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4. The Value to Industry of PSI: The Business Sector Perspective1 Martin Fornefeld MICUS Management Consulting, Germany This presentation discusses the value of PSI to industry from the perspective of the business sector. MICUS is a management consulting company based in DÃ¼sseldorf and Berlin. Besides management consulting, it focuses on e-government projects for the German federal government and market studies. In particular, MICUS does many market studies concerning PSI and the economic value of innovation. Its clients generally come from the public sector, the energy sector, and the service sector. MICUS plans to publish three studies in 2008: Business Models for German Companies in International Geo- Information Markets; The Impact of Broadband and Growth in Productivity; and The Assessment of the Reuse of Public Sector Information in the Geographical Information, Meteorological Information, and Legal Information Sectors. What are the problems in obtaining PSI in Germany today? Negotiations about PSI reuse often fail. The private sector is requesting new pricing and licensing models for PSI reuse throughout Europe, but these requests for easier and more liberal licensing models and lower prices for the procurement of PSI have not been very successful. There are barriers to PSI reuse. There is insufficient market transparency by the PSI holders who are responsible for the data. And despite strong demand there have been a number of bad experiences, such as those that happened in securing data for maps, which have resulted in the gradual emergence of economical alternatives from private sources. There are also barriers on the PSI holdersâ side, especially the lack of knowledge about how the market works and a tendency to overestimate the value of their products. In the meteorological market, for example, there are now parallel infrastructures in Germany, with weather stations maintained by the National Meteorological Service and similar stations maintained by private industry. This happened only after negotiations with the German government for PSI reuse failed. Because data production is costly, the government believes that the corresponding price must also be set high, and so the distribution network does not work. Consequently, there remain many unexploited business opportunities. In Germany the market for geo-information increased from â¬1 billion in 2000 to â¬1.6 billion in 2006. What is especially interesting is how this is divided. In 2000 the emphasis was on planning and maintenance systems, from which utility and engineering companies bought a great deal of cadastral2 information. However, by 2004 the navigation market had exploded, and two years later more than 50 percent of the demand for geo-information was being driven by the navigation market, much of this based on âfreeâ private data (cf., Intergraph, Google Earth). 1 Based on a presentation found at http://www.oecd.org/dataoecd/27/9/40047551.pdf 2 Merriam-Webster defines cadastre as âan official register of the quantity, value, and ownership of real estate used in apportioning taxes.â 2009. In Merriam-Webster Online Dictionary. Retrieved February 12, 2009, from http://www.merriam-webster.com/dictionary/cadastre. 10
VALUE TO INDUSTRY OF PSI 11 At about the same time, in 2007, the German governmentâs revenue from PSI was only â¬164,000. That revenue came from three main areas: legal information, vehicle information, and meteorological data. Meanwhile, cartography, statistics, medical information, geo-information, and environmental information from the government garnered little revenue. Although the market indicates that statistics and cartographic information have more potential value, the government did not appear to take advantage of this potential. So what is the value of PSI? In discussing this, it is important to remember that the source data are only the starting point. For each application that puts these data to work and for every additional function and data set one adds, the value is increasedâa higher step on the value chain. For a complex combination of data like statistics and geographical data, the value of the source data is increased by, say, a factor of five. And with information-based services like mapping, geocoding, and analyzing tools or applications, that factor may be 10. The further along the value chain, the greater the value that can be assigned to the data. This process of adding value is done by the private market. The PSI holder should make the offer, and the rest should be done by the service provider. This is called value chain production. The value of the source data are quite low, but the costs of the source data in most cases are quite high. So how do we discover the value of the additional factors? In 2007 we had the chance to observe bids on some companies that provided cartographic data, such as Tele Atlas and Navteq. TomTom was bidding on Tele Atlas, and Nokia was bidding on Navteq, and the prices being discussed were about â¬2-3 billion for Tele Atlas and nearly â¬6 billion for Navteq. That was about ten times the annual sales of these companies. Tele Atlas was not even profitable. TomTomâs profit in 2006 was â¬22 million, on sales of â¬1.8 billion. The interesting thing was that although the Tele Atlas and Navteq data maps were their own maps, the companies had bought the original maps from public bodies in the late 1990s. Afterwards, they added their own updates and digitized the data, and today these maps are proprietary and well along the value chain. There have been two other interesting acquisitions in the industry. Pitney Bowes bought MapInfo, a geomarketing software company, and Microsoft just bought Multimap, a Web map provider, for two to five times the annual sales. Meanwhile, the reuse of geographical PSI lags, so what would be the right strategy for the PSI holder to open the PSI market? To answer that question we developed a performance matrix that facilitates strategic development. On one side we list PSI availability and quality of services (including usability of web services) from low to high. On the other side we list the price for PSI from low to high.
12 SOCIOECONOMIC EFFECTS OF PSI ON DIGITAL NETWORKS FIGURE 1: Slide 11 from presentation of Martin Fornefeld, MICUS Management Consulting, Germany. Source: http://www.oecd.org/dataoecd/27/9/40047551.pdf Within the graph are four squares, the first being a sleeping market, that is, one with unrecognized potential. This unrecognized potential includes statistical information that has not yet been marketed. The second square holds a question mark representing a situation characterized by the question, Why do we see high prices but low availability and low quality of services? This is a market where replacement of PSI by private data may take place. The third square is a cash cow, e.g., a situation with high prices, high availability, and good service. This represents a successful public monopoly; an example would be Juris GmbH, a data-sharing plan in Germany that holds a monopoly on legal information, with high prices and high availability. The fourth square is the ideal of what we would wish to achieve in a dynamic marketâhigh availability, low prices, and a demand-oriented PSI market. EuroLex, another European provider of legal information, is a good example. So what strategies can we offer for these four squares? First, a sleeping market needs improvement in services and marketing. One needs to rethink the PSI strategy here. That is, is there a need anymore for a public service, or can it be replaced with a private service? The cash cows in the third square can increase the reuse of PSI by reducing prices and finding new customers, but are low prices for PSI a risk for the public service?
VALUE TO INDUSTRY OF PSI 13 In my opinion, no; rather, the risk is if you do not change your pricing policy at all. If we continue with the pricing models now in use across Europe, the sales will go down. Private alternatives may be found to substitute for PSI products. Moreover, if one reduces prices, this will increase PSI and sales, and, in the short term, the price reduction will be compensated by the increasing demand. For example, Austria reduced prices last year, and many new customers have been found there. Thus, reducing prices and enhancing the availability of PSI will lead to a dynamic market. In summary, what is our advice for better PSI reuse? First, one should raise awareness of the potential for PSI in the reuse of private sector information. There is a huge unexploited potential with a high economic impact. Exploiting the potential in the PSI market requires lower pricing and less restrictive licensing agreements. To be sure, there is no such thing as a free lunch. Reusable, high-quality information requires investment. There is also a need for innovative business models that consider the whole value chain. These models must be aware of product substitution. Finally, there is a need to rethink and review public services. If product substitution occurs, the question becomes: Is there still a demand for the public service, or may it be replaced by a private service?
14 SOCIOECONOMIC EFFECTS OF PSI ON DIGITAL NETWORKS DISCUSSION BY WORKSHOP PARTICIPANTS PARTICIPANT: Typically the costs of buying or acquiring PSI are really a small part of the costs for the reuser, perhaps 1, 2, or 3 percent. So why bother about decreasing the price if it is just such a small part of the costs anyway? Is it not more in the quality of the data where the pain is? Dr. Fornefeld stated that if one reduces the price, the demand goes up and everyone will be happy. But if only 1 percent of the reuserâs costs are in PSI, the effects will not be that strong, unless price elasticity is very strong. DR. FORNEFELD: We have to use intelligent, innovative business models to increase the reuse of data. It is not a question of whether there should be a price, but there should be a market price, and that is a problem especially for the public body. What is the market price? A public body cannot calculate the market price, but public-private partnerships can help to define it. PARTICIPANT: From the perspective of the European Commission, the important thing is to maximize the value of PSI. The earnings for the public bodies that charge only the marginal costs are very limited. Those bodies that have succeeded are those that have high licensing prices and high earnings. But this is only one way of seeing things. Perhaps one can have much more success if there are much lower earnings but a high degree of use because a very active reuse market has been created. The Commission has a license, a reuse policy, in which we do not charge at all for such uses as EuroLex. Very recently we put our language resources onlineâgigabytes of pairs of languages from machine translations that allow translations into 23 languages. These resources, which are unique, are works of a team of, I would say, thousands of translators during many, many years. This is something for which it is very difficult to substitute the work of private companies. We put it on the Web. We issued a press release, and we had between 1,000 and 1,500 downloads of the whole dataset in the first week. So I would offer the message of thinking in these terms about the value derived from making the work of public sector organizations freely available. For a public sector body, or at least for the Commission, talking about a business model seems inappropriate, because we are not a commercial business. You may talk about financing models, and then we would have to talk with the financial ministers, but to talk about business models seems to me a very one-sided way to see things, and perhaps this is part of the problem. Thinking in terms of business models when the context is not a real business creates some of the challenges. For my last comment, I would encourage everybody to come forward with examples of what Dr. Fornefeld mentioned; that is, whether usage increases if you diminish your licensing costs or the cost of PSI. If this can be proven to be the case with examples, that would be, as you say in Britain, the proof of the pudding being in the eating. So we have established that you really can provide geographical information this way. If there were sufficient examples perhaps there would be no further need to be here discussing it, as the proposition would be so straightforward. That would leave simply the question of implementation. Of course, this brings us to another issue that we will be
VALUE TO INDUSTRY OF PSI 15 talking about, which was mentioned previously in the United States, and that is the question of quality. In the United States, of course, there are also critics of the lack of funding from the national agencies in some areas, especially in geographical information. The critics argue that the government data is of limited value, so if you really want good data you have to go to the private sector to buy it. In the end, perhaps PSI is free or available at only marginal cost, but the value of it is limited for certain applications. That is another debate, however. PARTICIPANT: Dr. Fornefeld mentioned the importance of private-public partnerships and the possibility of determining a price. One of the experiences we have had with geographical information in the European Union, for instance, is that there have been a number of public-private partnerships working since the mid-1990s, and they have been fairly successful in terms of their data quality and the distribution of data among the major players. When one has established successful models like that, however, changing them later on to allow access for everybody and dismantle the barriers inevitably put up by the public-private partnership can lead to a problem. So, there is no such thing as a free lunch in this trade off. It would be interesting for us to hear if all the governments have been in that position and what they have done. PARTICIPANT: I found the question raised by the European Commission quite interesting and a crucial one. Are we talking about a business model or a business case? Are we as governments or public authorities talking about cost recovery when actually the business side is clearly thinking in terms of a business model and making something profitable? I think as policymakers we have certain policy imperatives. This discussion does remind me of some of the work we did on e-government both at the national and the European levels, but also work at the OECD when we were looking at the business case for e-government and we had a clear policy imperative. We were pushing information and communication technologies into the public sector and thereby indirectly encouraging the adoption of the new technologiesâthe new media and the Internet. This is very much along the same lines, but we are going maybe one step further, which is that we are contributing to innovation, to growth, and to productivity. Research by the OECD has proved that already, but I think it will be interesting to see how we can transformâor whether we need to transformâthe way of thinking in the public sector, where thinking about a business model is still foreign. It would be helpful to have a good quantification of how we do that both in terms of recovering costs from the public sector and also knowing how much effort we should put into it because we know what the end game may be. But that was supposed to be only a side comment, and I actually had a question for Dr. Fornefeld, which was that I was very interested in the map that he showed about the weather system in Germany. I was just wondering if he could elaborate on why the talks between the public authority and the private entity broke down. I wonder whether there are some lessons that we can take from this particular case study as to how we could improve collaboration between the public and private sectors in PSI.
16 SOCIOECONOMIC EFFECTS OF PSI ON DIGITAL NETWORKS DR. FORNEFELD: How did it work with the weather stations in Germany? There have always been, and still are, a lot of discussions about pricing of the meteorological data from the DWD, the German meteorological government agency. The private meteorological providers complain that there is a natural monopoly, especially on the data from satellites, that affects the prices. What is the right price for satellite photos for the weather station information? Due to the inability of the DWD to resolve this pricing question, the whole effort to provide this PSI meteorological data did not succeed. When the DWD could not determine the price at which to make the data available to the private meteorological data providers, the private data providers built their own grid of weather stations. This experience led to some critical discussions about public monopolies and the power of a natural monopoly in setting prices.