Technological convergence: a strategic perspective
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the process of mergers and alliances is so fast that any attempt we made at describing it would necessarily be outdated by the time this paper is read.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.
Section snippets
Technological convergence today
Technological convergence has both a technical and a functional side. The technical side refers to the ability of any infrastructure to transport any type of data, while functional side means the consumers may be able to integrate in a seamless way the functions of computation, entertainment, and voice in a unique device able to execute a multiplicity of tasks. The European Commission (1997), in its Green Paper on Technological Convergence, illustrates this idea and defines technological
Potential sources of uncertainty
After ten years of risky and expensive investments, on September 23 1998, the Iridium6 consortium launched its first low-orbit satellite, with the aim of allowing connection by users on any part of the planet. Although forecasts were very optimistic, and the project counted with the advantage of being the first such project running,
Users' attitudes versus the Information Society: ready for convergence?
In this section, we briefly consider technological convergence from the point of view of its adoption by the end users. We want to point out two main facts: on the one hand, the current percentage of home Internet users is still quite low; on the other hand, most people who do not use the Internet are not interested in doing so.
Traditionally, conventional television has occupied the central place in the sitting room of peoples' homes. The consumption experience of the traditional television
Key determinants of the firms' strategies
To understand the main motivations behind the strategies of the firms in the ICT markets, it will be convenient to establish a parallel with the retailing markets. A look at the evolution of retailing in the twentieth century reveals a pattern of increasing market dominance by the big firms that are located at the last step in the vertical chain, that is, those directly serving the consumers. Actually, there has been a shift in market power from producers to big retailers, who nowadays can
Conclusions
In this paper we consider the process of technological convergence that is taking place in the Information and Communication Technologies (ICT) sectors. This process implies that some markets will disappear to give rise to new ones. We have examined in some details the technological and economic factors that play a role in the process. Our focus has been to understand the firms' strategies. One of our main conclusions is that a key element in the firms' strategies is to be the window through
Uncited references
Ewing, 2000
Acknowledgements
We want to thank comments and advice from Jordi Balagué, Germà Coenders, Marc Sáez and Christian Serarols, and participants at the GRECOS meeting held in October 2000. We also want to acknowledge the support of the RECIT research group under Grant 9100081 from the University of Girona. An earlier version of this paper was presented at a GRECOS Symposium titled “Mondialisation, Globalisation et Stratégies des Entreprises”, October 2000.
Cristina Borés is currently an Assistant Professor at the Department of Economics from the University of Girona. At the moment she is working on her PhD, which is focused on the changing nature of the telecommunications markets. Her main interests are the technological convergence and its implications from the firm's standpoint, strategic issues related to standardization processes and consumer behavioural aspects related with the launching of new products.
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Cristina Borés is currently an Assistant Professor at the Department of Economics from the University of Girona. At the moment she is working on her PhD, which is focused on the changing nature of the telecommunications markets. Her main interests are the technological convergence and its implications from the firm's standpoint, strategic issues related to standardization processes and consumer behavioural aspects related with the launching of new products.
Carme Saurina is a member of the Faculty of Economics and Business of the University of Girona. For her PhD in Economics she investigated the topic of quality evaluation in service's enterprises and her mainly research topics are the analysis of multivariate data and the study of fiability and validity in questionnaires.
Ricard Torres is a member of the Faculty of Economics and Business of the University of Girona and of the Center for Economic Research (CIE) at ITAM. He got a PhD in Managerial Economics and Decision Sciences at Northwestern University, and has previously taught at the Universitat Pompeu Fabra. His research interests are in auction theory, R&D, organizations and contracts.