The Need For A Convergence Policy

And Next Generation Regulation


Dr Terry Cutler

Managing Director Cutler & Company


Communications Research Forum 1998

Canberra, 24 September 1998

Today in September 1998 we stand at the end of one policy era in communications and the beginning of another. Over a decade ago, in 1987, the then Cabinet established a Structural Adjustment Committee which initiated a process of telecommunications and broadcasting review and reform which has taken the last decade to work through. The driving structural adjustment agenda was competition policy. Now, in 1998, and in the second last week of an election campaign, it is a good point to draw a line in the shifting sands of industry change and to set an agenda for the next generation challenge of policy reform. This new agenda revolves around convergence and the challenges of structural adjustment within the emerging Information Economy.

The high water mark of the last reform programme was the 1991 Telecommunications Act, the introduction of network competition, and the new Broadcasting Services Act. In parallel there was a major change to institutional structures, with a proliferation of new regulatory agencies.

Almost immediately the elegant structure of the Broadcasting Act was spoiled by the clumsy additions to solve for Pay Television, a broadcasting piece of competition policy that was promptly captured by the new duopoly telecommunications players. Meanwhile other media players remained locked out of new developments by rigid cross-media rules. Different licensing and ownership rules were maintained for different categories of player.

In 1991, the Internet was a little known academic experimental network. Digital broadcasting was something for the future. Few would have predicted the speed with which non-voice traffic would overtake voice traffic.

Australia Post, separated from its Siamese Twin of Telecom Australia in the 1975 surgery on the PostMaster General's Department remained to one side as a separate issue for the attention of the new National Competition Council. Quietly on the sidelines Australia Post has emerged as Australia's most extensive retail and financial network, and now is a key player in the provision of electronic commerce platforms.

The industry has changed out of sight since 1988 and the last reform agenda. Over the last two years we have tried to tack on new legislative and regulatory annexes to deal with online services and the demands of an information economy, but the whole structure is looking decided awkward.

Internationally, advanced countries have been slow to respond to the policy challenges of convergence in a root and branch manner, reflecting the stickiness of entrenched regimes and arrangements. Nonetheless, the European Union has been to be active in promoting a convergence agenda, and recently the OECD has begun to discuss the challenge of next generation regulation. It is some of the new world countries, like Japan and Malaysia, which have taken the lead in defining radical change. Malaysia, for example has recently enacted a new Multimedia and Communications Act which replaces the prior telecommunications and broadcasting regimes and is moving to implement new institutional structures. [Here I need to declare an interest as my firm has been involved in developing the policy framework in Malaysia].

The issue now is whether the maintenance of the status quo in Australia is sustainable. Has industry change reached the point where policy and regulatory lag is likely to cause market distortions and inefficient national resource allocation? Does the current regime distort investment decisions, including investment in infrastructure? Does the current regime hold back consumer benefit? Have industry bottlenecks been displaced by regulatory bottlenecks to access to possible service benefits? Does the current regime undermine our efforts to capture the potential of the Information Economy?

I personally believe that the answer to all these questions is a resounding yes. What we need as a matter of priority is a full review of the policy and regulatory implications of convergence as a basis for establish a reform agenda for early attention.

The policy challenge of convergence is to recognise that convergence is happening, that it should be allowed to happen, and that we need to shape convergence to meet Australia's national interests.

Whether Australia captures the benefits of convergence will depend largely on our response to the imperatives of industry restructuring and the new global information economy. We can be active participants in change, moulding it to our advantage; or we can be victims of change.

What is convergence?

Clearly, a definition of convergence must underpin any discussion of its impact and the nature of the policy response. Despite the apparent wisdom of this observation, communications policy debate provides little evidence of any definition which could underpin a rigorous analysis of convergence and its effects.

There is no universally accepted definition of this term. It has been variously used to describe a process of technological development, to describe the merger and acquisition strategies of corporations, and to describe new service types. The first step in developing a coherent model of the convergent industry environment of the future is to set up a useful definition of the term convergence.

The working definition Cutler & Company has developed is as follows:

Convergence is the progressive integration of the value chains of the information and content industries - telecommunications, posts, broadcasting, print, multimedia, and data processing - into a set of linked economic markets and a single value chain based on the use of distributed digital technology.

This definition is not compellingly elegant, but it focuses on the crucial aspects of the commercial dynamics at work. These are that:

The important process aspect of convergence reflects the challenge of integrating business systems characterised by strong legacy regimes, each of which now needs to adjust to the new imperatives of digitisation.

Exhibit 1: Legacy Structures In The Convergence Industries

Legacy Structures In The Convergence Industries

Prior to the development of modern digital technology from the 1970s, these information and content industries were commercially distinct in all countries. This segmented industry structure was often reinforced by regulation which prevented integrated business strategies by firms.

Before convergence, there was a clear distinction between the transport industries such as telecommunications and posts, the content-based industries such as broadcasting and print, and the data processing industry which began as an in-house function of major corporations with technical support and supply provided by the computer industry.

These distinctions often reflected technological categories based on the type of hardware used - paper for print, radiocommunications for broadcasting, wires for telecommunications, and mainframes for the computer industry. At the time, these categories seemed stable.

Certain applications capabilities, such as programmable subscriber management systems, intelligent network services, and higher level networking technologies for encryption, authentication, structured data transport and transaction processing had not emerged. In a convergent industry, these new applications services are responsible for much of the new value generated within the digital value chain.

Convergence and the new digital services value chain

Convergence creates new business systems. The generic model of the building blocks of the digital economy is represented in the following exhibit.

Exhibit 2: The New Digital Services Value Chain

The New Digital Services Value Chain

Source: Cutler & Company

The art of applying this model to specific industry situations is in exploring the inter-relationships and dynamics within a period of rapid change. This model of the underlying dynamics of the digital economy becomes a road map for the conduct of any policy review because it helps position industry capabilities and development requirements within the overall landscape of the information economy. In particular, this analytical tool:

Applying a road-map model that is totally grounded on the realities of the emerging digital environment ensures that legacy assumptions and traditional approaches are re-examined within a context that will be a robust framework for setting future directions.

Business functions in the digital value chain

The following exhibit illustrates the range of participants across the digital value chain, all of whom now have a direct interest in the issue of convergence and the policy and regulatory arrangements which will shape their business fate.

Exhibit: 3: Examples Of Business Functions Within The Digital Value Chain

Examples Of Business Functions Within The Digital Value Chain

Source: Cutler & Company

Content creators

Content creators are, for the purposes of the digital value chain, the producers of the raw material for content services. It is taken for granted that this material can be digitised for transport across a digital network.

The power of modern digital production and post-production technology means that the product of almost any creative endeavour can be digitised and enhanced in almost any way imaginable. The data can then be represented in a number of modes. Text, for example, can be represented as a printed page, as a web page, or read out by a synthesised voice.

Content creators include journalists and writers, musicians, photographers, film and video makers, and multimedia developers.

Publishers, packagers and programmers

The function of publishers, packagers and programmers is to apply editorial and programming skills to develop an integrated and meaningful experience for the user from a range of content resources. These resources might include material prepared in the very recent past in response to current events joined to archival material to place current material in context. At the other extreme is the content production of data compilations.

A key element of this business function is the development of a strong brand loyalty from users, based on past quality and consistency. Since the product changes from day to day or from week to week, the brand and the reputation it represents is needed to present the credentials of the service again and again in the marketplace. The brand is a principal asset of this business.

Brands in a convergent environment are characterised by an integrated approach to the management of intellectual property and a presence across more than one form of media which protects the brand from the risk of unexpected technological change.

Network providers

A network means more than the physical components of wires, optical fibre, antennas and switches. The network is best thought of as a system or platform which supports a potentially unlimited number of different applications. This platform consists of the physical infrastructure and the software operating systems which provide network functionality.

The logical function of a network platform is simply to transport digital data from an originating point to a designated destination. It will not matter whether the link is wired or wireless, or whether it is used for telecommunications, broadcasting or computing. All communications and computer applications services will run over the same basic platform. Network providers will be those who are in the business of providing these platforms and managing connectivity.

It follows that mobile, wireless and wired facilities providers will be operating in the same market. From a service perspective, it is becoming difficult to distinguish between these technologies, which have become substitutable. From a policy perspective, it will become increasingly dysfunctional to regulate by technology type.

Applications service providers

In a digital age, all communications services are applications services. These services are embodied on the network as applications software which manipulates and adds value to digital data. Voice telephony will simply be a specialised software application running on the network (on the handset in fact), performing a specialised task - the conversion of speech into digital data and vice versa.

There will be many such network applications services, and not all of them will be person-to-person services. There are also networking functions to automate business functions or to support access to personal services. For example, a small business' cash registers will be connected directly to an accounting application running on a network server. This application will send weekly or monthly financial reports to the business. The data entered into an electronic organiser, with a wireless link to the network, could be stored by an application on a network server. This data could be re-displayed at a pre-arranged time or on demand if required. An entertainment application might respond to a user request by retrieving a digitised movie or soundtrack from a digital library and sending it to the user's TV or stereo set for performance.

An applications service provider is therefore the provider of a service which is generated by an application running on the network.

The applications service function is clearly distinct from the infrastructure facilities provider function only where complete digitisation has been achieved and a applications-neutral platform established. To the extent that legacy analog technology and proprietary operating systems designed for specific applications are in place, there is blurring between the network facilities and the applications service functions. Increasingly, complete digitisation will allow the network facilities and application service functions to be clearly distinguished.

User interfaces

User interfaces is simply a reference to the fact that end-users will continue to employ a number of interfaces, and employ those interfaces in a number of different guises. The same person will be a two-way user of a telephone handset and an audience for a movie. There will never be an all-purpose interface because there will always be a range of applications services. What will vary is the depth of user control over application or network configuration, and the user's degree of interaction with the process of service production and delivery.

This digital services value chain provides a robust framework for identifying likely issues and areas of potential market inefficiency and bottlenecks. Within this framework there will be tensions and changing balances of power and focus as between:

Convergence in the context of the information economy

A primary reason for convergence requiring the greatest possible attention is its role in underpinning the whole information economy.

We now talk about an Information Economy and an Information Society because of the extent to which information and communications services have become the main drivers of economic and social futures and the main determinants of structural and business change. This is because of the power of information processes and communications to transform economic processes and the nature of wealth creation.

The long term economic importance of the convergence industries is as intermediate inputs to the knowledge-based growth industries of the twenty-first century. These convergence, information industries are, of course, also important in their own right.

Exhibit 4: The Role Of Convergence Inputs To The Wider Economy

The Role Of Convergence Inputs To The Wider Economy

The impact of convergence is thus not confined to the communications and content industries. The emergence of a new class of networked applications services, encompassing electronic commerce and other intelligent applications, is extending the reach and impact of convergence throughout the economy as a whole.

Finally, the impact of sector convergence is global. The growing trade exposure of, and international investment in, the sector means that Australia does not have the luxury of addressing convergence at its own pace. We are in a race for investment, and investment will flow to the countries where a friendly regulatory regime welcomes and promotes the organisational and technological innovation needed to realise the potential of digital services.

Convergence and new economic markets

As has been noted, convergence is the progressive integration of the value chains of traditional communications and content industries within a single value chain based on the use of distributed digital technology. Convergence markets are the economic markets for:

Exhibit 5: Market Structures For Convergence

Market Structures For Convergence

Source: Cutler & Company

Understanding the structure of new convergence markets enables us to identify and examine possible policy issues and the possible parameters for regulatory intervention. Several European studies have been helpful in starting to locate policy concerns within this new environment as follows.

Exhibit:6: Positioning Policy And Regulatory Concerns

Positioning Policy And Regulatory Concerns

Particular strategies for regulatory intervention then need to be cast firmly within the context of industry realities.

Implications: a stocktake

There are four basic survival rules for policy development in an environment of radical industry restructuring:

Survival Rule Number 1: Synchronisation

Policy making must occur on a timetable dictated by global industry restructuring, not by domestic political pressures. This will require prompt and energetic action based on a Pareto principle for the allocation of effort: priority should be given to the 80 per cent of the new policy framework which can be erected relatively easily. The remaining 20 per cent of issues cannot be allowed to derail the entire process.

Survival Rule Number 2: Having a destination

Regulation and re-regulation are not ends in themselves. The development of a new policy framework for the sector must be underpinned by clearly articulated national interest tests.

Survival Rule Number 3: The right tool kit

Service definitions must reflect convergence realities. Policies based on technology-specific definitions (notably cross media rules) are being undermined by technological change, growing service diversity, and growing commercial pressure for industry re-organisation.

Regulation is always directed towards industry interfaces where leverage can be gained over commercial behaviour. The identification of stable points of intervention is essential to the implementation of policy intervention strategies. As technology change, market convergence and industry restructuring erode traditional points of intervention, the effectiveness of intervention declines and the likelihood of distortions increases. Regulatory reform must begin by identifying points of intervention which are robust against such changes.

New definitions and new points of intervention will in turn require new intervention strategies designed to achieve national interest objectives.

Survival Rule Number 4: Keep moving

Structural adjustment policies designed to accelerate and realise the benefits of industry restructuring are essential if Australia is to gain first mover advantage from sector restructuring. We must not make the mistake of resisting change or regarding convergence as a problem to be prevented. Instead, change needs to be promoted and channelled.

The way forward

With these issues in mind, what we need is a root and branch review of Australia's communications regulatory framework. We can no longer afford piecemeal adjustments. To move forward, let me suggest some possible terms of reference for a thorough inquiry to develop a convergence policy framework for the next decade.

Possible terms of reference for a Convergence Review

  1. Provide an assessment of the economic and social costs and benefits of industry convergence.
  2. Set out Australia's desired scenarios for industry convergence outcomes.
  3. Develop recommended policy objectives designed to promote the desired outcomes.
  4. Identify areas where technological change is undermining existing service definitions and traditional points of regulatory intervention.
  5. Provide recommendations for new market definitions and new points of regulatory intervention which are robust against rapid technological and commercial change.
  6. Identify market failures and industry bottlenecks which impede or prevent the realisation of desired outcomes.
  7. Provide recommendations for regulatory intervention strategies designed to address industry bottlenecks and market failures and achieve policy objectives, particularly the maintenance of media diversity.
  8. Provide recommendations for intervention strategies in regional Australia which address the structural and social differences between regional and metropolitan markets.
  9. Recommend changes to institutional structures and resourcing needed to address industry convergence.
  10. Recommend an orderly transitional regime which minimises consumer penalties.

In setting this new action agenda we need to bear in mind that:

The next generation agenda is certainly challenging, but we cannot afford to postpone addressing it.