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IX. The Internet


In just a few short years, the Internet has become a global phenomenon, transforming the way we conduct business, interact, and learn. In 1995, fewer than 10 million people were using the Internet. Today, there are over 140 million users worldwide. In 1999, it is estimated that for the first time more people will access the Internet from outside the United States than from within the country. This growing medium offers limitless possibilities, providing users with multi-media applications involving data, voice, and video. If realized, Internet-based services have virtually unlimited potential to bring people together from across the world, enhancing opportunities in education, health care, commerce, and entertainment. Indeed, it is not just a physical network but a network of people. It links people together through e-mail and chat rooms; it allows schoolchildren from around the globe to learn in an exciting environment; it is crucial to the development of telemedicine; and it has produced a booming economy known as e-commerce.


The Internet is a vast network of networks that communicate with each other based upon a set of software protocols that direct traffic so information can pass among the networks. The Transmission Control Protocol (TCP) and Internet Protocol (IP) define the rules by which packets of data are addressed and transmitted across physical fiber, copper, satellite, and wireless networks.

The physical Internet network is made up of a variety of components including:

  • Fiber networks owned or leased by Internet backbone providers Routers
  • Network Access Points (NAPs) where Internet service providers (ISPs) connect their networks in order to exchange Internet traffic
  • Host servers that hold the content
  • Access lines that provide business customers and home user connections to the point of presence (POP) of the ISP

Given the Internet's potential to drive future economic and cultural growth, a key challenge for developing countries is to implement sound policies to encourage Internet growth within their borders. Government policy can have a profound impact on Internet development; it can either foster it or hinder it. To date, the Internet has flourished in large part due to the absence of regulation. A "hands-off" approach allows the Internet to develop free from the burdens of traditional regulatory mechanisms. Regulatory policies governing the telecommunications market, however, have a direct impact on Internet development and usage by consumers. Basic transmission capacity is the physical infrastructure fundamental to the operation of Internet services and e-commerce applications. Policies to promote this infrastructure pave the way for increased Internet usage.


A truly global e-commerce marketplace cannot exist without the participation of developing countries. Approximately 97% of Internet users, however, are in high-income countries, which account for just 15% of the world population. In 1997, Africa had just 0.6% of the Internet hosts in existence; Latin America and the Caribbean had 1.0% and Asia just 6.3%. Yet e-commerce offers the unprecedented opportunity to create a truly global marketplace. Increasing shares of commercial transactions are occurring online. Estimates are that by 2002 e-commerce will account for over $300 billion in trade per year.

The Internet is especially important for small/medium enterprises (SMEs) as it enables SMEs to minimize marketing costs while reaching a wide market.

Both developing countries and industrialized nations stand to benefit economically and socially from increased participation in this growing electronic marketplace. The Internet provides a low-cost gateway linking millions of potential buyers and sellers from disparate populations around the world, transcending geographic and time barriers.

E-commerce has begun to unleash a revolution in entrepreneurship and innovation, providing a cascade of new, exciting services and products. The advent of the Internet has transformed the traditional business model by allowing a business to establish a website that provides a global marketing and sales distribution scheme. The Internet makes possible direct interaction between producers and consumers, cutting out the middlemen. Both sides benefit.

In the United States, the U.S. government has played a role in fostering a global e- commerce marketplace. In the 1997 document, "A Framework for Global Electronic Commerce," the U.S. Government outlined a series of principles to guide the development of the e-commerce marketplace, including:

The Framework urges governments to refrain from imposing unnecessary regulatory actions that could stifle the growth of the Internet and e-commerce, and recommends that competition and consumer choice be the guiding principles for a prosperous e-commerce marketplace.

In the United States, consumers are already enjoying the promises of e-commerce. The benefits of the Internet and e-commerce are increasingly reaching more middle income and lower income Americans. Whether for news, education or commerce, the Internet has made an indelible mark on global communications.


The Internet has evolved at an unprecedented pace, in large part due to the absence of government regulation. Consistent with the tradition of promoting innovation in new communications services, regulatory agencies should refrain from taking actions that could stifle the growth of the Internet. During this time of rapid telecommunications liberalization and technology innovation, unnecessary regulation can inhibit the global development and expansion of Internet infrastructure and services. To ensure that the Internet is available to as many persons as possible, the FCC has adopted a "hands-off" Internet policy. We are in the early stages of global Internet development, and policymakers should avoid actions that may limit the tremendous potential of Internet delivery.


Basic transmission capacity is the physical foundation necessary for the operation of Internet services and e-commerce applications. As a result, telecommunications regulatory policies can have a direct impact on the development of the Internet. Experience indicates that market-oriented policies spur the development of affordable and available infrastructure required for Internet services and e-commerce to flourish.

Three basic drivers - competition, investment, and technological neutrality - promote the establishment of the global information infrastructure upon which Internet applications thrive. Countries must have the physical infrastructure necessary to be a part of this new, Internet-based world; otherwise they may miss out on the future benefits derived from the global economy.

globe icon Competition

Open and vigorous competition is a principal driver for establishing the physical infrastructure necessary for Internet services to thrive. To succeed in a competitive marketplace, competitors just innovate, provide quality services, and reduce prices. By fostering a pro-competitive climate, economies can create self-sustaining Internet networks.

In the United States, the benefits of competition are evident in the telecommunications market. Networks have accelerated adoption of more innovative technology; service providers have responded to consumer demands; lower costs have stimulated use of the networks; and home and business users alike have enjoyed lower prices and a wider array of services.

Alternatively, limiting the ability of new competitors to access, build, and utilize the underlying network inhibits infrastructure deployment and ultimately retards the introduction of facilities necessary for the Internet to flourish.

globe icon Investment

Attracting private sector investment is the most effective way for countries to build the physical infrastructure necessary for a robust Internet network. To attract private sector investment, policymakers must remove barriers and establish favorable investment incentives. Without such investment, the benefits of the Internet will go untapped.

No single government has the wherewithal to capitalize the global Internet infrastructure.

Besides supplying inflows of capital, private investment stimulates development of new technologies, equipment, new sources of information, and managerial skills-all of which speed infrastructure growth. To increase capital from both domestic and foreign sources, nations are permitting a variety of commercial arrangements, ranging from joint ventures to direct foreign investment and from privatization of state-owned providers to licensing of privately owned competitors.

The need for capital investment is particularly acute in countries developing infrastructures, where limited government resources often make private financing all the more critical. The challenge, therefore, becomes to establish effective mechanisms to attract foreign investment.

Attracting Foreign Capital

The following steps can be effective measures to attract capital:

  • Privatization attracts capital to build out advanced telecommunications technologies
  • Creation of a stable and open commercial environment supported by transparent regulation
  • Establishment of fair and open bidding practices for infrastructure projects
  • Recognition of the concept "return on capital" that investors require
  • Establishment of sound repatriation polices
  • Promotion of private investment through legal and regulatory reform

globe icon Technological Neutrality

A policy of technological neutrality provides for the equitable treatment of different technologies and spurs innovation. Wireline facilities make sense in some places, while satellite and terrestrial wireless infrastructures may work better in others. Many regions of the world, for example, have great difficulty accessing high-speed Internet services because they do not have sufficient infrastructure. In these areas, satellite systems may be the answer. Policymakers should strive to create an environment in which such distinctions are of no great consequence to consumers. Governments should seek to promote competition among various technologies and industry segments with the goal of accelerating innovation and the deployment of advanced services. Simply put, regulators should not be in the business of selecting winners or losers of information technologies. With a policy of technological neutrality, the real winners will be consumers, as they will benefit from lower prices, improved quality, and more innovation.


As noted above, the fundamental regulatory decisions made in the telecommunications market have a direct impact on the development of Internet services and usage. The policies below-- broadband access, cost-based capacity, and fair local charges-- allow ISPs to provide, and consumers to access, services at lower prices, with improved speed and quality.

globe icon Broadband Access

As people across the globe access the Internet, they realize one thing - - they need to go faster. To fully utilize this network - - to tap the potential of multi-media applications involving voice, data, and video - - they need bandwidth. Internet users should have access to networks that are capable of supporting the broadest range of Internet offerings. It is critical, therefore, that the underlying network supports advanced communications.

In establishing the necessary incentives for the development of advanced technologies, technological neutrality is an important policy to adopt. Regulators should not favor one technology over the other, but should set polices to stimulate competition among various technologies and industry segments that will lead to the development and deployment of broadband capacity.

In wireline, cable, terrestrial wireless, and satellite, many new technologies are starting to be deployed. These include wireline telephone providers finding new ways to send high speed data over the telephone network, cable television operators offering high speed Internet access using specialized cable modems, and satellite operators providing higher data rates for downstream access with a standard dial-up telephone return path.

globe icon Cost-Based Transmission Capacity

Cost-based transmission capacity is necessary to achieve lower prices for Internet services and e-commerce applications. All ISPs either lease or own the capacity necessary to develop their Internet network. If the price of this capacity is high, ISPs must either absorb the extra cost or pass the cost forward in the form of higher prices to consumers. As a result, high transmission costs impact demand estimates and build-out of the information infrastructure.

High cost transmission capacity for ISPs may be directly related to the lack of competition in telecommunications services within a market. For example, telecommunications incumbents often seek to extend their dominant position to the provision of Internet access service by restricting the supply of transmission capacity. In contrast, a competitive telecommunications environment results in more affordable prices for, and greater availability of, such capacity.

globe icon Local Service Pricing

Local telephone charges are a part of the overall cost of Internet usage for consumers, and affordable local loop pricing is an important component of the cost structure for Internet access necessary for all Internet customers. Local service pricing that is prohibitively high restrains Internet usage. Indeed, one factor that contributes to the disparity of Internet usage among countries is the cost of accessing Internet services. This cost is directly related to the regulatory framework and level of competition permitted in the local telecommunications sector. Regulators can consider policies to drive the price of local service to cost as they seek to promote Internet usage.


The Internet will continue to change our lives in ways we have yet to imagine. What is certain, however, is the importance of ensuring that all corners of the world participate in and benefit from these profound changes. By maintaining a hands-off approach to the Internet, while implementing pro-competitive policies for the underlying transmission capacity, policymakers will go a long way towards ensuring that their citizens are full partners in the global Internet community and the emerging e-commerce marketplace.


U.S. Government Working Group on Electronic Commerce, First Annual Report, November 1998

A Framework for Global E-Commerce

How the Internet Works, Special Edition, Preston Gralla

Challenges to the Network, Telecoms and the Internet, ITU, 1997

29 Digital Tornado: The Internet and Telecommunications Policy, March 1997, Kevin Werbach

"Net" Impact: Guide to the Internet Changes the Industries and Companies in Which you Invest, Bill Whyman, Legg Mason Precursor Group 202-778-1972

E-Commerce: Virtually Here, Merrill Lynch & Co., Global Securities Research & Economics Group, Global Fundamental Equity Research Department, Special Report, April 1999, Jeanne Terrile 1-212-449-1893


Index Internet, p.50
Transmission Control Protocol (TCP), p.50
Internet Protocol (IP), p.50
Network Access Points (NAPs), p.50
Internet Service Providers (ISPs), p.50
Point of Presence (POP), p.50
Small/Medium Enterprises (SMEs), p.51

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