The
Three Digital Divides
Eli
Noam
August
2000
With Internet connectivity progressing at a dizzying
rate, the focus of attention has shifted to those left behind. The shorthand word for this concern is the
“digital divide.” Underlying virtually
every discussion about this digital divide of Internet connectivity is the
implicit assumption that such a divide is a bad thing, requiring us to do
“something.” But maybe we should first
pause for a moment and understand the implications of ending this divide. If we
do that we might end up changing our perspective on Internet policy in an
important way: away from a focus on Internet
connectivity, and towards the
creation of e-commerce.
For a number of years the U.S. administrations have
been talking prominently about the digital divide. However, if one looks at the US government’s own numbers, one can
reach a more hopeful conclusion. With present trends continuing, in a few years
Internet connectivity will be near universal in rich countries, like
electricity or television. A major
reason is that the access mechanism to the Internet will have changed and
become user-friendly or user-independent.
The Internet will soon be liberated from the complex gateway bottleneck
of the microcomputer, arguably the least-friendly consumer mass-product
ever. There will be many other
entry-gates to the Internet, such as regular phones or TV sets. Therefore, for the rich world the
universality of narrowband Internet connectivity will not be an issue.
It is most likely that an Internet differentiation
will emerge along dimensions of quality. High-speed broadband Internet access requires an upgrade of the
infrastructure -- whether telecom, cable, or wireless – which must be recovered
through higher prices. Income, location
and demand factors will be factors for bandwidth consumption. Broadband will therefore be the digital
divide issue for wealthy countries. Yet one cannot expect that high-speed
Internet access (most likely used by consumers primarily for video
applications) would command the same societal priority as the basic type of
Internet service.
But the transformation in rich countries of the
divide into a gentle slope does not mean that the issue will not last and
persist for the poor countries of the developing world. And in an interdependent world this becomes
a problem not just for the South, but also for the North, because such a gap
will inevitably lead to international conflicts.
In talking about the Internet for poor countries, it
is easy to feel like a modern day Marie Antoinette. Let them eat laptops. Of
course the Internet is important. But
is it really a priority? The answer is
yes, because tomorrow’s problems originate in today’s actions and
omissions. There is no luxury to solve
other problems first. The world does
not stand still and wait.
Spain and Portugal, the first European colonizers of
the New World, were the world’s leaders in shipping, which was the primary
communications technology in the 16th and 17th centuries. They had the best of vessels, navigation
equipment, maps, seafaring skills, and weapons. This combination catapulted the Iberian region to prosperity. And yet, by the 18th century
these countries had fallen behind England in industrial hardware and scientific
software. They missed the next
revolution, and centuries later had not yet caught up.
Today we are in the beginning of another revolution,
driven by the Internet, and the question is what the cost of falling behind is
this time.
It is important to distinguish between three kinds
of gaps: The 1st gap is that of telecommunications
connectivity. This gap is being closed by investment in infrastructure and
by liberalizing policy reform. In
consequence, the telephone penetration of the developing countries has been
improving. Governments have been making telecom connectivity a priority.
Overcoming this gap is thus something that engineers, investors, and
governments now know how to do. But
progress in telecom connectivity, difficult as it may be, will prove to be the
easy part.
The second type of gap is for Internet access. In 2000,
only 3% of Internet computer hosts were domiciled in non-OECD countries.
Telecom and Internet are related, of course. Internet usage is much more
expensive in developing countries, both relative to income and in absolute
terms. To an ISP in Argentina, leasing
a T-1 equivalent capacity (~1.5 Mbps) from a phone company costs, in 1999, 50
times as much as in the US. Of course,
progress is being made in Internet connectivity, too. For Latin America, growth exceeds 50% annually. But closing this gap, too, will prove to be,
relatively speaking, an easy task. In
fact, it is easier to overcome it than the gap in telecom infrastructure. Once
telephone lines exist it is not very difficult to connect a computer or a
simple Internet device to them. Some
specific policies to encourage internet usage is to establish flat rate telecom
pricing on local calls; accept widespread use of IP telephony; create public internet access
points such as kiosks at public places,
government departments or post office; and use of email for some government business with citizen.
Low-cost global transmission
leads to a great rise in electronic transactions with consequences for
business. Of course, traditional ways of doing business will not disappear,
just as the mom‑and‑pop store did not vanish when supermarkets
emerged. But the energy and dynamism will be in electronic modes of commerce.
And here, it will be especially US firms that will be most successful. They will
be technologically at the leading edge, with risk capital at their disposal,
with the advantage of early entrant, and a large home market. Once a firm establishes a successful model
for the US market, and invests the fixed costs and once transmission price is
near zero, there is no reason to stop at the border.
The implications are that e-commerce will be
dominated by firms from the US and other electronically advanced
countries. Closing the first two gaps
therefore exacerbate the third gap by creating the highways and
instrumentalities for rich countries to sell in poor countries.
Of course, it is not purely a one-way street. The Internet also provides poor countries
with opportunities to participate and share information. We have all heard stories about how a local
craftsman in a remote village can now access the world market for his
woodcarvings. True, for certain types of products marketing becomes easier. But
for most mass products, the complexities of sophisticated e-commerce sites are
great, are greater still for information products and services, and will be
even greater in a broadband Internet environment where the production costs of
attractive e-sites are high.
What counts are not absolute but relative cost reductions, relative advantage of e-commerce going to advanced countries.
One lesson we have learned the hard way is that it
is expensive to do E-commerce well.
E-commerce operations are difficult. They are vastly more is involved
than running a website and a shopping cart. Many systems need to be in place
and integrated. Some elements needed are supply chain EDI, payment systems,
integration with financial institutions, fulfillment systems, customer data
mining, production, customization, community creation and the creation of consumer
lock-in by additional features.
Intermediaries need to be re-shaped.
Processes are accelerated domestically and internationally, at lightning
speed, with great reliability, with easy scalability, and flexibility of
configuration.
All this is still truer for the emerging broadband
Internet. The costs for consumer e-commerce sites will rise considerably. Text
and stills will not be good enough in a competitive environment, and expensive
video and multimedia will be required.
What are some of the implications?
Instead of being that frictionless competitive
capitalism that people rhapsodized about, many parts of the new economy will
actually be a fortress of market power.
Economies of scale are
returning. On the supply side,
the fixed costs of e-commerce operations tend to be high, but the variable cost
of spreading the service to the entire world are relatively low—the classic
attributes of “natural” monopoly. On
the demand side, there are “positive network externalities” of having large
user communities. Put these three things together –high fixed costs, low
marginal costs and network externalities – and there are real advantages to
being large.
Another implication is
that traditional brands will predominate.
When insecure
customers brave into the new economy, they want to feel safe about the deal and
the quality of the merchandise, and whether that dot-com will be around next
week. Established brands are trusted?
But at the same time, such brands will not remain static. The tools of individualization will assert
themselves, and create customized branding.
Those without quality brand will have to find market
niches. Some of those will be offshore transactions, which will inevitably lead
to consumer protection problems. In other cases, developed countries and
established interests will desire to expand old rules to new activities, such
as for e-medicine or distant education
The Internet is a revolution, and it is
characteristic of revolutions that they create many losers -- banks will be
threatened by electronic global financial institutions; universities will find
their students migrating to distance education; global Hollywood video servers;
etc will bypass TV broadcasters. Most
institutions will be losing the protection of distance, and will be exposed to
world markets.
It is characteristic of losers, especially if they
are domestically still large and powerful, to seek protection through the
political sphere. And therefore, there
will be an inevitable global political backlash against e-commerce. This is likely to take the form of restrictions,
by countries on the wrong side of the gap for e-commerce, and there will be a
strong likelihood for international cyber trade wars.
Centuries ago in Spain, the powers resisting the
industrial revolution and its reshaping of domestic power were the Church, the
State, and agricultural economic interests. They won out, and Spain was slowed
on the road to industrialization. A similar scenario will play itself out as we
enter the digital economy, and as the losers begin to organize themselves.
The US has been strongly arguing in favor of
non-intervention into the evolution of the Internet. Yet for the US to preach
to the world to leave the Internet alone does not ring true. It is easy to
criticize foreign restrictions on e-commerce in the abstract. But imagine the response in the US if there
were a thriving entry by, say, tele-doctors from Albania, child pornographers
from Thailand, tele-casinos from Monaco, and blue-sky stock ventures from
Nigeria. Each society has a variety of
values and interests, for better or worth, which underlies its legal
arrangements, and it is not going to drop them just because the new activities
are done over computer networks.
The main alternative to future conflicts over
cyber-trade, and the best remedy to the gap in e-commerce is for developing
countries to create progress in e-commerce that makes the electronic highways
into two-way routes. But what can a
developing country do, concretely? This
is much more difficult than catching up with telecom densities, because it is a
question of general societal modernization, not just of an infrastructure
construction program.
There is no single strategy, no silver bullet. But here are several suggested
elements.
Use government as lead user, to help create domestic critical mass and
experts. The US military had been
successful in getting the Internet started in the first place. Government operations such as procurement
should move to the web. This would create transparency, reduce procurement
cost, and force domestic suppliers to move to electronic marketing. Governments could also provide some services
electronically, such as the filing of forms and applications, or information on
subjects such as health, education, taxes and agriculture.
Regional hub: Tunisia for North Africa
Language: Brazil for Portuguese speakers
Religion: Saudi Arabia for Moslems
Economics: Bahrain for oil industry
(6)
Support technological
education. Investments are important,
but not as important as IT skills and new economy mind set. There are 3.8 R&D scientists and technicians per
1000 people in developed countries and only 0.4% per 1000 in developing
countries.
Most well informed people understand the importance of e-commerce. But they often do not have a sense of urgency. Right now, the foundations are being laid for a great new economic system and for a new generation of business empires. Even if less developed countries cannot be expected to be among the leaders there are enough emerging countries and striving firms that could be suppliers and not only buyers. India, for example, may be a poor country by most measures, yet it could become an e-commerce participant beyond its growing Internet technology role.
Different countries are affected differently,
depending, among others, on their economic mix. The U.S. had a troubled
industrial sector, and the new economy was a way to resume growth. The US
society also is capable of change, being perhaps strongest in situations of
accelerating change --“2nd derivative” situations. In contrast,
Europe and Japan had stronger old economies, and are stronger in managing
steady growth –“1st derivative” economies. And less developed
countries had, for a multitude of reasons, the greatest difficulties of
changing to new economy activities, primarily because these require substantial
societal modernization and infrastructure investments.
This is then the challenge to developing
countries. To get moving, to move
beyond the first gap, that of telecommunications, by overcoming the traditional
policy squabbles about the rights of companies entrants and the privileges of
incumbents--issues that will seem in a few years quite trivial; to close the
second gap, that of the Internet. And
to deal aggressively with the closing of the e-commerce gap, because it is the
real, critical, and fundamental threat -- as well as major opportunity -- to
poor countries, and to economic relations around the world.