Chapter 11 Trading Strategies Involving Options

Cuando una organización ha tomado la decisión de entrar en un mercado de ultramar, hay una variedad de opciones abiertas a ella. Estas opciones varían con el costo, el riesgo y el grado de control que se puede ejercer sobre ellos. La forma más simple de estrategia de entrada es exportar utilizando un método directo o indirecto, como un agente, en el caso del primero, o un comercio compensado, en el caso del segundo. Las formas más complejas incluyen operaciones verdaderamente globales que pueden involucrar empresas mixtas o zonas de procesamiento de exportación. Habiendo decidido sobre la forma de la estrategia de exportación, las decisiones deben tomarse en los canales específicos. Muchos productos agrícolas de carácter crudo o de productos básicos utilizan agentes, distribuidores o involucran al Gobierno, mientras que los materiales procesados, sin excluirlos, dependen más de formas más sofisticadas de acceso. Estos se ampliarán más adelante. Los objetivos del capítulo son: El capítulo comienza mirando el concepto de estrategias de entrada en el mercado bajo el control de una mezcla de marketing elegida. A continuación, se describen las diferentes formas de estrategia de entrada, tanto la exportación directa como indirecta y la producción extranjera, y las ventajas y desventajas relacionadas con cada método. El capítulo ofrece detalles específicos entre la producción y la comercialización. Una organización que desee hacer frente a tres cuestiones principales: i) Marketing - qué países, qué segmentos, cómo gestionar e implementar el esfuerzo de marketing, cómo entrar - con intermediarios o directamente, con qué información ii) Sourcing - si para obtener productos, hacer o Compra iii) Inversión y control - empresa conjunta, socio global, adquisición Las decisiones en el área de marketing se centran en la cadena de valor (ver figura 7.1). La estrategia o las alternativas de entrada deben asegurar que las actividades necesarias de la cadena de valor sean realizadas e integradas. Figura 7.1 La función de la cadena de valor - detalle de la función de marketing Al tomar decisiones de marketing internacional sobre la mezcla de marketing, se requiere más atención al detalle que en la comercialización interna. Tabla 7.1 Ejemplos de elementos incluidos en el mix de comercialización de exportación 1. Soporte de producto - Suministro de productos - Combinar productos existentes con mercados - aire, mar, ferrocarril, carretera, mercancías - Nuevos productos - Gestión de productos - Producto - Apoyo de precios - Establecimiento de precios - Descuentos - Distribución y mantenimiento de listas de precios - Información competitiva - Formación de agentes / clientes 3. Promoción / venta de apoyo - Publicidad - Promoción - 4. Soporte de inventario - Gestión de stocks - Almacenaje - Distribución - Suministro de piezas - Autorización de crédito 5. Apoyo a la distribución - Provisión de fondos - Soporte de servicios - Información / inteligencia de mercado - Procesamiento de cotizaciones - Asistencia técnica - Después de ventas - Garantías - Garantías / reclamaciones - Merchandising - Informes de ventas, informes de ventas, 7. Soporte financiero - Facturación, recogida de facturas - Alquiler, alquileres - Planificación, programación de datos presupuestarios - Auditoría Los detalles sobre el elemento de aprovisionamiento ya han sido En el capítulo sobre análisis competitivo y estrategia. En cuanto a la inversión y el control, la pregunta es realmente hasta qué punto la empresa desea controlar su propio destino. El grado de riesgo involucrado, las actitudes y la capacidad de alcanzar los objetivos en los mercados objetivo son facetas importantes en la decisión sobre si se licencia, empresa conjunta o participar en la inversión directa. I) Estrategia de innovación técnica - Productos superiores percibidos y demostrables ii) Estrategia de adaptación del producto - Modificaciones a los productos existentes iii) Estrategia de disponibilidad y seguridad - Superar los riesgos de transporte por medio de: Contrarrestar los riesgos percibidos iv) Estrategia de precios bajos - precio de penetración y, v) Estrategia total de adaptación y conformidad - el productor extranjero da una copia directa. En la comercialización de productos de países menos desarrollados a países desarrollados, el punto iii) plantea problemas importantes. Los compradores en el país extranjero interesado son generalmente muy cuidadosos pues perciben problemas del transporte, de la modernidad, de la calidad y de la cantidad. Esto es cierto, por ejemplo, en la exportación de algodón y otros productos básicos. Debido a que en la mayoría de los productos agrícolas, la producción y la comercialización están interrelacionadas, la infraestructura, la información y otros recursos necesarios para construir la entrada al mercado pueden ser enormes. A veces esto está más allá del alcance de las organizaciones privadas, por lo que el Gobierno puede involucrarse. Puede involucrarse no sólo para apoyar un producto específico, sino también para ayudar a la. Pueden darse grandes inversiones, con el inversionista pagando un precio de alto riesgo, mucho antes de que se utilice plenamente la inversión. Un buen ejemplo de ello es la construcción de instalaciones portuarias o instalaciones de procesamiento o congelación de alimentos. Por otra parte, el equipo puede no ser capaz de ser utilizado para otros procesos, por lo que el equipo específico del activo, bloqueado en un uso específico, puede hacer que el propietario muy vulnerable al poder de negociación de los proveedores de materias primas y los compradores de productos que procesan la producción o comercio alternativo Opciones. Zimfreeze, Zimbabwe está experimentando estos problemas. Se construyó una gran planta de congelación de verduras, pero se encontró sin un contrato. Se ha visto obligado, por el momento, a aceptar materiales de producto de volumen secundario opcional sólo con el fin de mantener la planta tictac más. En la construcción de una estrategia de entrada en el mercado, el tiempo es un factor crucial. La construcción de un sistema de inteligencia y la creación de una imagen mediante la promoción requiere tiempo, esfuerzo y dinero. Los nombres de marca no aparecen de la noche a la mañana. Se necesitan grandes inversiones en campañas de promoción. Los costos de transacción también son un factor crítico en la construcción de una estrategia de entrada en el mercado y pueden convertirse en una gran barrera para el comercio internacional. Los costos incluyen costos de búsqueda y negociación. La distancia física, las barreras idiomáticas, los costos logísticos y los riesgos limitan el monitoreo directo de los socios comerciales. La aplicación de los contratos puede ser costosa y la escasa integración jurídica entre países dificulta las cosas. Además, estos factores son importantes cuando se considera una estrategia de entrada en el mercado. De hecho, estos factores pueden ser tan costosos y arriesgados que los gobiernos, en lugar de los particulares, a menudo se involucran en los sistemas de productos básicos. Esto se puede ver en el caso de la Junta de Comercialización de Cítricos de Israel. Con una junta monopolista de comercialización de exportaciones, todo el sistema puede comportarse como una sola empresa, regulando la mezcla y la calidad de los productos que van a diferentes mercados y negociando con los transportistas y compradores. Si bien estas juntas pueden experimentar economías de escala y absorber muchos de los riesgos mencionados anteriormente, pueden proteger a los productores de la información sobre, y de. Compradores. También pueden convertirse en intereses creados y convertirse en naturaleza política. A continuación, dan como resultado una reducción de los incentivos a la producción y dejan de ser demandas o orientadas hacia el mercado, lo cual es perjudicial para los productores. Las maneras normales de ampliar los mercados son por la extensión de la línea de producto, el desarrollo geográfico o ambos. Es importante notar que cuanto más se amplíe la línea de productos y / o el área geográfica, mayor será la complejidad administrativa. Las nuevas oportunidades de mercado pueden estar disponibles mediante la expansión, pero los riesgos pueden superar las ventajas, de hecho, puede ser mejor concentrarse en algunas áreas geográficas y hacer las cosas bien. Esto es típico de la industria hortícola de Kenia y Zimbabwe. Tradicionalmente se han concentrado en mercados europeos donde los mercados son bien conocidos. Las formas de concentrarse incluyen concentrarse en áreas geográficas, reducir la variedad operacional (productos más estándar) o hacer que la forma organizacional sea más apropiada. En este último se intenta (desarrollar un mercado que sea el mejor predictor de otros mercados). Los enfoques globales proporcionan economías de escala y el reparto de costos y riesgos entre los mercados. Hay una variedad de maneras en que las organizaciones pueden entrar en los mercados extranjeros. Las tres formas principales son la exportación o producción directa o indirecta en un país extranjero (véase la figura 7.2). La exportación es la forma más tradicional y bien establecida de operar en los mercados extranjeros. La exportación puede definirse como la comercialización de bienes producidos en un país en otro. Aunque no se requiere una fabricación directa en un país de ultramar, se requieren importantes inversiones en marketing. La tendencia puede ser no obtener información de marketing tan detallada en comparación con la fabricación en el país de comercialización sin embargo, esto no niega la necesidad de una estrategia de marketing detallada. Figura 7.2 Métodos de entrada en el mercado extranjero Las ventajas de exportar son: reduce los riesgos potenciales de operar en el extranjero. La desventaja es principalmente que se puede estar en el de los agentes de ultramar y por lo que la falta de control tiene que ser pesado en contra de las ventajas. Por ejemplo, en la exportación de productos hortícolas africanos, los agentes y las subastas de flores holandesas están en condiciones de dictar a los productores. Hay que distinguir entre la exportación pasiva y agresiva. Un exportador pasivo aguarda órdenes o se les ocurre por casualidad un exportador agresivo desarrolla estrategias de comercialización que proporcionan una imagen amplia y clara de lo que la empresa tiene la intención de hacer en el mercado exterior. Pavord y Bogart 2 (1975) encontraron diferencias significativas con respecto a la gravedad de los problemas de exportación al motivar las presiones entre buscadores y no buscadores de oportunidades de exportación. Distinguieron entre las empresas cuyos esfuerzos de marketing se caracterizaban por no actividad, actividad menor y actividad agresiva. Aquellas empresas que son agresivas tienen planes y estrategia claramente definidos, incluyendo productos, precios, promoción, distribución y elementos de investigación. La pasividad frente a la agresividad depende de la motivación para exportar. En países como Tanzania y Zambia, que se han embarcado en programas de ajuste estructural, se anima a las organizaciones a exportar, motivadas por el potencial de ingresos en divisas, los mercados internos saturados, los objetivos de crecimiento y expansión y la necesidad de pagar las deudas contraídas por los préstamos para financiar Los programas. El tipo de respuesta a la exportación depende de cómo las presiones son percibidas por el tomador de decisiones. Piercy (1982) 3 subraya el hecho de que el grado de implicación en las operaciones en el extranjero depende de factores motivadores, es decir, si las motivaciones fueron como resultado de un comportamiento activo o agresivo basado en la situación interna de la empresa (endógena) o como resultado De los cambios ambientales reactivos (exógenos). Si la empresa logra el éxito inicial en la exportación rápida a todos los buenos, pero los riesgos de fracaso en las primeras etapas son altos. (Véase la figura 7.3). Figura 7.3 Rutas de exportación agresivas y pasivas Los métodos de exportación incluyen la exportación directa o indirecta. En la exportación directa, la organización puede utilizar un agente, distribuidor o filial en el extranjero, o actuar a través de una agencia gubernamental. En efecto, la Junta de Comercialización de Granos de Zimbabwe, que se comercializa pero sigue teniendo el control del Gobierno, es una agencia gubernamental. El Gobierno, a través de la Junta, es el único exportador autorizado de maíz. Organismos como la Autoridad para el Desarrollo de Cultivos Hortícolas (HCDA) en Kenia pueden ser simplemente un organismo promocional que se ocupa de la publicidad, los flujos de información, etc., o puede estar activo en la exportación, en particular dando aprobación (como HCDA) a todos los documentos de exportación . En la exportación directa el problema principal es el de la información del mercado. La tarea del exportador es elegir un mercado, encontrar un representante o agente, establecer la distribución física y la documentación, promover y fijar el precio del producto. El control, o la falta de él, es un problema importante que a menudo resulta en decisiones sobre precios, certificación y promoción estando en manos de otros. Ciertamente, los requisitos fitosanitarios en Europa para los productos hortofrutícolas originarios de África son cada vez más exigentes. Del mismo modo, los exportadores son compradores de precios, ya que los productos proceden también de los países del Caribe y del Este. En los meses de junio a septiembre, Europa es porque puede cultivar sus propios productos, por lo que los precios son bajos. Como tal, los productores están mejor abasteciendo a los procesadores locales de alimentos. En el invierno europeo los precios son mucho mejores, pero la competencia de los productos sigue siendo. Según Collett 4 (1991), la exportación exige una asociación entre el exportador, el importador, el gobierno y el transporte. Sin estas cuatro actividades de coordinación, aumenta el riesgo de fracaso. Los contratos entre el comprador y el vendedor son una necesidad. Los promotores y agentes pueden desempeñar un papel vital en los procedimientos de logística, tales como la reserva de espacio aéreo y la organización de la documentación. En la figura 7.4 se muestra un canal de comercialización típico coordinado para la exportación de productos hortícolas de Kenia. En este caso, los exportadores también pueden ser productores y en la temporada baja tanto estos como otros exportadores pueden enviar productos a procesadores de alimentos que también se exportan. Figura 7.4 El canal de comercialización de productos hortícolas de Kenia. Exportar puede ser muy lucrativo, especialmente si es de alto valor agregado producir. Por ejemplo, en 1992/93, Zimbabwe exportó 5 338,38 toneladas de flores, 4 678,18 toneladas de productos hortícolas y 12 000 toneladas de cítricos por un valor total de unos 22 016,56 millones de dólares. En algunos casos puede obtenerse una mezcla de exportación directa e indirecta con resultados mixtos. Por ejemplo, la Junta de Comercialización de Granos de Zimbabwe puede exportar cereales directamente a Zambia, o puede venderlo a una agencia de socorro como las Naciones Unidas, para alimentar a los refugiados mozambiqueños en Malawi. Las modalidades de pago pueden ser diferentes para las dos transacciones. Los productos Nali de Malawi dan un ejemplo interesante de un modo exportador. CASO 7.1 Nali Producers - Malawi El grupo Nali, desde principios de los años setenta, se dedica al cultivo y exportación de especias. Las especias también se utilizan en la producción de una variedad de salsas para el mercado local y de exportación. Su mayor éxito ha sido el crecimiento y la exportación de chiles Birdseye. En los primeros días el conocimiento del mercado era escaso y por lo tanto la compañía estaba obteniendo precios ridículamente bajos. Hacia finales de 1978, los chiles Nali eran muy demandados, pero la empresa, en su modo pasivo, no apreciaba plenamente las implicaciones competitivas de la empresa hasta que varias firmas, entre ellas Lonrho y Press Farming, comenzaron a crecer y exportar. De nuevo, debido a la falta de información, producto de su pasividad, la empresa no se dio cuenta de que Uganda, con su producto superior, y Papua Nueva Guinea eran importantes exportadores. Sin embargo, el potencial de estos países se vio obstaculizado por dificultades internas. Nali fue capaz de convertirse en una exitosa empresa comercial. Sin embargo, con el fin de los problemas internos, Uganda en particular, comenzó una política de exportación agresiva, utilizando sus legaciones en el extranjero como propagandistas comerciales. Nali tuvo que responder con una operación de marketing más formal y activa. Sin embargo, ahora se ve obstaculizada por una serie de factores importantes. La entrada de una serie de nuevos productores de Malawi, con productos de calidad inferior, ha dañado la reputación del chile de Malawi, por lo que la falta de una política gubernamental clara y la falta de financiación para los comerciantes, los cultivadores y los exportadores. Este último sólo sirve para enfatizar el punto planteado por Collett, no sólo las organizaciones deben ser agresivas, también necesitan obtener el apoyo del Gobierno y los importadores. Es interesante observar que Korey (1986) advierte que los modos directos de entrada en el mercado pueden estar cada vez menos disponibles en el futuro. El crecimiento de los bloques comerciales como la UE o la AELC significa que el establecimiento de filiales puede ser uno de los únicos medios adelante en el futuro. Es interesante observar que Korey 5 1986 advirtió que los modos directos de entrada en el mercado podrían estar cada vez menos disponibles en el futuro. Los bloques comerciales crecientes como la UE o la AELC significan que el establecimiento de filiales puede ser una de las únicas maneras de avanzar en el futuro. Los métodos indirectos de exportación incluyen el uso de empresas comerciales (muy utilizadas para productos básicos como el algodón, la soja, el cacao), las empresas de gestión de exportaciones, las carteras y el comercio compensado. Métodos indirectos ofrecen una serie de ventajas, incluyendo: La aceptación de crédito toma la carga del fabricante. Piggybacking es un desarrollo interesante. El método significa que las organizaciones con poca habilidad de exportación pueden utilizar los servicios de uno que tiene. Otra forma es la consolidación de las órdenes de varias empresas con el fin de aprovechar la compra a granel. Normalmente éstos serían geográficamente adyacentes o capaces de ser servidos, digamos, en una ruta aérea. Los fabricantes de fertilizantes de Zimbabwe, por ejemplo, podrían colgarse con los sudafricanos que importan potasio de fuera de sus respectivos países. Con mucho, el mayor método indirecto de exportación es el comercio compensado. Intensidad competitiva significa cada vez más inversión en marketing. En esta situación, la organización puede expandir sus operaciones operando en mercados donde la competencia es menos intensa, pero no es posible el intercambio basado en divisas. Además, es posible que los países deseen comerciar a pesar del grado de competencia, pero la moneda de nuevo es un problema. Countertrade también se puede utilizar para estimular las industrias del hogar o donde las materias primas son escasas. También puede servir de base para el comercio recíproco. Las estimaciones varían, pero el comercio compensado representa alrededor de 20-30 del comercio mundial, involucrando a unas 90 naciones y entre 100-150 millones de dólares en valor. La ONU define comercio compensado como. Countertrade es la forma moderna de trueque, excepto que los contratos no son legales y no están cubiertos por el GATT. Puede utilizarse para eludir las cuotas de importación. Countertrade puede tomar muchas formas. Básicamente hay dos contratos distintos, uno para la entrega y pago de los bienes suministrados y otro para la compra y el pago de los bienes importados. La ejecución de un contrato no está supeditada a la otra, aunque el vendedor está aceptando efectivamente productos y servicios del país importador en liquidación parcial o total de sus exportaciones. Existe un amplio acuerdo en el sentido de que el comercio compensado puede adoptar diversas formas de intercambio, como el trueque, la compra contraria, el cambio de comercio y la compensación (recompra). Por ejemplo, en 1986 Albania comenzó a ofrecer artículos como agua de manantial, jugo de tomate y mineral de cromo a cambio de un contrato para construir un complejo de 60 millones de dólares de los EE. UU. y el metanol. Se puede obtener información sobre posibles intercambios en embajadas, misiones comerciales o en las mesas de negociación de la UE. El trueque es el intercambio directo de un bien por otro, aunque la valoración de los respectivos productos es difícil, por lo que se utiliza una moneda para sostener el valor del ítem. Comercio de trueque puede tomar una serie de formatos. El trueque simple es la forma menos compleja y más antigua de comercio bilateral no monetarizado. A menudo se llama trueque. El trueque es un intercambio directo de bienes y servicios entre dos partes. Los precios de sombra son aproximados para los productos que fluyen en cualquier dirección. Generalmente no hay intermediarios involucrados. Por lo general, los contratos por no más de un año se concluyen, sin embargo, si para períodos de vida más largos, las provisiones se incluyen para manejar las fluctuaciones de la relación de intercambio cuando los precios mundiales cambian. Los intercambios de trueque cerrado son modificaciones del trueque en que un comprador es encontrado para mercancías tomadas en trueque antes de que el contrato sea firmado por las dos partes comerciales. No hay dinero involucrado y los riesgos relacionados con la calidad del producto se reducen significativamente. El trueque de la cuenta de compensación, también denominado acuerdos de compensación, acuerdos de compensación, cuentas de compensación bilaterales o simplemente compensación bilateral, es donde el principio es que las operaciones se equilibren sin que ninguna de las partes tenga que adquirir divisas. En esta forma de trueque, cada parte acuerda en un solo contrato adquirir un valor especificado y usualmente igual de bienes y servicios. La duración de estas transacciones es comúnmente de un año, aunque ocasionalmente pueden extenderse por un período de tiempo más largo. El valor del contrato se expresa en unidades de cuenta de compensación no convertibles (también denominadas dólares de compensación) que representan efectivamente una línea de crédito en el banco central del país sin dinero involucrado. Las unidades de cuentas de compensación son universalmente aceptadas para la contabilidad del comercio entre países y partes cuyas relaciones comerciales se basan en acuerdos bilaterales. El contrato establece los bienes a ser intercambiados, los tipos de cambio y la duración del tiempo para completar la transacción. Los excedentes de importación o importación limitada pueden ser acumulados por cualquiera de las partes durante períodos cortos. Generalmente, después de un año de tiempo, los desequilibrios se liquidan por uno de los siguientes enfoques: crédito contra el año siguiente, aceptación de bienes no deseados, pago de una penalidad previamente especificada o pago de la diferencia en moneda fuerte. Los especialistas en comercio también han iniciado la práctica de comprar dólares de compensación con un descuento con el fin de usarlos para comprar productos vendibles. A su vez, el comerciante puede perder una parte del descuento para vender estos productos por divisas en el mercado internacional. En comparación con el trueque simple, las cuentas de compensación ofrecen una mayor flexibilidad en el tiempo de reducción de las líneas de crédito y los tipos de productos intercambiados. Contrato de compra, o recompra, es donde el cliente se compromete a comprar bienes a condición de que el vendedor compra algunos de los propios productos del cliente a cambio (productos compensatorios). Alternativamente, si el intercambio se está organizando a nivel del gobierno nacional, el vendedor acepta comprar bienes compensatorios de una organización no relacionada hasta un valor preespecificado (oferta compensada). La diferencia entre los dos es que las obligaciones contractuales relacionadas con la compra contraria pueden extenderse por un período de tiempo más largo y el contrato requiere que cada parte en el acuerdo resuelva la mayoría o toda su cuenta con créditos de divisas o comerciales a un valor de moneda acordado. Cuando el vendedor no tiene necesidad del artículo comprado, puede vender el producto a un tercero, normalmente a un precio descontado. Esto se llama un trato de cambio. En el pasado un número de tractores se han traído en Zimbabwe de países de Europa del este por repartos del interruptor. La compensación (buy-backs) es cuando el proveedor acuerda tomar la salida de la instalación durante un período de tiempo especificado o para un volumen especificado como pago. Por ejemplo, una empresa extranjera puede acordar la construcción de una planta en Zambia, y la producción durante un período de tiempo acordado o el volumen acordado de los productos se exporta al constructor hasta que el período haya transcurrido. La planta pasa a ser propiedad de Zambia. Khoury 6 (1984) categoriza el comercio compensado de la siguiente manera (ver figura 7.5): Un problema es la comercialización de productos recibidos en comercio compensado. Este problema puede reducirse mediante el uso de empresas comerciales especializadas que, por una cuota que oscila entre 1 y 5 del valor de la transacción, proporcionarán servicios relacionados con el comercio como el transporte, la comercialización, el financiamiento, la extensión del crédito, etc. en tamaño. La contrapartida tiene desventajas: puede ocurrir La calidad no es de estándar internacional tan costoso al cliente y al comerciante La variedad es remolque así que la comercialización de wkat es limitada Difícil fijar precios y calidad de servicio Inconsistencia de la entrega y especificación, Difícil volver a negociar de la moneda - Puede disminuir más y, por lo tanto, el producto es más difícil de comercializar. Por lo tanto, asegúrese de que los beneficios superen las desventajas Trate de minimizar la relación de los bienes de compensación con el efectivo - si es posible inspeccionar las mercancías para las especificaciones Incluir todas las transacciones y otros costos relacionados con comercio compensado En el valor nominal especificado para las mercancías que se venden. Evitar la posibilidad de error de explotación, primero adquiriendo un conocimiento profundo de los sistemas de compra, regulaciones y políticas del cliente. Asegurar que los bienes de compensación recibidos como pago no estén sujetos a controles de importación. A pesar de estos problemas, es probable que el comercio compensado crezca como un importante método de entrada indirecta, especialmente en los países en desarrollo. Además de la exportación, otras estrategias de entrada en el mercado incluyen la concesión de licencias, las empresas conjuntas, la fabricación por contrato, la propiedad y la participación en las zonas francas de exportación o las zonas francas. Licencia: Licencia se define como. Es muy similar a la operación. Coca Cola es un excelente ejemplo de licencias. En Zimbabwe, United Bottlers tiene la licencia para fabricar Coca Cola. La concesión de licencias implica poco gasto y participación. El único costo es firmar el acuerdo y vigilar su implementación. La concesión de licencias ofrece las siguientes ventajas: Existen opciones para comprar en socio o provisión para tomar regalías en stock. Las desventajas son: Requiere un hallazgo de hechos, planificación, investigación e interpretación considerables. Aquellos que decidan licenciar deben mantener las opciones abiertas para ampliar la participación en el mercado. Esto se puede hacer a través de joint ventures con el licenciatario. Las empresas mixtas se pueden definir como. Las empresas conjuntas constituyen una forma de participación más amplia que la exportación o la concesión de licencias. En Zimbabwe, Olivine Industries tiene un acuerdo de joint venture con HJ Heinz en procesamiento de alimentos. Las empresas conjuntas ofrecen las siguientes ventajas: Compartiendo el riesgo y la capacidad de combinar el conocimiento local en profundidad con un socio extranjero con conocimientos técnicos en tecnología o proceso Solidez financiera conjunta Puede ser sólo un medio de entrada y puede ser la fuente de suministro para un Tercer país. También tienen desventajas: los socios pueden tener opiniones diferentes sobre los beneficios esperados. Si los socios cuidadosamente mapa de antemano lo que esperan lograr y cómo, entonces muchos problemas pueden ser superados. Propiedad: La forma más amplia de participación es la propiedad 100 y esto implica el mayor compromiso en el capital y el esfuerzo de gestión. La capacidad de comunicar y controlar 100 puede compensar cualquiera de las desventajas de las empresas conjuntas y la concesión de licencias. Sin embargo, como se mencionó anteriormente, la repatriación de ganancias y capital debe ser cuidadosamente monitoreada. Cuanto más inestable es el medio ambiente, menos probable es que la vía de propiedad sea una opción. Estas formas de participación: la exportación, la concesión de licencias, las empresas conjuntas o la propiedad, están en un continuo en lugar de discreto y pueden adoptar muchos formatos. Anderson y Coughlan 8 (1987) resumen el modo de entrada como una opción entre los métodos propiedad de la empresa o controlados - los canales. Los canales integrados ofrecen las ventajas de planificar y controlar los recursos, el flujo de información y una penetración más rápida en el mercado, y son un signo visible de compromiso. Las desventajas son que incurren en muchos costos (especialmente marketing), los riesgos son altos, algunos pueden ser más efectivos que otros (debido a la cultura) y en algunos casos su credibilidad entre los lugareños puede ser menor que la de independientes controlados. Los canales independientes ofrecen costos de desempeño más bajos, riesgos, menos capital, alto conocimiento local y credibilidad. Las desventajas incluyen menos flujo de información de mercado, mayores dificultades de coordinación y control y dificultades de motivación. Además, es posible que no estén dispuestos a gastar dinero en el desarrollo del mercado y la selección de buenos intermediarios puede ser difícil, ya que los buenos son generalmente tomados de todos modos. Una vez en un mercado, las empresas tienen que decidir sobre una estrategia de expansión. Uno puede concentrarse en unos cuantos segmentos en algunos países - tan típicos son los cashewuts de Tanzania y las exportaciones hortícolas de Zimbabwe y Kenya - o concentrarse en un país y diversificarse en segmentos. Otras actividades incluyen la concentración del país y del segmento de mercado - típica de los alimentos para bebés Coca Cola o Gerber, y finalmente la diversificación de países y segmentos. Otra manera de verlo es identificando tres estrategias empresariales básicas: la primera etapa - internacional, la segunda etapa - la multinacional (las estrategias corresponden a las orientaciones etnocéntricas y policéntricas respectivamente) y la tercera etapa - la estrategia global (corresponde a la orientación geocéntrica). La filosofía básica detrás de la primera etapa es la extensión de los programas y productos, detrás de la segunda etapa está la descentralización en la medida de lo posible para los operadores locales y detrás de la tercera etapa es una integración que busca sintetizar los insumos de las sedes mundiales y regionales y la organización del país. Si bien la mayoría de los países en desarrollo apenas se encuentran en la primera etapa, tienen dentro de ellos organizaciones que se encuentran en la tercera fase. Esto a menudo ha llevado a una contra las operaciones de las multinacionales, a menudo infundadas. Zonas Francas de Exportación (ZFI) Aunque no es estrictamente una estrategia de entrada, las ZFI sirven como un mercado. Son principalmente un incentivo de inversión para los inversionistas, pero también pueden proporcionar empleo para el país anfitrión y la transferencia de habilidades, así como proporcionar una base para el flujo de bienes dentro y fuera del país. Uno de los mejores ejemplos es la EPZ de Mauricio 12. fundada en los años setenta. CASO 7.2 La Zona Mauriciana de Procesamiento de Exportaciones Desde su creación, más de 400 empresas se han establecido en sectores tan diversos como los textiles, la alimentación y los relojes. Y los plásticos. En el empleo laboral los resultados han sido sorprendentes, ya que en 1987, 78.000 estaban empleados en la ZFI. Las ganancias de exportación se han triplicado de 1981 a 1986 y el valor agregado ha sido significativo. Las raíces del éxito se pueden ver en la oferta, la demanda y los lados institucionales. Por el lado de la oferta, el factor más crítico ha sido el generoso incentivo financiero y de otro tipo, por el lado de la demanda, el acceso a la UE, Francia, India y Hong Kong fue muy tentador para los inversores. Desde el punto de vista institucional, se pusieron en marcha planes positivos, entre ellos el financiamiento del Banco de Desarrollo y la reducción de la burocracia. Al establecer la zona de procesamiento de exportaciones, el gobierno de Mauricio mostró una serie de características que, en retrospectiva, fueron cruciales para su éxito. El gobierno buscó inteligentemente una estrategia de desarrollo de una manera apolítica. Se aferró a su estrategia en el largo plazo en lugar de invertir el curso en el primer signo de problemas. Alentó los incentivos de mercado en lugar de socavarlos. Soluciones creativas en lugar de mantener el statu quo Ajustó el programa general de promoción de exportaciones para satisfacer sus propias necesidades y características particulares. Guardó conscientemente contra la creación de una estructura burocrática pesada. Organisations are faced with a number of strategy alternatives when deciding to enter foreign markets. Each one has to be carefully weighed in order to make the most appropriate choice. Every approach requires careful attention to marketing, risk, matters of control and management. A systematic assessment of the different entry methods can be achieved through the use of a matrix (see table 7.2). Table 7.2 Matrix for comparing alternative methods of market entry Details of channel management will appear in a later chapter. As has been pointed out time and again in this text, the international marketing of agricultural products is a affair between production and marketing and end user. Certain characteristics can be identified in market entry strategies which are different from the marketing of say cars or television sets. These refer specifically to the institutional arrangements linking producers and processors/exporters and those between exporters and foreign buyers/agents. Institutional links between producers and processors/exporters One of the most important factors is contract coordination. Whilst many of the details vary, most contracts contain the supply of credit/production inputs, specifications regarding quantity, quality and timing of producer deliveries and a formula or price mechanism. Such arrangements have improved the flow of money, information and technologies, and very importantly, shared the risk between producers and exporters. Most arrangements include some form of vertical integration between producers and downstream activities. Often processors enter into contracted outgrower arrangements or supply raw inputs. This institutional arrangement has now, incidentally, spilled over into the domestic market where firms are wishing to target higher quality, higher priced segments. Producer trade associations, boards or cooperatives have played a significant part in the entry strategies of many exporting countries. They act as a contact point between suppliers and buyers, obtain vital market information, liaise with Governments over quotas etc. and provide information, or even get involved in quality standards. Some are very active, witness the Horticultural Crops Development Authority (HCDA) of Kenya and the Citrus Marketing Board (CMD) of Israel, the latter being a Government agency which specifically got involved in supply quotas. An example of the institutional arrangements 13 involved is given in table 7.3. Table 7.3 Institutional arrangements linking producers with processors/exporters XX Dominant linkage Once again, it can not be over-emphasized that the smooth flow between producers, marketers and end users is essential. However it must also be noted that unless strong relationships or contracts are built up and product qualities maintained, the smooth flow can be interrupted should a more competitive supplier enter the market. This also can occur by Government decree, or by the erection of non-tariff barriers to trade. By improving strict hygiene standards a marketing chain can be broken, however strong the link, by say, Government. This, however, should not occur, if the link involves the close monitoring and action by the various players in the system, who are aware, through market intelligence, of any possible changes. Having done all the preparatory planning work (no mean task in itself ), the prospective global marketer has then to decide on a market entry strategy and a marketing mix. These are two main ways of foreign market entryeither by entering from a home market base, via direct or indirect exporting, or by foreign based production. Within these two possibilities, marketers can adopt an export path. Entry from the home base (direct) includes the use of agents, distributors, Government and overseas subsidiaries and (indirect) includes the use of trading companies, export management companies, piggybacking or countertrade. Entry from a foreign base includes licensing, joint ventures, contract manufacture, ownership and export processing zones. Each method has its peculiar advantages and disadvantages which the marketer must carefully consider before making a choice. 1. Review the general problems encountered when building market entry strategies for agricultural commodities. Give examples. 2. Describe briefly the different methods of foreign market entry. 3. What are the advantages and disadvantages of barter, countertrade, licensing, joint venture and export processing zones as market entry strategies 1. General problems: i) Interlinking of production and marketing means private investment alone may not be possible, so Government intervention may be needed also e. g. to build infrastructure e. g. Israeli fresh fruit. Method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, knowhow or some other skill by the licensor. ii) building capacity long before it may be currently utilised e. g. port facilities opportunities to buy into partner or royalties on the stock. iii) Time - processing, transport and storage - so credit is needed e. g. Argentina beef. iv) Transaction costs - logistics, market information, regulatory enforcement. requires a lot of planning beforehand. v) Risk - business, non-business iv) Joint ventures - An enterprise in which two or more investors share ownership and control over property rights and operation. vi) Building of relationships and infrastructural developments 2. Different methods These are either based. may be source of supply for third country. Direct - Agent, distributor, Government, overseas subsidiary partners have different views on exported benefits. Indirect - Trading company, export management company, piggyback, countertrade v) Export processing zones - A zone within a country, exempt from tax and duties, for the processing or reprocessing of goods for export Foreign - Licensing, joint venture, contract manufacture, ownership, export processing zone. Students should give a definition and expand on each of these methods. . Direct exchange of one good for another. (may be straight or closed or clearing account method) bureaucracy creation. commodity based valuation or currency based valuation. marketability of products. Customer agrees to buy goods on condition that the seller buys some of the customer s own products in return (may be time, method of financing, balance of compensation or pertinence of compensating product based) market. difficult to revert to currency trading. Exercise 7.1 Market entry strategies Take a major non-traditional crop or agricultural product which your country produces with sales potential overseas. Devise a market entry strategy for the product, clearly showing which you would use and justify your choice indicating why the method chosen would give benefits to your country and the intended importing country(s). 1. Cunningham, M. T. . In D. W. Turnbull and J. P. Valla (eds.) Croom Helm 1986, p 9. 2. Pavord and Bogart. , Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa 1991. 3. Piercy, N. . European Journal of Marketing, Vol. 15, No. 3, 1982, pp 26-40. 4. Collett, W. E. . Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, 1991. 5. Korey, G. . European Journal of Marketing, Vol. 20, No. 7, 1986, pp 34-42. 6. Khoury, S. J . Journal of Business Research, Vol. 12, 1984, pp 257-270. 7. Shipley, D. D. and Neale, C. W. , Vol. 26, No. 1, pp 49-52. 8. Anderson, E. and Coughlan, A. T. . Journal of Marketing, Vol. 51. January 1987, pp 71-82. 9. Keegan, W. J. , 4th ed. Prentice Hall International Editions, 1989. 10. Khoromana, A. P. . In S. Carter (ed.) Export Procedures Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, August 1991. 11. Basche, J. R. Jr. . New York: The Conference Board, 1971, p4. 12. Bheenich, R. and Shapiro, M. O. Mauritius: , EDI Development Policy Case Series, No. 1, 1989, pp 97-127. 13. Jaffee S. pp 198, 1993. Proceedings of the 8th International Conference on Carbon Dioxide Utilization Global challenges and strategies for control, conversion and utilization of CO 2 for sustainable development involving energy, catalysis, adsorption and chemical processing Chunshan Song . Clean Fuels and Catalysis Program, The Energy Institute, and Department of Energy Geo-Environmental Engineering, The Pennsylvania State University 209 Academic Projects Building, University Park, PA 16802, USA Available online 15 May 2006. Abstract Utilization of carbon dioxide (CO 2 ) has become an important global issue due to the significant and continuous rise in atmospheric CO 2 concentrations, accelerated growth in the consumption of carbon-based energy worldwide, depletion of carbon-based energy resources, and low efficiency in current energy systems. The barriers for CO 2 utilization include: (1) costs of CO 2 capture, separation, purification, and transportation to user site (2) energy requirements of CO 2 chemical conversion (plus source and cost of co-reactants) (3) market size limitations, little investment-incentives and lack of industrial commitments for enhancing CO 2 - based chemicals and (4) the lack of socio-economical driving forces. The strategic objectives may include: (1) use CO 2 for environmentally-benign physical and chemical processing that adds value to the process (2) use CO 2 to produce industrially useful chemicals and materials that adds value to the products (3) use CO 2 as a beneficial fluid for processing or as a medium for energy recovery and emission reduction and (4) use CO 2 recycling involving renewable sources of energy to conserve carbon resources for sustainable development. The approaches for enhancing CO 2 utilization may include one or more of the following: (1) for applications that do not require pure CO 2 . develop effective processes for using the CO 2 - concentrated flue gas from industrial plants or CO 2 - rich resources without CO 2 separation (2) for applications that need pure CO 2 . develop more efficient and less-energy intensive processes for separation of CO 2 selectively without the negative impacts of co-existing gases such as H 2 O, O 2 . and N 2 (3) replace a hazardous or less-effective substance in existing processes with CO 2 as an alternate medium or solvent or co-reactant or a combination of them (4) make use of CO 2 based on the unique physical properties as supercritical fluid or as either solvent or anti-solvent (5) use CO 2 based on the unique chemical properties for CO 2 to be incorporated with high atom efficiency such as carboxylation and carbonate synthesis (6) produce useful chemicals and materials using CO 2 as a reactant or feedstock (7) use CO 2 for energy recovery while reducing its emissions to the atmosphere by sequestration (8) recycle CO 2 as C-source for chemicals and fuels using renewable sources of energy and (9) convert CO 2 under either bio-chemical or geologic-formation conditions into new fossil energies. Several cases are discussed in more detail. The first example is tri-reforming of methane versus the well-known CO 2 reforming over transition metal catalysts such as supported Ni catalysts. Using CO 2 along with H 2 O and O 2 in flue gases of power plants without separation, tri-reforming is a synergetic combination of CO 2 reforming, steam reforming and partial oxidation and it can eliminate carbon deposition problem and produces syngas with desired H 2 /CO ratios for industrial applications. The second example is a CO 2 molecular basket as CO 2 - selective high-capacity adsorbent which was developed using mesoporous molecular sieve MCM-41 and polyethylenimine (PEI). The MCM41-PEI adsorbent has higher adsorption capacity than either PEI or MCM-41 alone and can be used as highly CO 2 - selective adsorbent for gas mixtures without the pre-removal of moisture because it even enhances CO 2 adsorption capacity. The third example is synthesis of dimethyl carbonate using CO 2 and methanol, which demonstrates the environmental benefit of avoiding toxic phosgene and a processing advantage. The fourth example is the application of supercritical CO 2 for extraction and for chemical processing where CO 2 is either a solvent or a co-reactant, or both. The CO 2 utilization contributes to enhancing sustainability, since various chemicals, materials, and fuels can be synthesized using CO 2 . which should be a sustainable way in the long term when renewable sources of energy are used as energy input. Keywords Carbon dioxide Strategy Sustainable development Atom efficiency Utilization energy Tri-reforming CO 2 reforming Emissions Catalysis Conversion Capture Separation Reforming Dimethylcarbonate Supercritical CO 2 Fuels Table 2. Fig. 1. Fig. 2. Fig. 3. Fig. 4. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Si sigues viendo el sitio, aceptas el uso de cookies en este sitio web. Consulte nuestro Acuerdo de usuario y Política de privacidad. Slideshare utiliza cookies para mejorar la funcionalidad y el rendimiento, y para proporcionarle publicidad relevante. Si sigues viendo el sitio, aceptas el uso de cookies en este sitio web. Consulte nuestra Política de privacidad y el Contrato de usuario para obtener más detalles. Explore all your favorite topics in the SlideShare app Get the SlideShare app to Save for Later even offline Continue to the mobile site Upload Login Signup Double tap to zoom out Volatility trading Share this SlideShare LinkedIn Corporation 2016 Proceedings of the 8th International Conference on Carbon Dioxide Utilization Global challenges and strategies for control, conversion and utilization of CO 2 for sustainable development involving energy, catalysis, adsorption and chemical processing Chunshan Song . Clean Fuels and Catalysis Program, The Energy Institute, and Department of Energy Geo-Environmental Engineering, The Pennsylvania State University 209 Academic Projects Building, University Park, PA 16802, USA Available online 15 May 2006. Abstract Utilization of carbon dioxide (CO 2 ) has become an important global issue due to the significant and continuous rise in atmospheric CO 2 concentrations, accelerated growth in the consumption of carbon-based energy worldwide, depletion of carbon-based energy resources, and low efficiency in current energy systems. The barriers for CO 2 utilization include: (1) costs of CO 2 capture, separation, purification, and transportation to user site (2) energy requirements of CO 2 chemical conversion (plus source and cost of co-reactants) (3) market size limitations, little investment-incentives and lack of industrial commitments for enhancing CO 2 - based chemicals and (4) the lack of socio-economical driving forces. The strategic objectives may include: (1) use CO 2 for environmentally-benign physical and chemical processing that adds value to the process (2) use CO 2 to produce industrially useful chemicals and materials that adds value to the products (3) use CO 2 as a beneficial fluid for processing or as a medium for energy recovery and emission reduction and (4) use CO 2 recycling involving renewable sources of energy to conserve carbon resources for sustainable development. The approaches for enhancing CO 2 utilization may include one or more of the following: (1) for applications that do not require pure CO 2 . develop effective processes for using the CO 2 - concentrated flue gas from industrial plants or CO 2 - rich resources without CO 2 separation (2) for applications that need pure CO 2 . develop more efficient and less-energy intensive processes for separation of CO 2 selectively without the negative impacts of co-existing gases such as H 2 O, O 2 . and N 2 (3) replace a hazardous or less-effective substance in existing processes with CO 2 as an alternate medium or solvent or co-reactant or a combination of them (4) make use of CO 2 based on the unique physical properties as supercritical fluid or as either solvent or anti-solvent (5) use CO 2 based on the unique chemical properties for CO 2 to be incorporated with high atom efficiency such as carboxylation and carbonate synthesis (6) produce useful chemicals and materials using CO 2 as a reactant or feedstock (7) use CO 2 for energy recovery while reducing its emissions to the atmosphere by sequestration (8) recycle CO 2 as C-source for chemicals and fuels using renewable sources of energy and (9) convert CO 2 under either bio-chemical or geologic-formation conditions into new fossil energies. Several cases are discussed in more detail. The first example is tri-reforming of methane versus the well-known CO 2 reforming over transition metal catalysts such as supported Ni catalysts. Using CO 2 along with H 2 O and O 2 in flue gases of power plants without separation, tri-reforming is a synergetic combination of CO 2 reforming, steam reforming and partial oxidation and it can eliminate carbon deposition problem and produces syngas with desired H 2 /CO ratios for industrial applications. The second example is a CO 2 molecular basket as CO 2 - selective high-capacity adsorbent which was developed using mesoporous molecular sieve MCM-41 and polyethylenimine (PEI). The MCM41-PEI adsorbent has higher adsorption capacity than either PEI or MCM-41 alone and can be used as highly CO 2 - selective adsorbent for gas mixtures without the pre-removal of moisture because it even enhances CO 2 adsorption capacity. The third example is synthesis of dimethyl carbonate using CO 2 and methanol, which demonstrates the environmental benefit of avoiding toxic phosgene and a processing advantage. The fourth example is the application of supercritical CO 2 for extraction and for chemical processing where CO 2 is either a solvent or a co-reactant, or both. The CO 2 utilization contributes to enhancing sustainability, since various chemicals, materials, and fuels can be synthesized using CO 2 . which should be a sustainable way in the long term when renewable sources of energy are used as energy input. Keywords Carbon dioxide Strategy Sustainable development Atom efficiency Utilization energy Tri-reforming CO 2 reforming Emissions Catalysis Conversion Capture Separation Reforming Dimethylcarbonate Supercritical CO 2 Fuels Table 2. Fig. 1. Fig. 2. Fig. 3. Fig. 4. When an organisation has made a decision to enter an overseas market, there are a variety of options open to it. These options vary with cost, risk and the degree of control which can be exercised over them. The simplest form of entry strategy is exporting using either a direct or indirect method such as an agent, in the case of the former, or countertrade, in the case of the latter. More complex forms include truly global operations which may involve joint ventures, or export processing zones. Having decided on the form of export strategy, decisions have to be made on the specific channels. Many agricultural products of a raw or commodity nature use agents, distributors or involve Government, whereas processed materials, whilst not excluding these, rely more heavily on more sophisticated forms of access. These will be expanded on later. The objectives of the chapter are: The chapter begins by looking at the concept of market entry strategies within the control of a chosen marketing mix. It then goes on to describe the different forms of entry strategy, both direct and indirect exporting and foreign production, and the advantages and disadvantages connected with each method. The chapter gives specific details on between production and marketing. An organisation wishing to faces three major issues: i) Marketing - which countries, which segments, how to manage and implement marketing effort, how to enter - with intermediaries or directly, with what information ii) Sourcing - whether to obtain products, make or buy iii) Investment and control - joint venture, global partner, acquisition Decisions in the marketing area focus on the value chain (see figure 7.1). The strategy or entry alternatives must ensure that the necessary value chain activities are performed and integrated. Figure 7.1 The value chain - marketing function detail In making international marketing decisions on the marketing mix more attention to detail is required than in domestic marketing. Table 7.1 lists the detail required 1. Table 7.1 Examples of elements included in the export marketing mix 1. Product support - Product sourcing - Match existing products to markets - air, sea, rail, road, freight - New products - Product management - Product testing - Manufacturing specifications - Labelling - Packaging - Production control - Market information 2. Price support - Establishment of prices - Discounts - Distribution and maintenance of pricelists - Competitive information - Training of agents/customers 3. Promotion/selling support - Advertising - Promotion - literature - Direct mail - Exhibitions, trade shows - Printing - Selling (direct) - Sales force - Agents commissions - Sale or returns 4. Inventory support - Inventory management - Warehousing - Distribution - Parts supply - Credit authorisation 5. Distribution support - Funds provision - Raising of capital - Order processing - Export preparation and documentation - Freight forwarding - Insurance - Arbitration 6. Service support - Market information/intelligence - Quotes processing - Technical aid assistance - After sales - Guarantees - Warranties/claims - Merchandising - Sales reports, catalogues literature - Customer care - Budgets - Data processing systems - Insurance - Tax services - Legal services - Translation 7. Financial support - Billing, collecting invoices - Hire, rentals - Planning, scheduling budget data - Auditing Details on the sourcing element have already been covered in the chapter on competitive analysis and strategy. Concerning investment and control, the question really is how far the company wishes to control its own fate. The degree of risk involved, attitudes and the ability to achieve objectives in the target markets are important facets in the decision on whether to license, joint venture or get involved in direct investment. Cunningham 1 (1986) identified five strategies used by firms for entry into new foreign markets: i) Technical innovation strategy - perceived and demonstrable superior products ii) Product adaptation strategy - modifications to existing products iii) Availability and security strategy - overcome transport risks by countering perceived risks iv) Low price strategy - penetration price and, v) Total adaptation and conformity strategy - foreign producer gives a straight copy. In marketing products from less developed countries to developed countries point iii) poses major problems. Buyers in the interested foreign country are usually very careful as they perceive transport, currency, quality and quantity problems. This is true, say, in the export of cotton and other commodities. Because, in most agricultural commodities, production and marketing are interlinked, the infrastructure, information and other resources required for building market entry can be enormous. Sometimes this is way beyond the scope of private organisations, so Government may get involved. It may get involved not just to support a specific commodity, but also to help the . Huge investments may have to be undertaken, with the investor paying a high risk price, long before the full utilisation of the investment comes. Good examples of this include the building of port facilities or food processing or freezing facilities. Moreover, the equipment may not be able to be used for other processes, so the asset specific equipment, locked into a specific use, may make the owner very vulnerable to the bargaining power of raw material suppliers and product buyers who process alternative production or trading options. Zimfreeze, Zimbabwe is experiencing such problems. It built a large freezing plant for vegetables but found itself without a contract. It has been forced, at the moment, to accept sub optional volume product materials just in order to keep the plant ticking over. In building a market entry strategy, time is a crucial factor. The building of an intelligence system and creating an image through promotion takes time, effort and money. Brand names do not appear overnight. Large investments in promotion campaigns are needed. Transaction costs also are a critical factor in building up a market entry strategy and can become a high barrier to international trade. Costs include search and bargaining costs. Physical distance, language barriers, logistics costs and risk limit the direct monitoring of trade partners. Enforcement of contracts may be costly and weak legal integration between countries makes things difficult. Also, these factors are important when considering a market entry strategy. In fact these factors may be so costly and risky that Governments, rather than private individuals, often get involved in commodity systems. This can be seen in the case of the Citrus Marketing Board of Israel. With a monopoly export marketing board, the entire system can behave like a single firm, regulating the mix and quality of products going to different markets and negotiating with transporters and buyers. Whilst these Boards can experience economies of scale and absorb many of the risks listed above, they can shield producers from information about, and from. buyers. They can also become the of vested interests and become political in nature. They then result in giving reduced production incentives and cease to be demand or market orientated, which is detrimental to producers. Normal ways of expanding the markets are by expansion of product line, geographical development or both. It is important to note that the more the product line and/or the geographic area is expanded the greater will be the managerial complexity. New market opportunities may be made available by expansion but the risks may outweigh the advantages, in fact it may be better to concentrate on a few geographic areas and do things well. This is typical of the horticultural industry of Kenya and Zimbabwe. Traditionally these have concentrated on European markets where the markets are well known. Ways to concentrate include concentrating on geographic areas, reducing operational variety (more standard products) or making the organisational form more appropriate. In the latter the attempt is made to (develop a market which will be a best predictor of other markets). Global approaches give economies of scale and the sharing of costs and risks between markets. There are a variety of ways in which organisations can enter foreign markets. The three main ways are by direct or indirect export or production in a foreign country (see figure 7.2). Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as the marketing of goods produced in one country into another. Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required. The tendency may be not to obtain as much detailed marketing information as compared to manufacturing in marketing country however, this does not negate the need for a detailed marketing strategy. Figure 7.2 Methods of foreign market entry The advantages of exporting are: reduces the potential risks of operating overseas. The disadvantage is mainly that one can be at the of overseas agents and so the lack of control has to be weighed against the advantages. For example, in the exporting of African horticultural products, the agents and Dutch flower auctions are in a position to dictate to producers. A distinction has to be drawn between passive and aggressive exporting. A passive exporter awaits orders or comes across them by chance an aggressive exporter develops marketing strategies which provide a broad and clear picture of what the firm intends to do in the foreign market. Pavord and Bogart 2 (1975) found significant differences with regard to the severity of exporting problems in motivating pressures between seekers and non-seekers of export opportunities. They distinguished between firms whose marketing efforts were characterized by no activity, minor activity and aggressive activity. Those firms who are aggressive have clearly defined plans and strategy, including product, price, promotion, distribution and research elements. Passiveness versus aggressiveness depends on the motivation to export. In countries like Tanzania and Zambia, which have embarked on structural adjustment programmes, organisations are being encouraged to export, motivated by foreign exchange earnings potential, saturated domestic markets, growth and expansion objectives, and the need to repay debts incurred by the borrowings to finance the programmes. The type of export response is dependent on how the pressures are perceived by the decision maker. Piercy (1982) 3 highlights the fact that the degree of involvement in foreign operations depends on motivating factors, that is, whether the motivations were as a result of active or aggressive behaviour based on the firm s internal situation (endogenous) or as a result of reactive environmental changes (exogenous). If the firm achieves initial success at exporting quickly all to the good, but the risks of failure in the early stages are high. The (see figure 7.3). Figure 7.3 Aggressive and passive export paths Exporting methods include direct or indirect export. In direct exporting the organisation may use an agent, distributor, or overseas subsidiary, or act via a Government agency. In effect, the Grain Marketing Board in Zimbabwe, being commercialised but still having Government control, is a Government agency. The Government, via the Board, are the only permitted maize exporters. Bodies like the Horticultural Crops Development Authority (HCDA) in Kenya may be merely a promotional body, dealing with advertising, information flows and so on, or it may be active in exporting itself, particularly giving approval (like HCDA does) to all export documents. In direct exporting the major problem is that of market information. The exporter s task is to choose a market, find a representative or agent, set up the physical distribution and documentation, promote and price the product. Control, or the lack of it, is a major problem which often results in decisions on pricing, certification and promotion being in the hands of others. Certainly, the phytosanitary requirements in Europe for horticultural produce sourced in Africa are getting very demanding. Similarly, exporters are price takers as produce is sourced also from the Caribbean and Eastern countries. In the months June to September, Europe is because it can grow its own produce, so prices are low. As such, producers are better supplying to local food processors. In the European winter prices are much better, but product competition remains. According to Collett 4 (1991)) exporting requires a partnership between exporter, importer, government and transport. Without these four coordinating activities the risk of failure is increased. Contracts between buyer and seller are a must. Forwarders and agents can play a vital role in the logistics procedures such as booking air space and arranging documentation. A typical coordinated marketing channel for the export of Kenyan horticultural produce is given in figure 7.4. In this case the exporters can also be growers and in the low season both these and other exporters may send produce to food processors which is also exported. Figure 7.4 The export marketing channel for Kenyan horticultural products. Exporting can be very lucrative, especially if it is of high value added produce. For example in 1992/93 Zimbabwe exported 5 338,38 tonnes of flowers, 4 678,18 tonnes of horticultural produce and 12 000 tonnes of citrus at a total value of about US 22 016,56 million. In some cases a mixture of direct and indirect exporting may be achieved with mixed results. For example, the Grain Marketing Board of Zimbabwe may export grain directly to Zambia, or may sell it to a relief agency like the United Nations, for feeding the Mozambican refugees in Malawi. Payment arrangements may be different for the two transactions. Nali products of Malawi gives an interesting example of a exporting mode. CASE 7.1 Nali Producers - Malawi Nali group, has, since the early 1970s, been engaged in the growing and exporting of spices. Spices are also used in the production of a variety of sauces for both the local and export market. Its major success has been the growing and exporting of Birdseye chilies. In the early days knowledge of the market was scanty and thus the company was obtaining ridiculously low prices. Towards the end of 1978 Nali chilies were in great demand, yet still the company, in its passive mode, did not fully appreciate the competitive implications of the business until a number of firms, including Lonrho and Press Farming, started to grow and export. Again, due to the lack of information, a product of its passivity, the firm did not realise that Uganda, with their superior product, and Papua New Guinea were major exporters, However, the full potential of these countries was hampered by internal difficulties. Nali was able to grow into a successful commercial enterprise. However, with the end of the internal problems, Uganda in particular, began an aggressive exporting policy, using their overseas legations as commercial propagandists. Nali had to respond with a more formal and active marketing operation. However it is being now hampered by a number of important factors. The entry of a number of new Malawian growers, with inferior products, has damaged the Malawian chili reputation, so has the lack of a clear Government policy and the lack of financing for traders, growers and exporters. The latter only serves to emphasise the point made by Collett, not only do organisations need to be aggressive, they also need to enlist the support of Government and importers. It is interesting to note that Korey (1986) warns that direct modes of market entry may be less and less available in the future. Growing trading blocs like the EU or EFTA means that the establishing of subsidiaries may be one of the only means forward in future. It is interesting to note that Korey 5 1986 warned that direct modes of market entry may be less and less available in the future. Growing trading blocks like the EU or EFTA means that the establishment of subsidiaries may be one of the only ways forward in future. Indirect methods of exporting include the use of trading companies (very much used for commodities like cotton, soya, cocoa), export management companies, piggybacking and countertrade. Indirect methods offer a number of advantages including: Credit acceptance takes burden from manufacturer. Piggybacking is an interesting development. The method means that organisations with little exporting skill may use the services of one that has. Another form is the consolidation of orders by a number of companies in order to take advantage of bulk buying. Normally these would be geographically adjacent or able to be served, say, on an air route. The fertilizer manufacturers of Zimbabwe, for example, could piggyback with the South Africans who both import potassium from outside their respective countries. By far the largest indirect method of exporting is countertrade. Competitive intensity means more and more investment in marketing. In this situation the organisation may expand operations by operating in markets where competition is less intense but currency based exchange is not possible. Also, countries may wish to trade in spite of the degree of competition, but currency again is a problem. Countertrade can also be used to stimulate home industries or where raw materials are in short supply. It can, also, give a basis for reciprocal trade. Estimates vary, but countertrade accounts for about 20-30 of world trade, involving some 90 nations and between US 100-150 billion in value. The UN defines countertrade as . Countertrade is the modem form of barter, except contracts are not legal and it is not covered by GATT. It can be used to circumvent import quotas. Countertrade can take many forms. Basically two separate contracts are involved, one for the delivery of and payment for the goods supplied and the other for the purchase of and payment for the goods imported. The performance of one contract is not contingent on the other although the seller is in effect accepting products and services from the importing country in partial or total settlement for his exports. There is a broad agreement that countertrade can take various forms of exchange like barter, counter purchase, switch trading and compensation (buyback). For example, in 1986 Albania began offering items like spring water, tomato juice and chrome ore in exchange for a contract to build a US 60 million fertilizer and methanol complex. Information on potential exchange can be obtained from embassies, trade missions or the EU trading desks. Barter is the direct exchange of one good for another, although valuation of respective commodities is difficult, so a currency is used to underpin the item s value. Barter trade can take a number of formats. Simple barter is the least complex and oldest form of bilateral, non-monetarised trade. Often it is called barter. Barter is a direct exchange of goods and services between two parties. Shadow prices are approximated for products flowing in either direction. Generally no middlemen are involved. Usually contracts for no more than one year are concluded, however, if for longer life spans, provisions are included to handle exchange ratio fluctuations when world prices change. Closed end barter deals are modifications of straight barter in that a buyer is found for goods taken in barter before the contract is signed by the two trading parties. No money is involved and risks related to product quality are significantly reduced. Clearing account barter, also termed clearing agreements, clearing arrangements, bilateral clearing accounts or simply bilateral clearing, is where the principle is for the trades to balance without either party having to acquire hard currency. In this form of barter, each party agrees in a single contract to purchase a specified and usually equal value of goods and services. The duration of these transactions is commonly one year, although occasionally they may extend over a longer time period. The contract s value is expressed in non-convertible, clearing account units (also termed clearing dollars) that effectively represent a line of credit in the central bank of the country with no money involved. Clearing account units are universally accepted for the accounting of trade between countries and parties whose commercial relationships are based on bilateral agreements. The contract sets forth the goods to be exchanged, the rates of exchange, and the length of time for completing the transaction. Limited export or import surpluses may be accumulated by either party for short periods. Generally, after one year s time, imbalances are settled by one of the following approaches: credit against the following year, acceptance of unwanted goods, payment of a previously specified penalty or payment of the difference in hard currency. Trading specialists have also initiated the practice of buying clearing dollars at a discount for the purpose of using them to purchase saleable products. In turn, the trader may forfeit a portion of the discount to sell these products for hard currency on the international market. Compared with simple barter, clearing accounts offer greater flexibility in the length of time for drawdown on the lines of credit and the types of products exchanged. Counter purchase, or buyback, is where the customer agrees to buy goods on condition that the seller buys some of the customer s own products in return (compensatory products). Alternatively, if exchange is being organised at national government level then the seller agrees to purchase compensatory goods from an unrelated organisation up to a pre-specified value (offset deal). The difference between the two is that contractual obligations related to counter purchase can extend over a longer period of time and the contract requires each party to the deal to settle most or all of their account with currency or trade credits to an agreed currency value. Where the seller has no need for the item bought he may sell the produce on, usually at a discounted price, to a third party. This is called a switch deal. In the past a number of tractors have been brought into Zimbabwe from East European countries by switch deals. Compensation (buy-backs) is where the supplier agrees to take the output of the facility over a specified period of time or to a specified volume as payment. For example, an overseas company may agree to build a plant in Zambia, and output over an agreed period of time or agreed volume of produce is exported to the builder until the period has elapsed. The plant then becomes the property of Zambia. Khoury 6 (1984) categorises countertrade as follows (see figure 7.5): One problem is the marketability of products received in countertrade. This problem can be reduced by the use of specialised trading companies which, for a fee ranging between 1 and 5 of the value of the transaction, will provide trade related services like transportation, marketing, financing, credit extension, etc. These are ever growing in size. Countertrade has disadvantages: may occur Quality is not of international standard so costly to the customer and trader Variety is tow so marketing of wkat is limited Difficult to set prices and service quality Inconsistency of delivery and specification, Difficult to revert to currency trading - so quality may decline further and therefore product is harder to market. Figure 7.5 Classification of countertrade Shipley and Neale 7 (1988) therefore suggest the following: Ensure the benefits outweigh the disadvantages Try to minimise the ratio of compensation goods to cash - if possible inspect the goods for specifications Include all transactions and other costs involved in countertrade in the nominal value specified for the goods being sold Avoid the possibility of error of exploitation by first gaining a thorough understanding of the customer s buying systems, regulations and politics, Ensure that any compensation goods received as payment are not subject to import controls. Despite these problems countertrade is likely to grow as a major indirect entry method, especially in developing countries. Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture, ownership and participation in export processing zones or free trade zones. Licensing: Licensing is defined as . It is quite similar to the operation. Coca Cola is an excellent example of licensing. In Zimbabwe, United Bottlers have the licence to make Coke. Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation. Licensing gives the following advantages: Options to buy into partner exist or provision to take royalties in stock. The disadvantages are: Requires considerable fact finding, planning, investigation and interpretation. Those who decide to license ought to keep the options open for extending market participation. This can be done through joint ventures with the licensee. Joint ventures can be defined as . Joint ventures are a more extensive form of participation than either exporting or licensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinz in food processing. Joint ventures give the following advantages: Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process Joint financial strength May be only means of entry and May be the source of supply for a third country. They also have disadvantages: Partners may have different views on expected benefits. If the partners carefully map out in advance what they expect to achieve and how, then many problems can be overcome. Ownership: The most extensive form of participation is 100 ownership and this involves the greatest commitment in capital and managerial effort. The ability to communicate and control 100 may outweigh any of the disadvantages of joint ventures and licensing. However, as mentioned earlier, repatriation of earnings and capital has to be carefully monitored. The more unstable the environment the less likely is the ownership pathway an option. These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum rather than discrete and can take many formats. Anderson and Coughlan 8 (1987) summarise the entry mode as a choice between company owned or controlled methods - channels. Integrated channels offer the advantages of planning and control of resources, flow of information, and faster market penetration, and are a visible sign of commitment. The disadvantages are that they incur many costs (especially marketing), the risks are high, some may be more effective than others (due to culture) and in some cases their credibility amongst locals may be lower than that of controlled independents. Independent channels offer lower performance costs, risks, less capital, high local knowledge and credibility. Disadvantages include less market information flow, greater coordinating and control difficulties and motivational difficulties. In addition they may not be willing to spend money on market development and selection of good intermediaries may be difficult as good ones are usually taken up anyway. Once in a market, companies have to decide on a strategy for expansion. One may be to concentrate on a few segments in a few countries - typical are cashewnuts from Tanzania and horticultural exports from Zimbabwe and Kenya - or concentrate on one country and diversify into segments. Other activities include country and market segment concentration - typical of Coca Cola or Gerber baby foods, and finally country and segment diversification. Another way of looking at it is by identifying three basic business strategies: stage one - international, stage two - multinational (strategies correspond to ethnocentric and polycentric orientations respectively) and stage three - global strategy (corresponds with geocentric orientation). The basic philosophy behind stage one is extension of programmes and products, behind stage two is decentralisation as far as possible to local operators and behind stage three is an integration which seeks to synthesize inputs from world and regional headquarters and the country organisation. Whilst most developing countries are hardly in stage one, they have within them organisations which are in stage three. This has often led to a against the operations of multinationals, often unfounded. Export processing zones (EPZ) Whilst not strictly speaking an entry-strategy, EPZs serve as an into a market. They are primarily an investment incentive for would be investors but can also provide employment for the host country and the transfer of skills as well as provide a base for the flow of goods in and out of the country. One of the best examples is the Mauritian EPZ 12. founded in the 1970s. CASE 7.2 The Mauritian Export Processing Zone Since its inception over 400 firms have established themselves in sectors as diverse as textiles, food, watches. And plastics. In job employment the results have been startling, as at 1987, 78,000 were employed in the EPZ. Export earnings have tripled from 1981 to 1986 and the added value has been significant - The roots of success can be seen on the supply, demand and institutional sides. On the supply side the most critical factor has been the generous financial and other incentives, on the demand side, access to the EU, France, India and Hong Kong was very tempting to investors. On the institutional side positive schemes were put in place, including finance from the Development Bank and the cutting of red tape. In setting up the export processing zone the Mauritian government displayed a number of characteristics which in hindsight, were crucial to its success. The government intelligently sought a development strategy in an apolitical manner It stuck to its strategy in the long run rather than reverse course at the first sign of trouble It encouraged market incentives rather than undermined them It showed a good deal of adaptability, meeting each challenge with creative solutions rather than maintaining the status quo It adjusted the general export promotion programme to suit its own particular needs and characteristics. It consciously guarded against the creation of an unwieldy bureaucratic structure. Organisations are faced with a number of strategy alternatives when deciding to enter foreign markets. Each one has to be carefully weighed in order to make the most appropriate choice. Every approach requires careful attention to marketing, risk, matters of control and management. A systematic assessment of the different entry methods can be achieved through the use of a matrix (see table 7.2). Table 7.2 Matrix for comparing alternative methods of market entry Details of channel management will appear in a later chapter. As has been pointed out time and again in this text, the international marketing of agricultural products is a affair between production and marketing and end user. Certain characteristics can be identified in market entry strategies which are different from the marketing of say cars or television sets. These refer specifically to the institutional arrangements linking producers and processors/exporters and those between exporters and foreign buyers/agents. Institutional links between producers and processors/exporters One of the most important factors is contract coordination. Whilst many of the details vary, most contracts contain the supply of credit/production inputs, specifications regarding quantity, quality and timing of producer deliveries and a formula or price mechanism. Such arrangements have improved the flow of money, information and technologies, and very importantly, shared the risk between producers and exporters. Most arrangements include some form of vertical integration between producers and downstream activities. Often processors enter into contracted outgrower arrangements or supply raw inputs. This institutional arrangement has now, incidentally, spilled over into the domestic market where firms are wishing to target higher quality, higher priced segments. Producer trade associations, boards or cooperatives have played a significant part in the entry strategies of many exporting countries. They act as a contact point between suppliers and buyers, obtain vital market information, liaise with Governments over quotas etc. and provide information, or even get involved in quality standards. Some are very active, witness the Horticultural Crops Development Authority (HCDA) of Kenya and the Citrus Marketing Board (CMD) of Israel, the latter being a Government agency which specifically got involved in supply quotas. An example of the institutional arrangements 13 involved is given in table 7.3. Table 7.3 Institutional arrangements linking producers with processors/exporters XX Dominant linkage Once again, it can not be over-emphasized that the smooth flow between producers, marketers and end users is essential. However it must also be noted that unless strong relationships or contracts are built up and product qualities maintained, the smooth flow can be interrupted should a more competitive supplier enter the market. This also can occur by Government decree, or by the erection of non-tariff barriers to trade. By improving strict hygiene standards a marketing chain can be broken, however strong the link, by say, Government. This, however, should not occur, if the link involves the close monitoring and action by the various players in the system, who are aware, through market intelligence, of any possible changes. Having done all the preparatory planning work (no mean task in itself ), the prospective global marketer has then to decide on a market entry strategy and a marketing mix. These are two main ways of foreign market entryeither by entering from a home market base, via direct or indirect exporting, or by foreign based production. Within these two possibilities, marketers can adopt an export path. Entry from the home base (direct) includes the use of agents, distributors, Government and overseas subsidiaries and (indirect) includes the use of trading companies, export management companies, piggybacking or countertrade. Entry from a foreign base includes licensing, joint ventures, contract manufacture, ownership and export processing zones. Each method has its peculiar advantages and disadvantages which the marketer must carefully consider before making a choice. 1. Review the general problems encountered when building market entry strategies for agricultural commodities. Give examples. 2. Describe briefly the different methods of foreign market entry. 3. What are the advantages and disadvantages of barter, countertrade, licensing, joint venture and export processing zones as market entry strategies 1. General problems: i) Interlinking of production and marketing means private investment alone may not be possible, so Government intervention may be needed also e. g. to build infrastructure e. g. Israeli fresh fruit. Method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, knowhow or some other skill by the licensor. ii) building capacity long before it may be currently utilised e. g. port facilities opportunities to buy into partner or royalties on the stock. iii) Time - processing, transport and storage - so credit is needed e. g. Argentina beef. iv) Transaction costs - logistics, market information, regulatory enforcement. requires a lot of planning beforehand. v) Risk - business, non-business iv) Joint ventures - An enterprise in which two or more investors share ownership and control over property rights and operation. vi) Building of relationships and infrastructural developments 2. Different methods These are either based. may be source of supply for third country. Direct - Agent, distributor, Government, overseas subsidiary partners have different views on exported benefits. Indirect - Trading company, export management company, piggyback, countertrade v) Export processing zones - A zone within a country, exempt from tax and duties, for the processing or reprocessing of goods for export Foreign - Licensing, joint venture, contract manufacture, ownership, export processing zone. Students should give a definition and expand on each of these methods. . Direct exchange of one good for another. (may be straight or closed or clearing account method) bureaucracy creation. commodity based valuation or currency based valuation. marketability of products. Customer agrees to buy goods on condition that the seller buys some of the customer s own products in return (may be time, method of financing, balance of compensation or pertinence of compensating product based) market. difficult to revert to currency trading. Exercise 7.1 Market entry strategies Take a major non-traditional crop or agricultural product which your country produces with sales potential overseas. Devise a market entry strategy for the product, clearly showing which you would use and justify your choice indicating why the method chosen would give benefits to your country and the intended importing country(s). 1. Cunningham, M. T. . In D. W. Turnbull and J. P. Valla (eds.) Croom Helm 1986, p 9. 2. Pavord and Bogart. , Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa 1991. 3. Piercy, N. . European Journal of Marketing, Vol. 15, No. 3, 1982, pp 26-40. 4. Collett, W. E. . Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, 1991. 5. Korey, G. . European Journal of Marketing, Vol. 20, No. 7, 1986, pp 34-42. 6. Khoury, S. J . Journal of Business Research, Vol. 12, 1984, pp 257-270. 7. Shipley, D. D. and Neale, C. W. , Vol. 26, No. 1, pp 49-52. 8. Anderson, E. and Coughlan, A. T. . Journal of Marketing, Vol. 51. January 1987, pp 71-82. 9. Keegan, W. J. , 4th ed. Prentice Hall International Editions, 1989. 10. Khoromana, A. P. . In S. Carter (ed.) Export Procedures Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, August 1991. 11. Basche, J. R. Jr. . New York: The Conference Board, 1971, p4. 12. Bheenich, R. and Shapiro, M. O. Mauritius: , EDI Development Policy Case Series, No. 1, 1989, pp 97-127. 13. Jaffee S. pp 198, 1993. Learn about key actions, proceedings and initiatives the Commission intends to undertake. Inside this Chapter Twenty-five years ago, the World Wide Web did not exist. Very few Americans had even seen a mobile phone, and broadband networks were available only to a few businesses and research institutions. Today, innovations such as broadband and others like it drive the creation of a wide variety of products and services. The competitive forces that sparked these breakthroughs need to be nurtured so that the United States can continue to reap the benefits of its unrivaled culture of innovation. This chapter examines innovation and competition in the broadband ecosystem. First, it discusses each of the three elements of the broadband ecosystem networks, devices and applications. Then it addresses competition for value across the ecosystem, the transition from a circuit-switched network to an all-Internet Protocol (IP) network and the leveraging of the benefits of innovation and investment internationally. Section 4.1 approaches network competition in three ways. First, it addresses the state of competition in residential broadband and makes recommendations to bolster consumer benefits by developing data-driven competition policies for broadband services. Second, it makes recommendations intended to ensure that consumers have the information they need to make decisions that maximize benefits from these services. Increased transparency will likely drive service providers to deliver better value to consumers through better services. Third, it focuses on competition in the wholesale broadband market including issues associated with high-capacity circuits, copper retirement, interconnection and data roaming. All are crucial for enabling competition in the small business and enterprise customer segments, in mobile services and in deployment of services in high-cost areas. Section 4.2 addresses devices, with a particular focus on set-top boxes. Of the three main categories of broadband devices mobile devices, personal computing devices and set-top boxes set-top boxes is the category with the least competition: two manufacturers control more than 90 of the U. S. market and have controlled comparable market shares for many years. Congress recognized the need for change in the set-top box market when it enacted Section 629 of the Telecommunications Act, but FCC s attempts to meet Congress s objectives have been unsuccessful. As video becomes an increasingly important element of broadband applications, driving usage and adoption, it is crucial that the FCC takes steps that will foster increased innovation in set-top boxes and video-navigation devices to bring more competition and choice for consumers. Section 4.3 addresses applications, focusing on the management of personal data and privacy. The number and variety of applications and content available over broadband connections has exploded over the last few years. Competition within different types of applications and content services must be looked at on a case-by-case basis. However, the importance of digital personal data is a common thread among current and emerging content and application services. Personal data, often aggregated into digital profiles, are often used to provide consumers with personalized services and to target them with more relevant advertising. These increasingly detailed digital profiles offer both an opportunity and a challenge. The opportunity is to increase the innovations and convenience provided to end-users, who may enjoy better targeted, more customized services and applications, many of them free of charge. The challenge is to enable consumers to take advantage of such innovations while ensuring that they can retain control of their personal data, protect their privacy and manage how the information collected on them is used. The last three sections of the chapter focus on various topics the competition for value across the ecosystem summarizing the FCC s ongoing Open Internet proceeding, the transition from a circuit-switched network to an all-IP network and the leveraging of the benefits of innovation and investment internationally. RECOMMENDATIONS 4.1 NETWORKS Competition in Residential Broadband Markets Competition is crucial for promoting consumer welfare and spurring innovation and investment in broadband access networks. Competition provides consumers the benefits of choice, better service and lower prices. This section begins by analyzing the available data to assess the current state of competition among wireline broadband services and mobile wireless broadband services, and the competitive dynamics across different broadband technologies. It does not analyze the market power of specific companies or reach definitive conclusions about the current state of competition for residential broadband services. The section then discusses how new technologies and network upgrades present both opportunities and challenges to competition in the near future. It concludes with several recommendations to promote competition and to improve the data the government collects to assess the state of competition in broadband markets in the future. Competition in industries with high fixed costs Building broadband networks especially wireline requires large fixed and sunk investments. Consequently, the industry will probably always have a relatively small number of facilities-based competitors, at least for wireline service. Bringing down the cost of entry for facilities-based wireline services may encourage new competitors to enter in a few areas, but it is unlikely to create several new facilities-based entrants competing across broad geographic areas. 1 Bringing down the costs of entry and expansion in wireless broadband by facilitating access to spectrum, sites and high-capacity backhaul may spur additional facilities-based competition. Whether wireless competition is sustainable in driving innovation, investment and consumer welfare will depend on the evolution of technology and consumer behavior among many other factors. The lack of a large number of wireline, facilities-based providers does not necessarily mean competition among broadband providers is inadequate. While older economic models of competition emphasized the danger of tacit collusion with a small number of rivals, economists today recognize that coordination is possible but not inevitable under such circumstances. Moreover, modern analyses find that markets with a small number of participants can perform competitively 2 however, those analyses do not tell us what degree of competition to expect in a market with a small number of wireline broadband providers combined with imperfect competition from wireless providers. 3 In addition, as the Department of Justice (DOJ) describes the issue, the critical question is not some abstract notion of whether or not broadband markets are competitive but rather whether there are policy levers around competition policy that can be used to produce superior outcomes. 4 Given that approximately 96 of the population has at most two wireline providers, there are reasons to be concerned about wireline broadband competition in the United States. Whether sufficient competition exists is unclear and, even if such competition presently exists, it is surely fragile. To ensure that the right policies are put in place so that the broadband ecosystem benefits from meaningful competition as it evolves, it is important to have an ongoing, data-driven evaluation of the state of competition. New data from the FCC s Form 477 combined with several other sources make possible certain general observations about the state of competition in broadband services today, though additional data are needed to more rigorously evaluate broadband competition. 5. 6 In general, broadband subscribers appear to have benefited from the presence of multiple providers. Broadband providers have invested in network upgrades to deliver faster broadband speeds and enter new product markets cable companies providing telephony and telephone companies offering multichannel video but the data available only provide limited evidence of price competition among providers. Fixed broadband service Unlike many countries, the majority of U. S. broadband subscribers do not connect to the Internet via local-access infrastructure owned by an incumbent telephone company. The U. S. cable infrastructure was advanced and ubiquitous enough to allow cable companies to offer broadband access services to large portions of the country, in many cases before the telephone companies. As a result, the U. S. market structure is relatively unique in that people in most parts of the country have been able to choose from two wireline, facilities-based broadband platforms for many years. Approximately 4 of housing units are in areas with three wireline providers (either DSL or fiber, the cable incumbent and a cable over-builder), 78 lives in areas with two wireline providers, about 13 are in areas with a single wireline provider and 5 have no wireline provider (see Exhibit 4-A). Exhibit 4-A: Share of Housing Units in Census Tracts with 0, 1, 2, and 3 Wireline Providers7 These data do not necessarily mean that 82 (78 4 ) of housing units have two or three competitive options for wireline broadband service the data used here do not provide adequate information on price and performance to determine if multiple providers present in a given area compete head-to-head. Additionally, the data show that rural areas are less likely to have access to more than one wireline broadband provider than other areas. The data also show that low-income areas are on average somewhat less likely to have more than one provider than higher-income areas. There are other types of fixed broadband providers. For instance, satellite-based broadband service is available in most areas of the country from two providers, while hundreds of small fixed wireless Internet service providers (WISPs) offer service to more than 2 million people 8 and Clearwire offers WiMAX service in a number of cities. 9 These providers compete for customers as well, although their services tend to be either more expensive or offer a lower range of speeds than today s wireline offerings. 10 The presence of a facilities-based competitor impacts investment. Indeed, broadband providers appear to invest more heavily in network upgrades in areas where they face competition. Exhibit 4-B shows that controlling for housing density, household income and state-specific factors that affect supply and demand, providers of broadband over any given wireline technology Digital Subscriber Line (DSL), cable or fiber generally offer faster speeds when competing with other wireline platforms. So, for example, available cable speeds are higher in areas in which cable competes with DSL or fiber than in areas where cable is the only option. DSL and fiber show similar results. Available speeds are even higher where three wireline providers compete (e. g. where a cable over-builder is also present). 11 Exhibit 4-B: Average Top Advertised Speed in Areas with 1, 2 and 3 Wireline Competitors 12 Indeed, competition appears to have induced broadband providers to invest in network upgrades. 13 Cable and telephone companies invested about 48 billion in capital expenditures (capex) in 2008 and about 40 billion in 2009. While it is very difficult to accurately disaggregate service provider capital expenditures into broadband and other areas, a review of analyst reports at Columbia Institute for Tele-Information (CITI) suggests that, of this total, wireline broadband capital expenditures were about 20 billion in 2008 and expected to be about 18 billion in 2009. 14 Companies channeled these investments into network upgrades in recent years, as detailed in Exhibit 4-C. 15 Exhibit 4-C: Select Fixed Broadband Infrastructure Upgrades 16 Consumers are benefiting from these investments. Top advertised speeds available from broadband providers have increased in the past few years. Additionally, typical advertised download speeds to which consumers subscribe have grown at approximately 20 annually for the last 10 years. 17 New choices at new, higher speeds are becoming available, as well. Clearwire offers download speeds of up to 2 Mbps service in several cities and plans to have its WiMAX service available to about 120 million people by 2011. 18 Two satellite providers plan to launch new satellites in 2011 and 2012, with ViaSat (WildBlue) expecting to advertise download speeds of up to 2-10 Mbps and Hughes Communications planning to advertise download speeds of up to 5-25 Mbps. 19 In principle, providers can compete on price as well as on service. Unfortunately, the dearth of consistent, comprehensive and detailed price data makes it difficult to evaluate price competition. The data that do exist are imperfect. First, some focus on the price of broadband when not bundled with any other services even though the vast majority of consumers purchase broadband bundled with voice, video or both. 20 Second, sources that have data on bundles do not provide sufficient information to determine the incremental price of the broadband component. Third, broadband providers frequently offer promotions to attract new customers. No data source consistently captures the relevant details of those promotions, including details such as how long the promotional price lasts, the length of the contract the consumer signs to get the promotional price, the price once the promotion expires and any early termination fee. Some international comparisons suggest the number of retail broadband providers may be positively correlated with advertised download speeds, at least at the high end of the market, and with affordability. 21 Others rank the United States high in affordability of broadband, despite the fact that 96 of consumers have two or fewer choices, and suggest that consumers may not be willing to pay as much for high speeds as they are for other functionality. 22 Nevertheless, the available data can be analyzed to see if they yield consistent results. Merging comprehensive cross-sectional data on prices 23 with Form 477 data makes possible econometric analyses of the effects of competition on prices, controlling for income, density and region-specific factors. These analyses yield some weak evidence that monthly prices are lower when more wireline providers are in a Census tract, but the data limitations discussed above make it difficult to draw robust conclusions. A fundamental question related to competition is how prices paid by consumers evolve as underlying costs change. While the data do not allow us to examine competition in detail, it is possible to examine certain aspects of prices over time. In particular, Greenstein and McDevitt (2010) analyzed about 1,500 broadband contracts 24 to construct price indices (see Exhibit 4-D). 25 The exhibit shows that the price index for standalone nominal prices, adjusted for upload and download speeds, changed modestly between 2006 and 2009 while the index for bundled prices remained relatively constant. 26 Exhibit 4-D: Price Indices for Broadband Advertised as a Standalone Service and as Part of a Bundle (2006 1) 27 Other data reach similar conclusions. The Internet service provider (ISP) price index compiled by BLS shows a slight increase in Internet service prices between 2007 and 2009. 28 The available time-series data, therefore, show, at best, a small decline in quality-adjusted nominal broadband prices while the econometrics reveal weak evidence that providers compete on prices. One clear conclusion from the analysis, however, is that better data for analyzing price competition would be helpful. Mobile broadband competition 29 As discussed in Chapter 3, as of November 2009, according to data from American Roamer, third-generation (3G) wireless service covers roughly 60 of U. S. landmass. 30 In addition, approximately 77 of the U. S. population lived in an area served by three or more 3G service providers, 12 lived in an area served by two, and 9 lived in an area served by one. About 2 lived in an area with no provider (see Exhibit 4-E). 31 These measures likely overstate the coverage actually experienced by consumers, since American Roamer reports advertised coverage as reported by many carriers who all use different definitions of coverage. In addition, these measures do not take into account other factors such as signal strength, bitrate or in-building coverage, and they may convey a false sense of consistency across geographic areas and service providers. 32 As with fixed broadband, most areas without mobile broadband coverage are in rural or remote areas. Nonetheless, the data can help benchmark mobile broadband availability nationwide. In total, while U. S. service providers are building out mobile broadband coverage, the United States is far from having complete coverage. Exhibit 4-E: Share of Population Living in Census Tracts with 0, 1, 2, 3 or More 3G Mobile Providers 33 Mobile data users typically receive download speeds ranging from hundreds of kilobits per second to about one megabit per second. 34 Several competing firms offer mobile broadband. In addition to the nationwide service providers AT T, Verizon, Sprint and T-Mobile (two of which are also leading providers of wireline broadband), new competitors such as Leap Wireless and MetroPCS have emerged in metropolitan areas in recent years. Like wireline broadband providers, these firms may compete along many dimensions including coverage, device selection, roaming and services. Many service providers have focused on network upgrades to 3G services. 35 As mentioned earlier, identifying broadband-specific capital expenditures is very difficult, but the CITI report indicates that total capital expenditures by major wireless firms were about 21 billion in 2008, of which about 10 billion was for broadband. In 2009, wireless companies were expected to have incurred about 20 billion in capital expenditures, 12 billion of which was for broadband services. 36 While projections should be viewed cautiously, wireless broadband capital expenditures are expected to be about 12 billion in 2010 and increase steadily to 15 billion in 2015 as service providers roll out their 4G services. 37 Mobile broadband services are relatively new and their competitive dynamics are changing rapidly. As new technologies such as High-Speed Packet Access (HSPA), WiMAX and Long Term Evolution (LTE) are introduced and rolled out by different carriers, new devices support different uses and consumers turn to different applications. Wireline-wireless competition Whether wireless broadband, either fixed or mobile, can compete with wireline broadband is an important question in evaluating the status of broadband services competition. The answer depends on how technology, costs and consumer preferences evolve, as well as on the strategic choices of firms that control wireline and wireless assets 38. including firms that offer both fixed and mobile broadband. Consumers preferences differ depending on how they use their broadband connections and how much they are willing to pay for such use. Some value download speeds more than any other attribute, some value mobility and new converts from dial-up may still even value the simple always on connection. A user who values little more than e-mail and browsing news sites has, in principle, many choices nearly any broadband access technology will do. But a user who streams high-definition video and enjoys gaming probably requires high download and upload speeds and low latency. That user will likely have few choices. Most consumers preferences are not so extreme they tend to value some factors more than others. If a sufficiently large segment of consumers are relatively indifferent about the attributes, performance and pricing of mobile and fixed platforms, then mobile and fixed providers are likely to compete for consumers. Today, however, most consumers who do not value mobility when purchasing broadband, or want high download or upload speeds, face only two choices for their fixed broadband service. 39 It is not yet clear how that might change. The spectral efficiency of wireless technologies has increased by a factor of roughly 40 or more since the early days of second-generation (2G) wireless (see Exhibit 4-F) 40. These technologies often deployed for mobile services can deliver even higher download speeds by replacing mobile devices with fixed terminals. Indeed, terrestrial, fixed wireless access solutions have already been deployed as a substitute for wired access technologies for example, in the United States by Clearwire with WiMAX and Stelera with HSPA. Exhibit 4-F: Evolution of Spectral Efficiency 41 Wireless broadband may not be an effective substitute in the foreseeable future for consumers seeking high-speed connections at prices competitive with wireline offers. 42 Given enough spectrum, however, a variety of engineering techniques including higher transmitter power, high-gain directional antennas and multiple externally mounted antennae may make wireless a viable price/performance competitor to wired solutions at far higher speeds than are possible today, further increasing consumer choice. The ongoing upgrade of the wireless infrastructure is promising because of its potential to be a closer competitor to wireline broadband, especially at lower speeds. For example, if wireless providers begin to advertise, say, 4 Mbps home broadband service, wireline providers may be forced to respond by lowering prices of their broadband offerings. This could be true even if wireless services are more expensive, especially if the service is also mobile. Such an outcome is a possibility for instance, according to CITI, LTE could offer speeds between 4 and 12 Mbps, with sustained speeds of up to 5 Mbps. Further, as with most goods, consumers choose broadband by trading off price and features. Providers offering a product with fewer features may have to reduce prices in order to remain competitive, even if the superior product charges more. Consider, for example, computer monitors. LCD flat-screen monitors were introduced at prices many multiples higher than older and once-standard CRTs. Even though the typical LCD did not offer as clear a picture as the typical CRT, its advantages in terms of weight, the space it took up on a desk and its rapid technological improvements were such that it quickly put downward price pressure on the already much cheaper CRT. 43 There is no guarantee, however, that competition will necessarily evolve this way. Technologies, costs and consumer preferences are changing too quickly in this dynamic part of the economy to make accurate predictions. Regardless of how those develop, affordability will remain a principle policy concern. The FCC should therefore carefully monitor affordability of low-end offerings and, if affordability does not improve in light of ongoing wireless upgrades, take further steps beyond those already described in this plan to address the issue. Potential future issues for fixed broadband competition Analysts project that within a few years, approximately 90 of the population is likely to have access to broadband networks capable of peak download speeds in excess of 50 Mbps as cable systems upgrade to DOCSIS 3.0. About 15 of the population is likely to be able to choose between two robust high-speed service services cable with DOCSIS 3.0 and upgraded services from telephone companies offering fiber-to-the-premises (FTTP). These upgrades represent a significant improvement to the U. S. broadband infrastructure, and consumers who value high download and upload speeds will benefit by having a service choice they did not have before the upgrade. The upgrades may, however, change competitive dynamics. Prior to cable s DOCSIS 3.0 upgrade, more than 80 of the population could choose from two reasonably similar products (DSL and cable). Once the current round of upgrades is complete, consumers interested in only today s typical peak speeds can, in principle, have the same choices available as they do today. Around 15 of the population will be able to choose from two providers for very high peak speeds (providers with FTTP and DOCSIS 3.0 infrastructure). However, providers offering fiber-to-the-node and then DSL from the node to the premises (FTTN), while potentially much faster than traditional DSL, may not be able to match the peak speeds offered by FTTP and DOCSIS 3.0. 44 Thus, in areas that include 75 of the population, consumers will likely have only one service provider (cable companies with DOCSIS 3.0-enabled infrastructure) that can offer very high peak download speeds (see Exhibit 4-G). Exhibit 4-G: Projected Share of Households With Access to Various Wireline Broadband Technologies in 2012 Some evidence suggests that this market structure is beginning to emerge as cable s offers migrate to higher peak speeds. Exhibit 4-H shows that in 2004 the mean advertised download peak speeds of cable and DSL were similar, and the maximum and minimum advertised peak speeds were identical. By 2009, the mean advertised cable speed was about 2.5 times higher than DSL, while the maximum peak advertised speed was three times higher than DSL. 45 The minimum advertised peak speeds remained identical. While the exhibit does not contain information about demand or uptake of the higher-speed offers, or actual speeds delivered, it shows that the upgrade in network performance for cable companies from DOCSIS 3.0 is likely to continue or accelerate the trend where offers to end-users of traditional DSL cannot keep pace. Exhibit 4-H: Broadband Speeds Advertised by Cable and Telco (5th Percentile, Mean and 95th Percentile), 2004-2009 46 As with fixed-mobile substitution, how the evolution of network capabilities affects competition depends on how pricing, consumer demand, technology and costs evolve over time. For example, if users continue to value primarily applications that do not require very high speeds (e. g. speeds in excess of 20 Mbps), and are not willing to pay much for vastly increased speeds 47. then a provider may not gain much of an advantage by offering those higher speeds. In contrast, if typical users require high speeds and only one provider can offer those speeds and expected returns to telephone companies do not justify fiber upgrades, then users may face higher prices, fewer choices and less innovation. Because of this risk, it is crucial that the FCC track and compare the evolution of pricing in areas where two service providers offer very high peak speeds with pricing in areas where only one provider can offer very high peak speeds. The FCC should benchmark prices and services and include these in future reports on the state of broadband deployment. Recommendations Two sets of recommendations address the current and expected nature of competition in broadband network services in the United States. First, the FCC should take specific steps to make more spectrum available to ease entry into broadband markets and reduce the costs for current wireless providers to offer higher-speed services that can compete with wireline offers for a larger segment of end-users. Second, the FCC and the BLS should collect data that enable more detailed analyses of the market and competition and make that data more publicly available to ensure visibility into competitive behavior of firms. 48 Recommendation 4.1: The federal government, including the FCC, the National Telecommunications and Information Administration (NTIA) and Congress, should make more spectrum available for existing and new wireless broadband providers in order to foster additional wireless-wireline competition at higher speed tiers. Chapter 5 discusses why additional spectrum is crucial to accommodate growing wireless broadband use. Additional spectrum is also critical for increasing competition along two interrelated dimensions. First, additional spectrum for mobile competitors is likely to enhance mobile competition. Second, more spectrum makes possible faster download speeds, which would allow new and existing companies to use wireless technologies to serve as closer substitutes to fixed broadband providers for consumers seeking more than just low-end plans. Recommendation 4.2: The FCC and the U. S. Bureau of Labor Statistics (BLS) should collect more detailed and accurate data on actual availability, penetration, prices, churn and bundles offered by broadband service providers to consumers and businesses, and should publish analyses of these data. Improve current Form 477 data collection. Collect location-specific subscribership data. Collect price, switching costs, customer churn and market share information. Make more data and FCC analyses publicly available. BLS should fully resume its computer and Internet use supplement. The FCC should revise Form 477 to collect data relevant to broadband availability, adoption and competition. Specifically, it should collect broadband availability data at the Census block level, by provider, technology and offered speed. Availability for mobile service should be defined in terms of coverage specifications to be determined by the FCC and include information on spectrum used by facilities-based providers. In addition, the FCC should collect broadband service provider ownership and affiliation data and clarify and refine all reporting standards to ensure data consistency and comparability. To improve its ability to make informed policy decisions and to track deployment, adoption and competition issues, the FCC should transition as quickly as practical to collecting location-specific subscribership data by provider, technology, actual speed and offered speed. Such data would make it possible for the FCC to aggregate the data to any geographic level rather than relying on providers to allocate subscribers by Census tract or block. The FCC should also continue to utilize consumer-driven data collection methods, such as voluntary speed tests and broadband unavailability registries. The FCC is fully cognizant of its obligations under the Electronic Communications Privacy Act (ECPA). To comply with the Act and protect citizens privacy, the FCC should investigate using a third-party to collect location-specific subscribership data, and aggregate and anonymize it before submitting it to the FCC. The FCC should collect data on advertised prices, prices actually paid by subscribers, plans, bundles and promotions of fixed and mobile broadband services that have material penetration among users, as well as their evolution over time, by provider and by geographic area. Collecting information on advertised and promotional prices, rather than only prices current subscribers pay, is very helpful for analyzing competition because advertised prices focus on winning new customers or keeping customers considering switching providers and can offer important insights into how firms compete. In addition, it is important that the FCC collect information about the pricing plans to which customers are actually subscribing. Pricing plans that are available to customers but are not de facto marketed by service providers tend to have more limited competitive impact. The FCC should also collect information related to switching barriers, such as early termination fees and contract length. To complement this information, the FCC should collect data on customer churn, as well as providers share of gross subscriber additions. Finally, the FCC should collect data required to determine whether broadband service is being denied to potential residential customers based on the income of the residents in a particular geographic area. 49 The data collection should be done in a way that makes possible statistically significant, detailed analyses of at least metropolitan service area (MSA) or rural service area (RSA) levels, thus allowing the FCC to understand the effect of bundles and isolate the evolution of effective pricing and terms for broadband services. The FCC should have a general policy of making the data it collects available to the public, including via the Internet in a broadband data depository, except in certain circumstances such as when the data are competitively sensitive or protected by copyright. Further, the FCC should implement a process to make additional data that is not accessible by the public available to academic researchers and others, subject to appropriate restrictions to protect confidentiality of competitively sensitive materials. 50 An analysis of this data should be published and made available through annual existing reports such as the wireless competition report and the 706 report, and through semi-annual reports such as the Form 477 data collection. The FCC should investigate if additional methods of providing this data and analyses are necessary. Finally, BLS should be encouraged to fully resume its computer and Internet use supplement to its current population survey . Better data on adoption and use will facilitate analyses of the effects of competition as well as make it possible to track the effectiveness of adoption programs. Transparency in the Retail Broadband Market Collecting better data and allocating spectrum are only the first steps in driving competition. Putting more information in the hands of consumers is a proven method to promote meaningful competition and spur innovation, both of which will generate more and better consumer choices. If customers make well-informed choices, companies will likely invest in new products, services and business models to compete more aggressively and offer greater value. For example, the U. S. Environmental Protection Agency s miles-per-gallon (mpg) label for cars encouraged automakers to improve fuel economy and design. That in turn helped boost average auto mileage in the United States from less than 15 mpg in 1975 to more than 25 mpg in 1985. 51 Or to take another example, the nutrition label by the U. S. Food and Drug Administration (FDA) has proven both useful and flexible. For example, when the negative health impact of trans fats surfaced, the FDA changed the nutrition label. It supplied the most current and important information to consumers and helped jumpstart the introduction of a wave of healthier food products. 52 With more consumers obtaining information on line, the concept of a label should evolve. Fixed broadband consumers, however, have little information about the actual speed and performance of the service they purchase. 53 Marketing materials typically feature up to peak download and upload speeds, although actual performance experienced by consumers is often much less than the advertised peak speed. 54 This disparity confuses consumers and makes it more difficult for them to compare the true performance of different offers. That hinders consumer choice and competition. It also reduces incentives for service providers to invest in better performing networks. Consumers need more information about the speed and overall performance 55 of the services they receive and of competitive offers in their area, and about the gap between actual and advertised speeds and the implications of that difference. Some providers have added information in advertisements and other communications about what applications different broadband offers will support. But the lack of standards makes it nearly impossible for consumers to compare providers and their offers. For example, describing a specific broadband offer as capable of supporting an application such as video may not be enough to ensure that all consumers clearly understand the capabilities of the offer, as there are many different types of video (e. g. varying standard and high-definition formats and compression techniques). Four steps must be taken to close this transparency gap. Recommendation 4.3: The FCC, in coordination with the National Institute of Standards and Technology (NIST), should establish technical broadband measurement standards and methodology and a process for updating them. The FCC should also encourage the formation of a partnership of industry and consumer groups to provide input on these standards and this methodology. The FCC, in coordination with NIST, should determine the technical standards and methodology to measure performance of fixed broadband connections with the objective of giving consumers a more accurate view of the performance of their broadband service. This would include what speeds and quality-of-service metrics should be tracked and how they should evolve with new consumer applications and uses. The FCC should encourage industry and consumer interest representatives to create a Broadband Measurement Advisory Council (BMAC) to provide input for the measurement of broadband services. 56 The BMAC would focus on the most difficult issues, including where exactly to measure service performance in a network, the timing and frequency of measurements and the standard set of protocols and applications that may be used to establish benchmarks. The key characteristics to be measured may include (see Exhibit 4-I): Actual speeds and performance over the broadband service provider s network (from point 2 to point 5 in Exhibit 4-I) and the end-to-end performance of the service (from point 1 to point 6 in the exhibit) 57 Actual speeds and performance at peak use hours 58 Actual speeds and performance achieved with a given probability (e. g. 95 ) over a set time period (e. g. one hour) that includes peak use times 59 Actual speeds and performance tested against a given set of standard protocols and applications 60 Exhibit 4-I: Simplified View of Internet Network and Connections Recommendation 4.4: The FCC should continue its efforts to measure and publish data on actual performance of fixed broadband services. The FCC should publish a formal report and make the data available online. The FCC should continue its efforts to measure and report on fixed broadband connections and, similar to the approach taken by the United Kingdom regulator (the Office of Communications, or Ofcom), the FCC should explore contracts with third parties as a means of doing so. 61 These measurement efforts would make data on actual performance easily accessible to all interested parties, especially consumers, and create a mechanism for checking service provider broadband performance claims. The FCC should also use these efforts to conduct pilot projects on different measurement and reporting approaches. Experience in the United Kingdom, New Zealand, Singapore and elsewhere shows it is possible to provide consumers with information that helps them compare service providers in meaningful ways. 62 All data should be made available to consumers and interested parties on a public website offering a searchable database. But the process should ensure the privacy of households that voluntarily participate in the measurement study. In addition, the FCC should publish a formal State of U. S. Broadband Performance report. This report should include detailed information about the actual performance of the country s top broadband service providers in different geographic markets (e. g. by county, city or MSA) and across all the metrics defined by the FCC. Recommendation 4.5: The FCC should initiate a rulemaking proceeding by issuing a Notice of Proposed Rulemaking (NPRM) to determine performance disclosure requirements for broadband. The FCC should issue an NPRM to determine appropriate disclosure obligations for broadband service providers, including disclosure obligations related to service performance. These obligations should include simple and clear data that a reasonable consumer can understand, while providing more detailed disclosure for more interested parties such as tech-savvy consumers, software developers and entrepreneurs designing products for the network. 63 The purpose of disclosure for consumers is to help foster a competitive marketplace. Consumers need access to information at four different decision-making points in the process: when they are choosing a service provider, when they are choosing a plan, when they are evaluating their billed costs and if and when they decide to change providers. 64 For broadband today, speed, price and overall performance are important factors in consumer decision-making. Consumers need to understand what broadband speed they actually need for the applications they want to use how the speeds advertised by a broadband service provider compare to the actual speed a consumer will experience and what broadband service provider and plan will give them the best value overall. The decision is especially complex because the actual performance of broadband service can vary significantly across geographic areas. Given these factors, the FCC should look for better ways to improve information availability for consumer decision-making. One example would be to investigate developing or supporting the development by third parties of an online decision-making tool for choosing a broadband ISP, similar to those being developed for cell-phone services. Some consumers will want a simpler way to gauge performance of different broadband service offers. For them, the FCC should develop a broadband digital label that will summarize broadband service performance concisely. Disclosure labels are among the most common tools used to ensure consumers have information about a product or service. They often come in two parts: a simple and clear standard page 1 and a page 2 listing more detail. The broadband digital label should take this concept and bring it to the online world. Illustrative examples of the front page of a possible broadband digital label can be found in Exhibit 4-J. Exhibit 4-J: Illustrative Broadband Speed and Performance Digital Labels In Example 1 in Exhibit 4-J, consumers would know maximum and average upload/download speeds, along with an aggregated quality of service rating incorporating uptime, delay and jitter, as well as a list of standard applications that can be used with that service. Example 2 includes only actual upload and download speeds and a quality of service rating. Example 3, similar to what has been proposed by Cisco and Corning, 65 would create a weighted average Broadband Quality Index rating for a service, from zero to five stars. This scoring system would evolve based on input from consumer and industry groups. The FCC should also consider a broadband service performance disclosure item with the required speeds for different applications. Broadband service providers now claim different required speeds for the same applications in their advertising. A standard and evolving list would help consumers know what they really need the first step in making an informed decision. Finally, as noted in the FCC s August 2009 consumer disclosure NOI, consumers need full disclosure of the contractual commitments they are undertaking. These include clear, understandable, and reasonably precise estimates of the likely price of different broadband service offers and plans before they sign-up, as well as all fees and taxes. 66 The FCC should establish appropriate disclosure standards for contractual commitments as part of a rulemaking. The FCC should conduct consumer research, potentially in collaboration with the FTC, to identify the disclosure obligations that would be most useful for consumers as critical input to a rulemaking proceeding. Recommendation 4.6: The FCC should develop broadband performance standards for mobile services, multi-unit buildings and small business users. Mobile For mobile broadband services, the FCC should create standards of measurement by location, carrier and spectrum band usage as input to a potential future rulemaking. The FCC should maintain and expand initiatives to capture user-generated data on coverage, speeds and performance. The FCC has launched a user-installed, self-testing application on mobile devices that could be used to both aggregate data about mobile broadband and publish the information on a public website. The FCC should continue to work with measurement companies, applications designers, device manufacturers and carriers to create an online database to help consumers make better choices for mobile broadband and spur competition, while ensuring privacy protections. 67 The FCC should also encourage industry to create more transparent and standard disclosures of coverage, speeds and performance for mobile networks. The FCC should work with industry to identify the unique challenges of mobile disclosure which requires reporting on speed and performance but also coverage and reliability to decrease consumer confusion. Standards on disclosure would apply to data disclosed to regulators, to third party aggregators of coverage, and to consumers, with varying levels of detail for different audiences. The FCC should follow the same roadmap as created for fixed broadband disclosures, including the identification of consumer needs, the standardization of technical measurements and the creation of clear and simple consumer disclosure obligations. 68 Buildings and small business The FCC should also investigate better ways to improve transparency about the quality of broadband connectivity in residential multi-dwelling buildings and, potentially, in commercial and industrial buildings. The FCC should study the benefits of initiatives such as South Korea s program to institute a voluntary system of building ratings for broadband connectivity. 69 A program in the United States, if created, should carry incentives for developers to put more high-speed connections in new buildings, to upgrade existing structures and to encourage better internal wiring of all buildings, much in the same way that the Leadership in Energy and Environmental Design certification program has encouraged developers to incorporate more environmental features into new buildings. As small and medium-sized businesses (SMBs) use more sophisticated broadband applications, it is important to ensure they have the right performance. Speed, security, reliability and availability requirements may differ greatly from one SMB to another and are often very different from those for consumers. The FCC should determine the appropriate metrics and standards for transparency in SMB broadband to help in purchasing decisions and to encourage innovation among broadband providers. Competition in Wholesale Broadband Markets Residential broadband competition as important as it is is not the only type of competition we must foster to lay the foundation for America s broadband future. Ensuring robust competition not only for American households but also for American businesses requires particular attention to the role of wholesale markets, through which providers of broadband services secure critical inputs from one another. Because of the economies of scale, scope and density that characterize telecommunications networks, well functioning wholesale markets can help foster retail competition, as it is not economically or practically feasible for competitors to build facilities in all geographic areas. Therefore, the nation s regulatory policies for wholesale access affect the competitiveness of markets for retail broadband services provided to small businesses, mobile customers and enterprise customers. 70 Unfortunately, the FCC s current regulatory approach is a hodgepodge of wholesale access rights and pricing mechanisms that were developed without the benefit of a consistent, rigorous analytic framework. Similar network functionalities are regulated differently, based on the technology used. Therefore, while networks generally have been converging to integrated, packet-mode, largely-IP networks, regulatory policy regarding wholesale access has followed the opposite trajectory. This situation undermines longstanding competition policy objectives. In some cases it limits the ability of smaller carriers often those specializing in serving niche markets such as SMBs to gain access to the necessary inputs to compete. While facilities such as end-user loops and other point-to-point data circuits often serve as critical inputs to retail broadband services for business, mobile and residential customers, competitors access to those inputs currently depends on factors that have little bearing on the economics of facilities-based competitive entry. For example, some wholesale access policies vary based on technology including whether the facility or service operates using a circuit - or packet-based mode or is constructed from copper or fiber regardless of the economic viability of replicating the physical facility. 71 Similarly, the FCC s wireless roaming policies vary based on the services offered roaming is only required for voice telephone calls and not mobile data services. 72 As a result, mobile customers may not be able to use all functions of their smartphone devices when roaming, even in situations where it is technically feasible for all of those functions to work. In other cases, FCC rules draw distinctions based on the capacity of the facility, or by using various proxies to measure existing or potential competitive entry. 73 The FCC has also been criticized for not collecting better data or monitoring the impact of its current approach to competition. 74 The lack of a consistent analytical framework hinders the FCC s ability to promote competition. Accordingly, the FCC should comprehensively review its current policies and develop a cohesive and effective approach to advancing competition through its wholesale access policies. Recommendation 4.7: The FCC should comprehensively review its wholesale competition regulations to develop a coherent and effective framework and take expedited action based on that framework to ensure widespread availability of inputs for broadband services provided to small businesses, mobile providers and enterprise customers. An effective analytical framework for the FCC s wholesale access competition policies will enable efficient collection of any necessary data, evaluation of current rules and determination of what actions are necessary to achieve the FCC s goals for robust competition in business and consumer markets. The FCC has already taken steps in this direction with regard to the regulation of special access services, which encompass a broad array of dedicated, high-capacity transmission services. 75 Recent filings at the FCC highlight additional dimensions of the FCC s wholesale regulatory framework that deserve attention, including competitive access to local fiber facilities, 76 copper retirement rules and implementation of Section 271 of the Communications Act of 1934 as amended. 77 The FCC should act on these proceedings within the context of rigorous analytic frameworks that establish coherent sets of conditions under which such rules should be applied and appropriately balance the benefits of competitive entry with incentives for carriers to invest in their networks. 78 Recommendation 4.8: The FCC should ensure that special access rates, terms and conditions are just and reasonable. Special access circuits are usually sold by incumbent local exchange carriers (LECs) and are used by businesses and competitive providers to connect customer locations and networks with dedicated, high-capacity links. 79 Special access circuits play a significant role in the availability and pricing of broadband service. For example, a competitive provider with its own fiber optic network in a city will frequently purchase special access connections from the incumbent provider in order to serve customer locations that are off net. 80 For many broadband providers, including small incumbent LECs, cable companies and wireless broadband providers, the cost of purchasing these high-capacity circuits is a significant expense of offering broadband service, particularly in small, rural communities. 81 The FCC regulates the rates, terms and conditions of these services primarily through interstate tariffs filed by incumbent LECs. However, the adequacy of the existing regulatory regime in ensuring that rates, terms and conditions for these services be just and reasonable has been subject to much debate. 82 Much of this criticism has centered on the FCC s decisions to deregulate aspects of these services. In 1999, the FCC began to grant pricing flexibility for special access services in certain metropolitan areas. Since 2006, the FCC has deregulated many of the packet-switched, high-capacity Fast Ethernet and Gigabit Ethernet transport services offered by several incumbent LECs. 83 Business customers, community institutions and network providers regard these technologies as the most efficient method for connecting end-user locations and broadband networks to the Internet. 84 The FCC is currently considering the appropriate analytical framework for its review of these offerings. 85 The FCC needs to establish an analytical approach that will resolve these debates comprehensively and ensure that rates, terms and conditions for these services are just and reasonable. Recommendation 4.9: The FCC should ensure appropriate balance in its copper retirement policies. Competitive carriers are currently using copper to provide SMBs with a competitive alternative for broadband services. Incumbent carriers are required to share (or unbundle ) certain copper loop facilities, which connect a customer to the incumbent carrier s central office. By leasing these copper loops and connecting them to their own DSL or Ethernet over copper equipment that is collocated in the central office, competitive carriers are able to provide their own set of integrated broadband, voice and even video services to consumers and small businesses. 86 FCC rules permit incumbents that deploy fiber in their loops to retire or remove redundant outside-plant copper facilities after notifying competitive carriers that may be affected. 87 Retirement of these copper facilities affects both existing broadband services and the ability of competitors to offer new services. 88 There are countervailing concerns, however. Incumbent deployment of fiber offers consumers much greater potential speeds and service offerings that are not generally possible over copper loops. In addition, fiber is generally less expensive to maintain than copper. As a result, requiring an incumbent to maintain two networks one copper and one fiber would be costly, possibly inefficient and reduce the incentive for incumbents to deploy fiber facilities. The FCC should ensure appropriate balance in copper retirement policies as part of developing a coherent and effective framework for evaluating its wholesale access policies generally. Recommendation 4.10: The FCC should clarify interconnection rights and obligations and encourage the shift to IP-to-IP interconnection where efficient. For consumers to have a choice of service providers, competitive carriers need to be able to interconnect their networks with incumbent providers. Basic interconnection regulations, which ensure that a consumer is able to make and receive calls to virtually anyone else with a telephone, regardless of service provider, network configuration or location, have been a central tenet of telecommunications regulatory policy for over a century. For competition to thrive, the principle of interconnection in which customers of one service provider can communicate with customers of another needs to be maintained. 89 There is evidence that some rural incumbent carriers are resisting interconnection with competitive telecommunications carriers, claiming that they have no basic obligation to negotiate interconnection agreements. 90 One federal court agreed with the rural carriers arguments and concluded that the Act does not require certain rural carriers to negotiate interconnection agreements with other carriers. 91 This decision, which is based on a misinterpretation of the Act s rural exemption and interconnection requirements, has since been followed by several state commissions. 92 Without interconnection for voice service, a broadband provider, which may partner with a competitive telecommunications carrier to offer a voice-video-Internet bundle, is unable to capture voice revenues that may be necessary to make broadband entry economically viable. Accordingly, to prevent the spread of this anticompetitive interpretation of the Act and eliminate a barrier to broadband deployment, the FCC should clarify rights and obligations regarding interconnection to remove any regulatory uncertainty. In particular, the FCC should confirm that all telecommunications carriers, including rural carriers, have a duty to interconnect their networks. 93 The FCC should also determine what actions it could take to encourage transitions to IP-to-IP interconnection where that is the most efficient approach. 94 Recommendation 4.11: The FCC should move forward promptly in the open proceeding on data roaming. To achieve wide, seamless and competitive coverage, the FCC should encourage mobile broadband providers to construct and build networks. Few, if any, of these networks will provide ubiquitous nationwide service entirely through their own facilities, particularly in the initial stages of construction and in rural areas. In order for consumers to be able to use mobile broadband services when traveling to areas outside their provider s network, their provider likely will need to enter into roaming arrangements with other providers. Roaming arrangements enable a customer to stay connected when traveling beyond the reach of their provider s network by using the network of another provider. Data roaming is important to entry and competition for mobile broadband services and would enable customers to obtain access to e-mail, the Internet and other mobile broadband services outside the geographic regions served by their providers. For example, small rural providers serve customers that may be more likely to roam in areas outside their providers network footprints. The industry should adopt voluntary data-roaming arrangements. In addition, the FCC should move forward promptly in its open proceeding on roaming obligations for data services provided without interconnection with the public-switched network. 95 4.2 DEVICES Innovative devices fundamentally change how people use broadband. Smartphones have allowed millions of Americans to use mobile e-mail, browse the Internet on-the-go, and more recently to use hundreds of thousands of mobile applications that did not exist a few years ago. Before smartphones, personal computers with graphical user interfaces and growing processing power enabled the emergence of the Web browser, which led to the widespread adoption of the Internet. Competition, often from companies that were not market leaders, has driven innovation and investment in devices in the past and must continue to do so in the future. When one examines the three main types of devices that connect to broadband service provider networks mobile devices, computing devices and set-top boxes one finds that there are many mobile and computing device manufacturers offering hundreds of devices with a dizzying assortment of brands, features and price levels. Whole new device classes, such as tablets, e-book readers and netbooks continue to emerge, shifting firms market positions and enabling entrants to capture market share. Mobile devices are rapidly incorporating technology such as Global Positioning System, accelerometers, Bluetooth, Wi-Fi, enhanced graphics and multi-touch screens. By any measure, innovation is thriving in mobile and computing devices. The same is not true for set-top boxes, which are becoming increasingly important for broadband as video drives more broadband usage (see Chapter 3). 96 Further innovation in set-top boxes could lead to: Greater choice, lower prices and more capability in the boxes, including applications. 97 More competition among companies offering video content (MVPDs). 98 Unlimited choice in the content available whether from traditional television or the Internet through an integrated user interface. 99 More video and broadband applications for the TV, possibly in conjunction with other devices, such as mobile phones and personal computers (PCs). 100 Higher broadband utilization. 101 Box 4-1: Broadband Modems as an Analog for Innovation in Set-Top Boxes Broadband modems offer an example of how to unleash competition, investment and innovation in set-top boxes and other video navigation devices for consumer benefit. For standard residential broadband connections, even though there are numerous delivery technologies (including cable, fiber, DSL, satellite and fixed wireless broadband), a customer must use an interface device, such as a cable modem. That device performs all network-specific functions. It also connects via a standardized Ethernet port to numerous devices consumers can buy at the store including PCs, game consoles, digital media devices and wireless routers. Innovation can happen on either side of that device without affecting the other side. Service providers are free to invest and innovate in their networks and the services they deliver. Because the interface device communicates with consumer devices through truly open, widely used and standard protocols, manufacturers can create devices independently from service providers or any related third parties (e. g. CableLabs). For example, PC manufacturers do not need to sign non-disclosure agreements with broadband service providers, license any intellectual property selected or favored by broadband service providers or get approval from any broadband service providers or any non-regulatory certification bodies to develop or sell their PCs at retail or enable consumers to attach them to service provider networks through the interface device. Establishing an interface device for video networks that serves a similar purpose to modems for broadband networks could spark similar levels of competition, investment and innovation. Congress wanted to stimulate competition and innovation in set-top boxes and other video navigation devices in 1996 when it added Section 629 to the Communications Act. Section 629 directed the FCC to ensure that consumers could use commercially available navigation devices to access services from MVPDs. 102 Lawmakers pointed to innovative uses of the telephone network, related to new phones, faxes and other equipment, and said they wanted to create a similarly vigorous retail market for devices used with MVPD services. 103 The FCC adopted its First Report and Order to implement the provisions of Section 629 in 1998. 104 The order established rules requiring MVPDs to separate the system that customers use to gain access to video programming, called the conditional element, from the device customers use to navigate the programming. Section 629 nominally applies to all MVPDs. The FCC, however, has applied its rules only to cable operators. It either directly exempted other MVPDs, such as satellite TV operators, or implicitly excluded them by taking no action against an operator. 105 Operators and other stakeholders agreed on a proposed solution for cable called CableCARD to separate the conditional access element. The CableCARD is about the size of a credit card and roughly similar in function to the Subscriber Identity Module (SIM) card used in mobile phones. Cable operators supply the CableCARD, which is inserted into a set-top box or television set that a consumer buys at a store to authenticate the subscriber. To ensure adequate support for CableCARDs, the FCC required cable operators to use CableCARDs for set-top boxes leased to consumers. The first devices from third-party manufacturers using CableCARDs hit the retail market in August 2004, six years after the FCC s First Report and Order. Three years later, in July 2007, cable operators began using CableCARDs in their leased set-top boxes. 106 Despite Congressional and FCC intentions, CableCARDs have failed to stimulate a competitive retail market for set-top boxes. The top two cable set-top box manufacturers in North America, Motorola and Cisco, together captured a 95 share of unit shipments over the first three quarters of 2009. That s up from 87 in 2006. 107 A national or global market with relatively low costs of entry, like that for many consumer electronics markets, should support more than two competitors over time. 108 The two companies continue to control both the hardware and the security on the cable set-top box through their proprietary conditional access systems. By contrast, the top two cable set-top box manufacturers in Europe, the Middle East and Asia (EMEA) where open standards are used for conditional access accounted for a market share of approximately 39 between 2006 and the third quarter of 2009. 109 There are 0.5 million CableCARDs deployed in retail devices today, 110 which represents roughly 1 of all set-top boxes deployed in cable homes. 111 Only two manufacturers, TiVo and Moxi, continue to sell CableCARD-enabled set-top boxes through retail outlets. Other alternatives are starting to emerge. For example, several innovators are attempting to bring Internet video to the TV. 112 Their devices often cannot access traditional TV content that consumers value content that is not available or difficult to access online. Without the ability to seamlessly integrate Internet video with traditional TV viewing, Internet video devices like Apple TV and Roku have struggled to gain a foothold in U. S. homes. 113 Retail set-top boxes have been competing on an uneven playing field. The barriers have been well-documented in multiple proceedings 114 and have prompted some companies not to enter the market at all. 115 To level the field, the FCC should adopt the recommendation that follows. To maximize the likelihood that the recommendation will succeed, it should apply to all MVPDs. Extending the rule to all MVPDs will enable consumer electronics manufacturers to develop products for a larger customer base and allow consumers to purchase retail devices that will continue to function even if the consumer changes providers. Today, four out of the top 10 MVPDs are not cable companies and represent 41 of MVPD subscribers. 116 Recommendation 4.12: The FCC should initiate a proceeding to ensure that all multichannel video programming distributors (MVPDs) install a gateway device or equivalent functionality in all new subscriber homes and in all homes requiring replacement set-top boxes, starting on or before Dec. 31, 2012. To facilitate innovation and limit costs to consumers, the gateway device must be simple. Its sole function should be to bridge the proprietary or unique elements of the MVPD network (e. g. conditional access, tuning and reception functions) to widely used and accessible open networking and communications standards. That would give a gateway device a standard interface with televisions, set-top boxes and other in-home devices and allow consumer electronics manufacturers to develop, market and support their products independently of MVPDs. The following key principles apply: A gateway device should be simple and inexpensive, both for MVPDs and consumers. It should be equipped with only those components and functionality required to perform network-specific functions and translate them into open, standard protocols. The device should not support any other functionality or components. 117 A gateway device should allow consumer electronics manufacturers to develop, sell and support network-neutral devices that access content from the network independently from MVPDs or any third parties. 118 Specifically, third-party manufacturers should not be limited in their ability to innovate in the user interface of their devices by MVPD requirements. User-interface innovation is an important element for differentiating products in the consumer electronics market and for achieving the objectives of Section 629. Similar to broadband modems (see Box 4-1), the proposed gateway device would accommodate each MVPD s use of different delivery technologies and enable them to continue unfettered investment and innovation in video delivery. At the same time, it would allow consumer electronics manufacturers to design to a stable, common open interface and to integrate multiple functions within a retail device. Those functions might include combining MVPD and Internet content and services, providing new user interfaces and integrating with mobile and portable devices such as media players and computers. It could enable the emergence of completely new classes of devices, services and applications involving video and broadband. To ensure a competitive market for set-top boxes, the open gateway device: Should use open, published standards for discovering, signaling, authenticating and communicating with retail devices. 119 Should allow retail devices to access all MVPD content and services to which a customer has subscribed and to display the content and services without restrictions or requirements on the device s user interface or functions and without degradation in quality (e. g. due to transcoding). 120 Should not require restrictive licensing, disclosure or certification. Any criterion should apply equally to retail and operator-supplied devices. Any intellectual property should be available to all parties at a low cost and on reasonable and non-discriminatory terms. 121 Should pass video content through to retail devices with existing copy protection flags from the MVPD. 122 Requiring that the gateway device or equivalent functionality be developed and deployed by the end of 2012 is reasonable given the importance of stimulating competition and innovation in set-top boxes, the extensive public record established in this subject area 123 and the relatively simple architectures proposed to date. 124 The FCC should establish interim milestones to ensure that the development and deployment of a gateway device or equivalent functionality remains on track. In addition, the FCC should determine appropriate enforcement mechanisms for MVPDs that, as of Dec. 31, 2012, have not begun deploying gateway device functionality in all new subscriber homes and in all homes requiring replacement set-top boxes. Enforcement mechanisms would be determined with public input as part of the rulemaking proceeding. They could include, for example, issuing fines against non-compliant operators or denying extensions of certain CableCARD waivers like those granted for Digital Transport Adapters (DTAs). The FCC could also reach agreements with operators to provide set-top boxes for free to new customers until a gateway device is deployed. The FCC should establish up front the criteria for the enforcement mechanisms. The FCC may want, for instance, to grant small operators more time to deploy the gateway device to take account of unique operational or financial circumstances. Transparency in the criteria for the enforcement mechanisms will establish more regulatory certainty in the market and help limit the number of waiver requests. Recommendation 4.13: On an expedited basis, the FCC should adopt rules for cable operators to fix certain CableCARD issues while development of the gateway device functionality progresses. Adoption of these rules should be completed in the fall of 2010. Four factors hinder consumer demand to purchase CableCARD devices and manufacturers willingness to produce those devices. First, retail CableCARD devices cannot access all linear channels in cable systems with Switched Digital Video (SDV) unless cable operators voluntarily give customers a separate set-top box as an SDV tuning adapter. 125 Second, consumers perceive retail set-top boxes to be more expensive than set-top boxes leased at regulated rates from the cable operator. This perception is partially driven by a lack of transparency in CableCARD pricing for operator-leased boxes and by the bundling of leased boxes into package prices by operators. 126 Third, consumers who buy retail set-top boxes can encounter more installation and support costs and hassles than those who lease set-top boxes from their cable operators. 127 Fourth, the current retail CableCARD device certification process, run through CableLabs, incurs incremental costs of at least 100,000 to 200,000 during product development. The process also currently introduces other negative elements, including complexity, uncertainty and delays. 128 Specifically, the proposed rules should address the four CableCARD issues. They should: Ensure equal access to linear channels for retail and operator-leased CableCARD devices in cable systems with SDV by allowing retail devices to receive and transmit out-of-band communications with the cable headend over IP. 129 Establish transparent pricing for CableCARDs and operator-leased set-top boxes. Consumers should see the appropriate CableCARD charge, whether they purchase a retail device or lease one from the operator, and they should receive a comparable discount off packages that include the operator-leased set-top box if they choose to purchase one instead. 130 Standardize installation policies for retail and operator-leased CableCARD devices to ensure consumers buying CableCARD-enabled devices at retail do not face materially different provisioning hurdles than those using operator-leased set-top boxes. 131 Streamline and accelerate the certification process for retail CableCARD devices. 132 For example, the rules could restrict the certification process to cover hardware only, similar to the certification required for cable-ready TVs, to ensure retail CableCARD devices do not harm a cable operator s network. Addressing these issues will not require large investments in either headend or customer premise infrastructure. 133 In fact, fixing these four CableCARD issues will sustain the current retail market for set-top boxes, enable companies that have invested in CableCARD-based products in accordance with current rules to compete effectively until the gateway device is deployed at scale, encourage more innovation until the gateway device is widely deployed and potentially allow for competition in the provision of the gateway device. 4.3 APPLICATIONS Over the last 10 years, there has been phenomenal growth in the applications and content available over broadband networks. Whole new markets have emerged, while others have migrated partially or totally online. Innovation in applications and content is transforming the way Americans communicate, shop, bank, study, read, work, use maps to find their way as they drive or walk, and are entertained. They have also changed the ways businesses interact with one another and market to their customers. Applications, content and the services they enable are bundled, sold, priced and monetized in many different ways. The nature and intensity of competition in applications and content varies tremendously and must be evaluated on a case-by-case basis. The collection, aggregation and analysis of personal information are common threads among, and enablers of, many application-related innovations. The data that businesses collect have allowed them to provide increasingly valuable services to end-users, such as customized suggestions for movie rentals or books often free of charge. These data have also become a source of value to businesses e. g. as an enabler of more targeted and relevant advertising and increased user loyalty. 134 These data collection and monetization activities are a major driver of innovation for the Internet today and have benefited consumers in many ways. However, many users are increasingly concerned about their lack of control over sensitive personal data. As aspects of individuals lives become more digitized and accessible through or gleaned from broadband use, the disclosure of previously private, personal information has made many Americans wary of the medium. Innovation will suffer if a lack of trust exists between users and the entities with which they interact over the Internet. Policies therefore must reflect consumers desire to protect sensitive data and to control dissemination and use of what has become essentially their digital identity. Ensuring customer control of personal data and digital profiles can help address privacy concerns and foster innovation. Personal Data, Innovation and Privacy Historically, many firms have used personal data offline to create consumer profiles that have spawned multibillion dollar industries. The credit rating industry, for instance, tracks personal information including payment history, loan balances and income levels, which it sells to third parties to facilitate critical decisions such as approval of mortgages, loans and credit cards. The credit card industry, advertising industry and telemarketers have always relied on personal profiles of customers to better tailor their products and services. However, the impact has not always been positive for consumers. This fact has led to government actions like the creation of the do not call list for telemarketers and the FTC s work on combating fraud and identity theft. The emergence of broadband and the growing use of the Internet makes aggregation of detailed personal data much easier and more valuable (see Box 4-2). As a result, single firms may be able over time to collect a vast amount of detailed personal information about individuals, including web searches, sites visited, click-stream, e-mail contacts and content, map searches, geographic location and movements, calendar appointments, mobile phone book, health records, educational records, energy usage, pictures and videos, social networks, locations visited, eating, reading, entertainment preferences and purchasing history. These data are giving rise to something akin to a digital identity, which is a major source of potential innovation and opens up many possibilities for better customization of services and increased opportunities for monetization. The value of a targeted advertisement based on personal data can be several times higher than the value of an advertisement aimed at a broad audience. For example, the going rate for some targeted advertising products can be several times the rate for a generic one 135 because consumers can be six times more likely to click through a targeted banner advertisement than a non-targeted one. 136 This differential will likely increase as targeting becomes more refined and more capable of predicting preferences, intentions and behaviors. Firms ability to collect, aggregate, analyze and monetize personal data has already spurred new business models, products and services, and many of these have benefited consumers. For example, many online content providers monetize their audience through targeted advertising. Whole new categories of Internet applications and services, including search, social networks, blogs and user-generated content sites, have emerged and continue to operate in part because of the potential value of targeted online advertising. 137 The ability to collect and store increasing amounts of personal data to develop these digital identities is accentuated by potential network effects. Firms with more predictive profiles and larger audiences will be able to offer increasingly better-targeted products and services that generate more advertising and consumer usage. This, in turn, enables the firms to collect more and better consumer personal data and develop even more predictive profiles. Those data and profiles are often so valuable for firms that they increasingly offer their products and services free of any monetary charges. Consumers gain access to valuable service, and businesses gain valuable information. However, new firms without access to detailed profiles of individual consumers, large audiences or subscriber pools may face competitive challenges as they try to monetize their innovations. They may face competitors offering an inferior service free of charge, and they may not have sufficient information about enough consumers to monetize their audience through advertising. One way to encourage innovation in applications is to give individuals control of their digital profiles. 138 Giving consumers control of their digital profiles and personal data, including the ability to transfer some or all of it to a third party of their choice, may enable the development of new applications and services, and reduce barriers to entry for new firms. Giving customers increased control of their profiles would also help address growing concerns about privacy and anonymity. Box 4-2: Online Personal Data Collection Online data collection can be either passive or active. Passive data collection occurs without any overt consumer interaction and generally includes capturing user preferences and usage behavior, including location data from personal mobile devices. The best-known example is the use of cookies on a user s computer to capture Internet browsing history. 139 Passive data collection and the sharing of this data among third parties is poorly understood by consumers and often not communicated transparently by websites and applications. Consumers have some tools at their disposal, such as private browsing capabilities provided in the latest version of popular Web browsers or tools that allow them to see what passive activity is being captured, but the tools are limited. 140 Active data collection requires a user to deliberately share personal data for instance, when completing an online retail transaction or downloading an application on a mobile device. It often includes some disclosure of the use of the data being collected, although disclosures are frequently complex and written for lawyers, limiting how effective they are at conveying information to consumers. 141 Additionally, active data collection disclosure forms can fail to divulge policies on data sharing with third parties when a consumer enters personal information, it is not clear whether these data might become part of a digital profile on a third party site. Once personal data are collected, either passively or actively, they can be aggregated through third parties. Large firms, with enough interactions with consumers and sufficient information about them, may aggregate the data on their own. Profiles may be simple contextual maps, drawing just on immediate actions that consumers take on a page for instance, someone searching for a flight may see a travel ad generated. Profiles may also be based on complex behavioral relationships that are not apparent to consumers for example, someone may see a more tailored travel offer on that same website based on purchases they made at a retail store a month earlier and on their subsequent spending. These more sophisticated profiles allow for targeting of products to individuals in a predictive fashion. Privacy and Anonymity Today, consumers may have limited knowledge (if any) about how their personal data are collected and used. The fiduciary and legal responsibilities of those who collect and use that data are also unclear. Once consumers have shared their data, they often have limited ability to see and influence what data about them has been aggregated or is being used. 142 Further, it is difficult for consumers to regain control over data once they have been released and shared. As a result, privacy concerns can serve as a barrier to the adoption and utilization of broadband. A recent FCC survey showed that almost half of all consumers are concerned about privacy and security online. 143 Clear and strong privacy protections that disclose how and when users can delete or manage data shared with companies will help develop a market for innovative online applications. Anonymity also must be addressed both because it can be a positive factor online and because it can be a negative one. Anonymity is critical for allowing Internet users to exercise fundamental rights such as whistleblowing and engaging in activism. However, anonymity could also have negative consequences, such as allowing cybercriminals to go undetected. Framework for Federal Involvement Several laws grant the FTC, FCC and other agencies regulatory authority over online privacy. The FTC has used its authority to prohibit unfair or deceptive practices and enforce promises made in corporate privacy statements on websites. 144 The FCC, for its part, typically works with the providers of broadband access to the Internet phone, cable and wireless network providers and the Communications Act contains various provisions outlining consumer privacy protections. 145 However, existing regulatory frameworks provide only a partial solution to consumer concerns and consist of a patchwork of potentially confusing regulations. 146 For instance, online communications are subject to ECPA, 147 but the privacy protections in ECPA may not apply to the information that websites collect from individual website visitors. 148 The Gramm-Leach-Bliley Act s protections for personal financial data apply only to financial institutions (such as banks, credit institutions and non-bank lenders), even though non-financial institutions (such as data brokers) may possess comparable information not subject to protections. 149 And while traditional telephone and cable TV networks are subject to privacy protections, ISPs operating in an unregulated environment can theoretically obtain and share consumer data through technologies such as deep packet inspection. 150 In terms of anonymity, communications privacy laws, 151 health privacy regulations 152 and financial privacy laws 153 all prohibit disclosure of some analog to personally identifiable information. However, defining personally identifiable information is not simple. In some cases, a single piece of information could be enough to identify an individual in other cases, multiple facts might be required. For example, some claim that an aggregate of gender, ZIP code and birth date are unique for about 87 of the U. S. population. 154 The right to speak anonymously without fear of government reprisal is protected by a number of laws, including federal whistleblower laws 155 and the First Amendment. 156 The protections for anonymous speech are broad. People who are actually engaging in expressive or political speech are afforded even fuller protections. 157 As a result, anonymity is a complex issue. As the FTC has stated, existing regulations are not enough in today s rapidly evolving world. 158 However, steps are being taken at the federal level to improve privacy protections, even in the absence of comprehensive privacy protections. 159 In particular, the FTC has addressed a wide variety of privacy issues since the 1990s. It has brought enforcement actions against spammers, makers of spyware and those who fail to protect sensitive consumer data. The FTC has also encouraged websites to post privacy policies that describe how personal information is collected, shared, used and secured. Today, nearly all of the top 100 commercial sites post such privacy policies. 160 Several years ago, the FTC launched an initiative to encourage greater transparency and consumer control with respect to online behavioral advertising. As part of that initiative, FTC staff issued a set of principles to guide industry self-regulation, including: Provide a clear, concise, consumer-friendly, prominent statement about behavioral advertising practices and a choice to consumers about whether to allow the practice. Provide reasonable security and have limited data retention. Obtain consent for material changes to existing privacy promises. Collect sensitive data for behavioral advertising only after obtaining consent from the consumer to receive such advertising. 161 Following the issuance of these principles, individual companies, industry organizations and privacy groups have taken steps to address the privacy issues raised by behavioral advertising. 162 At the time of this plan s release, the FTC is currently hosting a series of public roundtables to examine existing privacy frameworks and whether they are adequate to address the vast array of technologies, business models and privacy challenges in today s world. 163 The goal of the roundtables is to explore how best to protect consumer privacy while supporting beneficial uses of information and technological innovation. Finally, Congress and NTIA have taken an active interest in privacy and personal data protection. Several congressional committees have held hearings, and members have introduced bills that address various aspects of online privacy, from the brokerage of online information to deep packet inspection. NTIA, as part of its statutory obligation to advise the President, has worked closely with other parts of government on these issues. Box 4-3: Critical Legislation Reforming the Privacy Act This plan contains many recommendations, including some directed to Congress, for how to achieve the Congressional goals of access, affordability, utilization and achieving national purposes. In analyzing barriers to achieving these goals, a recurring theme emerges around privacy and control of personal data. The current legal landscape for how consumers control their personal data, when applied to the online world, may hold back new innovation and investment in broadband applications and content. These applications and content, in turn, are likely the most effective means to advance many of Congress s goals for broadband. New generations of applications and devices in sectors such as health care, energy and education will collect critical data that will help drive the next generation of American innovation, even as they raise important security and privacy considerations. 164 While it is beyond the scope of this plan to address the details of how the legal landscape should be reformed, it is likely that revising the current Privacy Act to give consumers more control over their personal data and more confidence in the security of their personal data is a positive action Congress could take to improve the broadband ecosystem. Done correctly, this would increase innovation, rather than stifling it, by allowing consumers to transparently understand and choose how their government data are used. Updating the Act for the 21st century reality of digital interaction and seamless content sharing could drive more Americans online, increase their utilization of the Internet and help American businesses and organizations develop deeper and more trusted relationships with their customers and clients. Recommendation 4.14: Congress, the Federal Trade Commission (FTC) and the FCC should consider clarifying the relationship between users and their online profiles. In particular, several questions need to be addressed: What obligations do firms that collect, analyze or monetize personal data or create digital profiles of individuals have to consumers in terms of data sharing, collection, storage, safeguarding and accountability What, if any, new obligations should firms have to transparently disclose their use of, access to and retention of personal data How can informed consent principles be applied to personal data usage and disclosures Recommendation 4.15: Congress should consider helping spur development of trusted identity providers to assist consumers in managing their data in a manner that maximizes the privacy and security of the information. Standard safe harbor provisions could allow companies to be acknowledged as trusted intermediaries that properly safeguard information, following appropriately strict guidelines and audits on data protection and privacy (see Box 4-4). Congress should also consider creating a regime that provides insurance to these trusted intermediaries. 166 Box 4-4: The FDIC as an Analog to Trusted Identity Providers Many government-backed entities have been created to help protect the public interest. The Federal Deposit Insurance Corporation (FDIC) provides one example of how government assists private companies in protecting and better serving consumers. Founded in 1933, the FDIC is an independent agency created by Congress to guarantee the deposits of individuals up to certain levels, thereby increasing trust in the banking system. Since the launch of FDIC insurance on Jan. 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. 165 The FDIC fulfills its mission: By acting as a private entity with the implicit backing of the government but that is fully self-funded through bank insurance payments. By creating minimum levels of security for depositors, giving Americans incentives to invest their personal funds in the banking system while limiting risk. By providing oversight of banks, assuring depositors that standards for good business and thoughtful risk taking are created and enforced. Congress could explore the creation of mechanisms similar to those used by the FDIC to foster the emergence of trusted identity providers to secure and protect consumer data. Recommendation 4.16: The FCC and FTC should jointly develop principles to require that customers provide informed consent before broadband service providers share certain types of information with third parties. 167 This information should include customers account and usage information such as patterns of Internet access use and other personally identifiable information. This should not limit the ability of the provider to render reasonable service. Consent to allow sharing of personal information should not be a prerequisite to receiving service. Identity Theft and Fraud Identity theft is not a new risk in fact, it is significantly more common offline than online. 168 However, with increases in electronic communications and online commerce, and the aggregation of information in databases, identity theft has become a growing concern. 169 In 2000, the FTC Consumer Sentinel Network received 31,000 identity theft complaints by 2008, this number had risen to 314,000. 170 According to the FTC: Credit card fraud (20 ) was the most common form of reported identity theft followed by government documents/benefits fraud (15 ), employment fraud (15 ) and phone or utilities fraud (13 ). Other significant categories of identity theft reported by victims were bank fraud (11 ) and loan fraud (4 ). In 2008, the FTC s network collected 1.2 million consumer complaints (up from roughly 900,000 in 2006) involving both online and offline transactions. Fraud and identity theft accounted for nearly 80 of these complaints. 171 Consumer risks like fraud and identity theft create a disincentive for individuals to engage in online transactions, increase the costs of doing business online and create law enforcement challenges. 172 Ensuring growing adoption and utilization of broadband requires that Internet users feel that they can connect and interact safely online. Recently, fraud has been growing. A separate report by the Internet Crime Complaint Center (IC3) showed a 33.1 increase in fraud from 2007 to 2008. 173 The IC3 found that non-delivered merchandise or payment was, by far, the most reported offense (32.9 ) while Internet auction fraud (25.5 ) and credit/debit card fraud (9.0 ) were also common offenses. Several federal agencies have authority and responsibility for identity theft. In 1998, Congress passed the Identity Theft and Assumption Deterrence Act, making identity theft a federal crime. By 2002, most states had followed the federal example and enacted identity theft statutes. 174 The Act called on the FTC to act as a clearinghouse for identity theft complaints and to provide consumer information to potential victims. 175 The FTC has produced several guidebooks with step-by-step information on actions consumers can take if they believe they are victims of identity theft. Those materials are available through the FTC. gov/idtheft website and the OnGuardOnline. gov project. Beyond existing regulations, the 111th Congress has multiple bills in development that specifically address identity theft and security breaches. 176 Recommendation 4.17: The federal government, led by the FTC, should put additional resources into combating identity theft and fraud and help consumers access and utilize those resources, including bolstering existing solutions such as OnGuard Online. Put more resources into OnGuard Online. The federal government should put additional resources into OnGuard Online, ensuring that it is easily accessible to consumers and provides them with information on risks, solutions and whom they can contact for further action. Federal agencies should connect their existing online websites to OnGuard Online and direct consumers to its resources. Maintain and publicize a database of agencies with responsibility. The FTC should maintain and publicize a database of agencies responsible for identity theft and fraud information, with clear information and directions available to consumers. Continue education efforts around identity theft and fraud. The federal government should continue educational efforts that clarify for consumers and businesses that personal information should only be collected when necessary and that entities should take reasonable measures to protect information from unauthorized access. Encourage broadband service providers to link to OnGuard Online. All agencies should encourage broadband service providers to link to OnGuard Online to direct potential victims of identity theft or fraud to necessary resources. Consumer Online Security In 1988, Robert Morris unleashed the Morris Worm on the Internet, bringing approximately 10 of the network to a halt. 177 In response, the Defense Advanced Research Projects Agency set up the first national cybersecurity effort the CERT Coordination Center at Carnegie Mellon University. 178 Today, DHS leads federal cybersecurity activities supported by numerous efforts such as the FTC s OnGuard Online program and DOJ legal actions. Consumer online security issues such as viruses, spam and malware are closely related to cybersecurity activities. In October 2009, spam accounted for 87 of all e-mail messages, and 1.9 of these spam messages contained malware. 179 According to the Anti-Phishing Working Group, the number of computers infected with malware viruses rose more than 66 between the fourth quarter of 2008 and the second quarter of 2009, representing more than half of their total sample of scanned computers. The incidence of malware such as password-stealing software directed at banking and financial accounts increased more than 186 in the same period. 180 DHS is the government agency with primary responsibility for cybersecurity, although the FTC often handles consumer online security complaints. DHS, DOJ and the Executive Branch have taken the lead in promoting cybersecurity. Other agencies such as the National Security Agency, the U. S. Department of Defense (DoD), NIST, the National Science Foundation and the FCC have all had active roles. Recently, these agencies have tried to enable simpler communication to the public about where to go in the case of online security issues, while also detailing strategies for protecting the online environment. 181 Broadband service providers have an incentive to offer security to customers to protect the network. Some offer antivirus software for free, although installation and control still primarily reside with the consumer. Application providers like Google also help consumers by providing information on vulnerabilities, such as by flagging sites that are security risks. This is a start, but there is a critical need for more consumer education on what threats they face, how to protect their connections and where to turn in case of emergency. Recommendation 4.18: FCC consumer online security efforts should support broader national online security policy, and should be coordinated with the Department of Homeland Security (DHS), the FTC, the White House Cyber Office and other agencies. Federal agencies should connect their existing websites to OnGuard Online to provide clear consumer online security information and direction. Child Protection In the FCC s recent study of broadband adopters and non-adopters, 74 of broadband users strongly agreed that it is important for children to learn how to use the Internet. In fact, technology has already become integral to children s lives. 182 While children can benefit from being online (e. g. through access to novel educational opportunities), they can also be exposed to risks. 183 Last year s Internet Safety Technical Task Force Report concluded that simply being online does not automatically put youth at risk for online predation. 184 Research also found that there was no evidence that online predators were stalking or abducting unsuspecting victims based on information they posted at social networking sites. 185 Still, there is a growing consensus that children need to be taught the critical skills necessary to succeed in an online environment. As stated by the National Academies of Sciences: Swimming pools can be dangerous for children. To protect them, one can install locks, put up fences and deploy pool alarms. All of these measures are helpful, but by far the most important thing that one can do for one s children is to teach them to swim. 186 Recommendation 4.19: The federal government should create an interagency working group to coordinate child online safety and literacy work, facilitate information sharing, ensure consistent messaging and outreach and evaluate the effectiveness of governmental efforts. The working group should consider launching a national education and outreach campaign involving governments, schools and caregivers. Content and Online Copyright Protection The Internet is revolutionizing the production and distribution of creative works, lowering barriers to entry and enabling far broader and faster access to culture and ideas than previously possible. 187 But the Internet s value as a platform for content and the ability of online content to drive increased adoption and use of broadband 188 depends on creators incentives to create and disseminate their works online, which are in turn at least partly dependent on copyright protection. The Internet must be a safe, trusted platform for the lawful distribution of content. At the same time, copyright protection efforts must not stifle innovation overburden lawful uses of copyrighted works or compromise consumers privacy rights. The Plan s recommendations regarding content and online copyright protection are limited to a few discrete suggestions regarding educational uses and public media (see Chapters 11 and 15). Digital Goods and Services Taxation Recommendation 4.20: The federal government should investigate establishing a national framework for digital goods and services taxation. The National Broadband Plan is focused on increasing beneficial use of the Internet, including e-commerce and new innovative business models. The current patchwork of state and local laws and regulations relating to taxation of digital goods and services (such as ringtones, digital music, etc.) may hinder new investment and business models. 189 Entrepreneurs and small businesses in particular may lack the resources to understand and comply with the various tax regimes. Recognizing that state and local governments pursue varying approaches to raising tax revenues, a national framework for digital goods and services taxation would reduce uncertainty and remove one barrier to online entrepreneurship and investment. 4.4 COMPETITION FOR VALUE ACROSS THE ECOSYSTEM The Internet s openness, and the transparency of its protocols, has been critical to its success. 190 As the FCC s NPRM on Preserving the Open Internet explains, broadband is a powerful engine for innovation and investment in America in part because the Internet is an open platform, where anyone can communicate and do business with anyone else on a level playing field. 191 The open Internet ensures that users are in control of the content that they send and receive, 192 and that inventors and entrepreneurs do not require the securing of permission to innovate. 193 The NPRM notes that these characteristics have made the Internet vibrant, and its continued health and growth as well as broadband s ability to drive the many benefits discussed in this plan depend on its continued openness. B roadband providers ability to innovate and develop valuable new services must co-exist with the preservation of the free and open Internet that consumers and businesses of all sizes have come to depend on. 194 In the latest step in a longstanding effort to ensure these interests remain balanced, the FCC adopted the NPRM on Preserving the Open Internet in October 2009, which launched a rulemaking process that is currently underway. 195 The NPRM asked for public comment on six proposed principles: Content. Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from sending or receiving the lawful content of the user s choice over the Internet. Applications and Services. Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from running the lawful applications or using the lawful services of the user s choice. Devices. Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from connecting to and using on its network the user s choice of lawful devices that do not harm the network. Competitive Options. Subject to reasonable network management, a provider of broadband Internet access service may not deprive any of its users of the user s entitlement to competition among network providers, application providers, service providers and content providers. Nondiscrimination. Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications and services in a nondiscriminatory manner. Transparencia. Subject to reasonable network management, a provider of broadband Internet access service must disclose such information concerning network management and other practices as is reasonably required for users and content, application and service providers to enjoy the protections specified in this part. The proposed rules also make clear that the principles would not supersede any obligation or limit the ability of broadband providers to deliver emergency communications or address the needs of law enforcement, public safety or homeland security authorities, consistent with applicable law. 4.5 TRANSITION FROM A CIRCUIT-SWITCHED NETWORK Increasingly, broadband is not a discrete, complementary communications service. Instead, it is a platform over which multiple IP-based services including voice, data and video converge. As this plan outlines, convergence in communications services and technologies creates extraordinary opportunities to improve American life and benefit consumers. At the same time, convergence has a significant impact on the legacy Public Switched Telephone Network (PSTN), a system that has provided, and continues to provide, essential services to the American people. 196 Convergence raises a number of critical issues. Consumers benefit from the options that broadband provides, such as Voice over Internet Protocol. But as customers leave the PSTN, the typical cost per line for Plain Old Telephone Service (POTS) increases, given the high fixed costs of providing such service. 197 Between 2003 and 2009, the average cost per line increased almost 20 . 198 Regulations require certain carriers to maintain POTS a requirement that is not sustainable and lead to investments in assets that could be stranded. 199 These regulations can have a number of unintended consequences, including siphoning investments away from new networks and services. The challenge for the country is to ensure that as IP-based services replace circuit-switched services, there is a smooth transition for Americans who use traditional phone service and for the businesses that provide it. This is not the first time the United States has overseen a transition in communications. In the past, the country transitioned mobile service from analog to digital and, more recently, transitioned broadcast television from analog to digital. In each case, government policies helped ensure that legacy regulations and services did not become a drag on the transition to a more modern and efficient use of resources, that consumers did not lose services they needed and that businesses could plan for and adjust to the new standards. As with earlier transitions, the transition from a circuit-switched network will take a number of years. But to ensure that the transition does not dramatically disrupt communications or make it difficult to achieve certain public policy goals, the country should start considering the necessary elements of this transition in parallel with efforts to accelerate broadband deployment and adoption. As such, the FCC should start a proceeding on the transition that asks for comment on a number of questions, including whether the FCC should set a timeline for a transition and, if so, what the timeline should be, 200 quality of service requirements 201 and safeguarding emergency communications. 202 This proceeding should consider questions of jurisdiction, 203 regulatory structure 204 and legacy voice-specific regulations, including interconnection, numbering and carrier of last resort obligations. 205 It should consider the impact of the transition on employment in the communications industry, particularly given the historic role of the sector in providing high-skill, high-wage jobs. 206 In the proceeding, the FCC should also look at whether there are requirements from other federal entities, such as tax requirements, that would affect the path of the transition. Finally, a number of recommendations in this plan will affect the path of the transition, including recommendations about universal service and intercarrier compensation (Chapter 8) and recommendations related to access for people with disabilities (Chapter 9). The proceeding should examine how best to proceed with a transition in light of these other recommendations. 4.6 LEVERAGING THE BENEFITS OF INNOVATION AND INVESTMENT INTERNATIONALLY While the National Broadband Plan focuses on developing the domestic broadband ecosystem, broadband policy also unfolds in an interdependent international market full of opportunities and challenges. Global trade in information and communications technology (ICT) is almost 4 trillion and growing. 207 U. S. companies have played a leading role in bringing technologies to market that support a worldwide ICT ecosystem through the development of software, devices, applications, semiconductors and network equipment. This trade and investment is supporting tremendous growth in international Internet traffic, which increased at a compound annual growth rate of 66 over the past five years, supported by a 22 compound annual reduction in international transit port prices over that same period. 208 Further investment and innovation in U. S. broadband networks will provide U. S. businesses and consumers with the infrastructure they need to continue to compete in the rapidly changing ICT market. However, to realize the tremendous promise of a networked world, U. S. leadership and international cooperation are needed to encourage Internet freedom and strengthen cybersecurity. The United States took a leading role in the global Internet revolution of the 1990s by contributing to the technological and policy developments that enabled the Internet. The breakup of AT T in the 1980s and the Telecommunications Act of 1996 served as catalysts for the spread of pro-competition policies around the world. 209 In addition, with the adoption of the World Trade Organization s Basic Telecommunications Agreement and Reference Paper in 1996, the world community took steps to adopt important liberalization principles that remain relevant and influential today. 210 The National Broadband Plan recognizes that making the right policy choices at home that result in domestic market success is essential for the United States to advocate effectively in the debate on policies and practices for the global communications network. The policies contained in the plan form the basic foundations of the U. S. international telecommunications agenda. These principles include support for regulatory frameworks that are pro-competitive, transparent and technology-neutral. Ubiquitous availability of broadband and universal connectivity enable people and entities in the United States to communicate worldwide, which increases productivity and enables innovation. The National Broadband Plan s emphasis on the promotion of the use of broadband for national priorities, such as education, energy, health care, economic development, e-government, civic engagement and public safety, demonstrates the possibilities for progress that can result from access to broadband. Even for the many people whose access to the global network is limited to mobile phones, there are still innovative examples of how mobile broadband can serve national priorities, such as providing access to health care information through mobile handsets. 211 Competitive communication policies have facilitated network development around the world. The trends are encouraging, with 1.7 billion Internet users and 4.6 billion mobile phone subscribers in the world today. 212 Mobile networks now constitute the world s largest distribution platform. And today s mobile users will be the next generation of Internet users, as smartphones enable those with mobile access to experience the benefits of connectivity. But more needs to be done to encourage mobile broadband access. About 40 of the world s population still does not have mobile phones and about three-quarters are not using the Internet. 213 The United States should continue to support policies that hasten the rollout and uptake of telecommunications technology that bridges the international digital divide. Integrating ICT deployment and utilization into broader regional economic development strategies is as important abroad as it is at home. 214 Policies that support the uptake of telecommunications technologies not only provide incentives for needed connectivity but also allow U. S. innovations to flourish in a rapidly developing world market. In turn, Americans benefit from a parallel stream of innovations coming from abroad. As more people gets access to mobile communications services, innovative uses of mobile technology are increasing. But proliferation of mobile phones not only allows people to share more information, it has also spurred innovation and investment in other sectors that would be impossible without global access to broadband. From health care to banking, entrepreneurs have recognized that the commonality and wide distribution of mobile communications devices make them ideal tools for launching a variety of services and applications. For example, in many developing countries, an entire segment of the population that previously had no access to banks is taking advantage of the convenience and availability of mobile banking. Mobile banking includes a variety of technology and business strategies to leverage mobile communications networks for the provision of transactional and informational financial services. Emerging markets are embracing mobile banking as a more effective means of reaching more people than traditional bricks-and-mortar banks. Access to banking for the previously unbanked can have a dramatic impact on individuals, families and small businesses as it increases safety, prevents monetary loss, enables savings and makes business more efficient and successful. 215 The United States also needs to provide continued leadership to ensure that the Internet will continue to evolve in ways that are cooperative, collaborative and maximally beneficial for the collective community of users, managers and investors. The three primary streams of cooperation intergovernmental cooperation, cooperation through non-governmental organizations and cooperation through technical bodies have served the world and the Internet well. The United States needs to provide continued leadership in all of these fora particularly by working (as recommended in Chapter 5) with the international community, including the ITU, to develop innovative and flexible global spectrum allocation. 216 Global harmonization across spectrum usage, along with international standards-setting, can reduce per-unit costs and lead to increased adoption and usage of the Internet around the world. Today, as in the 1990s, the changing capabilities of ICT are forcing the world to make critical policy choices. The great achievement of a near-ubiquitous global network is being threatened by curtailed Internet freedom and decreased network security. The global communications network has created an era in which information is perhaps freer than ever before. Maximizing the benefits of broadband worldwide will require increased attention to policies that promote universal and unrestricted access to the Internet. The United States should lead in efforts to create a global consensus on how to define and guarantee basic rights of openness, access to and creation of information and connection to the global Internet community. Cybersecurity, as discussed in Chapters 14 and 16, 217 is an important element of the National Broadband Plan. Cyberattacks can be generated from anywhere in the world. The importance of cybersecurity as a policy objective cannot be underestimated. Engaging counterparts in international fora, as appropriate, will be crucial to successfully implementing cybersecurity policies. 1 See, for example, Howard Shelanski, Adjusting Regulation to Competition: Toward a New Model for U. S. Telecommunications Policy . 24 Yale J. on Reg. 56 (2007), for a discussion. Even in the early days of high-speed access some recognized that the high-speed retail ISP market structure would differ from that of dialup ISP. Faulhaber and Hogendorn, for example, estimated that demand would support two or three wireline providers. See Gerald R. Faulhaber Strategies, Special Issue 2008, at 35, 49 (2008). 2 Bresnahan and Reiss s seminal article developed the model and tested its implications in a number of industries. See Timothy F. Bresnahan Peter F. Orazem, Do Entry Conditions Vary over Time Entry and Competition in the Broadband Market: 1999 2003 (Iowa State Univ. Working Paper No. 06004, 2006), available at econ. iastate. edu/research/webpapers/paper 12500 06004.pdf. While suggestive, the research relies on the FCC s ZIP code counts from the old Form 477 data. Those data, discussed elsewhere, show that most ZIP codes have multiple high-speed providers, but those providers do not always serve the same area within the ZIP code. 3 Imperfect competition occurs when goods or services are not perfect substitutes yet can impose some competitive discipline on each other due to the multidimensional nature of consumer preferences. For example, in this case, mobile broadband could provide some competitive pressure if enough people are willing to trade off speed for mobility. 4 Department of Justice Ex Parte in re National Broadband Plan NOI, filed Jan. 4, 2010, at 11 ( We do not find it especially helpful to define some abstract notion of whether or not broadband markets are competitive. Such a dichotomy makes little sense in the presence of large economies of scale, which preclude having many small suppliers and thus often lead to oligopolistic market structures. The operative question in competition policy is whether there are policy levers that can be used to produce superior outcomes, not whether the market resembles the textbook model of perfect competition. In highly concentrated markets, the policy levers often include: (a) merger control policies (b) limits on business practices that thwart innovation (e. g. by blocking interconnection) and (c) public policies that affirmatively lower entry barriers facing new entrants and new technologies. ). 5 Department of Justice Ex Parte in re National Broadband Plan NOI, filed Jan. 4, 2010, at 7 Gregory L. Rosston, Deputy Director, Stanford Institute for Economic Policy Research, Remarks at FCC Benchmarks Workshop 5 17 (Sept. 2, 2009), available at broadband. gov/docs/ws 20 benchmarks. pdf James Prieger, Professor of Pub. Policy, Pepperdine Univ. Remarks at FCC Economic Growth, Job Creation and Private Investment Workshop 4 15 (Aug. 26, 2009), available at broadband. gov/docs/ws 16 economy. pdf Ryan McDevitt, Lecturer, Dep t of Manag. Carl Shapiro, Deputy Ass t Attorney General for Economics, Antitrust Div. DOJ, Remarks at FCC Economic Issues in Broadband Competition Workshop 66 83 (Oct. 9, 2009), available at broadband. gov/docs/ws 28 economic. pdf . 6 See FCC, 2008 Form 477 database (accessed Dec. 2009) (on file with the FCC) (Form 477 database). While much improved from past years, the new 477 data are not ideal for analyzing competition because the data identify providers that operate anywhere in a Census tract and not whether their service areas overlap geographically. We improve the 477 provider counts in two ways. First, we do not count providers with less than one percent of broadband subscriptions in a given Census tract under the assumption that a provider with such a small number of subscribers is probably not available to a large part of the tract. Second, we identify cable overbuilders (such as RCN) in the data, which allows us to make reasonable assumptions about where cable companies actually provide service to the same geographic areas. Specifically, we assume that any given area is served by a maximum of one facilities-based DSL provider and one cable provider unless a cable overbuilder is present, in which case we count both cable providers. We also count fiber-specific competitors, but do not double-count telco providers that offer both DSL and fiber in the same tract (i. e. Verizon DSL and FiOs). Finally, we do not count CLECs providing service over another company s lines because we focus on facilities-based providers, and their inclusion would overstate the extent of competition. 7 The limited useful data on availability make it difficult to estimate these figures with precision. The OBI team has used multiple inputs and analyses to better estimate the availability figures, as discussed infra Chapter 8. See Omnibus Braodband Initiative, OBI, The Broadband Availability Gap (forthcoming) (OBI, The Broadband Availability Gap). 8 Robert C. Atkinson Schultz, Broadband in America). 9 According to Clearwire s November 10, 2009 earnings report, it expected to provide service in the following cities by the end of 2009: Atlanta, GA Baltimore, MD Boise, ID Chicago, IL Las Vegas, NV Philadelphia, PA Charlotte, Raleigh, and Greensboro, NC Honolulu and Maui, HI Seattle and Bellingham, WA Portland and Salem, OR and Dallas/Ft. Worth, San Antonio, Austin, Abilene, Amarillo, Corpus Christi, Killeen/Temple, Lubbock, Midland/Odessa, Waco and Wichita Falls, TX. Clearwire, Clearwire Reports Third Quarter 2009 Results (press release), Nov. 10, 2009, investors. clearwire /phoenix. zhtml c 198722 ID 1353840 . 10 Satellite-based broadband providers, because of limited satellite capacity, have Fair Access Policies (often termed usage caps) for their customers: the Hughes current limit is as low as 200 MB per day, while WildBlue s cap is as low as 7,500 MB per month. Next-generation satellites will have much higher capacities, in excess of 100 Gbps each, with download speeds per user of up to 25 Mbps. Larger capacities could allow for usage patterns that more-closely mirror terrestrial usage. However, the high fixed costs of designing, building and launching a satellite mean that satellite-based broadband is likely to be cheaper than terrestrial service only for the most expensive-to-serve areas. Atkinson Schultz, Broadband in America at 57. As the report notes, however, actual speeds will depend on several factors, including intensity of use in any given area. For examples of commercial services with usage caps today, see HughesNet, Fair Access Policy, web. hughesnet /sites/legal/Pages/FairAccessPolicy. aspx (last visited Mar. 4, 2009) and WildBlue Communications, WildBlue Fair Access Policy, wildblue /legal/fair. jsp (last visited Mar. 4, 2009). 11 See Form 477 database. The figure is derived from econometric analysis of the FCC s December 2008 Form 477 data and controls for housing density, household income, and state fixed effects. Simple correlations between the number of providers and any particular outcome are not necessarily meaningful because some factors that affect the number of providers in an area may also affect outcomes. For example, providers may offer faster speeds in wealthier areas, and wealthier areas may tend to have more providers. A positive correlation between the two might therefore be an income, not a competition, effect. We handle this issue through econometric analyses, including modeling the number of firms in a market before estimating the effects of the number of firms on outcomes. 12 See Form 477 database. This table is derived from FCC analysis of Form 477 data dated December 2008. Analysis controls for household income, housing density, and state-specific effects. The figure may understate the competitive effects due to the way Form 477 categorizes connection speeds our method of estimating speeds from those categories. In particular, rather than reporting actual advertised speeds, Form 477 identifies each connection as being in one of 8 groupings (200 768 Kbps, 768 Kbps 1.5 Mbps, 1.6 3 Mbps, 3.1 6 Mbps, 6.1 10 Mbps, 10.1 25 Mbps, 25 100 Mbps, and greater than 100 Mbps). We estimate speeds from these groupings by using the midpoint of each category as the advertised speed in our analyses. Therefore, increases in the figure may not appear to be especially large unless a large number of connections move from one category to another. For example, a connection that increases from 3.5 Mbps to 5.5 Mbps would not appear as an increase in our analysis. Fiber includes fiber-to-the-home connections (such as Verizon FiOS), but excludes fiber-to-the-node connections (such as AT T U-verse). Furthermore, the analysis is based on advertised speeds, not actual delivered speeds. The highest available fiber speed in areas with three wireline providers is not statistically different from the speed in areas with two providers. This result is an artifact of the way Form 477 aggregates speed data. In particular, about two-thirds of all fiber connections in areas with two or three wireline competitors are grouped into the 10 25 Mbps tier. A 10 Mbps connection, therefore, would appear in the data identical to a 20 Mbps connection. As a result, we observe too little variation in the fiber speed data to identify differences in speeds between areas with two and three wireline providers 13 Broadband providers can compete for customers in a number of ways. They can offer similar products and compete on price, they can improve their product so that people are willing to pay more for it, and they can offer products targeted to different groups. Chen and Savage find evidence that cable and DSL providers may compete by targeting different types of consumers rather than by lowering prices if preferences in the target population are sufficiently diverse. Yongmin Chen Nicholas Economides et al. Quantifying the Benefits of Entry into Local Telephone Service . 39 RAND J. Econ. 699 (2008). 14 2009 figures are estimates. See Atkinson Schultz, Broadband in America at 66, tbl. 15. 15 Atkinson see also supra Chapter 3.