The ICT sector is changing rapidly. The nature and pace of change create challenges for both regulators and regulated firms. This section provides an overview of key developments in the ICT sector, across four categories:
Technological Changes
ICT technology is continuing to develop rapidly. Five key areas of technological change are having a significant effect on the structure of ICT markets, and will continue to do so for the foreseeable future. They are:
Key implications for network operators and regulators are summarized here.
The Shift from Analog to Digital
Human beings use analog techniques for listening to and viewing content. Historically, technologies for communication have also used analog signals (for example, conventional telephony, music cassettes and records). More modern technologies convert analog signals into a digital format for processing, storage, and transport. This has a number of advantages. Digital signals do not degrade when duplicated, nor do they accumulate noise and other interfering signals when amplified. Devices such as computer hard drives can quickly store, retrieve, and duplicate digital files.
Digital signals can also be transmitted more efficiently than analog. Because digital signals do not readily spill over into adjacent frequencies many different signals can ride together, piggy-back style, on a broadband carrier. Substantial operating efficiencies accrue when a network can aggregate traffic going in the same direction, and transport it all over a single “pipe”. Compression technologies make it possible to reduce the size (bandwidth) of the pipe needed to send multiple or highly complex signals. Modern digital networks can simultaneously transport bitstreams representing many different types of communication (such as data, text, audio, video, and voice).
Data Replaces Voice
Until quite recently carriers designed and operated the telecommunications infrastructure primarily with voice communications in mind. Voice communications generated most company revenues and were the primary mode of communications.
While voice services are still dominant in revenue terms (in many cases voice accounts for more than 80 percent of company revenues), the importance of voice compared to other information services appears to be declining. There is evidence that local exchange telephony subscriptions, long-distance minutes of use, and revenues for conventional dial-up services are declining. Demand for information services and data transmission is continuing to grow steadily. This shift reflects a number of factors, including:
- Increased business data requirements,
- Growing consumer demand for “bandwidth hungry” services such as online music, movies, and games,
- The proliferation of private lines services, that can be used for voice and/or data transmission, and
- Migration of some voice calls from conventional networks to VoIP.
On the transmission side, digital technologies now play a central role. In addition to digital services, much voice traffic is now digitized, for at least part of the transmission circuit.
The shift from voice to data has important consequences for network design. Voice communications and data communications have quite different technical requirements. Table 1 highlights some of the key differences.
Table 1: Comparison of Network Requirements for Conventional Voice and Data
| Conventional voice service |
Data / information services |
|
Small but constant information delivery rate.
Requires a dedicated narrowband channel.
Little tolerance for delays, echoes, noise, and sound distortions.
Two-way, roughly symmetrical communications. |
Typically “bursty” traffic patterns, with short term peak demand requirements.
Generally requires a broadband, high speed network.
Users have diverse requirements. Network should be able to handle both time sensitive and delay tolerant traffic, and peak traffic bursts.
Often asymmetrical traffic requirements (for example for Internet services). |
Packet Switching Replaces Circuit Switching
In response to growing demand for data and digital voice, ICT networks are shifting from circuit switching to packet switching.
Networks configured primarily for analog voice communications typically use a technology called circuit switching to set up and break down links between the caller and call recipient. Circuit switching provides a dedicated, narrowband link available for use only by the caller and call recipient. This provides for a highly reliable and good quality link appropriate for short duration calls with a small but constant two way traffic flow.
Circuit switching does not work well for data communications such as Internet traffic, because it cannot handle bursts of high throughput, and cannot provide switching and routing for other users when the initial parties have a temporary pause in communications. Configuring a voice line for Internet access ties up a line for the duration of the call even though the data communications requirements may make up only a small portion of the total time.
Packet switching is a superior, more efficient, way to manage data traffic. The network breaks traffic down into small packets that can be routed over any available network link. Network links not needed by one set of communicators can become available for others, in effect making it possible for many communicators to use a network link at the same time. The digital nature of packet switching means that a single network can handle a variety of different packet-based services including voice, data, text, images, sound, and video.
However, packet switching can result in higher latency than circuit switching. When packets are routed over multiple networks and across large distances, some packets may be delayed or lost, or packets may arrive out of order. Packet switched networks do have some ability to reassemble and reorder packets, but where packets arrive too late for processing this will result in some lost information (for example lost words in a conversation, or lost sound and picture in a videoconference).
Broadband Replaces Narrowband Networks
A further consequence of the shift from voice to data services is a shift from narrowband networks to broadband networks. As Table 1 shows, data services typically require broadband networks. Broadband networks are able to transmit more information, faster. Unlike narrowband networks, broadband can accommodate the “bursty” nature of data traffic, and transmit large and complex files.
Intelligence Migrates from the Core to the Edge
In conventional circuit-switched telephone networks the “intelligence” is located centrally on telephone company premises. User devices are generally quite simple (for example telephone handsets). The hierarchy of switches in the telephone network provides the intelligence to route calls, generate billing information, and provide additional services (such as caller identification, voice mail, and so on).
Centralized intelligence is efficient where most users have similar requirements, as in a telephone network. However, this approach offers limited opportunities to customize services, and optimize the network, for individual user requirements. The architecture of the Internet moves intelligence from the core network to users operating at the edges of the network. Users can use on-site information processing to configure their own services, through software and other customized applications, and can treat the network as a generic information transport service.
The Increasing Role of Wireless
Consumers have readily and quickly embraced wireless telecommunications. Wireless service removes the need to be “tethered” to the network, and provides greater mobility for users. Wireless connections are often easier to install and can involve lower capital expenditure than wired ones. In many rural and remote areas, wireless provides a cost-effective alternative for achieving universal service.
Some of the traffic growth in wireless networks is due to customer migration from wireline networks, (rather than from new telecommunications customers), as wireless and mobile services become increasingly effective substitutes for wireline services.
Implications of these Trends
Table 2 identifies some of the implications of these technological shifts for regulators and network operators.
| The Shift from Analog to Digital |
The shift to digital communications makes it easier for users to tailor services to meet their individual needs, and to reduce costs. For example users of separate voice and data services can combine them using a single leased line, typically at a reduced price. This means that carriers can no longer engage in price discrimination by charging different rates for interchangeable services. In a digital environment users can switch to cheaper services, and services that trigger lower regulatory fees.
At the same time, new types of Quality of Service issues arise, including the possibility of carriers offering different levels of service priority for different types of data at different price levels. This in turn has raised concerns about lack of "net neutrality" from third-party service providers, worried that their access to carrier networks will be limited by price discrimination. |
| Data replaces voice |
In the past, many incumbent carriers have relied on voice traffic to generate higher per unit revenues and profits than data and leased line services. This approach is becoming less sustainable. In particular, as more users migrate to lower cost Internet telephony services, this is likely to adversely impact on revenues from conventional voice telephony. |
| Packet switching replaces circuit switching |
Network operators seeking to provide packet switched services will need to overhaul existing networks, and install new equipment. This will involve significant costs for incumbent telecommunications operators. Regulators may have to find ways to support the migration from analog to digital equipment, for example by recognizing the lowered economic value of existing equipment and authorizing shorter depreciation lives for this equipment. |
| Broadband replaces narrowband networks |
Incumbent operators will have to make sizable investments in new facilities, in order to offer broadband service. For operators with limited access to funds, this will involve a trade-off between improving the quality of service and coverage provided by existing facilities, and installing next generation infrastructure that can provide both narrowband and broadband services. |
| Intelligence migrates from the core to the edge |
Digitization and the development of the Internet give users greater control over networks and more flexibility to optimize the services they consume. Regulators and carriers have less control over how consumers interact with and manipulate networks. This means that neither carriers nor regulators may be able to fully limit what network users can (and cannot) do with the lines they lease, or the services they acquire. |
| The increasing role of wireless |
The migration from wired to wireless services underscores the need for flexibility in how we use radio spectrum. National governments allocate spectrum, and often specify the uses for each portion of spectrum. These decisions may adversely affect the flexibility, cost, and accessibility of spectrum for ICT services. In particular, historical spectrum allocation decisions may limit the scope for service providers to roll-out new, innovative wireless services. Mobile wireless ventures offering next generation features, such as broadband Internet access, may need more spectrum than was previously made available. However, in many developing countries, making spectrum available may be less costly than in developed economies as it typically is used less intensively.
As wireless telecommunications increasingly becomes a substitute for wireline services, regulators may have to rethink how to achieve universal service goals. This may involve a combination of wireline and wireless technologies. |
Emerging Services
Ongoing technological changes in the ICT sector are driving the emergence of new services, and changing the way in which existing services are delivered. For example:
- The Internet provides a platform for new information services, and an alternative delivery mechanism for existing services. Initially a medium for traffic associated with research and education, the Internet now delivers a wide range of information services including (but not limited to) text, images, music, audio, movies, and news services (text and video clips).
- The shift from analog to digital is driving convergence of communication services. Many different types of communication (such as data, text, audio, video, and voice) can now be transported over the same networks and, in some cases, sent and received over the same user equipment. For example users can now download movies from the Internet and view them on a personal computer, or can send e-mails from a digital television unit.
- Voice over the Internet Protocol (VoIP) is a converged service that has important implications for conventional voice operators and regulators. VoIP provides voice service over data networks, rather than conventional voice networks. Consequently, VoIP providers are able to bypass traditional interconnection and regulatory arrangements.
Market Structure and Level of Competition
Recent technological changes are changing the shape of the ICT sector.
Service convergence is blurring the boundaries between sectors. For example, the boundary between broadcasting and telecommunications is no longer clear. Many content providers broadcast material over the Internet as well as (or instead of) over conventional broadcasting networks. Broadcasting over mobile television networks is emerging as well. As networks migrate to digital technologies, broadcasting networks are able to carry a range of services including, potentially, voice telephony. This has important consequences for sector regulators and competition policy. Co-ordination across regulatory areas (between broadcasting, data services, and telecommunications) will be important to avoid regulatory arbitrage. Mergers between entities in previously separate sectors may now raise competition concerns.
Similarly, mobile and other wireless services are becoming effective substitutes for wireline telecommunications services for some users. Indeed, in some developing countries, wireless minutes of use exceed wireline minutes of use. This trend brings into question the long held assumption that an incumbent telecommunications operator will necessarily be the dominant operator in the market.
As the quality of VoIP services improves, it is becoming a more effective substitute for conventional voice service. VoIP is already placing competitive pressure on prices for long distance calls. As more users switch to VoIP, this will have significant implications for regulators and operators.
Financial Forces
In the past, telecommunications operators have been viewed as stable, monopolistic utilities. The main challenge for regulators has been to prevent excessive pricing by incumbent operators.
With increasing competition from new providers and new services, the telecommunications sector is becoming more volatile. Revenues from traditional telecommunications services are under pressure from competing providers and modes of delivery. The role of speculative financial markets has grown.
These changes are threatening the financial health of many incumbent operators. Historically, many incumbent operators have maintained high prices for long distance and international services, and used the proceeds to support below-cost prices for basic services. This pricing structure has generally been supported by regulatory arrangements. As competitive pressures erode long distance and international prices, regulated low prices for basic service will become unsustainable.
In addition, incumbent operators are facing potentially significant investment costs to upgrading existing infrastructure to keep up with technological change. Failure to do so will further erode competitiveness over the long term.
This scenario has the potential to erode the value of (often state-owned) incumbent utilities. In the face of increasing competitive pressure, regulators need to rethink the justification for pricing policies aimed at keeping prices for basic service low, and consider rebalancing tariffs to better reflect economic costs.