June 1, 2010

Enabling Sustainable Digital Highways

High-speed broadband access facilitates a number of pivotal socioeconomic services and activities, including education, health, trade, and innovation, and has transformed interactions among businesses, consumers and governments. The creation of national broadband networks is therefore crucial to sustainable economic development and social progress—not only in emerging economies, but in developed ones as well.

Despite the widespread recognition of broadband’s benefits, most of the world’s households today lack access to an adequate broadband connection. A study by Booz & Company, published in the World Economic Forum's Global Information Technology Report, found that in order to pave the way for universal broadband access, governments and private-sector operators both need to make fundamental changes in their mind-sets and business models. Broadband must move to the top of national strategic agendas, policymakers ought to consider balancing their goal of protecting consumers with providing for an efficient industry structure that entices investment in national networks and operators must adopt new business models to account for transformative shifts in the industry’s structure.


The Broadband Dividend

“Countries with higher broadband penetration have reaped rich broadband dividends across economic and social activities,” commented Karim Sabbagh, a partner at Booz & Company and the Global Practice Leader for the Communications, Media & Technology. For a society to realize the full potential of this asset, its broadband deployment has to be universal and affordable, it has to enable high-speed access, and it must happen in a timely manner.

Universality and affordability are vital to ensure that broadband is inclusive and can be used as a tool for public service, particularly in health, education, employment and social integration. Broadband’s performance is also a fundamental component of its effectiveness in transforming the way individuals and corporations cooperate and create.

In developed nations, the rapid deployment of broadband at the national level can accelerate economic recovery, create new markets and maintain countries’ competitiveness with global peers. Emerging nations can also reap these benefits, as well as more fully integrate their citizens into society and their private sectors into the global economy.


The Risk to Long-term Sector Sustainability

Three inhibitors are preventing governments and the private sector from collaborating to ensure adequate investments in national broadband infrastructure and therefore endangering the sector’s long-term sustainability: the sheer magnitude of these investments, revenue prospects and regulatory uncertainty.

“Investments in national broadband infrastructure are significant, front-loaded, and irreversible, and as a result investors are cautious,” commented Bahjat El-Darwiche, a partner at Booz & Company. “Uncertainty surrounding future broadband revenue streams and regulatory obligations are making it difficult for operators to gauge the level of investment risk.”

The emergence of powerful application and service providers is another critical factor driving uncertainties around future broadband revenue streams for investors, as the growing competition between operators and application providers marks a fundamental disruption to the sector’s prevalent revenue model.

Finally, regulators have not established a clear framework targeted at broadband networks. Until regulators define a new regulatory regime, operators will lack confidence in their ability to monetize their investments in national broadband infrastructure.


A Fundamentally New Approach

Broadband: A National Imperative
Given the economic and social benefits that broadband offers, governments must elevate broadband from merely another regulatory concern to a top issue on the national strategic agenda.

A Proactive Public Sector
Since governments have a vested interest in national broadband networks, they need to play an active role in the sector’s development. “Public–private partnerships (PPPs) are needed as a model for the telecommunications sector in developing national broadband networks, where governments subsidize infrastructure, provide tax concessions to private operators or trigger demand for broadband services,” commented Sabbagh.

New Business Models that Spread Investment Risk
An alternative new horizontal business model approach, which separates the layers of traditional service delivery and establishes three different plays, would allow risk to be more appropriately tied to rewards and ensure investment sustainability.

  • The top layer would have a number of “ServiceCos” operating in an extremely competitive and lightly regulated market consisting of multiple application and content providers.

  • Businesses in the middle layer, “ActiveCos,” would provide differentiated services to both application providers and end users, operating in a competitive market with regulations on service levels, quality, and pricing.

  • PassiveCo would focus on deploying passive infrastructure across the country, leveraging economies of scale and functioning like an infrastructure utility business. PassiveCo is likely to be a natural monopoly and would be heavily regulated.


The Legacy Mind-set Challenge

Shifting the Government Mind-set
Governments typically have migrated from owning incumbent networks to investing passively in them and finally to simply regulating them. Most regulatory authorities have pursued the singular strategy of preserving customer welfare by introducing competition in the various telecommunications markets.

“However, to address the three inhibitors to investment in national broadband, governments need to rethink their role and consider taking the bold steps necessary to facilitate investments and ensure the sector’s long-term sustainability,” commented El-Darwiche.

Shifting the Operator Mind-set
Operators need to diversify their revenue streams by seeking scale in their provision of access services and capturing a larger share of application and content providers’ revenues.

Success in changing markets requires operators to alter their business and operating models from vertical integration to horizontal plays. “Operators need to focus on building scale and cost efficiency in the utility-like infrastructure layer and offering reliability and affordability in the service layer, while competing on innovation and speed in the application layer,” commented El-Darwiche.

Finally, operators need to be proactive in both adopting the new horizontal approach and engaging the government on suitable implementation approaches in order to accelerate national broadband infrastructure deployment.


Imperatives for the Public Sector

Establish a National Broadband Policy
As a necessary first step to enabling universal broadband access, governments need to establish a consistent, coherent, and shared national broadband policy. This policy not only must put forth a national aim for the speed and coverage of the broadband infrastructure, but also provide guidance on how regulators, operators, and application and content providers will work together in achieving that aim.

Establishing this policy should involve an open dialogue with industry participants, including an objective assessment of the demand for broadband infrastructure. Once established, a common policy will serve as an important tool to continue the dialogue with industry stakeholders and ensure that everyone remains aligned on goals.

Create a Regulatory Environment that Supports Horizontal Business Models
As the industry moves away from vertically integrated models to horizontal ones, regulatory tools need to be adapted and new ones developed to ensure consumer welfare and effective competition.

“Regulators need to encourage the move toward horizontal business models by adapting existing regulatory regimes, especially at the infrastructure and service layers. Also, incumbent operators should be incentivized to open their network infrastructure, to put their knowledge and existing assets to the best use, and to keep the cost of national broadband infrastructure under control,” commented Sabbagh.  

Facilitate Investments in the Sector
Some governments recently have reversed past privatization efforts and have invested in the telecommunications sector, recognizing the significant benefits and national competitive advantages derived from broadband.

Governments, in concert with the private sector, need to evaluate their role and the magnitude of investment required in the sector, while identifying the right investment mechanism. Governments should also help stimulate demand for broadband services, for example, by ensuring that all public-service provisioning be handled over broadband networks.


The Role of the Private Sector

Adopt Open Infrastructure Plays
Operators have in the past resisted attempts by regulators to separate the infrastructure layer from the others, driven by concerns regarding loss of synergies and marketing power.

However, if operators proactively evolve toward a horizontal model and adopt a more open approach to sharing infrastructure, they can reap significant benefits while strengthening the sector’s future sustainability. “These measures relax the regulatory obligations that have been imposed on operators by their current vertically integrated operating model, as well as reducing operators’ costs for infrastructure deployment by allowing them to share those costs with the government or other private players,” commented Sabbagh. 

Pursue Double-sided Business Models
Having opened the infrastructure layer, operators need to pursue growth opportunities outside of providing end-user access services. Building double-sided business models will allow operators to augment service revenues by selling enabling services to numerous application and service providers, such as hosting services, managed services and transaction support services.

“Operators need to leverage their assets and capabilities, allowing them to pursue new growth opportunities in providing wholesale services, enabling transactional support to application providers and providing managed and hosted services to enterprises and application providers,” commented El-Darwiche.

Sharpen Focus on Application Innovation
Finally, having opened the infrastructure layer and built a double-sided business model, operators need to enhance their ability to innovate in and extract value from the application and content layer. Competition in this layer would be intense and dominated by current application giants such as Google, Yahoo and Facebook, all of which have high brand recognition and a larger user base than most national operators.

“Operators need to undertake an objective and pragmatic assessment of their capabilities in this space and focus on niche areas where they are likely to succeed, such as Internet Protocol television (IPTV), smart homes and location-based advertising services,” commented El-Darwiche.


Conclusion

Sustainable societies must provide the means for everyone’s voices to be heard - and increasingly, those means are digital. The relevance of broadband has transcended the industry and its impact reaches deeply into socioeconomic issues, and therefore mandates attention from policymakers and regulators as well as from the telecommunications industry. “Ensuring broadband access requires radical shifts in thinking, shedding decades-old business models, changes in regulatory policy and bold moves by government to spur development,” commented Sabbagh. 

For all stakeholders, time is of the essence. The quicker a country can provide comprehensive access to broadband, the quicker that country can reap a variety of economic benefits. It is also important that governments and the private sector realize that access for all people is paramount. Broadband is so vital that those nations that do not offer high-speed access to their populations will have a serious disadvantage in the global economy.