Universität Potsdam

UNIVERSITÄT POTSDAM

EUROPÄISCHE WIRTSCHAFT UND INTERNATIONALE WIRTSCHAFTSBEZIEHUNGEN

Paul J.J. Welfens Andre Jungmittag

Effects of an Internet Flat Rate on Growth and Employment in Germany

Diskussionsbeitrag 81 Discussion Paper 81

Europäisches Institut für internationale Wirtschaftsbeziehungen (EIIW), Potsdam European Institute for International Economic Relations, Potsdam

ISSN 1430-5445

Diskussionsbeitrag Nr. 81 Discussion Paper No. 81

Europäische Wirtschaft und Internationale Wirtschaftsbeziehungen European Economy und International Economic Relations

Paul J.J. Welfens Andre Jungmittag

Effects of an Internet Flat Rate on Growth and Employment in Germany

February 2000

Editor: Prof. Dr. Paul J.J. Welfens University of Potsdam, European Economy and International Economic Relations Karl-Marx-Straße 67, D-14482 Potsdam, Germany, Tel.: (0)331-9774614, Fax: (0)331-9774631 EUROPÄISCHES INSTITUT FÜR INTERNATIONALE WIRTSCHAFTSBEZIEHUNGEN (EIIW) ISSN 1430-5445

JEL classification: J23, L86, L96, O40 Key words: Telecommunication, internet, growth, employment, internet pricing Executive Summary:

The Internet is an especially dynamic sector of the information industry, and holds great importance for both its growth and its activity. The telecom sector's unique starting and margin positions, where service providers are obliged to cooperate with an ex-monopolist in a strong market position, make an undistorted market competition in the Internet sector difficult. Moreover, there are a number of major obstacles to Internet usage in Germany, which still include direct and indirect limitations– regulatory ones among others- on the pricing freedom of Internet service providers. In an international comparison, the prevailing metered tariffs translate to high prices for Internet usage; for off-peak usage, Germany is the second most expensive in a comparison of 10 EU countries, just ahead of Spain. Internet usage in households and businesses remains distinctly below efficient outcomes. This puts businesses at a serious competitive disadvantage, not to mention being discriminatory against poorer households (lack of equal opportunities). Given experiences in the USA, and based on our own analyses of the relationship between price and Internet usage, OECD countries show a clearly negative relationship: the higher the level of network prices, the lower the level of Internet usage –the lack of flat rate pricing in Germany serves to solidify a serious international lag in taking off with an information society. The trend to high Internet growth dynamics serves to obscure public perception of the existence of an Internet usage price problem in Germany. Based on experiences gained with flat rate pricing in the US and the UK, an accelerated Internet boom can be expected for Germany when price-setting regulations are liberalised. In 1998, the information industry already represented 2.8% of all employed persons and an impressive 21.8% of Germany's total employment growth. Based on a number of different studies, we expect a switch to flat-rate pricing – with price reductions between 20 and 50 percent - will create a growth effect around a half- percent of the gross domestic product (approx. DM 19 billion): the employment effect could amount to between 100,000 jobs (given a narrow sector definition) and 400,000 jobs (given a broader definition) in the medium term. There is still a number of distortions in the Internet market, such as when the dominant fixed-network provider offers intermediate inputs – transmission capacities or services on individual network levels - to its own Internet subsidiary, as well as to all other Internet providers; where pricing of the dominant operator is discriminatory or simply overcharging all Internet providers (services are rendered at prices above marginal costs). From a theoretical perspective the dominant operator also is likely to deviate from efficient peak load pricing which would require to impose a relatively high share of overhead costs on users with a low price elasticity – that is business users. Serious inefficiencies also occur to the extent that the ex-monopolist does not differentiate his services in line with market requirements, i.e. those that might be generally expected from competition in the market sector: that is, when the quasi-monopolist or the dominant company offers only metered data transmission prices, but bills its own Internet subsidiary for capacity-oriented advance prices, which are explicitly or implicitly lower. In Germany, or rather in all the EU countries, the wholesale stage should have freedom of choice at all levels of the fixed network; users of the Telekom's fixed network should be given the choice between metered (clocked) or capacity- oriented billing by the dominant provider; in view of the Internet market, the

dominant provider should provide the necessary technological prerequisites for differentiating between voice telephony and data traffic for billing purposes– in principle, this is not a technology problem. Moreover, the ex-monopolist's possibilities for cross-subsidisation should be reduced even further. The only way to achieve this is to have clear-cut regulation at all levels; otherwise, the dominant provider in the Internet market will be able to realize trade-distorting first-mover advantages by deploying all sorts of legal stalling tactics. Thus, whether the lower estimate of roughly 100,000 or the higher estimate of 400,000 new jobs in Germany's Internet sector is eventually achieved, depends largely on effective further regulation of the Telekom fixed network, with the Internet market in mind. We also hope for positive environmental effects, in that the increased use of electronic services – including governmental services – will serve to reduce traffic. Meanwhile, a more reasonably-priced Internet will also create opportunities for new local, regional and national forms of participation („Internet Democracy“). The step-by-step transition to flat-rate pricing suggested in the document at hand – starting with continuous availability for schools and weekend availability for all users - will hardly lead to bottlenecks in network capacity in the middle term. Where these do crop up in the short term, there is an incentive to invest in additional network capacity, again contributing to growth and jobs. The flat rate option should be introduced swiftly at both the end-user and the wholesale stage, as it is in line with cost-orientated price-setting and will create jobs besides.

Zusammenfassung: Das Internet ist ein besonders dynamisches Feld der Informationswirtschaft, das für Wachstum und Beschäftigung von großer Bedeutung ist. Die besonderen Ausgangs- bzw. Randbedingungen im Telekom-Bereich, wo Service-Provider auf das Zusam- menwirken mit dem marktmächtigen Ex-Monopolisten angewiesen sind, machen einen unverzerrten Wettbewerb im Internet schwierig. Zudem gibt es eine Reihe wichtiger Hemmnisse für die Internet-Nutzung in Deutschland, wozu bisher auch direkte und indirekte Beschränkungen – auch regulatorischer Art - bei der Preis- setzungsfreiheit der Internet-Diensteanbieter gehörten. Die bisher dominante takt- gebundene Tarifierung bedeutet hohe Internet-Nutzungspreise im internationalen Vergleich; in den Off-peak-Zeiten ist Deutschland im Vergleich von 10 EU-Län- dern am zweitteuersten, gerade noch vor Spanien. Die Internet-Nutzung bei Haus- halten und Unternehmen bleibt deutlich unterhalb des Optimums. Dies ist ein gra- vierender Wettbewerbsnachteil für Unternehmen, zudem werden ärmere Haushalte besonders benachteiligt (fehlende Chancengleichheit). Vor dem Hintergrund von US-Erfahrungen und auf Basis eigener Analysen zum Zusammenhang von Preishöhe und Internet-Nutzung zeigt sich für OECD- Länder ein deutlicher negativer Zusammenhang: je höher die Netzpreise, desto geringer die Internet-Nutzung – damit verfestigt sich angesichts fehlender Flat-rate- Tarife in Deutschland der internationale Rückstand beim Aufbruch in die Informationsgesellschaft. Die trendmäßig hohe Internet-Wachstumsdynamik verdeckt dabei in der Wahrnehmung der Öffentlichkeit, daß in Deutschland tatsächlich ein Preisproblem bei der Internet-Nutzung besteht. Auf Basis von Erfahrungen mit Flat-rate-Preisen in den USA und Großbritannien ist für

Deutschland ein beschleunigter Internet-Boom beim Übergang zu liberalisierten Preissetzungsregeln zu erwarten. Die Informationswirtschaft repräsentierte 1998 bereits 2,8% der Beschäftigten und immerhin 21,8% des gesamten Beschäftigungszuwachses in Deutschland. Auf Basis verschiedener Untersuchungen erwarten wir beim Übergang zu einer Flat-rate-Bepreisung – mit Preissenkungen zwischen 20 und 50 % -, daß ein Wachstumseffekt in der Höhe von einem ½ Prozent des Bruttoinlandsprodukts (ca. 19 Mrd. DM) zustande kommt: Der Beschäftigungseffekt könnte sich mittelfristig auf 100.000 (bei einer engen sektoralen Abgrenzung) bis 400.000 Arbeitsplätze (bei einer weiten Abgrenzung) belaufen. Allerdings bestehen noch eine Reihe von Verzerrungen im Internet-Markt, so z.B. wenn der dominante Festnetzanbieter Vorleistungen – nämlich Übertragungskapazitäten bzw. Dienstleistungen auf einzelnen Netzebenen sowohl für die eigene Internet-Tochter einerseits als auch für alle anderen Anbieter im Internet anbietet; und zwar für die anderen Anbieter zu überhöhten (Grenz-)Kosten. Eine verdeckte künstliche Überteuerung von Übertragungsleistungen liegt immer dann vor, wenn der Ex-Monopolist keine marktgerecht differenzierten Vorleistungsangebote macht, nämlich solche, die bei Konkurrenz im Marktsegment allgemein zu erwarten wären: also wenn etwa der Quasi-Monopolist bzw. das marktbeherrschende Unternehmen nur taktabhängige Datenübertragungspreise anbietet, der eigenen Internet-Tochter aber explizit oder implizit niedrigere kapazitätsorientierte Vorleistungspreise in Rechnung stellt. In Deutschland bzw. den EU-Ländern sollte es auf allen Ebenen des Festnetzes ein Wahlrecht auf der Großhandelsebene geben, daß nämlich Nutzer des Telekom-Festnetzes vom marktbeherrschenden Anbieter takt- oder kapazitätsorientierte Abrechnungsoptionen verlangen können; mit Blick auf den Internet-Markt sind seitens des dominanten Anbieters technische Voraussetzungen zu schaffen, um zwischen Sprachtelefonie und Datenverkehr abrechnungsmäßig unterscheiden zu können – prinzipiell ist dies kein technisches Problem. Zudem sollten Möglichkeiten zu Überkreuzsubventionierungen beim Ex-Monopolisten weiter reduziert werden. Hier kann nur eine klare Regulierung für alle Ebenen helfen, andernfalls wird der dominante Anbieter im Internet-Markt durch allerlei juristische Verzögerungstaktiken wettbewerbsverzerrende First-Mover-Vorteile realisieren. Ob die untere Schätzgrenze von etwa 100.000 oder die obere Schätzgrenze von gut 400.000 neuen Arbeitsplätzen im Internet-Bereich in Deutschland langfristig realisiert wird, hängt also wesentlich auch von adäquaten weiteren Regulierungen des Telekom-Festnetzes im Hinblick auf den Internet-Markt ab. Wir erwarten auch positive Umwelteffekte dadurch, daß die vermehrte Nutzung elektronischer Dienste – auch staatlicher Dienstleistungen – verkehrsentlastend wirkt. Im übrigen wird ein preiswerteres Internet auch die Chancen für neue lokale, regionale und nationale Partizipationsformen („Internet- Demokratie“) schaffen. Bei dem hier vorgeschlagenen stufenweisen Übergang auf Flat-rate-Tarife – beginnend mit Schulen durchgehend und an Wochenendzeiten für alle Nutzer - wird es kaum zu mittelfristigen Netzkapazitätsengpässen kommen. Wo diese kurzfristig auftreten, entstehen Anreize für Investitionen in Netzkapazitäten, was wiederum zu Wachstum und Beschäftigung beiträgt. Auf der Endverbraucher-

und der Großhandelsstufe sollten Flat-rate-Preise als Option rasch eingeführt werden, weil dies einer kostenorientierten Preissetzung entspricht und zudem Beschäftigungseffekte bringt.

Prof. Dr. Paul J.J. Welfens and Dr. Andre Jungmittag European Institute for International Economic Relations [EIIW], University of Potsdam, August-Bebel-Str. 89, D-14482 Potsdam, Germany, Tel.: +49 (0)331-9774614, Fax: +49 (0)331-9774631 [email protected] and [email protected] http://www.euroeiiw.de;

Effects of an Internet Flat Rate on Growth and Employment in Germany

1. Introduction...... 1 2. Importance of Internet Usage to the Economy as a Whole...... 3 2.1 The Internet as a Platform for Networking and Services...... 3 2.2 The Effects of Alternative Price Systems On Growth and Employment in Telecommunications and the Internet ...... 8 2.3 Obstacles to Internet Use in Germany ...... 9 3. The Effects Of Unmetered Internet Access ...... 12 3.1 Supply and Demand Effects...... 13 3.2 Growth Effects: Dispersion, Network Gains, Innovation ...... 20 4. Some Economic Conclusions...... 25 Bibliography...... 29 Appendix ...... 32

This analysis is part of research requested by AOL Europe, Hamburg

1. Introduction

Beginning in 1998, the telecommunications industry in Germany or rather in EU countries has been undergoing a large-scale liberalisation reflecting the interaction between ongoing deregulation, privatisation and internationalisation (WELFENS/GRAACK, 1996 and WELFENS/GRAACK, 1997; WELFENS, 1999). In its first two years, the liberalisation of telecom network operations and services has made enormous progress in the EU, although there are some sectors with problems that impede the internal market: these include exorbitant prices for rented lines, a lack of competition at the local network level in many member countries and, in a few countries, extensive ownership of the Cable TV network by the ex- monopolist (EUROPEAN COMMISSION, 1999). Beyond sectoral effects on structure, price and innovation, the liberalisation of the telecoms has brought considerable effects to bear on the economy as a whole, in particular – according to existing empirical analyses (JUNGMITTAG/WELFENS, 1996) – on employment and growth. In view of the Internet sector's high expansion dynamics, as evidenced in the latest research results (EITO, 1999; WELFENS, 1999a and WELFENS, 1999b), similar questions arise here regarding growth and employment. The Internet is going to result in considerable change for almost all economic sectors and for most companies' areas of activity (VARIAN, 1999): one may presuppose intensified price competition, falling transaction costs and/or price cuts, new product differentiations and a number of other developments in the Internet environment. Some of the major effects already familiar from the telecommunications sector (WELFENS, 1995) include cost-cutting scale effects on the supply side and so-called network effects on the demand side. The latter means that an increasing number of users – up to a certain user density – means an increase in the telecom/Internet platform's marginal utility for existing users (as well as the new users). The key point is that, when the network and/or the Internet expands, the increased communications options mean an increased benefit to the connected participants. Aside from technological impulses, the price-setting strategies of providers are especially relevant to the prospects of future Internet growth. Price-setting influences Internet use both in private households and in businesses. Europe's businesses alone spent approximately two billion dollars on setting up and using Internet lines in 1998, but surveys and current studies show that, in several EU countries, high network use costs are an obstruction to the spread of Internet hi-tech even in businesses (WELFENS/GUTH/HOLLANTS, 1999 and INSTITUT DER DEUTSCHEN WIRTSCHAFT, 1999, p.6). In Germany, the Internet may be regarded as an indirectly regulated market where pricing is concerned, as most Internet usage occurs on the basis of lines belonging to the dominant ex-monopolist. The Regulation Authority for Telecommunications and Postal Services (RegTP) has fixed the network

interconnection fees, fees for using the subscriber's line, and the level and structure of rates, as well as a number of other conditions for the Deutsche Telekom AG as dominant company. Internet use initially requires participants to dial into the local network – except in the case of Satellite Internet services. Naturally, given a normal access via a fixed network, the usage costs will be high wherever monopoly structures exist in the local network sector, as is largely the case in Germany. The unresolved deglomeration problem in the Cable TV sector also contributes to this: while the Deutsche Telekom AG intends to form nine regional companies, it hinted in November 1999 that it no longer intends to sell 74.9 % to external bidders as originally stated, but only 35 %. To date, Internet users in Germany pay– aside from one-time investment costs – a fixed monthly fee as well as access costs (for some providers) and metered user fees (e.g. telephone charges). From an economics standpoint, a variety of tariffing models is conceivable. In the following, we will examine in particular what effects a „flat rate,“ i.e. a non-metered monthly user fee as frequently found in the US and several other OECD countries, would have on the economy as a whole. Consequences are expected for both the business-to-business and the business-to- consumer sector. Experiences in the US have shown that a flat rate intensifies Internet use considerably: when AOL introduced this new rate several years ago, the average time spent online by users doubled within three months, to 30 minutes. Already, a number of OECD countries offer „free“ Internet service. According to information provided by the OECD, Germany's rates for off-peak Internet use are relatively expensive. Not only that: the Deutsche Telekom AG has provided an implied flat rate since mid-1999, that is, the first two hours are free each month. In addition it should be taken into account that the Internet essentially contributes to exposing a number of services - that have not been extensively traded internationally to date - to European and global competition. Thus, for Germany, a brisk development of Internet use options is of strategic importance for international competitiveness and for reducing its considerable (in international comparison) deficit in service sector jobs. According to IWF data, the ratio of service exports to commodities exports (1996) was 38.2 % in the case of the US, and 30.5 % in Great Britain, but only 16.3 % for Germany, while the worldwide figure was 25.1 %. The share of service exports in the 1996 gross domestic product was 3.6 % in Germany as compared with 3.2 % in the US (because of the country's size, a distinctly lower trade ratio for goods and services should theoretically be expected compared with Germany); for Great Britain, its value was assessed at 6.8 %. In the following analysis, we assume – unlike the DIW did in previous research (e.g. DIW, 1996) – that Germany indeed exhibits a considerable service gap in an international comparison. Meanwhile, a similar assessment was expressed by the Kiel Institute for World Economics (KLODT/MAURER/SCHIMMELPFENNIG, 1997). The information industry is the sector with the greatest employment dynamics. In the years 1996-98, 100,000 jobs were created, meaning that a total of 1.7 million people

work in information technology, telecommunications and the media. The importance of these sectors was pointed out repeatedly during the D21-Enterprise Initiative (“Unternehmerintiative”), which is supported by the German government. However, it should be noted that the information industry's employment prospects are subject to some controversy (SEUFERT, 1998) and that a lack of selective demarcation in the official statistics – which are broken down into traditional sectors – means that concrete information has proven very difficult to gather in some cases. In the following analysis, section 2 discusses the effects of Internet usage on the economy as a whole. In section 3, the consequences of unmetered Internet access are explored, including the determination of a number of empirical connections. The final chapter presents economic conclusions on the subject. Fears that the introduction of a flat rate option will lead to long-term network overload problems, are largely unfounded. Meanwhile, the principles of cost-oriented price- setting also speak for the introduction of flat rates for frequent users. It should not be overlooked that flat rate prices would put general downward pressure on all Internet prices, that is users who have decided in favor of metered pricing schemes also would benefit from introduction of flat rate pricing.

2. Importance of Internet Usage to the Economy as a Whole

2.1 The Internet as a Platform for Networking and Services

The Internet is a network platform that allows many kinds of data exchange to take place; moreover, it will probably enable considerable-quality telephony in the long term, which would serve to lower international distance costs drastically – to the level of a local call. But the economic importance of the Internet in the 1990s lies primarily in providing a high-performance services platform that is experiencing continual on-going development by content providers, in conjunction with other companies. A great many products and services lend themselves to Internet presentation and Internet distribution, while the visual quality of their presentation will increase steadily due to technological progress. At the same time, much is being done to increase data transmission security, using software- and hardware- implemented processes - to ensure problem-free payment options and the best possible data protection. The remaining barriers to use associated with insufficient consumer protection can be reduced considerably in the middle term, probably within the OECD initially. The European Commission has positive expectations of the transition to an information society in the EU and the world economy. The director of the European Commission's Information Society Action Centre (DG III/DG XIII) writes (WENZEL, 1999, p. 15/16):

• "In 1997, for the first time, more computers were sold all over the world than cars, and more money was spent on information and communication technologies than for airplanes, automobiles and steel products combined. • Electronic mail is increasingly replacing traditional correspondence. • Old types of jobs are disappearing and new jobs are emerging: information brokers, screen designers, online editors, etc. • The information industry will contribute roughly 15% to Europe's total growth this year [1998, authors' note], and has thus developed into the most important sector, economically speaking (turnover in the EU: approx. 850 billion ECU). ... At the same time, the information industry is one of the few sectors that contribute to additional employment. While more and more jobs are being lost in classic industry sectors (e.g. steel, mechanical engineering, shipbuilding etc.), things look completely different in the IT sector: • In the past year, the sector created a good 500,000 new jobs in the EU. In Germany alone, the figure was 100,000, and approximately the same number will be added in 1998.... • Additional impulses are given by the development of electronic trade, as well as from the dynamic growth of the multimedia content industry. Studies show that we can count on the creation of roughly 1.5 million new jobs in these sectors in the next five years." While considerable potential for the creation of new jobs lies in the expansion of telecom and Internet as well as the value-added services in Germany, there are also a number of barriers to growth in the IT sector that hamper the prospects for new growth and employment impulses. It becomes clear that Germany and the EU have some catching up to do, especially when compared with the leading light of the US.

US Leadership and Germany's Weak Points

In order to assess the Internet's relevance for Germany, a look at the OECD's leading country in the Internet sector, the US, is helpful. In both 1997 and 1998, the Internet generated more than 200 billion dollars annually. 85 % of the world's Internet jobs are ascribed to the US, and there are a number of interesting index numbers for the US (INSTITUT DER DEUTSCHEN WIRTSCHAFT, 1999b): In 1998, the US produced $301.4 billion in sales (4 % of the US GDP; the value added by the Internet relative to the GDP should lie at about 2-3 % of the gross domestic product), at annual growth figures tending towards 150 %. Based on comparable gross domestic product figures for the EU and the US – each approximately 7,000 billion Euro - the US figures would lead one to expect an Internet value creation of approximately 140-210 billion Euro for EU-15, or of roughly 40 billion Euro in Germany. But in fact, the Internet value creation in

Germany was assessed at only approximately 10 billion Euro for 1998. This shows that Germany is at a considerable disadvantage compared to the US. While in 1998, 24 % of US enterprises used the World Wide Web, the 1999 rate will most likely lie well above 50 %. According to a new report by Forrester Research, Inc. the 1999 retail E-commerce in the US will reach more than 17 million customers, generating approx. 20.2 billion dollars in turnover (FORRESTER, 1999). The forecast for the year 2004 is that 49 million US households will spend more than 184 billion dollars online for a multitude of consumable goods. Meanwhile, the average amount spent per household will increase from 1.167 dollars in 1999 to 3.738 dollars in the year 2004. According to another current analysis done by the Centre for Research in Electronic Commerce, Graduate School of Business, University of Texas at Austin, the total Internet Commerce turnover increased from 16.5 billion dollars in Quarter I/1998 to 37.5 billion US-dollars in Quarter I/1999 (INTERNET ECONOMY INDICATORS, 1999). The total number of Internet-related jobs in the US grew from 1.6 million in Quarter I/1998 to 2.3 million in Quarter I/1999. (for a population of 269 million). Meanwhile, 400,000 new E-commerce jobs were created in this time alone. In 19998, approximately 250,000 dollars in turnover were achieved per Internet employee, which is almost three times the equivalent index in the automotive industry. Based on US figures, 350,000 jobs would have been expected for 1998, and roughly 500,000 jobs for 2001. In fact, the number of employees was only at approximately 150,000 jobs in 1998, showing that an employment gap exists in the German Internet sector. This corresponds strongly with Germany's Internet lag in information and communications technology. In an IFO study for Germany (IFO, 1999), approximately 50 % of the responding companies in a survey had access to the Internet, 30 % were planning to introduce the Internet, 20 % were not intending to do so for their company. Interestingly, companies with 1-19 employees had a similarly high rate of Internet users as did companies with over 200 employees. The reasons behind the relatively high number of small companies among Internet users are probably attributable not only – as the Ifo Institute suspected – to the high proportion of business-oriented service providers in the sample, to whose businesses Internet communication is essential. Rather, the small business sector is where one naturally finds a wealth of budding businesses and start-ups, for whom dealing with the Internet is an important and standard component of modern business administration. Besides, the IFO studies do indeed show that service and trade enterprises are more involved in the use of eCommerce than industrial firms are. Seen in this light, Germany's structural weaknesses in the service sector has a negative effect compared with the US. However, this structural causal analysis might apply in reverse as well: because and to the extent that the government is taking its time to create ideal conditions for encouraging Internet use in businesses and households, the structural transition from an industrial to a service society is proceeding relatively slowly in Germany.

According to the above-mentioned study by the Centre of Research in Electronic Commerce, University of Texas, Internet jobs in the US are primarily distributed in the following sectors (INTERNET ECONOMY INDICATORS 1999a): (1) Electronic Commerce: the point here is to distribute services and goods via the World Wide Web. This sector already boasted 506,700 employees in Quarter I/1998 and 900.900 employees in Quarter I/1999. (2) Infrastructure: This includes Internet providers as well as hardware and software manufacturers for networks. Here, the number of employees in Quarter I/1998 was 472,600, rising to 656,600 by Quarter I/1999. (3) Trade Intermediaries: This refers to content providers, advertising marketers, brokers and travel agents. This sector counted 355,400 employees in Quarter I/1998, and 444.300 employees in the same Quarter of the following year. (4) Internet Applications: This sector includes consultants, scientists, software retailers as well as web-based databases. Here, there were 407,900 employees in Quarter I/1998 and 563,100 in I/1999.1 We estimate that Germany comes closest to approaching US employee magnitudes in sector (4), but that it distinctly lags behind the US in all other Internet job sectors. Internet use offers – as shown by the example of the US as well as the Scandinavian countries– considerable potential for employment and growth.

1 Due to overlapping, the total number of jobs in the four individual sectors plainly exceeds the number of Internet-related jobs (on a a scale of about 10 %), because this overlapping was accounted for as part of the study conducted by the Center for Research in Electronic Commerce, University of Texas.

Fig. 1: Internet Use Density in the Businesses of Select Countries 1998

20 Usage Density in %

0 FI SE DK DE UK NL FR IT ES

In a 1998 OECD comparison, the density of Internet use among businesses in Germany was in the medium range, the Scandinavian countries were approximately 10 percentage points above the German connection density of 35 % (see Fig. 1, INSTITUT DER DEUTSCHEN WIRTSCHAFT, 1999a). The user density for private households in Germany is worse by far. The amount of time households spend using the Internet in Germany is also considerably less than that of the US. The lower user density and shorter usage times can essentially be attributed to the use costs being higher than in the US. According to a 1999 analysis by Andersen Consulting, the US and European executives surveyed unanimously agree that electronic commerce primarily accelerates the process of launching new products on the market (INSTITUT DER DEUTSCHEN WIRTSCHAFT, 1999c). While 75 % of US managers agreed that eCommerce offers competitive advantages, only 50 % of the German executives – 64 % of European executives – see eCommerce as a competitive advantage. The strategic importance of corporate Internet use is apparently still seen as negligible in Germany. One reason for this is most likely the (as yet) limited use of the Internet at the business-household interface, that is caused by relatively high usage costs (based on conventional tariffs), among other things. A clear majority of executives in the US and Europe answered yes to the question of whether the Internet will lead to intensified competition. The interest that households have in using the Internet is important to Internet growth. According to an Allensbach survey (ACTA ´99) in the 14-64 age group, 50 % of the respondents were in favour of taking care of official business via the PC in the future, 44% and 43 % respectively for money transactions and ticket reservations, 40 % for travel reservations, 27 % for book purchases, 24 % for

ordering mail-order (catalogue) items, 22 % for ordering food. Metered Internet price-setting would liken the connection between citizen and city hall to paying for conventional governmental services according to the time spent waiting for them and processing them. Besides, it is important to note that metered Internet price- setting erects considerable barriers to Internet access for economically deprived households, which is generally problematic and will most likely have negative effects on equal educational opportunities for children from the poorer classes.

2.2 The Effects of Alternative Price Systems On Growth and Employment in Telecommunications and the Internet

The Internet increases price transparency and thus serves to intensify competition. By providing novel opportunities for new - and especially for technology-oriented - businesses to obtain venture capital, the Internet is of immediate importance to innovation and growth; in the US, an Internet-based Venture Capital Exchange was created in 1998, in Germany a similar institution was developed by 1999. In addition, the Internet improves the odds for businesses to rapidly assimilate new technologies and product ideas. Finally, corporate networking is facilitated at both the domestic and the international level. So there is a "Schumpetrian" quality to the Internet, as it will not only facilitate innovation and dispersion activities, but will also most likely improve the possibilities of technologically relevant innovation networks. This will create dynamic gains in efficiency and growth, especially in those (national) economies that successfully achieve rapid and widespread use of the Internet. On the one hand, the Internet is dependent on the development of the traditional fixed telecommunications network, on the other, it is increasingly developing into a separate communications medium associated with mobile telephony, Cable TV networks and satellite systems. The Internet's steep growth rate gives rise to the hope that the growth relevance of conventional telephone networks – thanks also to faster transmission processes and innovative services (e.g. ISDN) – will increase again, after telecommunications suffered a slight setback in its status as a growth factor in the 1980s and 1990s. But overall, an econometric study commissioned by the Federal Republic of Germany showed that telecommunications usage over the total study period from 1960 to 1990 contributed greatly to growth, in fact made up approximately 1/5 of total growth (JUNGMITTAG/WELFENS, 1996). The contribution to growth attributed to telecommunications usage in the individual sub-periods declined over time, which is not particularly astonishing: in the early network expansion phase, network establishment costs and productivity gains for the economy were naturally relatively high, decades later - the high penetration rates for telecommunications having already been established - they are merely negligible. One must bear in mind that the Internet is still at the very beginning of a logistical expansion curve, so that the

elasticities for the collective analysis period of the empirical telecom study used in the following represent a useful method.

2.3 Obstacles to Internet Use in Germany

The use of the Internet as a new communications platform is most likely characterised – as many product innovations are – by a logistical expansion curve as mentioned above. Germany is still at the very beginning of this expansion curve, with the Internet turnover rising from 0 in 1995 to an estimated DM 3 billion in 1999 and DM 7.4 billion in 2000; this would mean that, in absolute terms, Germany would be one billion DM behind Great Britain in 2000 (EITO, 1997); the estimate includes all turnover generated by the Internet both on- and offline, plus advertising turnover on the Internet. Even if Germany will probably surpass Great Britain in terms of absolute Internet turnover eventually – due to its larger population and per- capita income – nevertheless, Germany is clearly behind in Internet matters at the turn of the 21st Century. This holds both with respect to Internet density and hours on the web per user. Germany is behind the US, the Scandinavian countries and the UK (a lag vs. France will also emerge, to the extent that the French government is able to realise its plans of fusing France's popular Minitel System with the Internet, with the help of IBM). There are numerous obstacles to the Internet in Germany. The most important ones include: • The Internet is used much less in the government and public administration than is the case in the US. Internet reticence on the part of the government provides a weak initiative for businesses and citizens to avail themselves of the Internet. • The Internet gap vis a vis the US is relatively large in German schools. Here, there are - if any - only few Internet jobs; Internet rooms with a class-sized PC- network are a rarity. • There high usage costs for the Internet because of the monopolisation of the local network sector or rather, the type of interconnection fees that are billed to Internet providers by the Deutsche Telekom AG. An IFO survey showed that while only one in ten large corporations sees Internet use costs as a large problem, well over 30 % of the businesses with fewer than 50 employees consider them a major obstacle (IFO, 1999, S 16). • The Internet, as it has developed in Germany based on the conventional telephone system (including ISDN), is slow; this was clearly perceived as a problem, as shown in interviews with experienced Internet users conducted as part of the IFO survey. The major barrier to the development of a faster broadband Internet is the ex-monopolist, the Deutsche Telekom AG. Only after receiving pressure from the EU did the Deutsche Telekom AG agree to subdivide its West German Cable TV business into discrete regional companies

and let external investors buy up to 74.9% of them; meanwhile, the press reports that the DTAG has changed its plans as of November 1999 and now plans to sell off only 35 % to external investors.

Flat rate: Pros and Cons

The high use costs associated with the conventional metered tariffs authorised by the regulating authorities serve to inhibit Internet use both in businesses and – even more so– in private households. The fact that no flat rate option exists at the wholesale and/or retail level is also alarming because considering the minimal marginal costs of off-peak usage, the idea of flat rate pricing to pay for the standing charges of network utilization – with a surcharge to compensate for lump-sum marginal costs – is in line with cost-oriented price-setting. As this would come close to marginal cost pricing, which ensures economic efficiency, there are clear economic arguments for flat rate price-setting at off-peak times. This was also clearly stated by the British Telecom Regulation Authority OFTEL in a recent analysis (OFTEL, 1999). One general argument that could be brought against the flat rate pricing option is the risk of congestion on the data highway at peak times. First of all, this can be countered with the argument that congestion phenomena in the information sector often signal an unsatisfied demand for other sectors as well, where the volume of saturation is regarded as economically ideal – in the educational sector, e.g. Short-term congestion phenomena are cues for the provider to increase its network investment, or for users to get themselves a second or "n"th line. Meanwhile, both the dominant network operator and the circle of newcomers in the local network sector can benefit from this additional demand. Besides, increased investments in the network sector would most likely lead to additional direct employment and growth effects. Capacity shortages are not to be expected for the middle to long term. There are several pseudo-flat rates for infrequent users, i.e. those that have a rate with a number of included "free" hours (e.g. two or five free hours a month). Naturally, these pseudo-flat rates – offered by the DTAG - are not exactly conducive to intensified Internet usage; in borderline cases, they have more appeal for infrequent users. Flat rates (i. e. p.) for the Internet have existed in Germany since October 1, 99, when Silyn-Tek launched an offer for private and corporate users: for private users, the monthly rate is 359 DM for a 12-month contract, DM 199 for a 36-month contract; for corporate users, the fees are DM 399 and DM 299, respectively. In November 1999, the provider ecore also launched a test phase limited to 300 customers (!) - meanwhile, one tester critically remarked that: „A closer look at ecore's Terms of Business will cause real amazement at the massive limitations to the "Internet Unlimited" rate. Thus it is neither permitted to share the access…... with other computers…via proxy software, nor may a computer using the ecore rate

even be linked into a local network. Even the blocking of a fixed IP address, say for providing FTP archives or for video-conferencing, is frowned upon. After a maximum of 24 hours, the line is automatically interrupted“ (INTERNET WORLD, 1999/12, p. 103). So while there are first signs of flat rate prices in Germany, they are very high in an international comparison, and limited to peripheral areas of the Internet. At the end of 1999 Mannesmann Arcor announced a flat rate of DM 149, in February 2000 DTAG announced a flat rate of about DM 100 as of mid 2000. The leap to an Internet mass market for corporate and private customers will most likely only be achieved via true flat rate strategies – with low-cost use conditions; in the US, flat rate prices of 20 to 42 dollars for private households are the norm. From an economic point of view, an unmetered user rate might at first glance be problematic because an intense rise in usage might lead to occasional shortages in the telecom network. However, seen from an employment policy standpoint, such shortages will create welcome investment impulses at the network operator level. In addition to the use of the traditional fixed network, one should also consider connections via Cable TV and satellite, or the utilisation of upgraded (to telecom standards) electricity networks, if applicable. Essentially, true flat rates will have the following positive economic effects: • Increased user density on the part of the administrative authorities, leading to positive efficiency and productivity effects in the governmental sector; better yet, more new offers for state-run services can be extended to citizens. • Increased corporate user density, leading to competitive advantages and thus promotes growth and employment: existing companies will most likely realise cost savings in the distribution sector as well as on the purchasing side. • The start-up of new businesses, including virtual businesses, is facilitated. • Increased user density in private households, leading to a wider information intake and strengthened communications. • Stronger Internet use in schools, leading to improved options for network learning. • Time savings for all users, as repeated log-ins (per day) to the Internet are practically eliminated. • Information gains for private and corporate entities, as well as an accelerated dissemination of innovation. • Improved options for all users to download updated virus protection over the Internet – the risk of file corruption and/or the loss of valuable data is considerably lessened for private parties as well. • Improved options for national, regional and local authorities to disseminate information important to the population, in a targeted manner. • Relieve congestion in the transportation sector, as certain Internet-based communications options – including video-conferencing when using ADSL and Cable TV – can serve as a substitute for business trips; better yet, the increased

use of online banking, directory and trade services could mean a considerable relief of the strain on the transportation sector in the long term. If a more extensive use of the Internet were to succeed in saving just 1 % of Germany's annual congestion costs, estimated at approximately DM 200 billion, this alone would translate to a welfare gain of DM 2 billion each year. • Transaction cost reductions in the economy as a whole, which are equivalent to a positive real income effect. • An expansion of the Internet boosts the incentives for the emergence of new fields of occupation, that offer the promise of communications-intensive and communications–oriented jobs.

3. The Effects Of Unmetered Internet Access

In assessing the repercussions of unmetered Internet access, one has to differentiate between supply and demand effects. Both are in a position to generate growth due to diffusion effects, network gains, and innovations. In principle, growth effects are possible via several Internet-related channels: • The Internet as a basis for product innovation and new services. • The Internet as a low-cost and spatially extended option for corporate networking and venture capital procurement – Germany's high unemployment rate indeed reflects an entrepreneurial deficit. • The Internet as progress with cash savings, enabling companies to equip more work positions with the necessary hard- and software at a given rate of savings. • The Internet as a platform for the accelerated dissemination of knowledge, which promotes growth. • The Internet as an incentive for absolute price cuts resulting from reduced transaction costs, which translate to positive real income and demand effects. In the subsequent discussion, we will not separately address the issue of international displacement effects that will accompany a rapid international increase in Internet use. However, it should be noted that the Internet has expanded the relevant market for many commodities, and has further internationalised the locational competition with regard to number of products: countries that are internationally behind in tapping their Internet potential or who set inadequate and/or rigid market conditions, will have to reckon with lasting disadvantages in locational competition in the Internet sector, more so than was the case in earlier times. By the same token, countries that create conditions to promote expansion will enjoy considerable first-mover advantages. While Germany does show significantly increased competition in the telecom sector after 1998, the question now arises, at the dawn of the 21st century, of whether the potential of the increased competition was tapped to the full by the economy and regulatory bodies; and whether

international interconnection tendencies – in the mobile telephony as well as the fixed network sectors – might not lessen the intensity of competition in the long run. Meanwhile, it is impossible to ignore the fact that in Germany, the ex- monopolist, the Deutsche Telekom AG, with its local network traffic market share of approx. 97% in 1999, and with its dominance in the Cable TV sector (in areas especially important to the Internet sector) continues to be very dominant and – despite wireless local loop and other new technologies – is set to remain so for a good many years. Moreover, the overall boom in the mobile telephony market strengthens the ex-monopolist's position, as its network capacity usage rate is indirectly increased.

3.1 Supply and Demand Effects

A comparison of Internet access prices in the OECD proves yet again that Internet access costs vary greatly between different developed countries (OECD 1999). For the ten EU countries under study, the costs for 20 hours of Internet use per month ranged between approximately 60 dollars in purchasing power parities and approximately 30 dollars (Fig. 2). Even when examining an increased number of Internet use hours, the sequence of countries hardly changes. Ireland, France and Great Britain merely switch places during peak hours. While Germany is in the lower half of the order of cost during these peak hours, during off-peak times after 8 p.m. - important for private users - it is second most expensive, just behind Spain. A more sophisticated look at the costs incurred by Internet use in Germany shows that, for 30 use hours per month, users incur (pecuniary) costs of DM 62- 100, which can be considered a considerable usage barrier, especially for private users – except for high-income groups. In late 1999, metered usage rates for the Internet are the rule in Germany, usually coupled with a monthly subscription fee and - in some cases - with dial-up costs as well. There are some providers who do not charge a basic fee, but these confront their users with advertising. A kind of hidden flat rate is offered by Mobilcom– this was created with a minimum turnover of 20 hours in mind, and provides a low-cost minute price of 3.3 Pfennigs, along with a dial-up fee of 6 Pfennigs; for someone wanting to surf the network for no more than 20 hours a month, this translates to an implied flat rate price of roughly DM 60. The Deutsche Telekom AG also offers rates with implied flat rate pricing: tariffs including a given number of "free" use hours. Yet, the rates alluded to are not true flat rates, as they only benefit infrequent users. An ideal economic use of the Internet results only when network effects are comprehensively exploited, i.e. when a very extensive circle of users is linked via the Internet for as long as possible at a time.

Fig. 2: Comparison of Internet Access Costs for Selected EU Countries

20 Hours

70 60 at peak 50 off peak 40 30 PPP-US $ PPP-US 20 10 0 IE FR UK DK NL ES DE IT SE FI 30 Hours

90 80 70 at peak 60 off peak 50 40

PPP-US $ PPP-US 30 20 10 0 IE FR UK DK NL ES DE IT SE FI

40 Hours 120

100 at peak 80 off peak 60

PPP-US $ PPP-US 40

0 IE FR UK DK NL ES DE IT SE FI

NL=Netherlands, ES= Spain, DE=Germany, IT=Italy, SE=Sweden, FI=Finland Source: OECD (1999) Country Key: IE=Ireland, FR=France, UK=United Kingdom, DK=Denmark,

On the demand side, there is indeed a relatively close correlation between the Internet price level in the different countries under study and the level of Internet access and/or Internet use. An international syndicate of private research institutes aided by the European Commission's ACTS and ESPRIT programs conducted Project ECaTT (Electronic Commerce and Telework Trends) in Quarter I/1999: a large-scale survey of 7,700 households as well as 4,000 business

representatives in ten EU countries on current status and future prospects of eCommerce and tele-employment (ECaTT, 1999). Combining these figures with Internet use costs provides evidence for these correlations. As the ranking of Internet costs in the OECD country comparison hardly fluctuates between the different numbers of hours investigated, the following discussion will go into detail only on the cost for 20 hours (in off-peak times); the other results are included only as tables.

Fig. 3: "At Home" Internet Connection Density 1999 and Access Costs

35 NL DK 30 FI 25

20 SE UK DE 15 IE Share in %

10 IT FR y = -0,5861x + 38,627 2 ES 5 R = 0,2878

0 25 30 35 40 45 50 55 PPP-US $

First, let's have a look at the implications for access to the Internet or other online services. Varying definitions of the term „Internet Access“ are possible here. Fig. 3 shows the correlation between the share of persons connecting to the Internet - or other online services - on their Home PC via Modem or ISDN, and Internet costs (based on purchasing power parity calculations: PPP-US $). Based on national value pairs, the regression curve shows a functionally negative correlation between user density –the share of households with Internet use measured against all households – and price levels (adjusted for national differences in purchasing power). Here, Germany's share figure is found in the lower half of the ten-country comparison. Considering its poor cost situation, it holds a relatively good position. If the share were determined solely by the access costs, Germany would probably have a share of just roughly 12 %. Two countries that show a distinctly underaverage representation considering their access costs situation are Italy and France.

Fig. 4: Internet Use (broad definition) and Access Costs

60 SE FI NL 50 DK FR

40 UK IE DE

Share in % 30 y = -0,9486x + 73,554 IT R2 = 0,4009 20 ES

0 25 30 35 40 45 50 55 PPP-US $

A broader definition of Internet users naturally yields higher share values. In Fig. 4, the broadest possible definition was used, that is, users who have ever used the Internet (or a different online service). While the correlation between Internet use and access costs is statistically significant at higher levels, it changes nothing in the basic picture. Only France's position is shifted noticeably. Compared with this, the share of users who have signed subscription contracts for Internet seems a very narrow definition.2 Fig. 5 illustrates the connections for this case. Again, the basic picture doesn't change, although Germany does succeed in achieving an above-average share of subscribers given its poor cost situation. However, this may be an indication for the fact that in Germany, the tendency to use the Internet is relatively high, so accordingly, relatively high growth rates can be expected in the event of price cuts. Price cuts should result not only in increased user density, but also in the time spent using the Internet.

2 This information is based not on the EcaTT survey, but on estimates from EUROPEAN COMMISSION (1999), Annex 4.

Fig. 5: Internet Subscription and Access Costs

18 UK

16 SE

14 DK IE 12 FI DE 10

Share in % 8 NL FR 6

IT y = -0,3687x + 22,637 4 R2 = 0,3462 2 ES 0 25 30 35 40 45 50 55 KKP-US $

As mentioned above, the results change only slightly, when the costs for higher numbers of hours are taken as a basis for determining connections between access costs and Internet use. Table 1 reflects the corresponding linear determination coefficients for the costs of 30 and 40 hours of Internet at off-peak times. In all cases, there is a significant negative correlation, i.e. that lower Internet prices would increase Internet use. In all, the table shows that approximately 1/3 of the variation in Internet use density can be attributed to the price variable. Other influencing factors are most likely the per capita income, the educational level and the sectoral structure of the economy.

Table 1: Access Costs and Internet Use (varying bundles of time)

Cost Internet Access Internet Use Internet At home (broad definition) Subscription for 30 hours 0.344 0.391 0.290 for 40 hours 0.318 0.376 0.265

Usage costs and Internet-based services

Of course, high Internet use costs also represent an obstacle to the spread of individual Internet-based services. A virtually classic form of communication via

the network is e-mail. But here, too, the share of people who use this medium fluctuates widely in a European comparison, and the fluctuations correlate clearly with the usage costs (Fig. 6). For two other services – online banking and online shopping – the correlations between the current share figures at the beginning of 1999 and the Internet use costs are not very pronounced. Here, however, there is a relatively close connection between the shares of people planning to start using these services within the next two years (Fig. 7 and 8). That is high usage costs may obstruct the expansion of these services here. Again, Germany is conspicuous: here, it shows the third-lowest share in growth, a fact that is closely correlated to the high cost of Internet use at off-peak times. In Italy, which shows the second-lowest share in growth, factors other than the cost appear to be obstructing the spread of these services.

Fig. 6: E-Mail Usage and Access Costs

40 SE FI 35 DK 30 NL UK 25

20 IE Share in % DE 15 FR y = -0,9139x + 54,673 10 IT ES R2 = 0,4798 5

0 25 30 35 40 45 50 55 PPP-US $

Fig. 7: Intended Use of Online Banking By 2001 and Access Costs

SE 25

20 DK NL FI FR 15 IE UK

Share in % DE 10 IT y = -0,4139x + 29,473 R2 = 0,4045 ES 5

0 25 30 35 40 45 50 55 PPP-US $

Fig. 8: Intended Use of Online Shopping By 2001 and Access Costs

30 SE

FI 25 DK

20 NL IE

Share in % 15 UK FR DE

10 IT y = -0,5529x + 36,298 ES R2 = 0,4882 5

0 25 30 35 40 45 50 55 PPP-US $

On the one hand, high usage costs limit the expansion opportunities of Internet-based service providers and/or services. On the other, lower-cost Internet use would allow an expansion of the Internet sector itself, which offers considerable expansion opportunities to small and medium-sized businesses and dynamic start- ups. Indirect expansion effects could prove even more important: Because massive Internet use is associated with price-reducing advantages for products and services – due to reduced transaction costs among other things – high usage prices represent an obstacle to demand for many sectors offering commodities suited to eCommerce; seen in this light, lower Internet prices are accompanied by positive real income effects. Finally, expensive Internet use impedes corporate networking and raises the cost of forming virtual businesses. After all, Internet-based options for continuing education will most likely be little-used in the face of metered rates, which has to be interpreted as a locational as well as growth and employment disadvantage, considering the increased demands on continuing education imposed by globalisation. So a price reduction in the Internet by way of flat rate pricing would allow for positive growth and employment effects. In conclusion, considerable impulses may be expected in the following sectors: • Expansion of Internet-based services to households and businesses • A general growth in demand as a result of lower transaction costs in the commodities markets • Improved terms of competition for small and medium-sized businesses, for whom active Internet use is not yet a given - in contrast to multinational corporations, where communications standards are set by the US, leader in the Internet sector. • Incentives for corporate start-ups and networking • Improved Internet-based qualification options, which may be seen as advantageous to regional politics – especially considering rural areas and their frequently difficult problems of acculturation.

3.2 Growth Effects: Dispersion, Network Gains, Innovation

The dissemination of knowledge and the efficient information sharing that results from it are of central importance to economic growth. Assuming that (given a liberal regulatory environment) Internet use will become a means of knowledge dissemination in the middle and long term – at low rates determined by common sense or by competition – and will contribute to growth on a similar scale like telecommunications, then – going back to the elasticities assessment in JUNGMITTAG/WELFENS (1996) – a one percent increase in knowledge dissemination via the Internet would drive economic growth in the corporate sector (excluding the atypical sectors of agriculture and forestry, fishing and residential rentals) up by a good 0.18 percent. The accelerated information sharing associated

with increasingly intensive telecommunications network use in the latter half of the 20th century has had positive diffusion effects on product and process innovation. At times, there has been accelerated demand for telecommunications based on network effects: For existing telecom users in the corporate sector, the use value of telecommunications rose as other companies increasingly availed themselves of modern telecommunications services such as Fax and ISDN. In the case of Internet use, which is still at an early expansion stage in Germany, there are most likely considerable positive network effects to be realised. Moreover, the Internet is a novel way to link creative potential in the household corporate and science sectors, thus promoting innovation.

Assessment for Germany

If flat rate pricing brought about a 20 % price reduction, the share of the population having an Internet access at home - at a conservative estimate - would rise from 16 % to 17 % (greater reductions in usage costs are conceivable in the long term). Assuming a proportionality between Internet access and knowledge dissemination, the latter would be increased by roughly 6.5 %, which would in turn generate a percentage point of added economic growth in the corporate sector. A similar scenario results if one uses the broad definition of Internet use. Here, a 20 % price reduction would cause Germany's 33 % share to rise to approx. 38 %, implying corporate sector growth effects of just over 2 %. Meanwhile, the broader indicator naturally is fraught with more uncertainty. If this assessment is applied to the economy as a whole (including the housing industry, agriculture and forestry, fishery), a realistic growth surplus of a good ½ percentage point emerges for Germany as a consequence of flat rate pricing – with an implied price reduction by 20%. Even today, the employment growth in the information industry contributes greatly to overall employment growth. In all , the number of employed persons rose by 128,000 between 1997 and 1998. This is equivalent to an increase of approx. 0.4 %. Alone in the Hardware, Software and Services subsector, the number of employed persons grew by 27,900, an increase of approx. 2.9 % (see Table 2). This sector, with a 2.7 % share of the total labour force in 1997 and a 2.8 % share in 1998, supplied 21.8 % of Germany's total employment growth. Its contribution to employment becomes even more pronounced when we take a look at its Software and IT Services subsector. Here, the number of employed persons rose by 36,000 from 1997 to 1998. At shares of 0.65 % and 0.75 % of the total labour force for the years 1997 and 1998, respectively, this subsector was responsible for 28.1 % of the total growth in employment. It also contributed significantly to the rise in employed persons from 1998 to 1999. While the Hardware, Software and Services together register a growth employed persons of „only“ approx. 4 %, the figure is approx. 11 % for just the Software and IT Services subsector.

Table 2: Persons Employed In The Information Industry 1997-1999

Sector Persons Employed Change (%) 1997 1998 1999* 97/98 98/99

Hardware, Software & Service 973,500 1,001,500 1,037,420 3 4 Information Technology 379,000 396,000 433,160 4 9 Manufacture of Office 147,000 128,000 135,680 -13 6 Machines and DV Devices Software and IT services 232,000 268,000 297,480 16 11 Telecommunications 322,000 338,000 338,000 5 0 Manufacture of Optical 101,000 101,000 101,000 0 0 Telecom-munications Devices Telephone/telecommunication 221,000 237,000 237,000 7 0 services Electronic Components 83,500 83,500 81,500 0 -2 Entertainment Electronics 41,000 36,000 35,280 -12 -2 Specialised Dealers and 148,000 148,000 149,480 0 1 Distribution*

Media 692,000 691,020 698,690 0 1 Publishing Industry 222,000 217,000 219,170 -2 1 Print Industry 285,000 284,000 284,000 0 0 Film & Video Production, Rental, 24,000 32,000 32,640 33 2 & Distribution; Movie theatres Radio & TV, Program Production 72,000 62,000 65,100 -14 6 Correspondence & News Offices, 38,000 44,000 45,760 16 4 Freelance Journalists Book, Magazine & Music Trade* 51,000 52,020, 52,020 2 0

Total 1,665,500 1,692,520 1,736,110 2 3 * estimated Source: Professional Association for Information Technology in the VDMA and ZVEI; Federal Statistics Office, (1) FV Communications Technology; (2) FV Construction Elements

Again assuming a proportionality - between Internet use and employment - a 20% reduction in Internet use costs (using the „ At-Home Internet Access“ indicator) would mean an increase in employed persons in the Software and IT Services subsector by roughly 18,500, beyond the expected growth. If one uses the broader indicator for Internet access, which is probably the more relevant one in this case the relevantere, the number of employed persons added in this subsector would be at roughly 45,000. And assuming this proportionality for the information industry as a whole, there would be 108,000 newly employed persons using the „At-Home Internet Access“ indicator, and 263,000 additional employed persons using the broader Internet access indicator - all in addition to the expected trend- driven growth. In a more drastic scenario assuming a 50 % reduction in Internet use costs – which is, however, subject to a considerably higher uncertainty, as it entails shifting to the edge of the available sample of observations – then the consequences of the narrow and wide indicator definitions switch. While the broader indicator for Internet access now shows additional employment of 360,000 persons, the „At- Home Internet Access“ indicator would lead to roughly 430,000 additional employed persons in the information industry. This result also implies that a drastic price reduction would decrease the validity of the broader indicator for private Internet use and increase the importance of at-home Internet Access. Thus, the present conclusion is absolutely in agreement with intuitive expectations. In the face of unemployment figures near four million at the turn of the year 1999/2000, the possibility of creating 100,000 to 400,000 additional jobs through more liberal price-setting policies in the Internet sector should be seen as momentous for Germany in any case. A number of more indirect effects could not be quantified in greater detail within the scope of this middle-term analysis. For example, the Internet has other demand-side growth effects due to its increasing utilization of realisable transaction cost reductions. The commodities in question can thus afford a rise in demand, which translates to a positive real income effect. Meanwhile, it cannot be ruled out that the Internet-based growth of some sectors will be connected with shrinking effects in other sectors. Based on US experiences, a positive net effect can be assumed with a high degree of certainty. Moreover, higher Internet use rates and more favorable conditions for Internet use in households and businesses are crucial for Germany in its international competition for location: Germany could attract more direct investments, especially in the sector of communications-intensive industries and thus reduce its international weakness in per capita direct investment influx in the OECD sector, which has been in evidence for years (naturally, this would also involve developments in the corporate tax reform and other measures). Finally, a powerful and ubiquitous Internet facilitates the start-up of new businesses and the creation of virtual businesses, and considerably increases their chances for growth. Thus, the American City Business Journal writes that small businesses that use the Internet grow 46 % faster than those that don't use it (INTERNET ECONOMY INDICATORS, 1999a). In Germany's Business-to-

Business sector– especially in small and medium-sized businesses – there is considerable room for expansion. The same applies to teleworking, where Germany has only remained in the European centre field to date (EcaTT, 1999 and INSTITUT DER DEUTSCHEN WIRTSCHAFT, 1999c) - even though employed persons in all European countries have shown a marked interest in this mode of working (see Fig. 9).

Fig. 9: Actual and Desired Levels of Teleworking in Europe

100 Share of Regular Tele-Jobs 90 86 Share of Labor Force Wishing Tele-Jobs 80 75 72 74 71 69 70 65 65 65 61 60

Share in % 40

20 10,8 6,6 8,3 8 10 4,8 4,4 1,9 2,3 2 2,9 0 IE FR UK DK NL ES DE IT SE FI

Source: EcaTT (1999)

So flat rate pricing will lead to a steep rise in demand for private and corporate Internet use. This will likely result in increased investment in transmission capacities, due to time-related bottlenecks. The resulting employment effects will likely represent a rising share of the predicted increase in total employed persons (using the broader Internet use indicator) in the total information industry. Flat rate pricing at the retail level demands the introduction of similar models in the wholesale sector or rather in relations between dominant network operators and service providers (CAVE/CROWTHER, 1999). Meanwhile, there are indeed ways for Internet providers to influence the times at which users access the system. One conceivable option is that of bonus points for users who go on the Internet at off-peak times, where the bonus points could be used as „admission fees“ for buying information stored in user clubs or for free access to certain services. Other user incentives are also conceivable in the interest of optimizing the Internet use.

According to a number of current studies, the cost of data traffic based on Internet protocol are significantly lower than in conventional telephone traffic; orders of magnitude of 1:10 and more are quoted. This creates interesting growth perspectives for Internet telephony services and other Internet-based services. Still, the Internet expansion potential hinted at here can only be realised if new types– albeit cost-oriented by all means – of flat rate models applied at the wholesale and retail level.

4. Some Economic Conclusions

In the interest of increased growth and employment, flat rate Internet pricing is useful to the extent that Internet providers welcome it. Above all, it provides tremendous advantages to the economy as a whole, resulting from the intensified Internet use associated with a flat rate. In the middle term, we expect that intensified Internet will lead to considerable employment and growth gains in Germany. Positive employment effects will emerge not only in the regions in which leading Internet providers have settled. Rather, all regions and sectors will benefit, that are relatively communications-intensive or for which the Internet makes possible a significant reduction in transaction costs. Regions and/or cities with colleges and universities will profit especially, the Internet opens up new expansion opportunities for knowledge-based providers. Specifically, the following conclusions can be reached based on the analysis at hand: • Fears that a flat rate will lead to lasting network shortages are unfounded. Flat rate pricing –at off-peak times initially – corresponds to the principles of cost- oriented price-setting, used by the European Commission and most federal regulation authorities as a practical orientation aid in price regulation (marginal costs of using the network are near zero). • Flat rate price options would considerably stimulate Internet use in Germany, making both economic and ecological sense (traffic reduction effects), and would open up new points of departure for public participation at various levels of politics. In the face of nearly four million unemployed, the positive employment and growth gains resulting from low-cost flat rates should be considered, which incidentally are especially important for eastern Germany in its process of catching-up to the rest of the German economy – while the improved options for corporate start-ups in general, for corporate networking (in the research sector as well) and for sectoral structural transition should be deliberately exploited. • There is no factual reason why the action parameter of price strategy, so important to competition, should be artificially restricted by regulation

authorities. Only in the context of undue, trade-distorting cross-subsidisation by the ex-monopolist is there a reason for regulation authorities to intervene in price-setting autonomy. • The regulators should request that the dominant telecom provider, the Deutsche Telekom AG, provide special interconnection terms for Internet or data traffic - on the basis of the internet protocol. Because data traffic is much cheaper to handle than voice telephony, network usage prices could be expected to drop sharply given cost-oriented pricing. • As a joint owner of the DTAG, the German government should do its share to ensure that the company's Cable TV network - so important to growth and Internet policies - is sold in its entirety at least in some regions. Otherwise, it will remain unclear what economic or communications potential is contained in Cable TV, as private providers such as the DTAG develop the Cable TV platform without considering internal conflicts of interest (Cable TV telecom use as competition to their own fixed network business); it is conspicuous that in the Netherlands, the dominant fixed network operator KPN holds only one large regional Cable TV company, and even here, the Ministry has been pressing for a shift from a majority to a minority share, for reasons of competition policy. • Partial Internet flat rate prices – with a limited number of free Internet use hours - should only be permitted when flat rate prices have been authorised in general. Meanwhile, differentiated flat rate concepts are certainly conceivable, such as a flat rate allowing unmetered access within a given time window (e.g. in low- traffic times, calling for a lower flat rate than an equivalent arrangement for peak times or for the total 24-hours cycle). • When the regulator deviates from the price setting practices of leading OECD countries, the public should be given detailed reasons for this. Both the public and the economic sector have a vested interest in reasonable, transparent and appropriate regulation. It can be expected that the intensified use of the Internet resulting from the introduction of monthly flat rate pricing will lead to a more widespread use of the Internet. This will result in economic benefits to the entire economy and an increase in use value for private households. Alongside private PC leasing, which will probably increase in the long term and create new options for Internet use especially for lower-income households, the introduction of flat rate price strategies would be a large step towards „democratising the Internet," i.e. opening up the Internet to as many households as possible. In the long term, the triad will be the site of intensified competitive battles because of the increased price transparency associated with the Internet. For Germany, a lasting shortfall in Internet use – vs. the US, Scandinavia, and other OECD countries – would be a serious obstacle to development, or growth and employment.

From a regulatory standpoint, there are no reasons whatsoever to oppose a flat rate for Internet use. On the contrary, non-dominant Internet and/or telecom providers should be given the greatest possible freedom in choosing their price- setting strategies. This corresponds to the basic principles of Germany's social market economy, and also to the Fundamentals of economic freedom as determined in the EG Contract. Meanwhile, the regulators or the government should undertake the necessary measures to prevent the abusive exploitation of a dominant market position on the part of the ex-telecom monopolist. In a series of programs, Germany's federal and state governments and countries have granted subsidies for first-time Internet use to small and medium- sized businesses, so that this group of companies, so important for employment and innovation, can keep pace with the global Internet Age. So it cannot be in the government's interests if a restriction of price-setting strategies – and excessive local network prices and/or interconnection fees – on the user side reduce the societal dividends of this corporate Internet sponsorship. So, it is in the interest of both the government and citizens to permit flat rate pricing, which experience has shown will lower the cost of Internet use possibilities. In all political decisions relating to flat rate authorisation, the considerable advantages of lower-cost Internet use to the economy as a whole should be acknowledged in full. After all, considering the social market economy's regulative model, one should not overlook the fact that increased Internet use will serve to intensify competition, and that lower-cost Internet use will expand the potential user circle in favour of low-income classes as well. Flat rate pricing could be introduced in steps, which should, however, lead relatively rapidly to a comprehensive liberalisation in price-setting: • Unmetered Internet use for schools, colleges and universities, so that knowledge building and Internet use are strongly encouraged, which would benefit society and create new impulses on the content side for the Internet. • Unmetered Internet use on the weekends and on holidays, which ought to motivate households in particular to intensify their use of the Internet. • Unmetered Internet use for the low-traffic evening hours (beginning in the late afternoon hours where applicable). • Unmetered Internet use as a general price-setting option in the Internet sector. In the middle term, it appears possible to achieve 100,000 to 400,000 new jobs and increased growth by driving Internet use– an opportunity that the German economy should seize, especially in the face of its relatively poor past growth and employment figures in European comparisons; especially the businesses and households in East Germany should be encouraged to use the Internet– if necessary, using special demonstration and pilot projects, because expansion possibilities exist in the service sector above all, given the relatively low industrial density in the "new German states." (In turn, modern, low-cost, company-oriented services would improve the chances of expanding industry). Meanwhile, it would be problematic if

Germany were to fall behind the US, Great Britain and other OECD countries with regard to Internet regulation. In closing, one should note that a delay in deregulating or liberalising Internet price-setting would engender considerable disadvantages for Germany – the employment potential calculated above would not nearly be reached. Meanwhile, further empirical studies, including a modelling of telecom and Internet use in input-output models and macro models, would be most welcome. Naturally, the present analysis can only be a first step in a systematic investigation of the Internet industry in Germany and Europe.

Bibliography

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Appendix

A.1 Descriptive Statistics

Fig. A.1: AOL Customers Worldwide, August 1994 – December 1999

5 AOL Customers Worldwide (in Millions)

0 Aug 94 Feb 95 Aug 95 Feb 96 Aug 96 Feb 97 Aug 97 Feb 98 Aug 98 Feb 99 Aug 99

Table A.1: International Comparison of Telephone Flat Rates

Country Flat Rate Brazil 29 US$ + Provider Canada 8.40 ... 10.40 DM Great Britain 15 US$ Hull (Great Britain) 25 US$ p. month + 9 Cents p. call New Zealand 20 US$ NTT (Japan) 76...81 US$ (planned) Austria 20 US$ Spain 29 US$ USA 17.90 ... 249.00 US$

A.2 Internet Flat Rates and Deregulation Requirements

If Internet service providers offered a flat rate to customers the demand for network capacity would increase as the number of Internet users and the degree of capacity utilization would increase. As regards prospects for a level playing field and fair competition, respectively, it is crucial that there should be no cross-subsidization on the side of the dominanent fixed network operator – which itself is active in the Internet business – and that there is capacity-oriented “digital pricing“ and a flat rate, respectively, in network levels 1-2-3, too. As regards Germany one has to take into account that the former telecom monopolist Deutsche Telekom AG still has a monopoly on level 1. Moreover, the former monopolist has first mover advantages with respect to mobilizing new customers for the Internet – e.g. via special government programs (with a focus on bringing schools into the net) – and it also has developed various bundled offers (e.g. ISDN plus subsidized Internet access). In the UK the former monopolist, yielding to pressure from the regulator OFTEL, has introduced a flat rate in the backbone network as of end of 1999; moreover, at level 2 (regional exchange) there will be also a quasi flat rate. It would be desirable to have capacity-oriented prices, based on long term marginal costs, at all levels of the telcommunications network. If a flat rate – under the heading flat rate offer – were introduced only on one level, this would be quite problematic and would create distortions.

Cross-subsidization and Dominance of Fixed Network Operator A serious distortion will emerge if the local exchange (market j) is characterized by a de facto monopoly while the Internet market (market i) is competitive. Assuming M for simplicity constant marginal costs k´0 in local exchange on the side of the monopolist, we will observe under profit maximization and a given demand curve M DDj that the equilibrium is characterized by a monopoly price p and the quantity M q0 . Note that this quantity is much lower than supply under competition (q1),.and this already is to the disadvantage of Internet service providers which need broad access to customers in the local exchange market. The monopolist will obtain in the j-market monopoly profits equivalent to the rectangle ABCpM which can be used for cross-subsidizing its Internet business in market i. On the left hand side of the following graph we have shown the Internet market where we assume that the subsidiary of the former telecom monopolist is facing an initial Internet demand M (dd0 ) from the pool of fixed network customers; we assume that the subsidiary of the former monopoly has marginal costs k´i0 while that of the Internet competitor is lower, namely k´*i.

Fig. A.2: Cross-subsidization – Monopoly in the Telecommunications Network and Competition in the Internet Provider Market

Market i:Internet Market j: Telecom

Provider pi pj (Monopoly)

k‘i0 DDj DDi0 C pM k‘i1

M A B D k'0 FG k‘i* E H

M dd0

q q q q q q M q q i i3 i1 i0 i2 0 0 R‘ 1 Z j

Unbiased competition would result in sales of the Internet subsidiary of qi2, while the overall demand is qi3. Marketing activities of the newcomer have contributed to overall demand DD0 where sales of newcomers will be equivalent to qi3 minus qi2 which is equivalent to the distance EG. In this setting the market share of the newcomers is larger than that of the subsidiary of the former telecommunication monopolist. If, however, monopoly profits from the telecommunication business – e.g. from the local exchange – were used for cross- subsidization so that the marginal cost curve of the Internet subsidiary is shifted into the position k´i1, the subsidiary would realize a higher sales volume of qi1 which raises its market share (equivalent to the distance FG) at the expense of newcomers. Here the Internet subsidiary has become a dominant Internet provider due to the cross-subsidization financed from monopoly profits in telecommunications. Such a biased cross-subsidization can be avoided only if the former telecommunication monopoly is forced to introduce not only accounting separation for the Internet business but that the Internet activities become a separate business so that cross-subsidization on the side of the former monopolist can be avoided. This points to specific requirements for the privatization of the former telecommunication monopoly and the challenges for the regulatory authorities. Since Internet providers will get access to customers via the fixed telecommunications network (alternatives are the following: satellites as an expensive substitute; city carriers in a few cities; and in most cities cable TV which, however, in Germany also is controlled by Deutsche Telekom AG – having thus a double monopoly) it is most crucial that unbundled local access at adequate

marginal costs – possibly using efficient marginal component pricing rules – be imposed. The local access which is in the hand of a monopolist indeed is an essential facility for all Internet providers.

Discriminatory Pricing of Intermediate Products of the Former Monopolist Another problem of distortions in the Internet market stems from overcharging of intermediate inputs where the use of the former monopoly´s fixed network is a typical problem for all Internet providers; potential distortions concern conveyance as well as other services of the fixed link operator. A particular problem is the case where the fixed network operator has an Internet subsidiary and is overcharing other network operators with prices above long run marginal costs. In the following figure we have assumed constant marginal costs in the first three layers of the network, while there are rising marginal costs at level 4 (we disregard the case of falling marginal costs). An implicit overcharging of conveyance services is relevant whenever the former monopoly operator is not offering unbundled and differentiated services in a way which would have to be expected under functional competition – e.g. if the network operator offers only metered pricing for data conveyance while the Internet subsidiary of the network operator explicitly or implicitly obtains lower prices within a capacity oriented approach (according to Sprint the use of capacity oriented digital pricing could lead to a fall of telecommunication prices of up to 90 %). Such a situation can be described by the following figure which shows two indentical regional markets with demand schedules DD0 and DD0* (Fig. A.3), respectively, where the newcomer in the Internet market is facing excessive prices for using the fixed network. The situation is known to the subsidiary of the dominant network operator which apparently is accepting price leadership of other Internet providers. By imposing an excessive price in its own market segment the subsidiary of the Internet provider nevertheless contributes to higher profits of the fixed network operator; the dominent network operator will raise profits by the equivalent of the triangle A*B*C*D* which reflects overcharging of intermediate inputs – here on level 4 (see 4b* instead of 4a*). Moreover, there will be an additional extra profit in the subsidiary´s market, namely the area E1p1*poF minus the triangle FGEo. However, society is facing welfare losses and reduced growth prospects as the use of the Internet is lower than under competition. Note that the subsidiary of the network operator might transitorily assume the role of price leadership and thus lower prices in order to crowd out Internet competitors (from a theoretical point of view the price leadership uncertainty faced by these competitors raises their marginal costs schedules upwards).

Fig. A.3: Overcharging of Intermediate Inputs by Former Monopolist

III

k‘4b* DD0 DD0*

E1* k‘4a* k‘4 E1 p1*

E0* p0 F* E0 F C* k‘3b G D*

B* k‘3a A*

k‘2

k‘1

qq*q0 q1 q*1 q*0

Distortions Due to Former Monopolist and Growth Effects The larger the distortions described above the lower are the perspectives for society to fully exploit the potential benefits of the Internet in terms of new jobs and economic growth. This holds all the more as foreign direct investment inflows are impaired due to high communication prices; that is, monopoly prices and other distortions in the telecommunication sector are to the disadvantage of the respective country which could be a loser in international locational competition (e.g. as regards Germany one can conclude the following: whether the lower or the upper bound of the estimated potential of 100 000 – 400 000 new jobs as a consequence of flat rate pricing and strong Internet price cuts, respectively, is realized largely will depend on adequate regulations of the fixed network, in particular rules relevant for unbiased competition in the Internet). As regards Germany and other EU countries one can only conclude that capacity-oriented pricing should be offered as an option in the wholesale market. With respect to the dominant fixed network operator unbiased competition in the Internet market requires that the dominant operator technically should distinguish between data conveyance (packet switched data under IP) and voice telephony based on dedicated lines – from a technical perspective such distinction poses no

major problem. One also should eliminate opportunities for the dominant operator to create distortions via cross-subsidization. This all calls for clear regulations on all levels of the network; otherwise time-consuming legal conflicts will amount to major first mover advantages of the Internet subsidiary of the dominant operator. Given high national and international dynamics in the telecommunications and Internet markets, it is necessary to adopt adequate regulations/deregulations quickly.

A.3 Overall Economic Advantages of Internet Flat Rate

A) More users of the Internet B) People and firms will use the Internet for a longer time span C) Enlarged networking opportunities for the business community and society at large.

Economic Effects

• Accelerated diffusion of new information and knowledge

• Enlarged opportunities for e-commerce and creation of new firms

• Higher investment in the Internet sector

• 100 000 to 400 000 new jobs in Germany, up to 1.2 million new jobs in Euroland if estimates for Germany would apply to Euroland partner countries as well

• Additional jobs – beyond this estimate – if positive real income effects of falling output prices, i.e. the savings on transaction costs, are taken into account; there is no doubt new jobs in the Internet sphere will go along with redundancies in some sectors, in particular traditional wholesale trade.

Prerequisites

1) Flat rate on level 4 for end user 2) Flat rate on all other levels in the telecommunications network 3) Elimination of all cross-subsidization in favor of the Internet subsidiary of the dominant fixed network operator 4) Regulatory reform in favor of flat rate pricing

A.4 Some Reflections on Competition in Germany and Europe

In Germany the Monopoly Commission (MONOPOLKOMMISSION, 1999) has clearly stated that there is still no functional competition in the fixed network telecommunication market at the end of the 1990s. If one takes into account that newcomers´ market shares in regional and long distance strongly rely on intermediate input from the dominant telecommunication operator – the former monopolist – the market shares based on value-added are roughly only half as high as those calculated on the basis of sales figures or minutes. Thus the market power of the former telecommunication monopoly is bigger than it seems at first glance, and therefore there is a large potential for the abuse of market power on the side of the dominant network operator. If the dominant network operator would overcharge both its own Internet subsidiary and all other Internet service providers, this would improve the profitability of the dominant operator. While it is true that the Internet subsidiary will have a smaller customer base than in a case of lower network prices and hence lower Internet user costs, the dominant operator benefits from quasi-monopolist profits – due to excessive prices of its Internet subsidiary – and from artificially high profits of selling network access to other Internet service providers. Due to network effects in the Internet market – if more Internet users have access to the web existing users will benefit, too (rising marginal utility of network access, e.g. by enlarged opportunities for e- mail communication) – the dominant operator´s subsidiary will benefit from increased marketing efforts of all other Internet service providers. Overhead costs are largely recovered in network industries on the basis of principles of peak-load pricing. In most EU countries off-peak Internet prices are relatively high which means that private households are bearing much of the overhead and capital costs. Internet calls of residential users are rather price elastic so that there is a case of assigning a low proportion of common costs to them (CAVE, 1999). Regulators should observe this logic of welfare-enhancing allocation of common costs which should be mainly recovered from users with inelastic demand. If network pricing of the dominant telecoms operator in effect imposes a large share of common capital costs on residential Internet users, this would amount to a large welfare loss – hardly acceptable for any regulator. If one wants to determine the long term marginal costs of local access, the easiest way would be to rely on international benchmarking, while focussing in particular on countries in which independent cable TV networks provide an alternative access for local telephony and the Internet, respectively. The UK, the US, the Netherlands and Belgium are some of the most interesting countries in this respect. One should note that cable TV networks offer fast broadband Internet access, and the alternative to have this fast Internet access – instead of slow narrow band access via traditional networks (without ADSL) – certainly will reduce telecommunication prices in the local exchange market strongly.

For the digital market economy fast and affordable Internet access is a strategic requirement. The EU countries – in particular Germany and Italy – are lagging behind the US in the use of the Internet, in e-commerce and in job creation in the Internet and related sectors, including education and equipment. Therefore existing distortions in the telecommunications market are a serious policy problem. As regards national and international telephony the example of Finland with its strong competition points to the benefits of competition in telecommunications (ANDERSSON, 1999).

Additional References

ANDERSSON, M. (1999), Full Competition in Telecommunications: The Experience of Finland, in: WELFENS, P.J.J. et al.(Eds.), Towards Competition in Network Industries: Telecommunications, Energy and Transportation in Europe and Russia, Heidelberg and New York: Springer. CAVE, M. (1999), Interconnection and the Internet: Competition and Regulation Issues at Local Access and Backbone Levels, OECD Working Paper, No. VII, No. 83, Paris. MONOPOLKOMMISSION (1999), Wettbewerb auf Telekommunikations- und Postmärkten?, Sondergutachten, November 1999, Köln.