Convergence within a Developing Economic Environment: a Strategic Perspective of Interoperability in the SADC

Transcription

1 Convergence within a Developing Economic Environment: a Strategic Perspective of Interoperability in the SADC Mark Fricke University of Pretoria PO Box 772, Groenkloof, 0027 MFricke@tuks.co.za ABSTRACT The information and communication technologies sector is in a process of technological convergence. This changing nature of technology, together with growing international markets, both within the SADC (Southern African Development Community) area and beyond, represents large potential for telecommunication growth. However, there is large uncertainty associated with the market and environment in which ICT firms operate, and strategic decisions without an accurate forecast of the future is very difficult, especially once one considers the huge costs involved. It is therefore important for companies to collaborate in some way with other firms, either to maximise the geographic advantage or separate technology strengths. Considering the difficulties and advantages offered by the alternatives that enable this, a Memoranda of Understanding is one particularly suited method structuring the interoperation of different firms from a Southern African perspective. Collaboration in this way can enable an arrangement whereby seamless communication across many channels and to many industries is possible. Such an achievement could spark the economic growth so desperately needed in the SADC region. A MoU is a means to provide a framework for the development of technological and operational specifications using open standards. The end result is a set of standards, specifications and technical information that will provide a basis for any conceivable interoperation function. INTRODUCTION The Southern African telecommunications and information technology environment is becoming a progressively more competitive arena, with an increasing variety and number of providers of telecommunications services, operating on many different technology platforms. With the upcoming introduction of a second fixed line operator in South Africa, the liberalisation of markets and remarkable proliferation of cellular providers throughout the SADC, and the plethora of other ICT enterprises that have targeted the local telecommunication environment, the landscape has become increasingly multifaceted and developed. Within this framework of large-scale growth and maturity, the information and communication technologies (collectively referred to as ICT) sector is in a process of technological convergence. This is essentially the process by which the telecommunications, information technologies, media, broadcasting and entertainment sectors, largely as a result of digitalisation of electronic signals, are merging to form a so-called unified market. Because of this, previously well-differentiated markets are being transformed into common markets (and entirely new markets.) Accordingly, changes to technology and ICT market supply, as well as the nature of customer demand, can be observed. As a result, widespread consolidation through vertical and horizontal integration is experienced, in order for companies to better position themselves within this evolving landscape. Together with this changing nature of technology and the industries, growing international markets, both within the SADC area and beyond, represents a large growth potential for telecommunications. Since the value of a telecommunications network increases exponentially with the number of users of the network [8], this too represents a considerable area of opportunity. The need for collaboration or operating alliance of some sort between ICT companies of previously disparate technology strains or in different geographic markets is therefore important. The aim of this paper is therefore to explain the underlying technological and economic factors that will determine the strategies employed by companies in this growing international and regional (SADC) market, with respect to the modern drivers of communications technology and the interoperability of ICT providers. I will go about this by discussing the needs that modern SADC ICT companies need to address as a result of trends in the global markets in section 1, and conducting a closer

2 analysis of the technological factors influencing the strategy in section 2. A discussion of economic factors, focused around interoperability, is done in section 3, and the potential difficulties associated with collaboration are also identified. The situation is summarised in section 4. I. TRENDS IN SOUTHERN AFRICAN ICT AFFECTING STRATEGY There are certain arising issues and trends in the global ICT arena which demand consideration: 1. The liberalisation of markets. The push for complete liberalisation of telecommunications markets and the collaborative attitude of SADC members towards trade, commerce and development has increased the probability of economic and technological advancement throughout the region. New markets for telecoms operators have ensured the potential for growth of companies across political borders, and will in turn facilitate the technological progress desperately needed throughout the SADC region. 2. SADC telecommunications policies. One of the primary roles of the SADC is to facilitate integration of economies in the region. The objectives of the SADC telecommunications policies are to provide affordable, efficient and high quality telecommunications services, and to create partnerships and an environment for sustainable information and communications development [5]. An identified need for highquality telecoms services, enabled through partnerships, is recognised by the SADC as critical for long-term economic sustainability of the region. 3. Convergence of technology and rapid technological progress. The steady evolution of communications and information technologies through the digitalisation of signals has made possible the convergence of previously disparate technologies. This has essentially united entire industries and created an environment that has ranging implications for supply and demand. (This is further discussed in section 2.) Technological progress has also decreased the costs of voice and data transmission, thus promoting telecommunications growth [2]. The reduction in costs of infrastructures and the improvement in compression techniques have resulted in an increased cost efficiency of data delivery. 4. Stifled growth, price competition and global telecommunications recession in mature markets. The over-investment in 3G (third-generation) networks coupled with the generally high cost of development of new technology has forced firms to achieve business growth through exploiting existing telecoms technology in new markets. Companies seek to increase their revenues by increasing their customer base in new markets therefore represent huge potential for this growth. Foreign companies also diversify geographically into emerging markets, both for better growth prospects and because competition in the home countries is becoming tougher. But a lack of basic telecoms, banking and transport infrastructure precludes any real investment. 5. Changing nature of ICT competition. The nature of competition is altering significantly because of the underlying technological uncertainties associated with the recent rapid advances, market uncertainty, and the huge investments required, particularly in the telecommunications industry. This results in a need for companies to diversify and leverage risks in order to guarantee their survival. This can be accomplished through different means, but especially predominant is the collaboration (with varying degrees of formal control) between firms and particularly the vertical integration with other companies. In order to address these issues, companies must consider the strategic options with which they are faced. The most logical approach is to expand the business model and satisfy growing needs is through collaboration with other firms. Inter-company alliance, at some level, is becoming vital to guarantee a telecom firm s success and survival, and the achievement of the SADC s drive for economic sustainability. II. CLOSER ANALYSIS OF TECHNOLOGICAL FACTORS INFLUENCING STRATEGY: CONVERGENCE The determinants of a firm s strategies in an environment of rapid technological progress, especially technological convergence, are examined in this section. This is done by considering the technological factors that underpin the choice of strategies available to firms. Convergence can be perceived through its division into two essential components: a technical and a functional component. The technical element refers to the ability of any infrastructure to transport any type of data, and the functional aspect characterises the means by which users are able to integrate the functions of computers, television, media and voice into a single device. Convergence therefore affects industries concerned with both data delivery and content [2]. Corporations must fully realise this two-pronged characteristic of technological convergence, as it impacts on the entire strategy. The driving force behind technological progress and convergence is the digitalisation of information. Digitisation is the process through which information (whether it is relayed through text, sound or image) is converted into binary language. Data delivery in traditional and adjacent industries is consequently possible through many software and hardware

3 profiles: any station can access any data, which has been transmitted through any medium. Different network platforms can carry therefore similar types of services. Since the information is essentially platform independent, the applications and uses for the data are almost unlimited. Business in Africa will increasingly demand high-grade information services. There is an escalating need for the functioning and abilities convergence makes possible. Indeed, it is necessary to compete in the global markets. The NGN (Next Generation Network) and the services this makes possible are crucial to the success of generating and satisfying business demand. In order for operators to provide for this, one must consider the following issues: the volume of data flow differs for different uses: voice telephony requires a low transmission bandwidth, while digital video requires a higher capacity of transmission, commonly termed broadband. It is this difference in requirement for information content delivery that has created both problems and opportunities for the SADC ICT community. The existing infrastructures of fixed-line operators (mostly copper networks) are of insufficient bandwidth to carry the bulk of information often required by products of convergence technologies such as high-speed data and multimedia services. Attending these problems, telecoms operators must consider upgrading the network, or providing software solutions to compete with networks of greater bandwidth provided by competitors (or languish behind the market with existing network capacities.) However, infrastructure upgrades involve huge cost and may result in losses if the technology or market lacks the maturity to provide the required revenues. It is also dependent on an uncertain user demand and is built on technology which may be inferior to a newer one that soon displaces it. Therefore, making a reasonable forecast is relatively difficult to do. Are the existing South African firms separately technologically ready for convergence? Not really. Neither the terminal equipment nor the transmission infrastructures are entirely geared to provide widespread broadband to customers [6]. There is clearly a current inability do deal with technology convergence and uncertainty associated with the greater environment in which modern ICT firms operate. Strategic decisions without an accurate forecast are therefore very difficult make, especially when considering the costs involved. The position of traditional telecommunications operators Telecommunications operators have historically enjoyed a monopoly of voice telephony and to some extent, related data services. The liberalisation of the Southern African and international markets, together with digitalisation, has allowed an influx of competition and other players into the market. Although voice telephony currently enjoys a high level of public acceptance and usage, maintaining the operator s profitability, these markets will soon mature. As mentioned, the information-heavy business structures will require from the operators cost-efficient bandwidth and diverse, seamless services. Telephone lines are, as explained, inadequate for the transmission of the great quantities of information that are required by high-speed services. Fixed line operators must in some way upgrade their services to satisfy (and drive) demand, but they must also remain profitable and compete with economically viable business models. However, their strengths they have a large customer base and are cashrich [2] ensure a strong position and advantage over competition. Upgrading the entire network infrastructure is not presently viable because of the inherent costs and uncertainties of broadband infrastructures, so software solutions have been developed which transform ordinary lines into high-speed lines. Examples are DSL (Digital Subscriber Line) and ADSL (Asymmetric Digital Subscriber Line) technology, and each is applicable as an excellent solution to certain functions, but not all of them (e.g. ADSL is great for internet surfing, but not for video conferencing.) Therefore, investing in equipment such as the ADSL modems makes more sense than investing the entire network, as the costs can be shared with the consumers [6]. This, as a strategy, makes good sense, although the solutions offered by the software upgrades are by no means lasting. Telecommunications operators cannot be technologicalmyopic and over-invest in an obsolete technology. Issues arising One major concern of technology-rich markets is that, in line with modern trends (the liberation of markets); there will always be alternatives of similar performance offered by competing organisations. Also, the company who wins will not necessarily be the one that performs best but the one favoured by consumers. Another concern is the role played by standardisation in the initial phases of a technology-rich endeavour. From a supply perspective, the standardisation through the market of a certain product (either through obvious performance superiority or through quality/price ratios or even a government-imposed regulation) will play a vital part in determining the shareholders of a successful technology. Where only a few companies control the architecture of a dominant product, other suppliers and vendors are subordinated to their design specifications. (The role played by standards is too much to consider fully here, though to some extent it is discussed below.) One major problem cited concerning integration of telecoms networks through the SADC includes the standardisation of both technology and the operational standards and characteristics of that technology [5].

4 Issues such as having a more scalable, robust billing system and uniform maintenance protocols greatly affect the operational successes of telecommunications networks. From this, we can draw three conclusions that apply to ICT markets: 1. The role played by compatibility standards, both in the technology itself and the operational standards as a response to burgeoning industries initial uncertainty and the long-term technology survival, is critical. 2. The technological superiority of an alternative is not a guarantee it will become the dominant concept of the market. 3. The markets, technologies and demand for services are of uncertain nature. In order for a firm to appropriately position itself, it is clearly important to satisfy or in some way make consideration for the above three conclusions. To do this it must: 1. Play a role in the determination of standards, either through discussion with other companies in the embryonic stages of a technology whereby standards are agreed upon, or through some type of allegiance with the company offering the dominant standard, or being the market leader. By engaging in the setting of some sort of compatibility standard, though, companies automatically position themselves for maximum market penetration and success. 2. Realise the economic impact of a product depends on diffusion through the market (or the level of market adoption.) Organisations must provide for, or enable in some way, the efficient adoption of a product. This can be accomplished through high service standards, alliance with the players most likely to reach the highest percentage of users, and providing for indirect consumption externalities (e.g. in broadband, providing the users with content that they want, or supplying complimentary products.) For this, they often need to engage in some agreement with other firms to synchronise efforts. 3. Establish cross-industry alliances by which they can position themselves in various geographical and functional markets. Telecommunications operators have therefore engaged in a series of mergers, alliances and acquisitions in order to maintain profitability or secure larger profit margins (through horizontal and vertical co-operation.) Parallel with these alliances, which are primarily based on increasing revenue potential and market footprint, is the ability to aid in the setting of standards by which new technology is structured. In this way, a competitive edge is possible, and operators can offer developing technology (with the risks reduced through partnerships) that is so critical to their survival and prosperity in disparate markets. III. CLOSER ANALYSIS OF ECONOMIC FACTORS INFLUENCING STRATEGY: COLLABORATION I have briefly discussed the reasons for different technologyrich firms to engage in some sort of interoperability agreement (the most important being the liberalisation of markets and the role played by the convergence of technology) and shown why the collaboration is important to assure a strategic advantage. I will now address some economic issues that telecommunication operators must consider when formulating strategy regarding this matter, and offer a possible solution that would maximise benefits. Building a common market (across national borders and previously disparate technological markets) in the SADC region will stimulate competitiveness, drive economic growth and increase efficiency through all concerned industries (the latter especially resulting in a win-win situation to customers and providers by decreasing costs.) However, for this to succeed, activity must lie in the efficient use of this information more than the transfer thereof, and the framework through which information can be transferred must therefore be completely seamless. Certain options are available to telecommunication companies that address this need. Some of these include: Vertical integration (up or down through the value chain), horizontal integration (for example between similar providers in different industries or countries), mergers and acquisitions, joint ventures, strategic alliances, and the socalled Memoranda of Understanding. Since the various elements affecting all the above are too numerous and diverse to discuss in this paper, I will elaborate only upon that which is applicable to telecom operators, and particularly those economically powerful and of scale. Problems associated with collaboration In order to identify which of the above collaborative alternatives is best for operators in the SADC; some problems with inter-company and international relationships must be mentioned: 1. Privatisation. The requirement of investments in a competitive (privatised) environment is generally a return on the investment. In the past, where international collaboration between telecommunication operators was regulated by governments, this was not always so. Investments must now be justified by the return they will offer, and because of the uncertain nature of cutting-edge technologies in terms of the market demand and the changing regulatory framework in which the

5 technologies will be employed, this is often difficult to predict. In addition to this, in order to survive the resultant increased local and foreign competition, alliances between companies must be immediately profitable for the alliance to last. 2. Convergence of technology. One must consider to what extent the forecasted demand for convergence of technology is in fact accurate, especially in a technologically illiterate area. The rate of market adoption must also be questioned. 3. Liberation of markets. The difficulties of intercountry and cross-industry co-ordination increase in line with the number of players involved [8]. Interconnection in a multi-operator environment is fraught with interface and operational difficulties. 4. Regulation. Interoperation between companies on a local and international level is subject to regulation that is often antiquated (though in the process of changing), and uncertainty is created. The regulatory bodies charged with maintaining the environment are young and untested, from an operator position. Memoranda of Understanding Large telecommunications operators do generally engage in many types of inter-firm relationship: from buy-outs to tentative trade agreements. However, the one which is least disruptive to business, results in greatest intra-firm operational flexibility, requires least organisational reshuffling of each company, necessarily provides the endusers with the best service or offering by the nature of the agreement, and is complementary to government desires for greater competition and economic growth, is the voluntary collaboration between firms. Large telecommunications companies are best positioned to effect such industry-wide and countrywide alterations to the way in which telecommunications, as felt by small, medium and large firms in various communities and with a broad range of economic activity, will operate in the near future. It is these corporations that will have a large influence on the degree to which globalisation and market liberalisation do not remain buzzwords without real meaning, especially in developing economies countries. Agreements between such telecom operators regarding integration of businesses and networks with other companies (of any size, though usually large) through friendly coordination, offer a potential solution for inter-industry and international information transfer, which will in turn drive economic growth. In these circumstances, MoU, or, Memoranda of Understanding between these firms are an ideal way by which an arrangement is reached that enables seamless (international) communication across many channels and to many industries. Such an achievement in the SADC on some technological platform could spark the economic growth so desperately needed. A memorandum of understanding is a voluntary agreement which is based not on any legal obligation, but rather a public commitment to work towards a consensus on particular goals. In this respect it is consistent with the SADC s modus operandi and general principles. It is really an allegiance in undertaking of obligation to adhere to certain principles and guidelines that would facilitate the achievement of some undertaking. A Memoranda of Understanding is a means to provide a framework for the development of specifications using open standards. The end result is a set of standards, specifications and technical information that will provide a basis for any conceivable interoperation function. It can also specify the operational standards of some undertaking, thus eliminating a current barrier to effective integration. The European Union has been seeking for the last 13 years to stimulate competitiveness through an effort to build a common telecommunications market [8]. A memorandum of understanding has been signed between industry players before, and has generally resulted in successful technological development and implementation through the European Union. In particular, a memorandum of understanding signed in Copenhagen in 1987 afforded Europeans access to the GSM mobile telephone system. It was only through the structure and policy provided by the memorandum of understanding that the success involving 200 separate networks could be guaranteed. The above situation is an example of the interoperation of many dissimilar networks, governed by different legislations and operated by many companies, which was spurred by rising technological convergence. It also gave rise to further advances and applications of technologies converging, in the form of mobile banking, text messages, ing over the mobile network, voice recognition, etc. In order for a memorandum of understanding to exist, certain prerequisites must be met [8]: 1. Early definition and adoption of the standards embodied in the memorandum of understanding is required. Only in the initial stages of the development of a technology, before individual companies do expensive capital outlay and development, is a memorandum of understanding really feasible. 2. A critical mass of signatories is required. If a standard is to be set and adhered to without the legal obligation enforcing strict observation of the guidelines, a certain required commitment from all parties to apply the standards and use them in the manner proposed is necessary. Only with wide support from all players in the region will the agreement be worth upholding and succeed in the manner agreed to. 3. The memorandum of understanding must create economic incentive. The venture must be

6 potentially profitable, either on its own as the means by which new markets are made available, or through the direct satisfaction of customer demands, or through other benefits of interoperation in a multi-operator environment (e.g. achieving an economy of scale, allowing lower prices to be transferred to customers, or distributing new technologies through the existing widespread network of another company.) 4. Regulation and legislation must not prohibit or limit in any significant way the achievement of the stated objective, or make it commercially taxing to the operators. Governments can sometimes provide incentive for the development or add to the support base for the initiative, thereby contributing weight to the MoU. Industry partners should also be sensitive to the implications of the agreement in terms of national laws. The common problem prevalent in industry involving the introduction of a new technology is that operators need to see a demand for the technology before they invest heavily in the network and services infrastructure required, as do other industry players involved in related activities that help facilitate the service. But end-users will only subscribe to services once they are confident that the service is without fault and truly performs as it is claimed. [8]. This is the sort of vicious circle that a memorandum of understanding can break. There are no real limits to the scope of a memorandum of understanding. The specifications can explicitly define network capabilities domain (related to interactivity, transfer capabilities and network management functions), as well as the service capabilities domain, related to the inter-working of different networks, service management and service functions. MoUs can be a private agreement between two or more firms, acting as a business agreement where the use of the specifications is binding, or an open document that is publicly available and which can be signed by any party able to provide the necessary services/products, and not binding on any of the parties to conform to the specifications. IV. SUMMARY The rise of technological convergence and the liberation of SADC markets have contributed toward a necessary state in which modern organisations must, in order to minimise risk and maximise possible gains, consider entering into interoperation agreements with other firms. Such agreements, though many and varied, have a different impact on the firms and the market depending on the nature of the agreement itself. One of the agreements that could be most suited to the telecommunications and information technology sector in the SADC region is the memorandum of understanding. It is an ideal way to lay the foundation for the technological development required for economic growth amidst rapid technological progress and operational uncertainty. The achievement of a public MoU will stimulate competition throughout the region, rather than suppress it. It is for this reason that government can also facilitate the achievement of certain projects, if so required. Operators can broaden their services, diversify and consolidate their position in various markets through international borders, and realise expansion and profitability through such agreements. They can also entrench good operational practices throughout the region, which will eliminate many of the current problems hindering the networks. BIBLIOGRAPHY [1] Afullo, T.J.O. (1999) Telecommunication and information infrastructures in the Botswana and SADC development strategy. Internet Research: Electronic Networking Applications and Policy, Vol. 9 No. 4 pg [2] Bores, C., Saurina, C., Torres, R. (2001) Technological convergence: a strategic perspective. Technovation. Vol. 21 pg [3] David, G., Williams, D. (1997) Community networks - local information infrastructure for the next millennium, British Telecommunications Engineering, Volume 16, Issue 3, October 1997, Pages [4] Hodge, J (2000) Liberalising communication services in South Africa. Development Southern Africa 17(3) pg [5] McCormick, P.K. (2003) Telecommunication reform in Southern Africa: the role of the Southern African Development Community. Telecommunications Policy Vol. 27 pg [6] Owen, B. (1999) The Internet Challenge to Television, Harvard University Press, Cambridge, MA. [7] Southern African Development Community (1993) A framework and strategy for building the community. Gaborone, Botswana. [8] Torngren, J. (1998) MoU success stories: interoperability in telecommunications within a competitive, multiprovider, multicultural environment. Computer Standards & Interfaces, Volume 20, Issues 2-3, December 1998, Pg BIOGRAPHY Mark Fricke is studying towards his Masters degree in Engineering in the field of Technology Management at the University of Pretoria. He is scheduled to complete it before the end of He completed the B.Eng (Industrial Engineering) degree at the same university in 2001.