THE ROAD TO BROADBAND DEVELOPMENT IN DEVELOPING COUNTRIES IS THROUGH COMPETITION DRIVEN BY WIRELESS AND VOIP Francisco J. Proenza FAO Investment Centre Paper prepared for the workshop: Wireless Communication and Development: A Global Perspective Annenberg Research Network on International Communication October 7-8, 2005The author gratefully acknowledges valuable comments from Carlos Sánchez (OSIPTEL, Peru), Marcel Silva (Subtel, Chile), Ermanno Pietrosemoli (U. de los Andes, Venezuela), Juan Belt (USAID), David W. Mendoza (USAID), Bernard Merzer (USAID), Chat Garcia Ramilo (APC), Bona Simanjuntak (Center for ICT Studies, Indonesia), and Rose Maria Bonello (Telecom Italia). The views expressed in this document are those of the author and not necessarily reflect the official position of the FAO.Table of Contents Introduction......................................................................................................1 Significance of VoIP and Wireless for Low Income People .................................1 VoIP 1 Wireless ....................................................................................................... 3 Bandwidth Requirements of Low Income Rural Communities ................................ 3 Cost, Scalability and Ability to Serve Disperse Populations at Low Cost .................. 3 Local Networks, Digital Literacy and Sustainability of Service ............................... 3 The Regulatory Challenge..................................................................................7 VoIP 7 Wireless ..................................................................................................... 10 Licensing .................................................................................................... 10 Interconnection ........................................................................................... 10 Broadband Development .................................................................................11 Korea – An Urban Model ............................................................................. 11 South American Experience with Reverse Subsidy Auctions ........................ 13 Contest Design and Risk Management ............................................................ 13 Technology Neutral Contests Favor Wireless for Rural Areas............................... 17 Incumbents do not Like Reverse Subsidy Auctions............................................ 17 Risks Remain High ....................................................................................... 18 Nibbling at the Edges.................................................................................. 18 India’s Chiraag ............................................................................................ 18 Indonesia’s WiFi Networks ............................................................................ 20 Strategic Considerations for Rural Broadband Development ............................20 Institutions and Instruments...................................................................... 20 Effectiveness of Select Instruments............................................................ 22 Reverse Subsidy Auctions ............................................................................. 22 Effecting Change in Regulation ...................................................................... 23 Buildup of Participation and Monitoring Capacity of Stakeholders ........................ 23 Concluding Remarks........................................................................................24THE ROAD TO BROADBAND DEVELOPMENT IN DEVELOPING COUNTRIES IS THROUGH COMPETITION DRIVEN BY WIRELESS AND VOIP Introduction Internet telephony (VoIP) and Wireless technologies are radically transforming the telecommunications sector. By enabling rapid low cost deployment of service to traditionally underserved populations and expanding backhaul and last mile connectivity options, wireless technologies are making it easier for new competitors to arise and begin to challenge the traditional dominance of circuit switch operators. On its own, VoIP enhances the value of IP Networks and challenges traditional revenue models of incumbents. The two combined, wireless and VoIP, have the potential to wreak havoc with businesses dependent on land lines. These technological advances are seen in developed countries as opportunities to further facilities-based competition and are welcomed by independent regulators. Incumbent operators, whose dominance is challenged, observe these developments guardedly, with the most enlightened adjusting their market offers to profit from the new technologies. Competition in these countries takes place predominantly in profitable dense urban markets that can sustain several competing infrastructural networks – mobile, cable, land lines. The situation is different in developing countries. Regulators are generally weak, lacking independence and at times part of a system in which the legacy operator captures the regulatory and political processes. Monopoly operators serving metropolitan markets have faced some challenges mainly from mobile networks. The markets that remain untapped are rural, high cost, low-income and high risk. Serving these markets has required large investments that have not been forthcoming from the private sector. There have been few new entrants on account of the low potential profits, but also because of the high risks and obstacles associated with penetrating a weakly regulated market dominated by a monopoly. Wireless and VoIP are beginning to change the economic calculus of serving rural areas. But while technology is changing, significant regulatory and governance obstacles remain. There is broad recognition that Government subsidies are required to stimulate demand and spur investment to serve rural communities. The way that these subsidies are crafted will not only impact rural service in the short term, but also the future competitive development of information and communication technologies in developing countries. This paper gives an overview of the significant role of Wireless and VoIP technologies in expanding low cost ICT services to rural communities in developing countries, highlights the importance of competition between rivalrous networks to increase investment in telecommunications, identifies regulatory and