1. 1 The contribution of ICT in achieving the new Lisbon Agenda Brian Williamson David Lewin Puntoit/Key4Biz Workshop 7th June 2005 +44 207 324 1800 www.indepen.co.uk

2. 2 Agenda 1. The challenge – a productivity problem in Europe 2. Market context to 2010 – regulation is not keeping pace 3. Allowing creative destruction to revitalise Europe 4. Moving forward

3. 3 1.The Challenge A productivity problem in Europe

4. 4 Europe no longer catching up but falling behind Source: Denis et al. February 2005. Labour productivity growth per hour

5. 5 ICT contribution to labour productivity growth per hour Source: Denis et al. February 2005. Two-thirds of productivity gains in the US come from the use, rather than production, of ICT

6. 6 Breaking down the ICT contribution Source: Indepen-Ovum, January 2005.

7. 7 ICT investment in Europe has been low ICT investment/capita in Europe is at levels seen in the US 20 years ago Source: Indepen-Ovum, January 2005.

8. 8 Contribution of ICT investment to GDP growth Source: OECD. May 2005. Key ICT indicators.

9. 9 Contribution of ICT-using services to value added Source: OECD. May 2005. Key ICT indicators.

10. 10 Observations US productivity acceleration coincided with An explosion in networking of ICT during 1990s The rate of decline in semiconductor prices in mid-1990s doubling But everyone has similar access to ICT Many ICT goods and services are traded internationally - no need to produce ICT to benefit (e.g. Australia) Much of telecommunications is an exception – must get it right at home US has invested more in use of ICT and gained greater productivity payoff per unit of investment => Why is ICT investment more profitable in the US?

11. 11 Effective ICT use depends on creative destruction …ICT is less compatible with European incentive structures than investment in other types of capital. Professor Crafts, London School of Economics, 2004 [ICT] provides a striking example of the need for policy makers to promote entrepreneurship and a healthy process of creative destruction EC Directorate-General for Economic and Financial Affairs, February 2005 The European economic environment creates too little room for good firms to excel and for failing firms to exit the market so as to free up resources for the much-needed transition Bart van Ark, Groningen Growth and Development Centre, April 2005

12. 12 Creative destruction provides a guide to policy Simply promoting investment will not work due to diminishing returns Underlying problem is that ICT investment in Europe is less profitable because Levels and types of skills are less suitable – skills tend to be industry specific in Europe Product market regulation limits opportunities (e.g. in retail) Companies cannot exploit the full scale economies offered by ICT - Europe is a less integrated market than the US for services There are greater impediments to making the required organisational changes

13. 13 2.Market context to 2010 Regulation is not keeping pace

14. 14 The supply of ICT is important Traded goods and services can always be bought on a global market But efficient supply of, and investment in, non-traded ICT goods and services (such as telecoms and some software services) is essential There are also benefits from having a local ICT research and development capability The benefits from networking computers will grow rapidly, pointing to the increasing importance of communications within ICT But the EU lags the US on almost any measure of use of communications services

15. 15 Industry transformations - NGN effects SoftSwitch and applications servers SoftSwitch and applications servers SoftSwitch and applications servers Access networks - fixed and mobile IP transport networks Content NGN roll out well underway by 2010 – and nearing completion in some member states NGNs lead to separation of applications and services from transport and access We see much stronger competition at this first level This competition captures a high proportion of the economic benefits of infrastructure based competition

16. 16 Industry transformations - other Slow down in market growth (<1% pa in real terms) will push operators into value added and content based services Growing cross platform competition: between fixed and mobile operators for voice calls fixed incumbent will compete vigorously with CATV operators for triple play consumer spend in most EU countries Substantial consolidation: carrier selection based AltNets will disappear (or become ISPs) altnets with directly connected customers will merge for greater economies of scale corporate Altnets will reposition themselves or disappear

17. 17 Industry transformation – the need for investment A major change in regulation is needed if the industry is to invest at the speed and level required 19952000200520102015 Mobile connectivity Fixed broadband connectivity Fixed and mobile NGNs VA and content based services A period of intense investment by major ECNS players Major investment required The current prospects of greater network investment to exploit ICT fully are limited: investment levels per capita now at 70% of US and Japanese levels financial analysts predicting no increase in capex by EU ECNS suppliers likely with current regulation Traditional voice revenues are declining – where will the investment funds come from?

18. 18 Industry transformation and regulation Current regulation is backward focussed – on declining fixed voice markets Current regulation does not work well with new multi-service platforms: lots of uncertainty over which services will work on these platforms not enough information to apply the NRF big economies of scope between supply of services so… …bundles of services rather than individual services could form the new markets eg triple play high risk investment but potential for major dynamic efficiency gains New regulatory imperative – a need to encourage investment and innovation through the new multi service platforms New regulatory imperative – a need to encourage investment and innovation through the new multi service platforms

19. 19 3.Allowing creative destruction to revitalise Europe

20. 20 Make ICT use more productive and profitable Greater human capital and labour market flexibility Greater product and service market flexibility and integration Enable better use of ICT in the public sector Switch from targets to proper assessment of costs and benefits Benchmark against international best practice Target funding on e-policy projects that cross traditional boundaries Develop budgetary processes and policies that are ICT capital friendly A new (and necessary?) means of achieving European social model

21. 21 Rethink general policy approach Take account of the spillover benefits from ICT – as is done with environmental impacts Focus on the dynamic gains from market expansion - more weight on innovation and investment versus short term price objectives Do not apply any sector specific taxes to ICT (e.g. sector funded universal service obligations, levies on devices etc) Eliminate regulatory approaches that cannot keep pace with technological and market developments Improve access to premium content and do not extend scope of content and advertising regulation to services offered over new platforms Use European Communications Framework review to shift ex ante regulation of telecoms from one based on power in markets to one based on non replicable assets

22. 22 A possible new regulatory framework Now Markets focus for both ex ante sector specific regulation and competition law 18 pre-defined markets for possible ex ante regulation SMP assessment followed by imposition of obligations Obligations lifted when SMP disappears Post 2006? Competition law focussed on markets and ex ante sector specific regulation focussed on non replicable assets Market conduct left to competition law Obligations imposed on supply of non replicable assets Set market triggers in advance and lift obligations to supply non replicable assets when trigger is pulled

23. 23 4.Moving forward

24. 24 Challenges to reform Re-branding the Lisbon Strategy as i2010 is not a substitute for reform Five years after Lisbon the wording of i2010 is complacent and short on specifics relative to the challenge The European electronic communications framework, in force since 2003, is an example of best practice Businesses… still face… difficulties to reorganise and integrate ICT into the workplace French Non and Dutch Nee

25. 25 So, to move the debate forward… Explain that the terms of the trade-off between productivity growth and traditional social protection shifted abruptly in the mid-1990s Be honest about major policy change required to allow creative destruction on ICT supply & demand side in Europe Develop innovative policy approaches that allow creative destruction consistent with the European social model

26. 26 …implementation of the needed reforms will be the litmus test of whether the future will bring a substantial improvement in the EUs productivity fortunes or will confirm the EUs ongoing decline as a global economic power. EC Directorate-General for Economic and Financial Affairs, February 2005

27. 27 Bibliography David Lewin and Brian Williamson. May 2005. Regulating emerging markets. OPTA Economic Policy Note, no 5. http://www.opta.nl/download/EPN05_uk.pdfhttp://www.opta.nl/download/EPN05_uk.pdf OECD. May 2005. Key ICT Indicators. http://www.oecd.org/document/23/0,2340,en_2649_34223_33987543_1_1_1_1,00.html http://www.oecd.org/document/23/0,2340,en_2649_34223_33987543_1_1_1_1,00.html Denis, McMorrow, Roger and Veugelers. February 2005. The Lisbon strategy and the EUs structural productivity problem. Economic Papers 221. EC Directorate-General for Economic and Financial Affairs. http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpapers221_ en.htm http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpapers221_ en.htm Indepen and Ovum. January 2005. Achieving the Lisbon Agenda: the contribution of ICT. A report for the Brussels Round Table. http://www.indepen.co.uk/panda/docs/achieving_the_lisbon_agenda-fullreport.pdf http://www.indepen.co.uk/panda/docs/achieving_the_lisbon_agenda-fullreport.pdf Marcello M. Estevão. October 2004. Why Is Productivity Growth in the Euro Area So Sluggish? Working Paper No. 04/200. International Monetary Fund. http://www.imf.org/external/pubs/cat/longres.cfm?sk=17757.0 http://www.imf.org/external/pubs/cat/longres.cfm?sk=17757.0