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State of the industry

It is difficult to put an optimistic gloss on a year that saw the book value of the world’s telecommunication networks cut in half. From the bursting of the dot.com bubble, to the downfall of high-profile projects such as Iridium and Project Oxygen, to the profit warnings and job cuts announced by several of the largest public telecommunication operators, it is not hard to see why a pall of gloom has descended across the industry.

It is equally possible, however, to regard this outcome as the result of the operation of a healthy, competitive market. After years of moving towards reduced government intervention, the promotion of market entry and competition, a shift in the burden of investment risk from governments to the private sector, and unbridled euphoria about the Information Society, some degree of market correction was bound to take place.

As other industries have discovered, the stock market can be very fickle. While analysts’ assessment of the likelihood of more intense competition is certainly accurate, it masks a steady growth in the basic networks that continue to sustain the industry. The fixed-line network reached some 990 million telephone lines at the end of 2000, and had already passed the one billion mark in early 2001.

The year 2000 also saw the mobile communications sector continue its astonishing rate of growth. Early projections show that, by the end of the year, there were more than 740 million mobile phones in use. The number of subscribers will pass the one billion mark early in 2002 and, by the end of that year, will have surpassed the number of fixed-line telephones. The list of countries where mobile subscribers outnumber fixed telephone lines also continues to grow, with nations as diverse as Bahrain, Botswana, Singapore and South Africa among the 32 countries that crossed the threshold in 2000.

Internet growth, too, continued unabated despite declining confidence in the market. By the end of 2000, the number of Internet users worldwide had grown to around 350 million. One clear sign of the untapped potential for Internet growth is that, in the first month in which registration of multilingual domain names was permitted, some 700 000 such names were registered, notably in Chinese, Japanese and Korean scripts. In Japan, mobile Internet services grew to almost 25 million subscribers by the end of the year, with NTT DoCoMo becoming the world’s second largest ISP (after AOL) after just 18 months of operation.

FROM BULL TO BEAR

So what tipped the balance from a confident market to an uncertain one? There were a number of factors, but the biggest single shift probably occurred after the first rounds of auctions for licences to provide third generation (3G) mobile services. By the time the United Kingdom and Germany had completed their auctions, more than USD 80 billion had been spent even before network build-out had started. Given that these two countries represent barely two per cent of the world’s population and are already very well served by 2G services, the scale of the gamble began to become evident. Never before had the industry been asked to pay so much simply for the opportunity to provide services. In the face of increasing investor jitters, many subsequent auctions failed to realize even the reserve price that had been set on the value of the spectrum.

In the Internet sector too, rising barriers to entry and the virtual disappearance of venture capital after March 2000 caused a reassessment of the market value of the sector. The merger between TimeWarner and AOL and the takeover of Hongkong Telecom by Pacific Century Cyberworks represented the high watermark in market valuations. Subsequently, the market began to bifurcate between those market leaders who had already achieved brand name recognition, such as Amazon, eBay or Yahoo, and the thousands of other wannabes that trailed in their wake. The former have followed a model of rapid expansion, during a period when profitability appeared to be only a secondary concern, while the latter have been left to seek out niche markets which promise a more immediate return on investment.

BRIDGING THE DIGITAL DIVIDE

From a political perspective, one of the most significant developments in 2000 was the G8 Okinawa Summit, at which the leading nations of the world made a joint commitment to tackling the problems of inequality of access to information and computer technologies, a problem labelled the “Digital Divide”. The problem is not new, and nor is the diagnosis. But the political will to do something about it is. Whether this commitment can be translated into positive action remains to be seen.

Ironically, in 2000, there were signs that the nature of the Digital Divide was already beginning to shift. Many middle-income developing countries are now making rapid progress towards world-class networks. By contrast, in many of the least developed countries, problems like civil instability, under-investment and poor management continue to undermine progress. It is in these, the world’s poorest nations, that the problems of the Digital Divide are most acute. The challenge for the years ahead is to show how market reform and investment in information and computer technologies can make a genuine difference to improving the livelihoods of the world’s most deprived.

Indeed, the pessimism currently pervading the world's most developed telecom markets has tended to overshadow some significant steps forward in the developing world. In 2000, there were seven telecom privatizations, including three in Africa — the first in that region since 1996 — as well as two in the Arab States, representing the first-ever privatizations outside the Gulf region. The prices paid were a steal compared to Western European mobile auctions, especially considering the long-term potential of these countries.

DIGITAL DIVIDE AND DIGITAL OPPORTUNITY

Distribution of Internet, mobile and fixed-line users by income group, by comparison with the world’s population, 2000.
Source: ITU World Telecommunication Indicators Database.

 

 

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Updated : 2002-04-08