Leapfrogging in switching systems

TECHNOLOGICALFORECASTINGAND SOCIAL CHANGE 37.7743

(1990)

ASHOKA MODY and RON SEXMAN

ABSTRACT The rapidemergence of new technologies has increasedthe rateof obsolescence. ftus creates the possibtlity that developing countries and, in particular, newly indusmalizing countries may leapfrog older generations of technologies. We lay out the issues and vanables to the considered for an understanding of leapfroggin: in telephone switching systems. In parhcular, we distinguish between demand-driven and infrastructure-dnven leapfrogging. Data for the early 1980s offer some evidence that demand-driven leapfroggmg was most prevalent in ccuntries with mtermedtarrnetwork maturity. Infrastructure-drivenleapfroggmg has taken place mainly nn France, South Korea, Tawd, . and Singapore.

Introduction To understand leapfrogging behavior, this paper examines the deployment (as distinct from manufac,ure) of telephone switching systems in a number of countries. The advantage of this example is that there ha--p L been clearly defined technological stages in switching systems, and available data [3] makes it possible to empirically test some propositions. The disadvantage of the example is that switc%ng is only one component in the network, and decisions on switching technology are contingent on the evolution of the rest of the network. We distinguish between two types of leapfrogging: demand driven-an expansion of network capacity due to an increase in demand for telephone services; and infrastructure driven-the result of policy decisiolr G+a,modernize the telecommunications infrastructure and create greater demand for telecommunic&lon services. Of particular interest is the adoption of model n electronic (analog and digital) switching technologies. When adopted on sufficiently large scales, these technologies dominate the older, electro-mechanical technologres in terms of costs and calling features. They, therefore provide an excellent opportunity for leapfrogging in!countries that have relatively underdeveloped telephone networks 12, 61. The evidence pr=sented below, however, shows that such countries have been slow in using the opportunity to leapfrog.

Investment in new telecommunications equipment reflects a decision either to increase network capacity or to replace/modernize existing capacity. When expansion is necessary, both the first cost and the operating costs of the different technologies must

I JIOKA MODY IS at the World Bank. RON SHERMAN IS at AT&T Bell Lahm-atories. Address repnnt requests to Mr Ashoka Mody. The World Bank, 1818 H Street, N W., Washmgton, D C 20433 0 1990 by Elisewer Pubhshmg Co., Inc.

CtO40-1625/9001$350

A. MODY AND R. SHERk~AN TABLE 1 Economies of Scale in Swithin~

‘5p!cm (1980)

Number of

Switchng technology Step-by-step(Wine) Electronx andog ($/hne) _ Electronic dlgltal ($/line)

-

Lines Per Switch

200

500

loo0

2000

4ooo

225

175

160

150

-

-

-

-

-185

201

-

345

250

-

175

170

SW

Source. [I, p. 721

be evaluated.’ The lowest cost technology (in a “net present value” sense) should then be chose11(unless there are other constraints), and, to the extent there hss been significant technological progress, leapfrogging can occur. n.*rever, modernization (or rep!acemend) is being considered, then ahe relevant If, h,..w comparison is between the operating costs of the technology vintage in use and the first cost plus the operating costs of the alternative technologies. Since the technology in use requires less investment, there will be a bias in its favor. Alternatively stated, when the network is growing, all technologies are evaluated on the same basis; but when the network 1s mature and replacement IS the main concern, the technology in use is favored because the capital costs have already been sunk. Leapfrogging is particularly difficult when extensive worker r&aining or changes in complementary fixed assets are needed to maintain and operate the new technology. Thtis, the likelihood of leapfrogging will decline as a network becomes more mature. We refer to this as the “installed base” effect. In addition, there are “scale” effects. If new technologies offer significant economies of scale. less leapfrogging would be expected, since the benefit in the frontier technology is available only if it is applied on a significant scale. Some estimates of scale economies, or declining costs per line installed, are given m Table 1. Because this is an area in which only limir.ed information is available, these estimates must be treated with caution. To the extent that the estimates are valid, the costs per line appear to fall sharply for stepby-step and digital electronic equipment. Analog switches are used cost effectiveiy after they reach 400 lines. According to the study reporting these costs, the extent of scale economies in digital switching was noa expected to decline during the 1980s [1, p_ 741. In reading Table 1, care should be exercised in comparing costs of different types of ‘switches because the design features tend to be quite different. For example, modern electronic switches incorporate advances quch as call forwarding and call waiting, which older electro-mechanical switches cannot provide. Where such features gre not: immediately ikndemand , 0~ ~~~?~raFiotafor leapfrogging diminishes. At least 2s important as the scale econoylies ir. using the switches are the scale economies in complementary IeapTrogging to a new technology in switching, a number of fixed investments mu mEi’ in transmissio technologies and in personnel training. Such scale economie.5 fGL;laber impede ~ea~f~ogg~~g.

LEAPFROGGING IN SWITCHING SYSTEMS

59

The telephone network is mature when a large proportion of the population has been provided with telephone services and demand for further growth is weak. An index of network and switching systems’ maturity must be multidimensional. A simple and well understood index of maturity is the number of telephone sets per 100 people.* A large value of this index indicates that basic telephone services are being provided to a large fraction of the population.3 This index is useful for characterizing all but the most advanced countries. When the public telephone network provides more than basic telephone services, the simple index can be inaccurate. For instance, the number of telephone sets per 100 people in the Federal Republic of Germany is lower than in Sweden and Denmark; but the speed of data transmissions on public switching networks is considerably higher in Germany [3]. We consider four generations of switching technology: step-by-step, crossbar, electronic analog, and electronic digital.4 Step-by-step was the first automatic switch. Crossbar, like step-by-step, is an electro-mechanical switch, but allows for greater flexibility and speed In call routing. The core elements of electronic switches are semiconductors (microprocessors and memory devices); these allow the switch to be controlled by stored programs so that new services can be easily mtroduc:d by changing the program. Digital switches are faster, less expensive, more reliable, and more flexible than analog switches. (See Rey [S] for a history of switching systems.) The distribution of switches by type for 21 countries is available only for year-end i983. Ideally, the change in distribution over time should be studied. However, even from this data. some hypotheses can be advanced. If, for example, a country has a large number of step-by-step switches and electronic analog switches, but no crossbar switches, it is reasonable to assume that the crossbar technology was skipped (see Table 2). The Evidence on Leapfrogging Leapfrogging is most prevalent in countnes with telephone networks of intermediate maturity (approximately between 40 and 55 telephone sets per 100 people). Belgium, the Netherlands, and England fall in this category. They have skipped the crossbar generation, moving from step-by-step to electronic analog. However, in 1983 a large portion of the network in these countries continued to use step-by-step technology. The most mature networks in 1983 were in Sweden, Denmark, Germany, and France. Germany and France would fall into the intermediate category if measured only by telephones, but, as noted above, Germany’s switching network was more mature than Belgium’s, the Netherlands’ and England’s in terms of the services provided. Also, Germany and France-like Sweden and Denmark-had the more advanced crossbar technology, whereas Belgium, the Netherlands and England used primarily step-by-stq technology. Of the “mature” countries, Sweden, Denmark, and Germany did not leapfrog *The ranking of countriesby telephone setsper 100 people IS almost exactly equivalent to the ranking by peopie. 3The average number of telephone sets can mask the fact that the distribution may be very uneven We have not been able to considerthe drstrlbutionalaspectbecauseof lack of data 4Roraryand panel switchesare “gross-motion”devicesand are consideredhere as technolvgicalequivalenhs cf the step-by-stepswitch Similarly, tbc EYD switch IS conslderedthe technologicaleqmvalent of a crossbar switch In the orlgmal 5otm.c materA 131. the bulk of the swltchmg eqmpment In the Federal Repubhc of Germany was classified m the “other” category These were EMD switches which have been reclassifiedu&r “crossbar”for the purpose of this study. TI:ls reclasslffcat~on was supported rn dlscusslonwith Inan.

mamhnes per IO

A. MODY AND R. SHERMAN

80 TABLE 2 Network Maturity and Distribution

Country EUROPE Sweden Denmark

72

Germany

57

France

56

Netherlands

57

Umted Kmgdom

52

Belgium

42

Italy

40

Spain

35

CYPms

25

Ireland

24

LATIN AMERICA Venezuela Brazil Columbia Chde -ASIA Hong Kong Smgapore

38 37

Ta1wa.n

2R

South Korea

15

Saudi Arabia

14

Phihppmes

Percentage Distribalon of Switches

Telephoix Sets Per 100 People 89

2

of Switches

Step-by step 0 0 0 0

Percent of DIgital Switches with Analog Crossbar Electronic Electronic Other > 3000 Lines 0 0 0 0 0 0

I 0 0 0 0 0

21 16 3 3 0

1 0 0 0 2

0 0

4 0 0 0 72 64 65 N 67 60 63 47 0 0 54 0 4 87

99 100 98 68 95 100 63 84 6 5 9 N 0 0 71 42 94 99 46 100 93 0

2 32 1 0 15 0 19 28 24 N 33 38 0 12 2 1 0 0 0 0

Local Toll L.ocal Toll Local Toll Local Toll

26 0 7 0 19 N 17 0

74 100 80 90 72 N 76 5

0 0 4 10 6 N 3 5

Local L0cal Toll Local Toll Local Toll Local TO11 Local Toll

55 0 0 2 0 58 or 0 0 55

0 55 50 77 74 0 N 2 0 3 0

45 37 0 20 0 35 rir 97 100 38 0

Local Toll Local Toll Local Toll Local Toll Local Toll Local Toll Local Toll Local TO11 Local Toll Local Toll Local Toll

0 2 0 0 0 0 0 0 4 0

0 0 5 0 4 0 0 0 0 13

2 14 8 13 50 11 16 80 40 nf 35 N 50 20 17 2 18 47 13 0 5 11

0 0 0 0 3 4 0

0 0 10 0 0 N 0 906

23 20 23 30 78 N 56 0

0 7 50 1 26 3 nr 1 0 1 0

CJ 0 0 0 0 7 N I 0 3 0

72 94 100 60 100 60 100 60 83 31 0

N

N

N

= notreported. e “other” switches m Chile are manual. “Rotary” switches m Belgmm have been classified as “step-bystep”, “RIGID”switches m Germany have been classafied as ‘-cross-bar”; see footnote 4. SOlniCe. [3,4]

“N

LEAPFROGGING IN SWITCHING SYSTEMS

81

till late 1983 .5 This supports the hypothesis that network maturity is a deterrent to demanddriven leapfrogging. In contrast, France made a concerted effort to leapfrog to digital systems on the basis of a national policy that identified telecommunications as the key to economic growth. This is an example of infrastructure-driven leapfrogging. Ireland, Cyprus, and Spain, the three countries with the least mature networks (less than 35 sets per 100 people), showed no evidence of leapfrogging. In this regard they behaved like the most mature countries. Countries whh intermediate maturity have had a dual advantage. Their networks have been growing and so the installed base effect has been less than that for the mature counties. At the same time, their demand growth has been large enough to permit the economically efficient use of the relatively large electronic switches. Thus, in these countries growth in demand is driving the leapfrogging. On the other hand, the low maturity countries, which have the greatest potential for leapfrogging because they are hampered least by the installed base, have been constrained by scale effects. In order for these countries to efficiently use electronic switches, growth in demand for telephone services must justify the use of large switches. Low maturity countries could break out of this bind in two ways. First, like France and some of the East Asian countries described below, they could proceed and build large, sophisticated networks. As is well known, the very availability of the networks induces increased demand because users have a large number of other users to communicate with. The alternative is to wait for technological developments to reduce scale economies in the use of electronic switches. The Italian experience further underlines the importance of switch size in determining the possibility of leapfrogging. For historical reasons, the Italian network has used relatively small switches. The introduction of large and sophisticated switches in this configuration is relatively difficult. As a consequence, unlike other intermediate maturity countries, Italy has not been able to leapfrog to electronic switches. Instead, Italy has upgraded from step-by-step to crossbar equipment. Similar patterns can be observed in Latin American and Asian countries. Of the four Latin American countries for which we have data, Venezuela, with only 8 sets per 100 people, had the highest phone density in 1983. A large proportion of all four countries’ switching equipment was based on crossbar technology. They had, therefore, leaprogged the step-by-step generation. This was particularly true of the Bt3zih3n end ~re~~z!d~~ toll networks. Like their European counterparts with low telephone densities, however, these countries did not upgrade further. Brazil, with 10 percent of its toll switches being analog electronic, was the only country that was attempting to develop its telephone infrastructure ahead of demand. Two of the Asian countries considered, Hong Kong (38 sets per 100 people) and Smgapofe (37 sets per 100 people), fall on the border between low and intermediate maturity. Both show significant evidence of leapfrogging. Hong Kong has moved from step-by-step to analog electronic, and Singapore has undertaken the difficult task of leapfrogging the analog electronic generation in its toll network. Taiwan and South Korea, in the low maturity category, also show evidence of leapfrogging. Even the Philippines, which has a very low telephone density, skipped the crossbar stage in its local network, aithough its toll network continues LJ he step-by-step. Saudi Arabia is the only country that has skipped two generations, going directly to analog electronic. South Korea, Taiwan, and Singapore displayed a higher incidence of leapfrogging ‘Flough Sweden did not leapfrog m :he deployment c;f swmhcs. not thereby constrained

manufacturmg crpabthty an Sweden was

82

A. MODY AND R. SHERMAN

than European countries at a comparable level of network maturity. The leapfrogging was accompanied by a move to large-size switches. in fact, the share of switches with more than 3000 lines IS significantly higher in these three countries and Hong Kong than in all of the other countries in our sample. There are two explanations for this development. First, these countries have been among the fastest growing nations over the past two decades. Rapid growth permitted the economic installation of large switches without encountering the danger of overcapacity. The need for relatively large switches, in turn, made it possible to take advantage of advanced technologies. Second, these countries, like France, follow national policies that promote telecommunications as a key sector of the economy. In these cases, leapfrogging can be characterized as both demand driven and infrastructure driven.

Conclusions Demand-driven leapfrogging was most prevalent in countries wxth intermediate network maturity. The countries with mature networks were constrained by their large sunk investments. Moreover, as users of crossbar technology, mature countries would have had to leapfrog directly to digital electronic systems, an uncertain technology in 1983. This leapfrogging pattern resulted in some intermediate maturity countries “going ahead” of the high maturity countries for a short period of time, although the advance occurred pnmarily in hardware purchases. It is likely, however, that mature countries are now well-positioned to move to digital technology, as the cost and quality differential between crossbar and digital electronic switches widens. On the other hand, the intermediate nrakurity countries that recently installed analog switches may now be temporarily trapped by :the installed base effect. The striking feature noted above was the relative absence of leapfrogging to modem electronic technologies in the low maturity countries. The explanation put forth was that scale economies in the deployment of switches required an investment greater than was feasible for some of the countries. The argument is probably stronger than stated here. Leapfrogging also requires investment in complementary telephone technologies (e.g., transmission) and in training people to effectively use the technologies. There are iikely to be significant scale economies in the complementary technologies and in training. These constraints are likely to require that network capacity be built ahead of demand, since, as noted above, the very development or ~LII capacity can induce greater demand. This paper has been an exercise in understanding patterns of hardware Lapfrogging. An alternative to hardware leapfrogging is upgrading services on exisi%g hardware through retrofitting or better milization. Countries with mature networks have r-r&L some success in upgrading their older technologies to provide more and better services. It is not clear that low maturity countries have that option. This paper was largely written while ody was at AT&T B&l Laboratories. The authors are grateful to several colleagues at ell Labs for their comments. The views expressed in this paper do not necessarily reflect those of the World Bank or AT&T Bell Laboratories.

1 Arthur D. Lmle, Inc., World Cummunications~ Or~~iew and Technological Trends, Arthur D. Llttle, Cambridge, MA, 1980 2. Mobday, Mshael, The Impact of Muwelectromcs on Developmg Countnes The Case of Brazthan Telecommunications, Development 7d *Ck~?gf 16, 313-340 (1985) 3. Inan, Czatdana, World ~e~ecom~~~~cat~~nsPlans Bwmes~ Commumcattons Ca~ab~~~ty.T&phony, ChsVPO, Auglis; (1985)

LEAPFROGGING IN SWITCHING SYSTEMS

83

4 International Telecommumcatlons Union, Yearbook of Common Camer Statrstics. 1976-1985, 14th ed., Geneva. 1987. S. Rey. R F , ed., Engmeenng and 0,oerat;ons m the Bell System, AT&T Bell Laboratones. Murray Hill, NJ, 1984 6 Soete, Luc, InternatIonal Diffusion of Technology, Industrial Development and Technological Leapfrogging, World Development 13(3), 409-422 (1985). Recerved 20 October 1987; revised 21 October 1988