Regulatory intervention in networks (electricity, gas, water and transportation) is based on the idea that, under some circumstances, market mechanisms function incorrectly in terms of upholding the interests of users and the general community. One situation where this clearly occurs is when natural monopoly conditions prevail. This principle of regulation is valid in terms of cost conditions needed to create this market structure when these conditions are confirmed.

Nevertheless, the principle of intervention is more disperse in the context of industries with rapid technological change, such as telecommunications and other activities which, due to those changes, are now associated with or included in a process known as convergence. The figure below illustrates the configuration of the telecommunication industry and some problems associated with technological change.

The disperse nature we refer to is associated both with the objectives that regulation should pursue as well as to whether or not those objectives can be achieved through market forces. Moreover, intervention in situations of technological change leads us to question which instruments would be most effective (control of rates, licenses, etc.).

Part of the uncertainty observed in the debate on regulation of industries associated with telecommunications, whatever their form they take, stems from the fact that they have a solid technological and commercial integration with information services (among which the ¨communication media¨ stand out) thanks to the technical advances of recent years. In other words, the regulatory debate on convergence emerged between these industries not only because they tend to have a common technological matrix, as we will explain shortly, but because they influence economic development in a similar, joint way, and it is difficult—if not impossible—to separate their individual influence. It is an onerous, fruitless task to consider a regulatory framework that separates one industry from another.

The activities we are referring to and which are affected by convergence are known as ICTs, encompassing telecommunications, information systems and media. The industries covered by this definition of ICTs affect the productivity of the economy, which makes convergence an even more pressing issue. First, ICTs drive technological change, especially through the ¨digital revolution, ¨ creating new industries that produce goods and services. Second, ICTs permit the more rapid, less expensive dissemination of information through the reduction in processing costs and the increase in the capacity and speed of transport. Finally, ICTs enable access to more fluid knowledge given that they permit new forms of education, such as distance learning, for example.

The networks providing convergent services are a key component of the structure of modern economies just as the road network, ports and other components are for the traditional economy. They determine many aspects of a country’s economic activities: productive processes, development of new institutions and organizational change. In effect, these networks are frequently compared to traditional transportation networks with respect to their role in growth and development. With traditional transportation technology, the increase in the infrastructure was gradual and progressive, but ICTs provide a more rapid path to achieving ubiquity given that they act on multiple dimensions, shortening both distance and time.

There is another key aspect that differentiates the experience between the two types of infrastructure. The integration of land transportation networks remains partial, despite decades of development. Their design continues to be one of mainly national control. The integration of communication networks has an international dimension not found in transportation networks. Current possibilities for connectivity and therefore social and cultural integration are important assets of the new technologies that have never before been achieved.

In transportation systems, technological change first occurs mainly with vehicles and then spreads to the rest of the network: improved, more efficient vehicles improve the overall system. By contrast, technological change in networks of convergent services occurs both in the networks themselves as well as in services and contents.

An interesting consequence of studying these phenomena is that it leads us to redefine the exact meaning of the word ¨service, ¨ which among other things implies revising what we mean by ¨universal service.¨

In light of this new situation, consensus exists that we are in the presence of a regulatory paradigm shift and many developed nations have updated their standards as a result. The cornerstone of this new regulatory paradigm is the redefinition of services and products comprising the industry, in other words, the formal acceptance of the redefinition of the industry as a whole

The former licensing system was usually limited to a series of specific services, for example, mobile telephony or Internet access services. This led to the issuance of licenses for services and technologies that represented a specific phase in the evolution of the market. The global trend suggests that many regulators consider the granting of licenses too rigid, threatening the flexibility operators need to adjust their services to demand. For this reason, an increasing number of decision-making and regulatory entities are reorganizing their licensing and regulation systems to make them more flexible and inclusive in an effort to facilitate the process of convergence and thereby permit operators to provide innovative services using the latest technology.

There is solid evidence of how several countries adapted their legislation to the new environment or are in the process of doing so. When liberalizing their ICT markets over the last 20 years, these governments introduced new types of licenses to supply advanced, competitive services.

In effect, ITU statistics for 2003 demonstrate that 9% of African countries had adopted legislation on convergence and 57% planned to do so. In the Americas, the figures were 21% and 47%, respectively, whereas they were 10% and 40% for Arabic countries. Twelve percent of Asian-Pacific countries had already adapted their legislation and 41% planned to do so in the near future. In Europe, where an adapted supranational regulatory framework already exists, 43% of the countries explicitly recognized integration between communication and information technologies. These figures are no doubt more eloquent today given the large number of countries that planned to modify their regulations in 2003 and have already done so.

The brief review of the changes occurring in the last two years at the international level reveals that the process to adapt legislation is inevitable and that countries which quickly update their legislation are more likely to benefit from the advantages of a new industry model that incorporates communications and media activities.

Unfortunately, many countries of the region lack legislation that takes into account these circumstances and trends, which affects their possibilities for future development. The regulatory framework for telecommunications and related activities, such as radio broadcasting, has a divergent regulatory structure and logic. The definitions established by the legislation do not permit assimilating these structural changes resulting from the new technologies.

This situation by itself poses an obstacle to development, but even more so when it results in asymmetrical rules that permit the commercial integration of services under some technological platforms but not others.

This paper attempts to explain, from a technological and regulatory perspective, the key reasons supporting the convergence process, its meaning and its consequences.

Note of the Editor: in the next number of info @ CITEL we will publish the next part of this report.

Ignacio Luis Bergallo
Manager of International Regulations
Telefónica de Argentina