Digital economy and increasing trends of broadband network access in Europe and the Republic of Croatia

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1 Digital economy and increasing trends of broadband network access in Europe and the Republic of Croatia Winton Afrić University of Split, University Department of Professional Studies, Split, Croatia B. Sc. Višnja Troskot University of Split, University Department of Professional Studies, Split, Croatia Livanjska 5, Split, Croatia Abstract. The first part of the paper deals with forecasts of the global growth of the required access speed for broadband networks in the next decade. Broadband access is one of the basic components of digital economy. This part of the article also describes other factors influcencing the development of digital economy. The second part of the paper is a comparative analysis between main factors of the Croatian digital economy and the digital economy in the EU countries, and the movement of certain factors for the period between 2014 and One of the main factors is "Connectivity", but it is lagging behind in relation to movements in the EU. Furthermore, the article shows the comparison of the situation of individual broadband access technologies in the Republic of Croatia and the state of the EU average, indicating differences in the developmental trends. Finally, the paper proposes activities and stakeholders to further enhance the overall digital economy of the Republic of Croatia. Key words: digital economy and society index, connectivity, integration of digital technology 1. Introduction Eurostat gives a whole set of information about the state of the EU and each of its member states in its document Quality of life Facts and views. The data presented in this article is taken from the 2015 yearly edition of the mentioned Eurostat document and the 2013 yearly report of the EU member states. Trough analysis a correlation between the state of a national economy (described with gross domestic product per capita) and certain social facts is presented [8], [9]. Fig. 1: Gross domestic product (GDP) at market prices, 2013 (Current prices, PPS per capita) [8] P 370

2 From the graph presented in Fig. 1 it is visible that the Republic of Croatia is among the last in the EU when ordered by GDP per capita. When an analysis of the economic data found at the European Commission web pages is undertaken, it can be easily distinguished that the global economic crises that started in 2008 left its mark on the total economic growth of the EU and each of its member states. Perhaps that can be most obviously seen from the employment rate data during the years of crisis, presented in Table1. Table 1: Percent of employment in ages 20 to 64 [8] Year Percent of employment in ages 20 to 64 EU RH Values targeted for 2020 The European Commission has defined EU development goals it wants to achieve by the year Among those development goals of the EU, there are a 75% employment rate for people ages 20 to 64 and a scientific and education investment at a 3% rate of the GDP per capita. The estimations for Croatia set the employment rate at 62.9% and investment in science and education at 1.4% of the GDP per capita (at the moment those investments are at 0.79% GDP per capita). It could be argued that the predictions of the European Commission for the Republic of Croatia are not very optimistic. The European Union plans to base its further economic development on new technologies, protection of the environment, reduced electric energy consumption and, in general, on the idea known as Digital Economy. The term Digital Economy first occurred in a best-seller book named The Digital Economy published in the year 1995.The author of the book is Canadian born statesmen, businessman, consultant and author Don Tapascott (born 1. June, 1947). In the book he discusses how are the new technologies (especially computing and information technologies) going to change society and particularly business and economy. In today s world the term Digital Economy is widely accepted. The European Commission bases most of further EU development on and trough that term. According to the strategic plans of the European Commission, further economic growth is not possible outside of the limits dictated by the term of Digital Economy. In the year 2013 the European Commission has brought a whole series of strategic measures and plans connected with the term Digital Economy. It was additionally motivated to do so by the economic crises that started in the year 2008 and shook the global and European economies. One could say it is a strategic look at the possibilities of further economic growth in the European Union but also Europe in general. According to the strategic guidelines of the European Commission, the development of Digital Economy also encourages the entrepreneurship development, development of new work places, total economy growth and especially growth of small and middle sized companies. This very strategic plan, if implemented, should motivate further economic growth in the European Union, but also in Europe in general. If Croatia wants to achieve further economic growth, it has to harmonize and coordinate its strategic plans for development with the European trends in digital economy development. It has to develop its own complete strategy and determine its strategic goals. 2. Cloud computing and digital economy One important activity trough which positive changes in the economic environment can be observed is cloud computing [5]. P 371

3 The following questions need to be asked: Why is cloud computing important for further economic development? What is the connection between cloud computing and Digital Economy? In which aspects can cloud computing provide better possibilities than traditional forms of business based on Local area networks and bought applications? Why is cloud computing particularly motivating for small and middle size companies and how can it reduce operating costs of a business? 2.1. Work based on Local area network infrastructure The traditional business model has demanded that companies have their own local area network and that they buy their business applications. After buying the business application, it was necessary to install the application on the internal company infrastructure. To ensure work continuity of the local area network, companies had to have their own IT specialists, who maintained the networks and also helped maintain compatibility with bought software. To ensure that the servers of the local area network (strong computers on which the business applications were installed) were continuously accessible, the servers needed to be placed in special air-conditioned rooms and provided with backup generators for power outs. As a consequence of traditional model demands, more sophisticated applications were not easily accessible or were completely inaccessible to small companies. Acquiring such applications demanded large initial investments from small companies which were then spent on: Buying the application Building the needed infrastructure Providing adequate storage for the needed IT equipment Employing IT and Network specialists for development and maintenance of the needed infrastructure Also, it is important to mention that maintenance and further development of the bought applications were laborious to their sellers because they needed to reach out to all of their customers for each upgrade or fix patch The concept of cloud computing The concept of cloud computing is based on the idea that applications are not sold but rented out to the end user for an agreed period of time. Companies do not buy the application but rent its services for the time needed. This approach provides the possibility of starting a business with significantly smaller initial investments on IT support and infrastructure. Another benefit is that if a company realizes that it doesn t need a certain application, it can just terminate the lease of that application. When applications are leased, they are accessed through the internet, which means there is no need for a company to have its own local area network infrastructure but a quality broadband internet access. When companies had their own local area networks with central servers, which were then accessed by terminals in order to use a certain application, the demanded network speed was 100 Mbit/s. In cloud computing the server is not in a local area network but in a server center which can be located anywhere in the world. In order to have quality access to the needed application, the demanded speed is also 100 Mbit/s. Companies no longer need their own local area networks, air-conditioned server storage rooms with backup generators, they no longer need their own network specialists to take care of the vital infrastructure or need fewer of them, and they no longer need to permanently buy applications. Modern companies only need standard user computers, a fast internet access and to rent out the needed applications for a certain amount of time or certain amount of service. P 372

4 By utilizing this concept, small and middle size companies avoid large initial investments, but even in general, the monthly cost of operations is lower, since there is no need to maintain an internal local area network, and thus the costs of IT support are significantly lower. This allows small and middle size companies to be more competitive in the market and the general price of services to be lower. Smaller initial investments motivate the economy which then reduces the unemployment rate. In order to achieve cloud computing the following need to exist: Software centers which will provide the needed services A quality broadband internet access Network security in the software centers, on the network and at the end user Because of this the European Union is willing to financially support the development of: Software centers Fast and super-fast internet access Network and software security 2.3. Software center development According to all presented, development of software centers today is a global phenomenon which shows no sign of slowing down. Software centers serve for storing and processing data through various applications. They are accessible through broadband internet access. Unfortunately, a large number of companies still fear of cloud computing because they are afraid of leaking or loosing fragile and sensitive strategic or personal information. They feel uneasy not knowing the exact physical location of their data which can be stored in software centers around the world and not knowing the steps taken to ensure the security of their data. However, security mechanisms which exist today and which are implemented by large software centers provide significantly higher security level than most companies could hope to offer on their own. This is especially true for small companies that are just being set up. Data security in software centers is extremely high. Another vital security part of the architecture is the security of the network by which the data is being transferred. The security there is not as high as in software centers and there is room for improvement, which is why it is a field that s been constantly worked on. The weakest link in the security chain is the end user, who is also most often the target of attacks. Most attacks try to sabotage the communication and acquire vital information, such as user names and passwords. Since most of the attacks target the end user, the security level is the same or even higher when using cloud computing. Companies can rent applications through online services. Software centers can and mostly are located all over the world, and often in colder parts of the world to reduce the costs of cooling the spaces for the servers. When it comes to conducting business for companies it is not a big problem that the users do not know the exact physical location of where their data is stored. However, this is a problem when it comes to data which is of national importance. For instance, data related to and stored by applications such as e-citizen, e-government, e-healthcare and other public services work on and store data of national significance so they need to be protected on a national level. The Croatian Republic, as well as other European countries, has to take the development of their own software centers as a part of their national strategy relating to digital economy into the account. These software centers would be used for storing applications and data of national importance, but could also have capacity which could be rented out to other countries or companies for safe storage of their application and data. It would not be a good idea to let this part of the digital market be developed by someone else and then rent out their services. P 373

5 2.4. Development of fast and superfast Internet access In order to develop cloud computing in its full capacity it is important that end users, be they physical users or companies, get access to fast and superfast internet. Without such internet access there is no cloud computing and without cloud computing there are no advantages that it brings with it, such as the expanse reduction, increase in productivity and competitiveness. In the modern world, running a company without it having a web page, or at least internet access is unthinkable. Companies that do not have access to internet do not exist in the modern economic sense. When consumers need anything, the first thing they do is search the web for information. The basic economic capacity of a country comes from its people and its land. People are the ones performing the economic activity and land is the place where the activity is performed. When it is said that approximately 70% of land in Croatia cannot get broadband internet access, it means that 70% of the national land is out of economic function. In Croatia there is a big difference between internet coverage in urban, suburban and rural areas. Only urban areas can be satisfied with the quality and the speed of internet access. Although over 57% of the population in Croatia lives in urban areas, urban areas make only 3% of the national territory. This leads to the conclusion that only 3% of the national territory has internet stable enough to be put to economic use. The most developed countries in Europe such as Denmark, Belgium, The Nederland, and Germany have a balanced development of broadband internet access on their whole territory which means they can put their whole territory to economic use. When it comes to ability of connectivity and the quality of connectivity, the Republic of Croatia is among the last in the European Union. It is important to point out that telecom operators cannot take the whole blame for this situation. The reasons of this problem are more complex, as is their solution. 3. European digital economy 3.1. Digital agenda The European commission has presented its goals in digital economy through a document know as Digital agenda [1], [2], [7], [12]. These goals state that by the year 2020 the following needs to be achieved: Fast internet access (30 Mbit/s to 100 Mbit/s) for all European citizens Superfast internet access (100 Mbit/s or higher) for 50% of all European households The agenda makes no difference based on the location inside the European Union. Reaching the goals set by the digital agenda is a key precondition for further economic and societal development Digital economy and DESI index The European commission, as part of its digital agenda, keeps track of digital economy in European society through the so called DESI index (DESI-Digital Economy and Society index). This index is calculated for EU in general and for each of its member states. The DESI index is a complex indicator consisting of several components and subcomponents [7]. Five base DESI index components are: Connectivity Human Capital Use of Internet Integration of digital technology P 374

6 Digital Public Services Each of the five base components is complex and made out of several subcomponents. Connectivity is calculated as a weighted average of its four subcomponents o Fixed broadband internet access o Mobile broadband internet access o Speed of internet access o Availability of internet access Human capital is calculated as a weighted average of its two subcomponents o Basic internet usage skills o Advances internet usage skills Use of internet is calculated as a weighted average of its three subcomponents o Content of use o Communication use o Business use Integration of digital technology is calculated as a weighted average of its two subcomponents o Digitalization of business o E-Shopping Digital Public Services is calculated as a weighted average of its two subcomponents o E-Government o E-Healthcare Fig. 2. Croatia's performance in the DESI 2015 graphically shows the state of digital economy in the Republic of Croatia. By the total DESI indicator the Republic of Croatia is with a normalized value of 0.38 (normalized on scale from 0 to 1) on the 24 place of the 28 European Union countries. There are DESI indicators by which the Republic of Croatia is above the EU average. That is the DESI indicator of integration of digital technologies where 25% of all small and middle size companies in Croatia have online stores and 8.4% conduct overseas business (6.5% is the EU average). Small and middle size companies in Croatia make an average of 11% of its business online (8.8% is the EU average). Big companies make 14% of their business online (20% is the EU average). Fig. 2: Croatia's performance in the DESI 2015 [7] P 375

7 Fig. 3: Integration of Digital Technology, SME Turnover from ecommerce [7] In the Republic of Croatia 25% of small and middle size companies conduct online sales (15% is the EU average). 8.4% of Croatian small and middle size companies conduct overseas online sales (6.5% is the EU average). Fig. 4: Integration of Digital Technology, SMEs selling online [7] The Croatian economy is not very advanced but the DESI indicator of Integration of digital technologies shows that it is heading in the right direction and that it can potentially achieve big growth. An obstacle in achieving that growth is the bad DESI index relating to Connectivity. Despite the fact that fixed broadband internet access is available in 97% of households only 61% of households take the advantage of the opportunity. By this index of the 30 European countries Croatia is the worst ranked. P 376

8 Fig. 5: Ranking in Connectivity [7] Although 57% of households in Croatia have access to broadband internet of high speeds (NGA), only 1.1% of households use such access. It is important to notice two facts here: The reason why 57% of households have access to NGA internet is because 57% of the population lives in the four major urban areas which occupy only 3% of the national territory. Once more, this brings out the fact that only 3% of the national territory can be put to economic use because all of the adequately developed infrastructure is in densely populated urban areas. The fact that only 1.1% of households use a NGA connection points out two facts: o The price of such a connection is relatively high compare to an average household income o Low rate of informatics and information education An average household in Croatia spends 2.5% of its gross income on an internet connection (12-30Mbps) while the average in the European Union is 1.4%. It can clearly be seen from this data that for citizens of Croatia an internet connection is quite expensive. However, the reason why it is so expensive for an average Croatian household is not the high price of internet service but the low average household gross income. This makes the problem more difficult to solve as there is no more room for further price reduction. When ranked by the DESI indicator of Human capital, Croatia is 23rd in Europe with a modes 0.42 result. Croatia needs to work on achieving increasing the populations digital qualities and abilities. A clear indication of their lack can be seen in the fact that 28% of the Croatian population has never used an internet connection (the European Union average is 18%). On the contrary, in states like Denmark 92% of the population use internet and the EU average is at 75%. Advanced countries have a culture of internet usage which still needs to develop in Croatia. However, there are some aspects in which Croatia is above the EU average. For instance, video communication over the internet is at 38%, while the EU average is 37%, and reading the news over the internet is at 79%, while the EU average is at 67%. P 377

9 Fig. 6: Connectivity, Fixed Broadband Price. [7] Further analysis of DESI indicators for Croatia ( ) shows some positive, but also some negative trends. Positive trends: Small and middle size businesses base their sales and management on modern communication technologies more than average in the EU and usage of such technologies is showing an increase. Online sales as well as cross border trade are above the EU average. In some of its public services such as e-recipe (part of e-healthcare), Croatia is among the leading in the EU (over 99% of all recipes are issued in this way). Negative trends: Croatia is the worst in the EU when it comes to Connectivity and does not use all of the existing infrastructure. Fast and superfast internet access can only be achieved in highly urban areas which make only 3% of the national territory. Croatian citizens pay the highest price for internet access in relation to their income. When ranked by the amount of people who use the Internet Croatia is 21 out of 28 EU countries. The European Union bases and will continue to base its further development on Digital economy. Croatia should do the same, but it lacks a complete strategy for further development based on Digital Economy. For years Croatia has been developing strategies such as the Strategy for increase of broadband internet access. Although these strategies are heading in the right direction, they are not a complete solution. Developing strategies without considering their implications and what they are trying to achieve is the reason Croatia is among the worst in the EU regarding the factors those strategies are trying to influence. By taking into consideration the example of Italy which also has a strategy of just increasing the number of internet access points without a clear idea why that wants to be achieved, it can be seen that that is a bad approach, given that Italy is on the second last place in the European Union, only being better then Croatia. P 378

10 Croatia has to take all of the DESI indicators into careful consideration and then develop a complete strategy regarding Digital economy. This strategy should produce well determined goals that should be reached through a set of strategic measures implemented in several iterations. 4. Future economic growth in Croatia based of Digital economy As mentioned before, further economic growth in Croatia has to be based, among other things, on the development of Digital economy Investment in science and education Modern society is a scientific one or, in other words, one based on education and knowledge. Therefore, it will come as no surprise that it is planned to increase investment in science and education. This investment should reach a European level of 3% of the country s GDP by the year The educational system should take special care and make special effort in stimulating young people to enroll in areas of computer and information science. An estimate based on enrollment quotas shows that this profession will have a big lack of potential employees. It is also important to stimulate students to take part in the Erasmus and Erasmus+ program so they gain international and work experiences. This will not only make future employees more opened to international business, but will also help in creating more international business and thus benefit the economy. It is also important to simplify the process of establishing new firms and make the information on such activity easily accessible. It is immensely important to continue developing public online services regarding education. Some ideas go as far as to suggest creating the available public service sites that would freely provide all the textbooks for primary school and high schools. It is important to develop a culture of using communication and information technologies for online learning. Especially to establish online learning as a lifelong informal activity Development of informatics in society As part of the national strategy regarding digital economics, it is important to define and encourage development of software centers which will serve as a basis for cloud computing and storing data of national interest. Also, special care needs to be given to development of online public services. By the year 2020 all interaction with state administration should be possible over the internet. This would make things not only more efficient but also less costly. Through the use of online public services citizens need to be able to save both time and money, need to be given a high quality service and thus to be stimulated to use such services Connectivity development When ranked by DESI indicator for connectivity Croatia is the last in the European Union. It has the worst infrastructure, the highest prices and the least spared out broadband internet access coverage. The weight of infrastructure development cannot be solely placed on the market and existing telecom operators. Units of local government, with the help of EU funds, need to be stimulated to make development programs regarding broadband internet access infrastructure. Local government should be able to establish communal firms with the purpose of communication infrastructure development. A strategy is needed to ensure the possibility of broadband internet access all over the national territory. This is a needed precondition to further economic growth in Croatia. Every part of the national territory has to have access to water, electricity, roads and fast internet. This would not only make the whole territory economically usable, but would also motivate development of underdeveloped areas and thus motivate decentralization. In a communication sense it is important not only to motivate development of P 379

11 fixed networks, but also mobile ones, such as is the 4G system network. Tax reduction on investments in infrastructure development should be carefully considered. Future development of any economic activity will not be possible without high quality internet access Strategy of economic growth as a strategy of digital growth The European commission has determined all strategic goals which should be reached by the year Croatia should do the same and also look into all the motivational funds Europe has prepared for such development. In the year % of GDP (around 9 trillion euros) was achieved in economic service activities. Cloud computing is a technological innovation, but also a modern form of continuous service providing. From this, it could be concluded that cloud computing is a representation of a modern form of conducting business and as such is the future of economic growth. Fig. 7: Trade in service within the EU [13] Fig. 8 Proportion of services in the modern economy [13] P 380

12 Following the example set by the EU Croatia should develop a complete strategy regarding digital economy. There should be only one complete strategy not multiple strategies as there have been so far. A country does not exist in an economic sense if it does not have stable and fast internet access. In the modern world many rural activities or, more precisely, activities of the primary economic sector increasingly use services and support of computer software to optimize their activity and thus make them more competitive on the market. Development of the primary economic sector will also depend on it using more and more of modern technologies, especially information and informatics technologies. Without this change in conducting business, the primary sector cannot survive, let alone grow. Cloud computing and other modern IT technologies will reduce the number of needed government employees. A good example of this can be seen through the online public services provided to citizens in countries such as Estonia or Denmark. Such services reduce the need for government administration employees and consequently make the state more efficient and reduce its expanses. From the DESI indexes it can be seen that although the Croatian economy is weak, it is healthy or, more precisely, it is heading in the right direction. The Croatian economy shows it can adapt to digital economy even more than the current state of connectivity allows. It could be said that Croatia deserves and is capable of a better economy than it has at the moment. Unfortunately, whenever the bad economic state of Croatia is discussed, more time is spent on trying to find who to blame for such a situation than on developing a strategy to improve the state of the country s economy. It is vital to form a development strategy, to determine the goals of the strategy and the deadlines to achieve them, then to work on achieving the set goals. No goal can be reached by social division, but only by working towards it. 5. Conclusion The European Union to a large extent bases further economic growth and employment rate growth on the service sector. The modern service sector is and will largely be based on modern technologies, especially computing and information technologies. Special stress is given to the development of software centers which will be the base for increasing the market of digital services. Another important part of development is increasing the access to fast and super-fast broadband internet. National territory can only be used if it has internet access and access to communication networks [3], [5], [6]. Further economic growth in Croatia, as in the European Union, will be based on digital economy. It is vital to create a full development strategy based on digital economy. The strategy needs to define goals, but also the dynamic of achieving the set goals. Concrete actions in mobilizing people, society and economic subjects in Croatia need to be defined and undertaken from the strategy. According to DESI indicators, Croatia is good in some areas, even to a point that it is above EU average, but bad in other areas, sometimes even the worst in the EU. The European Union has development funds that can be used for broadband access development, software center development and cyber security development. These funds are available until the year Every year that passes without using these funds is a wasted year. Literature [1] FTTH Council Europe; "FTTH Handbook", 2014 [2] Thomas Martin: "Fiber to the home" P 381

13 [3] Šarić, S. Husnjak, S. Forenbacher. I,: "Guidelines for expansion of broadband internet access in rural Croatia, [4] Implementation of the EU regulatory framework for electronic communications ", 2015 [5] [6] [7] [8] Mariana Kotzeva: "Eurostat regional yearbook 2014" [9] Hrvatska agencija za poštu i elektroničke komunikacije: Prijedlog analize tržišta maloprodaje širokopojasnog pristupa Internetu, Zagreb, 2012 [10] Valdani Vicari & Associati, : "Broadband Coverage in Europe 2013" [11] "Ulaganja u širokopojasni pristup Internetu", 2011 [12] "FTTH Handbook", Fourth Edition D&O Committee Fiber to the home Council Europe, 14/01/2011 [13] P 382