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Attracting investment and encouraging innovation: why sending-party-network-pays proposals before WCIT are wrong

My comments at the Main Panel session at IGF 2012.

Question 1: What does it take to attract investment in infrastructure and encourage innovation and growth of ICT services, including mobile technology and how can these technologies best be employed to address development challenges?

Indonesia is a success story in Internet use. In a six-country, representative-sample survey we conducted in 2011, we found the highest use of the Internet among the poor among the six in Java, where the most of the Indonesian population lives. Indonesia is one of the heaviest users of Facebook, in the top five. In qualitative studies that we conducted in that country we found that even people who answered in the negative to questions about the Internet described what they were doing with Facebook. They were using an Internet-based application without knowing they were using the Internet. This phenomenon has also been found in Africa by our colleagues at Research ICT Africa.

What these research findings illustrate is the critical importance of content. Demand-side factors are what drive the take-up of the Internet. With attractive content, we will see more of our people, including those at the Bottom of the Pyramid, joining the Internet and enjoying its many benefits in terms of economic development, social empowerment, and increased opportunity.

It is true that the kind of demand that is being generated is difficult to respond to. We have plenty of examples from the voice world. Many mobile operators in Europe cannot imagine making money from customers who yield around 2 US dollars a month in revenue. Yet, we have plenty of operators in Asia who make good money with extremely low prices and large numbers of minutes. This is because they have innovated with new business models.

So demand is not enough by itself. We also need business models that can generate adequate returns on investment. If these two conditions exist, we will close the loop that is needed to connect people to the vast storehouse of knowledge and opportunities for communication, transactions, and remote computing.

And do we see investment? Yes. I do not think there has been more investment in undersea and terrestrial cables in the developing world as at the present time. Operators in regions that are undergoing macro-economic stresses and who are still stuck on old business models may have difficulties raising investment, but they should not use their problems as an excuse to cause problems for everyone.

What are these problems? If content is king, anything that threatens seamless access to content is a problem. No content; no demand; no success for innovative business models that will accommodate those at the bottom of the pyramid; no investment (or at least investment that will yield a decent return).

What is the threat to content?

Proposals before the WCIT conference in Dubai next month by the Arab States (and which are still being propagated by ETNO, the European telecom operators’ association) to impose fees for content coming into networks are a clear and present danger to investment that will connect our people to the Internet.

Let me illustrate how this would work. A young person in Sri Lanka, my country, requests a YouTube video. Small amount of data goes out to wherever the server is. A large amount of data flows in into the Sri Lankan network, a large net inflow. According to the proposals, the sending network would have to pay an “access charge” that is considered appropriate by the various governments. There is talk of commercial agreements, but what is a commercial agreement in which the payments are second-guessed by governments? Think about the transaction costs of negotiating thousands of commercial agreements in the newly liberalized telecom environment.

Recall who initiated the transaction: the young person in Sri Lanka did. So what these proposals want to do is to make a network or an applications- or service- provider pay a network for responding to a request made by a customer of that network. There is something fundamentally illogical and unfair about this: one person requests; another person who responds has to pay.
The Internet today is seamless and universal. There are costs associated with providing “free” server space, for example for a cricket video from Sri Lanka. These costs are absorbed by service providers because they make sense in an advertising-based business model.

The new payments that are being requested and the transaction costs are likely to Balkanize the Internet. Entire countries and networks may cease to have access to attractive content, because the content providers or the networks that host the content may deprive them of access because it no longer makes economic sense to serve them.

Alternatively, the demand for payments will cause more content to be moved behind paywalls. Paywalls increase transaction costs for all users. But they are insurmountable for the poor who do not have access to credit cards and especially internationally acceptable payment mechanisms.

Lacking seamlessly available attractive content, the pace of people in those countries signing up for the Internet will slow down. Lacking demand at the appropriate scale, the extension of the budget telecom network model to Internet access will prove futile. Without viable business models there will be no case for investment in the countries that I work in. Without investment, we’ll be left outside, looking in.

How does this link to innovation? The Internet is a wonderful platform for innovation and entrepreneurship. In my part of the world, young people are busy developing mobile apps because they believe that the barriers to entry are low here. You can develop apps that are sold for a price or apps that are advertising supported. Either way, the most important thing is to figure out the addressable market. The first requirement is people who are capable of accessing your app. This is not the totality of all the people in the country, but the subset which is technically equipped to use the app, be it on smartphones or on feature phones using network-based apps. The bigger this subset, the better it is. If you can reach markets in foreign countries, even better.

Government policy can help or hinder with the first requirement. By issuing enough frequencies, for example, they can help; by voting for “access charges” at the WCIT conference in Dubai, they can hinder.

The second requirement is a solution to a problem faced by all entrepreneurs. How do you make your potential customers aware of your app? How do you convert them into actual customers? How do you make sure that the customers yield revenues? Here too, governments can help by, for example, enabling mobile payments. You have all heard of M-Pesa in Kenya, but sadly, not all countries have created the enabling environments. In many countries, the ability to receive payments from abroad by means such as Pay Pal does not exist. By dithering over mobile payments for years, governments have stifled developments in this area.

So, the first thing we need to do is to beat back the proposals that seek to impose “access charges” for content desired by people and thereby slow down the demand that is exploding in the developing world, including among the poor. The first principle in public policy is “do no harm.” The “access charge” proposals that are being proposed by the Arab States, among others, will do harm. They must be rejected.

More can be done to unleash the innovative energies of our people. But let us begin by doing no harm.

Without demand there will be no investment. Without investment and a seamless Internet, innovation opportunities will be stifled. Do no harm to demand.

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