Speeches by the Secretary-General, Mr. Yoshio UTSUMI

IDATE

Address

Roberto BLOIS
Deputy Secretary-General
International Telecommunication Union

Montpellier, France - 22-23 November 2001

First of all let me take this opportunity to thank the organizers, IDATE, who have put together an excellent programme over the last two days and who have once invite the ITU to be present at this Conference.

I have entitled this presentation « Broadband in a time of financial crisis ». Broadband has shown tremendous growth, particularly in countries like Korea and Canada. The number of subscribers worldwide had grown to 22 million by June 2001, with an increase of more than 60 per cent in the first half of the year. Nevertheless, there are good reasons to believe that the operating environment has changed substantially.

Can broadband continue to grow in a time of financial crisis? I would argue that the answer to that question is « yes ». Indeed, it is arguably now more important than ever to promote broadband growth to counteract the effects of recession in the global economy.

In this presentation, I want to begin by reviewing the current status of broadband worldwide. The leading country, by some distance, is the Republic of Korea, and I will focus on the factors that have contributed to Korea’s success. I will also consider the factors which have been driving broadband demand.

I will then go on to look at the reasons that might justify pessimism. What are the factors that are hampering the roll-out of broadband ? What is the evidence to suggest there may be a broadband gap, or a mismatch between supply and demand ? In particular, what has been the experience of developing countries, which make up the main part of the membership of the ITU ?

I will then give you some observations on what governments can do to promote broadband development and to ensure a smooth and geographically inclusive roll-out.

Finally, I will conclude with some information on the ITU New Initiatives Programme and the World Summit on the Information Society.

These figures, which are taken from an OECD report published earlier this month, show the level of broadband take-up in the leading economies at the end of June 2001.

Several trends are evident from this chart. The first is that broadband is currently doing better outside Europe. Of the six leading broadband economies, three are in Asia (Korea, Hong Kong SAR and Taiwan-China); two are in North America (Canada and the USA); and only Sweden is flying the European flag.

The reasons why Europe is lagging are many, but at least one reason is because users in the critical group, European teenagers, are spending a higher proportion of their disposable income on mobile communication services than in Asia or North America, possibly diverting revenue away from broadband.

A second trend evident from this chart is that, in the broadband economies which are doing best, consumers have a choice of at least two technology platforms: DSL and cable modems. Many have other options too, like fixed wireless, broadband LANs or satellite delivery. Infrastructure competition is driving market demand.

Korea is the leading broadband economy with some 40 per cent of households already connected. But what are the secrets of Korea’s success ?

Part of the secret lies in pricing, both its type and level. It is difficult to make price comparisons for broadband, because of the wide variety of different packages available. Nevertheless, one dollar spent on broadband services in Korea, buys almost 60 kbit/s of connectivity per month, which is almost twice the level of the next best economy. Standard broadband packages in Korea range between US$20 and US$30 per month, but the average is around US$25 per month. This seems to be the « sweet spot » at which mass market broadband takes off.

A second reason lies in cross-media competition. The Korean broadband experience was marked by market entry of companies like Hararo Telecom and ThruNet, which pushed the incumbents, like Korea Telecom and Dacom, to roll-out their networks at a faster rate than they might otherwise have done. Korea’s modern infrastructure has also been a big advantage.

A third reason is Korea’s distinctive geography and demographics. Around half of Korea’s population lives in the seven main cities and a third live in large apartment blocks. Hence, they are relatively easy to serve.

A fourth reason is the significant push given to broadband roll-out by the Korean government, which has put more than US$22 billion since the mid 1990s into rolling-out a national broadband network, with an emphasis on serving the academic sector. It is worth noting that this government investment was made at precisely the time, in the late 1990s, when Korea was suffering a severe financial crisis and currency devaluation.

To what extent can Korea’s success be copied in other parts of the world, especially the developing countries ?

One factor certainly can. That is the presence of teenagers who are the main driving force behind residential broadband take-up. Teenagers are more numerous in the developing world than here in Europe and they are already using miltiplayer video games, like « Counterstrike », and downloading MP3 music files. This suggests that the potential demand for broadband is already high.

A second positive factor is ease of installation. As plug and play modems become more available and much cheaper, the prospects for take-up improve.

Korea’s experience suggests that broadband can be justified as a family investment in education and as a way of cutting prices for narrowband telephone services, through the use of voice over DSL.

But one very important tool in the armoury of all policy-makers is the possibility of increasing the level of infrastructure competition which is permitted. Experience shows that cross-media competition has been a major driving force for broadband roll-out, but correspondingly, where there is cross-media ownership of telecom and cable TV networks by the same company, this has tended to slow down broadband development.

One developing country where there is at least the potential to replicate Korea’s success, is the Philippines. There is already vibrant competition at the infrastructure level as you can see from this slide. Furthermore, the pricing of broadband services, although twice the level of Korea, is nevertheless relatively competitive.

But the problem seems to be that broadband take-up has reached a plateau at around 10,000 subscribers, divided between as many as ten broadband suppliers. Consequently, none of the suppliers has been able to achieve any economies of scale. Furthermore, consumers’ experience of broadband has generally been of low quality, low speed service. Disposable incomes have also been affected by the financial crisis, which began quite early in the Philippines. There is also evidence that young Philippino consumers prefer to spend their Pesos on sending SMS messages – the narrowest of narrowband services – rather than on broadband.

So, what are the factors that are hampering broadband take-up in economies like the Philippines ?

Part of the problem is technical. Many consumers do not have access to broadband, even in developed economies, and even if they do have access, the speed and performance available may not be sufficient to justify the high prices that are being charged.

Pricing is closely related to regulatory factors. Many ITU Member States still do not allow infrastructure competition. Where it is allowed, the first market entrants tend to be those that already have ownership interests in other communications infrastructures, such as cable TV or fixed-line telecommunications, thereby creating conflicts of interest.

A further barrier to broadband deployment is economics. In the majority of developing countries, broadband is simply not affordable and the lack of an obvious killer application for broadband means that consumers are choosing to stick with simple dial-up Internet access. This is one area where rates have been forced down by competition, especially through resale and the use of pre-paid services.

Part of the reason for slower than expected broadband deployment is because of adverse trading conditions, triggered by the dot.com collapse. In consequence, the incumbent telecom operators and cable TV networks have little spare cash for investment. Nor are the banks and finance houses as willing as they were a few years ago to loan money for investment.

A number of high-profile DSL service providers and cable TV companies have gone out of business or are in financial difficulties, and it is hard to find any company currently that is reporting profits from offering broadband services.

This problem, of how to make profits from supplying broadband, is sometimes referred to as the "Broadband gap".

As this slide shows, there are two equilibrium points at which the cost of supplying broadband is more or less equal to the price, at a given level of demand.

At equilibrium point A, a small easily-served market can be provided with broadband at relatively high prices. This market segment comprises mainly business or wealthy residential users living in apartment blocks.

Beyond equilibrium point B, a mass market is reached at which point profits can be made through economies of scale, from a residential mass market.

The problem lies between points A and B. In this zone, it is uneconomic to provide service and suppliers without deep pockets will tend to fail.

Some governments have taken an aggressive stance, seeing broadband as critical for future economic success. This is particularly true in Asia, but also in certain other countries such as Canada or Ireland which have attempted to develop comprehensive broadband plans. The current global recession is giving added impetus to attempts to create a new platform for economic growth.

One common element in these plans is the aggregation of demand in order to achieve economies of scale. Government is likely to be an early user of broadband and by aggregating the needs of different government-funded users – such as schools, universities, hospitals, government departments etc – the unit costs of supply can be reduced.

This policy of demand aggregation can often be successfully achieved at the local government, rather than federal, level. A number of cities, such as Stockholm, and Kuala Lumpur, or city states such as Singapore and Hongkong SAR are leading the way.

But the main role of government is to create the right environment. This means ensuring that there is infrastructure competition and ensuring that cross-ownership rules do not deter investment. Regulation on unbundling the local loop can also help, though evidence suggests that, while this may be a necessary precondition, it is not sufficient on its own to drive deployment.

Governments need to take a "technologically neutral" approach and should not try to pre-judge which of the many broadband technologies will prove dominant.

I want to conclude by sharing with you some information concerning the work the ITU is doing in terms of research on broadband. "The regulatory implications of broadband" was one of the topics selected for the first round of ITU New Initiatives Workshops.

On the ITU website, you will see the results of a workshop held on 2-4 May 2001. The research includes a background paper, a list of issues, and a series of country case studies covering broadband in Australia, Italy, Malaysia and South Africa.

As you can see by the slide the New Initiatives workshops should cover other workshops were already held. Each year the Council decides on the issues to be addressed by their workshops.

Finally, I want to mention the topic which will be the main focus of ITU research over the coming few years, namely the development of the information society.

As you may know, the ITU is the lead agency in preparing the United Nations’ World Summit on the Information Society, to be held in two phases, in Geneva in December 2003 and in Tunis in 2005.

The main theme of the World Summit will be bridging the digital divide. Although we have historically tended to think of the digital divide in terms of access to basic telecommunication services, it is clear that a new digital divide is emerging in access to high-speed Internet. Over time, as applications such as video-streaming and peer-to-peer networking grow in importance, and as websites make greater use of multimedia, it will be more and more frustrating to use the Internet over a narrowband link.

Bringing broadband to all the world’s inhabitants will be a major, long-term task. But I believe we can, at least, bring broadband to all the world’s countries, by removing the digital divide in international IP connectivity. This is within our grasp. The need to create a new global information infrastructure is all the more urgent in the face of worldwide recession.

The challenges the world faced in rolling out narrowband networks, one hundred years ago, are similar to those now faced in rolling out broadband networks. This time, let’s make sure it does not take one hundred years to close the broadband gap.