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Margit Vanberg, The Internet as the communications platform of the future in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 17 - 18

A Network Economic Analysis

1. Edition 2009, ISBN print: 978-3-8329-4163-5, ISBN online: 978-3-8452-1290-6 https://doi.org/10.5771/9783845212906

Series: Freiburger Studien zur Netzökonomie, vol. 14

Bibliographic information
17 1 Introduction 1.1 The Internet as the communications platform of the future Since the commercialization of the Internet, Internet services have penetrated many aspects of everyday-life. For regular users of the Internet, a world without E-mail, E-commerce, E-government, E-learning, etc. is practically unimaginable today, while little more than a decade ago most users of today had not even heard of the Internet.1 Information on a wide range of topics is available on the Internet and accessible easily and quickly to those that understand its basic principles. Newer applications, such as weblogs, wikis, podcasts, peer-to-peer networks, and social networks are experiencing enormous growth rates. The Internet has not only exerted a significant impact on individual consumers but on market transactions as well. Organizational structures of firms have, for instance, changed in answer to the new communication capabilities. New forms of transmitting knowledge have enabled a decentralized management. Business processes between firms have been altered due to shared information systems. Continuously updated databases are replacing warehouses. In general, the digitization of information has accelerated economic activity and thereby increased productivity. Judging from its development so far, one can expect the role of the Internet to grow even further in the future. The Internet Domain Survey which publishes estimated host counts for the global Internet twice yearly shows a continuous rise in this figure over the years: in 1995, the year the Internet was officially commercialized, the survey counted about 6.6 million hosts. In 2001 the estimate came to 125 million hosts. By January 2007 the survey estimates that over 433 million hosts are connected to the Internet.2 Statistics on the number of Internet users worldwide estimate that 1.262 billion users were online in 2007.3 The continued rapid growth of the Internet is evident 1 Most Internet-related organizations (i.e. the Internet Society, the Internet Engineering Task Force, the Internet Corporation for Assigned Names and Numbers and the World Wide Web Consortium) treat the term Internet as a proper noun and capitalize the first letter (see http://en.wikipedia.org/wiki/Internet_capitalization_conventions; site last visited on Feb. 15, 2008). The present thesis follows this convention. 2 The Internet Domain Survey results can be found at http://www.isc.org/ds/; site last visited on Feb. 15, 2008. A host is a machine that communicates via a network. A host can be a single web-server offering web content or a single computer connected to the Internet. 3 See http://www.internetworldstats.com/stats.htm; site last visited on Feb. 15, 2008. Internet users are defined as adults and children that accessed the Internet at least once during the 3 months prior to being surveyed. Where these figures were not available, nua.com used figures for users that went online in the past six months, past year, or ever. 18 from the fact that this number roughly quadrupled since March 2000 (309 million users) and is more than ten times the number of users in the second half of 1997 (100 million). Africa, Latin America and the Middle East are currently experiencing the fastest usage growth. In the more developed regions of the world the growth in registered sites and users may level out soon, but Internet applications are still showing growth rates in large orders of magnitude. Forrester Research is, for instance, predicting that E-commerce volume in Europe will more than double between 2006 and 2011.4 The process of network convergence Not only are Internet applications becoming ubiquitous, the Internet technology is gaining in importance in comparison to other communications technologies as well. There is a general understanding in the industry that the Internet is the communications platform on which other communications and media networks will converge, and that this network convergence will be completed in the near future. So-called next generation networks (NGNs) are generally defined as communications networks based on the Internet Protocol which support multiple services, especially telecommunications, Internet, and broadcasting of television and radio. The advantages of network convergence are seen in the lower costs of operating a single network for several uses as well as in the convenience for end-users who can receive a multitude of services from one provider. 1.2 The role of sector-specific regulation or competition policy in the Internet Because of its importance for business activity as well as for private consumption, the stability of the Internet is a top-priority for policymakers worldwide. Since the network characteristics of the Internet underscore its closeness to other regulated network industries, especially the telecommunications markets, it is an obvious candidate for government intervention. Competition authorities already watch over this market critically, and legislators have on several occasions appraised the need for sector-specific legislation for Internet markets. The following two subsections describe the cost and demand characteristics that are typical for network industries and explain why these have been used to argue for government intervention into network industries in general and in the Internet in particular. 1.2.1 Typical cost and demand characteristics of network industries Generally, network industries such as telecommunications, electricity and transportation have in common that the production of their services is based on a network 4 See http://www.entwickler.com/itr/news/psecom,id,29529,nodeid,82.html; site last visited on Feb. 15, 2008.

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Zusammenfassung

Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.