How Open Gateway increases market efficiency and social welfare

Open Gateway represents a revolution in the way in which telecommunication networks are made available to society. The platform's APIs will not only enable the Apps that any developer may imagine. In addition to this, its pricing will open up a new source of information about preferences of individuals. As a result, telcos will be able to better target their investments to the different network elements and capacities, which will increase the efficiency of the market and, ultimately, the welfare of society.

Fernando Herrera

Fernando Herrera González Follow

Reading time: 7 min

Open Gateway has been the fashion in the telecommunications sector since its launch at the last Mobile World Congress. This is not surprising, given its potential to transform the structure of the sector and the number of agents involved in its implementation. But, above all, its importance comes from its capacity to generate social welfare, which is what ultimately interests us as citizens, something that should not be hidden behind its considerable technical complexity. The reasons why such enrichment is to be expected are explained below from an economic point of view.

What is Open Gateway?

Telecommunications networks are composed of more or less heterogeneous assets, each of which provides different functionalities. Telco operators combine these functionalities to compose services which may be offered to their customers.

Logically, operators have a limited capacity for innovation and ideas, they cannot know everything that someone might find valuable. What would happen if those assets that make up the network could be freely used by any entrepreneur? Then, the ideas on how to exploit these assets would not be limited to those that the operators could come up with; instead, anyone with a good idea could try to combine them, and the variety of services so provided by the telecoms’ networks would be much greater.

This is precisely what Open Gateway is trying to achieve: making the network resources and capacities available to any innovator for whatever they want to do with them. This is done through a concept familiar to programmers: Application Program Interface (API), functions that the programmer can call to make the operator’s network behave in the way his application requires.

The theory of the firm and the role of prices

Nobel laureate Ronald Coase explained in his classic article “ The nature of the firm ” as early as 1937 the economic reasons for the structure of firms. Basically, it is a constant succession of the typical “buy or make” decision that firms face: if the costs of “making”, i.e. internalising the particular activity, are lower than those of “buying” it, the firm will do it internally, and vice versa. Note that the market price of the activity is crucial for this decision, as it is precisely the market price of the activity that sets the threshold between “buying” or “making”.

We had to wait a few years for other economists such as Israel Kirzner or Murray N. Rothbard to explain the important role that prices play in innovation and in the allocation of resources to the preferences of individuals. In other words, it is quite possible that Coase underestimated the value of the mere existence of a market price in improving the allocation of resources. If the firm does not open up points in its structure that allow market prices to emerge, social efficiency is lost as price and value information about the embedded, hidden if you like, resource, in that structure does not appear.

An example will help to explain these theoretical concepts. A car manufacturer faces for each of its components the dilemma of buying it or making it in-house. Coase explains that the car manufacturer will undertake those activities where it is cheaper to make it than to buy it, thus explaining the size/structure of the car manufacturer. This is a dynamic process in continuous evolution, but clearly the manufacturer will only have a choice if the good is offered outside his organization; otherwise, he will have to make it himself.

This is why the mere existence of market prices has value for society: in the absence of prices, the manufacturer will be blind as to the concrete value of this component and will have no guide as to whether or not it is too expensive for him in relation to society’s preferences.

However, the technology available at a given time does not allow all desirable points to be opened up. Tyres, steering wheels or windscreens are points in the production of a car that allow the value of the components to be observed by society, and thus improve the efficiency of car production. But it may not be possible to do the same with the various components of the engine or of the bodywork. As technology evolves and new access points can be opened up in these “monolithic” components, social welfare would be greatly enhanced, as society’s resources would be much better targeted and we all would be enriched.

An economic overview of Open Gateway

In economic terms, what operators are doing with Open Gateway is creating these new access points to their productive structure (separating parts of the “monolithic” engine), something that has not been possible until now. This openness is going to provide many entrepreneurs, including telecom operators themselves, with new “buy or make” options that did not exist until now, by using the different APIs or functions in their applications.

This will result in prices for the use of these resources, which will translate into payments that developers make for APIs, in the same way that many developers currently pay for different functionalities in the Azure or Amazon clouds.

And as described above, the emergence of these prices will provide essential information to operators for their investments, which will then be much better targeted. On top of that, this has to be seen in the context of the increasing complexity of telecommunications networks: how can they know which of the available functionalities are the most valued by the market? How can they know how much to pay for them?

Until Open Gateway, it was difficult for operators to determine the value of individual network elements or capabilities. They took all the resources and then combined them into services that they made available to customers. Based on the value of these services, they estimated the value of each asset involved in their provision. But, of course, the value thus obtained was that of the entire productive structure, not that of each individual asset, so they could not fine-tune their investments.

However, with the emergence of prices for APIs, valuable information for these decisions is made transparent, which would not be available if these points were not opened to third parties. This improved efficiency in investments will necessarily translate into improved social welfare, in addition to the innovation that can be generated by third parties.

The great challenge of Open Gateway

For this to happen, one fundamental piece is missing: the price. Each operator that wants to provide this platform has to set a price for a number of services (each API) that have so far not existed, and for which there is little or no guidance. Moreover, not only the price level has to be set, but possibly also the price structure: Determine not only how much, but also for what. Finally, of course, it remains to be seen whether at that price there are developers interested in buying. In turn, this will depend on the applications they can develop with the new capabilities, and the revenue they are able to obtain from end-users for those new applications.

Obviously, right now we do not know what these applications will be (although there are lots of entrepreneurs with very attractive ideas) and how much will be paid for them, which complicates the economic calculation, and makes it especially difficult for operators to set prices for their APIs.

Nor is this uncertainty something new. Each entrepreneur faces it when launching innovative products. Amazon faced it when it launched the first cloud services, and Apple faced it when it started selling Apps for iPhones in its App Store.

What is crucial is that this discovery process for API prices can be carried out as flexibly as possible, without having to worry about external interference as has been the norm in the telecommunications market. API prices may go up or may go down, or may even have to change their structure. No one knows right now what form they will take, any more than it is known which APIs will succeed or what new capabilities will be demanded from telecommunications networks.

What we do know is that interfering with the price-setting process will undermine the efficiency of the market and jeopardize the welfare we all hope to see as a result of Open Gateway.


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