SESSION 3.2: Business and Finance - Roads to Profitability Disruptive Technology Implementation -...

SESSION 3.2: Business and Finance - Roads to Profitability

Disruptive Technology Implementation - Requires Disruptive Regulatory Approaches

by Linda [email protected]

20th Annual Telecommunications Conference and Trade Exhibition 19-22 June, 2005 St. Kitts Marriott Resort, St. Kitts & Nevis Theme: “Telecom Liberalization and the CSME: Opening New Doors”

Who are we? Partner and Chair, Global Telecommunications Practice; Partner and Chair, Global Telecommunications Practice; Principal Principal

in Technology Consulting Affilate Companyin Technology Consulting Affilate Company

International Transactions, Telecommunications and Technology International Transactions, Telecommunications and Technology law firm specializing in the Caribbean and Latin American law firm specializing in the Caribbean and Latin American markets, as well as substantial other international jurisdictions. The markets, as well as substantial other international jurisdictions. The Technology affiliate firm specializes in deploying innovative Technology affiliate firm specializes in deploying innovative technology solutions in new markets and providing strategic technology solutions in new markets and providing strategic commerical, regulatory, finanical and technical capacity building commerical, regulatory, finanical and technical capacity building expertise and project management to private companies, expertise and project management to private companies, governments, and foundations around the world. governments, and foundations around the world.

In addition to DC metro office, Miami office and representative In addition to DC metro office, Miami office and representative offices in the Caribbean, Central America, and Europe. (Practice offices in the Caribbean, Central America, and Europe. (Practice conducted in English, Spanish and French.)conducted in English, Spanish and French.)

Presentation Outline

1. Disruptive Technologies in the forefront.

2. What we know of their effects and suggested ways to react.

3. Embracing disruptive technologies -Legacy regulatory regimes -- how they need to adapt.

4. Case Study: Guatemala “property rights” spectrum allocation and management.The region and developed world takes a hard look.

Disruptive Technologies VoIP (voice over internet protocol).VoIP (voice over internet protocol). TV-over-phone-lines or TV-over-Internet Protocol (TVIP).TV-over-phone-lines or TV-over-Internet Protocol (TVIP). Micro fuel cells, (next step for powering portables).Micro fuel cells, (next step for powering portables). Smart antennas (no longer “add on” features but will be embedded to Smart antennas (no longer “add on” features but will be embedded to

support multiple wireless technologies, including cellular, GPS and support multiple wireless technologies, including cellular, GPS and WLAN, including WI-FI.WLAN, including WI-FI.

Software defined radio (allows its operating frequencies and output Software defined radio (allows its operating frequencies and output power to be controlled through software.)power to be controlled through software.)

Nanotechnology (potential to become one of the most disruptive Nanotechnology (potential to become one of the most disruptive technologies in years, leading to molecular-size chips with significantly technologies in years, leading to molecular-size chips with significantly more functionality, lower power consumption than is possible in any of more functionality, lower power consumption than is possible in any of today’s consumer electronic products.)today’s consumer electronic products.)

Open Source Software (being adopted increasingly by government Open Source Software (being adopted increasingly by government agencies around the globe.)agencies around the globe.)

Adoption of Disruptive Technologies

1. Usually emerge over time

2. Appear first in someone else’s industry

3. Often funded by venture capitalists eager to convert them from science and engineering

into products

4. Invented by industries (grocers-bar coding).

How We Respond to Disruptive Technologies : In general, people react badly. In general, people react badly.

That is to say, they are hostile toward them, That is to say, they are hostile toward them, or embrace them without understanding or embrace them without understanding potential risks and hidden problems, potential risks and hidden problems, or they do not have good methods for or they do not have good methods for doing doing so.so.

Resistance and Denial are the two most widely visible Resistance and Denial are the two most widely visible patterns of behavior. patterns of behavior.

Suggested Ways to Deal: Develop effective ways to ease the transitions to new Develop effective ways to ease the transitions to new

technologies.technologies.

Required tools - not more technologies but rather economic, Required tools - not more technologies but rather economic, social & cultural incentives and processes.social & cultural incentives and processes.

Governments have to leverage regulatory bodies to motivate and Governments have to leverage regulatory bodies to motivate and permit new behaviors.permit new behaviors.

Executives need to introduce incentives and measures into their Executives need to introduce incentives and measures into their organization to promote understanding and adoption of disruptive organization to promote understanding and adoption of disruptive technologies at times most advantageous to their firms.technologies at times most advantageous to their firms.

Institutional cultures have to be modified. (biggest challenge of Institutional cultures have to be modified. (biggest challenge of all, e.g., tenured professors and Distance Learning classes all, e.g., tenured professors and Distance Learning classes development.) development.)

Suggested Ways to Deal: Industries and nations that learn to do this the best the soonest Industries and nations that learn to do this the best the soonest

will probably be those that will enjoy the greatest prosperity in will probably be those that will enjoy the greatest prosperity in this new century.this new century.

In the case of the US economy, for instance, disruptive In the case of the US economy, for instance, disruptive technologies have normally been powerful engines for economic technologies have normally been powerful engines for economic growth. growth.

They promise to continue to be so in the future.They promise to continue to be so in the future.

FOR COMPANIES OPERATING IN A GLOBAL SETTING, FOR COMPANIES OPERATING IN A GLOBAL SETTING, IDENTIFYING THESE NATIONAL POCKETS OF IDENTIFYING THESE NATIONAL POCKETS OF INNOVATION HAS TO BE ONE OF THEIR GREAT CORE INNOVATION HAS TO BE ONE OF THEIR GREAT CORE COMPETENCIES.COMPETENCIES.

New regulatory approaches to accommodate disruptive technologie:

Case Study - Guatemala “Property rights” spectrum allocation model

“Why Isn’t the world developed?”

Bethell quotes Mancur Olson who wrote in an unpublished Bethell quotes Mancur Olson who wrote in an unpublished paper of 1991:paper of 1991:

“ “ A thriving market economy requires, among other things, A thriving market economy requires, among other things, institutions that provide secure individual rights - - rights institutions that provide secure individual rights - - rights that insure that individuals, and the firms they create, can that insure that individuals, and the firms they create, can best advance their interests by being as productive as best advance their interests by being as productive as possible and engaging in mutually beneficial trade. The possible and engaging in mutually beneficial trade. The incentives to save, to invest, and to produce depend incentives to save, to invest, and to produce depend particularly upon individual rights to marketable assets -- particularly upon individual rights to marketable assets -- on property rights.”on property rights.”

(Ronald Coase - 1974)(Ronald Coase - 1974)

GUATEMALA

BEFORE - Legacy regulation status

AFTER - strongly positive growth

Logic: Privatization of land created a thriving and efficient market for urban and rural real estate.

The Guatemalans used this same logic applied to the radio spectrum.

GUATEMALAPrivate property test:Private property test:

Must be definedMust be definedDefensibleDefensibleDivisibleDivisible

Responds to increasing demand for alternate uses.Responds to increasing demand for alternate uses.

Divisibility of property rights in radio spectrum makes Divisibility of property rights in radio spectrum makes telecommunications market more flexible, allowing telecommunications market more flexible, allowing bandwidth parcels to be purchased and exploited by bandwidth parcels to be purchased and exploited by those who value them most highly.those who value them most highly.

GUATEMALAPrivate property approach:Private property approach:

Experimentation is encouraged.Experimentation is encouraged.

Leads to specialized types of risk takingLeads to specialized types of risk taking

Protects future persons by leading some to hold back Protects future persons by leading some to hold back resources form current consumption for future markets.resources form current consumption for future markets.

Provides alternate sources of employment for unpopular Provides alternate sources of employment for unpopular persons who do not have to convince any one person or persons who do not have to convince any one person or small group to hire them, and so on.small group to hire them, and so on.

GUATEMALAPrivate property approach:Private property approach:

Resulting price system allocates radio waves in the same Resulting price system allocates radio waves in the same manner that land prices allocate real estate.manner that land prices allocate real estate.

No central office is needed to zone bandwidth for specific No central office is needed to zone bandwidth for specific technologies and services.technologies and services.

Existing owners of rights to radio spectrum could sell, rent, Existing owners of rights to radio spectrum could sell, rent, subdivide or consolidate their spectrum rights.subdivide or consolidate their spectrum rights.

Can use different technologies at will and alter the use of their Can use different technologies at will and alter the use of their right subject only to their contractual agreement and the right subject only to their contractual agreement and the general rules of just conduct.general rules of just conduct.

GUATEMALAREFORM:REFORM:

Allocation from bottom up. Private action comes first.Allocation from bottom up. Private action comes first.

Conflicts: private parties encouraged to mediate between Conflicts: private parties encouraged to mediate between themselves.themselves.

Creation of usufruct titles: Use and enjoy property of another Creation of usufruct titles: Use and enjoy property of another to extent such use and enjoyment does not destroy or to extent such use and enjoyment does not destroy or diminish its essential substance.diminish its essential substance.

1996 Act - Titulos de Usufructo de Frecuencias (TUF) 1996 Act - Titulos de Usufructo de Frecuencias (TUF)

GUATEMALATUF: security paper certificate TUF: security paper certificate

1) Frequency band1) Frequency band2) hours of operation2) hours of operation3) maximum power transmitted3) maximum power transmitted4) maximum power emitted at the border of adjacent frequencies4) maximum power emitted at the border of adjacent frequencies5) geographic territory5) geographic territory6) duration of right (beginning and ending)6) duration of right (beginning and ending)

Back of TUF for endorsements (like property transfer).Back of TUF for endorsements (like property transfer).

SIT responsible for TUF registry. Open public access.SIT responsible for TUF registry. Open public access.

Adjudication Process:

The adjudication process contained in Guatemala law, article 61, is quite simple and has been implemented in practice as follows:

1) An interested party surveys existingspectrum use in the spectrum registry of SIT.

2) The party applies to SIT for the right to use a frequency band as specified in the application form.


3) The application is evaluated by SIT which deems it accepted, incomplete, or rejected. SIT is required, by law, to answer in 3 days or less. Grounds for rejection include technical interference, request of reserved or radio amateur bands. Reserved bands are for government use only.

The law stipulates that the government may at The law stipulates that the government may at any moment request SIT to transform any moment request SIT to transform reserved bands into regulated bands.reserved bands into regulated bands.


4) If the application is accepted, public notice is issued. Parties objecting the new use file formal complaints. Grounds for opposition are limited to technical interference.

5) Complaints are quickly adjudicated via binding arbitration. The adjudication process cannot exceed 10 days.


6) Other interested parties are allowed to file competing claims to requested spectrum rights.

7) If no competing claims are filed, then the petitioner directly receives rights without auction gratis.

8) If competing claims filed, then SIT must

schedule an auction 35 days after the end of the opposition period.

Results After Seven Years: SIT has issued more than 5,670 TUF’s since 1996.

There are over 1,050 different owners of TUF’s.

The auctions have generated more than $126 million in revenue.

Seventy per cent of the annual auction revenue up to a cap of US$3.7 per annum has been used to develop rural telephone services administered by FONDETEL, an office of the Ministry of Communications, Infrastructure and Housing. These funds have been used to develop community telephony services in the poorest rural areas of the country.

Results After Seven Years:

Seventy per cent of the annual auction revenue up to a cap of US$3.7 per annum has been used to develop rural telephone services administered by FONDETEL, an office of the Ministry of Communications, Infrastructure and Housing.

These funds have been used to develop community telephony services in the poorest rural areas of the country.

Results After Seven Years: The relative number of TUF endorsements provides a sign of an

evolving secondary market.

Of the total TUF’s issued, about 26% have been endorsed since 1996. This is only a partial indication of the secondary market because the rights may also be leased.

Since this commercial activity is not reported to SIT, data is hard to find. Interestingly, the TUF’s are also being used as collateral for loans.


The going market price for a FM radio TUF with coverage in the Guatemala City area goes from $600,000 up to $750,000; the same are leased at $4,000, or so, per month.

The SIT inventory of frequencies has annotated in its registrar the The SIT inventory of frequencies has annotated in its registrar the endorsements in favor of Citibank N.A. (Guatemalan Branch) for the endorsements in favor of Citibank N.A. (Guatemalan Branch) for the TUFs which belong to Telefónica (one of the mobile telephone TUFs which belong to Telefónica (one of the mobile telephone operators).operators).


José Toledo, former Superintendent of SIT (1999-José Toledo, former Superintendent of SIT (1999-2000), indicated his awareness of at least two 2000), indicated his awareness of at least two instances where local banks have given loans with instances where local banks have given loans with TUFs used as collateral. TUFs used as collateral.


Reasons cited for the vitality of the TUF marketplace:

interference complaints did not increase in number nor complexity and most of the problems have been resolved efficiently by mutually agreed bilateral negotiations.

Results After Seven Years:TELGUA, the largest private spectrum owner, reportedly had one instance of interference problems since 1996.

The interference occurred with one of the telephone company microwave stations.

The problem was quickly solved when company officers learned that TELGUA did not own the TUF for the microwave frequency being used by the company!


Interference problems appear to be concentrated in commercial AM and FM radio spectrum. To date only 14 interferences cases have been disputed in the government courts. The logic of Guatemalan law is to creates incentives for private parties to solve their conflicts by mediation.

One important incentive is the limited discretionary power of the One important incentive is the limited discretionary power of the regulatory agency. While private companies frequently complain about regulatory agency. While private companies frequently complain about SITs impotence, the very positive effect is that capture risks are reduced SITs impotence, the very positive effect is that capture risks are reduced (albeit not eliminated) and private parties are forced to work out their (albeit not eliminated) and private parties are forced to work out their problems by themselves.problems by themselves.


BROADCAST: Operators monitor themselves and their neighbors use readily available equipment such as an IC-PCR1000, a small unit that turns a computer into a worldwide communications receiver with modulation analysis capabilities.

If an operator encounters interference signals, the issue is brought up to the Cámara de Radio Difusión de Guatemala, a private association of broadcasters, which has established its own private arbitration office. (The Cámara itself has acquired sophisticated equipment to monitor the airwaves. )

Results After Seven Years:The interference problems that remained

unresolved were those caused by pirate radio stations (self named “community radios”) that SIT and the government were unable, or unwilling, to close.

The Cámara officials have identified and located 341 illegal commercial radios operating in FM. These stations apparently have a religious orientation but were reportedly also used for political propaganda for the party that will pass on political leadership at the then next elections which were held in 2004.

Results After Seven Years:This may explain the government and SIT’s inaction in persecuting the illegal radio operators.

In the past, the commercial radio licenses were subject to arbitrary dissolution by government officials. Radio operators were then subject to political pressures every election period.

Today the TUF’s may have protected the commercial radio operators from this political pressure.

Results After Seven Years:As may have been expected the initial effects of the telecom reform are more visible in the telephone sector:.

From 1996 to 2001 the total number telephone of lines (fixed and mobile) increased at an annually compounded rate of 38%.

Under the command and control conditions of the state monopoly the annually compounded rate from 1985 to 1995 was only 9%.

Results After Seven Years:As a comparison, consider the growth of the total number of telephone subscribers in Chile, Peru, and Guatemala.

If one uses as a baseline the year of the reforms (1988 for Chile, 1993 for Peru, 1996 for Guatemala), the growth rate in Guatemala far surpasses that for either country.

Five years after the reform the annually compounded growth rate for Chile and Peru was 21% and 27%, respectively. (Certainly a component of the difference may be explained by the fact that Guatemala started from a lower base. )


Data for the Dominican Republic, with an economy similar to that of Guatemala, shows a growth rate of 26% during the same period of time considered for Guatemala (38% growth rate).


Mobile phone subscribers rose from 64,197 at year end 1997 to an estimated 1,562,000 at year end 2003. Annualized compounded growth for the mobile sector during this period was 57%.

These growth rates are expected to diminish in future years, however, Guatemala expects the absolute and relative gains will continue to be unprecedented.


In 1999 TELEFONICA introduced free incoming calls before In 1999 TELEFONICA introduced free incoming calls before signing up the impending Calling Party Pays (CPP) agreement signing up the impending Calling Party Pays (CPP) agreement with TELGUA. with TELGUA.

Unsurprisingly TELGUA opted out of the CPP negotiations with Unsurprisingly TELGUA opted out of the CPP negotiations with all operators. all operators.

Guatemala is one of the few markets with free incoming calls and Guatemala is one of the few markets with free incoming calls and no CPP contracts. no CPP contracts.


As per most of North and South America, mobile phone penetration in Guatemala is higher than that of fixed lines.

Fixed lines penetration increased from 4.1% at year end 1997 to an estimated 7.7% at year end 2003 at an annual compounded growth rate of 11%.

On the other hand, mobile subscriptions grew from 0.6% of total population (year end 1997) to an estimated 12.7% (year end 2003) at an outstanding annually compounded growth rate of 66%. In 2003, mobile phones accounted for 62% of the total number of telephone subscribers in Guatemala.


Guatemala’s average population age is very young with forty-two percent of its population being 15 years old or younger.

Thus, a more accurate statistic is the measurement of mobile penetration in relation to working population. This ratio has increased from 1.2% (year end 1997) to an estimated 23.3% (year end 2003).

(Data from Pyramid Research, Population Reference Bureau (2003).) Data from Pyramid Research, Population Reference Bureau (2003).)


Taking into consideration that Guatemala’s GDP per capita in 2002 was 38% that of the average for Latin America, the performance of the Guatemalan telecommunications market during the years 1997-2003 is fairly impressive.

International outgoing traffic grew substantially more in Guatemala during the years after the telecom reform. The mobile sector in Guatemala grew 1.5 faster than the Latin American average (i.e., Guatemalan mobile penetration grew at an annually compounded rate of 65% compared to 45% for Latin America).

Results After Seven Years:Given that Guatemala started from a lower base the difference in growth rates could be misleading. Yet, if one compares the performance of the Guatemalan mobile market with other Latin American countries classified as the lower middle income group by the World Bank, Guatemala demonstrates a comparative lead.

From the year of Guatemala’s telecom reform in 1996 until 2002, the Guatemala growth rate of mobile subscribers per 100 inhabitants was 77% compared with 53% for those lower middle income countries designated by the World Bank.

Results After Seven Years: Annual churn rate in 2003 was lower in Guatemala than the rest of the

region.

The churn rate represents the number of disconnected mobile accounts during a calendar year as a percentage of total mobile accounts.

It is suggested that this may be a good sign of the quality of service. Additionally, it has been statistically documented that Guatemalans pay much less on average than fellow Latin Americans while at the same time spend more time on the telephone.

Conclusion:Numbers speak for themselves.

Before:“Jungle inside the regulatory straight jacket.”

After:If “private property is inextricably linked with civilization,” Guatemalans attest that property rights spontaneously “civilized”

(also energized) the radio spectrum.

Conclusion:

Regulatory Reform allowed a poor country to make good use of a precious resource that was being wasted.

Guatemalans claim that a centralized licensing spectrum allocation system is “a collectivist scheme that deprives persons of the freedom to organize wireless entrepreneurial initiatives creatively and efficiently”.

Conclusion:Guatemalan economists cite Peter Huber:

“The telecosm is too large, too heterogeneous, too turbulent, too creatively chaotic to be governed wholesale, from the top down.”

It is asserted that many wealthy countries waste resources with no apparent impact on their economies. But lack of property rights in radio spectrum limits one of the most important resources in the information age.

Conclusion:Past: Most significant resource was land and, for the West at least,

every parcel was represented in a property title.

“Thanks to this representation process…assets [in the West] can lead an invisible, parallel life alongside their material existence…The single most important source of funds for new businesses in the US is a mortgage on the entrepreneur’s house.”

Hernando de Soto

Conclusion:

These property rights assets provide a foundation for the creation of securities (like mortgage-backed bonds) that can then be rediscounted and sold in secondary markets. By this process the West injects life into the assets and makes them generate capital.

Conclusion:

According to calculations by DeSoto, the extra-legal possession of real estate in the hand of the poor of the Developing World and former communist nations was valued at US$9.3 trillion dollars or more in 1997.

Yet, its argued that this capital is dead because the land owned by the poor cannot be “used to produce, secure, or guarantee greater value in the expanded market.”

Conclusion:It is suggested that exactly the same situation is happening in those rich countries of the West that have locked out of their capital market networks this new “real estate”; the radio spectrum.

How much dead capital is out there?

Guatemalan case suggests - - if a principled approach will not induce a radical radio spectrum reform in wealthy countries , maybe expediency will.

SESSION 3.2: Business and Finance - Roads to Profitability

Disruptive Technology Implementation - Competitive Inroads for the Caribbean

by Linda [email protected]

20th Annual Telecommunications Conference and Trade Exhibition 19-22 June, 2005 St. Kitts Marriott Resort, St. Kitts & Nevis Theme: “Telecom Liberalization and the CSME: Opening New Doors”

SESSION 3.2: Business and Finance - Roads to Profitability Disruptive Technology Implementation -...

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