Technological convergence: a strategic perspective

Abstract

The Information and Communication Technologies (ICT) sectors are in a process of technological convergence. Determinant factors in this process are the liberalization of the telecommunications markets and technological change. Many firms are engaged in a process of mergers and alliances to position themselves in this new framework. Technological and demand uncertainties are very important. Our objective in this paper is to study the economic determinants of the strategies of the firms. With this aim, we review some key technological and demand aspects. We shed some light on the strategic motivations of the firms by establishing a parallel with the evolution of the retailing sector.

Introduction

Economists think about reality in terms of markets.¹ In practice, a market is just an abstraction, and drawing the limits of markets out of actual information is a difficult task, that has different answers depending on the objectives of the analysis we want to perform (strategy formulation, competition policy, industrial organization). It is not very common to have the opportunity of studying a process by which some well-differentiated markets are transformed into new ones, because of changes in the technology and the demand that cause the products or services of the original markets to end up by serving identical needs of the same customers. In such a situation, firms are faced with big opportunities and big potential drawbacks. Those that are able to correctly foresee the future developments can gain an important headstart and position themselves so as to obtain an important competetitive advantage. On the other hand, making irreversible investments in the wrong technology can seriously threaten the competitive position of a firm.

In this paper, we study the so-called technological convergence, a process by which the telecommunications, broadcasting, information technologies and entertainment sectors (collectively known as ICT — Information and Communications Technologies) may be converging towards a unified market. Actually, one of the first questions we consider is how accurate this convergence forecast is. But, whether or not a unique market results in the end, it is clear that those sectors are involved in the kind of process we described above, by which old markets change to give rise to new ones.

Our aim is to study the determinants of the firms' strategies. Many interesting phenomena are taking place within the domain we consider. For instance, we could analyse many interesting case studies to consider the old strategic controversy about the conditions under which firms should vertically integrate or consider some alternative like joint ventures or strategic alliances. Actually, the process of mergers and alliances is so fast that any attempt we made at describing it would necessarily be outdated by the time this paper is read. What we do in this paper is to describe the underlying technological and economic factors that influence the firms' choice of strategies. Technological convergence is possible because of a confluence of technological and economic factors. On the technological side, the key factor is the evolution of communications and information technologies. On the economic side, the most important factor is the worldwide liberalization of the telecommunications markets.

When making strategic decisions, firms take into account the environment, but when the uncertainty associated is very high, making accurate expectations becomes very difficult. Some firms try to influence the future developments. For instance, the investments of Microsoft in the cable industry may be interpreted as an intention to position its Windows CE software as a key element in the set-top-boxes for digital television. The establishment of alliances which is taking place in the ICT illustrates very well how the participants are trying to position themselves in the market. There are many reasons behind the changing nature of competition in the ICT. These are: the need to cope with technological uncertainty (trying to impose a standard), market uncertainty (create demand with the supply of content and get the rents where margins are higher) and huge investments (the need of complementary resources).

Before making a more accurate analysis, it is important to point out which have been the driving forces of the big changes in the industry. In the first place, the possibility of digitizing all type of signals has given rise to technological convergence, which has implications both for the supply (merging of different sectors that were previously separated) and the demand. In the second place, the costs of voice and data transmission have experienced a remarkable decrease. This reduction has been made possible thanks to an improvement in compression techniques, and the reduction in the costs of infrastructures. The increased efficiency of data delivery was one of the factors that influenced the decision by governments to change the monopolistic structure of the old Public Telecommunications Operators (PTOs, nowadays just TOs), engaging in a worldwide process of liberalization that started in 1998. Market dominance and high fixed costs have caused TOs to engage in a process of mergers, acquisitions and alliances. The arguments behind this agreements can be explained by two main reasons: to get the economies of scale needed to maintain profitability (horizontal co-operation); or looking for those steps in the value chain which can offer bigger profit margins (vertical co-operation).

By technological convergence is meant that any type of terminal can access any type of data, which in turn is able to be transmitted through any kind of pipe. Internet has been the catalyst of this process. The technology that has been responsible for platform-independence in the Internet is the IP protocol, which is the basis of a set of protocols that allow routing and transmitting any kind of data (text, image, and voice). Convergence has implications both for demand and supply. First, businesses and home users may have access to a lot of information in an interactive way using any type of terminal. Second, information that is transmitted is platform-independent. This means that there are several alternatives to transmit a given content. For instance, it is possible (or will be in the near future) to obtain local phone connection through the traditional copper wire, wireless, cable or television antennae. It is expected that in a few years just digital data will circulate through the pipes. Some of these data will be telephony voice (which requires low bandwidth), but other content, like digital films, will require more transmission capacity. But many problems must be solved; for instance, the current copper networks, which are the main asset of the TOs, are not wide enough to carry the bulk of information that is needed to broadcast a film. Hence, a telecommunications operator that wants to compete with, say, a cable company, must make the necessary infrastructure upgrades to provide broadband services. But problems may arise because neither the new technology nor the market may be mature enough. When will the demand size allow the firm to recoup the money? Besides, how will this demand be? If the services provided are close to a competitor's offer, consumers will choose the solution that fits their budgets best. So, it is difficult to bet on a concrete technology when the most popular uses of that technology are not clear yet. Leaving the demand aside, who can tell that the investment that is made today will not be obsolete tomorrow because a more cost-effective technology has appeared? In the next few sections we will elaborate all of these aspects.

All the changes mentioned above have shaped the landscape in the transmission activities. On the one hand, there are a lot of opportunities for all the agents involved because the markets are growing. But on the other hand, the competition has widened because there are more technological alternatives to satisfy the same demand. The technological changes provide opportunities for firms, but also imply big risks. In order to understand the opportunities and risks that have arisen in the ICT sectors, in Section 2 we make a brief survey of what is technological convergence and which are its consequences, for both the supply and demand sides. In Section 2.1, we provide a small description of infrastructures capable of supplying information. In Section 3, we take into consideration the factors that must be carefully weighed when launching a product to the market, and use some examples to illustrate them. In Section 4, we focus on the demand side of the technological convergence. Are the users ready for technological convergence? As an early indicator we use some data published by the ISPO on the Information Society. Essentially, the question we pose is whether there is a real convergence between television and Internet consumers. In Section 5, we analyse the determinants of the firms' strategies. In Section 6, we present some conclusions and avenues for further research.