INTERNATIONAL TELECOMMUNICATION UNION
 




Lyngby, 30th May 1995

PREPARING THE TELECOM INFRASTRUCTURE FOR THE INFORMATION SOCIETY

Presentation by Dr Pekka Tarjanne, Secretary-General, International Telecommunication 
Union (ITU)
"Steps towards an information society", Centre for Tele-Information, Technical 
University of Denmark
30 May 1995

It is appropriate that, when considering the steps towards an information society, we 
should begin by considering the infrastructure that is likely to provide the platform 
for all the wonderful, futuristic applications that we will be hearing about later 
today. Infrastructure provision is not particularly glamorous. After all, when we think 
about water we think about drinking it, bottling it, washing in it, swimming in it, but 
rarely do we think about sending it down pipes. The plumbers that provide us fresh 
water don’t often hit the headlines, and when they do it is usually for the wrong 
reasons: because of a leak, a flood or a drought. The same is true of information. We 
like to read it, hear it, see it, store it, analyse it and display it, but we take for 
granted that it will be available when we need it. Until recently, most of the 
organisations committed to providing the "plumbing" for the telecommunication 
infrastructure have been content with their unglamorous role. But within the last few 
years that has begun to change. Three US Bell Operating Companies have teamed up with 
the creators of Donald Duck. AT&T is making friends with the creators of Bugs Bunny. 
MCI has bought a minority shareholding in the creators of Bart Simpson. What is going 
on?

The profitable middlemen
One can think of telecommunication infrastructure providers as being in the middle of 
the information value chain, as shown in the diagram. At the top end come the content 
suppliers and at the bottom end the device suppliers. Public telecommunication 
networks, as a service delivery medium, fit between the two. For most of the history of 
telecommunications, the content suppliers have been individual users wanting to talk to 
each other, and their device of choice has been the telephone. While talk may be cheap, 
it is not cheap enough to prevent telecommunications becoming the most profitable 
business sector in the global economy, and one of the fastest growing. 

Every year, the Public Telecommunications Operators (PTOs) of the world invest about 
US$125 billion to keep up with demand. Most of those telecommunication operators have 
traditionally done business in an environment in which demand for their products 
outstrips supply and in which pricing is driven by scarcity, backed up by monopoly. But 
in recent years three things have happened which have changed that picture. Firstly, 
the equipment that the PTOs been buying -switches, cables, routers and the like- has 
become much cheaper, and infinitely more powerful. In particular, the shift towards 
digital networks has sent unit costs tumbling. The second trend, and this time more 
worrying for the operators, is that demand for basic telephony services is not growing 
as fast as it used to, or, to be more precise, demand is now growing faster in markets 
where the local operator does not have much money to spend than in markets where the 
local operator is cash rich. The third trend is that most operators in cash rich 
markets no longer enjoy a monopoly, or at least will not do so for much longer.

For these reasons and more, it is no longer quite so attractive as it used to be to 
invest in infrastructure. In the digital age, the process of bit-shifting business 
looks likely to become a commodity supply market. 
The value chain and potential roadblocks on the information superhighway

Illustrative diagram showing different stages in the value-chain for digital multimedia 
information services
Note:	This diagram is intended to be illustrative rather than an exhaustive listing 
of options.

For the moment at least, the cash flow of the PTOs is undiminished. So where should 
they be spending their US$125 billion per year?

The obvious strategy has been one of geographical diversification. Certain emerging 
markets have welcomed foreign investors, but the larger and more interesting ones tend 
to have strings attached: monopolistic market structures, restrictions on foreign 
ownership, socially-oriented tariff structures and the like. A second type of strategy 
is service diversification. Many of the PTOs have been successful in moving into new 
communication service areas, such as mobile communications, satellite communications or 
data communications. They have also been building bigger pipes over which to carry 
information, allowing them to offer full-motion video and high-speed data transfer. The 
drawback here is that if they are too successful, they might find their core business, 
simple voice telephony, contracting where and when customers can use mobilephones or 
send e-mail messages. 

Consequently, it is the third type of strategy -vertical integration- which is proving 
the most alluring. To return to the concept of the value chain, the network operators 
are still the middle part of the chain which links content suppliers and device 
suppliers, but now the content suppliers are just as likely to be film studios, TV 
channels, software houses, electronic databases or publishing houses, and the device of 
choice could be a TV, a computer, a games console or whatever. The big bonus for the 
network operators is that they are finding that it is easily possible to use their 
existing networks to provide most of these types of service. They can do this simply by 
upgrading the backbone network to fibre optic cable, and using clever software to 
squeeze more functionality out of the copper wires that go into individual homes, 
schools and workplaces. Even better, the really expensive part of building the 
information infrastructure can be left to others. Content provision will be left to the 
companies that specialise in this field, while the purchase of information devices can 
be left to consumers themselves.

The medium and the message
So what types of strategy are PTOs using to prepare exploit the new opportunities 
arising from the information society? Their aim has been to offer not only the medium, 
but also the message. In other words, to integrate their traditional strengths of 
conveyance more closely with the provision of content. Logically speaking, there are 
three main ways they can obtain access to copyrighted works: create them, buy them or 
partnership. The first two strategies have had only mixed success. For instance, many 
public operators in Europe and elsewhere tried to join the information revolution in 
the 1980s by building videotex services. With the possible exception of France, no 
country has made much money out of videotex. Similarly, many operators opened public 
electronic mailbox services without succeeding in setting the market alight. 
Interestingly, the successful development of information-rich services has largely come 
from outside the public telecommunications sector: the Internet, and associated 
applications such as the WorldWideWeb, have proved phenomenally successful, as have 
online services such as CompuServe or America Online. 

In the mid-1990s, having failed to build or buy their way into information services, 
the Operators have tried instead to establish partnerships with content providers. The 
three cases I alluded to earlier are good examples of this: 

 	The alliance between Walt Disney and three US Regional Bell Operating Companies: 
BellSouth, Ameritech and SBC Communications;

 	The agreement between Rupert Murdoch’s News Corp. -owners of the US-based Fox TV 
network and film studios, and part owners of the UK-based BSkyB and the Asian STAR 
TV- and the US inter-exchange operator MCI. According to press reports, MCI has 
agreed to invest some US$1.2 bn for a 13.5 per cent stake in News Corp. and both 
companies will invest US$200 million in a worldwide joint venture;

 	The tie-ups between Time Warner and different telephone companies including US West 
and AT&T.

These moves are a sign of a new realism on the part of PTOs that, despite their huge 
financial resources, they do not have the right blend of experience or talent to become 
creators, or even marketeers, of copyrighted works. But in seeking to become players in 
the entertainment market, the PTOs will inevitably have to make some sacrifices. One of 
the reasons their earlier ventures with videotex and public electronic mail were so 
abortive was because PTOs tried to hang on to their traditional tariff structures, 
adding charges per bit of information to their existing charges per minute and per 
kilometre of call. In the entertainment world, usage-based charging is a non-starter. 
The sooner the PTOs realise that, the sooner they will be able to compete with the new 
competitors they will be encountering such as Microsoft, Viacom, Bertelsmann or TCI. 

Do we need to worry?
What are the regulatory implications of these moves on the part of telecommunications 
companies into the entertainment business? Do regulators need to worry? As long as 
regulators have already cleared the way for entertainment companies and others to enter 
the telephony patch, then they do not need to be too worried about telephone companies 
moving in the opposite direction. Indeed, where telephone companies have been allowed 
to be involved in cable TV provision, as here in Denmark, the result has generally been 
a much faster network roll-out. 

For the moment, the multimedia garden resembles a cabbage patch with lots of weird and 
wonderful plants struggling to gain a position in the sun. No player or alliance can 
claim to have a dominant market position at present. There is now competition not only 
between networks (telephony, cable, satellite, radio) but also between firms using each 
type of network. Consequently it is unlikely that any single player would be able to 
gain a dominant market position in any of the three main activities of content 
provision, service delivery or information consumption devices. 

However, in the longer term, there may be concerns about dominant market positions 
being established in the interstices between these main activities. There are certain 
bottlenecks on the information superhighway, for instance the choice of encryption 
technology, the provision of access to the public network, the provision of billing, 
maintenance and customer care. Regulators need to be vigilant in ensuring that these 
entry and exit points from the information superhighway enjoy the same level of 
competition as on the highway itself. In this respect, the common carrier regulatory 
tradition, whereby public networks must be open to all-comers, still provides a valid 
model. 

The convergence of content and carriage interests within the same company only becomes 
a regulatory problem if it threatens to replace open, public networks with closed, 
proprietary networks. Themes such as open network access, standardisation of 
interfaces, promotion of open standards, accounting separation between competitive and 
reserved services, and universal service remain as relevant for information 
infrastructures as they have been for voice networks. On the other hand, the content-
regulation tradition of the mass media is arguably less relevant to multimedia. The new 
media are more likely to be "narrow"cast rather than "broad"cast so that the individual 
user will be more able to choose what information to consume, and should not therefore 
require so much protection. Furthermore, the diversity of channels that will be come 
available should help to allay concerns about preserving diversity of voice and 
avoiding over-concentration of ownership.

Friends of Mickey Mouse
The title of this paper is "Preparing the Telecom Infrastructure for the Information 
Society". The International Telecommunication Union, of which I am Secretary-General, 
can justifiably boast of having spent the last one hundred and thirty years building 
the Global Information Infrastructure. For most of that time, we have been involved in 
one of the least glamorous parts -standards-making and bean-counting- of an unglamorous 
industry. The measure of success was being able to get on with the job without creating 
controversies. We prided ourselves on being one of the most boring of all International 
Organisations. Boring, but efficient; grey but productive. 

But those days are over. We can no longer afford to be so shy. Telecommunications these 
days is more likely to be on the front page of a newspaper than stuck away in the 
financial pages. As a start, we are extending our birthday party to celebrate 130 years 
to some 200’000 guests who will be visiting Geneva in October for TELECOM ‘95. The 
theme this time is "Breaking down the barriers to the global information society". We 
are also getting wired, making our information resources available online over the 
Internet. Within the last few years we have initiated a new series of world 
conferences, for telecommunication standardization, for radiocommunication, for 
telecommunication development and latterly for telecommunications policy. The ITU’s 
membership is currently courting Mickey Mouse and his friends, and ITU may need to do 
so too. Mickey Mouse recently celebrated his fiftieth birthday looking as fresh as the 
day he was created. He has done this by constantly adapting to new audiences. I hope 
that ITU will also be able to recreate ourselves for new, younger, audiences as we 
enter the information age.
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