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:
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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. |
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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. |
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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. |
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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.