J20 billion opportunity for British business

British business and the economy could benefit from a productivity dividend of at least J20 billion, if changes to the regulation of UK telecommunications are put in place.

This is the headline finding of a major new study that identifies for the first time a strong link between investment in telecoms innovation and wider business productivity.

The independent study suggests that the impact of Information and Communications Technology (ICT) investment and innovation on increased economic productivity in the US correlated with the widespread networking of computers through telecoms in the late 1990s. The report concludes that, in the same way that ICT investment increases economic productivity, there is also a strong link between investment in telecoms innovation and business productivity. However, without decisive regulatory change to foster a more competitive market, a similar dividend from telecoms innovation for British business will not be realised.

"Reaping the telecoms dividend"
The report, "Reaping the telecoms dividend - Our opportunity for telecoms to drive innovation and productivity in British business and the economy", has been written by Spectrum Strategy Consultants and Indepen. The authors have reviewed fresh and compelling economic evidence from around the world which demonstrates that telecoms investment can stimulate productivity growth. They have used new economic modelling to suggest that, if certain regulatory barriers to innovation were to be removed, then there would be a clear opportunity for British business to enjoy a productivity dividend equivalent to at least ?20 billion.1

The report goes on to identify changes to the regulatory environment for fixed-line telecoms in the UK that would promote more choice in telecoms services for business and residential customers. Such regulatory changes would stimulate more effective innovation from all telecoms companies.

The report was commissioned by Cable & Wireless, the international telecommunications group, to inform the Strategic Review of Telecoms announced in December 2003 by Ofcom, the new telecoms and media regulator. This is the first review of its kind in the UK for 13 years.

Francesco Caio, CEO, Cable and Wireless plc, commented, "Fixed-line telecoms is a critical driver of UK productivity and competitiveness. This report indicates that business is missing out on the dividend from networking and telecoms.

"The new regulator has a key role to play in closing the productivity gap in the UK. Without decisive change there will continue to be a drag from stifled telecoms innovation in this country."

Ian El-Mokadem, managing director of Centrica Telecommunications, welcomed the research. He said, "Better regulation of telecoms will mean more competition and improved choice for all phone and internet users, not just businesses.

"This will help Centrica to deliver further quality, value and choice in telecoms for any of Britain's 25 million households looking to switch provider."

Need for decisive change
The report identifies an opportunity for improved regulation to deliver a productivity dividend of at least ?20 billion for British business. These are benefits that are already being enjoyed in other countries such as the US. Without decisive change, there will continue to be a productivity-drag from stifled telecoms innovation for British business.

The report describes a fixed-line telecoms sector in which competition is failing and innovation is delayed. Despite an ongoing process of deregulation over the past two decades, the incumbent operator retains 60% of the UK retail telecoms market and 80-90% of the wholesale telecoms market. When the UK's gas, electricity and mobile telecoms markets were liberalised, they took between five and nine years to achieve the same level of market competition as the fixed-line telecoms market has managed in 19 years, the report's authors claim.

A brake on innovation
The authors identify a number of specific examples where the telecoms sector has been slow to bring new products to market and to innovate. They assert that this has typically been due to a lack of rapid innovation on the part of BT Wholesale. This in turn stifles downstream innovation in the telecoms products sold to businesses and residential users by either BT Retail or competing telecoms companies.

A reliance on piecemeal regulatory intervention is also identified in the report as evidence of the shortcomings of the market. Two recent examples cited of lack of competition and delayed innovation cited in the report are:
Carrier Pre-Selection (CPS): The technology that allows business and residential users to switch telecoms providers without having to dial a prefix code, or have equipment installed in their premises. The authors argue that the first "fit for purpose" product took more than four years to come to market, while customers must still receive a confusing second bill for line rental from BT, in addition to one from their chosen supplier, which has hampered take-up.
Broadband Internet/ ADSL: Delayed by at least three years, due to the lack of "equivalent" access to BT's network assets by its competitors (ie lack of non-preferential treatment of BT Retail by BT Wholesale) and other factors. Using data from the US, the authors have concluded that earlier uptake of broadband, driven by improved regulation, could have returned an economic benefit in the UK of J100 billion.

Sector benefits
The authors of the report have identified specific industry sectors that would stand to gain the most from a regulatory environment that would foster better innovation and choice. These sectors are currently heavy and/or growing users of ICT, and in particular telecoms services, or they are sectors where quality of access to ICT affects choice of country location. The report cites evidence that:
large retailers increased their ICT spend by 27% in 2003;
9% of the "value-added" wealth in the Finance industry is created by ICT investment;
local authority ICT spend is set to increase by 25% in 2004;
up to 7% of the value-added wealth in the Manufacturing sector is created by ICT investment;
Creative and media companies are likely to become increasingly reliant on telecoms innovation.2
The report also notes that, in the longer term, the indirect economic benefits of improved telecoms innovation would be disseminated more widely throughout the economy, for example, retailers could pass on their cost savings to consumers.

Four key principles for telecoms regulation
If the productivity dividend that telecoms can deliver is to be realised, future regulation and policy-making must take greater account of the wider effects that telecoms innovation can have on the economy, the report's authors claim. The current, narrowly-focused approach typically only captures a fraction of the overall benefits and has resulted in ad hoc policies and piecemeal regulatory intervention that neither recognise nor support the substantial dynamic gains that can flow from telecoms innovation.

The authors have recommended four key principles for regulation, which should be applied en bloc to enable Ofcom to make good the lag in telecoms innovation. These are:
ensure "equivalence" of access to BT's upstream network assets for all operators by introducing a standard set of non-preferential systems and processes that are common to all operators. The relatively small set-up costs should be borne by all operators, not just BT;
prevent price-based discrimination against BT's downstream competitors and innovation, caused by restrictive pricing structures or loading of costs onto certain products;
regulation that provides incentives to innovate and ensures adequate returns to facilitate efficient investment in new services, wherever prices are regulated;
adjust the style of regulation to encourage innovation through commercial incentives, not regulatory intervention or penalties. Regulatory uncertainty should be minimised to encourage investment.

Note to editors
The Spectrum/Indepen report, "Reaping the telecoms dividend - Our opportunity for telecoms to drive innovation and productivity in British business and the economy", is available at www.spectrumstrategy.com and www.indepen.co.uk

Spectrum Strategy Consultants / Indepen, the authors of the report, will be available for interview on request.

About Cable & Wireless
Cable & Wireless is one of the world's leading international communications companies. It provides voice, data and IP (Internet Protocol) services to business and residential customers, as well as services to other telecoms carriers, mobile operators and providers of content, applications and internet services.

Cable & Wireless' principal operations are in the United Kingdom, continental Europe, Japan, the Caribbean, Panama, the Middle East and Macau.

For more information about Cable & Wireless, go to www.cw.com.