where this exists it offers:
We know very well that the underlying technological developments permit all of this, even if some market players prefer to make money by blocking access. An especially unpleasant example comes from the General Packet Radio Service (GPRS) where each network is protected by a firewall which is officially their to allow the use the IPv4. In reality it is there to allow the operator to control access to and from the user; it is the means by which the operators planned to get their share of the revenues.

Users would like converged bills, nobody wants to have to check multiple bills for their personal use. It is much worse for for large corporations where the scale and complexity of multiple bills make ensuring accuracy so difficult that some companies exist to check bills for a percentage of the savings.

However, users want to pay less for the converged service! This is hardly an incentive for an operator, since few companies wish to pursue lower revenues. The exception is a new operator for whom all revenues are entirely or largely new.

One important area in a world of globalisation, that is where users are global corporations, is how to reduce the number of suppliers. Business schools recommend no more than five suppliers worldwide. While for fixed communications it is possible to get a few good offers, there remain problems at the geographical edges.

Some services remain quite firmly national, making it difficult and expensive to create seamless global or regional services:
There are issues for the regulation of IP-VPNs where users want certainty.

There are also more general questions of IP telephony and ensuring that savings are passed on.

INTUG believes that policies towards telecommunications should be:
Latin America

Latin America remains an area of great potential for growth in telecommunications but where the performance has often been disappointing.

Many countries in the region continue to operate on the basis of a "concession" granted to a monopoly operator. It is an approach that needs to be abandoned as quickly as possible in place of as much competition as a market will sustain.

The countries in Latin America have an equivocal political and economic relationship with the United States, as shown by the recent negotiations over the Free Trade Agreement of the Americas. Nonetheless, these countries still look to the USA for ideas about technology and about regulatory policy. Indeed, many of their lawyers and engineers were trained there.

By comparison, few people in Latin America seem to have heard of the successes of Korea/Japan. It is time they were made more aware of different models, different ideas and routes to leapfrog into the future.

There are important advantages to having a group of countries speaking Spanish. It is a potentially large market for content in Castellano.


North America

There has been a single regulator in the USA since the early 1930s, so it is hardly a new concept. That said, the level of convergence within the Federal Communications Commission (FCC) is sometimes open to question.

Regulatory convergence in the USA is constrained by the lobbying activities of different interest groups which tend to see the outcome in terms of the survival of their group of broadcasters, incumbents or new entrants. It is especially important to recall the power of the broadcasters through their capacity to control the access of politicians to their constituents and campaign contributors, plus the more subtle capacity to invite regulators to meet their favourite stars of screen and stage.

In the last few days we have seen the USA take an important step towards competition in mobile telecommunications by the introduction of Mobile Number Portability (MNP), some six weeks ahead of South Korea. It has caused an outbreak of advertising to capture the customers of rivals and to retain existing customers. It is a very welcome move. Even before it was implemented, the FCC finalised the arrangements for portability between fixed and mobile, a useful step towards fixed-mobile convergence. This is expected to trigger significant numbers of customers to abandon fixed lines and to "cut the cord" to a purely mobile existence.

This may be adequate for voice services, but it raises some very real concerns over the provision of broadband. Winning those customers back to ADSL and FTTH will be a real challenge. However, the recent signs of growth of Wireless ISPs may be sufficient. It is a very incertain outcome.

The USA started from a good position in fixed broadband, based on cable modem service, but with ADSL growing relatively modestly. It was constrained by the incumbent telephone operators playing the 3D game: Deny, Delay and Degrade, in order to stave off competition. Unbundling has been the subject of extensive lobbying, litigation and lengthening of all the processes. The Triennial Review, published in August, was seen as an early christmas present for lawyers.

Everyone argues for a "level playing field", but each has a different concept of what that means. They want the level to be customised by regulation to their vision of the future. Ideally, they want their competitors to be buried underneath it, as part of the levelling process.

There has been very little progress in North America in the deployment of Fibre To The Home (FTTH) allegedly because of the fear that open access might be imposed by regulation. The other side to this is that they do not want to accept the revenues from mere carriage, they want a cut of the revenues, a position that may not be sustainable.


Africa

There are grave economic problems in Africa. So soon after World AIDS Day, it is impossible not to observe the effects that the high levels of infection of HIV/AIDS have in Africa.

The development of Internet and especially broadband access in Africa have been painfully slow processes. The development of Internet eXchange Points (IXPs) has made little progress, with Kenya closing one down! Leased lines remain very expensive, both for domestic tail circuits and international half circuits. This is because of the absence of competition and the power of the state-owned monopoly providers.

The regulator in South Africa was converged not for the obvious reason, but because the pre-existing regulator was a nuisance and had to be got rid of. Convergence was a good cover story. There are  few converged services or customers in South Africa. What little ADSL that is available there is very expensive.


Europe

The overall framework for the European Union is set by the eEurope Action Plan and by the "Lisbon goals".

In Europe there is the immense challenge of the introduction of the legislative package which Peter Scott described earlier this afternoon. It has absorbed considerable resources in its creation and its implementation, a process that will continue for many months and even years. Much of that energy is expended in a politico-regulatory game in which the network operators try to ensure that the level playing field that is created is the one they want and not the level playing field sought by their rivals.

For those with sufficient stamina, there will be a review of the legislation beginning in 2006 leading up to new legislation in, say, 2010.

There is no "single market" encompassing all European, instead there are national and fragmented markets, like the German states before Bismarck. The levels of market entry are relatively modest. This is described in some detail in the recent Ninth Implementation Report.

There are a few fixed services offered on a pan-European basis, mostly for large business customers. However, there are no mobile services, since that would kill the "cash cow" of international mobile roaming, some 15 per cent of the revenues of MNOs. There is no Fixed Mobile Convergence (FMC) since that would risk reducing high mobile charges to the level of fixed networks and might expose the mobile operators to new market entrants.

For example, Equant a market leader in fixed networks for business customers offers only GPRS and PSTN dial-up access. This is despite being in the France Telecom group, alongside Orange, the second largest mobile network operator in Europe.

In July 2003, the United Kingdom of Great Britain and Northern Ireland enacted a law creating a converged regulator. The Office of Communications (OFCOM) has now taken over from OFTEL. British users have a very real concern that OFCOM will be diverted to content regulation rather than ensuring a "Broadband Britain". Few services are really converged. Bureaucracy takes time to catch up.

There remain a number of long running market abuses in Europe:
It seems increasingly that GSM was not a clever scheme crafted by Eurocrats, but a lucky break for a bunch of operators. It confused the regulatory and political processes by creating a number of avaricious new political players and an appearance of success.

One, almost amusing twist, to convergence has been the finding that users must pay television licences for mobile phones in Finland and the UK.

Looking back to the European Commission's Green paper on convergence in 1997, there has been little progress. Stark contrast with the gains in productivity where the barriers to the adoption of ICTs remains a major issue for Europe. Implausible Lisbon goals. Irrelevance of the new legislation.


West, Central and South Asia

Growth of telecommunications in Asia has seen the addition of tens of millions of line, many mobile or limited mobility. Often people only have a narrowband cellphone. It is an immense challenge to provide broadband to such customers.

India has seen a long, bitter and bloody battle between fixed and mobile operators. Here convergence has taken an unexpected and unpredicted form, with limited mobility services using WLL cutting into the market for full mobility. There is a parallel in China where UTStarcom is installing 100 million lines of PAS. The new system of "unified licences" in India was introduced under the old legislation without any difficulties, though fiercely contested by mobile operators. The future growth of full mobility services, of GSM and of CDMA, will be much less than forecast, as cheaper limited mobility services take that growth.

The Lok Sabha in New Delhi has been discussing the Convergence Communications Bill for some years and seem likely to continue doing so. There is little political advantage in this legislation, such as the creation of the new regulator. Indeed it would reduce the capacity of the Government of India to influence and micromanage events. So the bill continues to be presented as a measure of modernisation and liberalisation without any real effort to have it passed into law. By comparison, there are political advantages to be obtained by provided community access telephones in hundreds of thousands of villages.

Very recently we have seen the prospect of manufacturing of GSM handsets in India.


Korea/Japan

I trust you will forgive me using the FIFA designation for the two countries!

I need not say anything about the story of broadband here in Korea, of its rapidity and of its success. World leadership says it all. The market for broadband is largely saturated, but is now migrating to VDSL at speeds of 25 to 50 Mbits per second. We are also seeing interesting developments i mobile telecommunications in the evolution of cdma2000 these appear to deliver bandwidth to customers and to have some revenues in return.

There are some excellent offers around. One example in 3G is the KDDI-Au service "Win" which costs about €33 per month for flat rate data access.

There is a nice lesson in convergence in Nespot, turning a small number of broadband lines into 10,000 hot spots, giving the fixed network a wireless edge to it. I was amused in June to be told that British Telecom (BT) was "aggressive" in deploying 600 hot spots, at time when KT had 6,000.

It is interesting to note that both Japan and Korea aspire to similar goals:
There is a willingness of foreigners to ascribe the success to factors which allow them to discount or to dismiss that as something artificial, irreproducible and even economically detrimental. To some extent, the efforts of Japan in the last two years, spurred on by the example of Korea, have shown that exceptional circumstances can occur more than once. (I even here rumours that Son-san is of Korean descent.)

Part of the lesson is that old business models cannot be carried into the future, that old revenues from expensive international telephony, from ISDN, from leased lines and the like will disappear. If an operator does not cannibalise its own revenues, then someone else will eat them. However, unattractive, it is better to create the future, than to allow others to create your future for you. Broadband is a mass market with economies of scale. Learn how customers use the network. Discover what they will pay for Video on Demand and just how much bandwidth they need. Interesting question of whether you need FTTH or whether VDSL is enough.

As bandwidth increases and as more convenient devices become available, we will see a growth of Wireless Instant Messaging and of Voice over Wi-Fi. The reality is that if there is sufficient bandwidth for affordable video-streaming, then voice will have to be carried almost free. When this is shown to work, it will do tremendous damage to the share prices of mobile network operators worldwide.
Conclusions

Convergence remains something which users seek, but only at a low price. We have to recover the substantial costs of conversion of networks, the installation of new equipment, the training of staff and so on.

While there is no obvious reason for having both a fixed and a mobile phone people will not pay more to give up this duplication. In particular, users want the lower prices of IP networks available on fixed networks and of WLAN for wireless Internet access.

There has been a willingness to pay a premium for mobility, but it has diminished enormously from a decade ago and is gradually disappearing. In developing countries we are seeing "limited mobility" services take up growth that operators had hoped would be full mobility. It has brought enormous savings to users.

Infrastructure competition is central, between the PSTN and CATV, between fixed and wireless, between telecom and electricity companies. It is central to success.

One highly controversial area is the difference in performance between Korea /Japan and Europe in the introduction of broadband. At the end of October 2002 there were more broadband lines in South Korea than in the European Union. While the European Union has seen continued growth, it has been overtaken by Japan which now has some 13 million lines. Moreover the lines in Korea/Japan are typically twenty times faster than those in Europe. Clearly something was correct in the policies being implemented in Korea/Japan.

In Europe, market opening has been small and incremental, with new entrants able to take only small market shares from incumbent operators. By comparison, in Korea/Japan the new entrants have much higher market shares and they have been achieved much more quickly.

While European operators do not believe in Santa Claus or Father Christmas, they certainly believe in tax breaks and investment incentives. They are going to inordinate trouble to convince their governments that the success of Korea /Japan in broadband was based on direct and indirect state aid and that the only way Europe can "catch up" on this "strategic" technology is to follow their generous example. They fail to mention market entry by new players taking large market shares.

It would be helpful, if you could quantify government support and show just how little effect they have.

Next week in Geneva, the United Nations (UN) and the International Telecommunication Union (ITU) will convene the World Summit on the Information Society (WSIS). Sadly, it has little to say on convergence.

So looking ahead, I see a slow progress towards convergence. At times wireless will be in the lead, at other times fixed networks. The driver is cheapness of service to customers. Where markets are open and competitive, someone will enter and offer cheaper and thus more attractive services. Voice revenues will almost disappear.


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last updated 3 December 2003.

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