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F.1 This annex reviews the contribution that telecoms makes to the UK economy. It underlines the importance of telecoms regulation. Assessing the contribution of telecoms to economic growth is also important in weighing up the static and dynamic benefits that telecoms can deliver, as discussed in Section 4 of the main consultation document.

F.2 Telecommunications is an important and influential sector of the economy. In 2002 the Office for National Statistics (ONS) estimated that the value added by the UK telecoms industry was over £20bn, or over 2 per cent of GDP.^(-1-) By way of comparison, the gas, electricity and water supply industries together contributed 1.9 per cent, and the radio and TV sector less than 1 per cent.

F.3 Currently, the total turnover for the sector is estimated to be £50bn per annum.^(-2-) In real terms this turnover has increased three-fold since 1984. Some of this growth can be attributed to a growth in competition in the industry. Wholesale revenues (for example, interconnection) are effectively transfer payments within the industry and, therefore, adding up the revenues of all the players in the industry results in an element double counting. Analysis estimates that wholesale revenues made up around 21 per cent of the turnover of the largest 20 telecoms companies in the UK in 2002, compared with a negligible proportion in 1984. Assuming this proportion is representative of the whole industry, it would imply that retail revenues have increased in real terms by 240 per cent since 1984. Telecoms revenue growth and its contribution to UK GDP are shown in Figure 1.

Figure 1: UK telecoms revenues and contribution to GDP^(-3-)

F.4 Analysis of revenue growth and the contribution of telecoms to UK GDP hides, to some extent, the enormous growth in the use of existing and new telecoms services since liberalisation, driven by technological innovation and significant price reductions. Figure 2 shows, for example, how the number of fixed lines has grown by almost 80 per cent since 1984, but nevertheless has been overtaken by the number of mobile subscribers. The number of internet subscribers has also grown to over 14m from a standing start in the early 1990s. The total volume of call minutes (fixed and mobile) has increased seven-fold from 55bn in 1984 to around 400m in 2003, and use of fixed and mobile data services continues to grow.

Figure 2: Take-up of telecoms technology^(-4-)

F.5 This increased use has contributed to increased consumer spend, although to a great extent this has been held in check by price reductions resulting from both regulation and enhanced competition. For example, the average proportion of household expenditure spent on telecoms has increased from around 1.5 per cent in 1984 to 2.5 per cent in 2002. But as Figure 3 shows this increase is due in its entirety to the take-up of mobile and internet services. Fixed telecoms expenditure, as a proportion of overall expenditure, has remained flat and is now roughly the same as that of gas and electricity.

Figure 3: Residential consumers’ telecoms spend as proportion of household expenditure^(-5-)

F.6 The telecoms sector is notable for the size of its annual investment. For example, in 2002 it represented 7 per cent of all capital expenditure in the UK.^(-6-) Telecoms investment is considered in more detail in Annex H.

F.7 In terms of employment, the sector as a whole employs about 250,000 people, around 1 per cent of the national workforce.^(-7-)These figures have been relatively stable over recent years. A decline in employment at BT has been matched by the growth of employment in other telecoms companies.

Contribution of telecoms to economic growth

F.8 Not only is telecoms an important part of the economy, but innovation and increased take-up of telecoms services contribute to economic growth.

F.9 It is very difficult to quantify the extent of this effect. Historically, the influence of information, communications and telecoms (ICT) on productivity growth was considered minimal. In 1987, Robert Solow famously coined what came to be known as the ‘productivity paradox’ when he quipped that “ you can see the computer age everywhere but in the productivity statistics”.^(-8-) Whilst there have been some technical arguments over what should be included in the productivity statistics,^(-9-) the broad view of economists has been one of scepticism until very recently.^(-10-)

F.10 More recent macro-economic analysis has identified the ICT industries in developed countries as being associated with enhanced productivity levels, this primarily being through stimulating innovation in product and service provision. For example, analysis carried out in 2001 for the Bank of England suggested that ICT accounted for 13 per cent of output growth in 1979-89 and 21 per cent in 1989-99“ despite its small share in DP”.^(-11-)

F.11 It is unclear, however, how useful historic estimates of productivity due to ICT growth will be in determining future contributions. Most of the work on this issue, particularly in the US, has focused on the period 1995-2000, a boom period during which the growth rate was well above trend. Moreover, it is generally considered that the (‘dotcom’) boom was driven particularly by ICT. The high growth period between 1995-2000 may have been a temporary phenomenon from which one should be cautious in drawing wider conclusions.

F.12 More recent studies take a more positive view of recent growth due to ICT. In particular, examining evidence from the US in the last three years has shown that while business investment in IT fell sharply, and economic growth slowed, the rate of US productivity growth has accelerated still further. The explanation for this, according to work by Erik Bryonjolfsson,^(-12-) is IT-related productivity. His studies show that the development of electronic communications networks has impacted significantly on residential consumers and the business sector in terms of the way that they run their affairs. It is difficult, however, to identify just how much telecoms services have contributed to economic growth, independently of other elements of the ICT industry.

F.13 Measuring the impact of these changes for the economy as a whole is not straightforward. Often, parallel changes need to take place in other sectors before technological change in any one sector can impact the economy as a whole. Therefore the relationship between telecoms and economic growth is complex and diffused. A study commissioned by Oftel (Office of Telecommunications) and the OEE (Office of the E-Envoy)^(-13-) looked at how other innovations in products and services eventually took hold in the economy. It concluded that all were related to the development of a bandwagon effect, which has yet to be felt in the context of broadband services. It is also plausible that because of their pervasive influence on all sectors of the economy, the continued development of electronic communications networks is critical to ensuring that prospective improvements in productivity across the economy actually take place.

F.14 Just because the effects of telecoms on economic growth are hard to measure and open to some debate, does not mean that they are not important. In weighing up the trade-offs between static and dynamic benefits of alternative regulatory policies, Ofcom will need to take into account their likely impact on economic growth. Footnotes

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Footnotes:

1:- Source: ONS Annual Business Inquiry, 2002;

2:- Source: ONS Monthy Turnover Inquiries, year to September 2003;

3:- Source: 1984-1994: BT and Oftel estimates. 1995-2002: ONS Annual Business Enquiry;

4:- Source: Ofcom market intelligence;

5:- Source: ONS, Ofcom market intelligence;

6:- Source: ONS Annual Business Inquiry, 2002;

7:- Source: ONS Employee Jobs, September 2003;

8:- Robert M. Solow, We'd Better Watch Out, New York Times Book Review, July 12, 1987, p. 36.;

9:- See Gordon (2000) for discussion of some of these issues;

10:- This view can be typified by Blinder (1997), who characterised growth of productivity due to ICT as “mostly poppycock”;

11:- Oulton (2001), ICT and productivity growth in the United Kingdom, Bank of England Working Paper 140.;

12:- Professor of Economics at MIT’s Sloan School of Management;

13:- Propelling the Broadband Bandwagon, Strategic Policy Research, August 2002.

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