Skip to main content

About this book

Russel Cooper and Gary Madden The present volume analyses the frontiers of broadband, electronic and mobile commerce markets. High-capacity and intelligent mobile telecommunication net­ works have resulted in new services, such as SMS and Internet banking. Growth in mobile Internet network infrastructure and subscription has provided a base for the development of e-commerce. Accordingly, recent research on broadband net­ works is forward-looking, e. g. , forecasting Internet telephony adoption and the structure of future retail markets. The broadband regime brings with it concerns of identifying appropriate standards and delivery for universal service. Regulation and pricing are matters of importance as well as appropriate investment decisions within a market of ongoing innovation. The volume is divided in five parts: e-commerce business models; network technology and productivity; demand and pricing; market growth, regulation and investment; and issues related to the development imperative. The structure of the volume is guided by the basic themes considered at the International Telecommu­ nications Society's Asia-Australasian Regional Conference "Mcbusiness, E­ commerce and the Impact of Broadband on regional Development and Business Prospects", which took place in Perth Western Australia on 22-24 June 2003. The volume contains a selection of papers presented at this conference as well as four additional invited papers, commissioned to augment the volume. The invited pa­ pers are authored by Jerry Hausman (Chapter 1), Jeffery Bernstein and Charles Zarkadas (Chapter 6), M. Ishaq Nadiri and Banani Nandi (Chapter 8) and Glenn Woroch (Chapter 13).

Table of Contents




The present volume analyses the frontiers of broadband, electronic and mobile commerce markets. High-capacity and intelligent mobile telecommunication networks have resulted in new services, such as SMS and Internet banking. Growth in mobile Internet network infrastructure and subscription has provided a base for the development of e-commerce. Accordingly, recent research on broadband networks is forward-looking, e.g., forecasting Internet telephony adoption and the structure of future retail markets. The broadband regime brings with it concerns of identifying appropriate standards and delivery for universal service. Regulation and pricing are matters of importance as well as appropriate investment decisions within a market of ongoing innovation.
Russel Cooper, Gary Madden

E-Commerce Business Models


1. Cellular 3G Broadband and WiFi

This chapter focuses on a potentially important emerging telecommunications market, cellular 3G broadband and WiFi. This study also concerns competition, and the role of both business and the Government. This topic is particularly interesting, because through to 2000 the industry remained buoyant with stock prices appreciating. Until then, telecommunications companies had invested in new technology, wireless spectrum licenses and acquisitions at an extremely high rate. From the enactment of the US Telecommunications Act of 1996, through 2000, the telecommunications industry raised approximately US$ 1.3 trillion in new equity capital from Wall Street. An even greater debt accumulated. According to the Wall Street Journal, telecommunications firms borrowed about US$ 1.5 trillion in debt from banks, and issued US$ 630 billion in corporate bonds from 1996 through 2001. By 1999–2000, new telecommunications-related equipment accounted for 12% to 15% of capital investment among the Standard & Poor 500 firms. As this equipment was being installed demand for new telecommunications services grew at up to 100% per quarter. Demand for additional services continues to grow, but at a tenth of that rate. Much of this optimism, and related aggressive investment activity, was based on the premise that high demand for broadband access to voice, video and data would provide room for many competitors backed by their infrastructure. Financial markets eventually realized the true state of the industry. About US$ 2 trillion of telecommunications industry value was lost through plummeting stock values and defunct corporate bonds. Of course, now things are in the basement, the important question is, where to next?
Jerry Hausman

2. Geographic and Socially Embedded B2C and B2B E-Commerce

The term electronic commerce (e-commerce) provides visions of anonymous online transactions with companies like Amazon or, where personal contact need not exist and locations of purchasers and sellers are irrelevant. Much business to consumer (B2C) e-commerce occurs this way, and the approach was prevalent among firms in the ‘’ era, e.g., Verticalnet and Such visions reflect the dominant perception of the role of e-commerce in economic exchange prior to the widespread failure of firms in 2000 and 2001. That is, e-commerce enables firms to access new markets, replace outmoded or inefficient supply chains and distribution channels, and achieve substantial growth in customer reach (Wigand and Benjamin 1995; Cairncross 1997; Choi et al. 1997). These perceived opportunities stem from maintained assumptions held at that time. (2003b) describes the primitive beliefs that shaped corporate e-commerce practice and strategy:
Geography is irrelevant. Electronic exchange costs are the same regardless of distance (Cairncross 1997). Indeed, unless a Web site explicitly identifies the geographical location of the firm, the physical address remains unknown to most users. An implication for economic exchange is that purchasers and sellers are not required to be geographically close. The Internet had reduced transaction costs for transacting with geographically distant partners to the extent that distant sellers are competitive with local sellers (Bakos 1997, 1998).
Internet transactions are substitutes for transactions formerly conducted in person or through other forms of direct communication. Enhanced graphics and multimedia enable highly complex products to be sold through this medium. Customization and personalized features substitute for the activity of sales personnel who formerly interacted directly with customers (Rayport and Sviokla 1995). Modern logistics and transport systems ensure rapid fulfillment of online orders, hence the essential elements needed to effectively automate transactions are present, and enable on-line transactions that are perfect substitutes for physical transactions (Choi et al. 1997).
E-commerce orientated firms experience network effects. Hence, firms that accumulate a substantial customer base will achieve a sustainable competitive advantage (Choi et al. 1997; Shapiro and Varian 1999; Kaplan and Sawhney 2000; Afuah and Tucci 2001). The presence of a network effect translates into increased customer marginal utility the greater is Web site patronage. Such effects are thought crucial for sites that provide intermediary services, e.g., brokerage. To improve market liquidity such sites must attract a critical mass, or minimum efficient scale, of customers. The more customers attracted to a market, the greater the probability a customer has of finding a desired match.1
Charles Steinfield

3. SME International E-Commerce Activity

This paper examines small and medium enterprise (SME) internationalization and the Internet. The economic importance of SMEs is widely recognized through their 40% to 60% contribution to employment and value-added in most OECD countries (OECD 2002a)1. Further, SMEs account for 20% to 25% of global exports (OECD 2002a). The 1990′s expansion of economic globalization, in concert with the not completely unrelated growth of the World Wide Web (WWW has set the stage for an even greater SME participation in global markets. Globalization, the WWW and SME internationalization became ubiquitous during the 1990s. Trade currently comprises about 20% of world GDP. Depending on the country, 40% to 60% of the population of developed nations is Internet users (International Telecommunication Union 2003). In 2002, more than 60% of Canadian, 55% of US and 45% of European Union (EU) SMEs had adopted Internet business solutions (McClean et al. 2003). Recent research on the international activities of SMEs shows that start-up companies, especially those in high-tech sectors, are internationalizing at increasingly faster rates (Oviatt and McDougall 1997; Schrader et al. 2000; Knight 2000).
James H. Tiessen

4. SME Interaction in Supply Chains

E-business activity involves the electronic transfer of critical business information. In particular, e-business activity encompasses e-procurement, supply chain management and the transformation of firms’ internal functions so as to allow the seamless transfer of information along supply chains. The role of the National Office for the Information Economy (NOIE), in the development of Australian ebusiness markets, involves the brokering of business relationships and the playing of a catalytic role in innovative projects, so as to: promote the effective use of ebusiness that results in productivity growth for the Australian economy; facilitate firm e-business adoption—especially by small business; remove impediments to small business participation in e-business by reducing associated costs, complexity and risk; and ensuring government e-business activity is consistent with broad industry contexts. In October 2001 NOIE released the report, B2B e-Commerce: Capturing Value Online, which provided independent assessment of contemporary developments in Australian e-business markets. The core emerging issues identified by that report for Australian e-business growth revolved around necessary cooperation on standards, greater interoperability between e-business frameworks and the effective integration of new and established technology.1
Phil Malone

Technology and Productivity


5. Deciding on Network Architecture for 3G Wireless Services

The demand for high speed data services, such as multimedia and interactive information services, is increasing. Since such data services are a potential source of network service provider profit, third generation (3G) technology is being developed to support them. Further, this emerging wireless network technology will ultimately result in a much more complex network and service environment. With increasing technological complexity and uncertainty wireless network operators require more flexible network architectures to achieve and maintain competitive advantage. However, since the complete replacement of existing wireless network architecture is not practicable, technology choice in the migration of existing networks requires that carrier management examine options available as a strategic decision. To allow strategic analysis of the possible evolution of wireless networks and their architectures—innovation (ITh, Henderson and Clark 1990) and real options (RO, Dixit and Pindyck 1994) theory—are introduced. (1990) examine why some firms are able to leverage innovations. RO allows the linking of strategic planning and financial strategy by determining a value for an uncertain opportunity. Clearly, the potential exists to employ ITh to analyze wireless network technology evolution and architecture, and RO to support strategic decision-making. The principal motivation for this study is to develop a conceptual framework through which wireless network operators can support their strategic decisions concerning next generation network architecture. Accordingly, typical network architecture migration path alternatives, global systems for mobile communications (GSM) and code division multiple access (CDMA) based network scenarios, are examined using ITh. Strategic options for network migration as a means to manage wireless network architecture evolution based on the RO are also discussed.
Hak Ju Kim

6. Measurement of TFP Growth for US Telecommunications

Gains in productivity reflect the extent to which output from production processes grow at a faster rate than the inputs to these processes. Thus productivity growth is an indicator that measures productive efficiency over time. Various sources directly contribute to productivity gains, notably among them is technological progress. The significance of technological advance to national welfare implies that estimates of the rate of productivity growth shape views of the long-term productiveness of a firm, industry or national economy. The main focus of this study is to measure productivity growth for the US telecommunications industry for the period 1985 to 2001. Estimates of productivity growth rates also appear prominently in the regulation of the telecommunications industry. In the last decade and a half price-cap regulation has been adopted in the telecommunications industry by the US Federal Communications Commission (FCC) and in over thirty states.1 Pricecap regulation typically specifies an average rate at which the prices that a firm charges for its regulated services must decline, after adjusting for inflation. This rate is called the X factor, or offset. An important element in determining the rate of change in inflation-adjusted regulated prices is the productivity growth of the industry.
Jeffrey I. Bernstein, Charles J. Zarkadas

7. Measuring TFP for an Expanding Telecommunications Network

Typically, multiple-output econometric models of Australian telecommunications production maintain an assumption that carriers are in long-run equilibrium (Bloch et al. 2001a; Bloch et al. 2001b; Madden et al. 2002). This assumption implies all factors of production are adjusted in a costless manner to determine carrier longrun factor demands instantaneously (Nadiri and Prucha 1999). It has long been recognized that this assumption is problematic if carriers incur adjustment costs in altering their capital stock. Internal adjustment costs are commonly characterized in the form of output foregone due to quasi-fixed factor changes (Nadiri and Prucha 1990). Also, short-run network expansion costs (that relate to the addition of quasi-fixed network capital) vary with subscriber density, e.g., extending service to remote areas is more costly than upgrading the metropolitan local-loop network. Productivity growth is an important indicator of the nature of production technology, and is related to changes in cost as technology change occurs. Accurate measurement is important as productivity growth is often employed to evaluate past and forecast future performance of monopoly carriers, and the effect on industry performance of the introduction of competition (Fuss 1994). Further, conventional measures of total factor productivity (TFP) assume both constant returns to scale and full static equilibrium, and they are biased measures when either of these conditions is violated (Schankerman and Nadiri 1986).
Russel Cooper, Gary Madden, Grant Coble-Neal

8. Dynamic Aspects of US Telecommunications Productivity Measurement

Information and communications technology (ICT) is an important source of economic growth and productivity improvement. Both the theoretical and empirical literature suggests a positive impact from ICT equipment investment and service production on firm, industry and national productivity.1 Aggregate productivity growth is via improved interaction among advanced communications technology and computer hardware that leads to lower transaction costs. Such technological improvement enhances the speed and accuracy of analysis, storage and transmission of information. Also, improvement increases the availability of knowledge. This process necessarily generates spillover or network effects among firms (Katz and Shapiro 1985). In particular, recent analysis by (1999), 2003, (Mun and Nadiri 2002a, 2002b) and (2002) examine the role of the US ICT industry within the national economy.2 These studies focus on the computer equipment and software, and telecommunication industry market segments as a growth industry and their impact on the economy more generally. Their reported results are based on econometric model estimates using data from US industry. The sample data for analysis of US telecommunications industry total factor productivity (TFP) growth trends is for 1935 through 1987. For analyzing the impact of the telecommunications industry on other US industry, they use data from 34 sectors of the economy for 1950 to 1991. These data are annual price, output and input time-series for industries that comprise the major economic sectors. A flexible functional form, translog cost function is employed.
M. Ishaq Nadiri, Banani Nandi

Demand and Pricing


9. Korean Wireless Data Communication Markets and Consumer Technology

At the end of the 20th century the focus of communication service markets shifted from voice to data. Simultaneously, wireless communication became mobile, spreading globally, and produced an immense economic impact, with external effects impacting on related industry. However, voice service provider revenues declined due to a slowdown in subscription growth and falls in calling charges. Service providers have offered data services based on the mobile communication networks as an alternative (mobile Internet). However, the traditional economic framework is not applicable to this mobile Internet environment since both the volume of data traffic and revenues are slight, as is the rate of increase. Moreover, new wireless technology such as wireless LAN and Bluetooth are developed to further threaten incumbents. Accordingly, uncertainty about the returns to enormous investments in the communications facilities has increased. Further, within the mobile communications industry, the relative importance of data communication as opposed to voice is growing.
Sang-Kyu Byun, Jongsu Lee, Jeong-Dong Lee, Jiwoon Ahn

10. WTP Analysis of Mobile Internet Demand

Pricing new services is a mostly trial and error process, and wireless Internet access is no exception. Additionally, judging by recent publication, wireless Internet pricing and consumer willingness to pay (WTP) is the subject of much interest. In particular, (2002) indicates wireless Internet provider expectations have not been met by realized market demand. Maier further argues that this disappointing consumer response is caused by complicated service provider pricing schemes. However, CNET considers that while complex pricing is an impediment to market growth, it is not the only problem, viz.
Paul Rappoport, Lester D. Taylor, James Alleman

11. Asymmetry in Pricing Information Goods

Firms producing information goods that exhibit a network externality often adopt an introductory pricing strategy. The argument is that to secure a critical mass or installed base of customers, a firm sets price lower than marginal cost at the time of introducing an information good. A salient example is the web browser, Navigator, which could be freely downloaded in the early-1990s. During this period, economists identified the existence of introductory pricing strategies by firms within information good markets.1 For example, (1996) develop a monopoly information good producer model to consider profit maximizing price setting behavior. Low initial prices are set, with price increasing later when a learning-by-doing network externality adds further benefit attracting new consumers to the market. Additionally, (1999), using a dynamic model, show that duopoly firms may choose an introductory pricing strategy.
Yong-Yeop Sohn

Market Growth, Regulation and Investment


12. Measuring Telecommunication System Network Effects

The idea that adding new subscribers to a telecommunications network increases the value of subscription to individual subscribers, or network effect, has attracted much interest in the network economics literature. (1973), (1974) and (1975) pioneered formal theoretical analyses of the welfare implications of such network effects. In particular, (1973) demonstrated the public good dimension of networks. (1974) extends the analysis to derive a demand function containing telephone price as an argument. However, difficulty in formulating structural demand models that incorporate network effects meant that few empirical studies provide evidence of the magnitude of network effects. However, (1983) estimates the value of the telephone service for different sized local calling areas and density of telephone main stations per square mile. Further, (1990) report evidence of a network effect using arguments similar to (1983). Following (1995), (2002), 2004 and (2004) estimate a network effect based on a structural model consistent with optimizing consumer behavior for individual telecommunications services.
Gary Madden, Aniruddha Banerjee, Grant Coble-Neal

13. Open Access Rules and Equilibrium Broadband Deployment

Investment in advanced communications infrastructure promises such tantalizing payoffs as accelerated economic growth and enhanced national competitiveness. Relatively little disagreement arises in policy debates that such benefits are possible—usually only their size and distribution across the population are at issue. Bitter disputes, however, have occurred over which path will lead the communications sector to deploy these technologies most expeditiously and equitably.
Glenn A. Woroch

14. Spectrum Management and Mobile Telephone Service Markets

In 2002 global mobile telephony subscription surpassed fixed-line subscription.1 Within this context, emerging mobile computing and data services are expected to enhance existing services with the blending of wireless, computing and digital information industry innovation. Visions of opportunity arising from new wireless platforms (e.g., meshed networks), intelligent devices (e.g., agile radio) and wireless applications abound (Lightman and Rojas 2002). Accordingly, industry experts predict mobile data communication to generate more than half wireless service market revenue by 2010 (Wireless Data 2000). Additionally, in many countries, including Western Europe, parts of Asia and many developing countries, mobile telephony networks are more widespread than fixed-line service. In these countries, mobile devices rather than personal or laptop computers are likely to be the dominant Internet access devices. Despite wireless platform bandwidth limitations, mobile Internet subscription is growing rapidly. However, substantial variations in mobile Internet activity exist internationally. For instance, 72.3% of mobile subscribers in Japan and 59.1% in Korea access the Internet via mobile telephone, whereas the corresponding use for the US and Western Europe is 7.9% and 6.4%, respectively (ITU 2002: 44). Network operators are currently upgrading network platforms to provide bandwidth necessary to support more advanced multi-media applications. Evolving second generation (2G) mobile service, or 2.5G service, that provide to 171.2 kbps are well suited to deliver mobile data applications, including basic Internet access. Some network operators are offering third generation service (3G)—designed to provide 384 kbps in fully mobile mode and to 2 Mbps in stationary mode—sufficient to allow video streaming and multimedia applications. Wireless local area networks, e.g., WiFi or Hiperlan, typically operate in unlicensed spectrum bands, provide to 54 Mbps and are deployed for local connectivity. Platforms such as Bluetooth provide very short range personal area networks. While such technology requires further testing and experimentation, and their compatibility and interoperability pose challenges, they promise to radically transform communication markets.
Johannes M. Bauer

15. Rational Explanations of ICT Investment

After the 2000 NASDAQ decline, and subsequent downturn in global information and communications technology (ICT) markets, the telecommunications industry remains an important source of productivity growth and technology diffusion (OECD 2002, 2003). For example, packaged software sales, whose estimated value in 2001 is US$ 196 billion, are still expanding at 16% p.a. in OECD Member Country markets. Further, global mobile telephony subscription increased from 11 million subscribers at 1990 to 945 million subscribers at end-2001. Finally, Internet subscription reached a penetration of 8.2 users per 100 persons globally at end-2001, i.e., equaling 1999 mobile telephony market penetration (ITU 2002b). Reasons proffered for the NASDAQ decline, and the bursting of the bubble more generally, include unrealistic market growth expectations, firm activity not aligned with core competency and the accumulation of unsustainable debt. However, such rationalizations themselves require explanation. That is, whose expectations are at issue, those of firms making infrastructure investment decisions or those of shareholders making portfolio investment choices? With asymmetric information these expectations may differ, and so should policy response. Additionally, for both the and shareholder groups, unrealistic growth expectations may arise from premature timing in an unfamiliar environment. While it is the nature of uncertainty that expectations are mostly wrong, such expectations are still rational should they prove correct on average, i.e., averaged over the circumstances that might occur. Based on this criterion, over a time interval and in an environment subject to technology change it is difficult to confirm that expectations are irrational. Specifically, it is uninformative to characterize management decisions as poor ex post. Further, a claim that firm activity is not aligned with core competency is at variance with the view that, in a modern economy, it is prudent to operate a portfolio of interests. Finally, conventional wisdom in the form of advice to management is often fashion driven, viz., debt is only a problem when it is unsustainable, and assuming that foreseen unsustainable events are avoided, this explanation does not add anything to the unrealistic expectations variant.
Russel Cooper, Gary Madden

Development Imperative


16. North African Information Networks

(1957), (1987) and (1995) establish that social networks are important for understanding innovation diffusion through social systems. Social network interaction exposes individuals to technology. Additionally, new technology is commonly adopted when acquaintances reinforce mass media messages (Katz and Lazarsfeld 1955). That is, adopters rely on personal networks to gain new technology insights. In this manner, social networks assist in building network technology critical mass (Markus 1987; Rogers 1995; Valente 1995; Kavanaugh and Patterson 2001). Namely, networked communication technology is more likely employed when it is of demonstrative value. Such demonstrations are reinforced by the social nature of computing activity, i.e., network users are linked by personal relationship and common interest (Wellman et al. 1996). Adopters involved in social networks, e.g., through work and community, increasingly integrate computing into regular activity. Formal education is also associated with computer adoption, e.g., in US households socio-economic status tends to differentiate adopters and their use patterns for personal and network computing (Fischer 1977; Dutton et al. 1987; Rogers 1995; Cooper 2000). That is, early adopters are generally better educated and receive more media exposure (Rogers 1995). For less affluent populations new technology adoption patterns are similar. Early adopters are usually community leaders and diffusion is via social networks (Hudson 1984; Wresch 1996; Kavanaugh et al. 2002). However, less affluent socio-economic group leaders have fewer social ties to computer users and accordingly acquire less computing skill. While public access to information technology (IT) is available, disadvantaged individuals are not typically comfortable in these social contexts. For example, less educated and affluent individuals often have negative associations with public schools and are not comfortable gaining Internet access in this manner. Similarly, individuals with poor reading skill are less likely to frequent public libraries. Clearly, IT diffusion is slower within disadvantaged populations. However, when IT is integrated in community social settings it is used. IT diffusion problems are exacerbated in developing countries with large uneducated populations that receive low incomes and are not computer literate.
Andrea L. Kavanaugh

17. OECD Broadband Market Developments

A recent Organization for Co-operation and Development (OECD) report to Ministers, concerning information and communications technology (ICT) and the digital economy, concluded that, “... considering the ongoing spread of ICT and its continued importance for growth, policy makers should foster an environment that helps firms seize the benefits of ICT” (OECD 2003a: 7). The deployment of highspeed (or broadband) Internet networks is integral for ICT diffusion generally, and in particular the availability broadband service.1 Broadband networks, as a general purpose technology, have the capability to deliver benefit to many economic sectors. That is, broadband networks can provide a vehicle to deliver, e.g., government, education, cultural and health services. Given the potential social dividend obtained from broadband technology use, it is important to ensure that this technology is widely diffused within nations—and not concentrated at the main, typically urban, national economic hubs. With broadband technology penetration increasing in urban areas, several OECD Member Country governments are addressing potential national broadband digital divide issues, viz., that national divides may develop should broadband service not be made readily available to rural and remotely located populations. Accordingly, this study provides an overview of broadband network developments within OECD Member Countries, and analyzes recent Member Country national broadband policy. Subsequent to this review, the potential for intra-Member Country national digital divides to emerge is considered, as are national initiatives to provide high-speed access to rural and remote populations. The chapter concludes with recommendations for policy makers.
Dimitri Ypsilanti, Sam Paltridge

18. Understanding the Evolving Digital Divide

Much activity of international aid and development agencies focuses on the North- South digital divide.1 Available evidence shows a staggering gap between developed and developing country information and communication technology (ICT) access, e.g., at the end of the 20th century the average OECD Member Country had an eleven times greater per capita income than that for a typical South Asian country. Further, it possessed 40 times more computers, 146 times the mobile telephones and 1,036 times Internet hosts (Rodríguez and Wilson 2000).2 Most developing countries are not catching up with developed countries, and so the gap continues to grow. As (1999) concludes:
Poor countries are not catching up with the rich, and to some extent the income distribution is becoming polarized. Countries do converge to their own steady states, but at an uncertain rate. One reason for this uncertainty is that countries catch up by adopting technologies from abroad, as weil as by investing in physical capital and education. It is easy to envisage a hypothetical long-run equilibrium in which countries grow at the same rate, but over the last thirty years, rates of efficiency growth have almost certainly varied widely (Temple 1999: 151).
Russel Cooper, Gary Madden


Additional information