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23
How Do Traditional Legal, Commercial, Social, and Political Structures, When Confronted with a New Service, React and Interact?

Maria Farnon
Fletcher School of Law and Diplomacy
Tufts University

Statement of the Problem

It is somewhat ironic that the Internet, which was originally pioneered for national security reasons in the United States, has evolved into an international network. In fact, it is the open, international character of the Internet that is largely responsible for its growth. Its explosive expansion has been exported from North America to Europe and Asia, in particular. At the same time, the Internet poses serious challenges to many traditional structures at many levels: regulatory, commercial, legal, and cultural.

Many governments have enthusiastically embraced the introduction of the Internet without understanding its subversive character. As new services like the Internet travel to countries where government intervention in the market is strong, and where the telecommunications industry remains a state-owned monopoly, these countries will seek to define the Internet in traditional terms. The determination to construct a national information infrastructure (NII) by imposing standards, reserving service transmission for a monopoly provider, and controlling content reflects a complete misunderstanding of the Internet model.

This paper evaluates the development of the international Internet as a case study of how the evolution and diffusion of a new service are affected by preexisting factors. In other words, how do traditional legal, commercial, social, and political structures, when confronted with a new service, react and interact? Even if the Internet represents an entirely new paradigm of services technology, it seems clear that domestic governments and industries will seek to apply a familiar framework, and thus exert the same control and derive the same benefits that the current telecommunications system allows. After reviewing the historical structure of the telecommunications industry, this paper evaluates the introduction of networking in several geographic regions to determine how a new service affects the traditional telecommunications model. The question then becomes, What can be done to preserve the originality of the Internet as a decentralized, scalable network on a global basis?

Background

The Old Paradigm: Government Ownership and Monopoly Service

Telecommunications operators (TOs) have traditionally been structured as state-owned monopolies for several reasons:

1.

Natural Monopoly. Telephone service has long been cited as an example of a "natural monopoly," characterized by significant ex ante investment (initial fixed costs) and increasing returns to scale. These factors imply that the size of the firm must be large to capture economies of scale and to recoup the initial investment.



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Page 190 23 How Do Traditional Legal, Commercial, Social, and Political Structures, When Confronted with a New Service, React and Interact? Maria Farnon Fletcher School of Law and Diplomacy Tufts University Statement of the Problem It is somewhat ironic that the Internet, which was originally pioneered for national security reasons in the United States, has evolved into an international network. In fact, it is the open, international character of the Internet that is largely responsible for its growth. Its explosive expansion has been exported from North America to Europe and Asia, in particular. At the same time, the Internet poses serious challenges to many traditional structures at many levels: regulatory, commercial, legal, and cultural. Many governments have enthusiastically embraced the introduction of the Internet without understanding its subversive character. As new services like the Internet travel to countries where government intervention in the market is strong, and where the telecommunications industry remains a state-owned monopoly, these countries will seek to define the Internet in traditional terms. The determination to construct a national information infrastructure (NII) by imposing standards, reserving service transmission for a monopoly provider, and controlling content reflects a complete misunderstanding of the Internet model. This paper evaluates the development of the international Internet as a case study of how the evolution and diffusion of a new service are affected by preexisting factors. In other words, how do traditional legal, commercial, social, and political structures, when confronted with a new service, react and interact? Even if the Internet represents an entirely new paradigm of services technology, it seems clear that domestic governments and industries will seek to apply a familiar framework, and thus exert the same control and derive the same benefits that the current telecommunications system allows. After reviewing the historical structure of the telecommunications industry, this paper evaluates the introduction of networking in several geographic regions to determine how a new service affects the traditional telecommunications model. The question then becomes, What can be done to preserve the originality of the Internet as a decentralized, scalable network on a global basis? Background The Old Paradigm: Government Ownership and Monopoly Service Telecommunications operators (TOs) have traditionally been structured as state-owned monopolies for several reasons: 1. Natural Monopoly. Telephone service has long been cited as an example of a "natural monopoly," characterized by significant ex ante investment (initial fixed costs) and increasing returns to scale. These factors imply that the size of the firm must be large to capture economies of scale and to recoup the initial investment.

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Page 191 2. Public Good. Government ownership is explained by the existence of "public goods," where the marginal cost of providing this good to an additional user is zero, and where it is difficult or impossible to limit consumption of the good. Thus, a commercial firm has no incentive to produce this type of product. An example of a "pure" public good is national defense. Telephone service, once the network is in place, might also be considered a public good. 3. Incomplete Markets. Incomplete markets occur whenever markets fail to produce a good or service, even where the cost is less than what people are willing to pay. Telephone service to rural areas or even to low-volume residential users could be considered an incomplete market, because firms may not generate enough business to recoup their investment. Thus, governments have justified their monopoly of telephone services as a welfare obligation, with the ultimate goal of providing access to every citizen, or "universal service." 4. National Security. Keeping the communications infrastructure out of foreign ownership and in the control of the government was long considered vital for protecting the national security, especially in times of crisis or war. Though it is overly simplistic to suggest that state ownership is inherently less efficient than private ownership, because of the large size of state-owned enterprises (SOEs), they tend to attract stakeholders who depend on the actions of the firm for benefits.1 The TO, for example, is often the largest employer in a country. Stakeholders include employees, suppliers, and the relevant government bureaucracies. Because the benefits they derive are significant, stakeholders have an incentive to organize in order to pressure the firm, and through this organization gain their power. Even though shareholders—namely the public—are the legal owners of the firm, they remain too dispersed to organize effectively. The stakeholders thus assume de facto control of residual rights. Governments are willing to maintain inefficient SOEs for fear of antagonizing powerful stakeholders, who are also political constituents. TOs in many countries across Europe, Asia, Africa, and Latin America have clearly attracted strong groups of stakeholders, including labor unions, equipment suppliers, and the government agencies that direct the TO. The employees are concerned foremost with retaining their employment, while the domestic equipment suppliers often depend on the national TO for the bulk of their orders. The third stakeholder, the government, also has an interest in preserving the TO under state ownership. By setting high tariffs for long-distance use, and subsidizing shorter domestic calls, politicians garner public support. Furthermore, a profitable TO can be used to cross-subsidize other operations, such as the postal service. In essence, the policy of high tariffs for phone usage constitutes an indirect tax.2 A Changed Consensus The question is why the consensus that supported the "natural monopoly" and state ownership of telephone services began to dissolve in the early 1990s. There are essentially three motivating factors: 1. Introduction of digital technology; 2. Privatization of SOEs around the world; and 3. Globalization of business. The most fundamental driver for this trend is the revolution in digital communications technology. A government monopoly was easy to justify for a service that was fairly undifferentiated (i.e., basic phone calls) and for which demand was relatively inelastic. Furthermore, the provision of universal service was a legitimate goal of governments, given that private industry was unwilling to assume the cost of laying lines to every household. However, since the 1970s, telephone penetration no longer constitutes a legitimate measure of the effectiveness of the telephone company. With the introduction of enhanced services, including voice mail, toll-free calling, and the establishment of data networks, the diversity and scope of services have become much more important indicators of progress.

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Page 192 The extraordinary growth of private value-added networks (VANs), especially within multinational organizations, demonstrates the failure of the TO system to adjust to technological innovation. The VAN market is characterized by high product differentiation and elastic demand, meaning narrow groups of users who demand highly customized services. It seems clear that in markets where the product is highly differentiated and demand is more elastic, government monopolies tend to be less flexible in meeting the demands of the market because of the constraints imposed by stakeholders.3 Telecommunications has assumed a vital role in the competitive advantage of firms, to the point where pricing and the availability of advanced services affect location decisions. This presents a fundamental conflict with the traditional goals of the TO, determined by the stakeholders, of maximizing revenues through high tariffs, and of controlling entry to the network and to the equipment procurement market. Telephone rates set by TOs are often not cost based, but created according to political pressures for cross-subsidization. Although some constituencies benefit from these subsidies, including residential and rural callers, they raise the costs of doing business and thus harm overall economic efficiency. In addition to the onset of digital technology, fiscal and competitive pressures have convinced many governments of the need to privatize the telecommunications industry. Telecommunications is now seen as an advanced factor that will determine a nation's competitive position in the global marketplace. However, governments have encountered difficulty attempting to deprive TO employees of their civil servant status, or more drastically, of their jobs. The political pressures inherent in the privatization process have often resulted in unhappy compromises that are at odds with the new services. For example, the ability of the European TOs to retain their monopoly of voice services even after 1998 will provoke tensions, especially when the Internet is used to carry voice. Finally, changes in the telecommunications industry have mandated the globalization of companies within the industry. These changes have taken place at the regulatory level, as well as at the levels of the customer, the competition, and the industry as a whole. The consumer who purchases voice, data, and video services is growing more and more homogeneous across national borders. At one time, consumers in the developed world demanded more sophisticated products, whereas consumers in developing nations strove simply to acquire basic telephone service. However, reliable communication is now recognized as providing the means to successful competition across the world, and new technology has given consumers the opportunity to leapfrog outdated communications systems to achieve a certain measure of equality. Thus, the cellular phone is no longer simply a status symbol for the wealthy but is instead a vital business tool from London to Moscow. The globalization of many industries provides for synergistic development: as financial services, for example, become standardized worldwide, the technology that supports these services must likewise go global. The U.S., British, and Japanese companies that underwent liberalization in the 1980s, and are thus free from political constraints that bind other TOs, have been much more aggressive in their international strategies. These firms are seeking to provide one-stop shopping for all telecommunications services by creating worldwide, seamless networks. At the same time, these companies have all realized that no single firm possesses the resources to offer global services alone. The result has been a host of alliances, including AT&T-Unisource (the TOs of Holland, Switzerland, and Sweden), Eunetcom (France Telecom and Deutsche Telekom), and the British Telecom—MCI joint venture. Together, the revolution of digital technology, the privatization of SOEs across industrialized as well as developing countries, and the internationalization of business have totally undermined the traditional TO structure. The internationalization of the Internet can only hasten this trend. The Internet, as a decentralized, uncontrolled service, stands in direct contradiction to the centralized, government-controlled model of the old TO system. The old system includes not only the state enterprises themselves, but also the entire system of standards setting (including supranational institutions like the International Telecommunications Union), a pricing structure distorted by political considerations, a national body of law that regulates areas including intellectual property and pornography, and even the national security of certain countries. Yet in responding to the challenge of the Internet model, countries often rely on traditional methods of control that are rendered ineffective by the new services. In Singapore, for example, Internet users are encouraged to report seditious or pornographic material to the Singapore Broadcasting Authority. In the United States, Senator Jim Exon sponsored the Communications Decency Act in response to pornographic images available on the Internet. In Europe, the European Union's (EU) Council of Ministers has agreed on a directive that limits the transmission of information about individuals,

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Page 193 especially to countries that do not offer adequate protection of privacy. All of these efforts will be impossible to enforce without literally pulling the plug on users. The problem is that many societies remain wedded to traditional structures that no longer match the new communications services. The EU has set 1998 as the deadline for the liberalization of the telecommunications market. The state-owned TOs will face mandated competition in every are but voice communications. However, new services like the Internet can integrate voice, data, and images, rendering old distinctions between basic telephony and value-added services meaningless. Perpetuating the voice monopoly of the TOs will significantly hinder the advance of countries that fail to recognize the advancing convergence of technologies and services. Though governments should continue to ensure that the majority of the population receives telephone access, the Internet demonstrates the foolishness of reserving a small slice of communications services for a monopoly provider. Analysis The Internet has grown far beyond the original vision of a network connecting research institutions and universities in the United States. More than 70 countries now have full TCP/IP connectivity, linking over 30 million users, and about 150 countries have at least e-mail service. About 1 million users are joining the Internet every month worldwide.
4 Governments across the world have identified international networking as critical to their national competitiveness, although few seem to actually have considered the subversive role of the Internet in undermining traditional political, commercial, and social structures. Political Issues As Subcomandante Marcos, the leader of the Zapatista rebellion in the Chiapas region of Mexico, explained, "What governments should really fear is a communications expert."5 Though traditional communications outlets such as radio and television are centralized and often controlled by the government, the Internet remains decentralized, diffuse, and nearly impossible to police. Thus, communiqués from the Zapatistas are transmitted throughout the world via the Internet. Likewise, during the 1991 coup in Moscow, reformers trapped inside the Russian Parliament sent out bulletins on the Internet, which the Voice of America picked up and then transmitted back to Russia over the radio. Obviously, the most repressive societies that restrict access to the necessary hardware—including North Korea and Iraq—will not be toppled by the information revolution. It is regimes like China and Singapore that recognize advanced telecommunications as a vital component of economic development, yet seek to maintain control over new services, that will face the most serious dilemmas. Legal Issues The totally unregulated nature of the Internet has allowed the diffusion of content that violates not only political controls but also legal structures. Some of the most public controversies have surrounded the diffusion of pornographic images on the Internet. In the United States, Senator Jim Exon sponsored the Communications Decency Act, which would set fines and jail terms for "lewd, lascivious, filthy, or indecent" material on the Internet or other networks. In New Zealand, the primary link to the Internet is threatened by a new antipornography law.6 U.S. service providers have responded by increasingly policing their own users. For example, America Online recently cut off subscribers using the network to transmit or receive child pornography images and eliminated the online fan club of the music group Hole. Other pressing legal issues include the protection of intellectual property rights and of privacy on the Internet, as well as censonship more generally. Essentially, the Internet's tradition of open access and its user-driven content challenge the traditional methods employed by societies—including copyright laws and limits on distribution—to restrict access to and use of controversial or protected information.

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Page 194 Standards Setting Standards setting has long been of critical importance in the telecommunications industry, even more so as internationalization has progressed. The interface of various TOs, equipment suppliers, and users requires some degree of cooperation and uniformity. Standards for basic telephony services have traditionally been set by national governments through their ownership of the monopoly TO, and through cooperative agreements brokered by international organizations such as the International Telecommunications Union (ITU). However, the inability of these organizations to keep pace with the advent of new services has allowed users and other nontraditional groups to subvert the top-down, "perfection-oriented" model of standards setting. The success of the Internet centers on its structure as an eminently flexible, open architecture, which has allowed its evolution to be determined largely by the users themselves. Bodies like the ITU have grown increasingly irrelevant with the introduction of new services such as the Internet, and have seen their turf eroded by new organizations that do not necessarily have official government sanction. For example, the Massachusetts Institute of Technology (MIT) and the European Laboratory for Particle Physics (CERN) announced in July 1994 that the two institutions will work together to further develop and standardize the World Wide Web (WWW).7 Likewise, countries such as Denmark and Singapore, which are aiming to become the networking hubs for their respective regions, are seizing the initiative to establish the regional standard. As Peter Lorentz Nielsen of the Danish Ministry of Research commented, "We can't wait for Brussels to act."8 The problem of compatibility obviously arises when systems such as UNIX and EDI meet, but users who become dependent on networking—from students to home shoppers to small and large businesses—will increasingly demand interoperability. The Internet offers the possibility of entirely user-driven services and technologies. Thus, despite the recent pronouncements of the Group of Seven (G7), governments may ultimately have little to say about the Internet or other new services. The debate over integrating the tangle of supranational standards institutions (ITU, CCIT, ITSC, and so on) may therefore be moot as well. The internationalization of data networks from the Fidonet to the Internet demonstrates above all the importance of open, flexible architectures that can be adapted to regional demands and constraints. Centralized standards setting makes as little sense as centralized network control. Regional Studies Asia Although the Internet is growing at a phenomenal rate in Asia, three critical components are lacking: legal and social structures, and software interfaces. Furthermore, dictatorships (China) or merely repressive regimes (Singapore) will undertake significant political risks by introducing networks that have international reach and that are impossible to perfectly monitor. In addition, the dominance of English on the international Internet provokes charges of "linguistic imperialism" that might "weaken indigenous languages and colonize the minds of the Asians."
9 Nevertheless, within east Asia only Laos and Burma currently remain without any form of Internet access. Hong Kong Although Hong Kong's Supernet is the oldest and main provider of access lines on the territory, eight other access providers have appeared since late 1994. In a classic example of the threat the Internet poses for traditional TOs, the Hong Kong Telecommunications Authority raided and closed down seven commercial access providers to the Internet in March 1995 for operating without a license. The companies claim that providing access to the Internet falls outside of current regulations.10

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Page 195 Singapore Singapore leads Asia in building digital networks to support an information infrastructure, and is clearly aiming to serve as the hub for the rest of the region. Despite Singapore's rapid advance, the government is attempting to police the Internet by encouraging users to report any criminal or antisocial behavior to other users as well as to the Singapore Broadcasting Authority, a government agency. As George Yeo, the minister for information and the arts in Singapore, admitted, ''SBA cannot police on its own without the support and cooperation of the members of the Singapore cyberspace community."11 Nevertheless, the Telecommunications Authority of Singapore plans to issue licenses for two more access providers for the Internet in addition to Singapore Telecom, which is currently the sole provider of Internet access throug Singnet. China China's leaders have quickly realized that the explosive economic development of the country can only be sustained by a modern telecommunications infrastructure. As a result, the Chinese government has been forced to introduce limited competition and to welcome foreign investment. This is especially significant for a country ruled by an authoritarian regime, where communications have long been defined as a national security issue. In June 1994, China broke up the telephone monopoly, which resulted in the formation of several new companies. Liantong Communications was formed in July 1994 by the cities of Shanghai, Beijing, and Tianjin as the country's second operator. The People's Liberation Army established Ji Tong Communications as another new carrier. Despite the urgent need for capital, however, foreigners have so far been banned from actually owning and operating networks, although they have been allowed to invest in the production of telecommunications equipment. Foreign companies are thus forbidden to take any equity stake in telephone networks. China has one of the lowest telephone penetration rates in the world, with only three lines available for every 100 people.
12 The government plans to lay about 15 million lines per year until it reaches 100 million lines by the end of the century. However, China's leaders have not restricted their vision to basic voice communications, but also plan to leapfrog to the latest technologies through the so-called "Golden Projects." The Golden Projects include three separate initiatives: 1. Golden Bridge: the backbone for data, voice, and image transmission; 2. Golden Card: a national credit card transaction system; and 3. Golden Gate: a paperless trading system to support offices, financial institutions, and foreign trade. To accomplish the Golden Projects, the Chinese government has called for overall planning, joint construction, unified standards, and a combination of public and special information networks.13 China will concentrate its investment in three main areas: digital switching equipment, fiber optic cable networks, and expanding the mobile phone networks.14 The Chinese Ministry of Electronics Industry assigned the Golden Bridge project to Ji Tong Communications company, which will construct a nationwide information network using satellites and fiber optic cables. Although many major cities have already built local data networks, the Golden Bridge will ultimately link 500 cities and more than 12,000 information sources, including large enterprises, institutions, and government offices. Ji Tong has entered an alliance with the China National Space Industry Administration, as well as with IBM, to support construction. Ji Tong has established the Shanghai Jinquiao Network Engineering Company—together with Shanghai Pushi Electronics Company and two university and scientific institutions—to begin building the Golden Bridge in Shanghai. The Jinquiao Network Engineering Company will be responsible for designing, building, and maintaining a system that is to link the State Council, provincial capitals, more than 400 cities, and over 1,000 large enterprises throughout the country.15 However, the reality of the communications culture in China remains in conflict with the stated goals of the Golden Bridge. At present, information centers for the central government's 55 ministries store 75 percent of all official information in China but are not interconnected and keep almost all of their information secret. According to a report in Economic Information Daily in November 1994, only about 6 percent of all official

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Page 196 information is allowed to publicly circulate. Partly as a result of the continuing perception of information as proprietary, only 300 of the country's 600 data banks are in fact operational, and fewer than 60 of these offer public access.
16 Thus, most of the software and equipment that China has introduced from abroad to support the information infrastructure remains useless. Economic Information Daily pointed out that 90 percent of the 100,000 electronic mailboxes imported from the United States in 1992 remain idle. Essentially, the premise of the Golden Bridge remains questionable within a regime whose attitude toward information is ambivalent at best, and where institutional jealousies regarding data prevent its diffusion even among government offices. There are signs, however, that this is slowly changing. For example, China's central bank released current money supply figures in 1994 for the first time since the communist takeover.17 Europe At the moment, about 1 million computers in Western Europe are connected to the Internet. However, the development of international networks in Europe has been hampered by the perpetuation of the state-owned, monopoly TO structure. As a result, movement toward a European Information Infrastructure has been mostly controlled by the state telecommunications companies (telcos), and thus fragmented along national lines. For example, while Britain offers the most liberal telecommunications market, where even cable television operators are allowed to offer voice services, not only does France Telecom continue to maintain a total monopoly over voice communications, but the French government has also failed to propose any framework for privatization. In Italy and Spain the basic telephone system itself requires significant investment. In addition, concerns about U.S. cultural dominance, which have pervaded EU legislation on media and film, have entered the discussion on the Internet. France is especially resistant to opening the country to international networks that might threaten local culture and language.18 (Ironically, Internet traffic is growing at a monthly rate of 15 percent in France.19) EU Commissioner Edith Cresson of France has proposed a 0.5 percent telecommunications tax to subsidize European content for online services. Jacques Santer named the erosion of cultural diversity as the number one risk of the technological revolution in the opening speech of the G7 Conference on the Information Society.20 Finally, European governments disagree among themselves as to what information belongs online—Scandinavia's tradition of open government contrasts with the more secretive British structure.21 Partial elements of an information infrastructure already exist in Europe in the form of national academic and commercial networks, but Europe still lacks guidelines for coordinated regional development. Denmark is determined to establish itself as the network leader in Europe, with the goal of bringing all government offices, hospitals, schools, businesses, and research institutions online by the year 2000 in the "InfoSociety 2000" project. As the first mover in Europe, Denmark also hopes to create the standards for the whole continent. According to the Danish proposal, all government agencies would go online first, creating a large body of users to drive costs down before introducing the network to the general population. Yet Denmark has not addressed the monopoly position of the state-owned TO, TeleDanmark, which was only partially privatized in 1994. Furthermore, InfoSociety 2000 reveals a statist approach to telecommunications development that is seriously misplaced in a world where the private sector continually pushes innovation and creates its own standards. The concern that Europe will be left behind as the United States roars ahead on the information superhighway prompted the creation of an EU task force led by Martin Bangemann, the German Minister of Economic Affairs. The task force consists of 20 politicians and the heads of major European communications and computer firms. The task force reported their findings to the European Council of Ministers in May 1994, beginning their statement with an affirmation of "market mechanisms as the motive power to carry us into the Information Age. It means developing a common regulatory approach to bring forth a competitive Europe-wide market for information services. It does not mean more public money, financial assistance, subsidies, or protectionism."22 Nevertheless, there remains a wide gap between these words and the reality of telecommunications development in Europe. In contrast with the haphazard and anarchic evolution of the Internet in the United States, the process in Europe aims to be much more deliberative and top-down. As Horst Nasko, Vice Chairman at Siemens Nixdorf, stated "In the U.S. they seem to shoot first and aim later. … What we are

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Page 197 trying to do is aim first and shoot when we are sure about what to do."23 This sentiment obviously contradicts the decentralized character of the Internet that has been so critical to its widespread acceptance. Africa An underdeveloped telecommunications structure continues to hamper Africa's access to all levels of service. Overall, charges remain much higher and line quality much worse than elsewhere. Besides the lack of infrastructure, the legal model of most national TOs forbids third-party traffic, making the commercial provision of online services impossible. Nevertheless, led by nongovernmental organizations (NGOs) such as the South African Development Community (SADC), as well as by commercial entities, some progress has occurred. The SADC's Early Warning Unit gathers advance data on the food supply situation from each of the 10 member countries as well as from international agencies to provide advance notice of impending food shortages.
24 The SADC employs the Magonet node through Harare, and converts to Fidonet nodes as they become available to communicate with various institutions via e-mail. Rascal Datacom is currently working with Barclays Bank to establish an Overseas Banking Retail Network (OBRN), which will provide e-mail service to 11 African countries, the Middle East, the Caribbean, and the United Kingdom. The initial phase of the projects is centered in Nairobi and is based on a combined LAN and X.25 solution. Ethernet LANs provide connectivity between users in major sites, whereas users across broader regions will apply more flexible solutions appropriate to local user requirements and available services and technologies.25 By employing solutions that match local needs and infrastructure, both the OBRN project and the SADC Early Warning system demonstrate that online connectivity is possible and highly useful even in regions that have missed the traditional route to telecommunications development. Another route to establishing connectivity in less developed areas is the galvanizing force of a "local leader." For example, an individual in South Africa has connected the country's research and academic Internet backbone to similar institutions in Botswana, Lesotho, Mauritius, Mozambique, Namibia, Swaziland, Zambia, and Zimbabwe. Latin America As in Africa, local telecommunications infrastructure remains an obstacle to high-speed international links. Although international operators like MCI and AT&T offer service, coverage is not total, forcing users to employ the local TO The "last-mile problem" becomes especially acute for communications outside of metropolitan areas. Many multinationals in Latin America have thus opted to create private VANs. Eastman Kodak, for example, relies on a private X.25 data network that links to its Rochester, New York-based computing center and to other host mainframes in Mexico and Brazil. Kodak opted for the X.25 network because of its ability to operate on bad wiring.26 As companies in Africa and Latin America create their own networking solutions, this sometimes allows the local population to piggyback on private carriers. For example, investment by Banco Pacifico has encouraged the diffusion of Internet connectivity in Ecuador.27 However, tight control by the government on international traffic can limit this option. Thus, the Internet remains fairly underdeveloped in Latin America. Forecast and Recommendations The International Internet versus Local Networks Many multinational corporations have already established proprietary value-added networks (VANs) to carry vital data among far-flung subsidiaries, suppliers, and customers. Likewise, industry groups in various countries have created their own networks to promote information sharing. An example of the latter is Electronic Data Interchange (EDI) in Europe. EDI was invented by the retailing and automobile industries as a "business

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Page 198 process and not a technology."28 The essential characteristics of the Internet as a global, scalable, decentralized network that delivers information at cost stands in contrast to the highly centralized, planned, and focused nature of these local business networks.
29 Nevertheless, both services are similar in that they are user- rather than vendor-driven. In terms of standards, the Internet assigns arbitrary addresses, while EDI employs an X.400 messaging system, in which addresses are logical and hierarchically structured. Searches on the Internet require a good deal of time and luck, but searches on local networks are usually constructed to be both dependable and repeatable. Furthermore, the services offered on business-oriented VANs are carefully planned to meet specifically defined information needs. Mike Holderness, writing in The Guardian, called these local VANs the "Outernet" and views the emerging information infrastructure as a battle between the Internet and the Outernet models. The Internet has succeeded precisely because it is not tightly controlled to deliver specific bits, but instead offers whatever the users themselves see fit to make available. By definition, this structure cannot adopt a standard to offer 100 percent reliability. In contrast, the Outernet perpetuates the hierarchical, "one-to-many" communication model of traditional media.30 Thus, the question is whether the Internet can succeed as a model for an international network, given the concerns of national governments over issues of control, or whether the Outernet model will succeed instead. Leaders versus Followers Besides the less developed countries (LDCs), even the member nations of the EU are worried that the United States is beating them in the race to construct an information superhighway. South African Deputy President Thabo Mbeki reminded the Group of Seven (G7) meeting in March 1995 that Manhattan offers more telephone lines than all of sub-Saharan Africa. Politicians warn that the digital revolution will divide societies and nations between the information-rich and information-poor. This pervasive sense of some countries gaining a lead in the information revolution is somewhat misplaced. Though the dearth of actual hardware obviously limits the ability of a country to connect to international networks, once connectivity is established, even the economically poor immediately become information-rich. The question remains, If the global information infrastructure will be constructed by blending national information infrastructures, what of the countries that lack the resources to develop this infrastructure? The extent of network services has been directly related to overall economic development. In many developing countries, connectivity is available only through a Fidonet link to a few PCs. In contrast, for most of the industrialized world, building a national backbone is now a top priority. For many of these countries—including Australia, Chile, Japan, South Africa, and Switzerland—this has resulted from the creation of research and academic networks.31 Nevertheless, the Fidonet, which is based on a simple protocol, has provided even the poorest countries with a networking tool to store messages and check for transmission errors. Furthermore, the Fidonet enables users to evade the local TO by allowing messages to be polled from a site outside of the country. As mentioned in the "Regional Studies" section above, often a country will act as a local leader within a region, such as Singapore in Southeast Asia, Costa Rica in Central America, or South Africa in southern Africa. As demand and experience increase, the connections may evolve from Fidonet to UUCP to IP.32 Obstacles to the International Internet Despite the clear intention of the industrialized world to foster the building of national backbones, and the gradual diffusion of connectivity in many developing countries, the traditional TO structure, as well as the resulting legal and commercial models this structure fosters, remains a serious obstacle to a truly international Internet. Although technical difficulties can be overcome with resources from institutions such as the World Bank, NGOs, and governments themselves, the traditional mindset of control over the communications infrastructure and services is more difficult to displace. As discussed in the "Background" section of this paper,

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Page 199 governments have long justified their ownership of the telecommunications operator on the basis of national security reasons and also derive significant political and revenue benefits from this ownership. Although this structure has been seriously undermined in the United States, the European Union, and parts of Asia, it remains strong elsewhere. Conclusion Ideally, an international network like the Internet should provide a protocol that is easily adapted to a wide variety of infrastructure development stages, and offer services that can be tailored to respect the cultural, legal, and regulatory norms of every country. However, the model that the Internet has provided demonstrates that an international network will, by definition, still act to undermine many traditional structures that have evolved around the old TO system. Rather than seeking to impose old standards of behavior and control on the Internet, governments can best encourage the development of national information infrastructures by eliminating the inherent conflicts that exist between the new services and the domestic organization of telecommunications. This means introducing competition into all levels of service and allowing the market to drive pricing and standards. Notes 1. This discussion in drawn specifically from a lecture by Professor Aaron Tornell of Harvard University, 1 March 1994, and more generally from his course, "Privatization" (Economics 1470, Spring 1994). I am grateful to Professor Tornell for providing the methodological framework for analyzing the structure of an SOE. 2. Dutch, Raymond M. 1991. Privatizing the Economy, Telecommunications Policy in Comparative Perspective. University of Michigan Press, Ann Arbor, Mich., p. 141. 3. Dutch, Raymond M. 1991. Privatizing the Economy, Telecommunications Policy in Comparative Perspective. University of Michigan Press, Ann Arbor, Mich., pp. 144–145. 4. OECD Observer, February 1995; and Goodman, S.E., L.I. Press, S.R. Ruth, and A.M. Rutkowski. 1994. "The Global Diffusion of the Internet," Communications of the ACM, Vol. 8, August, p. 27. 5. Watson, Russell, John Barry, Christopher Dickey, and Tim Padgett. 1995. "When Words Are the Best Weapon," Newsweek, February 27, p. 36. 6. Lever, Rob. 1995. "Battle Lines Drawn in Debate on Smut in Cyberspace," Agence France Presse, March 29. 7. Isa, Margaret. 1994. "MIT, European Lab to Work on World Computer Network," Boston Globe, July 8, p. 62. 8. Neuffer, Elizabeth. 1995. "Europe's Tiny Cyberpower," Boston Globe, March 27, p. 1. 9. Dixit, Kunda. 1944. "Communication: Traffic Jams on Superhighway," Inter Press Service, August 8. 10. Liden, Jon. 1995. "Internet: Asia's Latest Boom Industry," International Herald Tribune, March 8. 11. Richardson, Michael. 1995. "Singapore to Police Information Superhighway," International Herald Tribune, March 9. 12. Ramsay, Laura. 1995. "China Sees Great Leap Forward in Telecommunications Ability," Financial Post, April 1, p. 30. 13. Yu'an, Zhang. 1994. "China: Country Embracing Information Revolution," China Daily, October 7. 14. Murray, Geoffrey. 1995. "China Sets Priorities for Massive Telecom Investment," Japan Economic Newswire, March 31. 15. Wei, Li. 1994. "China: Company's Creation Marks 1st Step Towards Network," Shanghai Star, October 18. 16. Chandra, Rajiv. 1994. "China-Communications: Dial 'S' for Secrecy," Inter Press Service, November 28. 17. Murray, Geoffrey. 1995. "China Sets Priorities for Massive Telecom Investment," Japan Economic Newswire, March 31. 18. Neuffer, Elizabeth. 1995. "Europe's Tiny Cyberpower," Boston Globe, March 27, p. 1. 19. Monthly Report on Europe. 1995. "European Union: On-line Data Service to Shed Some Light on the EU," Vol. 127, March 23.

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Page 200 20. RAPID. 1995. "Opening Address by Jacques Santer at the G7 Conference on the Information Society," February 24. 21. Neuffer, Elizabeth. 1995. "Europe's Tiny Cyberpower," Boston Globe, March 27, p. 1. 22. Brasier, Mary. 1994. "European Business: Race for Knowledge on Super-highway," The Daily Telegraph, July 25. 23. Tate, Paul. 1995. "Putting Their Heads Together—Europe's Top Execs Take on Info Highway Challenge," Information Week, April 11, p. 26. 24. African Economic Digest. 1995. "Africa and the Information Superhighway," January 30. 25. African Economic Digest. 1995. "Africa and the Information Superhighway," January 30. 26. Lamonica, Martin. 1995. "Latin American Telecom Remains in State of Flux," Network World, March 13, p. 37. 27. Goodman, S.E., L.I. Press, S.R. Ruth, and A.M. Rutkowski. 1994. "The Global Diffusion of the Internet," Communications of the ACM, Vol. 8 (August), p. 27. 28. Computing. 1995. "EDI-Market Growth," January 26. 29. Holderness, Mike. 1995. "Networks: When Two Cultures Collide," The Guardian, February 2, p. 4. 30. Holderness, Mike. 1995. "Networks: When Two Cultures Collide," The Guardian, February 2, p. 4. 31. Goodman, S.E., L.I. Press, S.R. Ruth, and A.M. Rutkowski. 1994. "The Global Diffusion of the Internet," Communications of the ACM, Vol. 8 (August), p. 27. 32. Goodman, S.E., L.I. Press, S.R. Ruth, and A.M. Rutkowski. 1994. "The Global Diffusion of the Internet," Communications of the ACM, Vol. 8 (August), p. 27.