U.S. Telecommunications Services in European Markets

August 1993

OTA-TCT-548 NTIS order #PB93-231355 R ECOMMENDED CITATION: U.S. Congress, Office of Technology Assessment, U.S. Telecommunications Services in European A4arkefs, OTA-TCT-548 (Washington, DC: U.S. Gover- nment Printing Office, August 1993).

F’t)r WIC h) [he (1 S. (;[I\crIIIncIl( PI intlng 011’Icc SupcIIIIlcIdL.nt t~f DtKumcIIt., M.111 Sl{Ip: SS[Y. W’;i\h]r]glfm, M’ 20402-932X” ISBN O-16 -041895-X Foreword

The European T HE E UROPEAN MARKET FOR TELECOMMUNICATIONS SERVICES will grow rapidly over market for the next decade, fueled by demand from the European business community for fast telecommunications data transmission and other advanced services. In most European countries, the services will grow telecommunications services market is still largely reserved for a state-owned rapidly over the Public Telephone Operator, but this is likely to change in the near future. next decade, Meanwhile, U.S. telecommunications firms-including regulated carriers-are fueled by demand successfully competing in some European markets already open to them, from the European especially in cellular communications and cable television. U.S. firms appear to business have an edge in these markets because of their experience operating in competitive community for fast markets and developing innovative services based on advanced network data transmission technology and in response to changing user needs. and other advanced services. The U.S. economy can benefit both by increased export of telecommunica- tions and related services to overseas markets, and by the support that U.S. networks provide to other U.S. firms operating in global markets. Success in international trade in services can, and already does in part, offset our troublesome deficit in trade in merchandise. U.S. telecommunications firms are eager to pursue opportunities in foreign markets, and no government interventions appear to be necessary, other than continuing to press our European trading partners to open markets to U.S. competition. Beckoning success in European telecommunications markets does, however, raise some domestic policy concerns, including the role that trade objectives should play in fomlulating telecommunications policy.

This study of U.S. participation in European telecommunications markets was requested by the Senate Committee on Finance and the House Committee on Foreign Affairs, A Background Paper, [1. S. Bunks and International Networks, prepared in the course of this assessment was released separately in October 1992.

d-w== - Roger C, Herdman Director

Page iii Advisory panel John Diebold, Chairman Gene Kimmelman Diebold Institute for Consumer Federation of America Public Policy Studies, Inc. Michael Nugent James R. Beniger Vice President and Professor Associate General Counsel Annenberg School of Communications Citibank, NA University of Southern California Barbara O’Connor Mark L. Bigelow Professor/Chairperson Network Architect, Information Services Alliance for Public Technology Bechtel Corporation California State University NOTE: OTA appreciates Department of Communications and is grateful for the Robert Bruce valuable assistance and Partner Reynie U. Ortiz thoughtful critiques pro- Debevoise & Plimpton Vice President for Public Policy vided by the advisory panel U.S. West members. The panel does Emilio DeLia not, however, necessarily Frances Plude approve. disapprove, or Department Director endorse this report. OTA International Communications Services Professor assumes full responsibility AT&T Communications Department for the report and the John Carroll University accuracy of its contents. Steven Flajser Vice President for Space Systems Michael J. Reilly, Sr. LORAL Vice President for External Relations Reuters America, Inc. Kenneth Gordon Chief Commissioner Tony Rutkowski Massachusetts Department of Director of Technology Assessment Public Telecommunications SPRINT

Bruce Greenwald Marie-Monique Steckel Professor President Department of Economics France Telecom, Inc. Columbia University School of Business

J. Donald Karmizin Reviewers and contributors Vice President see Appendix A, pages 203-210. Management Infomation Systems United Airlines

Page iv Project staff

P RINCIPAL STAFF C ONTRACTORS Vary Coates, Project Director Bruce Egan, Columbia Business School Todd LaPorte, Analyst Louis Feldner, Mark Young, Research Analyst Feldner Telecom Consulting Rob Frieden, Telecommunication OTA MANAGEMENT Consultant and Attorney John Andel in, Assistant Director, OTA Dale Hatfield, Science, Information, and Natural Hatfield Associates Resources Division Manley Irwin, James W. Curlin, Program Manager University of New Hampshire Telecommunication and Computing Gligor Tashkovich, Consultant, Technologies Program International Telecommunications Deborah Workman, Consultant

A DMINISTRATIVE OTA ADVISORY GROUP Liz Emanuel, Office Adminisstrator Michelle Smith, Secretary Peter Blair. Karolyn St. Clair, PC Specialist Energy and Materials Program Sylvester Boyd, Telecommunication and Information Systems Linda Garcia, Telecommunication and Computing Technologies Program Julie Gorte, industry, Technology, and Employment Program William Keller, Industry, Technology, and Employment Program Bill Westermeyer, Oceans and Environment Program Robert Weissler, Industry, Technology, and Employment Program Ray Williamson, International Security and Commerce Program David Wyc. Telecommunication and Computing Technologies Program

Page v Contents 1 Exporting Telecommunications Services to Europe 1 Summary of findings 3 Conclusions and policy options 21

2 Technological Trends and Issues 25 Changing technology 25 The evolution of advanced services 31 The implications of technological change 37 Standards 38

3 The European Market for Telecommunications Services 47 The structure of the European market 49 Trends shaping the European telecommunications market 56 Market estimates and projections 64 The importance of U.S. trade in services 67

4 European Activities and Strategies of U.S. Telecommunications Firms 71 U.S. regulations and overseas expansion 72 U.S.,telecommunications firms’ European activities 74 Encouraging foreign expansion 88 Conclusions 89

5 Users’ Perspectives-Views of U. S. Services Exporters 91 Problems with European telecomnunications networks 92 European regulatory problems 97 Representative services export sectors 98 Policy issues 107

6 Telecommunications in Central and Eastern Europe 109 Defining and characterizing Central and Eastern Europe 110 The condition of telecommunications in Central and Eastern Europe 113 Regional relationships 117 Involvement of the United States 129 Conclusion 132

7 Domestic Deregulation and lnternational Trade Negotiations 135 U.S. deregulation and the worldwide consequences 135 Changing attitudes toward services and trade 138 GATT 143 Negotiating GATT 151 Long-range consequences of a GATT agreement 155 Page vii 8 How Telecommunications Policy Is Made 159 The telecommunications policymaking structure 160 The policymaking structure for trade in services 168 The adequacy of data for decisionmaking 171 Conclusions and options 174

9 international investment and Domestic infrastructure 181 International comparisons 182 The question of domestic disinvestment 188 Determinants of infrastructure investment 193 Conclusions 197

A Reviewers and Contributors 203 B Acronyms 211 Index 215

Page viii Exporting Telecommunications Services to Europe 1 CHAPTER

U.S. TELECOMMUNICATIONS FIRMS are send- by the Office of the United States Trade ing a message to Europe—’ ‘we intend to Representative (USTR). The industry struc- offer services to Europe’s under-served tele- ture, regulatory environment, and invest- communications users, ’ They are watch- ment strategies that are conducive to free fully assessing European progress toward trade and encouraged by the USTR may liberalization of national markets and inte- not be equally appropriate for meeting the gration into a single European market. Mean- broaderrange of national telecommunications while, U.S. carriers and enhanced-services objectives. providers1 are entering the niche markets Inadequate investment in domestic tele- that are open to them, such as cellular communications infrastructure could re- communications and cable television. sult from continuing investment overseas The entry into European markets for by regulated U.S. telecommunications op- The entry of U.S. services by American telecommunications erators, according to some State regulators telecormmmications firms, from major carriers to small niche- and public interest groups. (The Office of firms into European services providcrs, is—at this early stage—a Technology Assessment finds eviidence services markets striking success story. Growing U.S. export for this inconclusive, but concludes that is-at this ear/y of telecommunications and related informa- investment trends should be monitored.) stage-a striking tion services2 in the future can contribute This report rests on the premise that success story. significantly to national economic goals. telecommunications is not just a set of Further expansion appears to require little or tradable services, but also a basic function of no government intervention—in this area, society, essential for effective governance deregulation and pursuit of free trade has social cohesion, and economic viability’ and worked well. equity. International telecommunications is However, there are some major caveats to a primary vehicle for U.S. participation in the these conclusions: global polity, as well as the global market - Emerging technological and institutional place. Public policy interest in international trends could adversely affect bilateral and telecommunciations therefore goes beyond multilateral trade agreements already ne- the question of competitiveness in foreign gotiated or being pursued by U.S. trade a markets. representatives, making them eithcr unsta- This chapter summarizes findings from ble or overly restrictive. the analysis presented in more detail in the U.S. international telecommunications pol- follow in: eight chapters. It addresses several icy is being defined almost singlehandedly questions:

I The terms “enhanced” or “value-added” services Ind Icate services that go beyond the transm lsslon of voice or data (i. e., “basic services”) to provide collection, selection, formatting, processing, or selectlve dellvery of material being communicated. An enhanced-serwces prowder may be a carrier or network operator, but more often provides services over lines leased from a carrier. 2 For the sake of simplicity, this report will sometimes include two quite different phenomena under the shorthand phrase “export of services”: namely, the direct delivery of services from the United States toot her countries over electronic networks (e.g., cash management serwces or market data analysls), and the dell very of services through subsidiaries orjotnt venture corporations overseas. At other places in the report, Page 1 as appropriate to analysis, these two phenomena WIII be clearly and expllc[tly dlsttnguished. us. Telecommunications Services in European Markets

Growing U.S. C AN U .S . FIRMS GAIN WIDER ACCESS TO EURO- THEIR HOME REGIONS--I.E., THE REGIONAL BELL export of telecom- PEAN MARKETS FOR TELECOMMUNICATIONS AND HOLDING COMPANIES? munications and RELATED SERVICES? Expansion into European markets by U.S. related services Technological and political trends, espe- telecommunications firms can contribute can contribute to cially the likely effects of the European significantly to maintaining a positive trade U.S. economic Community’s Open Network Provision Di- balance in services, both directly and by goals. rective, are converging to bring about wider supporting the competitive activities of other access to European telecommunications mar- U.S. services providers, ranging from air- kets. For U.S. firms, nearly 85 percent of the lines to wholesale merchants, in European potential market is now closed. Continuing markets. It may also encourage the European pressure from the U.S. Government through sales of U.S. telecommunications equipment USTR may somewhat hasten broader market and other information technology. For politi- access. However, U.S. telecommunications cal reasons most of this economic activity is firms caution that such pressure should not in the form of joint ventures and similar result in opening U.S. markets to entry of kinds of direct overseas investment, which foreign telecommunications operators whose has given rise to fears that this will compete home markets still exclude U.S. services with capital for domestic investment in providers. infrastructure modernization and in research. There is so far no clear evidence of such

C AN U .S . FIRMS SUCCESSFULLY COMPETE IN THE harmful effects, but investment patterns EUROPEAN MARKETS? should be monitored to detect any emerging U.S. services providers can be strong adverse effects so that corrective measures competitors in European telecommunica- can be taken if appropriate. tions markets. Technology and deregulation

have allowed them to develop innovative W HAT CAN THE U .S . GOVERNMENT , AND ESPE- services attuned to the changing needs of CIALLY THE U.S. CONGRESS, DO TO ENCOURAGE business users. European business users now BROADER MARKET ACCESS AND TO ENHANCE THE are relatively poorly served by the public COMPETITIVENESS OF U.S. TELECOMMUNICATIONS 3 telephone operators (PTOS). U.S. firms, FIRMS OVERSEAS? including major long-distance carriers and Broader market access may come about regional Bell holding companies (RBHCs) more as a result of pressure from users and have already invested billions of dollars in actions by the Commission of the European Europe and are doing well in niche markets. Community (EC), than as a result of trade negotiations. However, the U.S. Govern- IS IT IN THE PUBLIC INTEREST TO ENCOURAGE ment should continue to press, through PARTICIPATION OF U.S. TELECOMMUNICATIONS FIRMS bilateral and multilateral trade negotiations, IN OVERSEAS MARKETS, ESPECIALLY THOSE FIRMS for further liberalization of European telecom- THAT ENJOY REGULATED MONOPOLY STATUS IN munications markets and wider access to

3 The state telecommunications authorities were traditionally called PTTs, for Postal, Telephone and Telegraph administrations, and were generally part of a government ministry. In most casestelephone’telegraph functions have been separated from postal functions and operating responsibility y has been divorced from Page 2 regulating responsibility, so that the older designation is no longer always appropriate. Exporting Telecommunications Services to Europe

those markets for U.S. firms. Caution is tution process for international telecom - ww-ranted, because negotiating positions de- munications. veloped by the Office of the U.S. Trade Representative may be undermined by tech- Summary of findings nological trends that challenge distinctions between basic and enhanced services and T HE EUROPEAN MARKET FOR BASIC AND EN- between public and private networks. HANCED TELECOMMUNICATIONS SERVICES WILL Beyond this, there is little that the U.S. EXPAND STRONGLY OVER THE NEXT FIVE TO TEN Government needs to do or should do, at this YEARS. time, to improve the competitiveness of U.S. Comparison of the consumption of tele- carriers and services providers overseas. communications services in Europe and the There is little evidence that the domestic restrictions imposed on carriers at divestiturc United States indicates that in all European (however onerous or effective they maybe at $billion (1987 dollars) home) now arc a significant factor in success 100 in European ventures. 50 Services balance > Is THE POLICYMAKING STRUCTURE FOR IN- TERNATIONAL TELECOMMUNICATIONS NETWORKS 0 ADEQUATE AND APPROPRIATE FOR THE COMING DECADE? -50 Merchandise balance U.S. policy for international telecommu- nications has for the last 5 years been largely -100 determined by USTR. This is cause for concern. The unidimensional focus of USTR -150 on forcing open world markets for services may slight or diminish other public policy -200 goals related to telecommunications, such as 1970 72 74 76 78 80 82 84 86 88 90 92 strengthening the domestic telecommunica- SOURCE U.S DEPARTMENT OF COMMERCE, 1993 tions infrastructure, extending the scope of universal service, or assuring the interopera- countries there is a substantial unsatisfied Figure 1-1. bility of networks. The mechanisms for demand for business-oriented telccommuni- U.S. Trade Balance, coordinating policy formulation and regu- cations services. Monopoly control of net- 1970-92 latory actions have become ineffective and works and services, high tariffs, and strict need to be strengthened. constraints on the development of private This chapter summarizes these and other networks have kept this demand from being findings discussed more fully in later chap- met. ters, It then suggests some actions that The Commission of the European Com- Congress may consider for monitoring the munity is pushing ahead with its effort to long-term, indirect effects of overseas ac- create a single European market; it puts high tivities of U.S. carriers, and for strengthen- priority on the integration of telecommuni- ing the policy development and implemen- cations networks and deregulation of value- Page 3 u.s. Telecommunications Services in European Markets

Box l-A. R ESTRICTIONS ON A CCESS TO THE U.S. MARKET FOR F OREIGN T ELECOMMUNICATIONS C OMPANIES

Although the U.S. telecommunications services market is relatively open compared with that of most other countries, there are some restrictions on entry of foreign firms. These are: ■ Section 310 of the 1934 Communications Act (47 U.S.C. 31 O) prohibits foreign companies from —holding common carrier radio licenses, -owning more than 20 percent of U.S. companies that hold such licenses, or —having any representation on the board of a U.S. radio license holder. Foreign citizens may not be officers of a U.S. company holding a radio license. When foreign investment in a common carrier is indirect, i.e., through a subsidiary, Section 31 O(b)(4) allows 25 percent foreign stock ownership, foreign directors, and foreign officers. It also gives the Federal Communication Commission (FCC) discretion in waiving these limits. The FCC has never done so. This provision was originally aimed at preventing foreign powers from gaining control of U.S. broadcasting, which might be used for propaganda. With the advent of microwave transmission for long-distance telephony, a result of this provision was to keep foreign firms out of long-distance telephone service as well. As telecommunications carriers continue a shift from microwave to fiber optic cables, Section 310 will pose less difficulty for foreign firms. There are also ways around Section 310, such as assignment of radio licenses to third parties. ■ The Submarine Cable Landing Act (47 U.S.C. 34-39, especially Section 35) prohibits foreign companies from landing cables in t he United States without permission from the FCC. One of the purposes of this act was to give the United States leverage in getting U.S. cables landed in other countries. ● The Telegraph Act (47 U.S.C. 17) forbids foreign companies from landing telegraph lines or cables in Alaska. ■ The Communications Satellite Act of 1962 (47 U.S.C. 701-757) established COMSAT as the sole U.S. participant in the INTELSAT consortium, thereby limiting foreign carriers’

added services. In spite of stubborn political on European governments from three sources: resistance, the liberalization of the 12 Euro- large business users, the EC Commission, pean national markets is underway. In most and other participants in the Uruguay Round of these countries, the responsibility for of the General Agreement on Trade and operating telecommunications networks has Tariffs (GAIT). been separated from telecommunications The European Community’s drive to a regulatory authority and placed in a free- single market promises to expand the geo- standing (but usually state-owned) corpora- graphical scale of many European corpora- tion. Competition is allowed in some or most tions, increasing their need for translational value-added services. Progress toward liberal - services. If the single market succeeds in ization and curtailment of state monopolies bringing about strong European economic is likely to pick up speed because of pressure growth, the demand for basic and enhanced Exporting Telecommunications Services to Europe

access to satellite transmission capabilities in the United States. ’ Satellite transmission requires radio licenses under Section 310, noted above. Private satellite systems used for common carrier purposes are subject the Section 310 restrictions.

■ The FCC Decision, International Competive Carrier (102 FCC 2d 812 (1 985), as modified The opportunity to in F?egu/alien of International Common Carrier Services (CC Docket No. 91-360, FCC 92-463 as released Nov. 6, 1992) stipulates that a firm with 15 percent foreign ownership, bypass public net- or which has a foreign representative on its Board of Directors, be considered a “dominant works will force carrier” in the United States for purposes of regulation, and therefore be required to register open the markets its proposed tariffs and costs with the FCC before offering its service to the public, and be now closed to 2 further required to file quarterly traffic and revenue reports with the FCC. Some foreign competition. telecommunications operators complain that the FCC has delayed action on applications for over a year. Private line services are not affected by this order. w The Exon-Florio Amendment to the Defense Production Act of 1950 (50 App. U.S.C. 21 70) provides that the U.S. Government may review and prohibit foreign acquisions, mergers, or takeovers of corporations that could adversely affect U.S. security interests. This provision has not yet been invoked in the telecommunications field. Note: While no mainland U.S. local telephone company has been acquired by a foreign firm, an 80 percent interest in Puerto Rico Telephone Co. has been acquired by Telefonica of Spain. The Section 310 radio license issue was dealt with by Puerto Rico Telephone Co. ceding its licenses to a third party.

1 An FCC ~llng on ~ ~etltlon from Reuters stated that the term “satellite terminal station” In the act meant Earth stations connected to a terrestrial commumcahons network, but thm left the scope of the act unclear to many foreign frms.

2 Swtlon 214 of the Communlcatlons Act of 1934 requtresthat the establishment of clrcults between the United States and other countrtes, or between the states of the Umted States, is subject to government approval The U.S. dom mant earners, AT&T and COMSAT, are ob41ged to fde their pro~sed tariffs 45 days m advance, with cost justtftcatlon. Nondommant earners, such as MCl and Sprint, have a streamlined requirement-14 days notice, with no cost justification necessary.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT 1993 telecommunications services will further in- is closed to even domestic competition. (In tensify. Thus European markets for telecom- the United States, the local cxchangc market munications services are attractive future for voice services is also closed to foreign targets for exported telecommunications serv- competition. ) (See box 1 -A. ) Basic voice and ices and reltitcd information services. data transmission is reserved to state-owned monopolies (the PT()) in all European coun-

A CCESS TO EUROPEAN MARKETS FOR U . S . tries except the United Kingdom. TELECOMMUNICATIONS FIRMS WILL NOW BROADEN Access to this rcscrvcd portion of the RAPIDLY. market will almost certainly soon be forced As much as 85 percent of the aggregate opened by the same kind of c(~mpctitive European telecommunications market re- pressure that brought about CJ. S. deregula- mains closed to U.S. firms chiefly because it tion and divestiture of AT&T--nanlely, the Page 5 Us. Telecommunications Services in European Markets

ability of large corporations to bypass the U.S. firms are already entering European public switched networks by developing niche markets for enhanced or value-added private networks. The EC Open Network services, largely through partnering with Provision Directive, issued in 1992, requires European firms, often the monopoly PTOs. each member-state to make leased lines A U.S. carrier can handle a global corpora- available to customers with no restraints on tion’s needs only so long as one end of the their use or on interconnection to the public traffic either originates or terminates in the United States. Partners are necessary both to Figure 1-2. 600 $billions (1987 dollars) share capital and to provide national regula- U.S. International Imports tory standing and customer access in many Transactions, countries. Exports 1992 The three major U.S. long-distance carri- 400 ers (AT&T, MCI, Sprint) are actively pursu- ing European partners for consortia to pro- vide large multinational corporations with a 200 Exports full range of services (’ ‘one-stop shopping’ Imports on a global basis. AT&T hopes to earn 50 percent of its total revenues overseas by 0 2000. Services Goods The seven regional Bell holding compa- SOURCE U.S DEPARTMENT OF COMMERCE, 1993. nies are estimated to have invested about$12 billion overseas. RBHCs pursue three kinds switched networks. This effectively opens of European activities. They are constructing the door for bypass—i.e., for the use of and operating cellular networks, building on private networks to deliver both voice and their solid expertise gained at home, both to data traffic in competition with the public compete with monopoly local carriers in networks. As corporations rush to develop Western Europe and to provide an alternative private networks in order to get cheaper, to wire infrastructure in Central and Eastern customized basic services, they will also Europe. They are experimenting with and want to attach equipment of their own gaining experience in other kinds of infra- choosing, and they will actively seek en- structure-Personal Communications Net- hanced or value-added services customized works and, especially in the United King- to meet their corporate needs. Thus broad- dom, cable television networks—hoping to ened market access in the future may have bring this experience and expertise home less to do with trade negotiations than with when there is a change in U.S. regulations. technological and market imperatives. They are also investing in privatized foreign PTOs, although these investments have mostly

U.S. TELECOMMUNICATIONS FIRMS ARE MAKING A been in non-European countries that have STRONG ENTRANCE INTO EUROPEAN NICHE MAR- greater need for infusion of foreign capital KETS, PREDOMINANTLY BY DIRECT INVESTMENT than do European countries. ABROAD. Economists have assumed that most serv- Page 6 ices must be produced where they are Exporting Telecommunications Services to Europe

delivered. Many telecommunications and constitute about 58 percent of all U.S. information services, however, could be services exports, and to financial services delivered electronically, directly from the and data processing services, which add United States through international networks. another 5 percent. But even with liberalization and market By comparison, American firms operating integration, European countries will try to in Europe feel seriously hampered by the arrange matters so that both national laws necessity of relying on European technology and EC regulations continue to favor Euro- and services for communications within pean firms. The primary purpose of Euro- Europe and at the European end of interna- pean market integration is to increase the tional networks. Many of them complain of competitiveness of European industries vis-a- the scarcity of high-grade leased lines, re- vis American and Japanese firms that have strictions on the use of all leased lines, lack benefited from larger domestic markets and of access to fast data networks, severe larger scale operations.4 The benefits of restrictions on-or delays in—approving transborder access and free movement of customer-premise equipment, irregular and goods will, however, accrue also to foreign inconsistent billings, and above all, exces- firms that have established a legal presence sively high costs. These problems beset in member-states; in theory, they will be European users as well. If U.S. telecommu- considered European firms. For this reason, nications firms are allowed broader access to many U.S. services vendors will continue to the market they may be able to capitalize on operate through European subsidiaries or these opportunities to prove greater effi- joint ventures. ciency and greater responsiveness to users’ needs.

T HE COMPETITIVE EDGE OF U .S . FIRMS IN BASIC

NETWORK SERVICES AND ENHANCED SERVICE> E UROPEAN OPPORTUNITIES, NOT U . S . REGU- BOTH IN TECHNOLOGY AND IN MANAGERIAL EXPE- LATORY RESTRICTIONS, NOW DRIVE U.S. PARTICI- RIENCE—IS WIDELY RECOGNIZED. PATION IN EUROPEAN MARKETS. U.S. services exporters to Europe, heavily U.S. telecommunications firms have con- dependent on international telecommunica- cluded that their future growth may depend U.S. carriers tions networks, agree that they are well largely on foreign markets, where growth know how to served by U.S. carriers. (See chapter 5.) rates are expected to be much higher than in provide innovative American communications and computer the now better-served U.S. markets. For services wanted technology, they say, gives them a competi- example, European consumer expenditures by both European tive edge in foreign markets by enabling for telecommunications (now much lower and American them to offer innovative services. Network than those in the United States) are projected corporate users. technologies and services are especially t. grow three times faster in the next few important to providers of transportation. years. Estimates of annual growth rates for freight, and travel-related services, which business-oriented enhanced services range

4 Japanese firms have not been significant competitors in the European market for telecommunications services (as distinguished from telecommunications equipment). Japan has not permitted the Nippon Telegraph and Telephone Co. to operate overseas. Page 7 Us. Telecommunications Services in European Markets

from 20 to 30 percent per year (see chapter inviting and there is hope of wider market 3 for detailed market projections). access. Although some industry spokesmen U.S. Federal and state regulations— continue to bring up the issue of overseas especially the Modified Final Judgment investment as a reason to end all remaining (MFJ) that has governed the activities of MFJ restrictions (indirectly implying that RBHCs and their regional Bell operating these discourage them from investment in companies (RBOCs) since their divestiture the United States), it is unlikely that resolu- from AT&T—limit the range of opportuni- tion of this domestic policy issue, one way or ties for new services and new sources of the other, would in itself have a decisive revenue in the United States. The MFJ impact on the rate of overseas investment. prevented RBOCs from engaging in infor- On the other hand, the experience RBHCs mation services, long-distance transmission, arc gaining overseas is likcly to affect what and equipment manufacturing in the United new enterprises they pursue at home, when States. The prohibition on offering informa- and if regulatory restrictions arc lifted. tion services has now been lifted, and Just as RBHCs use their overseas invest- legislation is pending that would allow ments as an argument for lifting MFJ restric- telecommunications companies to own and tions on domestic activities, they also argue operate cable television companies.s that U.S. antitrust laws should be softened Just after divestiture, being forbidden by because they prevent RBHCs from joining the MFJ to invest in many domestic telecom- together to respond to European competitive munications-related areas, RBHCs made widely contract bids. It is not clear that this is true. diversified investments beyond their line of U.S. Department of Justice rulings regarding business, including, for example, real estate antitrust arc not generally considered exporta- development. The poor performance of these ble, and no effort has been made by the noncornmunications investments strongly en- government to prevent RBHCs from partner- couraged RBHCs to look abroad for expan- ing with each other outside the United States. sion, divcrsification, and investment activi- Two RBOCs have in fact done so in New ties that would better match their corporate Zealand, and other examples have occurred. experience and competence. Corporate lawyers arc cautious in interpret- Now, however, it is likely that their ing antitrust law, since judicial challenges European initiatives arc pulled by opportuni- are expensive. It is likely, however, that ties abroad more strongly than they arc more important considerations are the per- pushed by regulatory limitations at home. ceived value of a European partner and the U.S. telecommunications firms would prob- perceived risk of sharing information and ably not pull back from overseas ventures if technology with another RBHC. MFJ restrictions were ended, as long as Some telecom firms argue that they arc at opportunities in foreign markets remain a competitive disadvantage vis-a-vis Euro-

5 RBOCS can still not prowde regional information services because the prohibition on Iong-distance transmission—including signaling—would force them to set up special transmission equipment and data banks in each local area rather than centralizing them, as efficient service would require. Exporting Telecommunications Services to Europe

pean firms because of the high cost in the The idea that a firm’s overseas invest- United States of capital and because foreign ments might contribute to declining invest- governments often subsidize low-cost capi- ment or disinvestment at home is based on tal for overseas expansion. However, there is the assumption that since companies must little evidence that any governmental financ- allocate scarce resources among competing ing support is needed. Most overseas tele- interests, a pool of investment capital (such communications investments are funded from as the BOCs’ retained earnings) would be retained earnings and the U.S. carriers are spread more thinly in an organization with generally cash-rich. many establishments than in one with few. In addition, if some of those establishments F OREIGN INVESTMENTS BY U .S . CARRIERS, ESPE- operate in faster growing markets or less CIALLY RBOCS, WHICH ARE REGULATED LOCAL restrictive regulatory environments, a parent MONOPOLIES, MAY INVOLVE SOME RISKS TO U.S. company may invest more in the enterprises CONSUMERS. located in these favorable environments. Domestic investments by RBHCs soon These are legitimate concerns, although as after divestiture, in fields unrelated to the discussed above, in high-tech enterprises the firms’ core business, were often unsuccess- failure to operate in global markets could be ful. By contrast, recent overseas investments a brake on efficiency and innovation. reflect focused corporate strategies that fit Could overseas These concerns have only recently begun their proven expertise and may have a much investment mean a to be voiced, and state regulators are moving better chance of success. The potential costs decline in domestic slowly to assess the risks. Only state regula- or risks of overseas competition have, how- investment? Close tors now have an obvious brake on the extent ever, not been satisfactorily addressed. Some attention is of overseas investment by RBHCs, through state regulators and public interest group warranted. representatives fear that foreign investment their regulation of tariffs and depreciation diverts funds that would otherwise go to rates and hence the ability to limit the investment in domestic infrastructure mod- amount of retained earnings available for ernization and development of innovative investment—the major source of investment services. Some also fear that business losses financing. (See chapter 9.) or lack of adequate return on investment The evidence as to whether domestic overseas could lead to rising consumer investment is declining is mixed and inconclu- prices at home, or could by weakening the sive. The value of U.S. carriers’ current plant viability of the regional holding companies grew little in the 1980s (when inflation is undermine the stability of their regulated taken into account), and the value of annual local subsidiaries. construction appears to have decreased strik- Us. Telecommunications Services in European Markets

ingly between 1980 and 1990.6 However, ican telecommunications users operating busi- technology costs also declined significantly nesses in Europe resent the multitude of Network interopera- during this period, and network architecture disparate prices and billing procedures and bility is essential changed in ways that affect the distribution the conflicting rules and regulations over to both users and of investment. Expenditure for research and relatively short distances. As discussed in providers of development—by long-distance carriers, by chapter 5, they often are even more eager for international RBHCs, and by telecommunications equip- liberalization of telecommunications mar- services. ment manufacturers-is far lower than that kets within Europe than they are for the end of European counterparts. This is a sig- of remaining restrictions on market entry of nificant concern, but R&D investment, al- U.S. providers. though low, cannot be conclusively shown to U.S. carriers want broader access to Euro- have declined since divestiture in 1984 or in pean markets, but they fear that they could be the period of high foreign investment begin- hurt by multilateral trade negotiations that ning about 1988. (See chapter 9.) result in the loss of some restrictions on Available time-series data are inadequate foreign telecommunications firms entering for making conclusive statements about the U.S. market, without assuring the full either a continuing decline in investment or dismantling of foreign state telecommunica- causal relationships between high foreign tions monopolies that exclude them from investment and low domestic investment. much of the European market. Some believe This issue is potentially very important. that they might fare better under bilateral Investment trends, both in infrastructure and than multilateral negotiations. However, since in research and development, should be each European country is a much smaller carefully monitored by state regulators, the market than the United States, most would FCC, and congressional committees.7 prefer a multilateral agreement. The interests of providers and users also INTERNATIONAL CARRIERS AND USERS HAVE DIF- diverge with regard to network interconnec- FERENTPERSPECTIVES ON COMPETITIVENESS AND tion and telecommunications standards. (See TRADE POLICY ISSUES. chapter 2.) Both carriers and users give lip Accustomed to the expansive domestic service to the ideals of global interoperabil- market and relatively homogeneous regula- ity and international standards. However, tory environment in the United States, Amer- telecommunications companies have strong

c According to the U.S. Telephone Association, t he value of U.S. carriers’ current plant grew only 3 percent from 1980 to 1989 (in 1980 dollars). From 1981 to 1989, there was shrinkage or no growth in value (i.e., an increase of 1 percent or less) in 5 of the 9 years. The value of annual construction, in 1980 dollars, decreased 40 percent from 1980 ($21.2 billion) to 1989 ($12.6 billion). In 8 of the 9 years following 1980, construction declined from the previous year or was stable in value (increasing 1 percent or less). FCC figures, for reporting carriers only, indicate that from 1985 to 1989, the value of gross plant grew by 6 percent (in constant dollars) but it did not increase from 1987 through 1989. Each year from 1986 through 1989, the value of annual construction declined from 2 to 10 percent over the preceding year (from S1 5.1 billion in 1985 to $12.3 billion in 1980 dollars). Annual revenues also declined by 3 percent in constant dollars from 1985 to 1989. 7 This will not be possible without requiring some standardized reporting of data by the industry, but the Page 10 paperwork burden would be very light since the data is well known to the corporations. Exporting Telecommunications Services to Europe

reservations about traditional international initiated and consistently pushed for recog- standards-setting bodies and procedures, and nition of services as tradable entities, for tend to cling to proprietary protocols and the which terms of trade could be embodied in use of specializcd interconnection technol- bilateral and multilateral treaties and should ogy to achieve interoperability. Users, how- eventually be included in the framework of ever, generally want international standards the international General Agreement on Trade that will give them broad choice in using and and Tariffs. In the current Uruguay Round of combining networks, customer-end equip- GATT negotiations, a “Telecommunica- ment, and services from a variety of vendors. tions Annex’ has been tentatively agreed on, The emphasis now being given by the pending acceptance of an overall trade agree- European Community to the development of ment (which may now be receding into the communitywidc telecommunications stand- distance). The annex sets out the rights of ards may put U.S. telecommunications firms users and services providers to network at a disadvantage both in gaining full access access, interconnect ion, and transparency of to an integrated European market, and in terms and tariffs. influencing international standards develop- The U.S. negotiating position for the ment. Some ad hoc, specialized standards Uruguay Round and its Telecommunications consortia are successfully pulling together Annex was worked out by USTR in consul- manufacturers, services providers, and users tation with Federal agencies and representa- to develop and implement standards in a tives of carriers, corporate telecommunica- reasonable time frame, but many tensions tions users, and labor groups. Because the remain in the cumbersome U.S. standards- responsibility, and therefore the constitu- setting process.8 ency, of USTR is very broad, cutting across Interoperability is essential to both users all industry sectors, it is a hospitable forum and providers, and while it can be achieved for large corporate users of telecommunica- by alternative strategies, the United States tions and is especially attentive to their cannot by itself dictate either the path to concerns. Corporate users reinforce USTR’s achievement, nor the architecture that even- focus on unfettered access to services and tually determines interoperability. More lead- unlimited network interconnection, but are ership by the U.S. Government may, how- concerned that USTR may not have pushed ever be necessary to assure this interopera- vigorously enough for open markets in bility, Europe. US. telecommunications firms are concerned about the degree to which the U.S. INTERNATIONAL TELECOMMUNICATIONS POL- domestic telecommunications market may ICY HAS BEEN THOROUGHLY SUBORDINATED TO be “locked open” to EC firms by GATT, TRADE POLICY. ACCESS TO FOREIGN MARKETS IS while the EC nations continue to protect their NOW THE ONLY CLEARLY ARTICULATED GOAL. national monopoly carriers by reserving U.S. trade policy is focused tightly on free large segments of the telecommunications trade and open markets. The United States market to them. (The GATT principle of

8 U.S. Congress, Office of Technology Assessment, G/oba/ Standards: Building E?/ocks for the Future, TCT-512 (Washington, DC: U.S. Government Printing Office, March 1992). Page 11 us. Telecommunications Services in European Markets

national treatment would assure only that distinctions between public and private net- foreign firms have equal treatment with works and between basic and enhanced national firms-who may not be allowed to services. Trade agreements based on distinc- compete with the national carrier.) The tions that are already becoming obsolete rough consensus that was hammered to- cannot be enforced or adhered to in the long gether to form USTR’s negotiating position term. has tended to erode somewhat over the long The international telecommunications arena course of negotiations and the necessity of is marked by increasing complexity in the compromises among nations participating in nature of relationships among industry par- the international give-and-take. Both U.S. ticipants and between industries and govern- telecommunications firms and users now ments. There are many new players— tend to argue that a‘ ‘bad’ GATT conclusion wireless communications companies, resell- will be worse than no agreement at all. ers, private network operators, value-added service providers—in markets previously U STR NEGOTIATING POSITIONS ARE BEING UN- dominated by single national firms. National DERMINED BY INSTITUTIONAL AND TECHNOLOGICAL carriers are for the first time competing with DEVELOPMENTS. each other in global markets and at the same The negotiating positions used by USTR time are partnering in joint ventures. Na- in multilateral and bilateral negotiations in tional authorities are struggling to develop many regards rest on traditional distinctions transparent regulations where before they between public and private networks, be- acted by fiat. Governments are struggling tween network operators and resellers, be- both to gain the advantages of competition tween competing technologies, and between for their consumers and corporate users, and basic and enhanced communication services. to protect their national carriers and national Many of these distinctions have already been blurred by network interconnection and ca- equipment manufacturers. pacity resale. They are rapidly being chal- Even as the Uruguay Round labors toward lenged by clearly identifiable technological a conclusion after repeated suspensions and Trade agreements trends and by the innovative services that extensions, the future of multilateral trade that distinguish they make possible. The development of regimes is being questioned because of the “basic” from “intelligent networks,’ in which program- coalescence of regional trading blocs and “enhanced” mable logic and customer databases are waves of political change and restructuring services will be distributed throughout the system and linked that increase the difficulty of concluding undercut by by a common packet-switched signaling stable trade agreements. It is unlikely, neverthe- changing technology system, as described in chapter 2, allows less, that the tradability of services, includ- and industry network services to be thoroughly custom- ing telecommunications services, will ever restructuring. ized. This leads to pervasive commingling of again be questioned. A series of bilateral and carrier-provided and user-provided network regional agreements, most recently the North facilities, logic, and databases. These tech- American Free Trade Agreement (NAFTA), nologies and services make it both difficult have codified principles that have reached and ultimately unproductive to maintain widespread agreement. (See chapter 7.)

Page 12 Exporting Telecommunications Services to Europe

— Carriers :,., : Interexchange carriers Figure 1-3. / Enhanced” Local exchange carriers:1 Us. ?$wvkM Telecommunications . . . . providers \ \, U.S. Chamber ‘1 “~ of Commerce I Po/icy Structure , !--- ———----- ~ 1 -- -7 Alternative> ‘+, ‘,_-I , us. co”rlcll 1..-.. , ‘ ‘+ \\ \\ for Internat’1. //’ ‘ / access / providers ‘“~ \,,Buslness,/;~.-’ / x., \ ,./ ,/

FEDERAL GOVERNMENT ➤ . –7 ––—– – –.– Schools, hospitals

/“ L_—–&- Nat’l. Assoc. of ‘i Consumer (Regulatory Uttllty ‘ group Commlssloners ‘ representatwes / \

Small businesses State utility Resldentlal commissions Congress (Senate in italics) customers Telecommunications — ------A L---- JEaE._.. L Resellers u lndlvldual firms c1

Corporate users

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 Us. Telecommunications Services in European Markets

F ORMAL RESPONSIBILITY FOR DEVELOPMENT OF some coherent and comprehensive policy U.S. TELECOMMUNICATIONS POLICY IS DISPERSED, that bridges the interests of carriers, services When telecommuni- AND COORDINATION MECHANISMS ARE WEAK. providers, and large business users. cations policy is Policy concerning international telecom- The National Information Infrastructure subordinated to munications, until very recently, was an advocated by the present Administration trade policy, incidental byproduct of domestic telecom- could also become an appropriate model for other national munications policy. For over a decade, the the evolution of a global information network— goals and telecommunications industry has been al- if the United States takes the lead in develop- interests may lowed to frame and articulate the goals of ing and coordinating international telecom- be ignored. telecommunications policy with relatively munications policy. U.S. telecommunications little effective counterbalance from the exec- policy should incorporate the national inter- utive branch of government. The diversity of est in global networks; for example, the “the telecommunications industry’ means national interest calls for network interopera- that there are many conflicting interests and bility and service for small as well as large perspectives, but a narrow range of policy users. At present, there is no such policy, no goals on which to agree. Domestic telecom- effective coordinating mechanism, and no munications policy has since 1978 focused leadership in articulating the national inter- almost exclusively on the divestiture of the est in telecommunications. Bell system and deregulation. The National Telecommunications and The divided and dispersed structure of Information Administration (NTIA) is em- Federal responsibility for telecommunicat- bedded in the business-oriented Department ions policy contributed to this outcome. of Commerce, which has many competing Organizational fragmentation has some ad- constituencies and has in the past had vantages—it provides alternative fora for relatively weak and diffuse channels to competing interests to be heard and resolved. Administration decisionmakers. NTIA is The fragmentation may also be necessary, strongly oriented toward representing carri- since there is a role for both a policy- ers, but tends to be paralyzed by the often development organ within the executive conflicting interests among local exchange branch and an independent regulatory com- carriers and interexchange carriers. mission outside of Administration control. The FCC Common Carrier Bureau has Since their immediate goals are sometimes until the last 2 years tended to give little divergent, there is probably also a need for a attention to international issues, The FCC coordinator or mediating mechanism, espe- Office of International Affairs is relatively cially in dealing with international tele- new and has primarily an internal coordina- communications, where it is desirable that tion function. The FCC, as an independent U.S. policy be articulated clearly and un- regulatory agency, is outside of and some- ambiguously. There is such a coordinating times at odds with Administration poli- mechanism located somewhat obscurely in cymaking. This often provides a valuable the Department of State—the Bureau of ‘‘check and balance’ on policy develop- Communications and Information Policy— ment, but the Commission sometimes acts but for true coordination there needs to be unpredictably, in violation of U.S. trade Page 14 Exporting Telecommunications Services to Europe

policies and its own standing rules and office within another Bureau. To make CIP policies. 9 an effective tool for coordination of telecom- The State Department’s Bureau of Com- munications policy would require restructur- munications and Information Policy (CIP) ing, refunding, and restaffing. It would also has the legislative mandate to coordinate require a hospitable environment within the telecommunications policymaking among State Department, one that recognizes the and between FCC, NTIA, and other execu- essential role of telecommunications in gov- tive agencies. The selection of the State ernance and in the conduct of foreign affairs. Department as the site for coordination of telecommunication policy represented first E FFECTIVE RESPONSIBILITY FOR INTERNATIONAL the perception held by the Administration at TELECOMMUNICATIONS POLICY HAS FALLEN TO that time that telecommunications is primar- USTR, A TRADE AGENCY. THIS CONSTRICTS AND ily a service for multinational corporations DISTORTS THE FORMULATION OF TELECOMMUNICA- engaged in world trade, 10 and secondly a way TIONS POLICY. of extending congressional oversight of The formulation and implementation of telecommunications trade issues.11 CIP has international telecommunications policy, be- however recently been largely ineffective cause of the 1988 Trade Act, has come to be both in its coordinating role and in contribut- dominated by trade negotiations. The United ing substantively to development of tele- States Trade Representative has in effect communications policy, functioning largely played the role envisioned for CIP, USTR as a clerical facilitator for industry/gov- consults other agencies in depth and at great ernment participation in international meet- length, but when strong interagency differ- ings. Its effectiveness may be further less- ences arise, USTR generally prevails, espe- ened by a current State Department plan to cially since telecommunications agencies do degrade it from Bureau status to that of an not have a seat on committees that resolve

9 For example, the FCC allowed Telefonlca of Spain to buy the Puerto Rico Telephone Co., although U.S. telecommunications firms do not have full access to Spain’s market. The Commission also did not impose any conditions related to Telefonlca adopting cost-based accounting rates, as called for m FCC’s CC Dec. 90-337 (Phase 11) (Nov. 5, 1992). The FCC has established “benchmark” U.S.-Europe accounting rates of $0.46 to S0.78, to be achieved within a year; existing accounting rates with Telefonica are $1.26 to $1.96. See ch. 3 for explanation of the accounting rate issue. ‘“ It was, however, the preceding CarterAdmmistration that in 1978 removed the Office of Telecommunications Policy from the Executive Off Ice and placed it in the Department of Commerce. This appeared to signal a change In perspectives, from viewing telecommunications as a powerful tool for governance and social pollcy Implementation, to an industry that produces goods and services for business users. 1‘ Communlcatlons primarily falls within the jurisdiction of the Senate Committee on Commerce, Science, and Transportation (Subcommittee on Communications) and the House Committee on Energy and Commerce (Subcomm lttee on Telecommunicate Ions and Finance). Ot her comm it tees, including for example the Senate Committee on Finance (Subcommittee on International Trade) and House Committee on Foreign Affairs (Subcommittee on International Economic Policy and Trade), are concerned with international trade Issues. The House Committee on the Judiciary has played a strong role in telecommunications issues, having responsibility for “protection of trade and commerce against unlawful restraints and monopolies. ” The Iocatlon of the Coordinator in t he State Department assures that trade and foreign affairs committees will have some oversight over telecommunications. Us. Telecommunications Services in European Markets

these differences. In the future, however, dominated markets. GATT agreements could formal trade negotiations may be less critical supersede provisions of domestic law and than technology and users’ needs in deter- regulation. Some stakeholders assert that mining the competitiveness of U.S. telecom- trade negotiators do not have full under- munications firms in foreign markets. The standing of highly technical telecommunica- industry structure, investment patterns, re- tions issues, and work on the basis of search expenditures, and risk exposure can- existing distinctions and categories that will not be effectively monitored by trade negoti- be rapidly made obsolete by already emerg- ators. ing technological changes. The central role of USTR in international telecommunications policy has had some U.S. POLICY FOR INTERNATIONAL TELECOM- advantages: it has imposed a degree of unity MUNICATIONS LACKS AN INFORMING VISION. on representation of U.S. positions in global The fragmented structure for telecommu- issue resolution; it has kept telecommunica- nications policymaking and the narrow focus tions trade issues under scrutiny by several of both domestic and international telecom- congrcssional committees with a broad per- munications policy has allowed policy for- spective on global economic trends: and it mulation and implementation to be driven by has given increased representation and im- the needs of a relatively few private sector portance to large business users of telecom- stakeholders (carriers, equipmcnt manufac- munications. to whom USTR has built turers, certain large business users), with strong bridges, while telecommunications government taking a hands-off position. agenies appear to listcn more attentively to Communications is not merely a utility for the major carriers. However, the dominance facilitating business competitiveness or a of USTR further reinforces the compression tradable commodity. Communications is also of policy formulation into a single dimen- a basic prerequisite of effective democratic sion, the opening up of foreign markets. The governance, an essential foundation for sci- established relationships and operating pro- entific endeavors, a channel for conducting cedures between the telecommunications foreign relations and cooperative activities, agencies (NTIA, FCC, and CIP) and interna- and a critical element in national security and ational institutions such as the International global peacekeeping. Teleccommunications Union (ITU) are being For over a decade, however, the national superseded by trade negotiations, and some administration has largely renounced any historical principles and procedures for co- voice in determining the structure, invest- operation and control may be effectively lost ment strategies, and technology develop- as a result. ment policies of this core industry. For The dominant role of USTR is also subject example, Europe and the United States to other criticism. Some communications increasingly tend to differ in the approach to industry representatives fear that subjecting network architecture. In Europe, relatively telecommunications to broad trade princi- more centralized ‘‘intelligence (computeri- ples may result in the asymmetrical opening zation) is integral to the network, while in the of U.S. markets without providing equal United States there is a tendency to use more access for U.S. firms to foreign monopoly- sophisticated termiinal equipment, owned by Exporting Telecommunications Services to Europe

the user. There arc many advantages to the ciples, ignoring special characteristics of latter approach, but on the other hard, telecommunications services; building advanced capabilities into the net- ■ Continuing confusion and conflict over work may facilitate uses of telecommunications the question of what the national telecom- by middle-sized and even small firms that munications infrastructure, and its con- could not afford the specialized customer nections to global networks, should be premises equipment. In a global economy, like at the beginning of the 21st century. the competitiveness of smaller firms may turn out to be important; in addition, smaller firms have a better track record in the United /+, States of creating jobs than have large corporations. Telecommunications policy, not trade policy, is the appropriate vehicle for considering strategic alternatives of this kind. Notwithstanding the often-conflicting ini- tiatives of congressional committees and attempts by a few congressional leaders to put forward a vision of the possibilities of b ‘electronic highway s,’ domestic telecom- munications policy has largely been articu- lated by the judicial branch of government. CORPORATE LEADERS GATHER IN A FIELD OUTSIDE DARIEN CONNECTICUT, WHERE No agency, including the FCC as an independ- ONE OF THEM CLAMS TO HAVE 5EEN THE INVISIBLE HAND OF THE MARKETPLACE. ent regulatory agency, has attempted to modernize or translate the old objective of DRAWING BY DANA FRADON, © 1992, THE NEW YORKER MAGAZINE, INC “Universal Service” in terms of new and Under the present, dispersed policymak- advancing technologies. ” Existing policy goals ing structure, attention to such aspects of remain narrow’: progressive deregulation at international telecommunications may not the domestic level; opening of foreign mar- be adequate. kets at the international level. This may result in: U.S. PARTICIPATION IN EUROPEAN MARKETS FOR Neglect of goals othcr than market access, TELECOMMUNICATIONS SERVICES IS IN ACCORD such as the most efficient interconnection WITH U.S. ECONOMIC INTERESTS AND SUPPORTS of networks and developmcnt of a full U.S. TRADE GOALS. spectrum of services for small business Export of services is now, and increas- and residential consumers as well as large ingly in the future, important to the U.S. businesses; economy. Concern about the Unitcd States’ Inattention to costs and risks such as long-term balance of payments has mostly weakening of regulated domestic subsidi - focused on the continuing trade deficit in aries or disinvestment at home; manufactured goods; but services exports are Complete subordination of telecommuni- now more than one-third as large as our cat ions policy to more general trade prin - export of goods and growing faster, with Page 17 U.S. Telecommunications Services in European Markets

Europe as the primary foreign market. The rates. A carrier originating an international United States has a healthy trade surplus in call pays a foreign carrier to route the call to services, partially offsetting the troublesome its final destination. Countries from which merchandise trade deficit. The increased more calls are made thus see a net outflow of export of enhanced telecommunications serv- payments. More international calls are made ices and closely related information services from the United States than are made to it, can add significantly to this surplus. (See because of our large industrial base, large chapter 3.) population, and high per capita income, and Telecommunications and information serv- because we enjoy much lower communica- ices are a relatively small part of all U.S. tions tariffs and greater access to useful services exports--only about 2 percent-but services than most countries. they hold the opportunity for strong growth. It is important to correct the accounting U.S. firms have a competitive edge in rate deficit, but this will require both renego- delivering telecommunications and informa- tiation of accounting rates to reflect real costs tion services because of their experience in (which will mean lower accounting rates), competitive markets and in developing inno- and lower customer charges in foreign coun- vative, user-tailored services based on ad- tries to reduce the asymmetry in telecommu- vanced transmission and network technolo- nications usage. But the accounting rate gies. Other U.S. firms operating in or selling deficit can also be partially counterbalanced to Europe benefit by the availability of U.S. by growth of the still-small U.S. export of telecommunications services. (See chapter 5.) The sale of telecommunications services enhanced services (in which we now have a overseas can also stimulate foreign demand healthy trade surplus), with the additional for U.S. telecommunications and computer benefit of supporting the competitiveness of equipment. other U.S. firms in Europe. (See figure 1-1.) In contrast to the overall surplus in trade The success of U.S. telecommunications of services, the United States now has an and information services firms in interna- overall trade deficit in telecommunications tional markets is important to the U.S. services. (See figure 1-4.) This deficit, how- economy. Most research on the employment ever, is not due to lack of competitiveness, effects of trade has dealt exclusively with but to the excellent performance of U.S. export and import of merchandise, but avail- telecommunications providers in compari- able projections indicate that exports of son with European telephone systems. The services create U.S. jobs and that these jobs deficit results from international accounting have relatively higher pay than other services

12 Accounting rates are discussed further in chapter 3. They are negotiated between carriers and are Page 18 independent of customer charges and of actual costs of message delivery. Exporting Telecommunications Services to Europe

13 jobs. However, there is relatively little ~ Billions of minutes ~“ evidence for this proposition, probably be- ~ From United States cause the concepts of ‘trade in services’ or 6 To United States b ‘services exports’ are themselves new and because statistics on trade in services are inadequate (see chapter 8). 4

Some services, for example financial serv- r-l nl ices, have been directly exported for centu- 2 ries (e. g., bills of exchange), but the direct electronic export of enhanced services has 0 burgeoned only recently.15 Most telecom- munications services are delivered overseas Net settlements ($ billions) –—- > through direct overseas investment in sub- I ‘ - \ sidiaries and joint ventures. It is difficult to -4 1 I I 1 1 1 1 I judge the impact of such corporate overseas 1975 77 79 81 83 85 87 89 91 investments on U.S. income, jobs, profits, SOURCE FEDERAL COMMU~lCATIONS COMMISSION, 1992. and general economic welfare. Offshore operations financed by direct investment U.S. parent firm increase the value of the Figure 1-4. generally create jobs and secondary income domestic corporate enterprise, and arc as- Telecommunications in the foreign country, not in the United sumed to strengthen its growth prospects and Traffic Balance States, but profit repatriation must also be stimulate domestic employment and income. NOTE Does not Include traffic with taken into account. Profits flowing back to a Foreign services firms entering our markets Mex!co and Canada.

‘3 For example, the Department of Commerce has estimated that 7.2 mllllon U.S. jobs were directly or Indirectly supported by merchandise exports in 1990. This study included some service-seetor jobs indirectly supported by merchandise exports, but It expressly did not include jobs supported by exports of services. U.S. Department of Commerce, U.S. Jobs Suppoded by Merchandise Exports, April 1992. The Office of the U.S. Trade Representative matched this data, dusaggregated by industry, with average hourly wage data supplled by the U.S. Bureau of Labor Statistics, and concluded that the average hourly wages for services jobs wlthln merchandise-export Ing firms were nearly 20 percent higher t han serwces jobs In nonexporting manufacturing firms, USTR’S analysls Included a comment that “there is every reason to believe that the same pattern of higher wages In companies exporting services would also prevai l.” See USTR, “U.S. Exports Create High-Wage Employ merit,” press release, Washington, DC, 1992, p. 4. ‘4 A newspaper projection pointed out that If U.S. export of services grows between 9 percent (recent annual growth In the domestic serwces sector) and 14 percent (recent growth In services exports) it will reach an annual total of between S206 and $257 bi Ill on by 1996, and t he statement was made that this could create 5 million new jobs. Stephen Klndel, “lnwslble Trade,” Fmanclal Wodd, Oct. 13, 1992, pp. 56-69. According to Klndel, t he employment est I mate was based on the number of jobs that USTR estimates are created by Increases In U.S. exports of goods, but this number was arbitrarily reduced by half on the grounds t hat the serwces jobs would be, on average, more highly skilled and highly paid than most manufacturing jobs. ‘5 During thesame period, telecommunications companies—includlng U.S. Iong-dlstance carriers and local exchange carriers—have been undergoing rigorous “downs lz[ng, ” butt hls job destruct Ion does not appear to be tied to concurrent overseas expansions. Similarly, there IS ewdence of some mlgratlon of data processing and other information Industry employment to offshore Iocatlons, but no evidence that this IS related directly to export of services. Us. Telecommunications Services in European Markets

Figure 1-5. A comparison of a 5-minute, peak-time call between the United Stated and Germany, 1991

Accounting and n rate Collection Rates for International Telecommunications Traffic

NOTES: The accounting rate with Germany In 1992 was 0.8 sp~ clal drawing rights or $1.14 (FCC, Stat6tlcs of Commumcatlons Com- mon Carriers, 1991 /1 992 Ed.). The collection rate (I e., what the caller IS charged) for the U S.-tmGermany

call IS calculated as $1.77 [for the 1 Inltlal m mute] + 4x$1 .09 -.$6.13 0 1 2 3 4 5 6 7 8 9 10 (FCC), The collection rate for the Dollars Germany -to-U.S. call IS derived from 5x$1 88 (TeleGeography 1992, in- ternational Inst{tute of Communica- tions). The costs to the carriers are ❑ Amount paid to the correspondent carrier to complete the call, as per the accounting rate estimated at SO.15 per m Inute at both the US and German end; thm number IS conservatwe. ❑ Amount retained by operator originating the call Ez2 Estimate of carriers’ costs

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993. under trade agreements also create jobs here. global operations. In some businesses, too, Unfortunately, economists have not devel- access to customers with different prefer- oped a credible way to track and calculate the ences, markets with different standards, and net benefits of these competing effects, researchers with a wide variety of ap- especially for services firms. 16 proaches to problems is an asset, In such In some industries, lower costs of produc- industries, foreign investment is likely to tion in foreign markets—often, lower labor result in a bigger pool of investment capital costs-have caused offshore facilities to for all the company’s establishments.lg displace plants in the United States. But in Those industries where offshore opera- other industries, particularly those with global tions are likely to displace domestic ones sales and increasing “returns-to-scale,’ 17 consist mainly of commodities like wheat, the most able firms are those with extensive textiles, apparel, and lumber.19 In the other

‘G James K. Jackson, “American Direct Investment In the European Community,” Congressional Research Service Report for Congress, June 9, 1992. 17 “Increasing returns to scale” means that, within a generous Iim it, the more the company procluces of its product the cheaper the costs of production are, per un[t, and the better off it IS, competitively. ‘a U.S. Congress, Office of Technology Assessment, Competing Economies: America, Europe, and the %ciflc Rim, OTA-ITE-498 (Washington, DC: U.S. Government Printing Office, October 1991). 19 These goods can be produced by well-known and stralghtfon+vard methods, usually in establishments Page 20 which, when sized to be efficient, add no more than small increments to global production. Exporting Telecommunications Services to Europe

category are industries where the most expe- sources, and U.S. regulatory policies. The rienced and large-scale producers are the strategies being used by U.S. telecommuni- most efficient and innovative, both because cations firms to compete in the European of increasing returns-to-scale and because of market arc described in chapter 4. the enormous amount of know-how and technology embodied in the production and Conclusions and policy options delivery of the output. The telecommunications U.S. telecommunications firms and en- services industry is in this category. Increas- hanced-services providers are well positioned ing returns-to-scale was the justification for to compete in European markets for services, its traditional status as a regulated monop- to the extent that those markets are now open oly. Provision of high-quality services is to them. A combination of technology, highly dependent on vast inputs of technol- market forces, and institutional pressures is ogy and decades of accumulated know-how. converging to force open much of the Limits on the ability of the telecommuni- telecommunications services market that is cations industry to invest in and serve now closed to all competition-the opportu- fast-growing, complex foreign markets would nity to bypass monopolistic public telephone likely prove a disastrous competitive disad- operators has been thrown open. vantage. The speed of innovation and the Congress need do little to enlarge the shortening half-life of products is a powerful competitive opportunities for U.S. telecom- argument for global operations. Slower mar- munications services providers in Europe, ket growth in the United States would not except for encouraging the President and continue indefinitely to encourage rapid USTR to continue to push for the liberaliza- innovation, while in faster-growing foreign tion of European telecommunications mar- markets there will be the opportunity to kets, and to support efforts of the European experiment fruitfully with different technol- Community to establish a single European ogy, different demands, and different stand- market for telecommunications. No other ards. actions are clearly needed. There is a strong The United States is now operating in a likelihood that European markets will con- global economy. It must begin to balance its tinue slowly to liberalize and move toward imports with exports-of services as well as greater integration. goods. Telecommunications equipment and There are two other unresolved issues that services is a sector in which U.S. firms excel. Congress may want to address:

The European market for telecommunica- B The risk of disinvestment or inadequate tions services is both growing and moving investment in domestic infrastructure as a toward liberalized entry. The U.S. Govcrn- result of overseas investment by the major ment can encourage and hasten this in- long-distance carriers and the holding creased opportunity through trade negotia- companies that include regulated local tions and other actions. Whether U.S. firms exchange carriers; and can remain competitive in this market will ■ The weak and ineffectively coordinated also depend on other factors: technological Federal organizational structure through superiority, management skills, access to which national telecommunications pol- affordable capital, well-trained human re- icy is developed and implemented. Page 21 Us. Telecommunications Services in European Markets

The Office of Technology Assessment a consistent pattern or trend of disinvestment found only mixed and inconclusive evidence appears, Congress and/or the states can then for inadequate or declining investment in consider legislative remedies, including de- domestic infrastructure. There may be no regulation, redefinition of depreciation rates, significant trend in that direction; yet if there tax inducements, or tax penalties to correct is, the long-term consequences would be the situation. serious. In order to resolve this question for State regulators are vitally concerned with purposes of future oversight and policymaking, this issue, but they may lack the resources Congress has options: and the geographical span of authority to ■ Congress could instruct the FCC to moni- track investments. Congress may therefore tor and report on all telecommunications wish to ask the FCC to report regularly on activities and investments overseas, on the patterns of investment. source of capital for these investments, In order to encourage the development of and on the financial condition and re- more comprehensive, coherent, and vision - sources of carriers undertaking such activi- ary international telecommunication.Y pol- ties. icy, Congress may wish to consider.. An appropriate monitoring system would Declaring goals and priorities for interna- also require reporting, in standardized tional telecommunications development format, of annual investment in infrastruc- and deployment that include, but arc not ture modernization and in research and limitcd to, export and trade goals: development. Consulting with the Administration to call D Congress could request consultation and attention to the importance of clear defini- cooperation among State regulators tion and location of responsibility for through the National Association of Regu- executive policy articulation and imple- latory Utility Commission (NARUC), with mentation and to cooperatively create a support from the FCC, to develop joint mechanism for consultation and coordina- strategies for protecting consumer rates, tion between executive agencies and FCC; requiring minimum infrastructure invest- Mandating a restructuring of the poli- ment, and other protective measures. cymaking structure, possibly The publicly available data about carrier -creating a new Office of Telecommuni- investments in infrastructure modernization cations Policy within the Executive or in research and development is not Office, or adequate to allow decisionmakers either to —restructuring, refunding, and restaffing accept or to reject a trend toward ‘ ‘disinvest- the coordinating function/position within merit. ’ The first step, therefore, is to create the Department of State. and a monitoring system that can track both —limiting the responsibility of USTR by investment in plant and equipment and setting congressional policy guidelines investment in research and development.20 If for or limitations on bilateral and multi -

20 Eight major carriers told the Office of Technology Assessment that they strongly object to the concept of monitoring as an additional paperwork burden. Although any well-run corporation has such Information for Page 22 internal decisionmaking, it is jealously guarded so t hat it will not fall into t he hands ofcompet Itors and crit ics. Exporting Telecommunications Services to Europe

lateral negotiating positions with re- of the effects of technology on the Nation spect to telecommunications. and on relations between nations, and has not afforded much influence or prestige to its There is a national The three primary options (congressional interest in the bureaus that are concerned with science and restatement of policy goals, active consulta- health, structure, and technology. A stronger position and voice tion and collaboration with the Administra- operations of the within the Department, which can only be tion, and strengthening the policy implementa- telecommunications effected by those heading the Department, is tion structure) are not mutually exclusive, industry that a necessary prerequisite for making CIP but could be strongly reinforcing. The most includes, but is effective. However, Congress can through its active of these options, organizational re- not limited to, funding and oversight roles encourage this to structuring, involves alternative approaches. competitiveness in Creating a small policy office within the happen. world markets. Executive Office would signify the impor- While the United States Trade Representa- tance of telecommunications and the recog- tive is also an executive branch office, nition that there is a national interest in the restricting and directing the USTR role in health, structure, and operations of the indus- telecommunications policy fomlulation would try that is responsible for this essential be an appropriate reassertion of Congress’ infrastructure. It would provide a voice in primary responsibility for U.S. trade policy, top-level deliberations. However, this action trade relationships, and conduct of other, to be effective must reflect the willingness nontrade, international relationships. Stating and intent of the Administration to make use such policy guidelines could take the form of of such an office. Past experiment has shown a general declaration of telecommunications that additions to the Executive Office that are policy goals and need not unduly limit trade forced on an unwilling President accomplish representatives in active negotiations any little. more than does any prior fomlulation of Revalidating and reinvigorating the role negotiating positions. The difference is that of the State Department’s Bureau of Com- these positions have recently been formu- munications and Information Po] icy reas- lated entirely within USTR, with little prior serts the interests of a number of congres- congressional instruction, or discussion. sional committees and subcommittees in international telecommunications. It would, Uniformity, single-mindedness, and a nar- however, also require the assent and collabo- row focus are not desirable in formulating ration of the Administration and Secretary of international telecommunications policy, but State and a reversal of current plans to ultimately some consensus and concerted downgrade the Bureau. Historically, the representation is needed in national and Department has shown little understanding international decisionmaking.

Page 23 Technological Trends and Issues 2 CHAPTER

E MERGING TECHNOLOGIES AND INNOVATIVE, compressing information signals into ever- SOFTWARE-BASED SERVICES are undermining smaller bandwidths. The second provides some U.S. telecommunications regulations both vastly improved transmission quality and policies. Intelligent networks and information- and the necessary transmission capacity for based services will make it increasingly bandwidth-intensive services that combine difficult to draw clear boundaries between voice, data, and video signals. public networks and private networks and between regulated ‘‘basic’ telecommunica- Changing technology tions services and ‘‘enhanced’ services. Eight broad technological trends should Such technological change may make the be noted: negotiating positions developed by the Of- conversion from analog to digital trans- fice of the United States Trade Representa- miss ion, Technological tive (USTR) irrelevant by the time they arc common channel signaling, trends will increase embodied in treaties, trapping the United unbundling of stored-program control need for international States in agreements no longer in its best switching functions, standards, and will interests. These technological trends will advances in transmission systems, challenge the both increase the need for international advances in digital multiplexing, viability of traditional standards, and at the same time challenge the advances in packet switching, standards processes. viability of traditional means of developing mobile communications, and standards. greater functionality in terminal equip- The broad technological trends that will ment. shape the networks of tomorrow stem from three fundamental developments: 1 ) the The most basic and important of these progressive increase in processing power of trends is the progressive conversion from microelectronnic circuitry, 2 ) the continuing analog to digital systems. The great ad- improvement in fiber optics, and 3) fiber vantages arc better performance, easier optics: extraordinary reduction in cost. The multiplexing, 2 easier encryption, easier sig - first provides the necessary processing power naling, better monitorability of performance, for advanced switching systems and for integration of switching and transmission,

NOTE: Much of the material In this chapter is based on an Office of Technology Assessment contractor report: Hatfield Associates, Inc., Advanced /ntematkma/ Te/ecommunicatbns Technologies and Serwces, December 1992. 1 In an analog system, the signal weakens and becomes corrupted by noise and distortion as it moves along a wire, unless It IS regularly boosted by am PI ifiers. But am pllflers cannot distinguish signal from noise, and they boost both, while adding some additional noise and distortion. These distortions accumulate over a long transmission path until the desired signal may become almost unintelligible. In a dtgltal system, regenerators are used along the path rat her than am pl If Iers. Regenerators merely detect whether a pulse IS present and, If so, they generate and send on tot he next regenerator a new (noise-free) pulse. The same sequence of pulses presented at the beginning IS delivered at the end without weakening and without the accumulation of nose and distortion.

z Multlplexlng IS the process of combin[ng multiple signals into a single channel for transm Isslon over a Page 25 common faclllty, e.g., a Iightwave or radio carrier, thus Increasing effect!ve capaclt y. us. Telecommunications Services in European Markets

and accommodation of other services.3 Com- does not consume conversation capacity on pression techniques are steadily reducing the the trunk. The network can ‘ ‘look ahead” to number of bits per second that must be see if lines or trunks are busy before setting transmitted to reproduce a given signal, and up a call on the circuit-switched network, advanced modulation techniques allow higher and then pick a route through the network bit-rates to be transmitted per unit of band- that minimizes congestion. These improve- width. (See figure 2-1 and 2-2. ) ments become even more powerful when A second important trend is common enhanced computer processors and data- channel signaling, or separating voice traffic bases are added to common channel signal- from signaling. Signaling is the information ing to create ‘‘intelligent networks. associated with setting up, maintaining, and A third trend is toward unbundling of stored-program control switching. Modem computerized or stored-program circuit b switches are composed of two basic parts— the matrix where physical connections arc c made between circuits, and a processor that o contains the logic that controls the switch- ) 11’U”Y ( ))))))) ( ing. In early ‘‘stored program control &/ Ampllfler~+ Ampllfler > ~,:,:.:,,,.. ..:?::::::.: .,:,:,:,:: switches, the switch (matrix) and processor ) I At elements were integrated. (In computer terms, / c there was no separation between the “appli- Signal strength rt / cation program’ and the "operating sys- ~ ~ Original signal tern, ’ The customer could not modify the I switch software to create new or changed f’ti } Distofied Signal services-the switch manufacturer had to do ‘pm that, usually with a new switch. SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 Separating the switch control from the Figure 2-1. taking down calls. Until recently, analog lower-level switching functions allows net- Analog Transmission tones were used to convey signaling infor- works to be programmable by a carrier, an mation, which was carried on the same enhanced services provider, or the customer/ NOTE In order to transmit a voice channel as the voice conversation. With end-user. In the case of a public network, a over the telephone network, the soundwaves (a) are converted to a common channel signaling, all of the signal- local switch can suspend an incoming call, corresponding electrcal wave (b) when the waves contact the mouth- ing associated with multiple conversations is look up the called number in a database, and pmce of the telephone handset. The handled on a common packet-switched subnet- route the call to the intended recipient at signal weakens as It travels along the wires of the network, and there- work. Conversation channels are circuit- another number and location (call forward- fore must be ampllfwd at intervals The signal mewtably picks up noise switched, while signaling information in the ing). In a corporate network, a private branch and dwtortton, and this noise and common channel is digitized and packet- exchange (PBX) can be linked to external distortion slncluded with the ongmal sound when the signal IS ampllfled switched. Common channel signaling is computers; calls can be delivered to particu- (c) faster than traditional analog signaling, al- lar corporate agents along with different lowing calls to be set up faster. The signaling screens of information depending on the

3 John Bellamy, Dlgdal Telephony, 2nd Edition (New York, NY: John Wiley& Sons, Inc., 1991). Technological Trends and Issues

Figure 2-2. Digital Transmission

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

...which is 1 . . . encoded as ...and sent as 10000011 n f-l 10000010 J-1 n 10000001 n n 10000000 n 01111111 -J 1 01111110 -1 L 01111101 J L-It 01111100 -r L- 124-- 01111011 ~ 20~8000 second @ L . . . / In a digital system, the soundwave is sampled (a) at sufficiently close intervals (1/8000 of a second) to very accurately reproduce the wave’s shape. The amplitudes of the samples are then quantized (b) -- or given approximate vaIues according to the range into which the amplitude falls. The new signal IS encoded to an 8-character binary format (which permits 256 possible levels) for transmission t/through the network. In this example, the digitized signal would be:

/“” 10000000,01111111,10000000 ,.. (129, 128, 129...) The digital signal is regenerated rather than amplified (as in analog) during transmission; the repeater reads the deteriorating signal (c) and generates a fresh sequence of 1s and 0s (d). / / // —

‘. ~———————- . —————— ~’

“Repeater /) Cr—J—,

Finally, the signnal is converted back into an electrical impulse (e, f) and to soundwaves (g). -—— ——— ,r e I 11I I I Ill -11111 ~ 1- I II ! I I .— ——J ~ I U.s. Telecommunications Services in European Markets

identity of the customer placing the call. This While technological advances have pro- The “Intelligent ccm~putcr/telephone integration is one of the duced significant capacity increases in even Network’ ’-locating most important trends changing telephony. the older technologies such as twisted-pair processors and The “Intelligent Network” is a natural copper cables, the largest increases are databases through- extension of these advances in switching and associated with the deployment of optical out the network— signaling. Computer processors and their fibers or lightwave systems; these systems permits a wide associated databases arc placed in the net- operate routinely at speeds as high as 2.4 variety of work where they can be accessed from the Gbps (billion bits per second) on a single specialized signaling channel. The system uses the fiber. network services, calling and called numbers plus other infor- A family of transmission standards now including virtual mation to handle calls in special ways--e. g., being extensively implemented, called Syn- private networks. to route calls to different locations depend- chronous Optical Network (SONET),4 al- ing on the time of day and/or the originating lows transmission rates in the range of 51 location. Public or private networks can be Mbps (million bits per second) to 2.4 Gbps. reconfigured to reflect changing traffic con- Because SONET uses synchronous trans- ditions or to respond to network failures. An mission, individual channels can be effi- intelligent network can also create software- ciently added or dropped at intermediary defined virtual private networks. nodes without the usc of back-to-back multi- One characteristic of intelligent network plexer. This allows the creation of ring concepts is that the call-handling logic and architectures that can provide added reliabil - databases can be stored at a handful of ity. (See figure 2-3. ) Moreover, SONET centralized locations, to be accessed by a includes special data channels that facilitate large number of switches. This makes it easy various network management functions such to reprogram them, since the software and as surveillance and rerouting from a central databases need be updated only at a limited location. By installing high-capacity facili- number of locations. As a result of these ties to the customer’s premises and using the developments, the logic and data associated advanced network management features of with the handling of individual calls can be these systems, additional or reconfigured optimal] y distributed among customer prem- channels can be provided to the customers ises equipment, the local or metropolitan or quickly, and without an on-site visit by a regional portion of the network, or the technician. Through this ‘preprovisioning, ’ long-haul portion, and linked using ad- a customer can even get additional capacity vanced signaling systems. by directly accessing the network manage- Greatly improved transmission systems ment system—a form of ‘‘bandwidth on arc a fourth broad technological trend. Trans- demand. mission systems for traditional services Packet-switching is another powerful tech- evolved from open wire line to twisted-pair nological trend. The public switched tele- copper cable, coaxial cable, line-of-sight phone network with circuit-switching was microwave, satellite, and optical fiber cable. optimized for voice communications. In the

4 Generally known outside of North America as Synchronous Digital Hierarchy (SDH), the international standard. Technological Trends and Issues

digital mode, it switches 56/64 kbps (thou- Megabit Data Service (SMDS), described sand bits per second) circuits, corresponding below. to the uncompressed bandwidth require- Frame relay utilizes the same type of ments of ordinary voice communications. variable length packets characteristic of tra- For data communications, there are two ditional packet systems, but the individual drawbacks to circuit-switching: the ineffi- packets--called frames-arc relayed through ciency of having dedicatcd connections when the switch in: nodes with no effort to recover traffic is intermittent or “bursty,’ and the from any errors detected. Much of the error constrained 56/64 kbps transmission speed. detection and all error recovery is left to the The lattcr can be partially overcome by terminal devices. Transmission rates in the 1 modifying or redesigning switches to handle to 2 Mbps range arc possible. multiples of the 56/64 kbps rate. (This is Cell relay operates similarly, except that currently being done to achieve speeds up to the packets-here called cells—have a short, 1.5 Mbps. ) A wideband, circuit-switched fixed length, and because of this can be service of this type is appropriate for bulk file switched at extremely high speeds (in the transfers, vidcoconfcrencing, and other ap- plications with relatively constant bit-rates. Traditional packet-switched networks arc effective for handling bursty data, but are ❑: currently 1 i m i ted to speeds of about 64 kbps. Q This is because the packet switch at each network nodc must read the address informa- tion, check the data contained in the packet for errors, correct the errors or request a retransmission, reassemble the packet, and forward it to another node. New technology, known generically as ‘‘fast packet-switching, ’ can reduce these delays. Frame relay and cell relay are two forms of fast packet-switching. Both rely on the SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 fact that modern digital transmission sys- tems have very low error rates compared range of hundreds of megabits per second). Figure 2-3. with analog systems, and the end user’s The expectation is that the high speeds and Multiplexing small delay will allow integrated combina- terminal equipment now has the processing NOTE Multlplexlng IS the process power to correct errors or ask for retransmis- tions of’ voice, data and video traffic to be of comblnlng multlple signals Into a single channel for transmission over sion. Both frame relay and cell relay are handled through a common switch. With all a common facll Ity (e.g , Ilghtwave or the transmitted information divided into radio carrier). Multlplexlng IS used to attempt to improve a situ at ion in which the Increase transm s.slon efffc!ency by ability to transmit information at high speeds individually addressed cells, both variable allowlng mult @e clrcu[ts to be earned by the common facility exceeds the ability of switches to route it. bit-rate (i.e., data) and constant bit-rate (i.e., These technologies have given rise to the voice ) traffic can be switched. While early important developments of Asynchronous applications of cell relay technology are for Transfer Mode (ATM) and Switchcd Multi- data communications, the goal is to extend Page 29 Us. Telecommunications Services in European Markets

the technique to voice and video. In addition, patible with a new protocol known as cell relay works in a synergistic way with Asynchronous Transfer Mode intended for Engineering or SONET, use in switching and transmitting voice, data, economic forces Frame relay is both a technology and a and video simultaneously. are shifting service. It is designed to carry data commu- ATM is the basis for Broadband Inte- telecommunications nications and interconnect local area net- grated Services Digital Network (ISDN), and intelligence and works (LANs), and it may be used to SMDS could be an interim step pending the functionality from the transport a variety of higher-level data com- arrival of Broadband ISDN.6 The standards center to the edge munications protocols. Frame relay services for Broadband ISDN are not fully developed. of the networks. are being introduced both in the United One configuration would provide for a States and internationally, by U.S. carriers channel of approximately 150 Mbps to and value-added network providers. Euro- customer premises, with integrated switch- pean public telephone operators (PTOs) are ing and multiplexing.7 This would allow also planning to introduce public frame relay transmission of high-quality, two-way video services. 5 However, there are still unan- telephone and vidcoconferencing, and other swered quest ions about performance charac- multimedia services combining audio, video, teristics and about support from carriers in graphics, text, and data. There is still much several countries. A major unresolved issue uncertainty about architecture and standards for the United States is the nature of intercon- for this development. nections between major carriers such as Another marked trend is toward wireless AT&T and MCI. Some users say that na- or mobile communications, with the rapid tional policy should insist on immediate growth of pm-table communications includ- action to ensure interoperability. ing cellular- mobile radio, specialized mobile Switched Multi-Megabit Data Service is a radio, cordless telephones, and radio pagers, broadband public data communications serv- and in the future wireless forms of Personal ice based on the second form of fast packet Communications Services (PCS).8 Some ob- switching-cell relay. SMDS was developed servers suggest that there may be a funda- primarily for LAN-LAN interconnection (i.e., mental shift in the way people communicate, data communications). However, specifica- with access to telecommunications services tions for handling voice and video are being through wireless technology becoming the developed. The cell relay structure is com- rule rather than the exception. (See figure

5 Robin Gareiss, “lnternatlonal Frame-Relay Services Expand,” Comrnurvcabw Week, November 1992, p. 27; Peter Heywood and Elke Gronert, ‘(Public Frame Relay Goes Global,” Data Cornrnm;cations, March 1992, p. 77. G “SMDS: The First Broadband Publlc Network Service,” supplement, Bus-mess Communications Review, 1992, p. 6. 7 Another possible configuration calls for four channels, butt his is considered unlikely to be deployed in t he foreseeable future. 8 Donald C. Cox, “Wireless Network Access for Personal Communications,” /EEE Comrnun/cations, Page 30 December 1992, p. 96. Some studies suggest PCS could find 100 million customers In the United States. Technological Trends and Issues

2-4.) Rapid growth9 has been encouraged by Thus advances in telecommunications serv- government actions to reallocate spectrum ices will occur not just within networks but for advanced mobile communications sys- at the edge as well. The time needed for such tems. by the continued increase in processing developments is often shorter than for devel- power (e.g., Digital Signal Processing chips, opments in the internal network infrastruc- or DSP), by steady improvements in battery ture. technology, and by increased use of comput- ers within the supporting land-based infra- The evolution of advanced services structure. The broad technological trends discussed Still another trend shaping telecommuni- above are the basis on which advanced cations networks is increased functionality services will evolve. Perhaps the most highly in terminal equipment. The provision of touted advanced telecommunications service is terminal equipment has been deregulated in ISDN. The concept of ISDN originally many countries and the markets arc intensely competitive. Intelligence and functionality Millions $billions in terminal equipment at the edge of the 12 T 8 network can substitute for intelligence and functionality within the network. For exam- ple, frequently called telephone numbers can 9“ Subscribers d 6 be stored either: on a b ‘smart card’ that is plugged into a handset. in the terminal equipment itself. within a telecommunica- Revenues 6- 4 tions network (e.g., in a PBX or CENTREX), or at some common location or database accessible to the customer from any network. Hard engineering or economic reasons arc 2 leading to locating intelligence and function- ality at the edge of the network rather than

internal to it. It may also be done to respond 0 to customer preferences. Some customers 1984 1985 1986 1987 1988 1989 1990 1991 1992

want to develop proprietary solutions to their SOURCE CELLULAR TELEPHONE INDUSTRY ASSOCIATION, 1993. communications needs to gain some compet- developed as an outgrowth of standards Figure 2-4. itive advantage, and such customization may development work in international bodies. It Growth in U.S. be difficult on a network designed to serve represented a combination of two of the Cellular general requirements. Other customers may technological trends identified above: the Subscribership feel more secure if information critical to conversion from analog to digital networks, and Revenues, their competitiveness is embodied in soft- and the separation of the signaling channel 1984-92 ware and hardware on their own premiscs.

9 In the United States, the number of f Irst-generation cordless telephones grew from 8 million in 1984 to 50 mllllon In 1992, and the number of cellular subscribers has grown from 100,000 to 8 million. Irwin Dorros, “Diversity, Success, and Change,” Be//core Exchange, November/December 1992, p. 4. Page 31 Us. Telecommunications Services in European Markets

Figure 2-5. —.—---———-——. . . ..—— .—. r- A Network =511r m-?— -. —— Topology =— 1 NOTE The publlc-switched tele- phone network consists of four malor segments Customer premises equipment fl +“\ (CPE) refers to the commumcattons . . ‘\ devices (mcludlng the mslde wlnng) In the user’s home or office, such as telephones, facslmtle machines, and computers and modems. The CPE of ,\ \. larger compames often includes pr- // \~I w-----+\ 1 f=%. ivate branch exchanges (PBXS) and Icd ar~ (computer) netvaks (lANS). m1° ‘“ “’:’:’’””O” /1’bm \ + LN@ //’ ‘—, came Local distribution network refers ,/ 1- / I I Swfld I I \ to the portion of the network connect- ,/’ ing homes and offices to the tele- phone company’s central office. The metropolitan or regional net- work cons(sts of the central office switches and the mterofflce trunk Imesconnectmgthose switches. Each cmtraloffceswtch arespncfs muc$ly %L[bY!!.4i J ~ TcentraK&5’ to a neighborhood so a city WIII be Interoffice trunks served by multlple central offices. \ Telephone traffic for pcxnts outside the metropolitan network is collected :, -jw~:* ,: piiEFEq \ at and routed through a tandem 4 , switch. / 1’ I \ The most obwous part of the inter- city or Iong-distance segment IS the web of high-capacity trunk Imes (mamly f~ber optic, but also mtcro- wave) that carry the telephone con- versations or messages; the packet- / \l swltched data network (represented by the thm dashed Ime) IS transpar- ent to the user but IS cntlcal as It IS the mtelllgence of the network— determmmg the best route for a call ~fiSignal transfer point I and allocating the clrcults, handllng blllmg, etc. The mterexchange (or Iongdlstance) carriers interconnect for access to the local network at the point of presence (POP).

— ! Interclty or I Iong-distance 1/ 1/ /’ /

=------Srna’iona’ga’eway Page 32 SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993, Technological Trends and Issues

from the channel carrying customer mes- sages. ISDN offers two primary transmission Percent of Percent of networks networks now ISDN speed- 144 kbps (the Basic Rate Interface) converted Target date capable (1 991) and 1.544 Mbps (the Primary Rate Inter- Belgium 800/0 1992 20% face). The former is divided into two 64 kbps Denmark 100 1992 o France 100 1991 100 voice and data (bearer) channels plus a 16 Germany 100 1993 60 kbps signaling channel. The Primary Rate Ireland 80 1993 0 Interface is divided into 23 voice and data 64 Italy “late 1990s” 0 Netherlands 100 1995 0 kbps data channels plus a 64 kbps signaling Portugal 100 1994 0 channel. These speeds are compatible with Spain “late 1990s” 0 United Kingdom 100 1992 60 the bandwidth capabilities of twisted-pair . copper cable. The bearer channels can be SOURCE FHE YANKEE GROUP, AND COMMISSION OF THE EUROPEAN COMMUNITIES, 1992 circuit-switched or packet-switched. 12. multiple ISDN phones on a single Table 2-1. ISDN was designed to support many ISDN basic rate interface loop, National ISDN applications, including mutimedia commu- 13. transparent feature operation between Status and nications (i.e., simultaneous voice and docu- ISDN, Goals ment transmission). The National ISDN 14. frame relay support, Users Forum identified 16 important appli- 15. centralized fax server with ISDN 10 cations for ISDN: access, and 1. high-speed file exchange, 16. engineering workstation interface to 2. videoconferencing, ISDN. 3z . data conferencing, In In 1990 the Federal Communications” 4. multipoint screen sharing, Commission (FCC) required Bell operating 5. . customer service call handling, companies (BOCS) to include plans for 6. telephone/workstation integration, ISDN in their open network architecture 11 7. image Communicant ions, plans. According to these plans, the seven 8. remote terminal access to LANs, BOCs expect to convert over 2,000 of their 9. automatic number ID/calling linc ID, 9,000 switches by 1994, making over half of 1 0. at-home agents, their regional access lines ISDN capable. 11. multidocument image storage and Some European countries arc much fur- retrieval, ther along. (See table 2-1.) The ISDN

‘“ John D. Hunter and Wllllam W. Elllngton, “ISDN: A Customer Perspective,” /EEE Cornrnunicakm.s Magaz/ne, August 1992, p. 21. ‘‘ The FCC’s Computer Ill decision required that Bell Operating Companies prowde their competitors Comparably Efflclent Interconnect Ion (CEI) through an open network architecture acceptable to the FCC. ‘2 Bellcore data reported In CornpuferWodd, Nov. 9, 1992. There are large differences In the regional Bell operating compames’ plans—from 21 percent of access lines for Southwestern Bell to 87 percent for Bell Atlantic, About 30,000 ISDN-equipped I!nes are now In use in the area served by Bell Atlantic. General Industry acceptance of a national ISDN-1 standard was shown with a multlvendor 22-node ISDN network demonstrated In November 1992. Page 33 Us. Telecommunications Services in European Markets

concept evolved largely outside the United most of the various European ISDN systems States and was identified with European has now been substantial y achieved. ]3 How- Postal, Telephone, and Telegraph (adminis- ever, ISDN may not increase PTT revenues tration) (PTTs). It was adopted by the because it sometimes replaces higher reve- International Telecommunications Union’s nue services. Consultative Committee for International The ISDN outcome could possibly affect Telephone and Telegraph (CCITT) in 1972, the pattern of suppliers of equipment in and was intended as the response of PTI’s to international networks. ISDN is part of the the growing demand for data communica- European pattern of centralized network tions. It assumed a unitary ‘‘solution’ in a intelligence, whereas the U.S. trend is to monopoly environment. diffuse intelligence (i.e., computer logic) In the United States there may now be throughout the network, making it effec- more critics than advocates of ISDN. ISDN tively a web of computers. The former has not lived up to early expectations. Its strategy will encourage European telecom- slow growth has been attributed to a number munications companies to stick with their of factors, including lack of user input in its traditional equipment suppliers; the latter design, slow development of ISDN stand- strategy could benefit U.S. firms such as ards, the high cost of terminal equipment, IBM. On the other hand, long-lived ISDN and competition from newer technologies. centralized switching and processing instal- Widespread acceptance of ISDN may have lations would, in the long run, work against lagged so far that other advanced technolo- small new firms with rapidly changing gies based on fiber optics and fast packet- technologies, many of which arc U.S. firms. switching will further limit the appeal of A second category of emerging services ISDN. AT&T officials point out, however, are those based on the ‘‘intelligent network that these alternative technologies will bene- concept described above, The intelligent fit only big corporations, and the lack of network allows network switching elements Programmable ISDN severely limits the services that can be to interrogate remote processors and data- networks open the offered for middle-sized and small busi- bases to determine how to route a call, opportunity to nesses, as well as for residences. Making the network programmable in this customize them to On the positive side, France and Germany way opens up the opportunity to customize meet customers’ arc heavily committed to ISDN and the it to meet the needs of individual customers, needs, either by European community is pushing it as a whether this is done by the carrier, by a third carriers, third means toward an integrated European net- part y on behalf of the customer or customers, parties, or (corpo- work. There is now a greatly increased or by a (corporate) customer alone. This was rate) customers demand for data services, and according to the basis for ‘ ‘800’ service--when a cus- themselves. the International Telecommunications Users tomer dials an 800 number, the call is briefly Group (INTUG), which is not a strong suspended while a remote database is con- advocate of ISDN, interconnection between sulted via the signaling network. In the

‘3 INTUG News (July 1992) reviews the status of European ISDN based on two reports: /SDN: 7-he ///usmy Ho/y Grai/, by The Yankee Group Europe (The Old Free School, George Street, Watford WD1 813X, United Kingdom), and /SDN Communications kJ Western Europe 1992, by CIT Research Ltd. (23 Derlng Street, London WI R 9AA). Technological Trends and Issues

Transport or call-carrying circuit Figure 2-6. Intelligent Network

‘&f-—’——— ((’l, NOTE Theadvanced mtelllgent net- ,{r ) work (AI N), elemen!s of wh{ch are L1 currently {nstalled In today’s publlc - Local earner Local /’c Ier ~ ~ swltched telephone network, envt- A c stons greatly lncreas~ operating ~-–Id efficiency as well as a broad array of (TEM J/ ‘ sophtstlcated network services by separat Ing the call t ran sport (I e., t he voice clrcult) function from the slg- \\ /\ Signal nalmg and control funct~on and em- L. I ploylng the powerful software In the swlfches. Imagme, for example, an Instance where a caller places a call to a ‘1 \A \ fam Ily member who while on vaca- tion has Ind Icated that calls from cerfam numbers are to be rerouted to the new Iocatlon and given a unique nng to Indicate pnorlty In this Illus- tration, the vacationer would have preprogrammed the pncmty telephone numbers (other calls m Ight be routed \ to an answering service or machine) \J and the new destmatton number by Signaling circuit v dlalmg mto the Intelligent peripheral and Inputt[ng these data When the caller dials !he number, the local SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 swlfch quer!es the sgnal transfer point for b[lling and accounting infor- mation and ascertains from the serv- database, the 800 number is translated into a cause the private network serves a limited ice control point a clear path through the Iccal network to the point of regular telephone number, which is sent back number of locations and telephones. An presence of Ihe caller’s long- to the switch where the call was intercepted, inelligent public network can emulate that dlstance earner of choice The slg- nahng networks of the two local and the call is then handled as a regular feature on VPNs, translating a 7-digit num- exchange compantes and the long circuit-switched call. It can be routed differ- ber dialed on a VPN into a normal 10-digit distance carrier interact to learn the status of the called party and thus ently depending on the place it originated, number, and muting it accordingly. Another how to set the cah up, In fhls case, the call has been red lrecteC to a the time of day, or other variables. Intelligent feature of private networks is the ability to telephone address In a new Iocatlon networks can route calls automatically to a restrict calling from certain telephones to so a third local company IS Involved and once again the status of the customer location nearest the caller (for reduce toll calling abuse (e.g., to prevent called party IS learneC (for example, I f the hne were m use, the network example, from a chain of retail stores or pizza employees from making unauthorized inter- would direct local carr!er A to trans- parlors) and could take into account the national calls). The same type of restriction mit a busy signal to the caller) and establishes a call!ng path Local car- closing hours of the stores and the time at can be imposed by an intelligcnt public rier C IS also Instructed to del wer the which the call is made. network by examining the calling and called special nng Another usc of the intelligent network numbers. Other features possible on VPNs concept is the creation of Virtual Private include, for example, alternative destination Network (VPN) services. One of the advan- routing, account codes for cost allocation tages of a real private network is that purposes, management reports, hot lincs, and corporate customers can employ their own call forwarding. VPN (and new tariffs for numbering plans, using fewer digits than high volumc traffic) may already have swung required by a public-switched network bc- the balance for large corporations away from

Page 35 Us. Telecommunications Services in European Markets

developing private networks and back to- developed, CT2 and DECT. CT2 is a low- ward reliance on public networks.14 powcr system in accord with a standard VPN services are not limited to voice known as the Common Air Interface, that communications; AT&T offers an interna- allows a single handset to be used in tional Software Defined Data Network in residential, business, and public (Telepoint) about 20 countries. Intelligent networks will applications. be crucial to the development of Personal There is a pan-European standard for a Communications Services or Personal Num- digital cellular system operating in the 900 ber Calling, which will require use of data MHz band, the Global System for Mobiles concerning user identity, completion prefer- (GSM),16 The GSM network will support not ences among available alternative networks, only ordinary speech transmission but trans- user-selected features, and billing proce- mission of short data messages, videotex, dures. 15 teletex, and facsimile .17 The Digital Cellular First-generation cordless telephones and System, DCS1800, is another standard for a cellular mobile radio systems are now widely Personal Communications Network that was available in most parts of the world. The derived from the GSM standard, but operates United States has lagged behind Europe in in a different region of the spectrum (1800 development of cordless telephone stand- MHz) at lower powers with smaller cells. ards. Here, the first-generation of analog The Europeans are also working on a third- cordless phones operated on a few channels, generation mobile system known as the near 50 MHz in the radio spectrum. Some Universal Mobile Telecommunications Sys- manufacturers have recently introduced digi- tem. tal cordless telephones that operate in a band Satellites have proven to be especially in the 900 MHz region that is set aside for effective in delivering one-way video serv- low power, unlicensed devices. U.S. cellular ices and two-way data services utilizing service providers are beginning to convert Very Small Aperture Terminals (VSATs). their first generation systems (operating in VSATs arc extensively used in the United the 800 MHz region) from analog to digital States, but development of VSAT services in transmission. The FCC is expected to reallo- Europe lagged because of regulatory restric- cate a substantial block of spectrum near 2 tions. As discussed in chapter 5 (Users’ GHz for PCS. Perspectives), they may become: increas- In Europe, two second-generation cord- ingly important in the near future. less telephone systems have already been

‘4 For discussion of this trend, see U.S. Congress, Off Ice of Technology Assessment, U.S. Banks and /ntemationa/ 7ie/ecomrrrunicatlons, OTA-BP-TCT-1 00 (Washington, DC: U.S. Government Printing Office, September 1992). 15 Irwin Dorros, “Diversity, Success, and Change,” Be//core Exchange, November/December 1992, p. 9. ‘G It is also known as Groupe Speciale Mobile. The GSM system was scheduled to begin commercial service in several countries in mid-1 991 but was delayed for various reasons, including problems with subscriber equipment-type approvals. 17 Raymond Boult, “EuropeAwards Herself t he GSM,” Network Managerner’r( Europe, May/June 1992, p. 28. Technological Trends and Issues

The implications of toward “light carriers,” providing interna- technological change tional service by reselling. rerouting. and Telecommunications networks are becom- reprogramming capacity leased from the Telecommunications ing more software-intensive and the costs Of traditional (’ ‘heavy”) carriers. This move- networks are developing networks and services is increas- ment is driven by the ability to usc software increasingly ingly in software rather than hardware. The to provide "least-cost global routing’ software--intensive way in which networks and services are through a wide choice of carriers (although and this plays to competitively differentiated is in the soft- in fact none of the light carriers can yet offer the strength of 18 ware incorporated in them. Fortunately, this "globa" service). U.S. firms. plays to the strength of U.S. firms. Carriers that have residual monopoly power In early generations of switching equip- over basic telecommunications services will ment, hardware and software were tightly have a continued means and incentive to coupled and had to come from the same leverage that power into the provision of vendor. This is likcly to remain the case for enhanced services. For example, a carrier simple switching software, but carriers, third - might providc customer access to its internal party services providers, and users all will in logic and databases more efficiently or the future have increasing ability to ‘‘pro- effectively than it would provide access to gram networks to meet specialized needs. external logic and databases belonging to a Carriers can be increasingly responsive to competitor. This means that regulatory is- customer needs, and decreasingly dependent sues such as open network architecture and on hardware manufacturers and vendors. open network provision will remain impor- Customization through software can help tant topics in the future. private network operators, such as financial As private networks also become more services providers. develop and offer inno- complex, some corporations arc contracting vative services and maintain a competitive with carriers, value-added network opera- edgc. tors, and other outside firms to manage their The pressure will thus grow to unbundle existing networks ("outsourcing"). But car- applications software and make basic trans- riers arc also seeking help in network man- mission a more commodity-like product. agement, administration, and maintenance. There is likely to be more commingling of For example, Ericsson, the Swedish telecom- carrier-provided and customer-provided logic munications company, and Hewlett-Packard, and databases. Both may be necessary. for the U.S. computer manufacturcr. recently example, in call-routing that is sensitive to announced a joint venture to provide tele- time of day or changing recipient locations. communications operators with network man- Internationtal traffic has traditionally been agement systems. This was described as carried over national carriers’ ‘‘half cir- being “aimed at winning business from the cuits"; that is, circuits were provided by growing demand among telecommunications contractual agreement between two national operators to place orders outside their own monopoly’ operators. Now there is a shift companies for systems that combine net-

“ Gregory Staple, “Winning the Global Telecommunications Market,” Telegeography 1992 (London: International Institute of Communications, 1992). Page 37 Us. Telecommunications Services in European Markets

work management with administrative and firms engaged in international commerce customer support systems. ’ 19 want a communications infrastructure that is Regulators and Because of the creation of services within seamless, reliable, cost-effective, and flexi- policymakers will software rather than in hardware, regulators ble. Above all, they want transoceanic and find it increasingly and policy makers will find it increasingly pan-European networks that, whether public, difficult to separate difficult to separate regulated telecommuni- private, hybrid, or shared, are fully intercon- regulated basic cations services from nonregulatcd enhanced nected and interoperable. This implies the services from information services, or to distinguish defin- necessity of international standards. unregulated en- itively between public and private networks. A standard is an agreed upon technical hanced services. Similarly, agreements reached by trade ne- specification or set of specifications used in gotiators that depend on distinctions be- producing goods or services. ‘ ‘Product stand- tween basic and enhanced services will be ards’ define a particular item, system, func- difficult to implement and enforce----a- will tion, or service. “Process standards’ define tend to stultify innovative developments. features or functions that must be the same in As networks become more software- all versions of a product or service in order intensive and more complex, like ‘ ‘giant to assure their safety, reliability, or interoper- distributed computer systems,”20 they may ability with other products or services. The also find that they are increasingly vulnera- latter is of paramount importance for com- ble to various kinds of systems failure puters and telecommunications. resulting from software and hardware de- Many standards develop informally or de fects, human error, effects of natural disas- facto; that is, one kind of product or services ters, and hostile and criminal intrusion. The captures the market, either by being first or 21 core cause of failure may be simply the by winning nearly universal approval. Stand- inability to comprehend and manage the ards may also be formally set by agreement proliferating relationships and dependencies among producers; these are called voluntary within extremely complex systems. In inter- standards. Finally, standards may be man- national networks, coping with these vulner- dated by governments, usually for reasons of abilities will require global cooperative ac- safety, health, or environmental protection. tions. Standards traditionally were promulgated long after a technology was invented, but recently they are often ‘‘anticipatory Standards —that is, they may be agreed on at an early Issues of standards development are in- stage of a technology’s development in order creasingly important in the context of U.S. to guide its design and make it attractive to competitiveness in European markets. U.S. a larger market than it would otherwise find.

19 R. van de Krol, “Ericsson Joins Hewlitt in Network Systems Venture,” Financia/ Times, Dec. 11, 1992. 20 Hatfield Associates, Inc.,Advanced /ntemationa/ Telecommunications Teclmo/ogies and Services, OTA contractor report, December 1992.

2’ David Hack, “Telecommunications and Information-Systems Standardization—Is America Ready?” Congressional Research Service, CRS 87-458 SPR, May 211987. Such informal standards can be taken as a sign, Hack says, t hat “past creativit y has provided societ y with a solution which if adopted k)roadly and consistently can move creative efforts to a new level.” Technological Trends and Issues

Anticipatory standards create a target toward treated as though they had, ‘ ‘monolithic, which technology development can be di- invariant needs,"25 In analog networks, the rected. content of the message (e. g., whether it is While simple product standards deal with voice or data) determines how it is to be the characteristics of stand-alone devices or treated or transmitted. Digital systems arc components, such as the 12-button keypad of fundamentally different: ‘‘a bit is a bit is a a modern telephone, integrated-systcm stand- bit,’ and what matters is what happens at the ards deal with the structure or architecture of interface to the user’s application. With complex technological systems or networks. programmable or intelligent networks, as Such standards assure that one part of a described above, control of the network may system will not disallow something that is be shared between carrier and user, and important for another part of the system. For flexibility becomes essential. Carriers and example, Open Systems Interconnect ion is providers of services have a disproportionate an anticipatory integrated-systems standard advantage here; standards, and user partici- that may allow multiple development efforts pation in standards-setting, are increasingly to be integrated into a cohesive structure. 23 important to assure users of full and cost- effective interconnect ion. Networks and interoperability In the 1980s, although computer costs Because of the imperative of interopera- were dropping rapidly, telecommunications bility, there is a strong incentive for develop- network costs were soaring because of prob- ing international network standards that span lems of incompatibility.26 which had to be many national markets.24 Telecommunica- solved one at a time with converters, transla- tions network standards were originally de- tors, and gateways, and other kinds of veloped for analog, hierarchical systems customized connectors. In traditional meth- where the carrier was the dominant (or only) ods of standards development, the cost- decisionmaker and the users had, or were effectiveness of manufacturing is balanced

22 Process standards to assure Interoperabllit y, compatiblllt y, or modularity are especially important wit h networks, whose value to users depends not only on the products’ intrlnslc qualities but on the number of others who have compat Ible products. The most fam il Iar examples oft his quallt y of beneftclal externally y are telephone systems, whose value to each customer IS assumed to Increase with the number of subscribers It connects. (Stanley Besen, “AM vs FM: the Battle of the Bands,” /r?dusfria/ and Corporate Change, vol. 1, No. 2, 1992,) Besen points out that the number of other users may directly effect performance, or may bring about Improvements in the supply orquallt y of com elementary goods and im prove t he qualIt y of after-sales service by enlarglng the market. 23 David Hack, op. cit., footnote 21. 2’ As used here, “lnternatlonal” means standards that are globally accepted, rather than standards fort he International I Inks between disparate national networks. ‘5 Richard Jay Solomon and Anthony M. Rutkowski, “Standards-Making for IT: Old vs. New Models,” presented at the Conference on the Economic Dimension of Standards—Users and Governments In IT Standard lzatlon,” sponsored by Mlnlstry of International Trade and Industry, Mlnstry of Posts and Telecommunlcatlons, and Organlzatlon for Economic Cooperation and Development, Tokyo, Nov. 18, 1992. 26 Stanley Besen, op. cit., footnote 22. Us. Telecommunications Services in European Markets

Figure 2-7. Transatlantic Communications Cables ./

., ,,. , r, , ! o

0 ‘--d

— Fiber optic cable – – Copper cable -— Proposed (fiber) cable

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

against protection for consumer safety and The U.S. process for standards develop- health. Standard-setting is slow and cumber- ment is increasingly unsatisfactory to many some, and largely dominated by technology critics, and perhaps to most participants.28 It producers, with very limited participation by is plagued with dissension and rivalry; it is users. This makes it difficult for standards to cumbersome and arcane; it is dominated by respond to customers’ emerging needs. For a few organizations with the considerable rapidly advancing telecommunications tech- resources and dedicated expertise necessary nologies, standards should also have three for sustained participation. Intellectual prop- characteristics, according to Richard Jay erty issues are unresolved. The dissemina- Solomon and Anthony M. Rutkowski: tion of standards is often limited by copy- ectensibility --the ability to incorporate rights and costs. Critics say that the process, evolving technology without complete developed for reaching consensus on rela- replacement of components; tively simple and slow-changing manufac- scalability --applicability to local, regional, turing technologies (e.g., the number of national, and international networks; and threads on a screw) is not appropriate for timeliness --synchronization with evolu- advanced electronic technologies and serv- tion of technology and markets.27 ices to meet the highly varied and continu-

27 Solomon and Rutkowski, op. cit., footnote 25. 28 Fora full description and analysis of the process and the growing dissatisfaction withIt, see U.S. Congress, Office of Technology Assessment, G/oba/ Standards: E?uild;ng Hocks for the future, OTA-TCT-512 Page 40 (Washington, DC: U.S. Government Printing Office, March 1992). Technological Trends and Issues

ally changing needs and desires of large the precise stream of data bits that must users. traverse from one computer to another. In each standard, the definitions of func- New ways of achieving interoperability tionality and the protocols arc organized into This widespread dissatisfaction. and the layers. In the Department of Defense model, implementation of packet networks in the four layers are recognized; in the OSI model, early 1970s, resulted in an effort to find a there arc seven. Layers make it possible for new way of assuring interoperability, by different committees to work in parallel on defining a generic open systems interconnec- the development of the standards. The refer- tion model.29 “ Open means that any two ence model defines the layers. A layer systems conforming to a reference model bounds the responsibility of each committee. and its associated standards can intercon- A well-conccivcd reference model can greatly nect. One such model was developed for the speed up standards development. Department of Defense’s research computer network, ARPANet, and included a suite of Producers vs. users protocols known as Transmission Control When products conforming to different Protocol and the Internet Protocol (TCP/IP). standards (including proprietary standards) Another, called the Open Systems Intercon- must communicate with each other, devices nection (OSI ) model, was adopted by the known variously as protocol converters, International Standards Organization (IS0) translators, or gateways can sometimes be and the International Telecommunication used. Such devices have limitations. Their Union (ITU).30 Both define the functions development depends on deep understand- that the communicating computers (as well ing of both standards; they can only support as some of the internal network components) features that arc implemented in both prod- must perform. Both define ‘‘protocols, ’ i.e., ucts, and they may become unworkable

2’ Solomon and Rutkowskl, op. cit., footnote 25. 30 The International Organization for Standardization is an Independent, specialized International agency whose members are 97 nat Ional standards-sett ing bodies. The I SO promulgates voluntary standards in all fields except elect rlcal and electronic engineering, where standards are promulgated by the International Electrotechnlcal Comm Ission (lEC), also an independent specialized agency. Standards for interconnecting nat Ional networks are establ Ished by the International Telecommunication Union (ITU), now a specialized agency of the United Nations. In Its standards-setting activities the ITU works primarily through two committees, the Consultative Comm Ittee for International Telephone and Telegraphy (CCITT) and the Consultative Committee for International Radio (CCIR). The ITU recommendations do not carry the force of law, but they are often Implemented and enforced at the national level. The ITU, as a United Nations agency, recognizes only governments. PTTs automatically have governmental status but not the United States’ American National Standards Institute (ANSI) and the Exchange Carriers’ T1 committee, whtch are private sector organizations. The U.S. Department of State therefore picks delegates to international standards meetings, but chooses largely representatwes of the telecommun!catlons Industry and some large user corporations. Critics of the voluntary standards-setting process note that the head of the State Department’s Bureau of Communications and Information Policy, which makes these appointments, IS a political appointee, and complain that the delegations may be politically vetted. In the ISO, which unllke the ITU is not a treaty organization, ANSI IS the U.S. member-representat Ive. Page 41 Us. Telecommunications Services in European Markets

when one or the other of the connected ment producers tend to agree on the need for devices is upgraded. (See box 2-A.) international standards but are much more On the other hand, either the informal immediately and urgently concerned with triumph of one standard, or the voluntary the specifics of those standards. Their indi- formal acceptance by the industry of one vidual market goals often drive them to resist standard, can cause nonconforming network agreement on standards longer than is in the products to suddenly lose all value. The interest of the industry as a whole. The standard that prevails may not necessarily be standards-development organizations them- the best, and always some users will be left selves have self-aggrandizing motivations with incompatible equipment or networks. and behaviors that often frustrate, rather than The large installed bases necessary for global advance, the development of consent to networks make it particularly costly for users voluntary standards. later to shift to newer, more technologically advanced standards. But while standards Standards and the future may cut off innovation at one level by Competitiveness in foreign markets is mandating one path of technological devel- increasingly tied to standards. The European opment, they make it possible to put one set Community is now giving strong attention to of problems behind and move up another standards as a fundamental mechanism for path. There is always tension between uni- pursuing the goal of a single market, and has formity and optimality, between universality particularly targeted telecommunications tech- Users tend and innovation. Compromises are necessary, nologies as a high priority sector for Euro- to urge ear/y and this may set producers against users. The pean standards development. The EC has adoption of challenge is to find just the right time to shown itself willing and able to develop new standards, while freeze a standard. institutions and adopt new procedures for equipment Users, whose chief concern is with inter- standards development. In 1988 it created a producers tend operability of systems, are generally eager to special standards organization, the European to resist early see the adoption of international standards so Telecommunications Standards Institute adoption. long as these do not unduly hinder the (ETSI), which is developing approximately continuing evolution of technology and serv- 300 European standards. Most will be volun- ices. In a survey and several case studies of tary but some will be mandatory, and these large-scale U.S. users of international tele- are likely to include standards aimed at communications conducted by the Office of assuring interconnectivity.31 Technology Assessment for this assessment Europe is a large market that is potentially the need for international standards was worth large investments by U.S. firms in among the points most frequently made by meeting its standards. U.S. firms active in users. (See chapter 5, Users’ Perspectives.) Europe therefore have a strong incentive to Telecommunications providers and equip- participate in ETSI standards-setting, but to

31 ETSI is now studying this question, according to information supplied by Anna Snow, Trade Division, Commission of the EC, Washington, DC. See also U.S. Department of Commerce, International Trade Association, “E.C. Telecommunications,” release of Oct. 1, 1991. ETSI’S technical comm ittees are staffed by technical experts rather than representatives of affected industries. To accelerate their promulgation, adoption of standards will be decided not by consensus development but through weighted voting. Technological Trends and Issues

Box 2-A. INTERNET S TANDARDS D EVELOPMENT

ARPANet, originally sponsored in 1969 by the National Aeronautics and Space Administra- tion (NASA) and the Department of Defense to link scientists in certain research centers, has expanded to become Internet. Internet consists of many linked regional computer networks like SuraNet, PrepNet, etc., and as many as 10,000 small networks, with an estimated 20 million users worldwide. The actual connections are often modems connected to T1 leased lines, paid for by universities, research institutions, or corporations to Iink themselves to a local carrier that in turn connects them with T3 “backbones” between major locations. Several government agencies, especially the Department of Defense, NASA, and the National Science Foundation, continue to be heavily involved with funding and support of Internet for the use of universities, research organizations, and government, but a number of private sector companies provide access to it for corporations and individuals, at varying costs to users. A new form of standards-setting appears to be evolving in connection with lnternet. An Internet Society has been formed as a global coalition of carriers, information services vendors, and equipment manufacturers. It includes a group called the Internet Architecture Board (IAB), whose job is to develop the series of international standards through progressive electronic discussion and standard-drafting on the network, which is open to all users at very Iowcost. IAB has established a “cooperative relationship” with international bodies such as the ITU to encourage the use of Internet to enhance global telecommunications collaborate ion in standards setting. It should be noted, however, that in part as a result of the informality and rapid, random growth celebrated by Internet enthusiasts, access to and use of Internet remain complicated and obscure to many potential users and there are few “road maps” to the system. The growth of Internet has given rise to a great many policy issues related to its commercialization and the role of government in its future. Many proponents of Internet, especially its earliest users in universities and research centers, have resisted any hint of government regulation; hence many issues such as universal service, privacy and intellectual property rights are unresolved even as Internet approaches the status of a major public utility.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993. do so they must have a European presence. nity. In international standards-setting are- This is a powerful incentive for them to nas, the influence of European institutions develop joint ventures or other strong alli- will be increasingly strong and effective ances with European firms, or find other because of the support provided to, and the means to establish European subsidiaries. insistence on, communitywidc standards de- The U.S. process of standards develop- velopment by the EC Commission. This too ment may require reform if it is to match the implies closer cooperation by U.S. partici- pace and increased effectiveness that is the pants, and possibly a stronger leadership role aim of the EC current initiatives. This is for the Federal Government in pursuit of unlikely to happen unless government policy strong competitive policy goals. provides leadership for, coordination of, and National or regional standards can be used strong pressure on the contending factions deliberately to create trade barriers and within the private sector standards commu- inhibit competition. Every nation wants its Page 43 us. Telecommunications Services in European Markets

telecommunications companies to be major required that Bell operating companies pro- players in world markets. In order to provide vide their competitors with “Comparably a strong domestic base, many nations dis- Efficient Interconnection” (CEI) and an criminate in favor of domestic firms through open network architecture (ONA) acceptable procurement or by adopting a national stand- to the FCC.34 ONA means that components ard that is different from that used by foreign of the telephone system must be made producers, thus effective y closing their mar- available to competing suppliers on an un- ket to foreigners by raising the costs of bundled basis so that they can be combined penetrating it.32 Some U.S. critics fear that with the services of these suppliers in any EC members may form a solid voting block manner desired. If components can be ob- in international standards negotiations to tained on a bundled basis only, the interface impede the introduction of superior network- between them is inaccessible to the compet- ing technology because it is perceived as ing supplier. The effect is the same as if the U.S. dominated.33 interface were accessible but incompatible.3s Thus standards inevitably become the The nature of the unbundling and identity of subject of trade negotiations. In the 1979 basic service elements are contentious issues GATT Agreement on Technical Barriers to because they affect the potential for competi- Trade, signatories agreed to refrain from tion. Services suppliers and telephone com- using national standards to frustrate trade in panies want different levels of aggregation. products. This agreement was embodied in The European Community has issued a the U.S. Trade Agreements Act of 1979. directive entitled “Open Network Provision However, since the GATT Standards Code (ONP) Framework and Services.”36 It calls explicitly does not apply to services or to for open access to harmonized services government purchasing, European PTTs are across national borders. Whereas ONA is usually exempt. aimed at technical interfaces, ONP is aimed Along with a strong movement toward at institutional change, but the intent is the international standards, there are parallel and same: to foster the development of expanded complementary movements to achieve inter- markets with heightened competition, and connectivity and interoperability by other allow translational companies to enjoy tele- means. The FCC’s Computer III decision communications and information services

32 Robert W. Crandall and Kenneth Flamm (eds.), “Overview,” Changing the Roles: Techno/ogica/ Change, /ntemafiona/ Con-rpeWon, and %gu/ation in Communications (Washington, DC: The Brookings Institution, 1989), pp. 1-10. ‘3 Sa’id Mosteshar, “Notes on Standard Setting: Bod ies in Telecommunicate ions,” in a Report of t he Working Group on Telecommunications, information Technology, and Broadcasting, of the American Bar Association Special Task Force on EC 1992, June 29, 1990. ~ This was a condition for waiving an earlier FCC requirement that the Bell operating companies offer enhanced services only through subsidiaries. 35 Stanley M. Besen and Gart h Saloner, “The Econom ics of Telecommunication Standards,” Crandall and Flamm, op. cit., footnote 32. M 0. A/. P.: The Progress Report-European Te/ecornrnunications 2, Analysis Briefing Report Series Page 44 (Cambridge, England: Analysis Publications, 1991). Technological Trends and Issues

without regard to national boundaries.37 likely outcome is not that many small Implementation of the ONP Framework has companies will be offering highly individu- so far been uneven.38 Some EC membcr- alized services but that small numbers of states have not yet taken the first step of major players will provide international separating telecommunications operating func- companies with services and Support.39 tions from regulatory functions. The U.S. opportunity to compete in Eu- Expectations are, nevertheless, that in rope in developing and delivering enhanced time the economies of scale made possible communications and information services by ONA and ONP policies will begin to depends on both the increasing interopera- transform the market for telecommunica- bility of U.S. and European networks, and tions equipment into a commodity-type mar- the increased inter-operability of networks ket in which goods compete more on price within Europe. The competitive advantage than on features. This in turn will make the of U.S. firms in Europe however also de- telecommunications” services market highly pends on their differential ability to offer competitive. However. given the global scale innovative, flexible, user-oriented services of the market and the importance placed by and technology. The challenge is to combine large companies on having efficient access to a broad menu of facilities and services, the those imperatives.

37 Japan has a comparable Imtlatlve, called Open Network Development (ON D), aimed at Ilmltlng the dom Inance of Nippon Telephone and Telegraph (NTT) by allowing access to Its network to competitive operators and resellers. 38 “Update on ONP,” /NTUG News (International Telecommunications Users Group, London), January 1992, p. 12, and October 1992, p. 10. 39 Besen and Saloner, op. cit., footnote 35. The European Market for Telecommunications Services CHAPTE3R

T HE EUROPEAN TELECOMMUNICATIONS SERV- regimes, institutional structures, trade barri- 2 ICES MARKET is ripe for profitable entry by ers, and infrastructure characteristics. About competitive suppliers. Its growth potential is 85 percent of the aggregate market is cur- greater than that in the United States because rently closed to competition, but technologi- of the present low market penetration for cal and political events are combining to many services. Barriers to entry and high open much of the market in the next few prices have prevented much demand from years. Meanwhile, the market is studded like being met. A recent European Community a rich plum pudding with niche business directive has opened the door for widespread opportunities for U.S. telecommunications bypass of public switched networks, which companies. will stimulate further demand for innovative A comparison of the scale and scope of applications and services. European business and industry with its The European This chapter describes the European mar- current consumption of telecommunications market should ket for basic and enhanced telecommunica- services indicates that there is a powerful, grow more than tions services’ and trends that arc changing underserved demand for enhanced services. the U.S. market its structure, and then summarizes available With the integration of a single European for the next projections of its size and growth over the market, geographical expansion and height- decade. . . and next 5 to 10 years. The Office of Technology ened competition should increase this de- access for Assessment (OTA) concludes that the Euro- mand, Many U.S. telecommunications firms U.S. firms pean market for telecommunications serv- are demonstrating that they can compete in will increase. ices will grow strongly in the next decade, Europe, and also strengthen the ability of and that opportunities for U.S. firms in this other U.S. services industries to operate market will greatly increase. successfully in European markets. The European market for telecommunica- Until recently, the European market for tions services is in reality many national telecommunications products and services markets, with wildly different regulatory was completely closed to entry by non-

NOTE: This chapter draws heavily on an OTA contractor report: Bruce L. Egan, “European Telecoms: A Market Assessment,” Nov. 10, 1992. 1 “Telecommunications services” is def!ned In this report as including all point-to-point, nonbroadcast communications transmission (basic services) and dependent or closely related information services (enhanced or value-added services). The term “value-added” is more often used in Europe and “enhanced” IS more often used in the United States. The two terms are equivalent (although the services categorized as value-added or enhanced may t hem selves d fer);if t hey indicate services t hat go beyond t he ransmt Isslon of voice or data to in some way collect, select, format, change, process, or selectively dellver the material being communicated. This report will treat the terms as interchangeable for most purposes. z The European market includes the 12 countries of the European Communlt y (Belglum, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, the United Kingdom), plus 7 members of the European Free Trade Association (Austria, Finland, Iceland, Liechtenstein, Norway, Sweden, and Switzerland). Together these constitute the European Economic Area for purposes of application of many of the directives of the European Communit y Commission. The countries of Central and Eastern Europe are also Included, but are treated in more detail inch. 6. However, due to data constraints, market size estimates are for the 12 EC member-states except where noted. Page 47 Us. Telecommunications Services in European Markets

Figure 3-1. Europe ~~ European community ~ European Free Trade Association ~~ EC Associate countries I

Croatia ———_,

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

Europeans, and in general European coun- foreign firms than are the European mar- tries are still protectionist,3 U.S. telecommu- kets,4 yet U.S. investments and business nications markets are more open to entry by activities appear to be much greater than the

3 For an overview of the history of European communications and recent trends, see Eli Noam, Te/ecornn?unicafiom in Europe (New York City, NY: Oxford University Press, 1992). 4 Europeans sometimes dispute this, and can point to many remaining U.S. barriers to entry (for example, prohibit ion of foreign ownership of radio licenses, including nonwlre I inks In telecommunlcat Ions networks). Page 48 See ch. 1, box l-A. The European Market for Telecommunications Services

combined activities and investments of Eu- status of U.S. trade in services, must be ropean firms in U.S. markets. Successful understood as indicative rather than precise. market entry by U.S. firms has so far generally required partnering, usually with The structure of the the incumbent monopoly telephone opera- 5 European market tors (public telephone operators, or PTOS). The strong drive to achieve a single Euro- As a single market, the EC, with 345 million consumers, will be the world’s pean Community market suggests that there will continue for some time to be powerful largest consumer market. Within the EC, advantages for American firms in having a four countries comprise over 80 percent of legally well-established European identity. the potential market in terms of gross na- Foreign subsidiaries, joint ventures and tional product (GNP) and income: the United 7 alliances, and other forms of shared owner- Kingdom, France, Germany, and Italy. ship make it difficult to measure precisely the performance of U.S. telecommunications The United Kingdom firms overseas. It is not always easy to The United Kingdom has the most broadly classify a business as U.S. or European. liberalized telecommunications market in More importantly, there arc theoretical and the world. It began partially privatizing its practical problems in measuring trade in monopoly operator, British Telecom (BT) in services, which arc usually not embedded in 1984, 8 requiring it to face competition in discrete, observable units that can be counted domestic long-distance services from Mer- as they cross a border or enter a customs cury, a subsidiary)’ of Cable & Wireless. The shed. h U.S. trade balance figures do not intent was to create effective competition for include sales of services by European sub- BT by limiting entry to one new firm and sidiaries of U.S. firms. The final section of giving that new competitor some entry this chaptcr, which described the current assistance. 9

‘ Historically, the term for these organizations has been PTTs (Postal, Telephone, and Telegraph admlnlstratlons). However In many cases they have been reorgamzed, separated, liberalized, or privatlzed and this term no longer fits. b Anne Y. Kester (cd.), Behind the Numbers: U.S. Trade IrI the Wor/d Economy, Report of the Panel on Foreign Trade Statist Ics of t he Comm Ittee on Nat Ional Stat Istics, National Research Council (Washington, DC: National Academy Press, 1992). For a brief rewew of practical difficulties, see also Stephen Kindel, “lnvlslble Trade,” Flnancfa/ Wor/d, Oct. 13, 1992, pp. 56-59. 7 The EC member-states together havea populat Ion of 345 m Ill Ion and GNP of S6, 157 bllllon. The European Free Trade Assoclatlon members add another 32.5 mllllon people and $852 billion. Turkey, Cyprus, and Malta are seeking EC membership; they have an aggregate population of 58 m{lllon and GNPof $103.7 bllllon. Czechoslovakia, Hungary, and Poland hold “EC Associate” status and Bulgaria and Romania are seeking It; together they add 97 mllllon in population and S224 billlon. The total population IS 533 million. ‘ In 1993, the British Government IS preparing to sell off Its remalnlng 21.8 percent ownership of BT. 9 Slr Bryan Carsberg, Director General of Telecommurvcat Ions for the Un!ted Kingdom, at a sem Inar at t he Center for Strategic and International Studies (CSIS), Washington, DC, Oct. 11, 1992; for proceedings see CSIS International Telecommunlcatlons Studies, Global Issues, “UK-U.S. Stakes In the International Regulatory Game,” no date. Page 49 Us. Telecommunications Services in European Markets

Population (millions) of services, with nearly a dozen companies 600 proposing to build domestic trunk networks. (The first of these was the U.S. firm Sprint.) Several other companies plan to provide local delivery services. The United Kingdom decided not to issue additional licenses for international facilities- based competition, because an open-door policy would require that access be granted to all reasonable newcomers, including those v Europe North America (like Germany) that have not opened their own market. But significant new freedoms to provide international services were intro- GNP ($ billions) duced. These include international simple 8,000 resale, for firms of countries with similar regulatory arrangements. (International sim- ----– Others ----- Mexico 6,000 ple resale is the right to sell capacity and — EC Associates -- – Canada — EFTA services on leased circuits connected at both ends to public-switched networks in two countries.) (See box 3-A.) National Network, as a reseller, became the third competitor to BT and Mercury in November 1992. An- other five applications are under considera- o Europe North America tion. Operators may also now provide addi- tional satellite services, with interconnection SOURCE: WORLD FACT BOOK, 1991. to the public network at both ends being permitted for data traffic, and interconnec- Figure 3-2. In 1990 the United Kingdom moved to tion at one end permitted for voice. Eight European full open-market licensing. Each new com- “ applications to provide such satellite serv- Demographics pany is to be offered some temporary entry 11 assistance, in the form of reduced charges for ices have been received to date. interconnection with BT networks. As of The United Kingdom is also fostering the February 1993, 13 new carriers have been establishment of cable television to provide granted licenses and 37 more applications competition in the local loop. It has licensed are under consideration. These licensees and 20 cable networks to provide telephone applicants propose to provide a wide range service as well as TV/radio channels, al-

10 Seethe U.K. Government’s 1992 White Paper, CornpetWon and Choice: Te/ecomnunicahorts Po/icy for the 1990s. 11 Information provided courtesy of Mark Hammond, First Secretary for Environment, Energy, and Page 50 Telecommunications, British Embassy, Washington, DC. The European Market for Telecommunications Services

though customer subscriptions for the tele- (ISDN) services are universally available, phone connection are said to be lagging.12 and France Telecom’s videotext services Further competition in local service was (Minitel) are famous worldwide. France assured by licensing five nationwide cellular Telecom has entered into many international networks. joint ventures and alliances; it intends to be Since competition began, BT tariffs have a global player, and says that 20 percent of its been significantly lowered, including a 10 to revenues will come from international activi- 25 percent reduction in 1992. BT has become ties by 2000. a strong international competitor. It plans to have its Global Network Services, with Germany high-speed frame relay for data applications, Germany’s market is the least liberalized serve 60 countries by 1994. 13 among the larger European countries, and Germany has consistently opposed EC moves France to abolish telephone monopolies, How- In France, telecommunications tradition- ever, Deutsche Telekom, one of Europe’s ally was part of the responsibility of the Ministry of Posts, Telecommunications, and largest telecommunications companies, be- Space. On January 1, 1991, France Telecom came an independent public company in became an autonomous, although completely 1991, when it was separated from the postal state-owned, entity with its own budget and administration. The Minister of Posts and management. Regulatory authority was re- Telecommunications has announced its in- tained by the Ministry Directorate of Regu- tention to partially privatize Deutsche Tel- latory Affairs (DRG). France Telecom still ekom by selling 49 percent of the organiza- has a monopoly in basic voice telephony and tion’s stock, in order to raise capital for the telex, but also operates competitively in telecommunications infrastructure of East some areas. Private operators may offer data Germany. Chancellor Helmut Kohl had ap- transmission and wireless communications proved the plan in August 1992, but it was under regulated competition: i.e., they must then postponed for political reasons; privati- The United Kingdom, be state-licensed. There is open competition zation will require the approval of two-thirds France, Germany, in cellular and paging services. Private of the Parliament, and there is strong opposi - and ItaIy now have networks for closed user groups, i.e., corpo- tion from one political party and from the wide/y different rate networks, must get a license from DRG, PTO’s employees, who want to protect their regulatory although small ones may not require licens- civil service status. Meanwhile, the number strategies. ing. Value-added services have been open to of telephone lines in East Germany has been competition since 1987. increased from fewer than 12 per 100 people France Telecom networks are highly digit- ized; Integrated Services Digital Network

‘2 New Sclent@ July 25, 1992. ‘3 ‘(BT Expands Global Network Services Coverage,” Te/corn Fhghhghts /international, May 20, 1992, p. 1. “ “Germany Defends EC Telephone Monopolies,” Telcorn Highlights /ntema~iona/, Oct. 16, 1991, p. 4. Page 51 U.S. Telecommunications Services in European Markets

Box 3-A. S IMPLE INTERNATIONAL R ESALE

Customers with large international capacity requirements often lease circuits from international carriers to connect corporate offices. Since these are dedicated circuits, no switching is required. The term international simple resale refers to the ability to connect these private circuits to the public-switched networks at both ends of the international transmission,1 and to resell spare capacity to other companies. This allows enhanced services providers to become “light carriers,” Ieasing high-volume capacity at reduced rates and reselling it to customers, often at lower rates than primary carriers can offer (since with private lines, the light carriers avoid paying international accounting rates). The right to do this both empowers users and challenges the traditional relationships between national carriers in providing services and distributing the revenue from international calls.2 Rules permitting international resale will enable carriers themselves to offer services on an international basis, substituting head-to-head competition between national carriers for the traditional cooperative relation- ship in delivering international traffic. International simple resale is being pursued in a few countries, including the United States, the United Kingdom, Canada, and Australia. In June 1991, the U.K.’S Department of Trade and Industry (DTI) lifted restrictions on reselling capacity on domestic private leased lines, but announced that for international simple resale, it would require equivalence in regulatory treatment from the corresponding country. The DTI has identified Canada, Sweden, New Zealand, and Australia as countries with sufficiently equivalent environments for the provision of international simple resale. In

1 Re@ethat ISnOt’’SlrnpleO” lSthatlnwhCh Onlyoneend, orneltherend, of the pnvateclrcu ltlsattached toapubhc-switched network. 2 International sew~e iS a cooperative effort; It was historically a “half-clrcult” arrangement whereby a natlOfial carrier’s jurlsdictton hypothetically extended from its home domain to a midpomt on each translational cwcujt (either a cabie or satellite channel); m this way the national carnerowned cable landings and satelhle receivers in itsowrr country. in practtce the “hand-off” of an mternahonal call does not occur at the midpoint butattha international gateway of the recipient country.

in 1989, to 20.15 Germany may follow the systems for taxis, trucking companies, etc. French model, a public corporation with By the mid- 1990s, the company hopes that autonomous management, but still under about one-third of its revenue will be in state ownership. competitive areas. ISDN is to be fully Meanwhile, the state retains a monopoly implemented during the 1990s, on terrestrial networks and telephone serv- In addition to the massive task of rebuild- ices, but cellular communications, satellite ing networks in caster-n Germany, Deutsche services, and data networks services have Telekom faces other challenges: reorganiz- been opened to competition. Two cellular ing its internal structure and expanding into systems have been licensed, and there arc a international markets.16 It has already initi- number of licensed private mobile radio ated joint ventures with firms in several

15 “Deutsche Telekom Appeals for Faster Privat Ization,” Telcorn Highlights /nfemafiona/, Feb. 10, 1993, p. 2. ‘G H. Rlcke, chairman of the board, “Germany’s TELEKOM: A New Way of Doing Business in a Liberalized Market,” Tekcornnwmca(lon Journa/, vol. 58, October 1991, p. 711. The European Market for Telecommunications Services

International simple September 1992, the DTI licensed ACC Long Distance to provide the service between the resale would likely United Kingdom and Canada. In the United States, the U.S. Federal Communications Commission (FCC) ruled in lead to growth of December 1991 that international carriers must permit the resale of private leased line “light carriers,” who capacity, but stipulated that this rule would apply only where the foreign country permits would challenge equivalent access. Despite objections from AT&T, the FCC has permitted resale between the national monopolies’ United States and Canada, and has authorized Fonorola and EM I Communications to offer control of interna- the service. tional services. No international simple resale is allowed directly between t he United States and the United Kingdom, despite their relatively harmonious approaches to liberalization. (Telephone rates between the two countries are relatively low compared with other international rates.) Each of the two regulatory agencies maintains that a reciprocal regulatory environment does not exist in the other country. The DTI objects to the FCC’s treatment of all foreign-owned common carriers as “dominant,” subjecting them to more rigorous filing requirements than some domestic carriers.3 U.S. regulators point to rules in the United Kingdom that deny U.S. firms international facilities licenses, which U.S. rules permit to foreigners. The DTI is reserving t he right to build, operate, and own international facilities to BT and Mercury, and competitors must bargain with one or the other for leased lines for international services. The intent is to protect Mercury, whose share of the U.K. market is only about 10 percent, in an effort to assure competition for BT.

3 AT&T and all foreign carriers are .wqactad to more rigorous regulatory requirements (I.e., 45 days notice before filin9 for “SectIon214“ authorlzahon to provide additional mternatlonal services) on the grounds that because of market dominance or monopoly power they are able to restrict competition m thev home markets. The FCC has proposed to modify this rule so that It WIII not apply to all foreign earners in regard to all serwces or geographical markets.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993. countries, including one to build an elec- cities. international services for Europe, and tronic data interchange (EDI) exchange for some data serv ices. Societa Italiana per Europe, and one with France Telecom to l’Esercizio delle Telecommunicazioni (SIP) offer managed networks services. is the major carrier, operating the national network and providing trunk services not run Italy by ASST. SIP also holds the concessions for In Italy several entities provide different mobile radio and packet-switched services, 7 kinds of telecommunications services, but The connection for all intercontinental com- each has a monopoly in its own kind of munications services is provided by Italca- services. Azienda di Stato per i Servizi ble, which also provides a number of value- Telefonici (ASST) is operated directly by the added services. Ministry of Posts and Telecommunications, and provides trunk services between major

‘7 The packet-switched serwce (Itapac) began In 1984, but has expanded significantly in only the last few years. Page 53 Us. Telecommunications Services in European Markets

The Italian Government-through its trad- $150 billion, of which 70 percent or $120 ing corporation, the Instituto per la Ricos- billion is for telecommunications services.19 truzione Industrial (IRI)--owns 85 percent Overall market growth for EC telecommuni- of the Societa Finanziaria Telefonica, which cations services for the early 1990s is ex- in turn owns most of the shares of SIP, pected to be about 5 to 6 percent per year.20 Telespazio, and Italcable. The IRI group also The EC also represents about 25 percent of has an research and development subsidiary, the world market for telecommunications CSELT, which also serves equipment manu- equipment (for comparison, North America facturers, in order to link carrier/manufac- accounts for 35 percent). It is widely re- 18 turer research. The Ministry of Posts and ported that U.S. companies are doing well in Telecommunications has final authority over European sales of equipment needed for all of the companies, in addition to operating private networks, such as very small aperture ASST directly. terminal (VSATs).21 Sales of enhanced tele- Italy expects to rationalize this complic- communications and information services ated market structure and to introduce by U.S. firms also encourage the sale of U.S. competition in services; it has ratified the EC equipment, even though some U.S. firms, Services Directives. The government policy puts high priority on increasing network such as MCI, make a point of using a mix of penetration to 42 lines per 100 people and U.S. and foreign equipment vendors. upgrading the infrastructure. Growth in PTO revenues and in market penetration (access lines relative to popula- The EC aggregate market tion) is much higher in EC countries than in The total 1992 market for EC telecommu- nications in terms of sales is estimated at

‘6 Italy ’stelecommunicat ions equipment manufacturer, Italtel, is the fourth largest {n Europe. However, all of the major European equipment manufacturers hold significant market shares in Italy. (“Research and Development in Telecommunlcatlons,” Te/ecornrnunicahons Po/Icy, January/February 1992, p. 49). 19 All market estimates in this section are for the 12 member-states of the EC unless otherwise noted. This represents the vast preponderance of the greater Europeantelecommunlcat ions market. The est i mates and projections unless otherwise noted were developed for OTA by Professor Bruce Egan, Columbia Institute for Tele-information, Columbia University School of Business, on the basis of assessment and integration of a large number of market analyses. The sources Include: McGraw-Hill and subsidiaries Northern Business Information and Datapro; Dataquest; Communications and Information Technology Research (CIT); Intelidata; Logica; Input; the Commission of the EC; Organization for Economic Cooperation an Development; North American Telecommunications Association; Observatolre Mondial des Syst&mes de Communications (France); Frost and Sullivan; the Gartner Group; Link; the Yankee Group. n Market forecasts range from 5 percent to 9 percent for services. Growth projections fortelecomrnunicatlons equipment ranged more widely, from 3 to 10 percent but concentrated at the lower end of the range. The projected growth rates for European telecommunications services revenues are very similar to those projected for U.S. telephone company service revenues (slightly lower in real growth because inflation is slightly higher in Europe at present). Revenues of U.S. private network serwce providers are growing faster.

2’ David Gilhooly, publisher of CommurricafionsWeek, speaking at asemlnaron International Strategies held Page 54 in connection with COMNET Exposition, Washington, DC, Feb. 3, 1993. The European Market for Telecommunications Services

zz the United States. Businesses account for Value-added services > 26 percent of total access lines and 45 Cellular/mobile ‘I’ percent of PTO revenues. Total EC traffic I Nonbasic services I Leased-line services & growth for the public-switched network is 1 —J — x about 6 percent per year. Toll call revenues are growing somewhat faster, and interna- Market status tional toll calls arc growing fastest—l 4 ❑,. Monopoly percent per year. Of all international calls ❑ Open made in the EC in 1991, 55 percent went to competition & other EC countries, and 11 percent to the rest El Partial competition “Basic” voice z services of Europe. ? (See figure 3-3.) $75 billion In most EC countries the sole or majority I owner of the monopoly PTO is the central government, although the operating entity (the PTO) has been separated from the entity I exercising regulatory authority. The PTO retains a monopoly on voice services.24 The telecom. ————— exception is the United Kingdom, which has 7 market Telecom. I liberalized market entry. As a result, BT $130 billion equipment I I $40 billion I (fomerly British Telecom) is beginning to I see its monopoly on local voice services II I eroded by cable television companies that I provide two-way telephone service. Most of I I these are now financed by U.S. telephone ? Y’1 – – – – ..’ companies. In major EC countries there are a few large SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 providers of nonvoice services: i.e., the structure of the market is oligopolist. In monopoly on voice services-also domi- Figure 3-3. practice, these markets are characterized by nates the major non-voice service market European what economists call "the dominant firm sector and sets the prices; the other providers Telecommunications model. That is, the PTO—which has a arc price-followers. There may be a number Market

22 EC revenue growth averaged 10 percent nominally (4 percent per year in real terms) during the 1980s, whi Ie market penetration grew about 5 percent per year. In the United States access I ine penetration is stable, Ilne growth is 2 to 3 percent per year, and nominal revenue growth is about 7 percent. The growth estimates are a broad average for 1980-90, and are different from some other growth estimates presented m t hls chapter for a shorter, more recent time period. Commission oft he European Commu nl t Ies, ‘“Towards Cost Orient at Ion and t he Adjustment ofPrlclng St ruct ures—Telecommun lcat ions Tarif fs in t he Communit y,” Brussels, July 15, 1992, p. 8. 23 Gregory C. Staple (cd.), “TeleGeography 1992: Global Telecommunications Traffic Statistics and Commentary,” International Institute of Communication, 1992, p. 86. 24 In Denmark, Finland, and possibly some other countries, although there is a national government monopoly PTO/telecommunications authority, there are also several other PTOS with regional monopolies. In Brltaln, one small service area has Hull Telephone Department as its monopoly PTO. Page 55 Us. Telecommunications Services in European Markets

of competitive regional and niche market oly for some fixed period. On the other hand, The EC ONP suppliers, including resellers and third-party some sources of funds for infrastructure Directive opened network management operations. projects, such as the World Bank and the the way for com- In most EC countries there arc two provid- International Finance Corporation, now tend petitive services ers of cellular communications; i.e., the to promote private sector control in a capital- suppliers and market is duopolist (as it is by regulation in istic market environment. business customers the United States). In a few countries, the to bypass PTOs PTO is still the only cellular services pro- Trends shaping the European In spite of their vider for the initial analog system. But as the telecommunications market legal monopoly. cellular communications markets begin to Over the next decade, the European mar- grow rapidly and new radio frequency spec- ket for telecommunications services will be trum is allocated to cellular service, the shaped not only by technological trends, as monopoly/duopoly structure is tending to described in chapter 2, but by demand give way to oligopoly, This has happened in patterns, price trends, market liberalization, the United Kingdom, which has the most and market unification. liberal entry policies for telecommunications in the world. Long-range demand patterns: The introduction of competition in the Several trends in demand for telecommu- European cellular market is being speeded nications services are discernible: by agreement on a new digital standard, the the expansion of private networks (much Global System Mobile Communications less advanced in Europe than in the United (GSM). 25 The United States has not adopted States, where a counter-trend is underway); a compatible standard, but U.S. cellular the popularity of communications porta- operators are aggressively pursuing Euro- bility; pean market opportunities using the GSM growing demand for multimedia services, standard. and The structure of the telecommunications strong and growing pressure from users. markets in Central and Eastern Europe, now undergoing radical economic and social In the United States, corporate private change, is discussed in a later chapter. These networks using leased lines proliferated in countries are likely to maintain the monop- the 1980s, as large corporations sought less oly model for switched voice, data, and even expensive and more flexible ways to obtain cellular services for a long time, but probably voice and data services. Before the AT&T the monopoly entity will not in all cases be divestiture in 1984, 80 percent of toll usage wholly government-owned. Foreign owner- was billed per minute of use. Private net- ship is needed to provide capital for rebuild- works shifted much of this traffic away from ing infrastructure, and to attract this capital the public-switched networks, and today less it may be necessary to guarantee investors/ than half of all long-distance access services operators that the PTO will enjoy a monop- in the United States are purchased under

25 The acronym originally stood for “Groupe Sp6cial Mobile,” but as use of the standard has spread, it has Page 56 become more generally known by the new name. The European Market for Telecommunications Services

traditional per-minute tariff rates. (‘‘Long- ity.27 Bypass cost U.S. telecommunications distance access services’ are the intercon- companies bill ions of dollars in lost revenue nections between local and long-distance in the 1980s.28 It is likely that the same telephone companies. ) Very large corpora- phenomena will occur in Europe, although it tions, especially in the financial services is being strong] y resisted to protect the social sector. may send over 90 percent of their objective of universal service .29 traffic over dedicated lines. There is good The EC Services Directive of 1990 called evidence. however, that the trend toward for liberalization of all telecommunications private networks is reversing in the United services except for switched voice service States, because of the fall in voice services and some data sin-vices, which member- tariffs and the new ability of public carriers states can continue to reserve for their PTOs. to provide "virtual private networks’ (software- The EC Open Network Provision (ONP) controlled allocation, by the public carrier, of Directive of June 1992, however, directly dedicated lines to customers on demand).26 mandated non-discriminatory interconnec- On the contrary, the movement toward tion for leased lines by 1993, with no private networks is just gathering steam in restrictions on their use, even for voice 30 k Europe. The substitution of private networks sevices.. . This provides an obvious bac for public-switched services (‘‘b)puss’ ) is a door for business customers and competitive result of market forces and deregulation, network suppliers to bypass the PTOs' voice especially the ability legally to resell capac - services in spite of their legal monopoly. ?

26 See ch. 2. See also, U.S. Congress, Office of Technology Assessment, U.S. Banks and /ntemationa/ Te/ecmnrnunfcatmw, OTA-BP-TCT-1 00 (Washington, DC: U.S. Government Prlntlng Office, September 1992), 2’ Well before t he AT&T dlvestlt ure, after years of Iltlgation, the FCC In 1976 recognized t he Iegalit y of MCI’S Execunet Service, which was a switched private Ilne serwce for large users. Private networks without Interconnect Ion had been allowed before 1976. Eventually this private network capacity expanded to most U.S. cities and became available for small companies and private residences. ‘e Bruce L. Egan, “Europeans Telecoms: A Market Assessment,” OTA contractor report, Nov. 10, 1992, p. 11. ‘g Universal serwce was bu[lt on broadly averaged subscriber rates and built-in cross subsidies that made It possible to serve all members of the society. EII Noam, op. cit., footnote 3, and others hold that as telephone penetration rrses to a high level, very large corporations are motivated to break away from the system rather than cost-share with the general body of subscribers, whose volume of use E low and who sometimes are remote and dlfflcult to serve. 33 The direct Ive calls for EC mem ber-states to make available by 1993 five categories of standardized leased Ilne services (two types of analog voice Ilnes, 64 kbps dlgltal lines, and two types of 2 Mbps dlgltal lines), with no restrictions on Interconnect Ion or use. 3’ Some EC member-states (Spain, Belglum, Italy) appealed to the European Court of Justice hoping to overturn the Comm Isslon’s directives on telecommunications equipment and services. However, the Comm Isslon has in a series of cases successfully defended Its authority under Article 90 of the Treaty of Rome to Issue direct Ives llm It ing member-states’ use of monopoly power. In t he most recent case, t he Court ruled that the Comm Isslon’s abolltlon of special rights was not lawful In that the Commlsslon had failed to define them precisely, but (t upheld again the Iegallty of measures intended to abolish exclusive rights to exploltat Ion of telecom m u nlcat Ions serwces gra nted to PTOS. “Europea n Comm Isslon’s Powers Upheld In Telecommunlcatlons,” Telcom /+gh/lghfs /ntematmna/, Dec. 2, 1992, p. 2. Page 57 us. Telecommunications Services in European Markets

This “back door" will open the way for three dimensional computer-aided design many innovative services arrangements to and videoconferencing, and to provide con- challenge PTO-provided services with ad- sumers with opportunities for distance learn- vanced software, customer premises equip- ing, shopping from home, entertainment, ment, and information content and fomat- and transaction services. How swiftly this ting. American firms have the knowledge market demand will mature is, however, and experience to develop such innovative hotly debated. services, and their prospects for successful There are many indicators of strong latent competition should grow. demand for services in the European market. Profits from software and value-added Greater Europe has a larger population and services are likely to grow in the future, income than has the United States. Yet the while core facilities or ‘‘conduits’ become United States’ consumption of telecommu- relatively less important as a source of nications services is over half of the world’s profits. Two other factors will further drive total. In 1990 the four largest EC countries prices for core network capacity close to together accounted for only 19 percent of commodity costs: the growing usc of wire- world sales of telecommunications services: less technology and the usc of other infra- the United Kingdom (5.6 percent), Germany structures as channels for telecommunica- (5.1 percent), France (4,5 percent), and Italy tions. Railroads, highways, and canals in- (3.8 percent). This indicates an unsatisfied clude rights-of-way that can accommodate market for telecommunications in Europe. fiber optic cable; electric power grids can Within the EC market, Germany has about provide poles, towers, and power. Sprint, the 30 percent of the total income, compared third largest U.S. long-distance carrier, has with the United Kingdom’s 16 percent, but bought the right to install cable along British its telecommunications sector is smaller. Waterway canals. There is thus especially great potential for Pm-table communications are now the growth in the German market, but it is one of fastest-growing communications mass mar- the least liberalized. In terms of real growth ket. As the technology improves, their con- in telecommunications services revenues There is a large venience becomes increasingly attractive. ( 1985-90), both Germany at 2.6 percent and unsatisfied market Demand for mobile phones is especially France at 2.4 percent lagged behind Spain for telecommunica- strong in Central and Eastern Europe be- (8.5 percent), Italy (4.9 percent). and the tions services in cause there are long waiting lists for basic United Kingdom (4. 1 percent). Germany is Europe, where telephone service, and wireless is a relatively struggling to bring the infrastructure in the business consump- fast and inexpensive way to satisfy this eastern part of the country up to par and has tion lags far pent-up demand. indicated that this will delay the move behind that in the Multimedia telecommunications is the toward telecommunications liberalization. United States. ability to combine video, audio, text and The United States represents about two- data, and also to provide interactivity be- thirds of the world market for ‘‘nonbasic’ tween end users and the network head-end. telephone services such as database services A growing demand for multimedia telecom- and cellular telephony, while the four largest munications can be expected in the long- EC countries together made up only 12 Page 58 range future to meet business needs such as percent in 1990, the latest figures available. The European Market for Telecommunications Services

Telephone penetration is now growing about twice as fast in the EC as in the United States.~z In 1991 there were between 45 and EC average U.S average (1 980-90) (1984-91 ) 50 telephone lines per 100 population in both Connection charges -39 ”/0 + 2% the United States and the larger EC coun- Monthly line rental +20 +15 tries; more in the Scandinavian countries, Local call charges +3 and man y fewer in Central and Eastern Monthly business line +8 Intracountry toll call -29 33 Europe (about 13). The latter area is Intrastate toll call -40 averaging 6 percent growth in telephone Interstate toll call -72 Cumulative inflation during period 60 22 penetration, and this is expected to speed up substantially during the decade. The goal in SOURCE: BRUCE EGAN, USING DATA FROM COMMISSION OF THE EUROPEAN COMMUNITIES, “TOWARDS COST ORIENTATION AND THE ADJUSTMENT OF PRICING STRUCTURES- these countries is 40 telephone lines per 100 ELECOMMUNICATIONS TARIFFS IN THE COMMUNITY,” BRUSSELS, JULY 15, 1992. population by the year 2000; this would require nearly 15 percent annual growth. Price trends Table 3-1. People in the United States make three Tariff rationalization has not yet been EC and U.S. times more telephone calls than people in the achieved in the EC, and there are wide Changes in four largest EC countries; but calling rates differences among countries in tariffing pol - 36 Prices for are increasing faster in those countries. 34 The icy. Prices are high compared with those in the United States and this clearly depresses Telecommunications average annual expenditure per capita in the demand and causes the telecommunications Services United States ($445) is more than twice the networks to be underutilized.37 Table 3-1 (changes in average for the large EC countries ($200) in shows relative price changes, 1980 through nominal prices) spite of lower U.S. customer charges, but 1990. Given the inflation rates, the average average growth rates for expenditures are EC tariff rates did not decline and perhaps much higher in the European countries (5 increased in real terms, whereas in the United 3s percent compared with 1.5 percent). States they declined as much as 72 percent in

32 “Telephone penetration” Is the number of telephones per 100 people. Average annual growth from 1985 to 1990 was: the United States, 1.8 percent; Germany, 3.2 percent; France, 4.4 percent; Italy, 4.2 percent; the United Kingdom, 3.1 percent. 33 Organ lzatlon for Economic Cooperation and Development, Te/ecomrnunicaflons and/nkmnakm Po/icles: 1992/93 Cornrnurvty Ouf/ook, OECD Working Party on Telecommunications and Information Services Policies, Aug. 7, 1992, pp. 100-109. 34 Observatolre Mondlal des Syst6mes de Communications, op. cit., footnote 20, pp. 60-63. Calling rates per capita are growing 3.6 percent in Germany, 4 percent in Italy, and 5.5 percent in the United Kingdom, compared with 2.4 percent in the United States. 35 The OMSYC statistics are in relative agreement with OECD spending data, although reported levels are different due to differences In both base year prices and methods of calculation. Egan, op. cit., footnote 29, p. 54. 36 Commission of the European Communities, “Towards Cost Orientation and the Adjustment of Pricing Structures—Telecommunications Tariffs in the Community,” Brussels, July 15, 1992. 37 Commlsslon of the European Communities, op. cit., footnote 23, says that revenue In the EC per main line averaged, In 1990, about 630 ecusorS819, while in the United States It was over 900 ecus or about $1,200, In spite of substantially lower U.S. prices. Page 59 Us. Telecommunications Services in European Markets

real terms during the shorter time period States, and except in the United Kingdom, used in the table. any excess capacity on them cannot be In 1992, the average toll call price per resold .41 minute in the United States was less than Cost declines due to technology adoption $0.20. In the EC it was $0.33 for intracountry should be roughly similar in Europe and in calls and about $1 for intercountry toll calls the United States, so most of the price within the EC.38 It may cost twice as much differential is due to political and institu- to make a call across a nearby national tional factors. The PTO prices appear to boundary than to call many times that provide heavy cross-subsidies to other serv- distance within one country. If the EC ices and markets. Such differences between succeeds in opening transborder communi- costs and price levels indicate a large poten- cations to competition (as may result from an tial for competitive entry. ongoing review of the EC Services Directive of 1990), price cutting will surely enlarge Market liberalization calling rates; there is evidence from AT&T The pace of liberalization slowed in 1992, and BT of the effects of aggressive price but the EC Commission has signaled its cutting on growth in usage, 39 determination that further liberalization of The average monthly rental for a 50-km telecommunications services markets will voice grade leased line is reported to be more occur. The Services Directive that specifi- than twice the U.S. price, although the cally reserved switched voice services to average monthly prices for PTO leased lines PTOs was scheduled to be reviewed in 1993. (voice grade) fell about 20 percent in real In spite of contention within the EC, prepara- terms from 1980 to 1991.40 In the EC, higher tion for this review produced a consultative capacity circuits cost about $3,000 per month, document that set out four alternatives for or about three times the cost in the United consideration: 1 ) direct regulation of intcrna-

38 Commission of the European Communities, op. cit., footnote 22. 39 In the United States there is evidence that as AT&T, the Bell operat ing companies, and BT lost market share due to market I iberallzat ion, total market volumes and revenues increased substantially, as did prof its and market values. AT&T tariff rates fell by over 70 percent in real terms between 1983 and 1991 and its market share declined by 35 percent, yet AT&T revenues and profit rates held steady because of increased demand. BT toll prices have fallen and its market share has declined as competition is introduced, butt here has been substantial growth in prof its. Bruce Egan and J. Wenders, “The Cost of State Regulation: In Theory and Practice, ” Columbia Institute for Tele-lnformation, Research Working Paper No. 443, Colum bia Business School, revised, 1992, p. 26. Whether all consumers also benefited, or benefited equally, is less clear. U.S. consumers Increased real spending on public telecommunications by 58 percent to $700 per capita per year. 40 Given Inflation rates, this implies that nominal tariff rates increased. Commission of the European Communities, op. cit., footnote 22. 41 The comparison here is for DS1 lines. The European version is 2Mb/s, with the capacity of 31 equivalent voice grade circuits (64kbps); in the United States a DS1 circuit has a capacity of 1.5Mb/s or 24 voice grade equivalent channels. Prices for DS1 service vary substantially within the EC. In the United Kingdom the average price is about 20 percent higher than the U.S. price; in France about two and a half times higher, Page 60 in Germany about 11 times higher. Egan, op. cit., footnote 29, p. 59. The European Market for Telecommunications Services

tional prices by the EC, 2) ending monopo- April 1993, the EC backed away from its If the U.S. lies’ control of cross-border interconnec- proposal, and instead announced that liberal- tions, 3) opening up the entire regulated ization would be accomplished more gradu- experience is any telecommunications market, and 4) freezing ally, between 1993 and 1998, under “a guide, bypass will /cad to increasing the liberalization effort and maintaining the well-managed liberalization plan’ to be competition in status quo. announced in a ‘‘new green paper’ by the 46 European markets, There was opposition to further liberaliza- end of 1995. in spite of political tion by most PTOs and in most govern- If the U.S. experience can be used to opposition. ments.42 In France, for example, members of foresee likely events in Europe, the ability to Parliament declared opposition to further bypass PTOs’ services that is implicit in the deregulation on the grounds that competition ONP Directive is likely to lead to steadily would led to higher prices for local calls increasing competition in the European mar- (which have been subsidized), hurting small ket, in spite of the success in blocking EC businesses, and because it would enable U.S. formal procedures. While there are strong operators to penetrate the European mar- cultural, institutional, and political differ- ket.43 On the other hand, the international ences between the U.S. situation in 1976 Users Group (INTUG) strongly advocated through 1984 and Europe today, business the second alternative, opening transborder incentives and responses arc similar and the infrastructure and voice services to competi- momentum already underway points to con- tion, in advertisements 44and in letters to the tinued erosion of monopoly protection. In Commission president. European newspa- international long distance, a number of pers reported that ‘‘almost all consumers entrepreneurs have begun to arbitrage asym- favour far-reaching liberalisation and har- metrical customer charges in the United monisation" 45— but over a period of 10 States and Europe with arrangements for years, rather than immediately. When the code-calling and automatic call-back EC’s 6-month period for comment ended in schemes.47

‘2 The newsletter of the International Telecommunications Users Group commented that”. . the forces of reaction continue to dom Inate. . and to retain their hold on the political levers. ” “Presidents Letter, ” /NTUG News, October 1992. The United Kingdom, Denmark, and the Netherlands are reported to support proposals to open the European vo[ce market to competition. Dawn Hayes and John Blau, “Crack in Serwces Market,” Comrnunicaflons Week /nterfraflor’ra/, Nov. 9, 1992, p. 3. ‘3 “France Hits EC Plans for Telecom Industry,” Te/corn High/ighfs /ntemahona/, Jan. 27, 1993, p. 3. “ /NTUG News, October 1992 and January 1993, p. 3. “ Andrew HIII, “Brussels Considers Widening Corn petition in EC Telecoms,” Flnarrcia/ Times, Mar. 10,1993, p. 1. ‘G Statement by EC Commissioner Karel van Miert on Apr. 15, 1993, reported by Telecommunications Reports, Apr. 19, 1993, p. 10.

‘7 For example, a European subscriber calls a U.S. number; the call IS not answered, but a computer in the U.S. st nps off the number of the Incoming call, automatically returns the call (at U.S. rates), and connects the caller to a desired reclplent. In many of these arrangements, calls from one foreign country to another foreign country can be hubbed through the United States at U.S. rates—this gives the caller the benefit of lower rates, but Incidentally exacerbates the accounting rate problem for the United States, which is described later In this chapter. Page 61 Us. Telecommunications Services in European Markets

European monopolies are beginning to this permission would require an FCC find- crumble due to the pressure from the Com- ing of regulatory equivalence. mission for competition within the EC, The domestic long-distance market may As European coun- pressure from the U.S. government, and the be the last segment to be liberalized in so tries reluctantly influence of the continuing general agree- Europe. As profits and subsidies from allow greater ment on trade and tariffs (GATT’) negotia- services to large businesses and from inter- competition, their tions. The United Kingdom has led the way national long distance begin to shrink due to policies will by offering permission for international re- competition, monopoly profits on domestic continue to favor sale to the firms of any country that will long-distance services will become even European firms. agree to bilateral symmetry in market access more important.s1 If the EC succeeds in and pricing. In October 1992, it granted the reducing intercountry toll service rates and first license for international simple resale to intracountry rates do not drop, companies ACC Long Distance UK, which will initially may route traffic via a neighboring country sell transmission services from the United with lower tariffs or lease private lines. Kingdom to Australia, Canada, and Sweden, The non-discriminatory interconnection and has applied to the U.S. Federal Commu- mandated by the Commission of the EC in nications Commission (FCC) for authority to the ONP Directive does not go as far as the resell service to the United States.48 The ‘‘equal ease and convenience of access’ United States also requires bilateral symme- ordered by the U.S. District Court in the try, and neither country’s regulators are yet AT&T divestiture. In that case the court said willing to agree that symmetry exists, each that there must be punctually equal access for pointing to restrictions on access to the all competitors such that users would see no other’s market. (See chapter 1, box 1 -A.) In difference, even to the number of digits that March 1993, BT’s U.S. subsidiary, BT- must be dialed. In Europe such issues as North America, asked the FCC for authority dialing parity, subscription procedures, and to resell U.S. carriers’ international switched control of telephone numbers still must be and private line services, in order to put addressed by regulators. However, as pointed together global virtual private networks;49 out in chapter 2, advanced software and

48 John Williamson, “Competition Drives Down Global Tariffs,” Te/ephor?y, Nov. 2, 1992, p. 24. A number of U.S. companies, called “light carriers,” already provide international resale services. 49 “British Telecom Applies for U.S. Private-Line License,” Te/ecom Highlights /nternationa/, Mar. 17, 1993, p. 3. 50 It should be noted, however, that in both Europe and the United States basic local telephone service for residential subscribers is still effectively a monopoly, even though in the United States and in ?he United Kingdom local loop competition is legal. 51 The comparable U.S. network segment ts intra-LATA long distance. (LATA stands for Local Access and Transport Area, a geographical term invented at the time of divestiture to denote the area within which a regional Bell operating company (RBOC), as a local exchange carrier, can legally provide end-to-end toll call ing service at tariffed rates. ) RBOCS cannot legally provide inter-LATA toll service. LATAs vary in size; there may be one in a small state or several in a large state, but they are roughly comparable in scale to domestic long distance in a European country. Local carriers have lost over a fourt h of this market to private networks, although legally this market is reserved for the carriers. The European Market for Telecommunications Services

switching systems may be able to overcome The further unification of the EC market such problems as dialing parity. will thus enhance the competitiveness of EC In short, it appears that there will eventu- firms relative to foreign suppliers. Domestic ally be competition in nearly all telecommu- firms will benefit most directly and immedi- nications services markets in Europe, includ- ately from liberalization of regulations, from ing toll voice services, not necessarily the opportunity to expand into neighboring because open entry is explicitly allowed but geographic areas, and from more uniform because of the back door created by the EC business law and technical standards. Expe- ONP Directive. This may, however, take rience in the United States and in the United some time-possibly the rest of this decade— Kingdom indicates that when competition is to become effective. It is likely to be at least introduced the revenues, profits, and market that long before U.S. firms will have full or value of the former monopoly provider increase rather than decrease. easy access to these markets. Until then, the The EC rules for unification and free trade strategy of partnering or joint ventures, as will apply specifically only to firms of described in the next chapter, is likely to member-states, while treatment of foreign prevail. firms will still be governed by GATT and other international conventions, as discussed Market unification in chapter 7. The prevailing U.S. strategy of Even as European countries move to allow partnering will continue. Joint venturing greater competition, they will continue to qualifies U.S. firms as European firms. In promote policies favoring their own domes- addition, firms in some of the smaller EC tic firms. They naturally prefer that if the member-states, not themselves large enough dismantling of monopolies and cross- to become strong players in an expanded subsidy structures is to occur, it should market, have recently been seeking to part- benefit first their own and then other EC ner with large U.S. firms. Examples arc businesses before it benefits foreign busi- STET (Italy) and Telefonica (Spain). nesses. The Commission of the EC appears If market unification is likely to benefit at to concede this; market unification itself is least the stronger European firms, conven- designed to develop a strong domestic mar- tional wisdom would suggest that U.S. firms ket base for leverage in the international might be relative losers. The perspectives of marketplace. 52 Explicit Commission support U.S. services firms operating in Europe, on 54 for favoring domestic firms in conjunction the contrary, suggest that the relative with EC market unification efforts was disadvantages to U.S. firms may be far reemphasized in the Eurostrategies Report outweighed by the benefits to them of greater released in July 1992.53 uniformity in equipment and services, regu-

‘2 See discussions in Commmon of the European Communities, 1992 Review of Ihe Sjlualim in /he Te/ecornmunlcatlons Services Sector, Brussels, July 10, 1992, pp. 33-41. 53 Commlsslon of the European Communities, The European Telecommunications Equipment /ndustry-The State of P/ay, /ssues at Stake and Proposa/s /or Action, Brussels, July 15, 1992. m See the extended discussion In ch. 5, “Users’ Perspectives,” based on interviews and contributed remarks of approximately 50 representative services firms. Page 63 U.S. Telecommunications Services in European Markets

lations, and institutional procedures, which prices are high, there are relatively few will allow them to offer additional innova- private networks.56 The growth potential for tive services in a more cost-effective way. leased line services is phenomenal now that Some American business people fear that technological improvements and the EC once the EC Commission has consolidated ONP Directive will allow leased lines to its regulatory authority it could assert cen- become a viable substitute for switched tralized protectionist policies of its own,ss In services for large customers. Revenues from view of that possibility, however slim, it is the fast-growing data and value-added serv- essential to make sure that there is parity in ices markets already constitute a higher the terms of trade between U.S. and Euro- portion of PTO revenues than do the monthly pean telecommunications services markets. rentals for leased lines. The growth potential for leased line services should be double that for traditional switched services for the next Market estimates and projections decade, at least 10 to 15 percent per year, and Basic services may be higher. The potential effect of the The PTOs control about 90 percent of the ONP Directive may be gauged by looking at European market for telecommunications the United Kingdom, where there are full services; their share is about $110 billion per interconnection rights. The United Kingdom year ( 199 I -92), with a growth rate of 6 to 7 represents only 16 percent of the total EC percent. The monopoly voice services por- market in terms of population and income, tion is, in turn, about 80 percent to 90 of total but has well over half of the leased lines and PTO revenues. Thus 85 percent of the total 90 percent of the high capacity lines (2 market is legally closed to competition at this Mbps), time. Nonvoice services (including leased In Europe, the OPN Directive should data lines) are growing about 10 per year. make the market structure for private net- Voice services have lower growth rates. work suppliers oligopolist, not only for In most European countries, because facilities-based leased line suppliers57 but for leased line interconnection is restricted and resellers and other value-added services In European countries there are 55 In a recent paper, Professor Eli Noam discusses the possibility of such a “power play” by theCornmlsslon: relatively few “Telecommunications Reforms at the Periphery: Role Models of Followers,” draft, Columbia Institute for Telelnformation, Columbia University Business School, September 1992. The possibility may not be slim. private network=,re. On Februarv. 1, 1993, the new U.S. Trade Re~resentative (Ambassador Michael Kantor) denounced the the growth EC’s Ut I lit Ies Directive as containing “discrim inatory procurement pract ices [t hat] prevent some of our most potentjal is competitive companies from selling products such as telecommunications amd power generating enormous. equipment to government owned utilities. ” As of March 22, 1993, Kantor said, the United States WIII prohibit the procurement of EC sourced products not covered by the GATT procurement code or other security-related agreements, and will also consider the feasibility y of withdrawing from the GATT government procurement code. 56 Organization for Econom ic Cooperation and Development, Te/ecomrnunlcat/ons arrdlnformatlon Pohcles: 1992/1993, Pans, 1992, pp. 79-87. 57 “Facllitles-based suppllers” are those firms that own and operate all or a large part of the network and equipment that they use to deliver services, or that build and lease such networks and equipments to ot her Page 64 services providers. The European Market for Telecommunications Services

providers. Competition may force the PTOs very large firms that span a wide range of to offer high-capacity (45 Mbps) DS3 leased services offerings and have the capacity and line services, not now available in Europe. geographical presence to serve large, multi- Large firms that can national corporations may dominate the offer multinational corporations a wide Value-added services market in the long run. 58 range of enhanced Value-added services include applica- Estimates of the total European value- services may tions such as electronic mail (E-mail), fac- added services market vary widely depend- dominate the simile, database services, cellular communi- ing on how broadly the category is defined. market in the cations, paging, high-capacity data services, A reasonable figure is about $5 to $6 billion long run. EDI, transaction services (automated teller for the networking, infomation, and deliv- machine services, credit card authorizations, ery portion of the market (not including computerized reservation services. electronic charges for private data nets, cellular, pag- funds transfer), and networked computer- ing, and other mobile and satellite business aidcd design and manufacturing (CAD/ services). 60 Annual growth estimates are CAM). ‘‘Soft’ \aluc-added services include generally as high as 20 to 30 percent.61 There network management and consulting, soft- arc 3 million subscribers for cellular commu - ware engineering, network operations and nications services in the EC, making up a systems support services. Local area net- market estimatcd at $4.5 billion in 1990. In works (LANs), wide area networks (WANs), the United Kingdom, BT provides less than and metropolitan area networks (MANs) are half of the cellular mobile services. but here also lumpcd with value-added services elsewhere PTOs dominate this market seg- because they are often used as the delivery ment. mechanism for services. New wireless technology applications arc The United Kingdom at present consti- expanding rapidly; these include wide area tutes most of the market for value-added paging, private and trunked mobile radio. services, about 70 to 80 percent.59 The mobile data transmission, GSM digital cellu- market for Yaluc-added services is generally lar communications, cordless phones. per- compctitive, and full of niche suppliers. It is sonal communications services, and satellite possible for small innovative firms to com- mobile services. The potential for market pete successfully in these markets. However, growth is very high. The United States and

58 As here used, value-added or enhanced serwces are those that add value beyond pure transmission. Basic services are traditional sw[tched services such as regulated local and toll voice services and some leased line serwces.

59 In many EC countnes the PTO IS the dominant suppller of value-added services, but tariff charges for PTO-provided network dellvery are excluded from market estimates. w Datapro, July 1990; CIT Research, 1992; U.S. International Trade Commlsslon, April 1990. The U.S. International Trade Comm isslon reported that In 1989 the EC value-added services market was S26 billion, compared with S50 bllllon for the United States. This, however, Included computer services and software. See Third Fo//owup Reporl on the Effects of Greater EconornIc /nfegration WIthIn the European Community on the U. S., Pub. 2368, March 1991. “ U.S. International Trade Comm Isslon, 1991; Northern Business Information, 1990; Communications and Information Technology Research, 1992. u.s. Telecommunications Services in European Markets

the United Kingdom, with relatively low allow a large number of TV channels, prices, have market penetration of about 20 including new high-definition television, to mobile phones per 1,000 population. The reach subscribers’ small, inexpensive receiv- Nordic countries, which adopted a standard ing dishes. The use of VSATs with high- very early and have lower prices than the powered satellites allows point-to-point data United States, have about 50 mobile phones transmission where good wireline network per 1,000 people. Germany and France have infrastructures do not exist, as in portions of 7 and 5, respectively; and some European Central and Eastern Europe. The total market countries do not yet have cellular services. for satellite business services is estimated to This should be a high-growth market grow from $350 million in 1991 to $1.3 through the 1990s.62 billion by 2001 .63 Electronic data interchange (EDI) is com- The traditional public broadcasting mo- puter-to-computer transfer of fixed-format nopolies are rapidly losing market share to data such as orders, invoices, payment in- new channels on satellite and cable televi- structions, and legal documents. This market sion. 64 In the United Kingdom, much of the is burgeoning in the United States. Only cable television activity is financed by U.S. about 7,500 of the EC’s 6 million companies firms. Cable television penetration in the were using EDI in 1992, and the market is United Kingdom is still only 1 percent but is only about $110 million, of which $65 growing rapidly. In France it is 3.7 percent million is in the United Kingdom. With and in Germany 31 percent; for comparison, many potential applications and the effects in the United States it is 55 percent. Cable of public network interconnection, the mar- penetration is estimated to rise from 23 ket may grow at 50 percent per year for the percent of European households in 1990 to next few years. 36 percent in 1995, with revenues increasing Two related technological developments 300 percent by 1999 (from $4.6 billion in may greatly expand the hitherto small Euro- 1990).6s Satellite television is also expected pean market for satellite communications. to grow rapidly. Penetration rates are now High-powered direct broadcast satellites will very low—from zero in Italy to 5 percent in

‘z Organization for Economic and Cooperation and Development, 1992, op. cit. footnote 56. m Communications and Information Technology Research, In “Satelllte Earth Stations: New Window of Opportunity,” f-inarrcia/ Times, Oct. 15, 1992, Sec. Ill, p. X. ~ Between 1986 and 1990, the number of broadcast hours on European television more than doubled. Much of this growth was reruns of U.S. television programs. Strong growth (32 percent) is expected over the next decade, much of it from purchase of reruns. Until recently, most growth was in in-house productions by t he monopoly (public) broadcaster. From 1985 to 1990, France’s public television lost 67 percent of public viewing, Germany’s 29 percent, and Italy’s 41 percent. (R. Le Chain pion and P. Rasmoela, “The Positioning of Private and Public Channels in Europe,” Twentieth Annual Telecommunications Policy Research Conference, Solomans, MD, Sept. 10, 1992.) But on October 31, 1992, an EC directive (which member-states are rushing to implement) setup a single EC market for television broadcasting and provided that broadcasters must reserve a majority of entertainment programming for European works. The implementation of this quota will be a significant trade policy issue. N Kagan World Media, Ltd., 1991. w Ireland is an exception, with 42 percent of households receiving satellite television. The European Market for Telecommunications Services

— 1 Figure 3-4. U.S. International I Telephone Traffic, 1991

-

SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1992 the United Kingdom. 66 Across Europe, pene- having 49 percent of the markct. Average tration is expected to increase from 3 percent annual growth for Europe was estimated at in 1990 (o about 16 percent by 1995.67 over 13 percent.68 Network management systems and serv- ices is a small and fast-growing niche market The importance of U.S. trade estimated to grow about 40 percent per year through the early 1990s. Networked data, in services facsimile, E-mail, and online database serv- Services exports arc increasingly impor- ices arc all expected to grow at about 20 tant to the United States economy. They arc percent per year. The United States domi- now one-third the volume of merchandise nates the field of on-linc database services, exports, and growing briskly. U.S. services except for Reuters, the British/international exports were $166,7 billion in 1992, 9.5 firm specializing in financial data. The 1990 percent more than in 1991 and 41 percent on-linc market for the United States, Europe, more than in 1989.69 The United States has and Japan together was estimated in 1990 to a healthy positive trade balance in services, be $10.3 billion, with the United States

‘7 CARAT TV Market Forecast, 1992. w Lydia Arossa, “Computerized Information Serwces: Economic and Trade Issues m the Database Market,” OECD DST1/lCCP (92)6. ‘g Due to definitional and methodological changes m data collection In 1989, figures before and after that date are not comparable. However, In 1988 serwces exports were 23 percent greater than in 1986. Page 67 us. Telecommunications Services in European Markets

$59 billion in 1992 and $52.2 billion in States, which prides itself on being a leadcr 1991.70 This should be compared with a in basic and enhanced telecommunications merchandise trade deficit of –$ 105.3 billion services, have a persistent and growing trade in 1992 and –$73.4 billion in 1991.71 deficit in this sector? The European Community is the primary The deficit in telecommunications serv- foreign market for U.S. service producers; ices trade is, by a strange twist, a measure of almost a third of all U.S. exports of business U.S. strength in telecommunications, rather services go to EC countries (an estimated than a sign of lack of competitiveness. The $37.5 billion in 1991). telecommunications trade deficits are a re- These figures cover only direct transac- sult of asymmetrical traffic demand patterns tions in services and do not include revenue and of international accounting and revenue from sales of U.S. affiliates overseas. Such settlement practices. When an international foreign investments account for about half of call is made over a public-switched network, the total U.S. delivery of services to foreign the long-distance company in the country of 72 citizens and organizations. In this category, origin pays the Iong-distance company in the also, the United States has a favorable receiving country for its services in routing balance of trade, $11 billion in 1991, up from the call to a customer. The amount of the $8.5 billion in 1990.73 payment, which is called the accounting rate, In telecommunications products and serv- has been negotiated between the two compa- ices taken together, the United States has a nies. It is the same regardless of the direction large trade surplus; but it has an overall of the call and is independent both of the deficit in telecommunications services, -$2.8 collection rates (what the customer is billion in 1991. This annual deficit has charged) in either country, and of thc actual doubled since 1987. Why should the United

70 The total international t rade in services KS $700 billlon ( 1991 ). The world’s majorserwces export ers are t he United States, France, Germany, the United Kingdom, and Japan. Most of the International trade In services is among the Organization for Econom IC Cooperation and Development countries, and these five countries together account for about 30 percent of t he OECD total. James Brian Quinn, “Technology In Services: Past Myths and Future Challenges,” Bruce R. Guile and James Brian Quinn (eds.), Technology m Serwces: Po/icies /or Growth, Trade, and &r@oyrnent(Wash ington, DC: National Academy Press, 1988), pp. 38-44. 71 The merchandise trade deficit is often reported in newspapers as “the U.S. trade deficit,” ignoring both the surplus in trade in services and other net income (direct investment receipts and payments, government receipts and payments). 72 Linda F. Powers, Deputy Assistant Secretary for Services, and Fred Elliott, Office of Service Industries, U.S. Department of Commerce, “U.S. Serwce Industries Face Open Quest ions,” Bus;ness Arnerlca, Feb. 24, 1992, pp. 9-10. Figures for sales to foreign persons by foreign affiliates of U.S. companies before and after 1989 are not exactly comparable because of “definitional and methodological improvements” in Bureau of Economic Analysis’ 1989 Benchmark Survey. However, the proportion of crossborder transactions to the total is roughly 50 percent in 1987 and 1988 and 54 percent for 1989 and 1990; figures for 1991 are not available. Bureau of Economic Analysls, Current Survey of Business. 73 In crossbordertransactions, travel and transportation services account for about 59 percent of U.S. exports and about 73 percent of U.S. imports, as a 5-year average, 1987-91. The second largest part of trade in Page 68 services is royalties and license fees (12 percent of exports, 3 percent of imports). The European Market for Telecommunications Services

A comparison of a 5-minute, peak-time call between the United States and Germany, 1991 Figure 3-5. Accounting and Collection Rates

NOTES The accounting rate with Germany m 1992 was 0.8 special drawing rights or $1 14 (FCC, Statls- tlcsof CommunlcatOns Common Car- riers, 1991/1 992 Ed.). The collection rate (I.e., what the caller IS charged) for the U S.-to Germany call IS calculated as $1.77 [for the Inltlal m!nute] + 4x$1 ,09 = S6.13 (FCC). The collection rate for the Germany- to-U.S call IS derwed from 5x$1 88 o 1 2 3 4 5 6 7 8 9 10 (TeleGeoraphy 1992, International Institute of Communlcatlons) Dollars The costs to the carriers are esti- mated at $015 per mmute at both Amount paid to the correspondent carrier to complete the call, as per the accounting rate the U S. and German end, this num- ber IS conservatwe.

Amount retained by operator originating the call

Estimate of carriers’ costs

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

cost to the phone company of de1ivering made from this country as arc received from calls. overseas. Thus accounting rates cause much In one sense, the deficits represent good more money to flow out of the country than news; they are a side effect of lower telecom- they cause to flow in.74 munications prices in the United States. The U.S. Federal Communications Com- They arc also testimony to the size and vigor mission, the International Telecommunica- of U.S. industry and its reliance on telecom- tion Union, and the Commission of the munications. In the United States, customer European Communities are pressuring Euro- charges for overseas calls arc much lower pean telecommunications authorities to join than in most other countries, because Euro- U.S. firms in negotiating lower, cost-based pean countries subsidize basic services with accounting rates. To end the negative U.S. international and business revenues; some trade balance in telecommunications” serv- countries also use telecommunications reve- ices, however, will require not only lower nues to subsidize the postal system and accounting rates but also lower customer public transportation. Because of lower costs charges in Europe for international calls, so and because of the size of the economy, that the number of calls made in each about twice as many international calls are direction comes into better balance.

74 Kenneth B. Stanley, FCC, “Balance of Payments, Deficits, and SubsIdles In International Communlcatlons Serwces: A New Challenge to Regulation,” Adrnmisfrative Law RevJew, vol. 43, summer 1991, pp.411 -438. Page 69 Us. Telecommunications Services in European Markets

The telecommunications services trade future are likely to become very profitable balance will also be much improved if U.S. ventures. Telecommunications services will exports of value-added or enhanced telecom- probably continue to be delivered primarily munications services grow significantly. Just through foreign-based subsidiaries. Some as telecommunications services are a small economists assume this because communi- part of all international trade in services cations are infrastructure-based services,76 (about 2 percent of U.S. exports and 5 to 6 but it should be noted that many telecommu- percent of imports), value-added or en- nications and information services can actu- hanced services are a small segment of the ally be delivered electronically, without overall market in telecommunications serv- regard to geographic proximity. Nontariff ices. The value-added services sector is, trade barriers are more potent reasons to however, likely to expand tremendously in establish a presence within Europe. How- the next decade. ever, U.S. subsidiaries and joint venture The United States had a positive trade firms do not necessarily enjoy all of the balance of $60 million in value-added serv- advantages of European firms, and as the ices in 1991.75 In addition, there are massive European market expands and is liberalized, investments by U.S. telecommunications direct U.S. exports of value-added telecom- companies in Europe that are too new to munications services to Europe could grow show substantial profits as yet, but in the near strongly.

75 Bureau of Economic Affairs, Current Survey of Business, September 1992, table 2. Page 70 ‘G See Bruce R. Guile and James Brian Quinn, op. cit., footnote 70. . . . .

European Activities and Strategies of U.S. Telecommunications Firms CHAPTER

AT&T CHAIRMAN ROBERT ALLEN’S BOLD GOAL creased spending on telephone service in of drawing 50 percent of the company other countries, which as described in the revenues from overseas by 2000 reflects the preceding chapter is expected to range from strong trend for U.S. telecommunications 30 to 80 percent. service providers to expand their interna- In contrast with the European market, the tional activities (see table 4-l ). The seven U.S. telecommunications” market is satu- l regional Bell holding companies (RBHCS) rated. There are, in the United States, several have in the last few years also aggressively layers of providers and within each layer pursued international investments. It is esti- there arc many firms. The two largest groups mated that they have invested nearly $12 arc the interexchange carriers (commonly billion overseas since the divestiture of the referred to as ‘‘IXCS’ and more commonly Bell Systcm, most of these investments since known as long-distance carriers) and the U.S. telecommunica- 1989.2 local exchange carriers (LECs). AT&T, MCI, tions firms think This trend extends to major carriers out- and Sprint dominate the long-distance busi- their future side the United States as well. BT (formerly ness. so much so that it is easy to assume growth increasingly British Telecom) is catering to the communi- mistakenly that they arc the only three depends on cations needs of largc multinational firms providers. In fact there are nearly 500 other foreign markets. through its Project Cyclone. Just as Sprint firms offering long-distance services in the dropped the ‘ ‘U. S.’ from its original name, United States.J Similarly, the seven regional BT’s name change doubtless is intended to Bell holding companies and General Tele- blur the explicit association with the United phonc and Electronics (GTE) arc by far the Kingdom. Telefonica, the Spanish national largest local exchange companies. account- carrier, has embarked on a series of overseas ing for 118 million access lincs, nearly 85 investments in South and Central America, percent of the 140 million telephone lines in and in Eastern Europe. ? the United States. GTE. unlikc the ‘s Baby U.S. firms are looking abroad because of Bells’ is not a regional company and does new opportunities and because their future not operate under the Modified Final Judg- depends increasingly on growth in foreign ment (MFJ), the court order codifying the markets. Increased spending on telephone divestiture agrement. In addition to these services in the United States is expected to eight largc firms. however. there arc some remain relatively small compared with in- 1,300 other local "independent" telephone

1 The seven regional Bell holding com panics (Amerltech, Bell Atlantic, Bell Sout h, NYNEX, Paci flc Telesls, Southwestern Bell, and US West) are the parent companies for the 21 Bell operating companies (BOCS). NYNEX, for example, consists of two operating companies, New York Telephone and New England Telephone. While the operating companies are by far the most significant component of the holding companies’ assets, NYNEX, like the SIX other RBHCS, also controls other nonregulated businesses such as cellular properties and a publishing arm.. (Due to several reorga nlzat ions since d(vestlture, the number of BOCS has fluctuated. At the time of the divestiture, there were 22 BOCS; currently there are 21). 2 Charles Mason, “Study Calls for Divestiture I l,” Te/ephony, Aug. 3, 1992, p. 9. ~ Maria Bird Pico, “Telefonica Pursues Overseas Opportunities, ” Telephony, Aug. 3, 1992, p. 9.

4 Page 71 U.S. Department of Commerce, 1992 U.S. /ndusfrM Out/ook, January 1992. us. Telecommunications Services in European Markets

Table 4-1. working, satellite services, and value-added Crossborder information services. Many of these compa- Value Acquisitions by nies, such as Millicom and EDS, have Number ($millions) c Telephone Companies extensive international operations. There 1985 5 $ 399 Worldwide 1986 7 132 are also several telecommunications equip- 1987 7 63 ment manufacturers with experience in for- a only 2.8 percent ($463 mll- 1988 11 117 eign markets that are using their strengths for hon) of the value ofcross- 1989 50 2,694 border transactions in 1990 1990 67 16,539a entry into services. The two most notable cases are Motorola, with its ambitious Irid- are for foreign companies in- SOURCE BOOZ, ALLEN & HAMILTON, AS CITED IN THE vesting in the United States. F/iVANC/AL TIMES, WORLD TELECOMMUNICATIONS SURVEY, ium project,7 and IBM, which is offering Fmancjal Times, “Vkrld OCT. 7, 1991, P. XXI. Telecommumcatlons Survey,” data networking and value-added services in Oct. 7, 1991, p. xxi. Europe. IBM recently announced its inten- companies, typically serving rural communi - tion to add voice capability to its European ties.s Information Network through the installa- Since the major long-distance companies tion of asynchronous transfer mode (ATM) and LECs account for most of the telecom- switches. 8 munications revenue in the United States, these firms are also those in the best position to exploit foreign opportunities, and will be U.S. regulations and the focus of the analysis in this chapter. overseas expansion However, the U.S. telecommunications in- RBHCs argue that they are prohibited dustry consists of many other niche players, from entering some of the most promising in cellular and paging services, data net- domestic markets due to the MFJ,9 which

5 These were not spawned from the former Bell System. AT&T looked f irst to larger, Iucrat ive markets when consolidating its nationwide operations. Smaller communities were left to build their own telephone networks. With the help of funding from the Rural Electrification Admlnistratlon of the Department of Agriculture, these independents have survived and even thrived. G For example, Millicom was recently awarded one of four licenses by the United Kingdom’s Department of Trade and Industry to offer telecommunications services in competition with BT and Mercury. “Telecom Sector Opens to More Competition,” Financial Times, Aug. 12, 1992, p. 5. 7 Motorola, a U.S. manufacturer of radio communications equipment, plans to build a constellation of 66 (originally 77) low-Earth-orbit satellites (LEOS) to relay communications to and from anywhere in the world. This project, called Iridium, is one among several competing designs for a LEOS-based communications system. Countries or communities with inadequate telephone service could benefit from global communications but be spared t he cost of installing such anetwock. A massive project, Iridium is st i II in t he design phase and there are many technical and regulatory issues still to be resolved. For a more complete discussion, see U.S. Congress, Office of Technology Assessment, The 1992 Wor/d Administrative Radio Conference: /ssues for U.S. /rrtemationa/ Spectrum Po/icy, OTA-BP-TCT-76 (Washington, DC: U.S. Government Printing Office, November 1991 ); and U.S. Congress, Office of Technology Assessment, The 1992 Wor/d Administrative Radio Conference: Tec/mo/ogy and Po/icy /mp/ications, OTA-TCT-549 (Washington, DC: U.S. Government Printing Office, May 1993). e John Blau, “IBM Plans Voice,” CommunicationsWeek /nfernationa/, Feb. 1, 1993, p. 1. Page 72 9 United States v. AT&T, 552 F. Supp. at 228. European Activities and Strategies of U.S. Telecommunications Firms

REPRINTED WITH SPECIAL PERMISSION OF KING FEATURES SYNDICATE, settled the antitrust case against AT&T (see tees of the 103d Congress are working on box 4-A), and certain laws, primarily the legislation related to provisions of the MFJ. Cable Communications Policy Act of 1984. Many analysts believe that the present Under the MFJ, the seven RBHCs were regulatory structure and philosophy no longer restricted from three lines of business: inter- suit the communications marketplace be- LATA10 long-distance service, the manufac- cause advances in communications technol- ture of telecommunications network and ogies arc forcing a reexamination of what customer equipment, and the provision of services are competitive. Cable television information services. Additionally, the con- and telephone service, for example, could sent decree originally barred RBHCs from with some significant modifications be pro- b 13 any service that was not ‘ a natural monop- vided over a single network. RBHCs argue oly service actually regulated by tariff."11 that: 1 ) the prohibitions preventing them The prohibition on information services has from designing and manufacturing equip- been lifted by the court. and several commit- ment unduly stifle or discourage their ability

‘“ In the divestiture, the country was dlwded Into 161 “local access and transport areas” (LATAs). All calls that cross a LATA boundary must be handled by one of t he compet it ive long-distance carriers, whl Ie calls within the LATA bounds (often referred to as “medium-distance calls”) do not. ‘‘ Modification of Final Judgment, Section II(D)(3), Urvted States v. AT&T, 552 F. Supp. at 228. This restriction, which effectively prevented the companies from non-telecommunications businesses, was subsequently removed at the triennial rewew In 1987. ‘2 For one of the most provocative discussions of the increasing incompatibility between the organization of the Industry and the technologies, see The Geodesic Network //and its antecedent report, The Geodesic Network. Peter W. Huber, Michael K. Kellogg, and John Thorne, The Geodesic Network //: 1993 Repoti on Cornpetdlon m the Te/ephone /ncfustry (Washington, DC: The Geodesic Company, 1992). Peter W. Huber, The Geodesic Network: 1987 Repofl on Corr?petihon m the Te/ephone /ndusfry (Washington, DC: U.S. Department of Commerce, January 1987). ‘3 In filings with the National Telecommunications and Information Admlnlstratlon (NTIA) for its study on Infrastructure, Dale Hatfield argued that significant variations In the transmission characteristics of voice, data, and video signals could, however, make the integration of these services over a single network inefficient and uneconom Ic. National Telecommunications and Information Administration, The NT/A /infrastructure /?eporl: Te/ecornrnunicat;ons in the Age of /nforrnation, U.S. Department of Commerce, October 1991, p. 229. Page 73 us. Telecommunications Services in European Markets

Box 4-A. THE MODIFIED FINAL JUDGMENT

A consent decree entered into by the American Telephone& Telegraph company and t he Justice Department in 1982 settled a decade-long antitrust suit. AT&T was broken up into eight companies: the reorganized AT&T and seven regional holding companies. Local service was assigned to the newly formed holding companies under certain restrictions, developed and administered by Federal District Court Judge Harold Greene. The basic premise of this divestiture settlement was that the Bell System’s competitive markets should be separated from their noncompetitive monopoly markets in order to prevent unfair monopoly abuses, such as AT&T forcing captive local ratepayers to bear the burden of subsidizing equipment and long-distance service against emerging rivals. The competitive markets had begun with MCI’S challenge to AT&T’s monopoly on long-distance service, starting in 1968, and the entrance of competing manufacturers of customer premise equipment. A Modified Final Judgment (MFJ) went into effect at the beginning of 1964, clarifying and expanding the terms of the 1982 consent decree. The Bell System’s 22 local telephone operating companies (BOCs) were separated from the parent company (AT&T) and grouped into seven regional Bell holding companies (RBHCs), which were entrusted with providing local services. The seven regional Bell holding companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U.S. West) were specifically prohibited under the MFJ from entering the three lines of business deemed competitive and therefore assigned to AT&T: 1) designing and manufacturing telecommunications network and customer premises equipment, 2) providing information services (such as electronic yellow pages), and 3) providing Iong-distance service. The information-services ban was to prevent RBHCs from using their control of the local loop “bottleneck” to engage in anticompetitive conduct toward other information-services providers. The prohibition was subsequently amended at the triennial review in 1987, and later reversed and remanded by the U.S. Court of Appeals for the District of Columbia. The other two provisions of the MFJ are the subject of intensifying congressional activity.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993,

AT&T hopes to get to properly upgrade their domestic networks, U.S. telecommunications firms’ 50 percent of its and 2) domestic line-of-business restrictions European activities revenue from interna- limit their options in overseas activities Interexchange carriers tlonal activities by because foreign government ministries are International telecommunications is an the end of this wary of permitting them into areas that the extension of long-distance service. AT&T decade. foreign ministries are forbidden to enter in delivers direct dial service to over 250 14 the U.S. market. countries and territories, while MCI and Sprint connect to nearly 200 foreign destina-

‘4 NYNEX, however, in discussions with the Office of Technology Assessment, noted its ability to offer cable services in the United Kingdom as a counterexample. ‘5 Under Section 214 of the Communications Act, international carriers must file with the Federal Page 74 Communications Commission for authorization for each connection to a foreign point. European Activities and Strategies of U.S. Telecommunications Firms

tions (though many of these are through $billions Figure 4-1. 80 AT&T facilities). Each of these carriers U.S. Toll Service owns a share of the capacity on the various Revenues, 1984-91 cables traversing the Atlantic and Pacific 60 Oceans to carry their outbound traffic, and leases Intelsat satellite capacity through Corn- Sat. International traffic is a lucrative market, 40 and it is experiencing high growth as com- merce becomes increasingly global in na- ture. International traffic grew by 13 percent 20 to 35 billion total minutes in 1991, the latest figures available.16 Though most foreign governments continue to reserve basic voice 0 1984 1985 1986 1987 1988 1989 1990 1991 services to a national monopoly, U.S. long- distance carriers arc making inroads into the SOURCE FEDERAL COMMUNICATIONS COMMISSION, 1993. European market for nonbasic services, such as value-added data networking. 7 It means increasing the company’s revenues Change in the telecommunications market for international equipment and services is often rapid, so the description that follows from about $12 to $90 billion and for of the activities of the major U.S. telecom- domestic telecommunications services from S munications firms is a snapshot as of the $48 to $90 billion. I The company purchased beginning of 1993. NCR in 1991 and Istel, a British information technology firm, in 1989. Both additions AT&T. AT&T is one of the few operators in solidify its European presence: with the the world that is vertically integrated to offer acquisition of NCR, which also strengthens both equipment and services. No other its computer business, AT&T more than company operates on the scale of AT&T in doubled its foreign workforce, most of which 19 Before the takeover, NCR both segments. AT&T Chairman Robert is in Europe. Allen’s target of 50 percent of revenues derived approximately 62 percent of its $6 coming from international activities by the billion in annual revenues from abroad. end of the decade is nevertheless ambitious. AT&T has also expanded its stake in the

‘G “lnternatlonal Telephone Traffic Up 13 Percent Last Year,” Te/corn High/ighfs /nternationa/, Sept. 30, 1992, p. 2. AT&T’s traffic Increased 7.8 percent to 6.6 billion minutes; MCI grew 35.1 percent to 1.6 billion minutes, while Sprint grew 25.3 percent to 723 m Ill Ion minutes. ‘7 The term “basic service” in Europe encompasses more than It does in the United States, where Iong-dist ance serwce us competttlvely provided. The European connotat Ion includes t he notion of ensuring network mtegrlt y. This becomes a contentious issue in services trade negotiations (see ch. 7). ‘8 Information provided by AT&T. ‘g Prior to the purchase of NCR, AT&T employed 22,000 people outside the United States; about half of NCR’s 54,000 employees are overseas. John J. Keller, “AT&T Plans to Name Toblas to Direct Overseas Lines in Bld to Speed Growth,” Wa// Street Jouma/, June 25, 1991. Page 75 -.. . .

Us. Telecommunications Services in European Markets

European market for value-added services operating a cable network, CANTV, in with purchases, through Istel, of service Venezuela). The Ukraine State Committee providers in other countries, such as expects to increase the penetration of phones DATAID in France. from 7 to 22 million lines by 2000. In AT&T is extending to Europe its managed November 1992, AT&T purchased for $28 data network services developed for the U.S. million an 80 percent stake in a Polish market, such as Clearchannel, Accunet Spec- telecommunications equipment manufactur- trum of Digital Services, and Accumaster ing plant, Telfa. Management Services. The company offers In May 1993, AT&T spearheaded the these services through separate subsidiaries formation of WorldSource, a joint venture in countries where competitive entry is with five other operators, including Kokusai permitted. AT&T currently has nodes in Denshin Denwa of Japan and Singapore eight countries, but has plans to locate in Telecom—at the outset, the venture lacks a 20 seven others. Its International Network European partner. WorldSource will provide Systems, originally started by Phillips but global voice and data communications to later bought by AT&T, is located in the multinational firms . Netherlands. AT&T has a strategic alliance with the MCI. A relative newcomer to international Italian local carrier, ItalTel, involving equip- communications (1983), MCI has been one ment sales and consulting to develop Italy’s of the fastest growing international carriers. infrastructure. It has an equipment manufac- MCI expanded its outgoing traffic from 103 turing facility in Spain, and is involved in a million minutes in 1986 to 2.2 billion strategic relationship with Telefonica. The minutes in 199222 and has become the company is participating in joint ventures 6th-largest international carrier (see table with the Ukraine State Committee of Com- 4-2), carrying 18 percent of U.S. interna- munications and the Netherlands’ Postal, tional voice traffic. MCI international com- Telephone, and Telegraph (administration) munications grew by 35 percent in 1991 and AT&T's Iongdistance (PTT) Telecom to build and operate a again in 1992. competitors are also modern telecommunications network in the In recent years, the company has made among the world’s Ukraine. The Ukraine State Committee will several key international acquisitions, in- fastest growing retain a controlling interest (51 percent), cluding two international record carriers, international while AT&T’s share in the project is 39 Western Union International and RCA Global carriers. percent and the Netherlands PTT has the Communications. In addition, it bought Over- remaining 10 Percent.21 This is the first seas Telecommunications Inc., a company major effort by AT&T to build an overseas involved in long-distance services in New network (though it has been involved with Zealand and Australia. MCI also owns part

m Information provided by AT&T; see also, Robin Gareiss, “AT&T Takes on European Data Nets; Expands outsourcing,” ConwnunicationsVVeek, Mar. 16, 1992, p. 5.

2’ “AT&T, PTT Telecom-Netherlands in Joint Venture With State Committee of Ukraine; Plan Includes Expanded International, Long Distance, Local Access Networks, Manufacturing,” Te/ecornrnunicafions Repotts, Jan. 20, 1992, p. 21. Page 76 22 Information provided by MCI’S Business Analysis Group, May 1993. European Activities and Strategies of Us. Telecommunications Firms

of Clear Communications, a competitive long-distance carrier in New Zealand.23 a Ambitious to form global partnerships, Outgoing MITT Growth in MITT (millions) (1990-91 ) MCI spearheaded the fomation of the Finan- AT&T (U. S.) 6,557 7.8%. cial Network Association, an association that DBP Telekom (Germany) 3,557 13.1 includes 11 other European carriers targeting France Telecom (France) 2,295 7.9 BT (UK) 2,213 1.9 communications services for international Cable & Wireless (UK) 1,660 28.6 financial firms (potentially in competition MCI (U. S.) 1,600 35.1 with the Society for Worldwide Interbank SWISS PTT (Switzerland) 1,429 12.5 Stentor (Canada) 1,425 6.0 Financial Telecommunications, SWIFT). MCI Netherlands PTT (Netherlands) 1,018 12.5 is also in a loose partnership with 23 other ASST (Italy) 980 17.1 KDD (Japan) 850 11.3 operators in Global Communications Serv- Belgacom (Belgium) 823 12.6 ices, which intends to provide ‘‘global one- Sprint (U. S.) 723 25.3 719 17.7 stop shopping or a full range of services to Telefonlca (Spain) Swedish Telecom (Sweden) 659 7.2 multinationals. 24 a Mlnules of lnlernatlonal telecommurucations Irafflc. Canada has been the most recent battle- SOURCE CCWfA4UNlCAT/0M5 WEEK INTERNATIONAL, SEPT. 21, 1992, P. 8. ground for MCI and AT&T competition as they build their global networks. When MCI network services in North America and the Table 4-2. negotiated an operating agreement with Sten - Caribbean. Traffic Base tor, the consortium of Bell Canada and the of Leading provincial phone companies. AT&T responded SPRINT. Like MCI, Sprint has experienced International by purchasing 20 percent of Unitel Commu- explosive growth in its share of international Carriers nications, a competitive long-distance com- telephone traffic: its share of outgoing traffic pany in Canada. and filing a patent- increased from 43 million minutes in 1986 to infringement case against MCI. 728 million minutes in 1991 (the last figures In June 1993, MCI reached an agreement Sprint has released), having doubled its with BT for an alliance between the two international outgoing traffic from I 990 to telecommunications firms that includes the 1991.25 Sprint wants to penetrate the market purchase by BT of 20 percent of MCI for for intra-European long-distance service; it $4.3 billion and the creation of a joint is involved in a project (Hermes) to build a venture firm to offer global voice and data pan-European network for voice and data. services to multinational users. BT will name This company is the leader in international three directors to MCI’s board. while MCI videoconferencing, with 1,200 video facili- chairman will join BT’s board. MCI will ties in 30 countries. Sprint International invest 24.9 percent of the $1 billion to form accounts for approximately $2 billion in the new venture (yet to be named). and will revenues compared with $8.8 billion for the be responsible for marketing these global parent company.

2’ ‘(MCI Steers Global IN,” CornrnunlcatlonsWeek /ntemafiorra/, Sept. 21, 1992, p. 1. 24 “MCI Pulllng Together Global Alliances,” Communications Week /nfernaflona/, Sept. 21, 1992, p. 7. 25 Telephone conversation with Sprint representatives, May 1993. Page 77 U.S. Telecommunications Services in European Markets

Sprint has applied for a license from the uses Sprint’s European packet network and Department of Trade and Industry to offer Sprintnet, its international data network.27 long-distance and international service in the In 1988, Sprint bought Private Telecom- United Kingdom. If this is approved, Sprint munications Services, Inc., which owned the will team with British Waterways, which U.S. end of the first private transatlantic controls canal rights-of-way throughout the fiber-optic cable, PTAT- 1. Cable & Wireless country, to build a fiber-optic backbone owns the foreign portion of PTAT- 1, which net work. connects the United States and the United In February 1993, Sprint joined with Kingdom (and also lands in Ireland and Alcatel NV, the French manufacturer of Bermuda). telecommunications equipment, to form Al- catel Data Networks. The new company, of The long-distance carriers’ strategy of expansion which Sprint will own 49 percent, will be headquartered in Paris with a unit in Reston, The three major U.S. carriers have been Virginia. It w ill develop and market products actively pursuing partnerships with public 28 based on ATM technology (see chapter 2), telephone operators (PTOs) in major Euro- pean and Asian countries to handle the for the data networking needs of large 26 communications requirements of large cor- international business customers. porate customers, who need to network with Sprint has a close operating arrangement and between several countries. These con- with Unisource, which is a joint venture sortia enable carriers to spread large capital between PTT Netherlands BV, Televerket in requirements and to offer comprehensive Sweden, and Swiss Telecom PTT that offers communications packages, including con- global network services. This arrangement, solidated billing and equipment, instead of which increases Sprint’s European presence, users needing to piece together international includes collaboration on global data net- networks. BT, with its Syncordia project,29 working and on very small aperture terminal has been at the forefront of this trend. More satellite communications services, Unisource recently, BT announced its intention to

26 /ntema(ior?a/ Hera/d Tribune, “Sprint and Alcatel Set Venture,” Feb. 4, 1993. 27 Jennifer L. Schenker, “Unisource Adds Swiss,” Cornrnunicatior)s Week /rrternationa/, Feb. 1,1993, p. 24. Donne Plnsky, “Sprint Targeting VSATS,” CornrnunicatiorrsWeek /nternationa/, Nov. 23, 1992, p. 3. 28 The traditional term, Postal, Telephone, and Telegraph (Authorities) or PTTs, is in most cases no longer accurate, since the functions have been separated. 29 At the outset, Syncordia has received more attention from the press than from users or ~tential partners. BT originally envisioned that Syncordia (formerly called Pathfinder) would be a collaboration with NTT and Deutsches Bundespost Telekom (DBT). However, NTT and DBT balked at their respective stlares in the project—BT wanted to retain 48 percent while the other partners would each have 26 percent. In addition, BT al ienated Telekom by rebuffing t he German carrier’s attem pt to include France Telecom. Telekom and France Telecom then formed t heir own venture, Eunetcom. BT more recently launched Project Cyclone, an attempt to coordinate BT’s various international operations, including: Syncordia for network outsourcing, Global Network Services for managed data networking, International Featurenet for international virtual net works, and Prlmex for internat ional private circuit management. “BT Bolts Forward,” Cornrnunicafions kVeek Page 78 /ntemafiona/, Sept. 7, 1992, p. 2. European Activities and Strategies of U.S. Telecommunications Firms

purchase 20 percent of MCI and to forrn a abroad. They want a single firm to be able to joint venture with the second-largest Ameri- provide for all their networking needs. can carrier (and the sixth largest global The desires of large users are often in telecommunications firm), The acquisition direct conflict with the modus operandi of The rise of multinational and the venture, which will strengthen BT’s European PTOs, which have earned a reputa- companies threatens presence in North America, follow directly tion for being more responsive to politics 30 national on the he e 1s of AT&T unveiling its than to customers. Large corporations are telecommunications Worldsource partnership with Kokusai Den- accumulating the political power, both indi- monopolies, since shin Denwa of Japan and Singapore Tele- vidually and collectively through groups single carriers will such as the International Telecommunica- com. MCI’s Financial Network Association have trouble tions Users Group (INTUG) and the Interna- and Sprint’s Unisource consortium are other operating in several tional Communications Associations (ICA), examples. countries. The growing leverage of the user commu- to challenge the PTOs when they are dissatis- nity in telecommunications policymaking is fied with the quality, the variety, or the cost at the center of this turbulence in the of services. organization of international telecommuni- A second general strategy for the world’s cations. The rise of multinational or global major carriers is the development of interna- companies is threatening to the national tional data networks. Again the target audi- monopolies, since a single carrier will have ence is a limited set of customers with multicountry, high-data requirements. Data trouble handling the communications needs communications traffic is still small relative of a company with headquarters or main to voice communications, but its growth is offices in several countries. A U.S. carrier impressive. PTOs arc clinging tightly to their can, for example, handle a firm interna- bread and butter, voice traffic, which may tional needs only so long as one end of the account for as much as 90 percent of the traffic originates or terminates in the United carrier’s revenue and 100 percent of its States. Given current restrictions on network profits. Data networking, therefore, appears access in most countries, an American carrier to be a U.S. carrier’s best opportunity to enter is not permitted to carry the traffic of a foreign markets, and each of the major U.S. company between, for example, Tokyo and carriers has a data networking subsidiary. Amsterdam. Large users are pressing for AT&T owns Accunet and Sprint, Telnet; harmonious international equipment stand- MCI owns 25 percent of Infonct. ards and service offerings; they arc also Foreign carriers are following similar demanding that levels of service that they strategies in an effort to make headway into have come to expect at home be available the U.S. market. BT purchased San Jose-

30 In particular, high international tariffs, which are important to telecommunications managers of firms with substantial international traffic, are typically used by governments to subsidize other areas, including nontelephone sectors. The international telecommunicate Ions regime, pejorat Ively referred to as “t he Club,” manipulates this subsidy through the international accounting rates procedure, whereby the carrier in the country originating a call remunerates the carrier in the foreign country for terminating the call. The accounting rates, which in theory are intended to relate to cost, are artificially large In many cases so that the country terminating the call receives a large windfall for doing very little. (See ch. 3.) Us. Telecommunications Services in European Markets

trade name: MCI offers Vnet, AT&T offers GSDN (Global Switched Digital Network), and Sprint offers GVPN (Global Virtual Private Network). Foreign national carriers have similar products: BT has FeatureNet; $62 France Telecom, Colisee; PTT Netherlands, GLOBAL; and KDD, Virnet. On an interna- tional level these require close collaboration between national carriers.

RBHCs overseas In the last few years, the seven RBHCs have also turned their attention outward, beyond their domestic networks. The RBHCs’ overseas activities have mainly taken three

SOURCE: 1993 INDUSTRIAL OUTLOOK, U.S. DEPARTMENT OF COMMERCE. forms: ■ The construction and/or operation of cel- Figure 4-2. based Tymnet from McDonnell-Douglas in lular networks; Estimated 1993 U.S. 1989. 31 Infonet, based in California, is jointly ■ Experimentation with other infrastructure, Telecommunlcatlons owned by 11 European PITs, in conjunction especially cable television; and Services ($billions) with MCI. ■ Investments in the privatization of state Carriers are also developing virtual pri- telephone companies. vate networks that behave to the client like a U.S. companies' involvement in cellular private network. That is, the user does not communications has mainly occurred in pay retail rates for long-distance or intern- Europe. In Eastern Europe RBHCs have ational calling, benefits from abbreviated helped construct networks that will serve as numbers, and is assured of bandwidth when alternate infrastructure; in Western Europe, needed; this is accomplished through the they are involved in cellular franchises software in the switch rather than through competing with the incumbent carriers’ op- discrete physical facilities. Virtual private erations. Their solid expertise m cellular networks relieve the user of the necessity of communications in the United States32 is running, monitoring, repairing, and upgrad- valued by countries building facilities to ing networks. Each of the U.S. carriers offers complement or in some cases replace the a virtual private network service under a existing ‘‘wireline infrastructure. In parts

31 Under the agreement recently announced between BTand MCI, the ownership of theTymnet aata network will transfer to MCI, which will purchase Tymnet’s parent, BT North America. 32 The United States accounts for roughly half of the worldwide subscribers for cellular services. AfterMcCaw and GTE, the independent telephone giant, the seven RBHCS have the next largest cellular franchises. The Federal Communications Commission, in 1983, automatically awarded the local telephone provider one of the two franchises in each metropolitan service area. See Cellular Telecommunications Industry Page 80 Association, State o~the Ce//u/ar /nd.My, Washington, DC, 1992. European Activities and Strategies of U.S. Telecommunications Firms

of Eastern Europe, the existing communica- Kingdom’s competition strategy permits a tions network cannot accommodate the bur- fertile testbed for RBHCs to experiment with geoning commerce. A cellular network, video (i.e., TV) and voice over the same though requiring large upfront capital costs, network. RBHCs also are gaining experience is faster than repairing or modernizing the in a market they are vigorously trying to existing network. Because the demand for enter in the United States; the ventures reliable communications is so critical, cellu- abroad provide technical experience and lar operators are commanding high installa- potentially political leverage. NYNEX and tion, equipment, and usage charges to cover U.S. West in particular are pursuing this this high investment. opportunity aggressively .x4 RBHCs are also joining in consortia for Investments in the privatization of tele- the second or third licenses for cellular phone companies have mostly taken place service in Western Europe, typically in outside Europe, in Central and Latin Amer- competition with the PTO. Differences in the ica and in the Pacific Rim (notably Australia technologies of mobile communications po- and New Zealand). The European telecom- tentially permit the survival of several com- munications operators are generally finan- peting providers. GSM, the European stand- cially and technically secure enough that ard for digital cellular communications, is they do not require large infusions of foreign replacing analog cellular: some providers arc capital and operating expertise. betting that personal communications net- There are strong similarities in the activi- works (PCN) or personal communications ties of RBHCs abroad, but their intentions services (PCS) represent the next evolution. and strategies are not always identical. They The second large area of activity that arc referred to as one group here for the sake several RBHCs arc pursuing is franchises for of convenience and because they are often cable television.33 These are expected to be allies in support of major legislative actions— high]y profitable ventures that also represent they. all have an interest in removal of the opportunisties for RBHCs to build infra- MFJ restrictions that limit their business The opportunity to structure and establish a local presence in activities. Since they were split from AT&T, build cable televi- anticipation of EC-mandated liberalization however, they have formed markedly inde- slon systems abroad offers testbed for of telecommunications markets. The United .pendent corporate strategies. a U.S. carriers eager to enter that market 33 Meanwhile, foreign ownership of cable franchises In the United States is a sensitive political Issue. In the 102d Congress, a House version of the cable (re)regulatlon bill Included a provision to limit foreign ownership at home. of these systems, slm Ilar (in theory and [n degree) to the foreign ownership Iimltatlons on telephone com pames and broadcasters. (Section 310 of the Communications Act Ilm its foreign ownership of radio Ilcenses—as may be used In m Icrowave communications or radio and TV broadcasting—to 20 percent.) Though t hls sect Ion of t he bill was event ually dropped, Rep. Edward Markey, chair of the Subcommittee on Telecommunications and Finance of the House Committee on Energy and Commerce, argued for the provision on nationalsecunt y grounds-noting the cableindustry’sconnect lon to the country’s “telecommunications nervous system.” “Regulation Foes Plan Barrage as Conferees Approve BIII,” Congressmna/ @atier/y, Sept. 12, 1992, pp. 2706-2707. 3’ The great success of cable television In the United States may not necessarily be duplicated in other count ries. Several European PTOS have staked their future on other technologies, such as direct broadcast satellite (DBS). Us. Telecommunications Services in European Markets

Figure 4-3. Regions of the Seven RBHCs

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

BELLSOUTH CORPORATION. Bell South is quarters. The parent company expects that one of the most aggressive RBHCs in BellSouth Enterprises will quickly increase pursuing international ventures. It is heavily its percentage of revenues within the com- targeting Latin America, but it also is creat- pany to 25 percent. ing a substantial presence in Europe, mainly The company’s main emphasis in Europe in cellular and paging operations. A subsidi- is on cellular communications. It is prohib- ary, BellSouth Enterprises, Inc., controls all ited in almost every country except the nonregulated activities, including the com- United Kingdom from offering alternative pany’s international ventures, while Bell- local service, which would draw on its great South Telecommunications, Inc. deals with networking expertise. BellSouth owns 29 the regulated core businesses—the provision percent of a consortium to build and operate of basic telephone service within its nine- a mobile phone network in Denmark. In state region. BellSouth Enterprises is com- Germany, a consortium that includes prised of Bell South Cellular, BellSouth Pub- BellSouth was awarded a license for the lishing, and BellSouth International (BSI), country’s third cellular network; the cellular which handles international operations and network will operate at 1800 MHz (as opportunities. BSI has a corporate office in opposed to the more traditional 900 MHz) Brussels for business development and tech- and will compete against cellular networks nical expertise, but the strategy for its global operated by Deutsche Telekom and Mannes- activities is established in the Atlanta head- mann (of which PacTel is a partner) .35 In

35 “German Mobi Ie Phone Net work Won by Thyssen and Veba Consort ium,”Te/com Highlights /nternationa/, Page 82 Feb. 10, 1993, pp. 2-3. European Activities and Strategies of U.S. Telecommunications Firms

France, it has shares in several diverse enterprises, including a small stake in Soci- ete Francaise du Radiotelephone, which holds a license for GSM, and a partnership with France Telecom to offer cable TV. Elsewhere, BellSouth owns 24.5 percent I BellSouth Telecommunications Inc. of the Australian consortium, Optus Com- I munications, in conjunction with Cable & I wireless and local investors, which will I build and operate a competing carrier for all I kinds of wireline and wireless services and I international long-distance (for which I BellSouth had to secure a U.S. regulatory I waiver). The company is providing cellular service in New Zealand, and was awarded I the cellular license in Argentina, along with Unregulated I Regulated

Motorola, in February 1989. BellSouth also SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993, BELLSOUTH ANNUAL REPORT. purchased Cidcom, Pacific Telecom’s cellu- lar operation in Chile, and operates cellular Kong and offices throughout Europe and Figure 4-4. systems in five Latin American countries: Asia, is responsible for overseas communi- Organization of the Mexico (western), Argentina, Chile, Vene- cation networks and services, notably its 14 Be//South zuela, and Uruguay. cable TV-telephony franchises in the United Corporation Kingdom. NYNEX CableComms was awarded NYNEX. New York-based NYNEX has vig- franchises in July 1990 that make it the orously pursued opportunities for foreign largest cable franchise owner in Britain, with ventures. Its nonregulated activities, includ- an investment of $1.1 billion.36 NYNEX ing its international ventures, are separated Network Systems also owns 50 percent of from its regulated local offerings (i.e., New Gibraltar Tel and is helping the government York Telephone and New England Tele- to modernize the communications infra- phone). which are handled through its Tele- structure. The company is in Indonesia to communications Group. NYNEX World- help manage network expansion, and in wide Services Group is organized into branches Japan it owns a minority share of two mobile covering cellular services in the United communications firms. NYNEX is also in- States, publishing (which involves some volved in a consortium to install two million overseas activities), and its diversified opera- lines in Bangkok, Thailand. tions, within which arc two subsidiaries that Various other subsidiaries of the company deal explicitly with international ventures. have successfully marketed products around NYNEX Network Systems Company, with the world. For example, its publishing arm, regional headquarters in Brussels and Hong NYNEX Information Resources Company,

36 NYNEX Cablecomms Increased Its presence [n the U.K. cable TV/telephony market through its acqulsltlon of three franchises from PacTel Cable in March 1993. Page 83 . --- -. . . . . - . - . -

Us. Telecommunications Services in European Markets

is responsible for telephone directories and Budapest in October 1990. Though expen- Yellow Pages in Gibraltar and Prague and sive, the cellular network, which is targeted was recently awarded the franchise for the at office communications, enables customers Czech Republic. NYNEX’s AGS Comput- to circumvent the slow process for getting ers, Inc. is licensing software in Russia, connected to the antiquated wireline net- Mexico, Australia, and Spain. Finally, NYNEX work 37 is spearheading a consortium to construct a U.S. West International has established a 25,000-km fiber-optic cable from the United strong presence in Russia for telecommuni- Kingdom through the Middle East to Japan. cations services. In January 1993, the Rus- The project, entitled FLAG (Fiberoptic Link sian Communications Ministry selected U.S. Around the Globe), was initiated 2 years ago, West and two domestic firms (Intertelcom will cost $1 billion, and is expected to be and VART) to coordinate the development operational by 1997. The company is in the of digital cellular service (GSM) for Russia’s process of negotiating landing agreements 12 cellular regions; in addition, U.S. West with national carriers. NYNEX’s previous and its partners won the rights to 8 of these Previous ventures in Russia attempt to purchase a stake in a private 12 regions. 38 transatlantic cable was rejected on the include operating a cellular telephone sys- grounds that RBOCs are restricted, under the tem in St. Petersburg (starting in September MFJ, from carrying traffic to or from the 1991), and outfitting the regular phone United States. networks in Kiev, Moscow, and St. Peters- In Central and burg with international long-distance switches.~9 Eastern Europe, U.S. WEST. Like the other RBHCs, U.S. The company also was involved in a venture cellular systems West is capitalizing on its experience with to build a fiber optic line across Asia, are attractive cellular communications, but unlike the oth- eventually linking Europe and Japan, but this alternatives to ers it is targeting the countries of Eastern and plan was delayed by U.S. security restric- antiquated Central Europe. U.S. West expects that 10 to tions on fiber optic technology and high- wirelines. 20 percent of its revenues will come from speed processors, international operations by 2000; currently, U.S. West, allied with Tele-Communica- international operations contribute only a tions, Inc. (TCI) in the United States to small percentage. U.S. West is involved in a pursue joint cable TV-telephone options, is venture along with Bell Atlantic and the state also actively mining similar opportunities in telephone company to build and operate a Europe. In the United Kingdom, TeleWest cellular network in Czechoslovakia. A cellu- Communications Group Ltd., the joint ven- lar network, Westel Radiotelefon, Kft., jointly ture between U.S. West Cable Communica- owned by U.S. West and the Hungarian tions and TCI, is the country’s largest cable Telecommunications Co., went on-line in TV operator with 16 franchises and a poten-

37 The service has surpassed projected use so far; 4,000 subscribers In the first 6 months saturated the network, which was expecting 2,500 subscribers in the first year. w “U.S. West Group Chosen by Ministry to Coordinate Russian GSM Digital Cellular System,” Telecommunications Repotis, Jan. 25, 1993, p. 18. Page 84 39 Andrew Kupfer, “Ma Bell and Seven Babies Go Global,” Fortune, Nov. 14, 1991, p. 124. European Activities and Strategies of U.S. Telecommunications Firms

tial customer base of 3 million households. acquired the Telecom Corporation of New As of March 1993, TeleWest had enlisted Zealand for approximately $2.5 billion. The 144,000 subscribers for cable TV services, of company also acquired a controlling stake in which 60 percent additionally receive tele- a New Zealand pay-TV operator, Sky Net- 40 Through United Communi- phone service. work Television. It intends to form a soft- cations International, it is building cable TV ware joint venture company with STET SPA, companies in Sweden (Swedish Cable & the Italian telecommunications group, to Dish) and Norway (Norkabel), and it is develop software systems that will be used developing systems and programming in by STET’s telephone subsidiary Societa Hungary with Time Warner. In the United ltaliana per L’Esercizio delle Telecomuni- Kingdom, U.S. West and Cable & Wireless cazioni and Bell companies.42 merged their respective operations develop- ing Personal communication networks in PACIFIC TELESIS. Within the Pacific March 1992. U.S. West headed the Unite] 43 Telesis family. two companies are Primar- partnership (which included Thorn EMI, ily involved in international ventures. PacTel Northern Telecom, and Deutsche Bunde- Cable deals with opportunities in the “home spost Telekom ) that was awarded a license in 1989 to build a PCN system. U.S. west entertainment industry’ (the management of cable television operations) in the United lnternational has joined with BMW and GTE to bid on a German PCN license.41 Kingdom. while Pacific Telesis International offers a variety of services, such as wireless communications, value-added networks, and BELL ATLANTIC. Bell Atlantic is one of the international l(~ng-distance service, in Eu- most aggressive at targeting foreign markets, but its European ventures arc limited. Its rope and Asia. The company’s flagship chairman expects 10 percent of company European venture is a 26 percent share of revenuc to come from international opera- Mannesmann Mobilfunk, a consortium that tions by 1994; it is currently, at $1.5 billion, built and operates a digital cellular network about 5 percent. Bell Atlantic, along with in Germany. Based on the European standard U.S. West and the state telephone company, for digital cellular service, GSM, D2 Privat owns and operates Eurotel, a cellular net- is the second national cellular franchise and work in Czechoslovakia that began opera- will compete with Deutsche Bundespost tion in September 1991. The venture will Telekom. Pacific Telesis International also also build and operate cellular data networks owns 23 percent of a consortium that is and modernize the basic telephone network. licensed to build a GSM-based digital cellu- Bell Atlantic in partnership with Ameritech lar network in Portugal.

4C Donna Pinsky, “U.K. Cable TV Ups Telecoms Ante,” CcmrnurwcafionsW eek /nfemakma/,” Mar. 8, 1993, p. 6. Slgnlficantly, TeleWest IS Investing S70.2 m Ill ion over 5 years to purchase its own switches to gain greater control of network services, rather than buy switching from Mercury Communlcatlons. “ “U.S. West Third Quarter Earmngs,” Te/corn l-lighhghts /ntemaflona/, Nov. 4, 1992, p. 12. ‘2 “Bell Atlantlc In Itallan Venture,” New Techrro/ogy Week, Dec. 16, 1991, p. 7.

‘q Pacific Teleslsl pending regulatory and shareholder approval, IS plann!ng a major reorganization of its corporate operations to spl It off Its unregulated business from its regulated operations. Page 85 - - —. . . - ...... -.

Us. Telecommunications Services in European Markets

PacTel Cable has recently lessened its visible venture has been its acquisition, involvement in cable TV services in the along with Bell Atlantic and two local firms, United Kingdom. In April 1992, PacTel of Telecom Corporation of New Zealand. As Cable sold its interest in East London part of the stipulation to reduce the combined Telecommunications Ltd., which owned six U.S. RBHC holding to 49.9 percent, 31 franchises, to BCE Telecom International.44 percent of New Zealand Telecom’s stock In March 1993, PacTel sold three of its was offered for sale, resulting in an aftertax original 14 cable TV franchises to NYNEX profit for each RBHC of $73.6 million.47 Cablecomms. 45 PacTel International sold its In Europe, the company joined with 25 percent stake in Microtel Communica- France Telecom to help the Polish PIT build tions Ltd., a venture with Matra, to develop and operate a national cellular network. The a personal communications network in Eng- PIT retains 51 percent of the venture, Polska land. Telefonica Komorkowa, while Ameritech In Asia, PacTel International is involved and France Telecom split the remaining 49 in consortia bidding for cellular franchises percent. In Norway, Ameritech (along with for Tokyo (through a 15 percent stake in Singapore Telecom) purchased a quarter Tokyo Digital Phone) and Osaka-Kansai stake in Netcom GSM, the country’s second (through a 13 percent stake in Kansai Digital provider of digital cellular services.48 Amer- Phone). 46 PacTel International also owns 10 itech subsidiary Tigon offers voice-mail percent of International Digital Communica- service in a number of countries throughout tions (IDC), a new competitor to Kokusai the world.49 Denshin Denwa offering long-distance and international services in Japan. IDC, which is SOUTHWESTERN BELL. The jewel in South- the primary Japanese partner in an undersea western Bell’s international crown is its fiber-optic cable connecting Japan and the acquisition of 20 percent of the Mexican United States, also will be the Japanese telephone operator Telefonos de Mexico partner in the FLAG project, which NYNEX (TeIMex), including 24.5 percent of the is spearheading to link Europe and Japan. voting rights. Through Southwestern Bell International Holding Company, the com- AMERITECH. Ameritech has been one of the pany teamed with France Telecom and most cautious of the Baby Bells in overseas Grupo Carso, a local industrial group, to investments, and its activities in Europe are purchase a controlling 51 percent of the small by comparison. Ameritech’s most company from the government. The initial

@ “BCE Unit Agrees to Buy PacTel, Jones Intercable Interests in U.K. Cable Franchises,” Te/ecomwunicat/ons Reports, Apr. 27, 1992, p. 34. 45 “Business Briefs,” Wa// Street Jouma/, Mar. 23, 1993, p. B4. 46 Pacific Telesis Group, 1991 Summary Annual Report. 47 Andrew Kupfer, “Ma Bell and Seven Babies Go Global,” Fortune, Nov. 14, 1991, pp. 118-128; Ameritech, 1992 Annual Report. 48 Steven Tich, “Around the Loop: Norway Beckons,” Te/ephony, Jan. 4, 1993, p. 10. Page 86 49 Ameritech’s 1991 Annual Report, p. 20. European Activities and Strategies of U.S. Telecommunications Firms

investment after exercising options totaled telephone operators and the opening of new $950 million, though the value of the invest- markets in Central and Eastern Europe. ment has increased significantly since then. Earlier international investments by tele- Like several other RBHCs, Southwestern phone operators were typically more ‘*op- Bell also has stakes in cable TV/telephony portunistic” than “strategic”; companies operations in the United Kingdom. The would seek deals primarily on the basis of an company controls eight franchises in Britain attractive rate of return, with little attention covering over a million households; it re- to whether the ventures reflected the compa- cently announced a plan to sell 25 percent of nies’ characteristic strengths or coincided its U.K. cable holdings to Cox Cable, the with any long-term strategies.52 More re- second-largest U.S. cable operator.so Before cently, the telephone companies are taking the Israeli Government decided to postpone advantage of the niche strengths that separate the sale of Bezeq, the Israeli telephone them from other carriers and give them a For an RBHC, the company, Southwestern Bell was rumored to competitive edge. These opportunities abroad most important be negotiating to bid for the company in permit U.S. telecommunications firms to criterion for foreign alliance with a large Israeli industrial group, extend the strengths from their domestic ventures is the Clal Industries.sl businesses in network, wireless, and busi- prospect of high ness systems, profiting from their U.S. returns. The overseas strategies of RBHCs expertise in managing and operating local 53 U.S. RBHCs, along with Western Euro- telecommunications while forging strate- pean PTOs and U.S. interexchange carriers, gic relations with other firms. arc among the corporate leaders in pursuing For an RBHC, the most important crite- investment options in foreign markets. It is rion for foreign ventures and investments is difficult to track precisely the number and the ability to earn high returns. A second value of foreign investments that RBHCs important criterion is the experience and have made since divestiture since many of political leverage that the RBHC can bring these arc small, unrelated to telecmnmunica- back to the United States. Overseas, RBHCs tions, and often not newsworthy. The scale can experiment with services and businesses of these ventures and the fervor surrounding that they are barred from in the United States them increased with the privatization of as monopoly carriers.

50 “U.S. Cable-TV and Telephone Company Get Together for UK Cable,” Te/corn /-/igh/igh/s /ntemationa/, Mar. 10, 1993, p. 5.

5’ Tlch, op. cit., footnote 48. 52 Ronald M. Serrano, P. William Bane, and W. Brooke Tunstall, “Reshaping the Global Telecom Industry,” Te/ephorry, Oct. 7, 1991, pp. 38-42. 53 More than 93 percent of U.S. households have telephone service (Federal Communications Comm ission, Statistics ot Corrrrr?unicatfons Common Cw;ers, 1991 /1 992 Edition). Many of the remaining 6.6 percent of households are thought to be without service by choice rather than necessity. The mandate for “universal service” has effect ively been achieved. Sweden boasts a higher number of telephones main I ines per capita than the United States, however; Sweden has approximately two telephone main lines for every three people compared with about one for two in the United States. Page 87 . ——

us. Telecommunications Services in European Markets

Encouraging foreign expansion and insurance.54 The issue of whether U.S. Should the U.S. Congress want to do more firms are unduly handicapped in interna- to support and encourage further exports of tional ventures for lack of access to low-cost telecommunications services and additional capital, which often foreign competitors foreign investment by U.S. telecommunica- often enjoy, usually arises regarding equip- tions companies, it has several options: ment exports rather than service exports. continue to promote the opening of for- Yet, U.S. Government financing assistance eign markets to U.S. entry; is in fact biased toward manufactured goods remove domestic restrictions or regula- because, compared with services, these ap- tions that allegedly affect the pattern of pear more tangible and readily quantifiable. investment by foreign telecommunica- For example, the benefits of supporting the tions companies (this action is urged by sale of several million-dollar switches abroad some, however, as a way to de-emphasize are politically more readily apparent than foreign investment); and assisting a U.S. firm to purchase a portion of provide positive assistance, e.g., low-cost a foreign telephone operator, the value of capital for overseas expansion. which may not materialize for several years. United States’ efforts to open European Some foreign governments actively sup- markets through trade negotiations are dis- port national champion manufacturers in cussed in chapter 7. The complex pros and securing foreign deals by low-interest loans cons of the current investment patterns, and or other means.ss They may also permit an the effect of domestic regulations, are dis- indirect subsidy in the form of over-priced cussed in chapter 9; it does not appear that procurement of equipment by the national domestic restrictions are now determining network operator (paid for by high customer factors in decisions to expand overseas. services charges), allowing the equipment Some telecommunications industry repre- provider to sell in foreign markets at artifi- sentatives have suggested that the U.S. cially low prices. U.S. export subsidies are Government should provide more support to limited, and are intended to ‘ ‘level the U.S. firms for telecommunications services playing field” when U.S. firms are clearly exports, in the form of financial assistance

~ These suggestions were made in response to questions f rom the Office of Technology Assessment as to whet her government act ion was needed to enhance t he com pet it iveness of U.S. telecommunicate ionsIrms f overseas. 55 Advisory Comm ittee on International Communicant ions and Informat ion Policy, U.S. Department of State, “Study of International Financing of Telecommunications,” Washington, DC, June 1992. Ttlis report is oriented toward the financing of export of telecommunications equipment sales rather t han services. Where it analyzes services investment, it mentions as a major benefit from such investment the potential boost to U.S. equipment trade. However, the only U.S. operating companies that are also equipment makers are AT&T and GTE. The other carriers often cultivate relations with several key suppllers, including foreign manufacturers such as Siemens, Alcatel, and Northern Telecom. MCI, whose network relies on equipment from 75 vendors, touts its vendor-neutrality. (“MCI Pulling Together Global Alliances,” CornrnunicationsWeek /nternationa/, Sept. 21,1992, p. 7.) Further, foreign governments can impose procurement criteria (e.g., t he Page 88 Utilities Directive). European Activities and Strategies of us. Telecommunications Firms

losing out to foreign firms that rely on more $billlons sfi aggressive or explicit subsidies. 5 ~ 1 U.S. Government mechanisms that could 4- potentially assist foreign telecommunica- 3 U.S. investment abroad m tions services ventures include the Agency ~ ~! for International Development (AID), the 2 Foreign investment in the U.S. Export-Import Bank, the Overseas Private 1 Investment Corporation (OPIC), and the -~di -.] 57 ,j ~ ~ Trade and Development Program. How- o m .= ~— ever, these program-when they include I I services providers—generally target devel- -1 1981 1983 1985 1987 1989 1991 oping countries rather than Europe (some SOURCE SURVEY OF CURRENT BUSINESS, BUREAU OF ECONOMIC ANALYSIS, 1993 Central and Eastern European countries may be covered). Such foreign services invest- dividend payments. (RBHCs have had 56 ments typically require financing insurance, Figure 4-5. opportunities to increase dividends in the 8 since they generally target developing coun- Direct Foreign years since their inception in 1984, and they Investments in tries, which are potentially susceptible to have in fact increased dividends 54 times.58) political instability}. Few commercial banks Communications, The pressure to maintain this traditional 1981-91 arc willing to fund these ventures. performance for stockholders is increasingly There is, however, little reason to believe at odds with the cornpanies desire to diver- that U.S. telecommunicitions companies arc 59 sify into overseas ventures. (See box 4-B.) constrained in overseas ventures by lack of financing. Most such ventures arc financed out of retained earnings. Conclusions Stockholders reportedly arc uneasy that The increasing attention of RBHCe to the RBHCs capital is financing overseas European markets is largely a result of new ventures, the payoff for which is long term opportunities there, compared with more and, by comparison to their reliable monop- nearly saturated and competitive markets oly service, uncertain. There is a growing here. RBHCs have had most of the tools to tension between the expectations that stock- exploit foreign markets since their inception holders have come to hold and the RBHCs’ in the divestiture of AT&T: large cash plans for overseas expansion. The Bell reserves, unsurpassed management and net- stocks have earned a solid reputation for work operating experience, and slow- steadily increasing value and for rising growing domestic markets and the incentive

56 Advisory Comm lttee on Internat Ional Communicant Ions and Information Policy, U.S. Department of State, “Study of International Flnanclng of Telecommunlcatlons,” Washington, DC, June 1992. 57 The FCC also supports foreign actlwt(es of U.S. firms, but as an independent regulatory agency it has no direct Influence over the Federal Government’s Iendmg agents, such as Exlm Bank, OPIC, or AID. 58 Peter Coy, “Are High Dlwdends Stunting the Babies’ Growth?” Business Week, Oct. 5, 1992, p. 134. 59 A recent Bu.wness Weekart Icle reported, for example, that stockholders were “unhappy” that t he RBHCS’ “foreign ventures are consuming cash rather than generating it. “ “The Baby Bells’ Painful Adolescence,” Business Week, Oct. 5, 1992, p. 124. Page 89 us. Telecommunications Services in European Markets

Box 4-B. FOREIGN CARRIERS OPERATIONS IN THE UNITED STATES

The robustness of the U.S. telecommunications environment makes it attractive to foreign firms. Most major foreign telecommunications operators aspiring to an international market have opened offices in the United States, and several are pursuing more ambitious plans. BT, in particular, is establishing a strong presence. in June 1993, BT announced its intention to purchase 20 percent of MCI for $4.3 billion and to form a joint venture company with the U.S. carrier. This major deal follows several other attempts by BT to gain access to the U.S. market, including its acquisition of the data network firm Tymnet from McDonnell Douglas in 1989 and its location of Syncordia, its consortium offering global network services, in Atlanta. ’ BT’s alliance with MCI comes shortly after the company sold its 20-percent stake in McCaw to AT&T, the leading U.S. cellular firm. Telefonica, t he Spanish telephone operator, is attempting to purchase 80 percent of the long-distance carrier in Puerto Rico, and France Telecom has indicated its interest in acquiring Westinghouse Communications, which offers a variety of switched, virtual, and private-line voice and data services to more than 100 companies, including its parent company, Westinghouse Electric.2 Cable & Wireless operates a small interexchange carrier in the United States with approximately 1 percent share of the total international market.

1 Thej~lnt “enturecompany formed by Mcland BTWIII subsume Syncordla, and Ml wllltakecontrolof BT’s North Amefican holdings, including Tymnet. 2 ~flon cr~kett, 4( Fren~h, German Carriers to Buy Into BT’s SyncOrdla,” A@fwork world, Feb. 17, 1992, p. 2.

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

to explore overseas. The critical clement that in the last 3 or 4 years and the promise of has attracted them to Europe is the liberaliza- further access, tion in telecommunications administrations

Page 90 Users’ Perspectives– Views of U.S. Services Exporters CHAPTE5R

U.S. TELECOMMUNICATIONS FIRMS not only lomatic contacts, for further opening of compete successfully in the European mar- European markets and removal of trade ket, they support and often provide the barriers for both services and manufac- competitive edge for other U.S. firms that tured goods; deliver services to Europe. This chapter Pay special attention to reducing restric- captures some of the perspectives of these tions on telecommunications services, users of U.S. and European telecommunica- since for most of these companies the use tions networks.1 Providers of travel and of American equipment and American- transportation services, financial services, provided enhanced information services is and architectural, engineering, and construc- highly desirable; and tion services are given particular attention Encourage both U.S. and European firms either because the y contribute strongly to the to move toward international standards as Service-exporting volume of U.S. services exports, or because the most cost-effective way of getting the firms agree they they represent sectors where considerable most out of information technology re- are generally growth in services exports is possible with sources. we// served by more intensive use of telecommunications. In all services-exporting industries sur- U.S. carriers. Exporters of these and other kinds of services veyed, most firms agreed that they are well provided information for this chapter served by U.S. telecommunications carriers, through interviews, letters, and responses to and that American communications and a written questionnaire. computer technology gives them a competi- Many of the corporate officials that re- tive edge in developing innovative services.2 sponded to inquiries of the Office of Tech- Accustomed to a geographically expansive nology Assessment (OTA) argued that the domestic market, the firms complain bitterly U.S. Government has a role to play in about the wide difference across European encouraging both the liberalization of Euro- countries in availability of telecommunica- pean markets and the efforts of U.S. indus- tions services and the difficulties of dealing tries to expand the export of services. The with many regulatory regimes within what themes most commonly expressed were that seems to them one natural market. From their government should: perspective, the benefits of an integrated ■ Apply strong and persistent pressure, European marketplace seemingly are more through trade negotiations and other dip-

1 In preparing this chapter, the Office of Technology Assessment (OTA), with the help of contractors, conducted three case studies of the use of international telecommunications by major sectors exporting services to Europe (travel and transport; banking; and architectural, engineering, and construction). Representatives of more than 40 firms and trade associations were interviewed for these case studies. Another dozen firms contributed information in response to mailed inquiries from OTA staff and the chairman of the project’s advisory panel. p For example, an energy firm said: “. . .U. S. competence In telecommunications and computer technology provides advantageous Information and deosion support processing capabilities that are reflected in Improved accuracy, tlmellness, analysis, and integration of products that support our objectives for customer service. ” (Thomas M. Woods, Vice President for Information Services, the Hall iburton Company, correspondence with OTA, July 30, 1992.) Page 91 .- .

Us. Telecommunications Services in European Markets

obvious than the risk that a “Fortress Eu- chapter, anticipating that the move toward rope will try to exclude them. Many firms deregulation or liberalization in Europe will said that if serious regulatory problems can continue, said conditions in Europe are likely be alleviated there arc good prospects for to improve steadily. expanding and diversifying their services The general outline of the community of exports. U.S. services exporters is shown in figure Many of the problems encountered by 5-1. Over half of all U.S. services exports are American services industries in dealing with transportation-related services (which in- European public telephone operators (PTOs) clude airline fares, shipping and port fees, are problems just as much for European and all tourist-related services provided in firms as they arc for U.S. competitors. If U.S. this country and other countries to foreign- telecommunications firms can gain wider ers).s Licenses and royalties (intellectual access to the European market, their biggest property earnings such as income from marketing opportunity will be the challenge movies and music) are the second largest to solve these problems not just for Ameri- group, but account for only 12 percent of can firms but for potential European custom- total services exports. All other services ers. combined account for less than one-third. Some U.S. firms operating in Europe had a more positive view of their experience than others had. A news firm said, ‘‘On the whole, Problems with European our experience with European telecommuni- telecommunications networks cations operators has been positive. The Many serious or frustrating technical prob- variety, quality and availability of communi- lems beset U.S. services providers using cations services is, with few exceptions, telecommunications in Europe. Some of excellent. (At the same time, the firm noted these problems are regulatory or institu- that services sometimes cost ‘‘5 to 10 times tional, but many simply result from the their equivalent in the United States."3) A necessity for U.S. firms to rely on European large financial institution said: “. . .we have technology and services at the far end of their had little or no difficulty with the financial international networks and for their intra- services regulatory policy bodies or with the European communications. In some coun- telecommunications regulatory authorities tries the infrastructure is technologically in developed countries that already have behind that in the United States, in other state-of-the-art information networks infra- cases it is not interoperable with U.S. net- structure. These strongly positive com- works, and in all cases it is unfamiliar. U.S. ments were not typical. However, many of firms must often depend on the very organi- the business people that contributed to this zations with which they arc competing for

3 Letter from Martin Fuhr, Director of Telecommunications, The /nternationa/ Hera/d Tribune, to John Dlebold, OTA Advisory Panel Chairman, Sept. 25, 1992. 4 Letter f rom Richard M. Rosenberg, Chief Executive Officer, Bank of America National Trust and Savings Association, to John Diebold, OTA Advisory Panel Chairman, July 9, 1992. 5 Note that a service delivered in this country to a foreign national, such as medical treatment or education,

IS counted as an exported service. Users’ Perspectives- Views of U.S. Services Exporters

Exports Imports Figure 5-1. Total value=$152.3 billion Total value=$100.0 billion U.S. Services Trade by Sector, 1991 ($billions)

~ Telecom. $5.56 — Financial services $2.43 Computer, ~ Financial services - I data processing ‘ $4.69 $1.71

SOURCE U S DEPARTMENT OF COMMERCE, BUREAU OF ECONOMIC ANAL Y’SIS, 1993 the final delivery of their services, or they interconnect private networks with public must deal with government bureaucracies networks and to connect preferred terminal that have only recently and reluctantly opened and network equipment. Several firms com- their markets to foreigncrs. plained about the lack of reliability of leased The nonavailability of leased lines in lines. In confirmation, a recent survey con- some countries and the long delays in ducted by the International Telecommunica- installing them in others arc common com- tions Users Group (INTUG) reported that plaints of U.S. users. 6 Financial institutions, only one-third of all leased circuits was for example, put high priority on the freedom available 100 percent of the 3-month period to usc private line services as they choose, examined, and 64 kbps circuits had an and emphasize the need for leased line prices availability rate of 99.0 percent, Availability based on costs. They want permission to of 99 percent means that downtime averaged

G This situat Ion should gradually Improve as the result of t he ECDlrectlve on Open Net work Provision, which calls for every member state to make aval I able five categories of leased Ilnes, with no restrictions on their use. (See ch. 3.) Although the Directive called for full Implementation by June 1993, European observers say It may take much longer before this dlrectlve IS fully Implemented. International Telecommunications Users Group, INTUG News, London, October 1992. Page 93 . . -.

Us. Telecommunications Services in European Markets

Figure 5-2. Leased-Line Private Network

A (dedecated) Ieased-line private net- work IS preferable for a user requlr- ing the interconnection of several Iocations with high traffic volumes. The transmission capacity that the user leases from the public earner(s) goes through the earner’s(s’) facili- ties, but revolves no switching since the routes are dedicated solely to that user. Note that the user can connect to a Iong-dstance carrier directly or through either the local exchange company (e. g., a Bell Factory Operating Company) or through an alternate access provider, such as Teleport or Metropolitan Fiber Systems.

PBX

SOURCE. OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

1 hour, 40 minutes per week, and is well could not get data transmission as fast as 2 below recommendations by the Consultive Mbps, or there are problems with getting and Committee for International Telephone and maintaining transmission.8 Said the bank Telegraph (CCIIT) of a minimum 99.6 official: percent availability.7 This is especially dis- This situation has to be compared with ruptive for users of higher bandwidth digital the options available to U.S. firms in links because such lines handle more traffic their domestic market, [where], . . even than analog circuits. 45 Mb/s channels can be obtained at The lack of fast data transmission is a prices designed to encourage the exper- serious problem both for U.S. firms and for imentation and learning needed to inte - their European competitors. A European grate new applications with a firm’s bank told OTA that in some countries it operations. 9

7 Ibid. 8 In Spain, a travel services company reported that speed on leased lines in some areas does not exceed .3 kbps or 300 baud. 9 Comments provided by Ulrich Cartellieri of the Deutsche Bank AG to John Diebold, Chairman of the OTA Page 94 project’s advisory panel, for OTA use, Aug. 19, 1992. Users’ Perspectives- Views of U.S. Services Exporters

Figure 5-3. Virtual Private Network

To the user, a virtual private network (VPN) appears to be identical to a Ieased-line network in terms of func- tionality-presubscribed bandwidth, abbreviated dialing, etc. However, while the "intellitgence” in a dedi- cated network resides m the cus-

Headquarters

inferconnect many sites with moder- Longdistance ate traffic (enough that direct dial

PBX Regional office Supplier

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993

Enhanced services such as virtual private in the United States are not the same as those networks, packet-switching, and interactive available in Europe. very small aperture terminals (VSAT) are Crossborder payments are a special prob- not available in some areas at any price. lem for financial services firms. National Where they are available from public tele- clearing systems differ in degree of automa- phone operators, they are often not interoper- tion, formats, access, and reporting sys- able across national boundaries. They may tems. 10 Integrated fault resolution is either be at different stages of development or there not available or requires users to put their may be differing national standards. As U.S. own support personnel at both ends of a services producers increasingly move to the circuit.11 Concerns about data security are use of frame relay technology, they are not addressed by most European carriers and finding that features and functions available

‘“ See U.S. Congress, Office of Technology Assessment, Trading Around the C/ock: G/oba/ Securities Markets and Informaflon 7iechno/ogy, OTA-BP-CIT-66 (Washington, DC: U.S. Government Printing Office, July 1990). ‘ 1 Letter from John M. White, President of the Information Technology Group of Texas Instruments, to John Dlebold, Chairman of the OTA project’s advisory panel, July 2, 1992. Page 95 Us. Telecommunications Services in European Markets

companies must provide their own engineer- wide variety of billing cycles and formats ing and technical support for this purpose. and currency conversion problems.14 A nearly univeresal complaint is the high Another major complaint is the long time cost of telecommunications. Voice calls required for PTOs to install circuits. One from Europe to U.S. headquarters can be 50 U.S. travel-related company reports that to 100 percent higher than calls in the other promised installation dates are not met 85 direction. lntracountry costs are also high. ’2 percent of the time, and very commonly it Leased line costs, although they have re- takes double the estimated time. cently declined somewhat, arc still high. American firms are typically impatient This constrains private network optimization with the need to negotiate separately with and business operations. Nevertheless, and many countries to install one network. A in spite of complaints. these costs are to a General European Network (GEN) becomes large extent accepted as the price of doing operational in the spring of 1993, with 16 business in Europe. They do not generally Mb/s capacity, operating between Frankfurt, discriminate against U.S. firms.13 (See figure London, Madrid, Paris, and Rome. This is to 5-4. ) bean infrastructure, not a service, and should The problems resulting from technologi- shorten time for getting private circuits cal incompatibilities are compounded by operating across several countries. GEN was institutional inconsistencies and vagaries. designed by European Telephone Operators U.S. firms complain of excessive variability to preempt pan-European networks that might European PTO high in European ordering and payment proce- be offered by American firms.16 It is a joint tariffs, billing dures and contracting arrangements, and of venture by France Telecom, BT, Deutsche practices, installation uninformative. confusing, and irregularly Telekom, Telefonica (Spain), and ASST/ delays, and other timed billing. In some countries bills are STET (Italy). problems constrain reported to arrive up to 2 years late, and in GEN will not end the coordination prob- business use of other countries firms may be requested to lem. A spokesman for INTUG says: telecommunications. pay for a year’s service in advance. At best, Differcnces in rules and regulutions planning and pricing new communications- among the various telecom operators

based services are difficult because of the make the management of business tele -

12 Amcmcan Alrllnes, for example, says that an average 70 percent of reservation communications costs are in the local loop between the long-distance carrier and the SABRE terminal. ‘3 It was reported to OTA, however, that In a few countries high costs and bureaucratic intransigence are compounded by the demand for bribes. 14 In Germany, a group has been formed to protest the refusal of Deutsche Bundespost Telekom to Item Ize charges rather than Issue blanket statements, as well as to protest Its high tariffs. “Providers Band Together,” CmnrnunicatIons Week /nferna/icma/, May 1991, p. 3. The group, the Association of Private Telecommunications Providers, includes subsidiaries of AT&T and General Electric (GEISCO). “ This company said that it t ypically had a 30 days’ wait in the United Kingdom, and a 150 days’ wait in Italy and Greece. ‘~ Reportedly the fear is that AT&T would be the first to build a pan-European network as regulations are Page 96 Ilberallzed. “Euro-Broadband Net Set,’) Corr?rnurricatiorw Week /ntema/iona/, July 20, 1992, p. 3. Users’ Perspectives-- Views of U.S. Services Exporters

Figure 5-4. Belgium MoM/y Charge France — I for Half of Private Germany Line to the United Ireland States From I -J 1 Europe, 1992 Netherlands —-1J Switzerland I 1

—————7 ~ United Kingdom -- BT I -— —.. .J United Kingdom – Mercury

o 10,000 20,000 30,000 40,000 50,000 Dollar cost per month

SOURCE NETwORK WORLD, VOL 9, NO 10, MARCH 9, 1992, P 32

problems will be their biggest marketing opportunity.

‘7 Ernst Weiss, Vice Chairman of INTUG, Europe, quoted in “Europe’s Telecoms Users Speak Out, ” Cornrnun/cahons Week /ntemahona/, June 22, 1992, p. 29. ‘8 Europeans point out that procurement restrictions are not one-sided. American computer companies (e.g., IBM, Digital, NCR) are usually in ihe top five suppliers in national markets across Europe including In some countries the government procurement sector. By contrast, according to some Europeans, non-U. S, suppliers to the U.S. Government are rare, as a result of Buy America laws. The EC. Directive aimed at opening public procurement in telecommunications/com puter equipment to com petltlon allows preference for European suppllers only If the price differential IS not more than 3 percent. On Feb. 1, 1993, the Off Ice of the U.S. Trade Representative prohibited government procurement of many EC products not specifically covered by trade agreements and threatened other actions In response to EC “dlscrim Inatory procurement practices. ” Page 97 . — — . . -. . . . .

us. Telecommunications Services in European Markets

AT&T equipment and complains that it had was to be issued in October 1992, but has not to struggle to adapt BT hardware to its yet appeared. There is a separate proposed network. ’9 When approval to use imported Directive on protection of personal data in technology is granted, the approval process the context of public digital telecommunica- may take many months or even several years. tions networks. According to the U.S. Inter- There is little that U.S. telecommunica- national Trade Administration, ‘‘ l-J. S. indus- tions companies can do to solve these try believes that the proposed umbrella data institutional problems, which make it diffi- protection Directive and the Council of cult to offer the ‘‘one-stop shopping’ and Europe Convention will provide adequate ‘‘seamless global networks’ that U.S. multi- protection. . . . [and] a sector-specific digital national corporations say they need. For services Directive is therefore unnecessary users, these problems add up to greatly and could create uncertainty and disruption increased costs of doing business. Added to in the provision of telecommunications serv- tariffs that are very high by U.S. bench- ices. ’ ’20 marks, are high equipment costs, mainte- Various national laws also restrict the flow nance costs, and value-added taxes that U.S. of data. This is seen as an attempt to keep services firms say prevent them from offer- data processing jobs within the country, by ing services at the lower prices they could many U.S. firms that want to consolidate otherwise aim for. their own data processing in a few large Another regulatory issue of particular centers for greater efficiency. This concen- concern to providers of financial services tration would have another benefit for the and data processing services is national United States, in that large computer systems legislation aimed at privacy protection. An are most often supplied by U.S. manufactur- EC privacy directive that was proposed in ers such as DEC and IBM. 1990 could have disrupted the use of transna- tional financial data systems by restricting Representative services the flow of data across national boundaries or export sectors by requiring explicit consent for each use (or 21 processing) of certain personal data. The Travel and transportation services proposed Directive was strongly criticized Travel and transportation accounted for 58 by the European Parliament. A new version percent of exported services in 1991, but that reportedly will be much less restrictive contributed only one-third of the services

‘g Letter f rom Joseph 1. Dione, Chief Execut ive Off ice of McGraw-Hill, Inc., to John Dlebold, Chair of the OTA project’s advisory panel, July 27, 1992. 20 U.S. Department of Commerce, International Trade Administration, “E.C. Telecommunicate ions,” release of Oct. 1, 1991.

2 ’ This section draws on an OTA contractor report: Gligor Tashkowch, “The Use of International Telecommunications Net works in t he Delivery of Transportation and Travel-Related Services,” September 1992. Interviews were conducted in, and corporate profiles were constructed for, two major airlines, three network support or computer processing firms serving airlines, two hotel chains, two package delivery f irms, and a diversified travel services firms. Other travel-related firms contributed Information directly to OTA through participation in mail surveys or workshops. —

Users’ Perspectives- Views of US. Services Exporters

trade surplus.22 About 10 percent of the total a private network and 4,000 arc intercon- trade surplus came from airline passenger nected through SITA (Societe Internationale fares. de Telecommunications Aeronautiques). Electonic reserva- Airlines depend heavily on satellite com- SITA is a network serving the interna- tion systems are munications for navigation, position report- tional airline industry. It operates in 187 considered a major ing, weather information, and traffic control countries. has 24 hub sites interconnected by factor in airline (and more recently, for passenger telephone three separate communications paths using competition. calling). It is, however, their electronic both cable and satellites, and is one of the reservation systems that arc considered major worlds heaviest users of international leased factors in intraindustry competition.23 circuits. A French company, SITA appears to Airlines use private leased lines, public be recognized not as a competitor but as the switched networks, shared networks and critical backbone that holds the entire airline third-party networks, usually with satellitc industry together.25 Other third-party service back up, to connect reservation centers, providers also provide data processing or airports, and travel agencies. They are con- network support for airlines or handle their stantly seeking ways to get higher bandwidth reservations and ticketing; most of these are and decreased costs. For example, American U.S. companies. and some are jointly owned Airlines’ SABRE travel information and by several airlines.26 reservations computer system operates in Freight transport also relies heavily on 10.000 locations and has 225.000 terminals, telecommunications. One of the difficulties of which 4.500 arc outsidc North America.24 here is coordinating and tracking goods Of the overseas locations, about 500 arc on movements that may require several travel

2Z In 1991, the large trade surplus In passenger fares ($5 billion), travel services ($1 1.8 billion), and port serwces ($4.9 btlllon) was reduced by a deflclt In freight transport (-$4.7 billion) . ‘3 European computer reservation systems, American firms said, are biased; the fllghts of the sponsoring alrllnes are booked first. This charge was made against U.S. computerized reservation systems In their early days. 24 During recent “fare wars” in the United States, Amerfcan Airlines set a record by processing over 3,100 messages In 1 second on Its SABRE system, and United Airllnes doubled the usual number of reservations transactions on its system to 2,100 per second. It was also reported that AT&T itself set a dally record of 177.4 m Ill ion calls on t hat same day, as compared with an average volume of 135 to 140 m ill ion calls. “Airfare War Strains Data, Voice Nets,” Comr-run;cahons Week, June 8, 1992, pp. 1. 25 Tashkovlch, op. cit., footnote 21. See also “Freedom of Choice,” Cornrnurucahon.s Week /nterrraffor7a/, Apr. 6, 1992, p. 1. In April 1992, SITA’S subsidiary International Telecommunications Services BV was renamed Scltor, Ltd., and relocated In Maiden head, England. It wi II provide value-added network services, mcludlng E-mall and electronic data interchange, for 250 customers such as Budget Rent-A-Car Corp. and Hilton Internat lonal Co., linking t hem Into t he SABRE system. SITA IS said to have taken t his step “because It sees little room for growth in the airl ine communications sector. ““SITA Broadens Base,” Comrrrunlca~ions Week /n/emationa/, Apr. 6, 1992. 26 For example, PARS Service Partnership provides data processing or network serwces or both to Trans World Alrllnes, Northwest Alrllnes, and some regional carriers. WORLDSPAN, which provides airline schedules and Informat Ion services to t ravel agents worldwlde, is owned by affiliates of Trans World Airl ines, Delta Airlines, Northwest Alrllnes, and ABACUS Dstrlbutlon Systems (a computerized reservations systems which In turn IS owned by nine airlines in the Far East). -. — . . . -- -- .- - — - - -

U.S. Telecommunications Services in European Markets

Figure 5-5. The Programmed Airline Reservation System Network

I I

SOURCE PROGRAMMED AIRLINE RESERVATION SYSTEM, JUNE 1992.

modes (sea or air, rail, truck) and may cross services than postal authorities offer.27 The several national boundaries and time zones. challenge is to operate ground-based deliv- A triumvirate of U.S. companies has formed ery systems that must be fed through an Encompass Europe, NV, to offer a data- international air network and must delivcr network tracking service for multinational within a tight time frame. Package delivery corporations that send inventory worldwide. firms said that telecommunications is the This will allow shippers, consignees, for- single most critical factor in success in the warders, and carriers to communicate European market, and U.S. technological through a single electronic interface regard- know-how gives them a competitive edge, less of the kinds of computer systems they United Parcel Service (UPS), for example, use. has four communications systems using both U.S. package delivery systems operating public and private international networks in Europe are in direct competition with and local packet-switched data networks. national postal systems, serving primarily These systems are used for package routing business customers looking for speedier and vehiclc/aircraft control; international

27 The Federal Express Corporation in 1992 drastically reduced its operations in Europe, shutting down operations In over 100 cities; it will continue to serve 16 major business centers directly for intercontinental shipments. The company was reported to have lost $1.2 billion In 4 years. “FedEx: Europe Nearly Killed t he Page 100 Messenger,” Business Week, May 25, 1992, p. 124. Users’ Perspectives- Views of U.S. Services Exporters

billing and receivables transmission; elec- Holiday Inn Worldwide has about 150 tronic messaging for company coordination; locations and 14 reservation offices in Eu- and electronic data interchange (ED I ) for rope. The company uses the TAT-8 and package tracing, links to financial institu- TAT-9 transatlantic cables for a 64 kbps link tions, and links to other services such as from Brussels to London to New York (its weather reporting. UPS recently got Federal headquarters is in Atlanta). It had been using Communications Commission approval to a conventional terrestrial star network within provide common carrier services by acquir- Europe, with the hub in Brussels, but in 1992 ing capacity in three transoceanic cables the company began a transition to a VSAT (two of which cross the Atlantic) .28 network operated by MCI, using INTELSAT. Hotels, like airlines, depend on interna- which will have 120 to 150 Earth stations in tional telecommunications to handle reser- the United Kingdom. Belgium, France, Ger- 2 ) vations, as well as for intrafirm coordination many. Italy, and the Netherlands. ’ This will and handling and charging for calls made by connect all of the chain’s proper-tics in these guests. U.S. hotels in Europe say that they countries, but MCI cannot offer a pan- need, but do not yet have, integrated reserva- Europe network under existing regulations. It will provide terrestrial links until it obtains tion networks operating across countries and licenses needed to operate VSATS in the six linked to airline reservation systems. They countries. Holiday Inn Worldwide says that also report that they need better software that the reason for the move is to ‘circumvent the can be continually updated for changing area problem of long (and often unpredictable) Codes. service delivery times required for leased The Sheraton reservation network, for 30 lines." example, consists of interconnected star networks with hubs in major European cities, Financial services31 each hub connected by 56 kbps leased lines About 3 to 5 percent of U.S. services to hotels and reservation centers. However, exports are financial services, primarily in the network in fact covers only 10 percent of commercial and investment banking. In 1991, the hotel chain’s properties, because the the United States exported about $4.7 bill ion number of facilities changes rapidly but also in banking services, which accounted for 3 because in some countries the telecommuni- percent of total services exports and about 4 cations options are ‘‘very limited. ’ percent of the total trade surplus. Less than

29 The UPS application to the FCC was unopposed; the company ts thought to be strategically positioning Itself to provide a value-added mternatlonal network for customers, In the future. Tashkovlch, op. cit., footnote 21. 29 The network will operate at 19.2 kbps, with the expectation of higher speeds when the TCP/1 P protocol is brought mto the system. 30 “Freedom of Choice,” Communications Week /nfernatlona/, Apr. 6, 1992, pp. 18-19; also “MCI VSAT Push,” p. 1, and “No Turning Back,” Editorial, Cornrnurucatkms Week /nfernahona/, Apr. 6, 1992. 3’ The case study on which this section relles has been separately publlshed. See U.S. Congress, Office of Technology Assessment, U.S. Barks and/nfernaflona/ Te/ecornrnunicafloms, OTA-BP-TCT-1OO (Washington, DC: U.S. Government Printing Office, September 1992). Page 101 . . . — .—

U.S. Telecommunications Services in European Markets

a score of U.S. banks actively compete in are signs that U.S. international banks are European markets; middle-sized and smaller moving toward greater user of public- banks serve their domestic customers’ over- switched networks or hybrid networks, some- seas needs through correspondent banks and times outsourcing their own networks. One the use of shared networks such as SWIFT reason for this move is to reduce the costs of and CHIPS. maintaining network management person- Banks operating overseas use networks in nel; a more positive driver is the availability two ways: for intracorporate business sup- since 1990 of virtual private networks, less port such as might be used by other large expensive than traditional leased line net- multinational corporations-voice, data trans- works because they make more efficient use mission, fax, electronic mail (E-mail) and of network facilities by dynamically allocat- voice mail—and as a means to create and ing dedicated lines to customers on demand. deliver financial products and services. U.S. In addition to private networks, banks use banks say that they have many disadvantages several shared networks or third-party net- in European markets,32 but that American works for credit authorization and valida- computer and communications technology tion, and for payments and settlements. has nevertheless given them offsetting ad- These include SWIFT, CEBAMAIL, Mas- vantages. Their competitive edge has been terCard International, VISA International, the ability to create and supply innovative and payment netting systems. The most value-added financial services. widely used is SWIFT (the Society for During the 1980s, several U.S. banks Worldwide Interbank Financial Telecommu- U.S. banks maintain a aggressively developed global networks with nications), which has over 1,800 member competitive edge packet switches, multiplexer, and multipro- banks and links over 3,000 financial institu- in creating and tocol bridges/routers to connect local area tions in 84 countries. SWIFT is currently supplying innovative networks (LANs) and wide area networks being upgraded to offer EDI services, a value-added (WANs) serving their dispersed facilities. netting service for banks trading in European services. Alternatively they used third-party services Community units (ECUs), and the automatic providers to interconnect LANs with X.25, matching of foreign exchange and money TCP/IP, frame relay, or other fast data market transactions. CEBAMAIL is a data transmission technologies.33 Recently there network established by European central banks.

32 They are generally smaller and less diversified than foreign competitors as a result of U.S. laws and regulations originally designed to prevent monopolistic aggregation of financial capital and power. By U.S. law, national banks can conduct foreign lending operations only through chartered subsidiaries (Edge Act corporations). American banks lack the close corporate ties enjoyed by the banks of Japan, Germany, and some other nations. U.S. corporations increasingly bypass banks to raise their own capital through commercial paper. Moreover, retail deposits have been migrating to nonbank competitors such as mutual funds. U.S. banks have been hurt recently by the large U.S. trade deficit, a low savings rate, and losses on developing countries debts and on commercial real estate. Finally, banks are usually at some disadvantage outside of their own domestic markets because of language and cultural differences. 33 For example, Chemical Bank has a private international network for intrabank messages but outsources all telecommunications related to cash management services, to the General Electric Information System (GEIS). Both U.S. and European banks may use IBM’s International Network and DIAL service to Page 102 communicate with each other and with the Bank of International Settlements in Basel, Switzerland. Users’ Perspectives- Views of U.S. Services Exporters

Increasingly, international banks want to failure. Yet banks are reported to be laggard have access to technologies such as Inte- in demanding from carriers, or providing for grated Services Digital Network (ISDN), themselves, badly needed security safeguards frame relay and Switched Multi-megabit such as encryption technology, in part be- Data Services (SMDS), EDI,34 and elec- cause of the costs and in part because of a tronic document imaging. They want more long-standing dispute with the U.S. National efficient forms of packet switching to Security Agency about the role of the U.S. squeeze more out of their existing networks. intelligence agency in defining standards for Frame relay and SMDS are especial] y impor- this technology.3s tant for high-speed data transfer and to let Financial institutions find, in some coun- financial institutions send bulk data in irreg- tries, that they have special regulatory prob- ular bursts. Electronic document imaging is lems beyond those that affect all telecommu- a promising way to computerize and use old nications user groups. In most countries both paper records as well as to store and transmit banking and telecommunications36 are regu- current documents. lated industries and banks with private net- As users of international telecommunica- works may run into a double regulatory tions networks, banks are especially con- burden. In some countries, electronic funds cerned about data security and reliability; transfer, credit card authorization, and switch- they are threatened to varying degrees by ing for automatic teller machines (ATMs) criminal actions, human error, and systems are considered telecommunications services

w EDI IS both a competitive threat and atechnologlcal opportunity. Provided by third-party service providers, ED I Intervenes between banks and their tradlt ional clients so t hat the bank provides little or no value-added serwce and might be able to charge only commod!ty prices for passing money through Its system. A corporate EDI system, or an ED I system operated by a third-party services vendor, can continually net transactions between companies and their suppllers and customers, with consolidated payments to each at the end of the day; this would greatly reduce the role of the banks. However, the banks themselves can move to become ED I hubs, adding ths to their exlstlng cash management services and offering the advantage of their ab~ Ilt y to transfer funds (I.e., make final payment, which nonbanks cannot do) and their com putenzed processing capabi I It y. To take advantage of t hs, banks WI II have to participate actIvel y In t he rapidly progressing development of EDI standards. 35 In the 1980s, the Reagan Admlnistratlon expanded the military/intelligence role in communications and data securlt y, and the National Secunt y Agency was given responsibil it y for certifying cryptographic designs for use by U.S. companies. Concerns about costs and availability and about the appropriateness of such a strong role for a mllltary intelligence agency In corporate Information security have persisted. 36 Computing and communications technology has greatly benefited banks but has also encouraged telecommunications companies and Information services vendors to compete with banks m offering financial serwces. For example, the AT&T Universal Card prowdes general consumer credit as well as calllng privileges. Telecommunlcat Ions companies increasingly offer cash management functions for their large business customers and home banking for residential and small business customers. They are also moving to prowde electronic trading systems for government bonds, currencies, and derlvatwe financial products. The large customer base and well-developed billlng systems of telecommunications companies maket helrcompetltlon a strong threat to banks. See U.S. Congress, Office of Technology Assessment, U.S. Barks and /nfematlona/ Te/eccvnrnunicaf inns, OTA-BP-TCT-1 00 (Washington, DC: U.S. Government Printing Office, October 1992). . . .— .- -

Us. Telecommunications Services in European Markets

and are so regulated. Cash netting and cash munications. Architectural, engineering, and management services for multinational cor- construction services, sometimes called AEC Architectural, porate clients may have particular problems- services, show relatively little reliance on engineering, and most such systems accommodate some mes- construction services telecommunications now, but in the future, sage transmission in the form of instructions are typically not information technology and telecommunica- or explanations, but some foreign regulators big users of tions networks could lead to significant consider this to be resale, or an unlawful international expansion of exports, which is unlikely to messaging activity by the banks. It may not telecommunication occur otherwise. be clear whether an online transaction is a because of tradition This sector is highly fragmented across regulated banking service, a telecommunica- and unintegrated disciplinary lines: most firms offer either tions service that is regulated in some industrial structure. architectural design, engineering design and jurisdictions, or an unregulated data process- consulting, construction and construction ing service. ATM networks or other shared management, or a combination of two of networks may also be held to violate antitrust these.ss Although referred to as AEC firms, regulations or other policies designed to in reality there arc few integrated companies require competition, While they may face dual regulation in that offer the full range of services. A given some countries, a few U.S. banks have also facility’s construction project almost always used international networks to escape regula- is conducted by a number of contractors and tion and taxation, by locating offices or subcontractors working for, but usually not :{9 branches “offshore ‘‘ in countries with few closely managed by, a developer. or no regulations. This allows them to The pace of internationalization in the engage in ‘“money laundering’ and other AEC industry has quickened since the mid- forms of illicit or unethical behavior. 1970s. The international market for such

Construction services37 Not all services exports are at present highly dependent on international telecom-

37 This section relies on an OTA contractor report: Deburah Workman, “Emerging Applications of Information and Telecommunications Technologies m the U.S. Construction Services Industry,” October 1992. 38 Some classifications include facilities management in this sector. The AEC industry IS characterized by a few extremely large firms, a modest number of mid-sized firms, and a great number of very small firms. Ninety-seven percent of all U.S. AEC firms employ fewer than 50 people, and 90 percent have fewer than 20 people. 39 In the United States, the AEC sector includes nearly 1 million establishments, employs nearly 10 m illion people, and accounts for 8 percent of gross national product, with $400 billion in new construction in 1991. Workman, op. cit., footnote 37. Construction value statistics are from the U.S. Department of Commerce, /ndustr/a/ Out/ook 1992. Export statistics are from the Bureau of Economic Analysis, Survey of Current Business, September 1992. According to Workman there is no single comprehensive source of statistical measures for the U.S. construction industry. The data used in this section is drawn principally from Engineering News Record’s annual ranking of the top firms and from U.S. Government reports, which, Page 104 however, also often rely on the Engineering News Record. Users’ Perspectives- Views of U.S. Services Exporters

services, in 1991, was about $130.2 mil- rival, the United Kingdom. by a wide mar- lion.40 About 25 percent of this was in gin. But even though the value of their 41 Europe. AEC services accounted for less foreign billings has continued to rise, U.S. than 1 percent of U.S. services exports in firms have lost market share over the last 1991, producing revenues of $1.3 billion, decade. and contributed 1.9 percent of the U.S. trade The AEC industry now makes very lim- surplus, Nevertheless, U.S. firms win 36 ited use of telecommunications networks, percent of all engineering and construction and especially of international networks. contracts awarded around the world to non- This is not principally because of costs or national firms, and they take 41 percent of band with limitations but because the indus- architectural design contracts. 42 European try’s traditional procedures have not been firms win 43 and 46 percent, respectively. In conducive to wide area networking and the European market, U.S. firms get nearly because of the peculiarly non integrated struc- 44 percent of nonnational awards for con- ture of work units. Most firms hold to the struction and 56 percent of design contracts; philosophy that they cannot “compete from other European but nonnational firms win 50 home and need a presence abroad. Over- and 40 percent, respectively.43 U.S. firms are seas projects arc typically managed overseas strongly competitive in Europe, and Euro- with relatively little dependence on over- pean firms are their chief rivals both in sight from the home office. Several contrac- Europe and in the rest of the world.44 The tors, providing services ranging from design United States leads its closest individual through procurement to construction, typi-

40 The “lnternatlonal market” is taken to be the sum across countries of the value of contract awards to nonnational firms.

4’ The United States was the site for about 12.7 percent of such awards. 42 U.S. firms captured $44 billion in overseas construction services in 1990 and $3.7 billion In architectural design billings. The latter rose in 1991 to $4.2 billion (1991 billings from engineering and construction contracts are not yet available). Able the apparerrt discrepancy between these figures, supplied by the Engineering News Record and checked with analysts at the International Trade Administration in the U.S. Department of Commerce, and those given above for total U.S. exports of AEC services ($1.3 billion in 1990), supplled by t he Bureau of Economic Analysis. The explanation Is that the figure for billings, prowded by t he AEC firms, often includes multiyear contract awards, large umbrella contracts in which much or even most of the work is subcontracted to European firms, contracts awarded to multinational consortia led by U.S. firms, etc. The Bureau of Economic Analysis (BEA) figures are more restrictive, representing the money that flows to the United States. However, both sets of figures depend heawly on self-reporting and are subject to many distortions common to all figures dealing with trade in services. 43 In construction, Japanese firms win about 14 percent of international contracts, and 4.4 percent of European contracts. In design services Japan IS not, currently, a strong competitor; It takes just over 3 percent of the total international market, none of the European market, and under 9 percent of the Asian international market. “Other” (not European, U. S., or Japanese) firms take 6.6 percent of the total mternatlonal market for construction and 9.7 percent of the international design market. 44 U.S. AEC services overseas are predominantly concerned with infrastructure, industrial facilities, and environmental work. The largest projects undertaken by U.S. International design firms are probably industrial/petroleum projects, which have an average value of about S300 m illlon. Workman, op. cit., footnote 37. . .-

U.S. Telecommunications Services in European Markets

cally work on a project, but coordination is and quickly accessible. Financial managers mostly done on the site to minimize the must monitor project expenses and release inefficiencies that result from fragmentation, funds on schedule. The technology exists for Sometimes a client will demand that the thoroughly transforming the work through various contractors create a common tech- integrated databases, interactive three- nology platform for project communications dimensional computer assisted design (3-D and information exchange, but this is rare at CAD),45 and greater use of telecommunica- present. A few firms are now beginning to tions. integrate—that is, to present themselves as But the adoption of advanced information full AEC firms with a complete range of technology in this industry has been very services. This integration at the firm level slow because of its costs, its human re- may stimulate demand for integration of sources demands, industry fragmentation, information systems that support these var- % and inadequate telecommunications. Five ied functions. or six of the largest U.S. AEC firms, Information technology and telecommu- especially Bechtel, are experimenting with nications will someday transform this indus- 3-D CAD and have found that even dedi- try. The earliest stages of construction con- cated 56 kbps links produce inferior results; sist almost entirely of generating and sharing well over 100 kbps or even megabit speeds information: formulating client goals and will be needed. These links may be available plans, creating architectural designs, devel- in the future between major cities in this oping specifications, identifying and com- municating legal and budget guidelines, country and Europe, but large construction checking standards and codes, making engi- projects such as petrochemical or nuclear neering shop drawings, etc. Yet, much of this plants most often occur in rural, sparsely work is still done by exchanging paper. At populated areas where such telecommunica- the next stage, a major problem is managing tions are least likely to be available. procurement and scheduling construction so The number of U.S. AEC firms that now that there are no delays to cause resources to use advanced international telecommunica- remain idle. Change in architectural or engi- tions is therefore small. Probably only about neering design during the project requires 140 U.S. firms are engaged in foreign major changes in material procurement needs, competition and the top dozen of these yet supplier input must be current, complete, account for nearly 90 percent of all U.S.

45 This is three-dimensional imaging of the facility to be constructed. At its most advanced, 3-D CAD would allow continual updating and interactive modification at dispersed computer locations. This 3-D imaging would guide procurement, scheduling, and construction management throughout the project and allow continuing adaptation to or better coping with changes in weather, materials avai Iabil it y, human resource availability, and environmental factors. ‘G There are other barriers, even stronger at present, including the lack of suitable software and protocols to support information-sharing in a mult i vendor environment. The largest firms, perhaps t he top 20 U.S. f irms, may lead in the adaptation of this technology for the industry; but because together they may have fewer than 150 major project offices in the United States, the market generated by their needs may not be sufficient Page 106 to drive development. Workman, op. cit., footnote 37. Users’ Perspectives- Views of U.S. Services Exporters

47 foreign billings. Currently, small AEC other factors are much more important, firms require nothing more than one or a few including financing of foreign projects, dis- standard voice lines for voice, fax, and tribution of information about foreign con- Information low-speed modem communications. E-mail tract opportunities, education of technical technology will is popular and there is some experimentation personnel, software standards development, someday transform with EDI. Sometimes clients install special and most critically the fragmentation and this industry, temporary communications facilities for the lack of coordination within the industry. The as firms see latter hinders the adoption of modem infor- duration of the project to connect the client advantages in mation technology that would enormously firm, AEC vendors, and the project site. The sharing information, enhance the creation, sharing, and coordina- transfer of 2-D CAD files is usually done by designs, and tion of design and the complex tasks of physical delivery of software copies. The schedules coordinating and managing the construction firms with European operations tend to electronically. connect one major European office, most process, which in turn would also help lower often London, to the U.S. headquarters for costs and increase industry competitiveness c-mail traffic and data related to financial and profitability. However, as the more management and business development. The immediate problems of financing projects link may be used occasionally to transfer 2-D and integrating the industry are addressed, and 3-D CAD files in batch mode. greater information-sharing will result within The firms with significant international the industry, leading to greater use of domes- billings, among the largest U.S. AEC firms, tic telecommunications networks, and ulti- typically need to connect four to six major mately to more use of international net- U.S. locations and two or three foreign works, This progression may become signif- locations for exchange of corporate and icant before the end of this decade if obstacles constraining the usc of advanced engineering data. Most of their U.S. sites arc information technology within the industry connected with 56 or 64 kbps, sometimes on can be overcome. public-switched networks and sometimes leased lines with bridges, routers, and multi- plexers. The networks of the largest firms Policy issues usually support TCP/IP, SNA, and DECnet U.S. services exporters want more in- traffic. X.25 may be losing ground to these volvement of U.S. telecommunications firms competitors but it remains important as a in Europe, and greater availability of U.S. network access protocol. telecommunications and information serv- Those firms that are subsidiaries of large ices. This requires, as they see it, U.S. conglomerates usually have the widest range Government pressure on European countries of technology options; they may have private to further open their telecommunications frame relay backbones, and even 384 kbps markets. According to some user firms, it videoconferencing. also may require full domestic deregulation The competitiveness of U.S. AEC firms in of telecommunications so that U.S. carriers Europe is little affected, at this time, by will have the incentive to ‘‘maximize infor- telecommunications availability or costs; mation-based services.

47 The 10 largest U.S. firms consistently rank among the top 20 firms worldwide. Page 107 U.S. Telecommunications Services in European Markets

Specifically, government intervention is network interconnectivity. Some user firms wanted to negotiate the end of restrictive said that government involvement might be ‘‘homologation’ (equipment approval or necessary to push U.S. manufacturers, as certification) practices that inhibit the de- well as European manufacturers, to agree to ployment of U.S. equipment and thereby global standards. access to, or the ability to offer, innovative User firms have come to realize that they information-based services. have interests to protect in the process of Service providers that rely on interna- standards development, and some arc de- tional telecommunications networks seem manding the right to participate in the universally to want more international stand- process. At the same time, pallicipation ards. Many favor a stronger role for the U.S. incurs significant costs, that relatively few Government in standards development. Some large user firms have been willing to assume. firms see the need for government interven- For example, financial institutions increas- tion in standards-setting to discourage Euro- ingly want to be included, yet in many banks pean standards organizations from adopting senior managers with little understanding of standards that would shut U.S. firms out of technology are reluctant to approve costly European markets, or that would delay participation in standards development.

Page 108 Telecommunications in Central and Eastern Europe CHAPTE6R

T HE DRAMATIC POLITICAL DEVELOPMENTS that exactly how telecommunications fits into have transformed Central and Eastern Eu- economic, social, and political development rope (CEE) appear to be closely linked to is often not placed in context. The absence or communictions. Radio and television broad- dilapidation of the telephone network is not casting provided a window on Western the only problem in Central and Eastern democracies and markets, and their appeal Europe; many other urgent needs, such as proved difficult to resist compared to Stalin- energy production and environmental cleanup, ist central planning and political structures. will require attention and resources. Thus Many observers predict that the successful telecommunications, while critically impor- development of competitive market econo- tant to these countries, competes with other mies and free democratic organizations will needs. depend critically on the installation and Each country has distinct political and Successful availability of modern telecommunications economic characteristics that lead to differ-

development of services. ‘‘Improved communication chan- ing strategies on future economic develop- market economies nels will assist the free flow of information ment, legislation, and the role of private and democratic and stimulate economic growth."2 enterprise.~ The challenge these govern- governments Improved telecommunications capability ments face is to carefully match their socie- depends on modern is presumed to be positively correlated with ties’ communications needs with the desired telecommunications economic development, the strengthening of characteristics of their economies, societies, democracy, the broadening of culture, and and politics, in order to facilitate the transi- greater educational opportunities. However, tion from centrally planned socialist regimes

1 “Flndlng Their Voice, ” The Economist, Feb. 8, 1992, p. 74. See also “Please Stand By,” report of the State Department Task Force on Telecommunications in Eastern Europe. Observers say that the telephone, the fax, and the photocopier were critical In the erosion of Soviet control. James O’Toole, “lnformatlon and Power: Social and Political Consequences of Advanced Tele/Computing Tech nology,” The Aspen /nsfitufe Quarter/y, vol. 3, No. 4, autumn 1991, pp. 42-73. O’Toole notes that “the unprecedented events in the communist world were seized upon . . as illustrative of the positwe consequences of the new information tech nologies,” but caut Ions t hat technology IS not a driver—as it is often port rayed—so much as an enabler: “new technologies are capab/eof [dest roying power st ruct ures] If humans choose to apply t hem to t hat end” (P. 44). Further, O’Toole argues that the “bimodal characteristics” of new communications technologies— I.e., they are simultaneously centralizing and decentralizing, empowering and controlling-are rarely well understood: “It would require an unconscionable act of Intellectual selectivity to portray technology as simply either the defender or usurper of freedom” (p. 43). p “Central and Eastern Europe: The Problems of Reconstruction,” Te/ecornrnunica(;om, October 1991, p. 158. s For example, Erno Pungor, the Hungarian minister responsible for technological development, told the Off ice of Technology Assessment (OTA) t hat whl Ie telecommunicate ions was clearly im port ant to economic development, energy and environmental problems WIII also require significant resources. Presentation at the Hungarian Embassy, Washington, DC, Dec. 11, 1991. A theme running through the 1991 International Telecommunlcatlons Union Regional Development conference in Prague was the question of how to emphasize government assistance to telecommunications. U.S. concerns at the Conference were, as a consequence, to discourage the participants from establishing too strong a role for antlcompetitive State telecommunications monopolies. Page 109 —

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to market-oriented capitalism. Developing a has little leverage over developments in telecommunications modernization strategy those countries, apart from trade, foreign aid, is one step. and technical assistance tools already in use. In the past, public telecommunications has not been a priority in these countries. Infor- Defining and characterizing Central mation has been tightly controlled, and and Eastern Europe development of public telecommunications rigorously curtailed. As a consequence, tele- Eastern Europe has for many years been communications networks cannot meet the the shorthand reference for those countries in requirements of contemporary social and the political/military and economic sphere of s economic interaction. Recognizing the criti- the Soviet Union, i.e., under the Warsaw cal importance of communications to eco- Pact and the Council for Mutual Economic nomic activity, however, most of these Assistance (CMEA or Comecon). Comecon countries have begun to develop ambitious was the economic trading bloc set up by the plans for basic telecommunications system Soviet Union (Comecon is now defunct). For expansion and modernization.4 the most part, Eastern Europe was usually This chapter will characterize the state of defined by geography (see figure 6-1). The telecommunications in the CEE region and countries of the region themselves refer to discuss strategies for modernizing the net- the area as Central and Eastern Europe, works, in order to identify implications for which conveys a degree of differentiation to the telecommunications industry and policy- which the United States has until recently not makers in the United States. Growing ties been sensitive. Though there is consensus between East and West are making effective that Poland, Hungary, Czechoslovakia,6 Ro- telecommunications critical for the conduct mania, and Bulgaria are members of this of business and public affairs. The chapter group, there is some ambiguity about how to concludes, however, that the U.S. Govern- classify other countries, such as Albania, the ment, and in particular the U.S. Congress, republics of the former Soviet Union, and the

4 The most advanced planning is in Hungary, Czechoslovakia, and Poland; Bulgaria and Romania have also begun to develop plans. Albania lags behind. While Yugoslavia had been actively modernizing its network, the breakup of the republic has disrupted these efforts. 5 The original signatories to the Warsaw Treaty of Friendship, Cooperation, and Mutual Assistance signed in May 1955 Included Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and the Soviet Union; China was an observer to the conference. Albania, however, formally withdrew from the treaty following the 1968 invasion of Czechoslovakia, for which it refused to commit troops. Romania, too, did not participate in the “Prague Spring” invasion and began to distance itself from the Pact. e Czechoslovakia, or more formally the Czech and Slovak Federal Republic, was split into the Czech Republic and Slovakia in January 1993, following a national referendum on the political future of the Federation. The term Czechoslovakia will be used here where appropriate. 7 Because Yugoslavia was not a full member of Comecon, it was not always considered part of Eastern Europe. At the time of this writing, the status of Yugoslavia is highly uncertain. The disintegration of the Soviet Union and the independence oft he Baltic republics has occurred so recently that t hey have onl y just begun to act as independent nations. Until its integration into the Federal Republic of Germany in 1990, the Page 110 German Democratic Republic (formerly East Germany) was considered part of Eastern Europe. Telecommunications in Central and Eastern Europe

remains of Yugoslavia.7 In effect, Eastern Europe is as often determined by politics and economics as by geography. For the pur- poses of this chapter, the focus is mainly on the countries that were not part of the former Soviet Union. Russia

Regional differences Because the economic and political ties between the United States and the countries of this region are growing, it is necessary to be sensitive to the significant differences Ukraine among and between the countries, especial] y regarding their economic transformation. Czechoslovakia, Poland, and Hungary are expected to move successfully toward mod- ern market economies and democracy. Both the European Community (EC) and the European Free Trade Association (EFTA) have negotiated trade agreements with these Italy three countries, anticipating eventual inte- gration within the economic and political West.R The United States has begun to view them as it does other trading partners; the SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 United States Trade Representative (USTR) annual report on foreign trade barriers listed Bush extended to Hungary and Czechoslo- Figure 6-1. Poland, Hungary, and Czechoslovakia for vakia permanent most-favored nation (MFN) Central and Eastern the first time in 1992.9 President George status in April 1992; this had previously been Europe

B Poland, Czechoslovakia, and Hungary signed slmilardeclarat ions of intention with both the EFTA and the EC, that stipulate a 10-year transition period eventually leading to free trade. The three countries “signed agreements forging closer commercial and political ties” with the EC in December 1991, which will dovetail with EFTA negotiations, which are expected to be made official in the spring 1992. “EC-Central Europe Association Agreements Signed,” Europe Now, A Report, U.S. Department of Commerce, International Trade Administration, winter 1991-92, p. 4. “EFTA Hopes to Sign Free-Trade Pacts With Three Eastern Nations by April,” /nfernatior?a/ Trade Repoder, vol. 9, No. 10, Mar. 4, 1992, p. 404. 9 Eduardo Lachlca, “Report on Trade Barriers Says U.S. Made Some Inroads in Japan, Mexico,” Wa//Streel Jouma/, Mar. 30, 1992, p. Al 8. The New York Times notes that the USTR’S annual report, which is required by Congress, is “a propaganda exercise” as well as a harbinger of Impending trade investigations. Keith Bradsher, “U.S. Adds 7 Countries to Trade Barrier List ,“ P/ew York Times, Mar. 30,1992, p. D2. Meanwhile, Czechoslovakia, Poland, and Hungary are reducing and in some cases eliminating tariffs on products imported from the EC, in accordance with association agreements between the EC and the countries. “C. S.F.R. Tariffs on EC Exports Reduced, El im inated Under Agreement,” /nterna(iona/ Trade Repotier, vol. 9, No. 13, Mar. 25, 1992, p. 536. Page 111 Us. Telecommunications Services in European Markets

Telephone main lines per 100 population Comecon, was dissolved in January 1991 100, 7 under pressure from the countries of Eastern Europe to substitute the barter system with a hard-currency-based trading system. While some trade and professional bonds were forged as a result of years of participation in Comecon, 11 overall the structure of trade within the organization minimized the eco- nomic interaction between the countries and instead imposed a system in which the Soviet Bulgaria CSFRa Hungary Poland Romania Yugoslavia Union supplied these countries with energy and raw materials and in return they sold SOURCE: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT, INTERNATIONAL TELECOMMUNICATION UNION, 1992. manufactured goods back to the U.S.S.R, The pattern of international telephone lines Figure 6-2. subject to annual review. 10 The prospects for shows clearly the lines of dominance, and the Telephone MFN status for Albania, Bulgaria, Romania, extent to which the individual countries of Penetration Levels: political units of the former Yugoslavia, the Comecon were cut off from one another. A Comparison Baltic republics, and republics of the Com- The former Soviet Union used its energy (1991) monwealth of Independent States and Geor- supply to force a set of bilateral barter trading gia arc less clear. systems on the CEE nations. ’ 2 The Soviet a Czech and Slovak Federal Republic Union exchanged cheap oil and other raw legacy of Soviet economic and materials for machine goods and food, and trade policies coordinated the trading of manufactured The West generally had a false perception goods throughout Central and Eastern Eu- that the countries behind the Iron Curtain rope. 13 Early in the democratization process were economically and socially integrated. begun in 1989 it became apparent that as the The Soviet Union-dominated trade bloc, Soviet economy deteriorated, CEE econom-

‘0 “President Signs Measure Extending Permanent MFN to Hungary, C. S. F.R.,” /nternatior@ Trade Reporter, vol. 9, No. 16, Apr. 15, 1992, p. 700. 11 Comecon consisted of Poland, East Germany, Czechoslovakia, Hungary, Romania, Bulgaria (Yugoslavia part icipated as an associate member), as well as Mongolia, Cuba, and Vietnam. A Congressional Research Service report suggested that being behind the Iron Curtain together for many years spawned fairly close and collegial relationships among the nations of the region. See Francis T. Mike, “East European National and Ethnic Relations in the 1990s,” CRS Review, vol. 11, Nos. 3-4, March-April 1990, p. 13. In spite of the tremendous ethnic tensions t hat characterize the region now, and have for centuries past, it maybe t rue that Comecon tempered t hese ethnic and religious conflicts by forging professional ties where previously t hey did not exist. Now that Comecon has dissolved, some ties may remain among professional communities. 12 For a good discussion of how trade was handled within theComecon system, see Martin Schrenk, “Whither Comecon?” Finance& Deve/opn?ent, September 1990, pp. 28-31. 13“Comecon: An Idea Whose Time Has Gone,” The Economist, Jan. 13, 1990, p. 46. Pal Horvath, general manager and director general of the Hungarian Telecommunications Company, told OTA that over 70 percent of Hungarian telecommunications equipment was shipped to the Soviet Union. OTA interview, Page 112 Budapest, Hungary, Oct. 7, 1991. —.

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ics were being hurt as well, due to this tries. Telephone penetration levels are low, trading system centered on Moscow. CEE the number of disconnections is high, and countries now see that they must diversify waiting lists for service are long. trade relationships, with one another as well Digital switching technology has only as with the outside world, if they want to very recently been introduced. Most of the 14 develop rapidly. networks consist of electromechanical or semielectronic technologies, such as cross- The condition of bar or step-by-step switches, that are anti- telecommunications in Central quated by Western standards. For example, and Eastern Europe electromechanical crossbar switching tech- Telecommunications in Central and East- nology comprised 47 percent of Czechoslo- ern Europe are in dismal disarray. Communi- vakia’s telecommunications switching infra- cations networks in these countries are structure in 1991, and electromechanical several generations behind the West techno- step-by-step switches accounted for 48 per- logically and cannot provide the services cent of capacity; only 3 percent of exchange required for these countries to achieve eco- capacity was digital, and nearly all of that 15 nomic parity with the West. Though tele- was used in international service. communications operators are aggressively Levels of telephone penetration are signif- modernizing facilities for important business icantly behind those in Western European and government centers, these networks countries (see figure 6-2). ’6 Bulgaria, with main] y rely on decades-old transmission and the highest telephone density of Eastern switching equipment, and have few interna- European countries, [7 in 1991 had approxi- tional connections. even among CEE coun- mately 25 main lines per 100 people, while Central and European telecommunications cannot now provide “ Some observers advocated that foreign assistance to the CEE countries was best delivered via money sent to the USSR, which could then continue to buy goods and serwces from the CEE countries. services required ‘5 Calculated from data In International Telecommunication Union, “Summary of the Survey on Present State for their countries and Plans for Telecom Development In Central and Eastern Europe,” European Regional Development to develop Conference (EU-RDS), Prague, Nov. 19-23, 1991, doc. no. EU-RDC-91/26-E (Geneva: International economically. Telecommunlcatlon Union, 1991), table 3, p. 5, hereinafter referred to as ITU Summary. ‘G Comparative data in this report are drawn from International Telecommunication Union, European Te/ecomrnunmatmns /ndlcators, European Regional Development Conference (EU-RDS), Prague, Nov. 19-23, 1991, doc. no. EU-RDC-91/46-E (Geneva: International Telecommunication Union, 1991 ), hereinafter referred to as ITU Indicators, 1990; and International Telecommunication Union, European Tekcornmumcahons /rrdicators, (Geneva: International Telecommunicate ion Union, October 1992), hereinafter referred to as ITU Indicators, 1991. ‘7 ITU Indicators, 1991, op. cit., footnote 16, table 5, p. 5. This measure, which gauges the number of telephone main Ilnes per 100 people, is the standard international measure for telephone penetration. As a rule, this measure fairly accurately depicts the relatlve development and extension of a country’s communications network. Svetoslav Tlnchev, chief expert, Digital Switching and Network Planning, PTT Mlnlstry, Bulgaria, oral presentation, noted in “Report of a Seminar With Central and Eastern European Count nes,” In Po/icy Dla/ogue on Te/ecornrnunlcation Deve/oprnenf: A Sernmar With Centra/ and Eastern European Countries, held In The Hague, Apr. 22-24, 1991, doc. no. DST1/lCCP/TlSP(91 )7 (Paris: Organlzatlon of Economic Cooperation and Development, June 4, 1991 ), p. 5. Page 113 . . . . .

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Figure 6-3. much as 30 years, compared with less than 2 Waiting Time for Bulgaria weeks in Western Europe. These figures Telephone Service, probably understate true demand. which is 1992 CSFR a likely to grow as the waiting lists shrink and a people who were not bothering to sign up see Czech and Slovak Hungary better chances of getting connected. (See Federal Republic Poland figures 6-3 and 6-4.) Neglect is most critically manifest in the Romania limited range and poor quality of services available. Lines only marginally reliable for Yugoslavia basic voice service are unreliable for data I I )

o 5 10 15 20 and facsimile transmission. The number of annual faults reported per 100 lines ranged SOURCE: INTERNATIONAL TELECOMMUNICATION UNION, 1992. from 18 (in Croatia) to 97 (in Romania); by the average for the region was 13.18 By contrast, reports of faults in Sweden were 10 comparison, the number of main lines per per 100 lines, in France 9, and in the United 100 people in the industrialized countries Kingdom 15. In Romania, 70 percent of calls ranges from 34 (Spain) to 69 (Sweden), with were not completed, and in Hungary, 45 the average for the developed countries of percent of local calls failed to go through. Western Europe at 43. Levels in Canada and (See figure 6-5.) the United States hover around 50. (See Services available to businesses and resi- figure 6-2.) dences are limited, but are growing fast. In As a consequence, waiting lists for con- 1990 there were only 28,000 fax machines in nection are lengthening, and some areas have all of Central and Eastern Europe (compared no service at all. In Poland, for example, the with over 3.3 million in Western Europe), waiting list for a telephone grew from around but by 1991 there were more than 72,000 1 million in 1981 to 2.3 million in 1991. On (Western Europe had nearly 3,9 million in average, waiting lists for the CEE countries 1991). In 1990 Western Europe had 3.4 increased by 9 percent a year between 1981 million mobile phone subscribers, and in and 1990; in Western Europe these lists 1991 4.3 million, while in Central and shrank by 12 percent over the same period. ’9 Eastern European countries there were only The CEE average waiting time for telephone 4,500 in 1990, but 9,000 in 1991. Public installation is 11.5 years and it is not packet-switched data networks are barely off uncommon to hear accounts of delays as the drawing boards in Central and Eastern

18 Bulgaria expanded numbers of telephones at the expense of quality of service and infrastructure investment. For example, in 1990, 48 percent of local calls were not completed in Bulgaria, compared with less than 2 percent not com pleted in Western Europe; Bulgaria invested only $5.60 per capita in Its network, compared with $20.00 per capita in Hungary and $132 per capita in Western Europe. These levels inmproved madaxfly by 1991: Bulgaria spent $28 per capita, Hungary spent $30, and the Western European average had dropped to $128. See 1990 data in ITU Indicators, 1990, op. cit., footnote 16, table 20, p. 20; and 1991 data in ITU Indicators, 1991, op. cit., footnote 16, table 30, p. 30. Page 114 ‘g See data in ITU Indicators, 1990, op. cit., footnote 16, table 7, p. 7. Telecommunications in Central and Eastern Europe

Europe, with 317 subscribers in Hungary and Waiting list for main lines (millions) 3 ‘— Bulgaria in 1990, but 761 in 1991, while r~ 1981 1991 Western Europe has an extensive X.25 [ I service in place, with over 337,000 subscrib- 21 ers in 1991. Finally, productivity of telecommunica- tions operators varies a great deal between 1 the two parts of Europe: in 1991, the number of main lines per employee in Central and Eastern Europe was 67, up from 58 in 1990, 0 LBulgarla CSFR a Hungary Poland Romania Yugoslavia compared with 158 in Western Europe in 1991 and 152 in 1990.20 (See figure 6-6.) SOURCE INTERNATIONAL TELECOMMUNICATION UNION, 1992 Services to rural communities have been especially poor. The telephone network is tion thus far has been overwhelmingly on Figure 6-4. often concentrated in the major cities and business users, on the presumption that Waiting Lists for administrative centers, so the outlying rural businesses can absorb the increased costs.23 Service, 1981 and 1991 areas have much lower telephone penetration (See figure 6-7. ) than suggested by the national averages.21 The case of Hungary illustrates the condi- a Czech and Slovak tion of CEE telecommunications Federal Republlc For example, approximately 7,500 Polish networks. b 1990 villages arc without telephones, and nearly The average wait for telephone connection two-thirds of those villages with phones arc over the past two decades has been 12 years, sevred by manual switches:22 service effec- and even then there is considerable difficulty tively stops when the switchboard operator in securing a dial tone or in completing a leaves for the evening. The same situation call .24 There were only 10.9 telephone main can be found all over Central and Eastern lincs per 100 people in 1991, and one source Europe. While several CEE telecommunica- indicated that three-quarters of these are in tions authorities have told the Office of the government.~s Only 7 percent of switches Technology Assessment (OTA) that rural were digital. While in the main cities 90 service is a priority, the focus of moderniza- percent of lines had automatic switching in

20 Data for 1990 taken from ITU Indicators, 1990, op. cit., footnote 16; and ITU Indicators, 1991, op. cit., footnote 16, table 24, p. 24.

2’ Jurgen Muller, “Closing the Capacity and Technology Gap In Eastern European Telecommunlcat ions,” European Regional Development Conference (E U-RDS), Prague, Nov. 19-23,1991, doc. no. EU-RDC-91/8-E (Geneva: International Telecommunication Union, 1991), p. 1. 22 Jurgen Muller, op. cit., footnote 21, p, 1.

23 OTA Interview with Pal Horvath, op. cit., footnote 13. Horvath clalms this IS demanded by Hungarian banks, whose loans prowde 50 percent of the financing. ‘d OTA noted on a t np to Hungary that want ads for apartments to rent usually specify “has telephone” even before mentioning how many rooms are [n the apartment. 25 OTA interview wlt h And ras Sugar, general manager, a nd John Handley, operat Ions director, WESTEL (a U.S./Hungarian cellular telephone joint venture), and Jlm Russell, manager of direct dist nbutlon, U.S. West Newvector Group (U.S. West IS the U.S. joint venture partner In WESTEL), Budapest, Oct. 8, 1991. Page 115 Us. Telecommunications Services in European Markets

Figure 6-5. Annual faults per 100 main lines percent are not connected to interna- 27 Service Quality: Bulgariab Central tional long-distance dialing." Telephone Faults, 1991 and CSFRa Eastern Causes of decay a b Europe Czech and Slovak Hungary Federal Republic In the political environment of Central and b lggo Romania Eastern Europe until recently, information France was deliberately and tightly controlled and Western the development of public telecommunica- Sweden Europe tions services and facilities was rigorously United curtailed. International and even much re- Kingdom 1 1 0 20 40 60 80 100 gional direct dialing was prohibited, circuits were extremely limited in number and qual- SOURCE INTERNATIONAL TELECOMMUNICATION UNION, 1992. ity, and telephone books were made classi- fied documents.28 Horvath of the Hungarian 1990, automatic dialing was available to 26 Telecommunications Company (HTA) told only 50 percent of main lines in rural areas. OTA that the Marxist government had delib- In a great number of Hungarian vil- erately neglected infrastructure and discour- lages the telephone provides a link with aged communications except among the few the outside world only in the daylight authorized decisionmakers. In the early 1980s hours. . . 78 percent of the 2,024 main there was a debate over the importance of exchanges operating in Hungary at the According to Horvath, telecommunications. 29 end of 1988, for example, were manu - the new leaders do not yet realize that poor ally operated exchanges representing communications ‘‘is a deadly brake on the 50 year old technology. . .[which means economy. that] 78 percent of the locations in Telephony and other services were not Hungary are not connected to long- considered industrial production in socialist distance dialing, 60 percent of the cities economics and, since they had no quantifia- in Hungary are not connected to do- ble output, were seen as parasites on the real 30 mestic long-distance dialing and 80 industrial economy. Investment priorities

26 OTA interview with Pal Horvath, op. cit., footnote 13. Horvath suggests that because more revenue will haveto be raised to cover operating and modernization expenses, rates will rise, and demand for telephone service will therefore fall. See also Eva Ehrlich, “Telecommunications Developments in Eastern Europe,” Budapest F/G YELO, July 18, 1991 as cited in JPRS Te/ecomrnunlcations Report, Oct. 25, 1991, p. 57. The author notes that “there are only ‘quasi telephones’ “ due to the unreliabllit y of the vastly overloaded and outmoded network. The half million people on the waiting list for a main line connection In 1990 probably underestimates the true number of people seeking service by 50 to 80 percent. 27 Eva Ehrlich, op. cit., footnote 26. 28 Tim Kelly, “Telecommunications In the Rebirth of Eastern Europe,” The OECD Observer, No. 167, December 1990, pp. 19-20. 29 OTA Interview with Pal Horvath, op. cit., footnote 13, confirmed by Peter Eisler, general manager, Hungirocom Telecommunications Ltd., Oct. 9, 1991, Budapest. Page 116 30 Measuring service productivity has been difficult for classlcal and neoclassical economics as well. — —

Telecommunications in Central and Eastern Europe

were not high for telecommunications serv- Main lines per employee 175 ~ I ices. (See table 6-1.) Much of the little i——-— 4 spending that did occur, according to a 31 World Bank study, went to new lines rather than maintenance, so figures on CEE tele- phone density mask poor service and anti- quated and nonperforming equipment, as the figures on line faults and completed calls show. u The network deteriorated as a result, Bulgaria CSFR b Hungary Poland Romania Yugoslavia necessitating the parallel development of ‘‘closed purpose networks’ for the more SOURCE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT, INTERNATIONAL TELECOMMUNICATION UNION, FEDERAL COMMUNICATIONS COMMISSION, 1992. sensitive government activities such as the defense and interior ministries. For example, from readily changing goals, strategies, or Figure 6-6. in the former Soviet Union three separate internal structures. Furthermore, telecom- Telephone Operator telephone networks existed: one for a very munications operators were closely super- Productivity, 1991 small circle of the political and military elite vised by finance ministries as they set prices (for which special keys are needed), another a L~l exchange carriers and collected and distributed revenues. Tele- for the party bureaucracy, and a third for the (regional Bell operating 32 communications supported the postal serv- general public. compames and the major ice and contributed to the general treasury. Independents). Despite the lack of reinvestment, telecom- Until recently, for example, the Czechoslo- b Czech and Slovak munications nevertheless proved a reliable Federal Repubhc vakian PTT turned over 87 percent of money maker. Following the traditional telecommunications profits to the general European model, telephone service in CEE 33 treasury. The awakening of users to the countries was vested in Postal, Telephone, value of communications has strained old and Telegraph (administrations) (PITs), also telecommunications operating models in many responsible for postal and telegraph services countries. A major challenge to these coun- and in some cases for broadcasting, and tries will be to become much more respon- typically under the control of the ministry in sive to users’ needs. charge of communications. (See table 6-2. ) As state-owned enterprises, telephone serv- ice operators, therefore, were both highly Regional relationships political and highly bureaucratic: telecom- Western approaches munications was used as a political tool for Other aspects of telecommunications mod- social and economic control, and telephone ernization are cooperation among countries enterprises were bound by administrative in the region and assistance from interna- public-service structures that prevented them tional agencies. As noted above, for years the

3’ Timothy Nulty, Corwderafions m Te/ecom /nvesfrnent in Eastern Europe (Washington, DC: World Bank, 1 990). 32 Discussion with Gordon Cook, former OTA analyst and specialist on Soviet telecommunications networks. 33 Tlm Kelly, op. cit., footnote 28. Page 117 .-

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~~ Telephone main lines per 100 population Figure 6-7. 7U officials to begin to emulate the telecommu- Urban and Rural nications world outside of the Soviet CSFR a 35 3s Service average sphere. Euroteldev has so far only pro- 30 penetration duced plans, though those who have partici- Fi c~~h and Slovak 25 I Federal Republic pated agree that its work should continue. 20 Now that free political and commercial relationships between the East and West are 15 — possible, Euroteldev mission may however 10 have less justification. 5 In addition, the ITU itself is attempting to 0 I I — play a larger role in helping developing Prague Brno Bratislava countries modernize their telecommunica- SOURCE: INTERNATIONAL TELECOMMUNICATION UNION, tions networks. Under the auspices of the AT&T’S THE WORLD’S TELEPHONES, 1991. newly created Bureau of Telecommunica- 36 Soviet Union presided over a set of unilateral tion Development (BDT, after the French telecommunications arrangements with its acronym), the ITU organized its second satellites and limited their interaction with Regional Development Conference on tele- one another. In the mid- 1980s, the United communications development in Central and Nations Development Program (UNDP) and Eastern Europe, which was held in Prague in 37 the International Telecommunication Union November 1991 . (ITU) proposed to reduce this isolation by The conference focused on four main sponsoring a regional telecommunications areas: regulatory policy and structure of the development program, which became known telecommunications sector (i.e. privatiza- as Euroteldev.34 Its formal goal was to tion, creation of a separate regulatory body); establish projects relating to new equipment, telecommunications standards and network services, and network structures. Informally, harmonization with Western Europe; needs however, it was intended to provide money for and sources of financing; and human and motivation for CEE telecommunications resource training and development.

34 For a thorough description of Euroteldev, see John F. Healy and Ronald A. Davidson, UNDP//TU Evacuation Mission, European Tekxommunications Deve/oprnen&-Phase //, Project RER/87/025, Evaluation Report (Geneva: mimeo, June 1991). 35 OTA interview with John F. Healy, project director, UN DP/lTU Evaluation Mission, Washington, DC, Sept. 17, 1991. w A High Level Comm ittee on the st ructure of t he ITU recommended t hat it be reorganized into t hree equal branches: telecommunications development, standards, and radio communications. The BDT is the successor to the Center for Telecommunications Development, which was an ancillary part of the ITU. 37 The first conference was held the previous year, in Africa, and the third was held in early 1992 in Latin America. Participating in the conference were officials from the telecommunications authorities of all the countries in Europe. Attending as observers, but with full participation in committees, were such countries as the United States, Canada, Mexico, and Japan, and such international organizations as Inmarsat, Intelsat, the European Commission, the Organization for Economic Cooperation and Development, the Page 118 World Bank, and the European Bank for Reconstruction and Development. Telecommunications in Central and Eastern Europe

The conferees agreed to create a working group of members from the subregion to jointly tackle issues left unresolved at the Average telcom close of the conference, such as financing, investment, 1989-91 Investment (US $ mil.) per capita (US$) network development, and human resources Bulgaria 160 28 development. This group, the Central and Czechoslovakia 113 10 Eastern European Telecommunications Co- Hungary 195 30 Poland 42 4 operative Mechanism (CEETEC), builds on Central and Eastern Europe 630 9 the experience of Euroteldev. Recent reports Western Europe 43,810 128 on these cooperative ITU activities suggest SOURCE INTERNATIONAL TELECOMMUNICATION UNION (IW), they are likely to move slowly .78 Most ITU INDICATORS, 1991, TABLE 30, P 30. cooperative activities will occur on a company- to-company basis, as financing questions can ern industrialized countries because of com- Table 6-1. be resolved. peting goals, military security, and free Telephone Investment trade. Principally at issue are fiber optics and Levels, Comparing CoCom 32-bit digital computer processors, both of Hungary, Central to the telecommunications mod- which may have military and civilian uses. Czechoslovakia, ernization plans of CEE countries is invest- Fiber optics permit vastly greater transmis- Poland, with ment in advanced transmission and switch- sion capacity than coaxial copper c-able or United States and ing equipment. This equipment is not avail- microwave but are much more difficult to Western Europe able from the former Comecon trading tap, which makes monitoring of military and partners, but only from the Western coun- military industrial activities more difficult.40 tries. However, during the Cold War the CoCom has set a limit of 140 Mbps data West, through the Coordinating Committee transmission rate on systems installed be- on Multilateral Export Control (CoCom), tween Russian cities, and 565 Mbps on established strict controls on the export of systems terminating in some Russian cities, goods with military applications to Soviet- including Moscow, St. Petersburg, and Vlad- bloc countries and China.39 ivostok. Intracity communications in re- CoCom restrictions on importing high- stricted countries would have to continue tech communicantions equipment to the United using microwave or copper cables, 41 As late States have, until very recently, hindered as 1992, this ban prevented U.S. West from CEE governments in modernizing their net- constructing a trans-Siberian fiber optic net- works, Telecommunications exports were a work. According to officials in Hungary, bitterly fought export-control issue within however, Cocom should not now be a the Bush Administration and in other West- problem because the level of technology

38 Interview with senior State Department official, Washington, DC, Apr. 29, 1992. 39 CoCorn consists of 18 countries: the NATO countries except Iceland, plus Japan and Australla. 40 Advanced digital processors are controversial because they could allowsigruf icant advances in computmg speed for weapon design, targeting, encryption and other m II itary operations.

4’ In developing ciwlian telecommunications, reliance on microwave systems can beofgreat benefit, as the systems are capable of carrying substantial traffic, are well understood, are relatively inexpensive, and are easy to set up and reconfigure. Page 119 Us. Telecommunications Services in European Markets

(North Atlantic Treaty Association), the CoCom countries recently have taken a Telephone revenues, Revenues number of steps to modify their restrictions, 1991, (US$ mil.) per capita (US$) in order to nurture new potentially lucrative 44 Bulgaria 112 12 trading partnerships. Further, fiber Optic Czechoslovakia 543 35 Hungary 533 52 technology is becoming available to these Poland 520 14 countries. Because German firms are permit- Central and Eastern Europe 3,188 24 ted to honor contracts made in the former Western Europe 128,426 355 East Germany, the former East German firm, SOURCE: INTERNATIONAL TELECOMMUNICATION UNION (ITU), ITU INDICATORS, 1991, TABLE 28, P. 28. Carl Zeiss, can export advanced fiber optic technology to the CEE countries and Russia. Table 6-2. presently available to them is acceptable and This loophole is putting pressure on CoCom Telephone Revenues appropriate .42 members to modify the restriction. for Hungary, In the United States, the Department of Change is quickest for the three most Czechoslovakia, Defense and the various agencies of the politically progressive and stable countries, Poland and/or intelligence community argue that maintain- Poland, Czechoslovakia, and Hungary, which CEE Average ing CoCom restrictions is essential for na- have begun to institute export control proce- tional security. Firms such as AT&T, on the dures that satisfy CoCom.45 Hungary, which other hand, claim restrictions are no longer has had an export control regime in operation needed. 43 It appears that proponents of trade since October 1990, is the farthest along; liberalization are prevailing. As it becomes CoCom agreed in May 1992 to remove apparent that Eastern European countries no Hungary from the list of proscribed destina- 46 longer pose a direct military threat to NATO tions. The prospect of relaxing or elinlinat-

42 Also, it was—and still is—a matter of national pride in Hungary, for example, to successfully circumvent the restrictions. OTA Interview with Erno Pungor, Hungarian minister for technological development, Washington, DC, Oct. 31, 1991. 43 Hearings in the 102d Congress before the House Foreign Affairs Committee’s Subcommittee on International Economic Policy and Trade ventilated these arguments. OTA has not attempted to evaluate these claims independently, as this would require use of classified material. Subcommittee staff believe, however, that nothing they have seen in the record suggests that continued restrictions on high capacity fiber exports are warranted. OTA interview with John Scheibel, staff director, House Foreign Affairs Comm ittee’s Subcommittee on International Economic Policy and Trade. 44 “U. S., Allies Preparing to Ease Curbs on Exports to Baltics, Other Countries,” /ntemat~ona/ Trade Reporfer, vol. 9, Mar. 11, 1992, p. 434. 45 Some barriers remain for export to t he Commonweal h of Independent States, part icularly for systems to be used for internal traffic. “U. S., Allies Agree to Liberalize Telecommunications Exports to Ex-USSR,” /ntematior?a/ Trade Reporfer, vol. 9, Mar. 11, 1992, pp. 430-31. 46 This move is cent ingent on establishing new guidelines covering nuclear technologies and munitions and requiring that rest rict ions be placed on t he export of Hungarian technologies and goods as well. Previously, Hungary’s export rules only restricted the reexport of high-tech goods to t he former Soviet Union and only targeted dual-use technologies. “Hungary to Comply Soon With CoCorn Requirement for Freeing High-Tech Trade,” /ntemationa/ Trade Repoder, vol. 9, No. 10, Mar. 4, 1992, p. 390. The status of Poland and the Czech and Slovak Federal Republic (CSFR) was given more favorable consideration, but Page 120 consideration of removal from the proscribed list is to be delayed. Telecommunications in Central and Eastern Europe

ing bans on importation of high-tech goods current standard.48 Expectations of improv- is an important leverage to impel these ing penetration levels to Western levels by countries to progress toward Western politi- the end of the century arc ambitious, perhaps cal and economic practices. unrealistic; and these figures only represent Efforts are underway in CEE countries to additional lines, not replacements of dilapi- correct major structural flaws that have dated network and terminal equipment. (See contributed to the disintegration of both the table 6-3.) economic structure in general and the tele- How telecommunications modernization communications sector specifically. Mod- will be paid for is a difficult issue for all CEE ernizing telecommunications” addresses only countries, as their economies are relatively a single, but critical, element of the broader unproductive in world markets, their foreign need for reform. In recognition of its funda- exchange reserves are low, and their pros- mental importance to their economies, both pects for short-term improvements arc bleak. as an industry in its own right and as a It is likely that some combination of self- multiplier for other economic activities, the generated revenues, capital raised in foreign CEE countries are planning major organiza- markets and eventually from domestic mar- tional and legal changes. This liberalization kets as these develop, and foreign aid or is aimed at both improving the communica- loans, will be necessary. tions networks and creating an environment The prospects for raising revenue inter- conducive to foreign financial and technical nally from telecommunications service and assistance for modernization. allocating it for network modernization are The World Bank and the Organization for not encouraging. Profits from telecommuni- Economic Cooperation and Development cations services generally arc returned to the (OECD) estimate that the total cost of general treasury, rather than being reinvested modernizing will be around $50 to 60 billion in telecommunications. Tariff structures in over the next decade, and considerably more each country provide subsidies to local calls if the countries of the former Soviet Union and handset rental charges, depriving the are included.~’ The ITU estimates that the operator of revenues that could be used for network modernization. cost for Central and Eastern Europe, includ- Modernizing ing the former Soviet Union, would be $94 CEE financial markets are as yet weak, telecommunications billion just to bring service levels to Ireland’s and in some cases there is no other domestic systems will cost about $50 to $60 ‘7 The World Bank’s project Ion of costs IS generated by a rough estimate of the average cost of installing a billion. Who will single telephone line (about S2,000) multiplled by t he number of add itional lines t hat the government/operator pay is still forecasts putting In. Timothy Nult y, Comsuderatmns m Te/ecom /rrvestrnent in Eastern Europe (Washington, DC: World Bank, 1990). According to OECD’S calculations, the $50 billion in investment necessary to unclear. Increasing the telephone penetration rate to levels on par with the West do not include the investment required to Improve services. Moreover, this amount does not account for the former Soviet Union. See “Finding Their Voice,” The Econormst, Feb. 8, 1992; “Central and Eastern Europe: The Problems of Reconstruction,” Te/ecornmunlcabw, October 1991, p. 158; and Tim Kelly, “Telecommunlcatl ons in the Rebirth of Eastern Europe,” The OECD Observer, No. 167, December 1990, pp. 19-20. 48 “New St udy Says Eastern Europe, ex-USSR Need to Spend S94 BI II ion to Upgrade Phones,” /r?temat/ona/ Trade Repotier, vol. 9, No. 41, Oct. 14, 1992, pp. 1758-59. Ireland has one of the lowest telephone penetration rates In Western Europe, at 29 telephones per 100 Inhabitants. Page 121 Us. Telecommunications Services in European Markets

Box 6-A. U.S. WEST TRANS-SIBERIAN LINK PROJECT

CoCom restrictions have prevented a U.S. West-led consortium from constructing a fiber optic link across Siberia. One proposal is to lay a 565 mbit/second fiber line totaling 11,528 miles from Nakhodka, in the east, to Moscow, where the line would split, one branch going to St. Petersburg and Denmark, the other to Sevastopol and Italy; the deal is reportedly worth $500 million. Currently, most of the European-Far East traffic goes across the Pacific, the United States, and the Atlantic. Sending calls across Asia would reduce the transmission length by 30 percent. With traffic between Europe and the Far East projected to rise by 15 percent annually, U.S. West estimates that the fiber line’s full capacity would probably be completely used as soon as deployed. Furthermore, internal demand for both Iong-distance domestic and international telecommunications services is likely to be enormous. With CoCom restrictions still in place, calls will Iikely be routed around Russia, with most of the network not within the country at all. High capacity links from certain Russian cities would send Russian calls to switching centers outside the country. The calls would then be routed to other switching centers, and then sent back into Russia via high-capacity 565 megabits/ second fiber terminating links. Traffic continuing in Russia would be sent via high-speed microwave equipment (156 mbit/second), which does not violate CoCom restrictions. From the Russian point of view this is less desirable than a fiber link, but would improve substantially capacity and reliability while observing existing CoCom restrictions.

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

source of investment capital than the govern- to the ITU show that Hungary, Czechoslova- ment, either through the Treasury or the kia, and Poland each expect 45 to 70 percent government-owned banks. International cap- of modernization investment to come from ital markets could be used, but the rules on internal sources, 15 to 35 percent from bank investing are not yet clearly delineated. loans, and 10 to 15 percent from private Horvath of the Hungarian Telecommunica- sources, including foreign investment.~9 tions Company (HTC) told OTA that he Thus, reform of telecommunications fi- attempts to get financing as much as possible nancing will involve several elements, First, from Hungarian banks, but while HTC is a it will be necessary to reform the PTTs in preferred customer, the banks’ resources arc order to make them more responsive to insufficient to meet HTC’s needs. Horvath private business needs. All the Central and noted that there would be limits to foreign Eastern Europe PITs arc slated to break into investment because Hungary is a small several parts, splitting the telecommunications, country, and it is already getting half of all postal and in some cases, broadcasting foreign capital coming into Eastern Europe operations off from the ministry, which will (of that, more than half comes from the retain oversight and regulatory authority. At United States). Aid money from the West the same time, tariffs arc likely to be changed and from multilateral lending agencies is not to bring prices more in line with costs, and to available in the amounts required. Estimates reduce telephone rental and local calling provided by telecommunications authorities subsidies. Second, financial and regulatory

Page 122 4’ Calculated from data in ITU Summary, op. cit., footnote 15, chart, p. 3. Telecommunications in Central and Eastern Europe

policies will have to be made predictable so that companies will conclude that it is not unduly risky to invest in these countries. Main lines to be added Estimated investments from 1992-2000 (millions) 1992-2000 (US$ bil.) Finally, privatization, as is projected in Bulgaria .69 1.0 Hungary and discussed in other countries, Czechoslovakia 2.6 3.8 will open telecommunications firms to pri- Hungary 2.2 3.3 vate capital. Capital will be sought on Poland 8.8 13.1 Central and Eastern Europe 24.2 36.3 domestic markets, as these develop, and on SOURCE. INTERNATIONAL TELECOMMUNICATION UNION, EUROPEAN TELECOMMUNICATION M31CA- international markets, through the sale of TOf?S (GENEVA INTERNATIONAL TELECOMMUNICATION UNION, OCTOBER 1992), TABLE 33, P. 33. shares in the national firm when the state sells off its assets. The need for external framework, especially regarding private prop- investment may entail a significant amount erty and repatriation of profit.so Table 6-3. of foreign ownership, eithcr through share Major sources of financing, such as the Telecommunications purchases of privatized firms, or through European Bank for Reconstruction and De- Modernization, participation in joint ventures or other coop- velopment (EBRD) and the World Bank, are Main Lines and erative arrangement. making liberalization a precondition to as- Investments, A number of CEE countries, especially sistance. For example, the EBRD, which was 1992-2000 Poland, Hungary, and Czechoslovakia, an- created in 1990 specifically for the purpose ticipate becoming members of the European of providing financial assistance in the Community, where they will be required to transition to market economies,51 lent $377 follow EC directives, including those regard- million (268 mill ion ecus) for telecommuni- ing telecommunications. Several are already cations projects in Central and Eastern Eu- pursuing or intend to follow these require- rope in 1991, while the World Bank lent ments for liberalization in order to improve $270 million for telecommunications im- their prospects for membership. Additional provement to Poland and Hungary. The pressure for liberalization or reform is com- European Investment Bank provided an 52 ing from potential investors and financing additional $211 million (150 million ecus). sources, who, against the backdrop of gen- Strategies for liberalization eral uncertainty about political stability, are reluctant to invest without the proper legal Because Western Europe is looked at as a model for the newly emerging democracies,

50 Analysts are divided on this point. There may be some capital inflows to the region regardless of the legal uncertalnt y: as one analyst pointed out to OTA, U.S. firms hope to hide behind t heir joint ventures with CE E enterprises, who, they say, wt II understand the laws and deal with t he regulators. OTA interview wlt h Robert Bruce, attorney, Debevolse and Pllmpton, Washington, DC, Sept. 23, 1991. A senior State Department off Iclal noted, however, that U.S. firms are still on the sidelines, by and large. OTA interviews, Washington, DC, Apr. 29, 1992. “ On the Inltlatlve of the EC, 42 countnes In May 1990 created the European Bank for Reconstruction and Development, a mult i Iat eral bank modeled after t he World Bank “as a major vehicle for channeling Western resources Into the reconstruction of the economies of Eastern Europe. ” Holliday and Harrison, “The Economics of Reform In Eastern Europe,” CRS Review, vol. 11, Nos. 3-4, March-April 1990, p. 26. 52 “Finding Their Voice,” The Economist, op. cit., footnote 1. Page 123 Us. Telecommunications Services in European Markets

Table 6-4. Foreign Participation Country/city Partners ownership Award date Comments in Cellular Czechoslovakia Eurotel 1990 Eurotel wiII invest $60 million US West (US) 24.5% over next 10 years. Licenses of Bell Atlantic (US) 24.5 Eastern Europe Czech & Slovak PTTs 51.0 and the Hungary WesTel 1989 To date, US West has in- Former U.S. West (US) 49.0 vested $13 million. Soviet Union Hungarian Telephone Company 51.0 Poland Polska Telefonia Komorkowa 1991 $50 million investment over Ameritech (US) 24.5 3-4 years. France Telecom 24.5 Reportedly, Ameritech and Polish PTT 51.0 France Telecom paid $70-80 million for the license,

Romania Nationwide Cellular (U. S.) 51.0 1991 Romanian PTT 49.0

Russia Moscow Moscow Cellular Communications 1991 Initial investment: $7 million. US West (US) 22.0 Millicom International Cellular Sweden 20.0 (Us.) 50.0 Ministry of Posts and Telecommunications 8.0 Fyodorov Eye Microsurgery Science and Technology Complex of Moscow

Euronet 1992 Reportedly awarded a test Plexys International (US) license by the RussIan mli- tary to operate an 800 MHz cellular system. Information Transfer Technical System Center (Russian Ministry of Foreign Affairs) Vimpel Corp. (Russian military elextronics contractor)

Russia St. Petersburg Delta Telecom 1991 Priority connection to interna- U.S. West (US) 40.0 tional gateway switch. $7 mil- St. Petersburg City Telephone Network 55.0 lion investment. Production Association St. Petersburg Station Technical Radio Control

Ukraine Ukrainian Mobile Company 1992 The consortium IS licensed to DBP Telekom (Germany) 16.3 provide paging, analog cellu- PTT Telecom (Netherlands) 16.3 Iar, GSM cellular and PCN Telecom Denmark 16.3 services. Reportedly, PTT Ukranian Government 51.0 Netherlands has relinquished its stake to DBP Telekom.

Page 124 Telecommunications in Central and Eastern Europe

Country/city Partners Ownership Award date Comments Estonia Eestl Mobiil Telefon (EMT) 1990 Baltic Systems are interoper- Telecom Finland 245 able with the Scandlnavian, Swedish Telecom 24.5 Moscow, and St. Petersburg Estonian PTT 51.0 cellular networks.

Latvia Latvian Mobile Telephone Company 1991 Swedish Telecom 24.5 Telecom Finland 24.5 VEF (Latvia) 23.0 Latvian State Radio & Television Centre 23.0 Latvian Telecommunication Centre 50

Lithuania Comliet 1991 Comliet wiII also establish in- Millicom International Cellular 490 ternational satellite Iink. (Sweden/U. S.) 41 0 Vilnius Telephone Network (Lithuania) 10.0 UAB Antena (Lithuania)

Byleorussla CommStruct international (U S ) 50.0 1991 Byleorussian PTT 50.0

Russia Expected Government has announced early 1993 bidding for GSM Incenses in 12 Russian cities, including Moscow and St. Petersburg.

Uzbekistan Uzbanrobita 1992 ICG is providing hard cur- ICG 45.0 rency and operating expertise. Uzbek Communications Ministry 550

Hungary 1993 2 nationwlde, 15-year GSM Iicenses, One IS reserved for Hungarian Telecommunica- tions Company/foreign com- pany joint venture; the other wIII be 100 percent private. Likely foreign bidders: WesTel for the HTC joint ven- ture; BT, France Telecom, DBP Telekom consortium for the private license. Upfront $30 million fee and $1 million annual radio frequency usage fee,

SOURCE “INDUSTRY TRADE AND TECHNOLOGY REVIEW,” OFFICE OF INDUSTRIES, U.S INTERNATIONAL TRADE COMMISSION, FEBRUARY 1993, PP 2-3

Page 125 us. Telecommunications Services in European Markets

the EC telecommunications directives and thorities. The recasting of the public tele- the precedents established by EC member phone operators (PTO) relationship with the countries are a guide to the liberalization government is the critical first step to mod- The European measures. For example, Czechoslovakia’s ernization. Modernization will be impossible Community is the new telecommunications law, passed in March so long as revenues from telephone service model for liberalizing 1992, is consistent with European Commu- arc turned over to the government rather than Central and Eastern nity directives.53 In Romania, the EC Green reinvested in the network. Operators have European telecommu- Paper is also a guide for telecommunications been unable to raise domestic rates because 54 nications. However, liberalization. As the senior legal analyst in of pressure from finance ministries, which much uncertainty the Hungarian Ministry of Communications respond to political pressure from users who ss has accompanied put it recently, would suffer if rates were raised. liberalization efforts, The intention of the Hungarian tele- Privatization is an opportunity for the and many are still communications policy is to follow the government to raise much-needed funds and incomplete. directives of the EEC [European Eco - get large infusions of hard currency. The nomic Community]. The reason for this recent privatization of Mexico’s telephone is not only because it is a political aim, company is setting a precedent for CEE but also because EEC directives are countries. Hungary, Poland, and Czechoslo- based on large scale compromises be- vakia have all separated the operator from tween the various players, especially the government in a carefully planned evolu- the pro- and anti competitive ones. 56 tion eventually leading to privatization. Nevertheless, U.S. regulators feel they arc This separation necessitates the creation successfully communicating the elements of of a regulatory agency. Under the old PTT the U.S. regulatory structures, process, and system, no functional distinction was made philosophy to CEE telecommunications au- between operations and regulation because

53 “Czechoslovakia Passes Law,” CornrnunicatiorwWeek /ntema(iona/, Apr. 6, 1992, p. 34. The law stipulates the creation of a regulatory body separate from the operator and anticipates competition m communications services, except for basic voice telephony, for which the service providers in the two republics (SPT Praha and SPT Bratlslava) retain exclusive rights. w Dan Stenfanescu, “Telecommunications in Romania,” paper in FWcy Dia/ogue on Telecommunication Development: A Seminar With Central and Eastern European Countries, held in The Hague, Apr. 22-24, 1991, doc. no. DST1/lCCP/llSP(91 )7 (Paris: Organization of Economic Cooperation and Development, June 4, 1991), p. 2. 55 Krisztlna Heller, “Regulatory Trends in Hungarian Telecommunications,” European Regional Development Conference (EU-RDS), Prague, Nov. 19-23, 1991, doc. no. EU-RDC-91/13-E (Geneva: International Telecommunication Union, 1991), p. 1. 56 Privatlzat ion maybe accompl ished in a variet y of ways, and is a complex process for which governments in Central and Eastern Europe may be unprepared. Telecommunications attorney Robert Bruce told OTA that in Hungary, the debate on privatization also dealt with decentralization of telecommunications. Tim Nulty, senior economist at the World Bank, notes that developing countries should proceed slowly on privatization, and that a variet y of “bottom-up” forms of privatization can occur without selling off t he whole telephone net work. See Timothy E. Nult y, “Telecommunications in Developing Countries: The World Bank’s Perspective and Role,” European Regional Development Conference (EU-RDS), Prague, Nov. 19-23, Page 126 1991, doc. no. EU-RDC-91/14-E (Geneva: International Telecommunication Union, 1991 ), p. 4. Telecommunications in Central and Eastern Europe

the government was presumed to protect the works for office communications as well as general public good and ensure that social for mobile communication. Cellular net- goals were met. Also, the distrust of monop- works are targeted first at incoming Western oly that necessitated regulation in the United businesses and investors, to whom the dilap- States theoretically did not exist in centrally idated telephone system seems an unman- planned economies. ageable impediment. New foreign entrants A great deal of uncertainty has accompa- will also focus on more lucrative and easier- nied the drafting of new laws, despite the to-serve centralized business clients. mode] of the 1987 EC Green Paper. The new Another immediate goal is the establish- Hungarian telecommunications law has been ment of overlay digital backbones to provide through many drafts, changing almost daily. international access for business and govern- The Polish bidding process for a foreign- ment, and to link major business centers. owned new cellular network was nearly These networks are typically either micro- completed when the government decided to wave systems, or fiber optic networks, as are reverse legislation allowing 1 ()()-percent for- planned in Hungary and Poland. Given the eign ownership, instead requiring majority difficulty of raising tariffs for the whole 57 Polish ownership. - political opposition to public-switched network, there are some privatization in Poland and Czechoslovakia important benefits from the fact that overlay may constrain the types of services that may and cellular networks can be tariffed at be privately provided. higher rates. Business customers are willing Since several of the countries of the region to pay these higher rates for better service aspire to economic parity with western until telecommunications operators reform Europe in short order, they are acutely national tariffing schemes for both land- concerned with the provision of advanced based and cellular systems.59 telecommunications services, such as high- speed data and mobile communications. Problems with liberalization This was one of four main issues highlighted Some skepticism is justified with regard to at the ITU’s Regional Telecommunications telecommunications liberalization in this re- Development Conference. Business custom- gion. First, there is a question whether the ers, especially those accustomed to Western rhetoric for telecommunications reform matches standards of service options and quality, will the genuine intentions of these governments need modern services and thus may shoulder and the ability or inclination of the system much of the costs of modernization.58 operators. While significant strides have The establishment of cellular networks been made quickly in upgrading the facilities has high priority, to supplement (or perhaps and the services in primary cities, moderniz- supplant) the existing public wireline net- ing the entire networks is the real challenge,

57 Jullan Brtght, “Poland,” Te/ecornrnur?icatmns, October 1991, p. 164. 56 OTA Interwew with Pal Horvath, op. cit., footnote 13. 59 Jtirgen Muller, “Closing the Capacity and Technology Gap in Eastern European Telecommunications,” European Regional Development Conference (EU-RDS), Prague, Nov. 19-23,1991, doc. no. EU-RDC-91/8-E (Geneva: International Telecommunication Union, 1991), p. 12. Page 127 Us. Telecommunications Services in European Markets

If modernization is not integrally tied to cently absorbed by the Soviet market, have changing corporate and social demand, this been devastated by the breakdown of intra- goal may not be met. Residential customers bloc Comecon trade and the shift to hard 62 arc accustomed to paying artificially low currency transactions. Efforts to keep these prices for telephone service and may not be companies afloat will likely require some able to afford the higher rates for moderniza- form of industrial policy as countries decide 60 tion. Though initially successful, Bulgaria to what extent they will subsidize, privatize, was unable to sustain a telecommunications or direct firms to engage in joint ventures modernization effort in the 1980s. Poland, with Western companies. too, has twice announced ambitious inten- Third, resorting to advanced business tions to improve services, both of which fell services, overlay networks, and differential far short of expectations. However, the tariffs, while expedient for attracting foreign financial participation from multilateral agen- business, risks widening the gap between cies and foreign investment from the West communication haves and have-nets. While marks a major difference with previous there are some plans to improve rural and reforms. There is strong interest among these public pay phone services, investment and countries, the European Community, and the attention will go to those who can pay, United States in developing telecommunica- leaving the public network to be modernized tions networks rapidly. later. Second, the pressure to liberalize telecom- Finally, the initial enthusiasm for whole- munications and open markets to foreign sale reforms is beginning to subside. Plans to involvement creates an acute dilemma re- privatize telephone companies havc been garding procurement and manufacture of delayed as the view reemerges that telephone telecommunications equipment. The pres- service still should be entrusted to govern- sure to assure the economical construction of ment. Problems with wholesale sectoral modern communications infrastructure, which reforml in society in general are dampening in the short term will require purchasing plans for privatization and liberalization of Western products (or joint ventures with the telecommunications sector. France has Western firms), conflicts with the need to emphasized that its model of development solidify their own h igh-tech industrial bases.61 may be more appropriate for CEE countries Telecommunications equipment firms, 80 than that of the United States or the United percent of whose production was until re- Kingdom, since France managed to bring a

w To align the prices of service with the costs—not only of the dellvery of the service but for modernization—will be difficult, as rate increases are Ilkely to raise social tensions. This has happened elsewhere. Business Week reported that an Intended rate increase for telephone service in Venezuela had to be forestalled shortly after the m ilitary had mounted a coup attempt for fear of setting off more civil unrest. Mary Farquharson et al., “The Deals Are Good, But The Dial Tone Isn’t,” Business Week, No. 2260, Apr. 6, 1992, pp. 86-87, “ Jurgen Muller, op. cit., footnote 21. ‘2 Marc Dandelot, “Telecommunications In Eastern Europe: Is the Problem Really a Lack of Money?” Te/ecorrrs A&game, October 1991, pp. 41-46, cited in JPSR Report, Telecommunications, JPSR-lTP-924301 -L, Jan. 6, 1992, p. 14. Telecommunications in Central and Eastern Europe

deteriorating telephone system up to a level CEE countries also have an interest in of excellence without privatization, by means participating in global markets, and are of thorough internal reorganization. clearly looking to the United States for The process of transforming the centrally financial and technical assistance. For them, planned economy into a market economy in the United States presence represents a Poland, in particular, has been beset with potential counterbalance to the influence of 63 problems. Reports of fraud and scandal and other Western European countries, princi- troubles with effective tax collection are pally but not exclusively Germany. The rife.64 The telecommunications reforms have Overseas Private Investment Corporation not so far delivered improvements in tele- and the Export-Import Bank encourage trade phone service. The parliament has turned to development by providing insurance and a more cautionary plan of bolstering state financing to U.S. exporters. U.S. participa- industries and slowing down privatization.65 tion in the World Bank, the International Whether Poland’s troubles will prove to be Monetary Fund, and the European Bank for a foreshadowing of problems for the rest of Reconstruction and Development represents Central and Eastern Europe or a guide to a major locus of financial assistance to more successful transitions is yet to be seen. Central and Eastern Europe. Congress has acted to assist the economic and social transformation of the region; in Involvement of the United States 1989, Congress passed the Support for Western Europe, and particularly Ger- Eastern European Democracies Act (SEED), many. is deeply interested in economic and which allotted $1.5 billion in grants for social reform in Central and Eastern Europe. 1990-92 to encourage political reforms, eco- In addition to being neighbors, Western and nomic development, and social reforms (es- Eastern Europe share a similar heritage, and pecially recognition of human rights) in economic cooperation seems imminent. Nev - Central and Eastern Europe. The SEED Act ertheless, the United States also has signifi - was an expanded version of President Bush cant stakes in the future of the region. proposal for $350 million in assistance to Beyond matters of national security, the Poland and Hungar). opening of the CEE countries represents Congress has also been particularly inter- sizable new markets, and their success in the ested in energy, environment. and telecom- transformation to democratic governancc munications as the keys to these general represents an affirmation of important eco- market and political reforms in the CEE nomic and political ideals. countries. The House Committee on Foreign

‘3 For a very detailed account of Poland’s experience with reform, see Lawrence Weschler, “Deficit,” The A/ew Yorker, May 11, 1992, pp. 41-77. See also Stephen Engelberg, “Poland’s New Cllmate Yields Bumper Crop of Corrupt ion,” New York Times, Nov. 12, 1991, p. Al. M Whereas the state used to receive much revenue from the state Industries, prlvatecompanies are finding ways of avoiding paying taxes. “Poland’s Wrong Turn,” and “Poland Loses Heart, ” The Ecormrnlst, Feb. 22, 1992. Also, OTA interview with Martin Morell, Network Dynamics Associates, Washington, DC, Oct. 1, 1992. 65 “Poland’s Wrong Turn,” and “Poland Loses Heart,” The Econom/st, op. cit., footnote 64. Page 129 Us. Telecommunications Services in European Markets

Affairs, for example, sent a delegation to Despite these initiatives, some observers Poland, Hungary, and Czechoslovakia in feel that the U.S. effort is meager relative to November 1990, which issued a report on the magnitude of the problems CEE coun- “Eastern European Telecommunications, tries face. U.S. budget difficulties and eco- Broadcasting, and Environment. ’ Congres- nomic conditions make it difficult politically sional requests to the Office of Technology to allocate much money to the region, and Assessment include policy information for U.S. policy emphasizes advice and technical Central and Eastern Europe on issues such as assistance rather than direct aid. This leaves telecommunications and energy efficiency. a relatively greater role for U.S. private OTA people have been involved in informal sector involvement in economic develop- and formal discussions on developing sci- ment in the region. ence policy and technology assessment institu- American companies have been active in tions in these countries. telecommunications rehabilitation in the re- The Office of International Communica- gion, and in increasing numbers are capital- tions in the Federal Communications Com- izing on the opportunity to tap into new mission (FCC), along with the National markets, for both equipment manufacturers Telecommunications and Information Ad- and service providers. Regional Bell operat- ministration, is working closely with several ing companies (RBOCs) are involved in of the CEE countries to help establish numbers of projects to build and/or operate regulatory mechanisms and spectrum man- cellular networks and data networks in key agement technique and expertise. Though cities of the region (see chapter 4). U.S. West significant constitutional differences make it and Bell Atlantic joined the Czechoslova- difficult to exactly duplicate the U.S. FCC kian Ministry of Posts and Telecommunica- (an independent regulatory agency) else- tions to form Eurotel, a joint venture to build U.S. involvement where,66 several countries have created tele- and run a cellular mobile system and con- in reforming communications regulatory bodies with U.S. struct a public packet-switched (data) net- telecommunications assistance, and others are in the process. The work. Eurotel, of which each RBOC owns in the region U.S. Telecommunications Training Institute, 24,5 percent, began operation in September emphasizes advice, a private organization, works under contract 1991 with an initial capacity of 4,000 sub- technical assistance, to the U.S. Agency for International Devel- scribers; the cellular system is expected to and private sector opment, and other private sector organiza- reach 50,000 within 5 years.67 U.S. West is involvement, rather tions work to bring management skills to also involved in a venture to operate a than direct aid. Central and Eastern European telecommuni- cellular network with the Hungarian Tele- cations operators. communications Company, Westel Radio-

M The FCC’s “independence” is the carefully constructed result of t he tension between adm inistrat ive and executive (with the oversight of the judicial) branches of governance, which is unique to the United States. The Central and Eastern European countries are re-establishing parliamentary democracies, which characterize Western Europe. “ The regional Bell holding companies (R BHCS) expect to invest $60 million over 10 years in the system. “Telecommunications Profiles for Select Eastern European Countries,” NTIA, Department of Commerce, Oct. 5, 1990. See also Charles Mason, “Czechs Turn Up Cellular Service,” Te/ephony, Sept. 16, 1991, p. Page 130 3. Telecommunications in Central and Eastern Europe

telefon, Kft. Westel went online in Budapest in October 1990 and attracted 4,000 sub- scribers in the first 6 months, surpassing the projected usc by 2,500 subscribers in the first year.h~ AT&T is pursuing contracts in Central and Eastern Europe and the republics of the former Soviet Union. It is installing a new international exchange in Warsaw for the Polish telephone company, which will dou- ble Poland’s current capacity for interna- tional calls.69 Additionally. AT&T is in- volved in a deal worth $26 million, signed in March 1992. to build a 1,400-km fiber-optic telephone network. These deals require creative financing: AT&T is taking significant risks in getting paid, since all of the republics in the region have little if any hard currency reserves. and their currencies are not yet convertible. The company may end up with in-kind payments in oil or copper. 70 Businesses require clear rules and a stable political environment before they will undertake large-scale invest- ment. Such stability is not yet present in many countries in the region. Wall Street is reluctant to commit much capital to ventures in the region, and has pressed for increased political risk insurance from the U.S. Gov- ernment. m U.S. West WIII contribute S20 million over the f irst 2 years to build t he system, while HTC, through World Bank loans, will Invest another $20 m Ill Ion. OTA Interview with Andras Sugar, general manager, and John Handley, operat Ions director, WESTEL (a U.S./Hungarian cellular telephone joint vent ure), and Jlm Russell, manager of direct dist nbut ion, U.S. West NewVector Group, Budapest, Oct. 8, 1991. See also Steven Tltch, “The Llberallzatlon Express Roars Through Hungary,” Te/ephony, June 3, 1991, p. 40.

‘g This deal IS worth $12 m Ill Ion. “AT&T Signs Polish Accord,” Te/corn Hfgh/ights /nternationa/, vol. 14, No. 16, Apr. 15, 1992, p. 1. 70 John Keller, “AT&T Signs Big Contract to Supply Former Soviet Republic With Phone Gear,” Wa// Street Jouma/, Mar. 3, 1992, p. A2.

7’ Madeleine Albnght, “The Role of the United States In Central Europe,” Proceedings of the Academy of Polltlcal Science, NIIS H. Wessell (cd.), New York, 1991, vol. 38, No. 1, p. 80. 72 Ibid. Page 131 U.S. Telecommunications Services in European Markets

President Lech Walesa has claimed that infrastructure and institutions. In the tele- foreign companies are reaping the benefits of communications sector, the United States is Poland’s privatization without contributing pressing for an aggressive “liberalization” anything to the culture, economics, or infra- agenda. This entails primarily the divestiture It is in the 73 structure of the country. There is growing of the telephone operator from the govern- political interest of frustration in Poland over a perceivcd lack of ment and its eventual privatization, open the United States involvement and investment by the United entry and free-market competition for serv- to promote States in Poland’s modernization. The divi- ices and equipment. This approach, paced by telecommunications, sion of Czechoslovakia into the Czech Re- strong industry input, is based on self- in order to solidify public and Slovakia signals not only abiding democratic gains in interest as well as a commitment to improve nationalist sentiments, but also differences Central and Eastern welfare in the CEE. The opportunity for U.S. over industrial development strategies, in- Europe. equipment and service suppliers to receive cluding reliance on market mechanisms in contracts is greatly improved by a competi- economic development. tive free-market environment, where West- The relation between economic activity ern products are generally superior to indig- and telecommunications is well known, enously-produced equipment, at least for the though not always well understood. It is no time being. A competitive free-market environ- coincidence that the conditions of telecom- ment depends on the existence of an inde- munications networks in these countries pendent oversight body and the replacement deteriorated (or failed to develop) alongside of political criteria by economic and opera- ruinous economic policy; and it will be no tional factors. There may also be benefits coincidence if these networks improve hand- associated with roughly similar regulatory in-hand with economic reforms. However, to approaches among nations as well. suggest that telecommunications directly Finally, the United States is motivated in leads to economic development is to over- part by a sense of democratic purpose. It is in state its place in a far more intricate social/ the U.S. Government’s political interest to political/economic/cultural dynamic; indeed. promote broader and deeper access and use the quality of the communications network of telecommunications in order to solidify may be as much a consequence as a cause of democratic gains in the region, which would a strong economy. Modem telecommunica- hedge against a return to antidemocratic tions may be necessary but is not sufficient regimes in the future. for development of a modern industrial and The fuller implications of liberalization service economy. and competition, or even privatization, seem to be often overlooked for short-term consid- Conclusion erations. What is good for U.S. firms is The countries of Central and Eastern presumed to be good for these countries. Europe are in need of quick repair to their While a number of agreements have already telecommunications networks; they are also been struck by U.S. firms to provide invest- in need of quick repair to other critical ment, products, or services, CEE policy makers

73 Blaine Hard in, “Poles Sour on Capitalism: Walesa Accuses West of Preying on Country,” Washington Page 132 Post, Feb. 5, 1992, p. Al. Telecommunications in Central and Eastern Europe

are somewhat ambivalent about the appro- is how to encourage CEE countries to adopt priateness of U.S. recommendations for their particular types of reforms that most further needs and circumstances. They have not U.S. interest in an area where U.S. leverage rushed to embrace the U.S. regulatory model, is generally weak. The EC member countries and have considered more statist models, are also attempting to persuade CEE coun- such as European telecommunications, par- tries to reform in particular ways, not all of ticularly France, as possibly more appropri- which are exactly as U.S. interests would ate to their needs. They also undoubtedly wish. Thus North America and Western have hesitated because of their own inexperi- Europe are struggling over Central and ence, uncertainty, and lack of consensus Eastern Europe, trying to influence struc- about what direction they should take. The tures and regulations and ultimately gain challenge facing the United States generally access to new markets.

Page 133 Domestic Deregulation and International Trade Negotiations CHAPTE7R

T HOUGH SERVICES SUCH AS TELECOMMUNI- terms of service with one another under the

CATIONS w-c increasingly central to the opera- ITU, more generally applicable rules for tion of the global economy, rules governing trade were thought to be unnecessary. Be- international trade in services arc still being cause international telecommunications were established. This chapter describes the proc- provided by monopolies over circuits that ess that is generating these rules, and exam- the monopolies each half-owned, services ines the principal forum in which they have were considered the result of joint invest- been debated, the General Agreement on ment, and not traded items. Trade in Services, a component of the In the late 1970s, telecommunications General Agreement on Tariffs and Trade deregulation in the United States began to (GATT). U.S. policy and negotiating posi- change these assumptions. Pressure for new tions for GATT talks arc then discussed, international telecommunications trading ar- Telecommunications because these have become major determi- rangements mounted in the United States. as deregulation in nants of U.S. international telecommunica- a result of deregulation, technological the United States tions policy. change, the entry of new suppliers, and the has led to beginnings of political organization of tele- pressure for new U.S. deregulation and the communications users. international trading worldwide consequences Telecommunications competition in the arrangements. United States began with microwave tech- Before the 1980s, the concepts of natural nology, which made long-distance competi- monopoly and universal service dominated tion possible in the 1970s, and with digitiza- telecommunictions. Telephone systems were tion of data, which blurred the distinction conceived as intricate technical systems between computing and telecommunications. presided over by engineers and regulators With the divestiturc of AT&T in 1984, the whose main responsibility was to ensure the Modified Final Judgment (MFJ) laid down smooth operation of networks. Since tele- by a U.S. District Court became a key aspect communications operators were national mo- of U.S. teleccommunications policy. Tele- nopolies and each monopoly dealt directly communications costs and terms of use with its foreign counterparts, there was no became a prime factor in profitability and need for an international trading system. competitiveness for many large businesses. Public telephone operators (PTOs) struck Large corporate users of telecommnunica- political bargains that set stable patterns of tions began to form active interest groups. relationships for many years. The Interna- The largest users arc concentrated in a small tional Teecommunication Union (ITU) co- number of firms: it is widely believed that 20 ordinated the relationships of these national percent of users generate 80 percent of bodies. The ITU consultation process devel- revenues, and less than 5 percent of users opcd technical standards to permit intercon- egenerate 20 percent of local traffic and over nection, and the international settlements 50 percent of long-distance traffic. This process assured that accounts between coun- concentration made it easy for large users to tries would be reconciled. organize. They began to pressure political With countries (through their national decisionmakers to allow them to intercon- telephone operators) negotiating prices and Page 135 U.S. Telecommunications Services in European Markets

nect their offices independently of the tele- negotiate with several competing telecom- phone company. munications firms in one country? How was Competition in The development of microelectronics “plain old telephone service” (soon known the United States brought new suppliers into the telecommuni- as POTS) to be distinguished from newer challenged the cations equipment market. Computer equip- value-added services? Where competition monopoly service ment firms such as IBM and Control Data was allowed, what conditions would be providers in other now wanted telephone monopolies opened imposed on foreign competitors, especially countries, who have up so that they could compete in the equip- those from countries where competition was come under fire from ment markets. Some firms such as Electronic not permitted? Who would be allowed to international users Data Services (EDS) and IBM saw new own what kinds of facilities or radio frequen- and from domestic opportunities to offer information services, cies? How could competing service provid- users as well. but needed access to the national network to ers deliver enhanced and value-added serv- do so. New network operators, first MCI and ices without having their own facilities? later Sprint, wanted to compete with AT&T How could countries maintain distinctions for long-distance traffic. between basic voice telephony and enhanced Deregulation resulted in opening the U.S. services (and so preserve the 1 ion’s share of telecommunications equipment market to business for the monopoly provider), when foreign as well as American firms. This had technological change, such as digitization of immediate and significant trade consequences. voice signals, rendered them meaningless?2 The U.S. balance of trade in telecommunica- The basic business practices and profita- tions equipment went from a surplus of $275 bility of most foreign PTTs, as well as those million in 1982 to a deficit of $2.6 billion 6 of AT&T and its operating companies in the years later, due largely to the lack of United States, were directly challenged by reciprocal overseas markets for customer competition. Their stable organizational en- premises equipment (handsets and other vironment came under fire, along with their terminal equipment). ] elaborate systems of cross-subsidies, which With U.S. deregulation, the government had been set up to achieve a variety of monopoly mode] of Postal, Telephone, and economic, social, and political goals, such as Telegraph (PTTs) administrations began to universal service, come under strain. Competition in one coun- In many countries, long-distance and in- try presented problems for other countries. It ternational telephone services subsidized raised questions about systems organization local telephone service, business telephone and operation, especially flows of funds service subsidized residential telephone serv- between countries to settle international ice, and urban telephone service subsidized telephone financial accounts, How were rural telephone service. In some countries national monopoly telephone operators to also, revenues from telecommunications

1 Kenneth Robinson et al., “International Telecommunications Trade,” Affer fhe Breakup: Assessing the New Post-AT& TDivestiture Era, Barry G. Cole (cd.) (New York, NY: Columbia Universit y Press, 1991 ), pp. 428-445. 2 Karl-Heinz Neumann, “Models of Service Competition in Telecommunications,” Restructuring and Managing the Te/ecornrnunications Sector, Bjorn Wellenius et al. (eds.) (Washington, DC: The World Bank, 1989), pp. 19-21. Domestic Deregulation and International Trade Negotiations

contribute to both the general treasury and political mobilization of business interests the postal services These cross-subsidies was greatest: the United States, the United would be difficult to sustain in a more Kingdom, and Japan. As one analyst has competitive world, where companies are observed: forced to reduce prices and costs. Further- While winning the regulator-y battle at more, strong PIT telecommunications un- home, [U. S.] firms calculated that the ions resist the inevitable change in employ- U.S. bargaining power made global ment levels and practices that result from reform feasible, and they became the deregulation and the attendant cost-cutting. most prominent exponents of regula- PTTs, which in the remainder of this tory reform in many countries. But in chapter will be called public telephone the 1980s, a translational corporate operators (PTOs), arc also concerned about coalition .for reform emerged as firms in eroding market share and their perceived other countries wanted to match the inability to finance network modernization terms offered to U.S. companies.6 unless they control the new high-value enhanced information and data services— Thus change in the United States brought the most profitable business traffic and also about change in other countries. Large users that traffic most likely to migrate to the in the EC saw that to be competitive with competition. On the other hand, lower tele- U.S. and Japanese firms, they needed to communications prices mean lower costs for reduce their costs, increase their scale, and both business and residential consumers, and improve their ability to deliver flexible and 7 may ultimately result in increased revenues timely services. The Commission of the for the telephone operator due to greater European Community acted to open parts of calling volume. 4 Finally, PTOs worry that the European market to reduce telecommuni- the presence of competitors will seriously cations costs and thereby improve operating undermine their control over their own efficiency for all firms. To do this, users operations. 5 required (but did not immediately get) more Liberalization of telecommunications oc- favorable operating terms from PTOs. curred first in those countries where the

3 Tlmot hy E. Nult y, “Emerging Issues In World Telecommunicate ens,” In Bjorn Well lnius et al. (eds.) op. cit., footnote 2, pp. 17-18. 4 This has been the experience in Europe, Latin America, and Asia. 5 European PTOS have been working over the past decade to strengthen their control of t heevolutlon of bot h technology and the pollcies that shape it. In general, European PTOS are politically more powerful t han their countries’ computer and electrorucs industries, whereas in the United States the reverse tends to be the case. For example, the stronger role of PTOS is reflected in the scarcit y of corporate private networks and the widespread use of X.25 protocols in Europe for data networks, while in the United States computer equipment companies have successfully pushed U.S. data net works toward other protocols as well as X.25. b Peter F. Cowhey, “The International Telecommunications Regime: The Political Roots of Regimes for High Technology,” /nternationa/ Orgarrizatlon, vol. 44, No. 2, spring, 1990, p. 188. 7 See Giandomenico Majone, “Cross-National Sources of Regulatory Policymaking In Europe and the United States,” Jouma/ of F%bhc Poky, vol. 11, No. 1, pp. 79-106. Page 137 Us. Telecommunications Services in European Markets

Changing attitudes toward U.S. equipment manufacturers believe the services and trade way to gain access to European telecommu- The globalization of business pushes firms nications equipment markets is to break the to seek telecommunications operations that link between PTOs and their national pre- can help them deliver similar services world- ferred monopoly suppliers. One way would wide, and this may mean bypassing national be to liberalize services markets, which networks or locating operations elsewhere. would engender competing service provid- The country with the environment most ers, and, in turn, result in more competitive conducive to telecommunications for busi- equipment markets, since each national com- ness sets the standard for all others.8 petitor would try to develop its own sources As major users tried to modernize their of supplies. networks, they sought more flexible terms of In essence, U.S. users want access to access and prices and the right to attach new foreign markets on nondiscriminatory terms. equipment. Foreign telephone operators were But large users in the United States cannot unwilling to provide these terms, arguing achieve their objectives without outside that such changes would require new invest- allies, as changes in foreign regulatory re- ment or new operating procedures. In reality, gimes will be necessary. Foreign users want these restrictions protected foreign markets terms and service similar to their U.S. from inroads by U.S. or other foreign firms. counterparts to protect their competitive Meanwhile, U.S. telecommunications equip- advantages. Under serious pressure from the ment manufacturers, in particular AT&T, EC Commission, beginning notably with its were alarmed by their eroding share of the 1987 Green Paper on telecommunications equipment market (as noted above). While services, PTOs now realize that they must the portion of the market initially most respond to their large users to keep control of affected was consumer premises equipment (e.g., telephone handsets), U.S. switching their own domestic telecommunications sys- equipment manufacturers saw their market tems. They have begun, reluctantly, to re- share threatened over the long run.9 It is duce cross-subsidies to small users in order widely believed that there is significant to relax barriers to terminal equipment trade. world overcapacity in manufacturing of cen- The United States, the United Kingdom, tral office equipment, as the cost of design- Japan, Australia, Canada and Sweden have ing, developing and producing it rises pre- now introduced some forms of competition cipitously. in basic services and in network facilities

8 Jonathon David Aronson and Peter F. Cowhey, When CountriesTa/k:/ntemafiona/ Trade in Te/ecomnunicatiom Services (Cambridge, MA: Ballinger Publishing Company, 1988), p. 33. 9 AT&T claimed that Siemens, the German telecommunications equipment giant, was sell ing its equipment in the United States for less than a quarter of what the Deutsche Bundespost Telekom, the German telephone operator, was paying, in essence dumping telecommunications switching equipment in the United States and cutting into AT&T’s markets. AT&T declines to pursue Siemens in trade courts at the Page 138 current time. OTA interview with International Trade Administration official, Dec. 4, 1992. Domestic Deregulation and International Trade Negotiations

(i.e., facilities-based competition).l” Shifting could not go into under the existing trade the international telecommunications regime regime. Thus, a small number of firms, led toward competition has been difficult be- by the American International Group (an Shifting the cause the traditional monopoly regime in insurance company), American Express, Citi- international most countries is supported by institutional corp, Merrill Lynch, and Sea-Land (a ship- telecommunications and governmental interests. PTOs arc usu- ping firm), began to press for services to be regime toward ally powerful government ministries that included in GATT Congress acceded to this competition has been often contribute substantial funds to their pressure: with the passage of the Trade Act difficult as poweful general treasuries. Many PTOs assume that of 1974, Congress for the first time asserted interests in many they would fail to compete effectively with that services were to be included in the countries resist. U.S. firms that have had nearly a decade of definition of international trade, and directed experience in a competitive marketplace. the Administration to work toward an expan- There is usually resistance from a PTO labor sion of GATT to include trade in services. force, which in many European countries is The United States was unable to make organized and extremely powerful. Some much headway in the Tokyo Round of countries also see their PTO as important to GATT in the 1970s, but this failure led to the maintenance of national sovereignty.11 efforts by the United States to take the issue Altering the telecommunications regime sig- up in the Organization for Economic Coop- nificantly will thus require sustained politi- eration and Development (OECD), where it cal dedication and effort. Many EC govern- was believed that a more analytic approach ments are resisting the efforts of the EC to developing the conceptual framework Commission to liberalize telecommunica- might be possible. The members of OECD tions. were persuaded to begin a study of service trade issues. Trade-oriented service firms Moving toward GATT succeeded in persuading Congress to give As the consensus on telecommunications services equal footing with merchandise as a natural monopoly began to crode in the trade in the 1979 Trade Agreements Act, 1970s, the lack of rules covering trade in which then led to the 1984 Trade and Tariff services could be seen as blocking the Act specifying that the President should give expansion of free trade. U.S. banking, tele- high priority to the negotiation of multilat- communications, data processing, and other eral and bilateral agreements governing serv- service firms saw that new technologies put ices trade. 12 By 1982, U.S. efforts came to within their reach lucrative markets that they fruition in the form of an agreement in GATT

‘0 The first three countries have been on the forefront of regulatory change. The United States, the United Kingdom, and Japan comprise about 60 percent of the world telecommunicateIons market. They are also t he largest and most important international financial centers, and have many multinational manufacturing enterprises that demand leading edge communications and computing technologies. ‘‘ Recent rejection of telecommunications privatization in Venezuela, and continuing difficulties in the prlvatizat Ion of telecommunications authorities in some countries in Eastern and Central Europe attest to the sigmflcance nations continue to attach to their own telecommunications systems. ‘2 Jonathon Dawd Aronson and Peter F. Cowhey, op. cit., footnote 8, p. 37. —

U.S. Telecommunications Services in European Markets

that countries that wished could undertake In the U.S. Government, conceptual work national studies of trade in services.13 began in the mid-1980s to clarify the notion Political support for including services in of trade in services, hitherto not recognized an international trading regime based on as a legitimate subject of multilateral negoti- GATT grew in the mid- 1980s when increas- ation. In economic theory, services were ing U.S. trade deficits prompted American generally not thought of as tradeable items; free trade supporters, concerned with what therefore measurement of such services that they saw as increasing protectionism, to seek were traded was practically nonexistent. new allies to protect free trade. In the 1988 With no conceptual framework or data, Trade Act, Congress explicitly included governments typically believed that services telecommunications trade as a priority for trade was insignificant, and therefore unnec- U.S. trade negotiations, and specified a set of essary to include in multilateral negotiations. general and specific objectives that the Lacking both adequate measures of trade and As the consensus that United States Trade Representative (USTR) conceptual frameworks on which to hang telecommunications was to seek in opening foreign markets to policy, support for services exports was is a natural monopoly U.S. suppliers of both equipment and serv- almost nonexistent. For example, financing 14 began to erode, the ices. If U.S. services firms could gain of goods trade is well understood, and there lack of rules covering access to foreign markets more readily, then are a variety of Federal programs to promote trade in services U.S. equipment sales would improve as well. goods trade abroad, but services do not became an impediment Also, if PTO monopolies were forced open, receive financing proportionate to their sig- to free trade. U.S. equipment firms would stand to gain nificance in overall U.S. exports.15 from sales to the new competitors. The In the case of telecommunications serv- coming together of these interests led to real ices, the negotiation of the U.S.-Israel and innovation in trade policy. U.S.-Canada Free Trade Agreements in the

13 The events leading to GATT signatories agreement to consider discussing trade in services is a complex story. See Geza Feketekuty, International Trade in Services: An Overv/ew and Blueprint for Negotiations (Cambridge, MA: American Enterprise Institute and Ball inger Books, 1988); and Bela Balassa, ““The United States,” Patrick A. Messerlin, Karl P. Sauvant, et al., The Uruguay Round: Services in the Wor/d Economy (Washington, DC, and New York, NY: The World Bank and the United Nations Centre on Transnational Corporations, 1990), p. 129. For a dissenting view of the desirability y of the United States’ efforts to continue to support GATT, see Clyde V. Prestowitz, Jr., Alan Tonelson, and Robert W. Jerome, “The Last Gasp of GATTism,” Harvard Business Review, March/April 1991, pp. 130-138. 14 While both equipment and services are the subject of t he 1988 Trade Act, t he shift in the U.S. balance of trade in telecommunications equipment from a surplus of $275 million to a deficit of $2.6 billion provided much of the impetus for the legislation. The breakup of AT&T had led to the unilateral opening of the U.S. market in telecommunications equipment without any attempt to extract reciprocal concessions from U.S. trading partners. See Kenneth G. Robinson et al., op. cit., footnote 1, p. 431, passim. Throughout this chapter, Robinson and the other contributors make virtually no reference to telecommunicate ions services. 15 OTA interview with Robert Atkins, International Trade Administration, Department of Commerce, Oct. 1, Page 140 1992. Domestic Deregulation and International Trade Negotiations

1980s laid much of the intellectual ground- The ITU has always been the province of 16 work. The concepts of trading telecommu- national telecommunications authorities and, nications services and their coverage by therefore, has never been sympathetic to GATT principles are now widely embraced, competition. Although the ITU has little real but less than 10 years ago, they were thought power in the enforcement of international to be radical innovations. agreements, it is important in creating frame- In general, the United States led the way works in which rules and regulations oper- to relaxation of restrictions on international ate. telecommunications during the 1980s. For OECD has also played an important role example, there was growing interest in the in issues such as privacy, accounting rates, idea of deploying telecommunications satel- and financial and capital flows, but it is lites outside the monopoly international considered to reflect the interests only of the telecommunications satellite consortium, In- richest countries. The United Nations Con- telsat. Under U.S. pressure, INTELSAT ference on Trade and Development liberalized its process for approving compet- (UNCTAD) has long played a role in coordi- itive satellite systems and, and in return, the nating international shipping and insurance United States has refrained from attacking services, and could well have assumed some Intelsat's exclusive carriage of international jurisdiction over telecommunications. This public switched international telephone traf- was rebuffed by the industrialized nations, fic. INMARSAT, the international maritime because of the weakness of UNCTAD’s satellite communications organization, has dispute-resolution mechanisms. begun to explore new business opportunities GATT was ultimately chosen by the considered beyond its purview a decade ago, United States as the venue for pressing for such as aeronautical and Iand-mobile per- changes in the international telecommunica - sonal communications services. tions regime, in part due to the perception that only GATT has a dispute-resolution Choosing a forum mechanism with teeth for enforcement. The The choice of GATT as the arena for choice of GATT meant that services, and changing international trade relationships telecommunications services in particular, with regard to telecommunications was made had to be cast into terms that the traditional carefully. The European PTOs’ resistance to trade community would accept; their trada- change had been buttressed by the fact that bility had to be established. Given the there was only one international forum for institutional opposition to change in both the discussion of telecommunications issues, the ITU, which would lose some control of International Telecommunication Union (ITU). international telecommunicate ions, and

‘G For a clear and complete discussion of the U.S.-Israel Free Trade Area Agreement, and the role it played In helping U.S. trade negotiators to formulate basic principles on trade In services, see Carol Balassa, “Negotiation of Services In the U.S.-Israel Free Trade Area,” unpublished manuscript. For a general treatment oft he t rade in services concept formation, see Geza Feketukut y, /nfemationa/ Trade in Serwces (Washington, DC: American Enterprise Institute, 1986). Much of the early work on trade in serwces was driven by user Issues, and was fully supported by USTR. The agency played an im port ant role inelaborat Ing these Ideas. Page 141 - —. .

us. Telecommunications Services in European Markets

within GATT, which had seen its mission and Telephone (CCITT) regulations, though solely in terms of trade in goods, the United voluntary, are widely adopted by member States found it necessary to attempt to effect countries. The United States wanted to make changes on two fronts. In these efforts the sure that these regulations did not provide United States was joined by the United countries with a means to prohibit private Kingdom and later by several other coun- networks or competitive service offerings. A tries. compromise position was adopted (Article 9), stating that countries wishing to permit Building an international constituency special arrangements for value-added serv- 8 An important series of negotiations affect- ices or private networks could do so. ] ing telecommunications services trade oc- Large telecommunications users in the curred at the ITU World Administrative United States saw the results of WATTC as Telegraph and Telephone Conference crucial to their ability to conduct their (WATTC) in 1988 in Melbourne, Austra- business internationally and, to underline the lia.17 This conference established a new set importance of these results, there is now of International Telecommunication Regula- some concern that the subsequent GATT tions, which on July 1, 1990, superseded trade in service negotiations may actually those written 25 years before. The main issue reduce firms’ scope of activity. Other U.S. in Melbourne was how ITU members, no service industries, such as construction, mari- longer all public telephone operator monop- time shipping, and air transport, were less olies, would deal with the questions of enthusiastic about submitting services to a deregulation, privatization and competition. GATT regime. The U.S. construction indus- Many countries feat-cd the United States try, for example, wants help competing with would induce the ITU to accept regulations foreign firms that have access to government that would force competition, which would financing for overseas business, and resists run against their own national policies and opening the U.S. market to such foreign Against significant might infringe on national sovereignty. firms. Maritime shipping and air transporta- opposition, the At the root of U.S. concerns in Melbourne tion have separate trade agreements that set United States has was an interest in facilitating the deployment their trade rules, and these industries tend to constructed an of specialized, private intracorporate net- see open markets as disruptive. intellectual works. ITU regulations have the force of The United States also had to convince framework and international law, and the ITU Consulta- other countries to allow services to be put on a political tive Committee on International Telegraph the agenda. Many countries wanted to con- foundation for more liberal trade 17 G. Russell Pipe, “Telecommunlcatl ons Services: Considerations for Developing Countries In Uruguay in services. Round Negotiations,” United Nations Conference on Trade and Development, Trade In Services: Secbra/ /ssues (New York, NY: United Nations, 1989), pp. 74-78. ‘8 The subsequent CCITT D.1 recommendations provide all the details on private line services. U.S. trade officials attended these meetings and watched closely to see that t he resulting regulations or resolutions did not commit the United States to posltlons that would wolate the 1988 Trade Act. 19 OTA interview with Phi i ip Onst adt, sen ior manager of international telecommunicate ions regulatory affairs for the International Communications Association, a U.S. industryassoaation of international telecommunications Page 142 users, Nov. 12, 1992. Domestic Deregulation and International Trade Negotiations

tinue to trade with the United States on a sions to developing countries on interest preferential basis, and would go along with rates and debt arrangements, and threatened the United States only to an extent. that it would turn to bilateral service trade While Canada, the United Kingdom, Swe- agreements (which would benefit only those den. and Japan were the earliest supporters of who participated) unless GATT was used as the U.S. position on services, some European a forum. In September 1986, the United countries were more reluctant to follow the States won its struggle to get services trade U.S. lead. France wanted more assurances on the agenda. but later become a vigorous supporter of a GATT services agreement. Germany was GATT concerned about the future position of the Bundespost, the largest German employer, GATT is a wide-ranging agreement, cov- under a new services trade regime. The EC ering many countries. For most of its history, has jurisdiction in Europe on trade, but not GATT dealt with trade in commodities and on services; however, the EC came to merchandise. When it was established in support the general idea of trade in service 1948, the most fundamental elements of negotiations by March 1985. world trade were steel. coal, and manufac- Once the United States had secured EC tured goods. Services were thought to com- support for service negotiations, other devel- prise an insignificant proportion of world oping countries had to be persuaded not to trade. oppose the idea. Opening GATT to services The United States argued that established was viewed with suspicion by developing GATT principles of market access, fair countries, who saw the dominance of the competition, and resolution of trade disputes United States and other advanced nations in should apply to services, including telecom- high-tech services as a threat. Brazil and munications. Because trade in services is India led the developing countries in oppos- more difficult to measure than trade in ing services in GATT. However, free trade goods, and barriers to trade arc likewise gradually came to be seen as potentially difficult to define, GATT would be a valua- compatible with economic development ob- ble forum for resolving grievances over jectives. Due to lower unit labor costs, market access. This principle is of funda- developing countries may have advantages mental importance to U.S. negotiators and to in some subsectors of services.20 Increased U.S. companies. service trade also can benefit developing GATT rules arc designed to be applied countries because cheaper inputs, such as across al I commodities and signatories.21 telecommunications, can make other eco- This general principle gave rise to a serious nomic activities more competitive. The Unitcd dispute over the U.S. position that services States was willing to make political conces- could be part of a GATT framework: some

20 Patrick A, Messerlln and Karl P. Sauvant, “lntroductlon,” in Patrick A. Messerlln, Karl P. Sauvant, et al., op. cit., footnote 13, p. 2.

2’ GATT dlsciplinedoes not fully apply tocertaln sectors, such as agriculture and textiles. Richard H. Snape, “Prlnclples in Trade In Serwces,” Patrick A. Messerlln, Karl P. Sauvant, et al., op. cit., footnote 13, p. 7. See also G. Russell Pipe, “Telecommunicate ens,” In the same volume. Page 143 U.S. Telecommunications Services in European Markets

argued that since services are so varied in also agreed that the negotiations should next their characteristics, it was not practical to turn to the application of these general negotiate a single set of trade rules for them. principles to specific sectors. This has been Others argued that a general framework underway since 1990. would be more likely to lead to liberalization than would an approach dealing only with General principles individual sectors. General principles are at NONDISCRIMINATION. Nondiscrimination the heart of GATT’ rules on trade, and the is a core principle of GATT. It asserts that effort in the services negotiations has been to any advantage extended to one signatory find ways to apply these rules, derived from must be applied to all signatories, and that trade in goods, to service sectors.22 withdrawal of trading privileges for one This argument was resolved with a com- country must mean withdrawal for all. This promise that general principles would be is the most-favored-nation (MFN) principle. agreed on through a separate parallel negoti- Applying it to international telecommunica- ation on services, to take place alongside the tions services conceivably could require negotiations on trade in goods. This would important changes to the way in which keep the services agreement from becoming services arrangements are set up, since these too quickly incorporated into GATT without arrangements (i.e., accounting rates) are giving countries an opportunity to mitigate negotiated bilaterally. Existing arrangements its effect on various sectors of their econo- would, however, likely be accepted as preex- mies.23 Second, there were to be sector- isting commitments. specific negotiations, codified in annexes, including one for telecommunications. This MFN could permit free-riding by some compromise permitted concerns for general signatories, who could take advantage of principles and maximum flexibility both to other countries having already reducing sec- be satisfied. Finally, it was agreed that the toral trade barriers. Country A may not have rights enumerated in the annex would come a reason to drop its telecommunications into force only if there was agreement on trade barriers with the United States if the terms of access to markets in specific sectors, United States has already dropped its own. such as telecommunications services. Efforts have been made in successive GATT Most disagreements among GATT signa- rounds to reduce this problem by negotiating tories stem from governments’ efforts to concessions on specific products, as has protect their domestic industries while at- occurred with respect to telecommunications tempting to gain access to sectors of others’ procurement. This aspect of GATT has, markets. The concepts outlined below were however, become less important as countries agreed on in principle at the 1989 Uruguay increasingly negotiate bilateral concessions Round Mid-term Review in Montreal. It was rather than multilateral ones.24

22 Richard H. Snape, op. cit., footnote 21, pp. 5-7. 23 Stefan Voigt, “Traded Services in the GATT—What’s All the Fuss About?” /ntereconornics, vol. 26, No. 4, July/August 1991, p. 177. Page 144 24 Richard H. Snape, op. cit., footnote 21, p. 8. Domestic Deregulation and International Trade Negotiations

NATIONAL TREATMENT. National treatment try in order to limit the possibility of petty or differs from MFN in that it requires that there covert bureaucratic or political limitations to be no less favorable treatment of foreign legitimate trade. Predictability of trade rules firms than of national firms. Restrictions follows from the consistent application of may be imposed, but must apply to all firms these principles. equally, foreign or national. It does not imp] y a requirement to permit unconditional access SAFEGUARDS AND EXCEPTlONS. Safeguards to a market. Where no competition by and exceptions from international rules must domestic firms is allowed for a national be allowed if political agreement is to be monopoly, there will also be no competition achieved, since countries will generally not by foreign firms. agree to bind themselves to inflexible princi- Non-discrimination ples. Safeguards and exceptions are permit- and national MARKET ACCESS. Market access is one of ted under GATT rules, and are very impor- treatment are the most important principles of GATT. It tant in the telecommunications sector. Na- important GATT denotes the extent to which service providers tional sovereignty has long been a concern of principles; their wishing to offer a service in a foreign market nations with respect to their telecommunica- application to can enter without confronting entry barriers tions networks, and social, and political telecommunications or other requirements. The 1988 Montreal objectives are often sought through the use services must be declaration states that firms may supply their of telecommunications networks and pricing negotiated. services by whatever means they prefer, and structures. Safeguards and exceptions allow especially identified the telecommunications countries with such concerns to reserve sector as covered. For telecommunications access to parts of their markets. Nations services. market access includes: retain the right to regulate to achieve national the right to lease lines for data transmis- policy objectives, with the proviso that such sion within and between countries: regulations are consistent with the liberaliza- reasonable prices for services; tion commitments under the framework. freedom of choice in the types of equip- These general principles have been the ment to attach to the network; basis for negotiations since they were agreed reasonable flexibility in interconnection to in 1989. However, their actual formal standards; and acceptance is not a foregone conclusion. the right to store and process information. Some arc especially troublesome as applied to services. LIBERALIZATION. Liberalization is often Trade economists, until recently, gener- grouped with transparency and predictabil- ally believed that services were only con- ity as principles of GATT Liberalization is sumable at the point where they are pro- the general promotion of trade across bor- duced, and thus arc limited to domestic ders, especially by means of increased mar- markets. To the extent that such services ket access and international competition, but were provided by foreign firms, it was with allowance for national policy objec- thought that these firms generally are re- tives. Transparency is the public availability quired to invest in or rent local facilities. of the rules and regulations, including tariff With the market access principle, GATT schedules, that govern services in any coun- could for the first time play a role in limiting Page 145 U.S. Telecommunications Services in European Markets

Box 7-A. TELECOMMUNICATIONA ANDNATIONAL SOVEREIGNTY National sovereignty has been a critical issue in control of telecommunications networks since their origins in the early 19th century.l Nations have typically held that national control (either directly by the government or by government-sanctioned monopolies) was vital for economic independence and national security (control of communications for military purposes). In the late 1970s, the U.S. Department of Defense argued in court that AT&T ought not to be divested of its local operating companies on the grounds that this would harm national military communications systems. With the erosion of monopoly telecommunications regimes and the movement toward competition, pressure has mounted against maintaining national control in the name of security or sovereignty. The military constructs and operates its own networks where it is concerned about control-this is as true in the United States as it was in the Soviet Union, which had several networks for military and Communist Part y use. Competition, particularly when it involves separate facilities, may provide increased security through having multiple suppliers of comparable service, and hence redundancy, which is one key to survivability.2 Governments also have a variety of regulatory tools, including the right of expropriation or nationalization during wartime, to control the activities of telecommunications firms, whether domestic or foreign-owned. However, national sovereignty is still a significant concern. Israel has recently rejected a bid to privatize its network, for fear of compromising national security and sovereign y, and many developing countries are also unwilling to do so. Many countries fear the effects of “propaganda” transmitted to their citizens by external enemies. Others fear a dilution of their distinctive cultures. Many experts warn that the huge volume of funds electronically transmitted around the globe daily seriously decrease the control a country can exert over its currency and its ability to implement national monetary policy.3

1 ~m~ R. \win, “Natbnat Sovereignty ancf Global Networks,” OTA Contractor rePOfl. July 1992.

2 ~ever, if cornp~iiiorl cwws companies to operate tcm close to safety marginsin cfder to cut costs, w to scrimP on capital investment, it may engender lower reliability. 3 uosc ~wrw, ~f~ of Technology Assessment, U.S. Banks arrd Irrterrratlorral ~*~~urrk8ti~s, oTA+P-T’cT-100 (Washington, DC: U.S. Government Printing Office, September 1992).

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993.

national restrictions on foreign investment.25 or private network, firms need to be able to Market access, apart from direct imports, create and operate corporate networks with also deals with the right of foreigners to minimum hindrance. Services firms also establish businesses in a signatory country. want ‘‘the right of nonestablishment," the This means permission to setup telecommu- right to operate without having to set up a nications networks to deliver services and subsidiary or other local presence if services the right to make investments in such net- can be delivered directly. Essentially, firms works (’‘the right of establishment’ ‘). Since want to structure their operations according service delivery often involves a specialized

Page 146 25 Peter F. Cowhey, op. cit., footnote 6, p. 194. Domestic Deregulation and International Trade Negotiations

to the requirements of the services to be The Telecommunications Annex provided. A GATT Telecommunications Annex was Network design is important in delivering informally agreed to by GATT member services, and therefore standards-setting is states in spite of the stalled GATT general part of market access. This implies that negotiations. Negotiators say that the princi- national networks should have diverse repre- ples embodied in this annex were partly sentation in their standards-setting proc- worked out in the course of negotiations of esses. including input by users as well as the U.S.-Israel and U.S.-Canada Free Trade carriers and equipment providers. Currently, Agreements, and latcr some of the essential Service providers the ITU standards process gives great lati- elements of this annex were adopted in the and equipment tude for national or regional variation in North American Free Trade Agreement manufacturers are 27 standards, allowing some nations to close (NAFTA). demanding a direct their markets behind a wall of national The current telecommunications annex to role in standards- standards. Foreign services providers and the General Agreement on Trade in Services setting so that markets won’t be equipment companies want to play a more has been called the Telecommunications closed to them direct role in standards-setting to prevent Users’ Bill of Rights, because it lays out for the first time explicit rights of users. The through technical this. This notion of vesting large users with basic outlines of the annex provisions are: Incompatibility. what amount to minimum rights through zh Transparency must be ensured, includ- GATT is a new concept. ing information on tariffs and conditions Market access would also require more of service, specifications of technical in- GATT oversight of signatory policies on terfaces, information on standards organi- telecommunications service pricing, cus- zations, information on conditions of at- tomer service levels, and procedures for taching terminal equipment, and licensing redress of grievances in disputes between or recgistration information. users and telecommunications operating au- Network access must be assured on rea- thorities. Treating these as trade issues would sonable and nondiscriminatory terms, and benefit large foreign users who depend on pricing of public telecommunications must local telephone companies to make the final be cost-oriented. Leased lines will be connection to customers. available to signatories, and users must be

‘G Peter F. Cowhey, “The Future of the Telecommunlcatlons Market place,” The Te/eccvnrnunications /?evo/ution: Past, Present, and future, Harvey M. Sapolsky, et. al. (eds.) (London and New York: Routledge, 1992), p. 153, 27 This report does not deal with (nternatlonal telecommunications (n other areas than Europe. However, it must be noted that some observers sharply disagree that NAFTA telecommunications prowsions are essent I ally t he same as t hoseIn GATT. The Communlcat Ions Workers of America (CWA) argues that cert ain prowslons of the NAFTA treaty would preempt some State and Federal regulations, In v(olation of the Communlcatlons Act of 1934. Under NAFTA, CWA argues, States would lose regulatory oversight over some aspects of domestic telecommumcatlons, and the Federal Communications Comm Isslon in some areas would be Improperly subordinated to executive branch authority. USTR, which negotiated the agreement, argues that loss of such oversight IS exaggerated. See John Morgan, Adm Inistratlve Assistant tot he Secretary-Treasurer, Communlcat ions Workers of America, “Testimony before the U.S. International Trade Commlsslon,” Nov. 17, 1992. U.S. Telecommunications Services in European Markets

able to attach terminal equipment to the Nugent of Citicorp, which is a major user of network. Private circuits must be con- international telecommunications services nectable to the public-switched network, and operator of extensive private corporate and users must be permitted to use their networks,

own operating protocols over these net- [t]he way the annex is shaping up, it works. is turning into a bill of rights for the Intracorporate and other communications telephone administrations and for those may move within and pass across na- who seek restrictions on usage of the tional borders of signatory countries, network.29 including those aimed at gaining access to In the view of large users, the original U.S. foreign databases. submission, which was not accepted, reflects The signing parties also agreed to impose a much better compromise between the U.S. no conditions on access and use of public Government and industry.3o It contained networks other than as necessary to safe- substantial rights for users and service pro- guard the public service responsibilities of viders, whereas the current draft at many suppliers of public telecommunications net- points allows a PTO or national regulatory works or services. Examples are protecting body to limit access, usage, and bypass, in the technical integrity of the networks or the name of safeguarding public service making sure that only services that have been rcsponsibility. 31 Large users, like carriers, agreed to are supplied. also believe that no agreement on telecom- In the view of large users, the theoretical munications is probably better than a bad application of GATT principles to telecom- agreement. Some have argued that this munications turned out, in the political arena would permit the negotiation of trade agree- of trade policy formulation and diplomacy, ments without the hindrance of multilateral to be less than perfect. Some argue that U.S. coverage. trade negotiators did not push hard enough to In contrast to either U.S. industry position, extend market access and favorable operat- EC believes that MFN under the terms ing conditions for big users. 28 In particular, outlined in the telecommunications annex companies find that they do not have much should be granted now. This may be driven latitude in making arrangements for capacity by institutional dynamics: EC is trying to resale: while they are given the right to set up increase its leverage over telecommunica- networks in the first part of the annex, in tions regulation so it can enforce the agree- another part this right is subject to restric- ment itself, thereby taking control of this tions, with the balance appearing to favor aspect of EC economic regulation from continued restriction. According to Michael member states. With this agreement, EC may

2a OTA interviews with service indust ry represent at ives; see also Bob Davis, “GATT Talks Near Collapse at the Deadline,” The Wa// Street Jouma/, Dec. 18, 1991, p. Al 1.

29 Michael Nugent, Citicorp, cited in Craig Johnson, “IS There Life Still in the Uruguay Round?” ~ransnationa/ Data and Communications Report, vol. 14, No. 2, March/April 1991, p. 7. 30 OTA interview with service industry representative, June 4, 1992.

3’ Nugent, op. cit., footnote 29. Domestic Deregulation and International Trade Negotiations

come to play a more central role on both These conditions basically consisted of com- trade and telecommunications regulation. mitments by foreign governments to break up their telecommunications monopolies: The problem of basic There would be no limit on number of telecommunications services competitors. The final major issue under discussion in Foreign firms would be allowed to offer the current round of talks on telecommunica- basic long-distance service through facil- tions is market access for basic telephony, ities-based competition and through re- specifically the ability of firms to offer basic sale. long-distance telephone service in foreign Foreign investment would be permitted in countries. This market is open in the United basic long-distance services. States, although not without restrictions. There would be transparent, nondiscrimi- (See ch. 1, box 1-A; for example, foreign natory and cost-based access to basic firms cannot hold radio licenses and hence cannot directly offer some forms of long- telecommunications services. distance service. ) Long-distance services are There would be a fair and transparent not competitive in most other countries. regulatory process overseen by an inde- The Telecommunications Annex did not pendent regulatory body. resolve the issue of liberalization of basic If all the conditions were met, the full services. The United States wants, as a basic long-distance telecommunications mar- matter of policy, to promote the opening of ket would be subjected to MFN by all other long-distance markets to a level com- parties. 32 U.S. trade negotiators’ reasoning parable to its own. Therefore, at the same for not insisting on extending MFN to basic time that the draft Telecommunications Annex U.S. negotiators telephone service, but including it in the was published. USTR proposed in a deroga- hold out for furfher derogation offer. is that other countries were tion, or partial exemption from the general talks on liberalizing agreement, that as soon as a GATT agree- not willing to liberalize as quickly as U.S. basic long-distance 33 ment is reached (now scheduled for Decem- carriers would like. In the absence of services. ber 1993) the major telecommunications specific market-access commitments, other signatory parties will seek to agree on terms countries would have limited the liberaliza- to liberalize their basic long-distance te- tion of their markets while attempting to lephony markets over the next 3 years, under enter the U.S. market. Application of MFN conditions set forth by USTR in its proposal. to basic telecommunications services would

32 The GATT negotiating process permits countries to take derogations from specific sections of an agreement, wit h the expect at Ion that these except Ions will become t he focus of future trade negotiations, and will eventually be ellm Inated when the conditions justifying the except Ions no longer pertain. This may have played a signlf Icant role In weakening t he large users’ posit Ion wlt h USTR, resulting in concessions to the European PTOS. 33 Inlt Ially, USTR dld support extending MFN to basic services, but changed Its position after strong protests by AT&T and MCI. Page 149 U.S. Telecommunications Services in European Markets

lead to less market access.14 Linking MFN is better than one that would lock open the with market access as outlined by the U.S. U.S. market without the possibility of com- proposal would put pressure on nations to peting in others’ markets. mutually exchange commitments in order to Divisions between the U.S. interexchange get MFN treatment. It would make opening carriers and their major users on the issue of up telecommunications markets somewhat basic services reflect different positions on less difficult for some countries, in that the the amount of competition to be permitted in agreement allows better control over conces- the United States, and the degree to which sions to be granted. Finally, the U.S. pro- the U.S. Federal Communications Commis- posal recognizes that MFN works when there sion (FCC) will continue to have the power is a large enough number of countries to control the U.S. operations of foreign offering the same terms of access, thereby carriers. After the divestiture of AT&T in minimizing the problem of free riders; the 1984, when the U.S. telecommunications U.S. position is that there is not yet a market was unilaterally opened (except for sufficient number of countries to permit this local service), the FCC retained authority in telecommunications services.3s over foreign carriers (through its section 214 The asymmetry in the degree of market filings requirement) in order to protect the openness between the United States and interexchange carriers from unfair foreign elsewhere is damaging to U.S. domestic competition in services. This could occur interests, it is argued, and gives away an because foreign carriers can cross-subsidize important bargaining lever that the United their competitive operations from their do- States might usc in bilateral negotiations to mestic monopoly service operations. open other countries’ markets.36 This point is Large telecommunications users, on the of particular importance to AT&T, which other hand, want as much competition as reportedly vigorously lobbied USTR to re- possible to assure themselves of favorable frain from applying MFN to basic telecom- prices and a wide choice of services. They munications services. 37 would like foreign carriers to operate freely Other U.S. long-distance carriers differ in the United States. If basic services are only marginally with AT&T on these points. subject to the GATT agreement, the FCC For example, Sprint relies heavily on inter- will have less ability to restrict foreign national leased lines and resale of voice carriers operations in the United States. services in Europe, and needs an agreement This disagreement among countries, how- that allows them to do this easily. All service ever, is symptomatic of a deeper issue: trade providers reportedly feel that no agreement negotiations in GATT reflect nations’ de-

~ Ambassador S. Lynn Williams, Deputy U.S. Trade Representative, cited in Craig Johnson, “IS There Life Still in the Uruguay Round?” Tr’ar?snationa/ Data and Communications Report, vol. 14, No. 2, March/April 1991, p. 6. 35 Ambassador S. Lynn Williams, Deput y U.S. Trade Representative, cited in Craig Johnson, op. cit., footnote 34. 36 Randolph Lumb, AT&T vice-president for international regulatory affairs, cited in Craig Johnson, op. cit., footnote 34, p. 6. Page 150 37 OTA interviews with representatives from USTR, Nov. 5, 1992. Domestic Deregulation and International Trade Negotiations

sires to retain control of their telecommuni- difficulty: there is no agreement among cations infrastructures for reasons of eco- economists about the extent to which mod- nomic sovereignty, wealth creation, privacy ern telecommunications are inherently mo- 40 protection, civil defense, and national secu- nopolistic.. There is agreement that some rity. To the extent that countries are con- enhanced services can be easily provided cerned about loss of sovereignty, they will competitively; the question is how close to At the core inflate the definition of basic as opposed to plain old telephone service can deregulation of the debate over enhanced services in an effort to minimize come without decreasing economic or social telecommunications the domain of negotiable issues.38 welfare, Countries that wish to protect their market access are At the core of the debate about deregula- telecommunications market and traditional the definitions of tion and competition and thus about tradea- telecommunications providers seek to define “basic” and bility of services lies the question of defining as much as possible as basic services. Non- “enhanced” basic telecommunications services and en- telecommunications firms that seek to offer services. hanced telecommunications services. The new services seek to define as much activity usual technical distinction is simply that as possible as enhanced or value-added. basic services arc those where messages are delivered with little or no enhancement by Negotiating GATT computer or other manipulation, whereas value-added or enhanced services are those How GATT negotiations work where signals have been manipulated in GATT agreements arc generally arrived at some way—selected, formatted, processed, by the mutual exchange of concessions stored, forwarded, etc.39 Basic services are between countries. One country may offer to assumed to be best provided by monopoly reduce restrictions on foreign banking, for service providers, to gain economics of example, in exchange for another country scale. Enhanced services, it is assumed, may lowering barriers to trade in insurance. be provided competitively. But efforts to While the classical economic theory of arrive at clear and useful definitions for trade comparative advantage would emphasize the purposes have encountered a theoretical benefits of free trade for both the exporting

38 Peter Robinson, “Globallzat Ion, Telecommunications and Trade,” Futures, October 1991, pp. 810-813. 39 Aronson and Cowhey argue also that a distinction between irrhstructwe /aci/ities and mhstructure servlcesought also to be made, because control of facilities can affect the provision of com petltlve services. If facilities are provided only by a single monopoly telecommunicat ions operator, then to ensure competition in services, stringent regulations must be made and enforced. Jonathan David Aronson and Peter F. Cowhey, op. cit., footnote 8, pp. 64-65. A Ioommg question is the status of wireless communications technologies, which will Ilkely be international from the outset. See U.S. Congress, Office of Technology Assessment, The IA/or/dMnmistratwe Radio Conference.’ Techno/ogyand Po/icy /rnp/icatior%s, OTA-TCT-549 (Washington, DC: U.S. Government Print Off Ice, May 1993). ‘c GATT Secretariat, Multilateral Trade Negotiations: The Uruguay Round, Group of Negotiations on Services, Trade In Telecommunications Services, doc. no. MTN. GNS/W/52, May 19, 1989, p. 4; Jonathan Dawd Aronson and Peter F. Cowhey, op. cit., footnote 8, p. 61. The distinction between basic and enhanced or value-added services was adopted essentially to avoid having services t hat can be offered competitively hamstrung by regulations designed for common carriers. Page 151 us. Telecommunications Services in European Markets

and importing countries, trade barriers are signatories to press for reopening issues in the consequence of political factors.41 the future. Once the basic framework and the sectoral The U.S. position did not prevail. Each agreements are struck, the issue in GATT country agreed to put on the table its negotiations becomes the terms under which sector-by-sector offers, i.e., those specific access to markets will be granted. This is a liberalizing commitments it was willing to particularly sensitive issue where countries make. At the same time, each country was have monopoly service providers. An agree- permitted to list restrictions in other coun- ment to open markets under the most-favored- tries that it wished to see removed. nation principle can hurt countries that have Initially, no country except the United unilaterally liberalized earlier; MFN can States proposed a list of offers, while the lock open the markets of liberalized coun- U.S. list of sectors that it wished to restrict tries without obtaining equally open access was so short that other countries were visibly 43 to markets in countries that maintain a embarrassed. Currently, however, there are offers on the table from 27 countries (with monopoly. EC counting as one country) on all sectors of The United States and other countries the services negotiations, with 20 proposals have taken different approaches to the proce- specifically covering telecommunications serv- dures for deciding what should be liberal- ices. In the view of some U.S. observers, the ized. The U.S. position, spelled out in detail offers merely describe the status quo and in its October 23, 1989 proposal, is that every promise little additional liberalization. services sector should be opened unless The process of deciding what U.S. offers The United States specifically excluded (and defined in a will be extended, while not strictly speaking has argued that schedule list). Exclusions or reservations secret, is largely shrouded from public view. services should be would be periodically reconsidered and with- By and large it consists of the process liberalized unless drawn when circumstances permitted, This described below and in chapter 8, through specifically flexible approach offers some protection to which USTR solicits input from other gov- excluded, whereas countries unwilling to embark on massive ernment agencies and listens to lobbying by other countries liberalization immediately, but also provides various firms, industries, and interest groups believe that services the opportunity for the United States to with a stake in the outcome, as required should be restricted continue to press for market liberalization in under the 1988 Telecommunications Trade unless specifically the future.42 Other countries argued that all Act. With the complexity of the issues, and /liberalized. services sectors should be restricted unless with the paucity of data about services specifically liberalized. In the U.S. view, this (discussed in chapter 8), there is no way for would limit the number of items that could trade negotiators to assess the likely conse- be reviewed, and would limit the ability of quences and effects of their offers, restric-

41 Brian Hindley, “Principles in Factor-Related Trade in Services,” in Patrick A. Messerlin, Karl P. Sauvant, et al., op. cit., footnote 13, p. 14. 42 Bela Balassa, “The United States,” in Patrick A. Messerlin, Karl P. Sauvant, et al., op. cit., footnote 13, p. 130. 43 OTA interview with Margaret Wigglesworth, Coalition of Service Industries, June 12, 1992. See also Richard H. Snape, op. cit., footnote 21, pp. 10-11. Domestic Deregulation and International Trade Negotiations

tions, or final agreements. It falls to the ably clear-cut for a relatively new policy private sector to analyze the likely costs and issue. A number of participants note that benefits, and then to press for a negotiating significant policy innovation has occurred position that retlects their assessments of over the past decade. The fragmentation of advantages and disadvantages of any partic- policymaking (see chapter 8) sometimes ular position. In this process, those with results in trade policy conflicts, but these direct economic stakes in the outcome may conflicts are usually over details of the trade have a voice, but there is no direct voice for agreements or over negotiating strategies, the interest of consumers and jobholders in with only a few over fundamental issues. affected industries. General principles of transparency, progres- sive liberalization, national treatment, most- Formulation of U.S. negotiating favored-nation, nondiscrimination, and mar- positions in GATT ket access all arc relatively noncontroversial Congress is concerned about the degree of for government. network operators, equip- access to the U.S. market that is afforded ment providers, and large users. Government other countries compared to the access that and business share a common view of the U.S. firms have overseas. The 1988 Trade benefits of liberalization in trade in services, Act established telecommunications as an and business plays a significant role in area of particular concern, and directed advising trade negotiators on their positions. USTR to assume the lead in both telecom- The trade negotiation positions of the munications equipmcnt and services negoti - ations. Congress’ intervention, exercising its United States arc formally the responsibility constitutional power to regulate foreign trade of USTR, in conjunction with the Treasury and commerce, reflected its suspicion of the Department. USTR. however, has a small free trade policies of recent Administrations staff, and is dependent on other agencies for and the reluctance during those Administra- specific sector-al expertise. USTR assembles tions to take action against U.S. trading teams of negotiators from a number of agencies, such as the International Trade partners who engage in unfair trading prac- tices. Administration (ITA) and the National Tele- Congress typically does not have much communications and Information Adminis- interaction with USTR whilc negotiations tration, both in the Department of Com- arc proceeding. Trade negotiation docu- merce. The FCC, through its Common ments are sometimes classified to prevent Carrier Bureau, plays an important role, leaks that could affect the U.S. bargaining because of its technical expertise. Represen- position,44 which tends to make Congress tatives are also drawn from the Bureau of less well-informed about the issues, some of Communications and Information Policy which are highly technical.45 (CIP) at the State Department, although CIP The U.S. negotiating position on trade in is thought by some trade participants and by services and telecommunications is remark- some of its own staff to make relatively little

““ This occurred for example during the negot Iations for NAFTA. 4’ OTA interviews w[th USTR of flclals, Nov. 5, 1992. Page 153 - . . — ------

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contribution to trade policy.% The Antitrust developed countries. A U.S. member is the Division of the Department of Justice is also International Communications Association part of the team,47 and other agencies some- (ICA), the largest U.S. user group, which times participate. itself deals mostly with domestic issues. Formal and informal advisory committees Another important user group is the Coali- and task forces also are consulted by USTR tion of Service Industries (CSI), which in developing positions. Formal committees represents 14 very large firms.48 include an Advisory Committee on Trade In most policy areas industry groups or Policy and Negotiations, composed of chief interest groups line up behind different executive officers (CEOs) of large firms, government agencies; these alignments are labor unions, and trade associations; and five clear in the area of international telecommu- sectoral Policy Advisory Committees, also nications services.49 The natural interest drawn from the CEOs or executive vice- groups are: presidents of service companies. There are in the dominant long-distance wrier (AT&T); addition 17 Industry Sector Advisory Com- the alternativc interexchange carriers (MCI mittees, one of which is devoted to services. and Sprint); Trade associations and lobbying groups the regional Bell holding companies also contribute to USTR deliberations. The (RBHCs); U.S. Chamber of Commerce has an Interna- large users with an interest in operating tional Telecommunications Subcommittee private networks for themselvcs and oth- that marshals and elaborates U.S. users’ ers (such as EDS, IBM); and views, as does the U.S. Council for Interna- other, usually smaller users, with an inter- tional Business. The International Telecom- est in service at favorable costs and munications User Group (INTUG), based in flexible operating conditions. London, speaks for users of international telecommunications here and in Europe and It appears that AT&T receives consider- is a vigorous and outspoken proponent of able support from the FCC, USTR and, at liberalization and freer rnarket access. Its times CIP; the regional Bell operating com- membership is composed chiefly of national panies from the FCC and NTIA; and alterna- communications users associations of the tive long-distance carriers from the FCC and

‘G OTA interviews with senior State Department officials, USTR officials, and with senior staff members of the Committee on House Foreign Affairs. A proposed reorganization of the State Department (State 2000 Reporf) indicates that CIP is to be downgraded and put under the Economics, Business and Agriculture Bureau, although the head of Cl P will cent inue to enjoy ambassadorial rank, under exist ing Iegislat ion. Cl P has suffered from being lodged in a department that is unfriendly to functional offices. See ct apter 8. 47 According to participants and observers, Department of Justice has not recently played any significant role in negotiations. 48 CSI was started in 1982 at the suggestion of WilliamBrock, U.S. Trade Representative. Because It has only 14 members, CSI finds it easier to take strong positions on issues than most other t rade associations, whose members often have more cross-cutt Ing interests on t rade issues. On t heot her hand, because CSI has bot h large users and network operators as members, it cannot take a vigorous stand on some other user issues. Page 154 49 Chapter 8 has more detailed descriptions of these agencies and their relationships. Domestic Deregulation and International Trade Negotiations

the Justice Department. The large users have Nevertheless, users may find a more strong support from USTR. The smaller sympathetic ear at USTR than at the telecom- users have only weak representation, chiefly munications agencies. Users are drawn from in the Service industries branch of the a variety of industries, and so are not a International Trade Administration. natural constituency for telecommunications While the FCC’s deregulatory orientation agencies. They typically spread their lobby- has largely benefited the alternative long- ing efforrts, since telecommunications is not distance carriers and their users on the their only regulatory or operating concern. domestic level, the health of U.S. carriers in Users’ telecommunications requirements be- the international arena is a different question, yond plain old telephone service are also and the FCC seems averse to policies that relatively new. could harm AT&T. NTIA takes a strong promotional and supportive stance toward Long-range consequences U.S. telecommunications operators. particu- of a GATT agreement larly RBHCs. The agency’s Infrastructure The success of GATT negotiations on Report and Telecom 2000 Report recognizes services would represent important chal- the importance of the domestic infrastructure lenges to the traditional control of nations in promoting economic growth and asserted over their domestic affairs. With reliance on that competition is the best means to promote market access principles, trade officials would domestic telecommunications development, play a much greater role in international and but NTIA does not support trade policies that even domestic telecommunications policy. would potentially challenge domestic opera- This was recognized by Congress in the 1988 tors. There does not seem to be an explicit Telecommunications Trade Act, which gave 50 NTIA focus on users. USTR the leading role in multilateral tele- With reliance on USTR appears to be strongly influenced communicate ions trade negotiations. market access by AT&T and by large users, while other USTR has already begun to intervene in principles, trade long-distance carriers and users complain specific telecommunications policy areas, officials play a much that USTR pays insufficient heed to their even beyond the GATT setting. For exam- greater role in 51 needs. Since USTR is at the center of ple, USTR halted the FCC’s proposed inter- international and overall trade negotiations, its function is to national simple resale initiative in late 1991, even domestic assimilate and aggregate input from a wide on the grounds that the FCC’s timing on telecommunications range of industries. USTR needs to have changing the ‘‘dominant carrier regulation’ policy. some distance from all interest groups in would interfere with USTR's negotiations in order to be able to adjust U.S. policy overall, GAIT (The FCC proposed to remove some and horse-trade with other countries. This reporting requirements on foreign carriers may explain why USTR appears to many operating in U.S. markets; these carriers observers as standoffish. were all treated by the FCC as ‘‘dominant

30 This maybe changing In regard to spect rum management, where NTIA has established a private sector Ilalson office. “ For example, In OTA interviews with of flclals of the International Communlcatlons Association, July 22, 1992, Page 155 ——— ...... — .-

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carriers or monopolies with the power to tional telecommunications through trade min- restrict competition in their home markets. ) istries, they may negotiate telecommunica- The FCC complied with USTR’s request to tions trade deals that are suboptimal from the delay its action: later USTR gave the FCC its standpoint of telecommunications users or approval to go ahead. Such conflict among carriers, It sometimes is politically expedient 52 agencies is likely to increase. to agree to trade policies, such as asymmetri- The fact that trade officials have emerged cal market access, which are harmful to one as important players in international tele- segment of a national industry. In other communications negotiations is important words, national competitiveness and free because their ministries have multiple con- markets are not always compatible goals. stituencies with less specific focus on tele- The web of negotiating relationships is communications issues than do telecommu- further complicated by the fact that sepa- nications agencies. Some observers believe rately and within GATT, bilateral negotia- that trade officials should not be given too tions take place among countries, and not all much authority, as they lack subject matter countries arc party to all multilateral negotia- expertise. Furthermore, trade officials arc tions. The 1988 Trade Act specifically re- not necessarily concerned or knowledgeable quires the President to negotiate access to about efforts to improve the competitiveness foreign markets in telecommunications, and of national industries. In the United States, authorizes him to use sanctions if such this responsibility is presumably lodged in access is not achieved (section 301). These NTIA, if anywhere, and NTIA plays a arc necessarily bilateral negotiations:53 par- limited role in trade negotiations. ties that recently have been identified as One potential consequence of the increas- having serious barriers to U.S. telecommuni- ing trade focus of international telecommu- cations trade are South Korea, which has nications may be that as political leaders reduced its trade barriers through bilateral increasingly come to preside over interna- negotiations, and the European Community,

52 Peter Cowhey argues that this may bring about an equilibrium outcome or stalemate because no one will have strong Incentives to resolve the conflict. Peter F. Cowhey, op. cit., footnote 6, p. 198. 53 The most recent example of t his is in the dispute over t he ECUt ilities Directive, an equtpment issue. This dlrectlve went Into effect on Jan. 1,1993, after the failure to reach agreement with the United States on the GATT Government Procurement Code. It requires that EC countries have open bidding proceciures, but in the absence of an international or bilateral agreement they are to give preference to EC firms in procurements. A 50 percent EC-content requirement was established, with a 3 percent price differential favoring EC companies. The United States is seeking the elimination of such Buy National rules in the GATT Government Procurement Code negotiations. See United States, Off Ice of the United States Trade Representative, 1992 Nationa/ Trade Estimate Repori cm Foreign Trade Barriers (Washington, DC: U.S. Government Printing Office, 1992), pp. 75-76. Agreement in GATT would provide rules specifying open, nondiscriminatory procurement. Furthermore, the United States and the EC disagree on the status of the Bell operating companies and AT&T in t he Government Procurement Code. The EC claims, and AT&T has acknowledged, that AT&T preferentially buys its own equipment, known as “self -dealing.” The fact that AT&T is both a service and an equipment prowder causes the United States serious problems in trade negotiations. In announcing the imposition of sanctions against the EC in February 1993, USTR hoped that the EC would waive the discriminatory provisions of the Utilities Directive. Domestic Deregulation and International Trade Negotiations

which has not. Furthermore, with the growth tions services trade patterns’? So far, there in importance of computing and other elec- appear to be few losers. Although much of tronic media in telecommunications, a com- the change came at the behest of large plex network of standards organizations now telecommunications users, the cost reduc- has a role in telecommunications policy tions and improved flexibility in operating sq debates. terms seems to have significant spillover Given that countries have differing tele- benefits for residential and small and me- communications history, politics. and infra- dium business users. Computer equipment structure, they will not all move smoothly or and electronics firms and enhanced services at the same pace from the stable domcstic providers have benefited by lowcr costs and monopoly/ITU model toward a relatively improved terms of access. Although many stable competitive market. Some may exper- services providers arc now saying that no iment with a variety of telecommunications GATT agreement is better than a bad agree- structures and policies. This could result in ment (i.e., one that would lock open the U.S. persistent failure to eliminate obstacles to market without giving them full rights to efficient interconnection of equipment and compete in others’ markets), it is likely that networks, which could hurt U.S. firms wish- ing to take advantage of their installed they will acquiesce in an agreement that has technical base, their experience, and their broad political support. Even organized labor, established operating procedures. This in which may have less bargaining power with turn may affect the competitiveness of U.S. the opening up of the telecommunications companies in areas of the world that follow- system, expects to endorse the Uruguay ing a telecommunications trade path differ-- Round GATT agreement, when and if it is 55 ent from that favored by the United States. finalized. Are there clear winners and losers in the changes occurring in global telecommunica-

‘“ For a recent discussion of the standards-making process In relation to U.S. competitiveness, see U.S. Congress, Off Ice of Technology Assessment, G/oba/ Standards: f3ul/ding f3/ocks for the future, OTA-TCT-512 (Washington, DC: U.S. Government Prlntlng Off Ice, March 1992). 55 Morgan, op. cit., footnote 27. How Telecommunications Policy Is

Made 8 CHAPTER

IT IS DIFFICULT TO DEFINE U.S. POLICY FOR tiations could be thrown awry as a result of INTERNATIONAL TELECOMMUNICATIONS, and even unilateral actions by regulators. Some pri- more difficult to identify the locus of respon- vate sector observers fear that with negotia- sibility for its development. International tors powerfully motivated to reach agree- telecommunications policy was for many ment in the waning days of the current round years an incidental byproduct of domestic of the General Agreement on Trade and telecommunications policy; now it is a Tariffs (GATT), there is an increasing possi- subheading in foreign trade negotiations. bility that telecommunications objectives Yet, the political and economic relationships might be sacrificed for unrelated trade objec- of the United States with the rest of the world tives. depend heavily on global networks—for The fragmentation of the policymaking diplomatic and military communications; for structure provides an opportunity for ‘forum The fragmentation directing business, coordinating trade, and shopping’ in which competing interests can of the policymaking settling financial transactions; and for the play one agency against another. In practice, structure invites myriad cooperative efforts ranging from it has created a situation in which the “forum shopping. ” environmental amelioration to disaster relief interests and demands of major telecommu- that arc made necessary by today’s highly nications providers and some large users are interdependent global community. well represented, with relatively little atten- This chapter first describes the govern- tion to the interests of other users, including mental structure is responsible for formulat- small businesses.1 The public as a whole ing international telecommunications pol- appears to be considered chiefly as second- icy, and then relates this to the structure for ary consumers whose only recognized inter- developing trade policy. At best, telecom- est is the relative prices of goods and services munications decisionmaking works well be- delivered with the aid of telecommunica- cause it includes many fora for the expres- tions. sion of competing interests, and because of Policy makers, regulators, trade negotia- the commitment and cooperation of experi- tors, and consumer interests groups alike arc enced people whose responsibilities have further handicapped by the often inadequate, over time spanned both industry and govern- incomplete, or misleading data related to ment. At worst, decisions about international telecommunications. Especially in the area telecommunications are a secondary byprod- of competitive trade in telecommunications uct of international agreements reached in services, a growing need for better data has broad trade negotiations, and as a result may been frustrated first by single-minded adher- be unidimensional and shortsighted. Broader ence to a goal of reducing industry ‘‘paper- telecommunications objectives may be ig- work burden, ’ and more recently by the nored. Conversely, international trade nego- necessity of budget trimming.

‘ The Federal Communications Commission (FCC) is supposed to speak for small users and consumers in formulat mg telecommunications regulatory policy. The White House Bureau of Consumer Affairs ES used by the Off Ice of the United States Trade Representative to represent consumer interests In its consultative groups advising on telecommunications trade negotiations positions. The Consumer Federation of America may also part Iclpate, along with the Communications Workers of Amertca (a labor union). Page 159 .- — -— . . . -- - -. - - - -- — -

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The telecommunications acknowledges the State Department’s first policymaking structure Telecommunications Coordinator.4 In 1978, President Carter removed an Four decades earlier, the 1934 Communi- existing Office of Telecommunications Pol- cations Act, which established the Federal icy from the Executive Office, and by Communications Commission (FCC), had Executive Order combined it with an Office set forth the guiding Federal communica- of Telecommunications in the Department of tions policy as one of Commerce to form the National Telecom- . . . regulating interstate and foreign munications and Information Administra- commerce in communications by wire tion (NTIA). and radio so as to make available, so far as possible, to all the people of the This move effectively signaled a change United States a rapid, efficient, Nation- in perspectives on telecommunications. "Shift- wide, and world-wide wire and radio ing communications policy functions from communications service with adequate the White House to the Commerce Depart- facilities at reasonable charges, for the ment in 1978 was an effort to depoliticize purpose of the national defense, [and) communications policy, acknowledges pol- for the purpose of promoting safety of icy analyst Howard Symons, ‘‘. . .howevcr, life and property . . . . [47 U.S. C, 151]. the move also appeared to diminish the importance of communications policy. Commerce, national defense, and mainte- The existence of an Office of Telecommuni- nance of civil order provided the rationale for cations Po] icy in the White House had Federal responsibilities for telecommunica- indicated symbolically that telecommunica- tions (otherwise a state regulatory responsi- tions was a core element in national infra- bility). But the major thrust of Federal policy structure and a uniquely valuable tool for was to achieve universal service through the policy implementation (although in reality regulation of rates, service offerings, and this concept had seldom been exercised). ~ infrastructure development. That goal essen- The move to the Department of Commerce, tially secured. in 1978 the driving policy together with the beginning of deregulation, goals became deregulation and opening up meant that telecommunications was hence- markets for equipment and services. This forth viewed primarily as an industry pro- effort intensified after the Democratic Ad- ducing goods and services for business users. ministration was succeeded by a Republican “The United States is unique in regarding Administration in 1981. telecommunications primarily as a trade From 1934 until the mid-l980s, U.S. factor rather than as a social policy tool,” telecommunications policy was largely gen-

2 Howard J. Symons, “The Communicant ions Policy Process,” in Paula R. Newberg (cd.), New Directions in Te/ecommunlcaikms Pcdicy (Durham and London: Duke Unwersity Press, 1989), p. 299. 3 Some observers report that the Office of Telecommunications Policy provided the orlgln and Impetus of the move to deregulat e telecommunicate ions, and thatIt was ef feet ive because it wasIn the Execut Ive Off Ice and could get the ear of the President, or at least of his most influential adwsors. (OTA interviews) 4 Ambassador Diana Lady Dougan, now at the Center for Strategic and International Studies, in d scusslon Page 160 with OTA staff. How Telecommunications Policy Is Made

Figure 8-1. Carriers Us. Telecommunications Policy Structure

Schools, hospitals I

I Small I businesses Residential customers

SOURCE OFFICE OF TECHNOLOGY ASSESSMENT, 1993 —— . . . . . -. . - -- - - — - - - - -

us. Telecommunications Services in European Markets

erated within the framework of the FCC’s the years, played an active and important role relationship with the regulated monopoly, in the development and negotiations of In practice, AT&T. Since the divestiture of AT&T in telecommunications trade policy. ’ At a international/ 1984, a “troika’ of Federal agencies has minimum, this puts USTR in the de facto teleommunications formally been responsible for telecommuni- position of reconciling or coordinating the policy has cations policy, through an often uneasy three telecommunications agencies’ some- effectively process of consultation and negotiation. The times divergent positions. been made in three agencies are NTIA in the Department Some participants see the fragmentation the Office of the of Commerce, the Bureau of International of policymaking within each structure and United States Communications and Information Policy the uncertain borders between the telecom- Trade (CIP) in the Department of State, and the munications and trade policy structures as Representative. FCC, which is not part of the executive serious problems. Others see the same char- branch, as are the other two, but is an acteristics as a positive benefit that allows for independent regulatory commission. (The flexibility and representation of diverse in- FCC’s five-member bipartisan Commission terests. At best, some crucial aspects of is, however, appointed by the President.) In future international telecommunications es- practice, international telecommunications cape all of these agencies. The complex and policy has effectively been made by the highly controversial issues surrounding Fed- Office of the United States Trade Represen- eral sponsorship of a national high-speed tative (USTR). data network-i. e., the National Research In the United States, trade policy—like and Education Network (NREN)—-have de- telecommunications policy—involves sev- veloped in or been contested by the National eral agencies: USTR within the Executive Science Foundation, the Department of De- Office of the President, the Department of fense, the Department of Energy, and the Commerce and its International Trade Ad- National Aeronautics and Space Administra- ministration (ITA), the Department of State, tion, but telecommunications agencies have and somewhat more peripherally, the De- been on the sidelines. partment of Justice, the Department of the Treasury, and at times, the Department of National Telecommunications and Defense. s Information Administration Increasingly the responsibilities of the NTIA, within the Department of Com- multiagency telecommunications policy- merce, is supposed to lead in formulating making structure interact with and overlap telecommunications policy and to speak for those of the multiagency trade policymaking the Administration to Congress. It comments structure. USTR emphasizes that representa- on FCC proceedings either singly or as tives of NTIA, CIP, and the FCC ‘‘have, over representing Executive branch agencies. It is

5 In addition, the U.S. International Trade Commission provides studies, reports, and recommendations involving international trade and tariffs to the President and Congress. It has a number of statutory functions related to adm inistration and enforcement oft rade agreements, customs laws, and tariff acts. The Bureau of Export Administration in the Department of Commerce administers export controls, including export licensing and control or decontrol of technologies that may Impinge on national securlt y. Neither of these Page 162 bodies is considered to develop or initiate trade policy. How Telecommunications Policy Is Made

a key member of U.S. delegations in various Report and the Spectrum Report, both in international fora. NTIA also manages the 1991.7 Federal Government’s use of the electro- For the most part, however, the agency’s magnetic spectrum. (This duty, in fact, agenda is set reactively, through responding constitutes by far the largest part of NTIA’s to initiatives of other agencies within the workload as measured by staff assignments.)6 Department of Commerce and other parts of NTIA’s Office of International Affairs the Administration, or to the expressed prepares position papers on international concerns of the telecommunications indus- trade issues, monitors private sector devel- try. NTIA constantly receives and responds opment of technical standards, works with to questions, requests, or initiatives from the Departments of State and Defense on other agencies or from industry lobbyists. submarine cable issues, and oversees NTIA’s attention has generally been concen- COMSAT and its activities in INTELSAT trated on domestic issues, and particularly on and INMARSAT. Its people serve on U.S. the thrust toward deregulation, since that is trade and regulatory delegations to foreign where most of the interest of the telecommu- governments and international organizations nications industry is directed, and the agency such as the International Telecommunica- has paid relatively little attention to interna- tions Union (ITU) and Organization for ational issues. When trade negotiations are Economic Cooperation and Development impending, however. NTIA will be asked to (OECD). A major part of the work of the prepare a draft issue paper for the Office of Office is in preparing for international meet- USTR, or to review trade position papers ings; this preparation is carried on in close prepared by USTR or other agencies, to help liaison with industry, and to a lesser extent in developing a bargaining position. with major user groups. The approach to all of these activities is Does NTIA “initiate” policies’? That depends in part on the activism and the shaped by NTIA’s commitment to fostering agenda of the Assistant Secretary of Com- the U.S. telecommunications industry, pro- merce for Communications and information, moting competition in domestic markets, who is also the Administrator of NTIA. The and opening greater access to foreign mar- Administrator may, for example, initiate a kets. Trade issues are not in fact a part of “public inquiry’ on policy issues, in which NTIA’s legislative mandate, but the agency industry and other groups will present their provides technical expertise in support of the often conflicting viewpoints. The public agencies that take the lead in trade negotia- inquiry may then be followed up with a tions, and speaks to them for its industry major report, such as the Infrastructure constituents.

fi Other mandated responslbllltles include administering Federal grants to public radio and television and operating the government’s telecommunications research and engineering laboratory, the Institute for Telecommunications Sciences. The Inst it ute’s main activities are spectrum-related research and systems/ networks-related research. 7 U.S. Department of Commerce, National and Information Administration, The /infrastructure Report Te/ecornrnunicafiorrs m the Age of /n/orrnah’on, October 1991; and U.S. Spectrum Po/icy: Agenda for the Future, 1991. Page 163 . ------—

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NTIA’s explicit policy has been to “en- ment the policies it proposes and has had courage further infrastructure development problems establishing a partnership with by removing government-imposed barriers other agencies, particularly with the Depart- to competition and efficient investment in ment of State. 11 8 telecommunications facilities and markets." On both domestic and international issues, It was the position of the last two (Reagan NTIA’s position within the Department of and Bush) Administrations that ‘‘govcm- Commerce, not generally a powerful depart- ment policies should not attempt to direct the ment, has in the past been a handicap. NTIA selection of particular technologies or the had trouble getting attention at a high level pace of infrastructure investment by or for of the last two Administrations because there private-sector firms.’”) NTIA applied the was no telecommunications spokesman in same deregulatory position to international the Executive Office. This may change under markets, pressing other countries to allow the present Administration, especially since facilities-based competition. This explicitly Vice President Gore has long demonstrated stated position has the possible disadvantage a strong interest in telecommunications, but of limiting or removing NTIA's maneuver in there have been no clear signals of strength- developing policy or in responding to dereg- ened NTIA effectiveness as yet. ulatory demands of industry, or initiatives by U.S. agencies or other countries in standards- Federal Communications Commission development or trade-agreement negotiating sessions. 10 NTIA tends to be seen in both The FCC is the source as well as the means domestic and international fora as represent- of implementation of much telecommunica- ing the positions of the telecommunications tions policy, although as an independent industry rather than as a policy-development regulatory commission, it is not part of the organ. executive branch policymaking structure. Henry Geller, a former Assistant Secretary The FCC was created by the Communica- of Commerce for Communications and In- tions Act of 1934 to regulate interstate and formation and NTIA Administrator, has said foreign communications. The 1934 Act made that “. . . in practice, NTIA has encountered it responsible for the development and regu- considerable difficulties. It cannot inple- lation of both radio and wire services, and its

E Under the Reagan and Bush Administrations, NTIA advocated allowing the Bell operating companies to enter the information services and equipment manufacturing markets, allowlng telephone companies to enter the cable television market, and allowlng competition in the local exchange; and opposed legislation deregulating the cable television Industry. Positions confirmed by the Office of International Affairs, NTIA, NOV. 6, 1992. 9 Conversations with Charles Rush, Associate Administrator of NTIA, Interview with OTA, Nov. 28, 1990. Wording oft he quote conf irmed by t he Off Ice of International Affairs, NT IA, correspondence of Nov. 6,1992. ‘0 An NTIA brochure says, however, that”. .FCC or NTIA act Ion to expedite the standards process could be justified. . . in areas, such as the development of standards, that would require competitors to agree on matters that could affect their relation ships.” NTIA, op. cit., footnote 7, p. xvi. ‘‘ Henry Geller, “Reforming the Federal Telecommunications Poltcy Process,” in Newberg, op. cit., footnote Page 164 2, p. 320. How Telecommunications Policy Is Made

authority now extends to television, satellite, report. The FCC is considered by many in the and cable as well.12 industry to have ‘‘unilaterally opened the Under the last two The Commission is composed of five U.S. market to foreigners, and it is criticized Administrations members appointed by the President, with for doing so without determining whether there was no the approval of the Senate; no more than there is the same degree of openness in telecommunications three of the five members can be from the foreign markets. For example, the FCC was spokesman jn the same party. The President designates one of criticized for allowing Spains Telefonica to Executive Office; the members as Chairman. The Chairman buy the Puerto Rico Telephone Company in this may change. usually plays a dominant role in Commis- early 1993. The FCC has managed to main- sion decisionmaking. tain its authority over foreign operators in The Common Carrier Bureau regulates this country. international and foreign communications The Commission has a Director of Inter- services provided by common carrier.13 Other national Communications, who is responsi- bureaus and offices also participate in inter- ble for representing it in international fora national issues and organizations.14 and for coordinating FCC activities and The Common Carrier Bureau has always policies that relate to international issues. overwhelmingly emphasized domestic inter- The International Communications Office state communications with relatively littlc carries out these coordinating functions, but attention to international aspects. This may is small and relatively new. It lacks the clout be changing, as evidenced by the concerted commanded by the largcr Common Carrier attention recently given to accounting rates, Bureau, which can bring to trade negotia- the dominant carrier status for international tions, for example, greater technical and firms. and other issues discussed in this legal expertise and experience.15

‘2 The Communications Act gives the Comm Is.won responslblllt y for, among other things: 1 ) the allocation of spectrum for nonfederal uses; 2) the assignment of licenses for broadcast, satellite, common carrier and prwate radio services In interstate and foreign commerce; 3) the monitoring and regulation of tariff Ing, cost allocation, and interconnection of common carriage service; 4) type acceptance and registration of telecommunications equipment; and 5) the development of communications policy and rules In these and related areas. The Communications Satelllte Act of 1962 gave t he FCC speclflc authord y to regulate Comsat in the provision of international satellite services. FCC authority has been supplemented with the Cable Telewslon Consumer Protection and Competition Act of 1992.

13 A “common carrier” IS an organization that prowdes transm ission communicant ions serwces to t he public for hire, and that must provide serwces to all who wish them, at established rates. Common carriers offer services over Iandllne wire, (electrical or optical) cable, point-to-point m Icrowave radio, land mobl Ie radio includlng cellular systems, or satellite systems.

14 The Mass Media Bureau IS responsible for policy and rulemaking in the areas of tradlt!onal broadcasting, cable television, and emerging video technologies. The Private Radio Bureau regulates private radio use. In addition, t he Off Ice of Engineering hasresponsiblllt y for frequency allocat ion and technical standards, and the Field Operations Bureau is responsible for radio enforcement activities. All part iclpate In, for example, proceedings of the International Telecommunlcatlons Union. ‘5 The Office of International Communications (OIC) notes t hat it “E not intended to replace [the] technical and legal expertise and experience” oft he Bureaus. Trade Issues often cut across a num ber of bureaus and offices and are coordinated by OIC; since these issues most often concern common carriers, “continued participation In trade negotiations by the Common Carrier Bureau IS deemed essential.” Page 165 . . — ----

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Because of the way the Commission is setting telecommunications policy lodged appointed, it clearly reflects the party and either in the FCC, a nonexecutive agency, or policy orientation of the President.16 Never- in the Department of Commerce, 18 which fell theless the FCC’s relative independence is within the oversight of active congressional attested to by the fact that it is sometimes committees that would have their own tele- spoken of within the executive branch agen- communications agenda. cies as “a congressional agency. ’ FCC The position of U.S. Coordinator for decisions, as directives of an independent International Communications and Informa- regulatory agency, are not subject to presi- tion Policy was therefore created by statute dential veto, yet these decisions may have in 1983, placed in the State Department, and important international ramifications (as in assigned the rank of Ambassador. The Bu- recent FCC decisions on accounting rates). reau of Communications and Information Critics speak of a ‘‘presidential veto issue,’ Policy was established by the Department to arguing that ‘‘when FCC gets into interna- support this position. The Coordinator was tional policy it is intruding on Presidential to chair a Senior Interagency Group that turf. ‘ ‘‘7 This is a source of some strain would be the primary coordination mecha- between the FCC and executive agencies. nism for about 14 Federal agencies and subagencies. The Department of State and the The Department of State was an unlikely Bureau of Communications and site for coordination of telecommunications Information Policy policy, since the desired coordination was to After the Office of Information Policy was apply to domestic as well as international taken out of the White House, it became clear issues and since the Department has never that some mechanism was needed to “coor- been a hospitable environment for scientific dinate’’—or mediate-–between NTIA, the or technological initiatives. Its science- The Department FCC, and other agencies sometimes in- related divisions have not had much power of State was an volved in telecommunications policy issues. or prestige. However, this location could be unlikely site for Tension often ran high between NTIA, with justified on the grounds that it was necessary coordination of its pronounced pro-competition stance, and for the United States to speak with one voice international the FCC, which some critics (in the execu- in international teleccommunications fora. It telecommunications tive branch) said was less wholly committed also gave leaders of congressional trade and policy among 14 to free market ideas, at least where these foreign affairs committees some oversight Federal agencies. would diminish its own authority. over international telecommunications (the The Administration that took office in House, in 1983, was controlled by the 1981 reportedly did not want dominance in Democratic Party while the Republican Party

‘G The former Chair of the Commission, Alfred Sikes, pointing out that telecommunications deregulation began under President Carter’s Administration, has said that recent telecommunications history would be only a little different under a Democratic president. (Remarks at a Sem inar on “Transatlant Ic Competition: U. S.-U.K. Stakes in the Telecom Regulatory Game,” Nov. 5, 1991.) 17 Interview (Nov. 18, 1990) with Ambassador Diana Lady Dougan, former Coordinator for Communications and Information Policy, now at the Center for Strategic and International Studies, Washington, D.C. Page 166 18 Interview with Dougan, cited, footnote 17, Nov. 28, 1990. How Telecommunications Policy Is Made

held the Senate and the White House). multinational corporations that rely heavily Finally, the State Department had the advan- on telecommunications networks, but there tage of being somewhat removcd from the is no provision for direct representation of a internecine struggles cm the domestic scene more general public interest except as may over divestiture and deregulation. be assumed to be represented by the FCC. CIP is designated in legislation as the Only in its first few years did CIP actively principal adviser to the Secretary of State on exereise its role of coordinating Federal international telecommunications policy is- communications policy development among sues, and as ‘ ‘coordinator with other U.S. the various agencies. It now confines itself Government agencies and the private sector chiefly to an administrative role in coordi- in the formulation and implementation of nating participation in international confer- international policies relating to a widc range ences, and is not considered by other agen- of rapidly evolving communications and cies to be a serious factor in developing information technologies."19 The Bureau is policy positions. It has been ineffective as a the official overseas spokesman on telecom- generator, implementor, or articulator of munications issues and to some extent on policy. The real coordination among agen- trade issues related to telecommunications. cies on telecommunications policy comes CIP is not however empowered to negotiate about less fomally, through the interactions legally binding trade treaties, as is USTR. of a relatively small group of people who In reality, CIP acts in international fora as have, over the last 10 or 12 years, moved the spokesperson and facilitator for teams about the Washington telecommunications made up of industry reprentatives and scene, holding positions in two or more experts drawn from other Federal agencies.20 agencies and in the Washington offices of CIP has a very small staff and little technical telecommunications firms and industry asso- expertise: State Department policy has been c i at ions.21 to depend on industry expertise. On these The Department of Defense (DOD), with national delegations, there may be “user a broad mandate to protect national security, group" representation, drawn chiefly from with broad telecommunications networks of

‘9 The United States Government Manua/, 1991/92, p. 429. 73 For example, a U.S. delegation cochaired by CIP and NTIA to an ITU meeting In Prague in November 1991, Included 35 people, including 11 from government (NTIA, Cl P, the FCC, and Office of Technology Assessment) and 24 from Industry and law firms. (The Agency for International Development was represent ed, but not USTR or ITA, since t hls meet I ng d id not Involve t rade negot Iat ions.) The In dust r y people were sent by the long-distance common carriers and Bell operating companies, mostly from their Washington government affairs offices, Several equipment manufacturers and investment bankers attended, as well as some lawyers representing their own firms. “ The Off Ice of Technology Assessment has identified at least 11 people who have served in the top levels (dlwslon or bureau chief and above) of at least two of the three telecommunications agencies in the last 15 years. Many more have served at lower levels In two or more of the agencies. This is neither unexpected or negat Ive; there are a I Im Ited number of people with the required expert lse wi Illng to work In government rather than In Industry, with Its higher pay. —...... - . - - - -

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22 its own, and as a major user of public trade in services in the current round of telecommunications networks, often has a GATT negotiations and the special attention strong influence over telecommunications paid to international telecommunications in policy. DOD opposed the divestiture of the integration efforts of the European Com- AT&T on grounds of national security, but munity, and also because of international was overruled. It has been responsible for disagreements over accounting rates and a some restrictions on the export of telecom- variety of other issues identified in this munications equipment. DOD opposed the report, there is increasing interaction be- separate satellite policy pushed by the FCC tween telecommunications and trade agen- and NTIA; this dispute was mediated within cies. The need for coordination is also the White House, (During the first years of greater, to make sure that these interactions CIP there was regular coordination between are based on a consistent, collectively devel- the Communications Coordinator and DOD, oped policy that takes into account the full the CIA, and the National Security Adminis- range of national telecommunications goals tration, but this was allowed to lapse.) and objectives. The Department of Justice is almost al- ways present at trade negotiations. The antitrust division of the Department of Jus- The policymaking structure for tice has been deeply involved in promulgat- trade in services ing and implementing domestic telecommu- Trade policy, because of its important role nications policies since divestiture. While its in national economic affairs, is assumed to judgments do not enjoy extra-territoriality as be made at the top levels of government, in a general rule, it continues to affect the Congress and in the Executive Office. The overseas as well as domestic behavior of Constitution allocates to Congress the power U.S. telecommunications firms and services " . . . to regulate Commerce will foreign providers because of the respect, or fear, with Nations. . .’ which it is regarded by corporate lawyers. (Art. I, sec. 8), but the details of Increasingly there is a strong need for trade policy implementation, and even its better coordination not only among those development, arc largely generated in the agencies that deal with telecommunications executive branch. For more than a decade policy but between them and agencies that U.S. trade policy has been strongly aimed at develop and implement trade policies. As the broad access to markets and the progressive telecommunications industry is restructured dismantling of trade barriers. The source of because of deregulation, globalization, and this policy appears to have been rooted in a technological change, the need for an im- broad, although not universal, political con- proved policymaking structure will become sensus, analytically supported within the more pressing. Because of the inclusion of Executive Office by economic advisers to

22 Note that DOD has an Assistant Secretary for Command, Control, Communications, and Intelligence who is responsible for computing, systems security, telecommunications, and information management within Page 168 the military system. How Telecommunications Policy Is Made

recent President\.~? The Department of Com- committee, FCC because it is not an Execu- merce helps to provide background infoma- tive agency. NTIA because the Department tion and contributes to the development of of Commerce is represented by the Interna- policy. but the lead agency for the United tional Trade Administration. Representa- States in all foreign trade negotiations and tives of both NTIA and the FCC attend agreements is USTR. meetings as observers, and USTR empha- sizes that ‘‘for a number of years both United States Trade Representative agencies have played key roles i n developing All foreign trade negotiations, at least in and participating in trade policy negotia- theory. are conducted by USTR. For tele- tions. communications, the 1988 Trade Act specif- TPSC is described by some inside observ- ically gives USTR the statutory mandate to ers as ‘‘a central point for policy formula- conduct all trade talks. USTR negotiators tion." Thus. it matters that the two telecom- work from position negociated among con- munications agencies do not have a strong tending domestic interest groups and usually voice in TPSC deliberations. For example, approved at the upper (political) levels of the according to some participants or observers, government. These policy positions begin there have been times when international with paper-s prepared by USTR in consulta- bilateral discussions being pursued by the tion with various agencies. In the case of telecommunications” agencies were authori- telecommunications services or equipment tatively ‘‘subordinated to GATT’ by the issues, NT I A, the FCC, CIP, and sometimes TPRC. Even at the level of the TPRC there the Department of Justice, as well as trade - is sometimes strong and persistent inter- related agencies. will be involved. USTR agcncy disagreement; there will then be points out that the diverse inputs to fomulat- negotiations at the agency-head or Assistant ing telecommunications trade policy are Secretary level, where an Interagency Trade beneficial because they reflect the highly Policy Rview Group resolves issues among diverse nature of the current telecommunica- Departments. The lead tions environment and permit relevant For international negotiations on trade agency constituency groups to be represented in issues, whether they are to be bilateral or for all trade policy development. multilateral (for example, the Canadian Free foreign trade Where there are incconsistencies or disa- Tradc Agreement and GATT negotiations), negotiations- greements in the positions of the agencies, USTR will assemble a negotiating team. The including these problems are mostly worked out in negotiations are led by USTR staffcrs, who informal meetings and telephone communi- arc not sector-specific specialists; this makes those on telecommunications cations. If they recquirc slightly more formal the team as a whole and its associated experts negotiations they may go before an intera- very important. For trade issues involving —is USTR. gency Trade Policy Staff Committee (TPSC). telecommunications services. the delegation Neither NTIA nor the FCC has a seat on this would typically includc people from the

23 For a reasoned exposition of the rationale underlying the official U.S. position on trade barriers, see Geza Feketekuty, /nterrtatmna/ Trade In Serwces (Cambridge, MA: American Enterprise Institute, 1988). For an opposing point of wew, see Clyde V. Prestowltz, Jr., Alan Tonelson, and Robert W. Jerome, “The Last Gasp of GATTlsm,” Harvard .9uslr?ess Rewew, March-Aprl I 1991, Us. Telecommunications Services in European Markets

FCC’s Common Carrier Bureau and Interna- have been worked out between USTR, carri- tional Communications Office, from NTIA, ers, and large users. from ITA’s Office of Telecommunications, from the State Department’s CIP and Eco- International Trade Administration nomics and Business Bureau, and from the In development of foreign trade policy, Department of Justice. Industry representa- the Department of Commerce acts as liaison tives are consulted but are not on the official between industry and government, and in delegation. most cases, is assumed to speak for industry Private sector representatives (both tele- to the rest of government. This is formalized communications firms and large users) are at the top levels of the Department in 25 consulted throughout the process of develop- Industry Sector Advisory Committees (ISACs), ing USTR’s negotiating positions. USTR jointly administered by the Department of has a formal and informal industry liaison Commerce and USTR. Among these are structure and holds frequent meetings with a ISAC V, which deals with electronics, in- cross-section of industry representatives. For cluding telecommunications equipment, and example, on telecommunications issues, meet- ISAC XIII, which deals with services, in- ings may be called to try to develop a cluding telecommunications services. Al- consensus among representatives of long- though the United States, as well as other distance carriers, Bell operating companies, advanced industrial countries, is often said to enhanced services providers, and other user have a “services’ economy, at least until groups as well as the formally constituted recently services were presumed to play a Services Policy Advisory Committee. The minor role in export trade. This may explain U.S. Chamber of Commerce has a Task why only 1 of 25 ISACs deals with the Force on Telecommunications, and both it services sector, in spite of its wide diversity. and the U.S. Council on International Busi- The mission of ITA, within the Depart- ness frequently advise and counsel USTR. ment of Commerce, is to aid U.S. companies Inevitably, however, tensions among com- in developing and participating in export petitors and between sectors of the industry trade by promotional events, provision of are reflected in wrangles about the negotiat- analytical services, and other forms of advice ing positions of USTR. and assistance. ITA interfaces with compa- State regulators, the Consumer Federation nies and industry associations through con- of America, and the Communications Work- stant meetings, telephone calls, etc.24 ers of America (a labor union) also are ITA has a Foreign Commercial Service, consulted in developing USTR negotiating an International Economic Policy Section positions. However, some of their represen- (with country desks), an Import Administra- tatives complain that their participation in tion Section, and a Trade Development the process is usually invited well after the Section. Included in the latter is an Office of critical elements in the negotiating position Telecommunications, with a staff of about

24 Much of the descriptions in this section rely on interviews with ITA personnel, including Roger Stechschulte, Director of the Trade Development Section (Aug. 14, 1991), and Ivan Shefrin, Industry Trade Page 170 Specialist in the Office of Telecommunications (Aug. 14, 1991 and June 23, 1992). How Telecommunications Policy Is Made

15 people. Its tasks include counseling gram, along with some other activities of companies on the potential and characteris- CIP, has been allowed to lapse. tics of foreign markets, helping firms com- Data on international pete on major telecommunications procure- The adequacy of data ments, preparing competitive assessments of service trade industry sectors, and writing chapter-s on for decisionmaking are poor. telecommunications for the Department of The fragmentation of policy responsibility Commerce’s annual Industrial Outlook and becomes more troublesome because it is other trade-related reports. 25 Other assign- compounded by lack of data needed to 26 ments, chiefly of an analytical nature, may monitor trends and detect problems. The originate in requests from the Secretary, great expansion of international trade in other Federal agencies, or industry, to help in services increases the need for data to assess developing policy positions within ITA and its status and outlook. It has, however, long upper levels of the Department of Com- been recognizcd that the dimensions of merce, international trade in services are poorly In the first years of the communications defined, the real volume and value of trans- Coordinator and the State Departments CIP, act ions is uncertain, and the data available to a formal telecommunications attache pro- analysts and decisionmakers is inadequate.27 gram was established in key foreign ports to Moreover, since the Paperwork Reduction support trade in telecmmunications serv- Act of 1980, Federal policy has been to ices and work closely with ITA, This pro- reduce the amount of data reporting required

25 The analysts use data from the Department of Commerce’s Bureau of Economic Analysis and Bureau of the Census, and from other sources; the ITA Itself is not a collector of primary data. 26A report prepared for the OffIce of Technology Assessment Ident I f led man y I im i tat ions and inadequacies in data relevant to telecommunications issues. Louis Feldner, Feldner Telecom Consult Ing, “The Status of Data Collection on International Telecommunications Services Between the U.S. and Europe,” Sept. 1, 1992. This report was based on rewew of FCC flllngs and dockets, a literature search, and over 45 direct or telephone interviews with current and former Federal agency employees, representatives of major carriers, representatives of trade assoclatlons, and other experts. 27 A.Y. Kester, Behind the Numbers: U.S. Tradejn the Wor/d Economy, Report of the Panel on Foreign Trade Statistics, National Research Council, 1992. Theoretical and emplrlcal problems in measuring services delivery or export are complex and longstanding. The same services (for example, data processing) may be imbedded in technology (a magnetic tape or floppy disk) or may be dellvered electronically. Many services cannot be counted at the border as can goods. Many must be created and delivered simultaneously, but services dellvered by an aff Illate or subsidiary overseas are not counted in trade f igures. The Council of Professional Assoclatlons on Federal Statrstlcs has also crltlclzed government data collection (Annual Report, 1991 ). The Office of Technology Assessment [n 1986 and again In 1987 strongly called attention to def iciencies in t he data on serwces, saying t hey were “subject to major sources of error.” U.S. Congress, Office of Technology Assessment, Trade in Services: Exports and Foreign Revenues, OTA-ITE-316 (Washington, DC: U.S. Government Prlntlng office, September 1986), p. iii; and U.S. Congress, Office of Technology Assessment, /nternahona/ Cornpehhon in Serwces: Banking, Buik%ng, Software, Know-how, OTA-ITE-328 (Washington, DC: U.S. Government Prlntlng Office, July 1987). Page 171 . . . .

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of industry. This policy has been strongly dominated by regulated monopolies and for criticized. 28 Congress called for better trade which there have long been international Much information data collection in the Trade and Tariff Act of coordinating mechanisms. Here too, how- that was once 1984 and again in the Omnibus Trade and ever, there are often inadequate data. For concentrated and Competitiveness Act of 1988. Recent NTIA example, it is nearly impossible to develop routinely reported reports have also pointed to important gaps comprehensive or consistent data about pat- is now dispersed 29 in data. terns in or changing levels of investment in or proprietary, In response to such criticism, some steps physical infrastructure and in research and unavailable to have been taken to improve coverage,30” but policymakers. development since the burgeoning of over- all efforts to increase data collection or seas investment by U.S. telephone compa- change reporting requirements are still given nies. This information is needed by Federal stem scrutiny by the Office of Management and state regulators to address the question and Budget (OMB) in the Executive Office of whether there is a possible decline in of the President. In 1991, President Bush telecommunications investment. approved a multiyear initiative involving all Much of the data now reported by tele- major statistical agencies to implement rec- phone operators in Europe and in the United ommendations developed by a working group of the Economic Policy Council. Through- States are considered proprietary and confi- out the government, however, progress has dential since competition has become a 32 been slowed or reversed by budget cuts. factor, and much of the rest are not Major statistical agencies lost 13 percent of comparable across national boundaries. In constant-dollar funding and more than 10 the United States the divestiture of AT&T percent of their staff from 1980 to 1988.31 and the proliferation of large numbers of It might be expected, in spite of these alternative carriers, resellers, and value- problems, that data on telecommunications -added services networks means that much services would be plentiful and readily information that was once concentrated and available since this is an industry still routinely reported is now widely dispersed

m Katherine K. Wall man has argued that “Federal statistics need to be evaluated in terms of their intrinsic worth. . . not merely as the burden they might impose.”” Losing Count: The Federal Statistical System,” ~op,dat~on Trends and Pub/ic Po/icy, No. 16 (Washington, DC: Population Reference Bureau, September 1988). m U.S. Department of Commerce, National Telecommunications and Information Information Adm inistrat ion, The /infrastructure I?epofl, 1991, and U.S. Te/ecornrnunicatiorts in a G/oba/ Economy, 1990 w B. Ascher and O. Whichard, “Developing a Data System for International Sales of Services: F)rograms, Problems, and Prospects,” P. Hooper and J.D. Richardson, /nternationa/ Economic Transactions: /ssues in Measurement and Ernpirica/ Research (Chicago, IL: University of Chicago, 1991) conclude that efforts to improve U.S. statistics on trade in services have resulted in “a lengthy list of improvements.” See also “Technical Notes” in BEA, Survey of Current Business, June 1989, for a description of some recent improvements to U.S. data on international services.

3’ David Hamilton, “Blind Data,” The Washington Month/y, October 1991, p. 41. 22 Since the mid-1980s some nations that have deregulated customer telephones do not even make public the number of telephone lines or stations. Feldner, op. cit., footnote 26. How Telecommunications Policy Is Made

and less subject to mandatory reporting.~1 cations services. Both gaps and overlaps of The loss of a central point for data collection coverage arc fortuitous. both in industry and in government is BEA is legally prohibited from disclosing causing problems for international telecom- data of individual companies; FCC data on munications organizations and for trade individual companies is, for the most part, 34 reporting organizations. More and more public, although data on international operat- services are provided by unregulated net- ing agreements, licensing arrangements, and works that do not report data at all. authorizations and concessions to foreign There are two Federal primary data collec- entities is classified confidential.ss The FCC tors for international telecommunications: does not have the resources to thoroughly the FCC and the Bureau of Economic check and verify data submitted by the Analysis (BEA) in the Department of Com- private sector, so for the most part it is merce. Both have statutory mandates to merely assumed to be complete, accurate, collect some data, and legal authority to and comparable. obligate respondents to furnish some data. Both make most of their data available to the All international carriers must report traf- public, and therefore to public interest fic and revenue data to the FCC each July 31 groups, by periodically reporting aggregated for the preceding calendar year; current data data and publishing reports on international arc never available. FCC data is on interna- telecommunications. However, the FCC col- tional message telephone services (IMTS) lects international revenue and traffic data and non-IMTS (private lines, record mes- relevant to its regulatory mission, and in for- sages, etc.). Most of the available statistics mat ion about international trade is incidental deal with voice messaging, not with data to that purpose. BEA collects a wide range of transmission and value-added services, which trade data including some on telecommuni- will be especially important in the future.

33 Feldner reports that there maybe more categories of carrier services reported to the FCC since divestiture, but the nature of these reports IS not as detailed as in the past and there are fewer FCC staff to conduct thorough data reviews. Feldner, op. cit., footnote 26, p. 9. On the other hand, U.S. international transactions m telecommunications services used to be reported to t he Bureau of Economic Analy.ws on a voluntary bas~s but are now mandatory reporting, beginning with 1988 data. 3“ For example, AT&T publlshes The Wor/d’s Telephones, but no edition has been publlshed since 1988. More than 30 percent of the world’s carriers do not report any Information, and some of the world’s largest countries (mc!udmg Germany, the UnJted Kingdom, China, India, and the former U. S. S. R.) have not reported any Information since 1979. 35 See CFR 47, chap. 1, par. 43.51. Carriers can requestconf identiallty on the grounds that public access to the data would cause “compet It Ive harm. ” The FCC grants requests for conf ident Ial It y at its discretion, and says It is generally reluctant to do so. The publlc may oppose such requests for confidentiality and could Invoke the Freedom of Information Act. Carriers prowding data on international service to the FCC may request confidential treatment for reported data on operating agreements, I icenslng arrangements, and authorizations and concessions to foreign entities Involved (n providing foreign services. The amount of data that is classified IS not reprted, This confidentiality could affect the ability of pollcymakers and congressional oversight committees to gauge the competitive Impact of FCC decisions on the market. . . . .

Us. Telecommunications Services in European Markets

Other Federal agencies, such as NTIA, vision for public comment before a major sometimes conduct public inquiries or pub- change in data collection rules. This has, for lish studies of trade in telecommunications some changes, taken as long as 6 years. services, but these generally do not produce An Interagency Task Force on Services new primary data or build consistent time- Trade Data was established by USTR in series data banks,36 U.S. trade agencies 1982, but became inactive in early 1991 for depend on the FCC and BEA for primary over 18 months; it began meeting again in data. September 1992.38 All participants seemed BEA has instituted mandatory annual to agree that efforts to improve the collection surveys of selected services transactions that of international telecommunications data, cover basic and enhanced telecommunica- slowed by budget cuts, are not keeping pace tions services; previously, on] y data on basic with accelerating changes in the structure of transmission services were available and services and the nature and volume of their only from carriers that voluntarily submitted trade. data to BEA.37 The FCC has begun collect- ing traffic data for U.S.-Canada and U. S.- Mexico traffic, which was not collected Conclusions and options before. International telecommunications policy Both the FCC and BEA are modifying has become more important in the last few their data collection and reporting mecha- years, as foreign markets for communica- nisms or installing new data systems. The tions services and equipment began to open FCC’s attempts to revise its data collection to U.S. competition. It is perhaps not surpris- have sometimes run into resistance from ing that U.S. policymaking about interna- OMB, and also suffer from ‘*institutional tional telecommunications has been a com- lag. ’ ‘ As a regulatory body operating under bination of domestic regulatory policy (fo- the rules of the Administrative Procedures cusing on deregulation) on the one hand and Act, the Commission is subject to detailed general trade or export policy (opening up procedural requirements, which require pro- foreign markets) on the other. Thus a consis-

36 The Census Bureau also collects data on communications services establishments. Its Ar?nua/ Survey of Communications Services identifies firms engaged in providing point-to-point communications services including telephone, telegraph, other message communications (such as E-mail, facsim ile, and telex), radio and television broadcasting, cable television, and other communications services such as satellite Earth stations. The survey provides estimates of operating revenue and expenses, and it breaks out telephone communications by local, long distance, and t ype of customer. However, it does not break out international services. The Census Bureau is undertaking its largest program expansion in over 40 years in the 1992 Quinquennial Economic Census, including expansion of coverage of communications. This will not include data on international services but It is possible that the next economic census, in 1997, will do so. (Information provided by Dennis Shoemaker and Mary Beth Morris, Division of Business Services, Bureau of the Census). 37 According to Obie G. Whichard, Chief of the Research Branch, International Investment Division, BEA, Oct. 26, 1992. 38 In 1989 the Interagency Task Force set up a Working Group on Information, Computers, and Page 174 Communication Services. How Telecommunications Policy Is Made

tency is established between the two, but the in foreign markets, both because there are increasing dominance of USTR in telecom- tradeoffs to be made in negotiating such munications issues tends to override or agreements and because it may neglect other restrict consideration of other goals or inter- factors necessary to enhance competitive- ests. ness (e. g., standards development, financing, Currently, most of the effective decision- domestic regulatory changes, antitrust con- making about international telecommunica- siderations, etc. ). An effective competitiveness- tions within the executive branch appears to enhancement policy implies a more inte- be done by the Office of the United States grated telecommunications policy than now Trade Representative, with NTIA in a sec- exists. ondary, contributing role. The FCC some- There has, for example, been little atten- times plays lone wolf, taking actions that tion given to long-range issues of standards- may be out of step. mistimed, or discordant setting, interoperability, or infrastructure de- with the views and objectives of trade velopment. Europe and the United States negotiators. Both the telecommunications increasingly tend to differ in the approach to industry, large telecommunications users, network architecture. In Europe, relatively and regulatory officials fear trade negotiators more centralized ‘‘intelligence’ (computeri- may make tradeoffs that they regard as zation) is integral to the network, while in the undesirable or may inadvertently lock into United States there is a tendency to use binding agreements old categories and dis- sophisticated terminal equipment, owned by tinctions that could become technologically the user. There are many advantages to the obsolete (for example, de fin it ions of basic latter approach, but building advanced capa- and enhanced services ). bilities into the network may facilitate ad- The development of telecommunications” vanced uses of telecommunications by middle- policy within the executive branch is a sized and even small firms that could not process of continuing arbitration or negotia- afford the specialized customer premises tion among several agencies, sometimes equipment. In a global economy, the com- brought together only by their collective petitiveness of smaller firms may turn out to resistance to policies proposed by Congress, or to judicial mandates. The latter have been be important; smaller firms have a better Single-minded almost entirely directed at domestic, rather track record in the United States of creating emphasis on than international, activities and structural jobs than have large corporations. Telecom- opening markets characteristics of the industry. munications policy, not trade policy, is the is not the same National policy with regard to interna- appropriate vehicle for considering strategic thing as fostering tional telecommunications-so far as there alternatives of this kind. the competitiveness is such a policy-may be both too narrow Effective development of an international of U.S. telecommu- (driven by trade considerations alone), and at telecommunications policy may require re- nications firms. the same time unfocused and ineffective. organization or strengthening of the poli- The single-minded emphasis on opening cymaking structure for telecommunications. foreign markets is not the same thing as It is becoming increasingly obvious that . . fostering the competitiveness of U.S. firms . . . Domestic telecommunications policy . .

us. Telecommunications Services in European Markets

choices have international components and public and private systems) is testimony to effects,"39 and that the reverse is equally the central importance of telecommunica- true. The lack of coherence and integration in tions in modern society. Without a coherent telecommunications policymaking has been v is ion of what telecommunications networks recognized as a problem for many years. A should be and do, the United States will be Without coherent 1951 Communications Policy Board estab- at a disadvantage as national networks merge vision of what lished by President Truman found that tele- into global networks and international rules telecommunication communications problems were being dealt of cooperation and trade are developed. networks should be, with on a “piecemeal basis” with little Given this complexity, there will continue the United Sfates prospect for developing “a total national to be a need for executive branch statement will be at a communications policy."40 During the 1960s of a national telecommunications policy that disadvantage as and 1970s there were proposals from many can reconcile the views of diverse interests. national networks sources for reorganizing or reforming the There will continue to be a need for broad merge into global policymaking structure.41 Congressional direction and legislative man- networks. Some commentators have proposed “a dates to provide the framework for national single, integrated, Executive branch agency. 42 telecommunications policy. Finally, there This does not, however, fully recognize the will continue to be a need for an independent responsibility of Congress for telecommuni- bipartisan regulatory agency like the FCC cations as a mode of interstate commerce and that implements those legislative mandates. international relations, or the persistent ne- This indicates the importance both of cessity of balancing or prioritizing compet- attention to telecommunications a t the high- ing goals for telecommunications. It is nec- est level of policy fomulation, and of an essary in policymaking not merely to resolve effective coordination mechanism at the the differences in interests within the tele- agency level where the details of policy are communications industry, or between large developed. The legislatively-designated co- producers and large users. but also to medi- ordination mechanism is the Communica- ate among competing ‘‘public interests, ’ tions Coordinator within the Department of such as domestic universal service (defined State; to provide staff support for the Coordi- in modern terms of advanced network tech- nator, the Department created the Bureau of nology), competition in world markets, state- International Communications and Informa- of-the-art infrastructure, consumer equity, tion Policy. CIP, as it is now constituted, is continuing innovation, reliability, and broad not an active and effective coordination interoperability. The sometimes conflicting mechanism for interagency activities and demands made on a national telecommuni- policies. That role has been partly filled by cations system (or more accurately, merging USTR, in the course of carrying out its duties

39 Symons, op. cit., footnote 2, p. 294. 40 Symons, op. cit., footnote 2.

4’ For example the Presidential Task Force on Communications Policy (the “Rostow Commission”) in 1967-1968, the Ash Council in 1971, and other inltiat ives described by Howard J. Symons, op. cit., footnote 2, and Henry Geller, op. cit., footnote 11. 42 For example, Henry Geller, op. cit., footnote 11. How Telecommunications Policy Is Made

under the 1988 Trade Act. But USTR is not to "coordinate the initiatives of one or a suitable vehicle for intenational telecom- more executive branch agencies and those of munications policy coordination, because its an independent regulatory body (the FCC is responsibility extends only to trade relation- generally considered to be a “congressional ships. agency")—all of which operate primarily on CIP had, and still has, a potential advan- agendas framed around domestic issues— tage as the locus for coordinating telecom- CIP is doubly handicapped by its location in munications policy. CIP’s location in the the State Department. It is regarded by the Department of State appropriately extends other agencies as peripheral or irrelevent in Congressional oversight of telecommunica- domestic policy struggles that shape the tions policy to a broad range of Congres- sister agencies own approach to interna- sional Committees. including those con- tional telecommunications. It is also re- cerned with foreign relations and with trade. garded as peripheral in agenda-setting and This meets the need to consider many decisionmaking within its own department, national goals and interests in formulating where technological questions arc seldom at teleccommunications policy--epecially when the forefront. The Department of State has treaty obligations must be evaluated in the generally neglected science and technology light of Federal and State responsibilities and in managing international relations and its perogatives. The Department of State also technology-oriented bureaus have had little has experience in operating at the interface of clout with departmental leadership. The domestic and international policy and speak- 1992 Report by the Carnegie Commission on ing for the United States in international fora Science, Technology, and Government of many kinds. blamed this on the prevalence of ‘gentlemen However, CIP also has serious disadvan- diplomats’ with ‘‘nineteenth century val- tages as a mechanism for effective telecom- ues, ‘ ‘ and callcd for steps to strengthen the munications policy coordination. It has a knowledge of science and technology within small staff, without depth in technical, engi- the Department of State and U.S. embassies neering, and regulatory expertise; it is there - abroad. 43 fore almost entirely dependent on industry- CIP status within the Department has been and especially on the narrow segment of further diminished because only USTR is industry that is able to invest considerablc empowered to negotiate telecommunications money and personnel to participate in inter- trade treaties and agreements,44 and the FCC national meetings and negotiating sessions. and NT I A largely determine the position of These are large corporations. In attempting the United States with regard to spectrum

“3 Carnegie Commlsslon on Science, Technology, and Government, Science and Technology In U.S. /ntemaflona/ ,4/fairs: a Reporl (New York: The Commlsslon on Science, Technology, and Government, 1992), “ Cl P does have responslblllty for negotiating some bilateral agreements, on International value-added networks, called IVAN agreements; It also has responslbl hi y for coordinating some multilateral nontrade agreements, such as frequency allocations (World Adm inlstratlve Radio Conference). Us. Telecommunications Services in European Markets

allocation issues .45 This effectively deprives international fora where foreign government CIP of several vital functions with regard to representatives are highly sensitive to status. international telecommunications policy. It could weaken the oversight of several There are several structural options for congressional committees in telecommuni- improving this situation; the broad alterna- cations policy. It would leave open the tives are: option of creating a real, effective coordina- 1. to strengthen and enhance the capabili- tion mechanism somewhere else, such as in ties of CIP as a policy coordination the Executive Office, but even this could be mechanism, or confused by the continuing existence in the 2. to abolish CIP and create an effective Department of State of the legislatively policy coordination mechanism else- mandated position of Telecommunications where, possibly in the Executive Of- Coordinator with Ambassadorial rank. fice of the President or in NTIA. One possible option for achieving better coordination of telecommunications policy The State Department is (in the summer of 1993) about to adopt a third option—that of formulation is to abolish CIP and shift its downgrading CIP, now a Bureau headed by functions to some other part of the Federal the Coordinator, and placing its functions structure. Old line State Department officials within the Department’s Bureau of Econom- would probably be unlikely to object to this, ics, Business, and Agriculture. Telecommu- since CIP is not embedded in the Depart- nications responsibility would no longer be ment’s power structure and is said to be vested in an assistant secretary but in a regarded as something of an anomo]y within deputy assistant secretary, one of five within the Department. This option would however the bureau, This would require legislative presumably require Congressional action, ratification, since the post of Coordinator, because the position of U.S. Coordinator is with ambassadorial status, is statutorally set by legislation. It would be resisted by the established. industry groups on whom CIP relies for This appears to be the least desirable of the making up or supporting its delegations to three broad options. Reorganization of this international meetings, since it could deprive kind is unlikely to enhance CIP’s ability to them of entree into some negotiating fora. A coordinate or provide policy leadership. It greater objection to abolishing CIP and would instead further diminish CIP’s ability transferring its mandated role as coordinat- to coordinate or negotiate with the other ing mechanism is that this would probably agencies, already nearly non-existent be- remove international telecommunications pol- cause CIP is a small bureau attempting to icy formulation and implementation from “coordinate” large agencies. It would be oversight by congressional committees re- perceived abroad as a downgrading of the sponsible for foreign affairs and trade. importance of telecommunications policy It would also leave open the question of and would lessen the authority of CIP in the appropriate locus for the necessary coor-

45 U.S. Congress, Office of Technology Assessment, The 1992 U/odd Administrative Radio Conference: Tmhno/ogy and Po/icy /rnp/ications, OTA-TCT-549 (Washington, DC: U.S. Government Printing Office, Page 178 May 1993). —

How Telecommunications Policy Is Made

dination between NTIA and the FCC or ganization, restaffing, and refunding. CIP among the several other government agen- would need a still small but highly qualified cies that will from time to time have strong staff with knowledge of advanced communi- positions on teleccommunications issues. The cations and computer technology and of obvious place for such coordination to occur, political, economic, and regulatory condi- provided the new Administration places high tions affecting the telecommunications in- priority on telecommunications issues, is dustry here and globally. It would also be within the Executive Office, possibly within possible to mandate a larger, perhaps co- the National Economic Council or in the equal, role for CIP in telecommunications Office of the Vice President, who has taken trade issues that now fall entirely to USTR. the lead in discussions about the future This would improve CIP’s relative power telecommunications infrastructure. The Of- status with its parent Department, and to fice of Telecommunications Policy (OTP), some extent with the other executive agen- which existed in the Executive Office of the cies. However, in the interest of CIP’s President from 1970 until 1978, could be primary role of coordination, care would reconstituted. This opt ion, however, cannot have to be taken that its role not be limited be effective unless it is initiated and fully supported by the President. solely to international or trade issues. Alternatively, CIP itself might be strength- Improving ClP’s position within the State ened and reinvested with its original mission Department could be done only with the full of active policy development and coordina- support of, and ideally at the initiative of. the tion. This suggests that international tele- Department’s top-level administrators and communications policy would be recognized decisionmakers. Improving CIP’s ability to as an important part of domestic telecommu- act as a leader and as a mediator of other nications policy and distinct from, yet closely agencies. on telecommunications issues would related to, general trade policy. To reinvigor- require the political attention and nurturing ate CIP would likely require decisive reor- of executive and congressional leadership.

Page 179 International Investment and Domestic Infrastructure CHAPTE9R

A MAJOR PUBLIC POLICY DEBATE is shaping On the other side, some state regulators up over the modernization of the U.S. and consumer group representatives object telecommunications infrastructure. The de- to proposed large investments in moderniz- bate is framed primarily in terms of domestic ing public networks, on the grounds that technology policy. but is closely linked to residential and small business subscribers the subject of international teleconmmnica- will find themselves paying for capabilities tions and trade in services. The linkage is in and services that benefit only large corpora- two prevalent assertions: tions. A highly advanced domestic communica- The term ‘telecommunications infrastruc- tions infrastructure may be necessary to ture’ has become popular to denote the sustain long-term competitiveness in world facilities, networks, and equipment used to markets, but deliver telecommunications services; it is Some analysts excessive investment overseas by U.S. often extended to include organizations and believe that there telecommunications firms could lead to people. The term acknowledges that tele- is a decline in ‘‘disinvestment’ in domestic communi- communications is not merely a set of U.S. infrastructure cations networks, or in research and devel- tradeable services but also a basic part of the quality relative to opment (R&D). structure of industrial societies that is essen- that in other tial to social cohesion, governance, eco- The latter concern has been expressed by advanced nations. nomic viability and equity. Even in purely some State regulators, public interest group economic terms, many people hold that representatives, and independent analysts, “investments made in an advanced telecom- who say the drain of capital from local and munications infrastructure are justified on regional operating companies for investment the basis of benefits that are realized at the in overseas ventures is causing a decline in macroeconomics level, over and above any telephone industry investment in domestic direct benefits to individual enterprises. ’ networks. Some believe there is already a On the other hand, critics have warned that decline in infrastructure quality compared the use of the term, especially by U.S. with that in other advanced nations. carriers, is sometimes ‘‘self-serving and The objection to overseas expansion is not instrumental because it is intended to to international trade in services, which is suggest that the networks are imbued with almost invariably seen in positive terms, but the public interest and, thereby, merit direct to the preponderance of overseas direct public investment and regulatory relief.2 investment through subsidiaries and joint Within the scope of this report on U.S. ventures. These investments by carriers are telecommunications firms in European mar- sometimes assumed to compete for capital kets, there is no room to address the complex and for management attention with domestic arguments and counterarguments about how infrastructure modernization.

I Bruce L. Egan and Steven S. Wlldman, “Investing in the Telecommunications Infrastructure: Econom ics and Policy Considerations,” Institute for Information Studies, Annual Review, A Afationa/ /r? fonnafbn Network-Changing Our Lwes m the 21st Century, 1992, p. 29. p Oscar H. Gandy, Jr., “Infrastructure: A Chaotic Disturbance in the Policy Discourse,” Institute for Information Studies, op. cit., footnote 1, pp. ix ff. Page 181 . ——.

us. Telecommunications Services in European Markets

much domestic infrastructure modernization Infrastructure modernization should occur and who should pay for it, or The superiority of the U.S. network was whether the United States should construct a generally accepted for decades, but is now “National Information Infrastructure’ or being questioned. Some analysts claim the “electronic superhighway, ’ This chapter Nation’s telecommunications infrastructure will, however, address the narrower question is, if not deteriorating, at least no longer that directly relates international trade in clearly the world’s best. Robert G. Harris of telecommunications services to this domes- the University of California at Berkeley, tic telecommunications policy issue: William Davidson of the Management Edu- Is there evidence that growing overseas cation Services Association, and Kenneth investment by regulated U.S. telecom- Robinson, former assistant to Chairman munications operators is resulting in a Alfred Sikes of the Federal Communications significant decline in domestic invest- Commission (FCC), are among those who ment, either in modernizing of physical believe that the quality of the U.S. telecom- facilities or in research and develop - munications infrastructure is slipping and ment? could fall behind that in Europe.4 Harris says: International comparisons [B]y the late 1980’s the United States no longer [had] a telecommunications Two kinds of investment must be consid- sector far superior to that of other ered: investment in infrastructure moderni- nations, in the quality or extent of the zation, and longer-term industry investment network, in the range of communica- in R&D. According to many researchers on tions or information services available innovation and competitiveness: through the network, or even in the Facilities for basic research. . . can be underlying technological prowess. s considered as an increasingly impor- tant part of the infrastructure for down - Others suggest that the United States has stream technological and production ac - already been surpassed.6 These charges were tivities. 3 made so frequently and strongly that the

3 K. Pavitt, “What Makes Basic Research Economically Useful?” Research Po/Icy20, 1992, p. 109. 4 Robert G. Harris is Chairperson of the Business & Public Policy Group of the Walter A. Haas School of Business, University of California, Berkeley; William Davidson is a professor at the University of Southern California and President of the Management Education Services Association (MESA), a consulting group often used by RBOCS; see MESA, Comparative Assessment of Nationa/ Pub/ic Te/ecommunicatiorrs /nfrasfructures, April 1990. 5 Robert G. Harris, “Telecommunications Services as a Strategic Industry: Implications for U.S. Public Policy,” Michael A. Crew (cd.), Competition and (he Regdation 01 LMities (Norwell, MA: Kluwer Academic Publishers, 1991 ). G For example, Shlomo Maital argues that “the French phone system may now be the world’s best.” Shlomo Maital, “The Global Telecommunications Pict ure: Is America Being Outstripped by France?” The Brookings Page 182 Review, summer 1992, p. 41. International Investment and Domestic Infrastructure

National Telecommunications and Informa- In international comparisons, the United tion Administration (NTIA) in 1991 under- States ranked 13th in average annual indus- took a detailed assessment of the evidence try investment per main line during the There may for infrastructure deterioration.’ While the 1980s, according to NTIA, falling behind the have been a study was underway, a series of service major European countries except for the “political bias outages occurred in the summer of 1991 that United Kingdom.8 However, when the ex- toward the involved failures of software switching and penditures were partitioned into two catego- competitive signaling; these raised further suspicions ries, ‘‘expansion’ and ‘‘modernization, ’ solution” about the quality of the network. the United States ranked higher on industry to infrastructure The NTIA report concluded that the United investment in modernization.9 issues. States still holds a high ranking in interna- The NTIA report concluded that “. . .thc tional comparisons of telecommunications United States is a nation with an advanced infrastructure. By NTIA assessment, the telecommunications infrastructure, a very United States was in 1991 first in network high access-line density, a robust level of utilization, first in network reliability, and telephone usage, and a heavy emphasis on first in fiber optics deployment and common modernization. 10 It noted, however, that channel signaling. It was seventh in number ‘‘other countries may be planning to deploy of lines per 100 persons, but it was exceeded several new technologies, such as digital only by the Nordic countries, Switzerland, switching and Signaling System 7 (SS7), Canada, and Iceland, all of which for reasons more rapidly than companies in the United of geography, climatic, and population dis- States.’ NTIA then advocated increased persion put especially great emphasis on competition in local exchange markets and access to telephone lines. The United States the elimination of government-imposed bar- is far down the list in Integrated Services riers to competition such as those in the Digital Network (ISDN) capability, but ISDN Modified Final Judgment (MFJ) and cross- is not necessarily a good indicator of mod- ownership provision of the cable-telephone ernization. The lower rate of ISDN deploy- company. (See chapter 1, box 1 -A,) ment in United States reflects a trend toward There was, according to William F. Maher, a different philosophy of network architec- the NTIA Associate Administrator responsi- ture, oriented toward dispersed intelligence ble for the report, ‘‘a political bias toward a or computerization rather than centralization competitive solution’ to the infrastructure and integration (see chapter 2). issue in the NTIA report. In a statement

7 U.S. Department of Commerce, National Telecommunications and Information Administration: The NT/A /infrastructure Report: Te/ecornrnunlcatlorrs in the Age of /n/orrnatlon, October 1991. ‘ NTIA, op. cit., footnote 7, pp. 153 ff. 9 NTIA used several measures for investment in modernlzatlon, making adjustments for factors such as accounting treatment for labor costs and varying patterns of responsibility for consumer premises equipment. In t he several resultlng analyses, the United States ranked from first to sixth, either ahead of or close to the major European countries. ‘“ NTIA, op. cit., footnote 7, Executive Summary, pp. i-ii. Page 183 Us. Telecommunications Services in European Markets

provided to OTA by Maher in 1992,11 he try, there is also much corporate investment acknowledged that prior to its release, the in private network technology. Moreover, NTIA study was thoroughly examined to the figures for the United States exclude ensure that it was fully congruent with customer premises equipment, while those prevailing deregulatory policy. Thus the for foreign countries arc likely to include report recommendations and international functionally-comparable equipment belong- comparisons should be accepted with at least ing to the PTOs. The FCC says that annual a grain of salt. infrastructure investment in the United Maher said that the NTIA data, although States totals more that $50 billion, which is ‘‘limited," split almost evenly between network equip- 12 . . . appeared to contain indications that ment and customer premises equipment. a straight competitive market approach Thus, while it is widely accepted that may not be the most efffective way to investment by U.S. carriers in physical develop a superior telecommunications infrastructure is lower than such investment infrastructrure, e.g. . . . The U. S., the by many foreign PTOs, both as a percentage world’s most competitive country, is of revenues and a percentage of net profits, being eclipsed in key areas of technol- it is difficult to determine how large the gap ogy (e.g., SS7 and digital switching) by really is, what causes it, and whether all or countries that have retained a single any part of it is related to overseas invest- supplier telecommunications environ- ment. ment (e.g., France). . . ." International R&D expenditures The NTIA infrastructure report itself cau- Successful competition in international tions that other countries are rapidly catching telecommunications markets may in the long up, especially those countries in which run depend on continuing investment in investments for network modernization are R&D: supported by government policy. The United Where innovation is an important as- Kingdom, France, Japan, and Singapore It is difficult to pect of competition, the ability of a firm tell how large the have all made telecommunications moderni- to survive depends on the effectiveness zation a high priority, gap in investment of its research and development labora- is, or what Most international comparisons look only tories [and] on its ability to exploit its causes it. at investments by the public telephone oper- innovations and protect them, or to ators (PTOs) for public networks, but in the quickly match anything its competitors United States, more than in any other coun- may do.13

‘1 Maher made these statements personally in an informal meeting at George Washington University, and himself distributed the typed version, which does not however bear his name but that of J.C, Barry, Regulatory Research, and the date Nov. 12, 1991. ‘2 Statement of Robert Pepper, Chief, Office of Plans and Poltcy, FCC, In Hearings on National “Technology Policy, before the Subcommittee on Technology, Enwronment, and Aviation of the House Committee on Science, Space, and Technology, Mar. 23, 1993. 13 Richard Nelson, Understanding Technica/ Change as an Evolutionary Process (New York: Elsevier Page 184 Science Publishers, 1987), p. 6. .—

International Investment and Domestic Infrastructure

Table 9-1. R&D Expenditure R&D expenditures ($millions) Comparison: Bell Company 1985 1986 1987 1988 1989 1990 6 yr. total 6 yr. avg. Operating Companies BOC composite s 91 $ 112 $ 126 $ 306 $ 325 $ 319 $ 1,279 $ 213 vs. Domestic and Alcatel 200 237 316 330 297 386 1,766 294 Foreign Equipment AT&T 2,228 2,278 2,453 2,572 2,652 2,433 14,616 2,436 Vendors, Fiscal Years Ericsson 314 424 507 601 673 803 3,322 554 Fujitsu 530 884 1,141 1,529 1,862 1,891 7,837 1,306 1985-90 NEC 1,146 1,841 2,634 3,482 3,665 3,496 16,264 2,711 Northern Telecom 430 475 588 711 730 774 3,708 618 Siemens 1,561 2,303 3,443 3,913 3,629 4,123 18,972 3,162

R&D expenditures as a percentage of revenue Company 1985 1986 1987 1988 1989 1990 6 yr. avg .— BOC composite 0.1 % 0.2% 0,2% 0.4% 0.4% 0.4% 0.3% Alcatel 16.7 16,0 18,4 19.5 20.2 22.9 18.3 AT&T 6.5 6.7 7,3 7.3 7.3 6.5 6.9 Ericsson 8.6 9.9 9.9 11.3 11.0 10.7 10.4 Fujitsu 8.5 9.3 9.3 9.3 10,3 11.7 10.0 NEC 12.7 14.0 15.7 15.9 15.8 16.1 15.4 Northern Telecom 10.0 10,7 12.0 13.1 12.0 11.4 11.6 Siemens 8.8 11.5 12.1 10.9 11.2 11.0 11.0

SOURCE ROBERT G HARRIS, “RESEARCH AND DEVELOPMENT EXPENDITURES BY THE BELL OPERATING COMPANIES A COMPARATIVE ASSESSMENT,” 23RD ANNUAL CONFERENCE, INSTITUTE OF PUBLIC UTILITIES, MICHIGAN STATE UNIVERSITY, DEC. 9, 1991

Investment in R&D by telecomnmunica- factor that would be expected to dilute its tions companies is said by many experts R&D expenditure relative to purely technology- (even within the industry) to be lower in the development firms. United States than in Europe and Japan, both Other analysts have compared the R&D for equipment manufacturers and for serv- expenditures of the three largest U.S. firms ices companies. ( See table 9-1. )14 AT&T’s manufacturing telecommunications equip- annual expenditures for R&D from 1985 ment (AT&T, GTE, and Rockwell) with that through 1990 averaged about 6.9 percent of of the five largest European manufacturers revenues: those for European equipment for the years 1985 through 1990. U.S. manufacturers were all higher, ranging from spending on R&D increased about 2 percent 10 to 18 percent. However, AT&T is a carrier in these years (i.e., was essentially flat), as well as an equipment manufacturer, a while the Europeans’ R&D investments

‘4 Robert G. Harris, “R&D Expenditures by the Bell Operating Companies: A Comparative Assessment,” paper presented to the 23rd Annual Conference of the Institute of Publlc Utilities of the Michigan State University, m Williamsburg, VA, Dec. 9, 1991. Professor Harr~s’ data were gathered in an audit performed on behalf of the National Association of Regulatory Utility Comm Issioners. Page 185 . . —

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Table 9-2. R&D Expenditure Comparison: Bell R&D expenditures ($millions) Operating Companies Company 1985 1986 1987 1988 1989 1990 6 yr. total 6 yr. avg. vs. Foreign BOC composite $91 $112 $ 126 $ 306 $ 325 $ 319 $1,279 $ 213 Telecommunications British Telecom 226 239 305 368 361 376 1,875 313 France Telecom 298 431 449 730 595 723 3,226 538 Companies, Fiscal NTT 507 767 1,024 1,461 1,672 1,568 6,999 1,167 Years 1985-90 R&D expenditures as a percentage of revenue Company 1985 1986 1987 1988 1989 1990 6 yr. total BOC composite 0.1 % 0.2% 0.2% 0.5% 0.4% 0.4% 0.3% British Telecom 2.4 1.9 2,0 1.9 1.9 1.9 2.0 France Telecom 3.3 3.4 2.8 4.6 3.5 4 4.0 3.6 NTT 2.7 2.7 2.8 3.2 3.8 4.1 3.3

SOURCE ROBERT G HARRIS, “RESEARCH AND DEVELOPMENT EXPENDITURES BY THE BELL OPERATING COMPANIES A COMPARATIVE ASSESSMENT,” 23RD ANNUAL CONFERENCE, INSTITUTE OF PUBLIC UTILITIES, MICHIGAN STATE UNIVERSITY, DEC. 9, 1991

increased by 17 percent.’s The annual aver- Table 9-2 compares R&D expenditures by age number of U.S. patents granted to the the regional Bell holding companies (RBHCs) U.S. companies decreased by 3.2 percent (including support for their shared research during this period, while the number granted facility, Bellcore) with expenditures by BT to the European companies rose by 11 and France Telecom, a more suitable com- percent. overseas expansion by U.S. carriers parison because those firms are also carriers began growing significantly during this pe- that do not manufacture equipment and serve riod (about 1987-88), but the period also saw populations and geographical areas compa- a serious recession begin. rable to those of some RBHCs. The expendi- Table 9-1 includes for comparison the tures for R&D, as percentage of income, are R&D investments of the Bell operating respectively 7 to 12 times greater for the companies (BOCs), which are only 0.3 European PTOs than for the RBHCs. Here percent of revenue annually. This is again a also there are caveats. In Europe the trend is misleading comparison because the BOCs toward building intelligence into the net- are precluded from equipment manufactur- work, whereas in the United States the trend ing, which is generally more research- is toward placing intelligence at the periph- intensive than services. Nevertheless, invest- ery of networks, including more of it in ment in R&D is very likely depressed by the advanced terminal or customer-premise equip- regulatory separation of manufacturing and ment. This affects where investment in R&D services.1’ occurs and by whom it is made.

15 Robert T. Blau, “IS Technology the Key to Competing in Global Telecommunications Markets?” %chrdogy in Transition, 1993 BellSouth Environmental Scan, pp. 44-51. R&D expenditures by Japan’s NTT increased 19 percent in the same period, and its number of U.S. patents grew by 11 percent. Page 186 ‘G Robert G. Harris, op. cit., footnote 5. —.

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Table 9-3. R&D Expenditure on South Telecommunications in U.S. Japan Germany France U.K. Italy Sweden Korea Netherlands Spain—- Selected Countries, R&D expenditure on 1987 telecommunications 13 4.7 2.5 2.1 2.1 0.5 0.48 0.41 0.2 0.11 a a a ($ billions) Military sector 5 0 0.2a 1.0 0.7 na O.1 na O na Civil sector 8 4.7 2.3 1.1 1.4 na 0.38 na 0.2 na R&D expenditure on telecommunications as percentage of total national R&D expenditure 10 10 11 13 13 6 14 9 5 5

NOTES Estimates Conversion factor of nat(lonal currencies with purchasing power parity m U S dollars a Approxlmatlon. SOURCE HARIOLF GRUPP AND THOMAS SCHNORING, “RESEARCH AND DEVELOPMENT IN TELECOMMUNICATIONS NATIONAL SYSTEMS UNDER PRESSURE,” TELECOMMUNICATIONS POLICY, JANUARY/FEBRUARY 1991, PP 46%5.

According to this reasoning, European $2.5 billion; France, $2.1 billion; the United expenditures attributed to industry research Kingdom, $2.1 billion: and Italy, $0.5 bil- on telecommunications equipment probably lion). The conclusions of Grupp and Schnor- include much research that in the United ing are thus at odds with most other analysts, States is conducted by computer manufac- probably because they include all sources of turers. R&D funding, including military spend- 17 Since the PTOs are largely state-owned, ing. Nearly all nonmilitary R&D spending they may be a channel for national R&D in the United States comes from the carriers, support that in the United States would be the German analysts claim, compared with directed at military research or at the national about 60 percent in France and only 7 laboratories. Hariolf Grupp and Thomas percent in Germany. In the United States, Schnoring, German researchers, compared much government funding of R&D has been 10 countries in terms of R&D expenditures carried out through the Department of De- on telecommunications in 1987, and con- fense,18 while in other countries it may come cluded that levels of spending reflected the from nonmilitary agencies; so this compari- size of national economies (see table 9-3. ) son may reflect national differences in public They ranked the United States first ($13 administration rather than differences in bill ion), followed by Japan ($4.7 billion) and government/industry research funding, the four large European countries (Germany,

‘7 M[lltary R&Don telecommunications, according to Gruppand Schnoring, has significant splllover benefits for clvlllan telecommunications. Harlolf Grupp and Thomas Schnoring, “Research and Development In Telecommunications: National Systems Under Pressure,” Telecommunications Policy, January/February 1991, pp. 46-65. See also Thomas Schnoring, “European Telecommunlcatlons R&D Systems m Transltlon,” Wissenschaftliches Institut fur Kommunikationsdienste GmbH, Bad Honnef, Germany, December 1992. ‘8 Federal Government funding supports nearly half of the communications R&El performed by Industry, according to the National Science Foundation, /Vationa/ Patterns 01 R&D Resources: 1992, NSF 92-220, October 1992, table 3, p. 19. Page 187 .-

U.S. Telecommunications Services in European ‘ Markets

Trends in infrastructure modernization According to the U.S. Telephone Associa- Telecommunications Plant tion, the value of U.S. carriers’ current plant Exchange Carrier grew only 3 percent from 1980 to 1989 (in Plant and constant 1980 dollars), and the value of Revenues, annual construction appears to have de- 120 1980-89 creased strikingly between 1980 and 1989. (See figure 9-1.) In 1980 dollars, it decreased 80 40 percent from 1980 ($21.2 billion) to 1989 ($12.6 billion). In 8 of the 9 years, construc- tion declined from the previous year or was stable (increasing 1 percent or less). FCC figures for ‘reporting local carriers indicate that from 1985 to 1989, the value of gross plant grew by 6 percent (in constant dollars) but it did not increase from 1987 to 1989.19 (See figure 9-2. ) Each year from Most of the available international com- 1986 through 1989, the value of annual parisons are highly questionable on several construction declined from 2 to 10 percent grounds, including differences in industry over the preceding year, from $15, 1 billion structure, regulatory requirements, and ac- in 1985 to $12.3 billion in 1989, in 1980 counting procedures. What is included in dollars. (Annual revenues also declined by 3 “R&D expenditures” and the meaning of percent in constant dollars in the same “net income’ may differ. period.) Construction increased slightly in 1990 and 1991, as did revenues. During the The question of domestic 4 years 1988-91 (the only years for which disinvestment data is available), the value of gross plant for the seven RBOCs declined just over 3 Assuming that investment by U.S. tele- percent in constant dollars; the value of communications firms in physical modern- annual construction was steady.zo These ization and in R&D is below that in Europe, figures include both expansion and moderni- this still does not address the narrower zation expenditures. questions of whether it is declining, and Interpreting these trends is complicated, specifically whether it declined after over- however, by the fact that the cost of com- seas expansion became common and as a puter and telecommunications equipment result of the increasing overseas investment. (e.g., fiber optics) was decreasing during

19 FCC figures are for reporting carriers only, i.e., all regulated local exchange carriers. In 1984 RBHCs/RBOCs were separated from AT&T, and those figures may not be comparable to later figures. Page 188 20 FCC Statistics of ComrnorJ Carriers, 1988-89, 1989-90, 1990-91, 1991-92, table 2-7, each volume. International Investment and Domestic Infrastructure

these years, The way in which several Telecommunications is among the indus- factors--cost trends, divestiture and separa- tries that have generated positive social tion of equipment and services provision, externalities from R&D; it can be shown that and overseas investment—interacted rides advances in telecommunications systems conclusions on the basis of this evidence and services have benefited most sectors of questionable. A decade or less, in which American life and society, have been essen- there were several major disruptions, does tial to national security, and have supported not provide reliable trend data. Further, the the rise of major industries. Professor of numbers are themselves suspect because of business Robert C. Harris says that R&D several industrywide changes in accounting expenditures in leading-edge technologies procedures promulgated by the Financial such as telecommunications equipment and Accounting Standards Board.21 services generate tremendous positive spill- overs that accrue to those who use and those Trends in research and development who supply the product or process innova- 23 Expenditures for research, development, tions that flow from R& D." But the recent and engineering are also a long-range invest- status and future prospects for telecommuni- ment in infrastructure modernization. As cations R&D is obscured, for public poli- noted by political scientist John Zysman: 1980 $billions Figure 9-2. . . . [C]ertain industries may be more 200 Local important than others because they Telecommunications generate benefits for the rest of the Gross plant 160 Exchange Carrier economy, and government policies to Gross Plant promote or protect them can improve and Revenues, 120 welfare by fostering these spillover 1984-91 effects. High-technologogy industries are likely to generate positive externalities because of the knowledge generated by their research and development activi- ties, and because the benefits of this know’ledge cannot be completely ap- propriated by the private agents who pay the costs for the generation of such knowledge. 22

2’ The Financial Accounting Standards Board (FASB) is a nongovernmental entity authorized by the U.S. Securltjes and Exchanges Commission to set financial accounting and reporting standards for business organizations for which stocks are publicly traded. It made changes in accounting procedures for telecommunications carriers m 1982, 1986, 1987, and 1989 (FASB Statements 71, 86, 87, 89). This Introduces dlscontlnulties in time-series data. Information courtesy of Mark Card In, FASB. 22 John Zysman, “Trade, Technology, and National Competition,” International Journal of Technology Management, vol. 7, No. 1-3, 1992, p. 169. 23 Robert G. Harris, op. cit., footnote 14, p. 2. Page 189 Us. Telecommunications Services in European Markets

cymakers, by a dearth of reliable data. As tions), including RBHCs’ support for pointed out in chapter 8, divestiture and Bellcore, is not reported. Financial state- deregulation together with longstanding gov- ments that the RHOCs make to the Securities ernment policy toward industry data collec- and Exchanges Commission (Form I Ok) tion have resulted in deficiencies in the unanimously list R&D expenditures as "N.A." information available to policy makers. (nonavailable). The Bureau of the Census conducts an Attempts to identify trend lines in research annual Survey of Industrial Research and expenditures by major carriers are further Development on behalf of the National confused by the lack of consistent time- Science Foundation (NSF) .24 Individual cor- series data resulting from the many disconti- porate responses are protected by law and nuities: divestiture and reorganization, only highly aggregated data are available to changes in accounting procedures, and ac- policy makers and the public; the way cate- quisitions. *7 The implications of the obser- gories are defined makes it impossible to get vations reported below, therefore, contain a comprehensive value that includes all significant uncertainties and can be consid- telecommunications R&D,25 Telephone op- ered as indicators only. erating companies with revenues over $100 The NSF reports based on Bureau of million must report research expenditures Census data indicate that R&D performed by annually to the FCC; but this data is available U.S. telecommunications equipment manu- only since 1988, and it covers only regulated facturers, including AT&T, was 117 percent 26 common carriers, including the RBOCS. higher in 1985 than in 1980, but had The research performed or funded by the increased only another 10 percent by 1990. parent RBHCs on nonregulatcd services and For comparison, R&D performed by all technologies (such as cellular communica- manufacturers was only 89 percent higher in

24 A “controlled sample” of enterprises is designed to include all large companies known to be “major performers of R& D,” according to analysts at the Bureau of the Census. A long detailed questionnaire is used in odd years and a shorter form in even years. See National Science Foundation, Surveys of Science Resources Series (latest edition, Research and Deve/ojmentirr /r@stry: 1989, NSF 92-307), and Nationa/ Patterns otRt?D Resources: 1992, NSF-930, October 1992, which covers government and university R&D performance and expenditures as well as industry performance and expenditures. 25 The annual dollar value of R&D performed by telecommunicate ions equipment manufacturers is reported. This would include AT&T, since company identif icat ion is by standard industrial classif ication code. Closely related R&D on telecommunicate ions performed by computer manufacturers is in a different category that aggregates all computer R&D, and telecommunications services companies are lumped with construction, engineering, and all other services providers in the single category of “nonmanufacturing companies.” 26 The data is published annually in the FCC’s Statistics of Common Carriers. R&D expenditures were not reported prior to 1988, when a new FCC reporting rule was implemented, according to the FCC’s Industry Analysis Division. 27 Research expenditures are not specifically reported to the Securities and Exchanges Commission by telecommunications companies, and the chief source of information about them are the companies’ annual reports and “Form Ms” filed with the FCC. However, the FCC doubts such figures are fully comparable across companies. (Discussions wit h Industry Analysis Section, FCC). See chapter 8 for a discussion of t he inadequacy of data for policy analysls. International Investment and Domestic Infrastructure

1985 than in 1980 but increased 24 percent from 1985 to 1990. Information supplied by AT&T indicates Total R&D operating R&D as % of that in constant dollars, AT&T’s annual Year expenditures Constant $ % Change revenue revenue research expenditures (chiefly for Bell Labs) 1984 $2,188 $2,404 $33,187 6.59 have fluctuated slightly from year to year, 1985 2,228 2,360 -1.8 34,417 6.47 but essential y remained flat from divestiture 1986 2,278 2,373 0.6 34,087 6.68 in 1984 through 1991 (see table 9-4). They 1987 2,453 2,453 3.4 33,768 7.26 1988 2,572 2,475 0.5 35,210 7.30 increased in constant dollars about 2 percent 1989 2,652 2,444 1.2 36,112 7.53 from 1987 through 1991, the period of 1990’b 2,935 2,593 6.0 62,191 4.72 1991 3,114 2,643 1.9 63,089 4.94 overseas expansion. In 1992 there was a 1992 2,911 2,414 -8.7 64,904 4.49 significant decrease in research expendi- accounting tures, about 9 percent less than 1991 in a The fluctuation 1990-91 Includes the effect of software capltalizatlon, a change In procedures. constant dollars. AT&T’s comptroller attrib- b The large jump In total operating revenue results frm mcluslon, after 1989, of access charges. uted this in part to a real decline and in part SOURCE OFFICE OF TECHNOLOGY ASSESSMENT R&D EXPENDITURES AND TOTAL OPERATING to a ‘ ‘bookkeeping artifact” related to the REVENUE FROM AT&T ANNUAL REPORTS TO STOCKHOLDERS, 197S-92. NCR acquisition. Looked at as a percentage than they were in AT&T’s years as a of reported operating revenues, research Table 9-4. regulated monopoly, and are often ‘‘hotly expenditures have been declining since 1990. AT& T Research and contested’ by the company’s business units. The AT&T Annual Report says that this Development " The profile of R&D expenditure is also . . .reflects streamlined efforts for telecom- Expenditures, changing. Infrastructure modernization de- munications network products and systems 1978-92 and a consolidation of research and develop- pends heavily on software. Bell Labs has 25,000 scientists and engineers, plus 5,000 ment efforts for computer products and ($millions) administrators and support staff, located in systems following the merger [with NCR]. ’ Constant $: 1987=0 The new president of Bell Labs, John S. 29 facilities in six states; of these, approxi- 30 Mayo, promised in July 1990 that he would mately 4,000 have doctorates. Software make the institution ‘‘. . more of a profit- development is now the dominant activity— minded industrial laboratory. ’28 An AT&T there are now more computer scientists than spokesman said that the outlook for research electrical engineers at Bell Labs. In 1992,90 expenditures is to remain flat, or shrink percent of the budget went to “develop- slightly, over the next few years.29 This, the merit," under the control of the managers of spokesman said, is a result of competitive the 20 lines of business. This allocation pressure. Although AT&T remains “deeply between development and research does not committed to research, ’ in recent years appear to have changed a great deal since R&D expenditures have been subjected to divestiture, but the physics and materials more critical scrutiny within the company

‘a Peter Coy, “The Man Who’s Running a Nutsier-Boltsier Bell Labs,” Business Week, Aug. 5, 1991, p. 69. 29 OTA interview with Gale Jackson, AT&T Comptroller, Mar. 10, 1993. 30 Michael Maccoby, “Transforming R&D Services at Bell Labs,” Research & Technology Management, January/February 1992, pp. 46-47. Page 191 Us. Telecommunications Services in European Markets

science laboratories within the research divi- Bellcore’s RBHC owners provide most of sion are being “de-emphasized.” 31 the institution’s revenue, sharing the cost AT&T officials say they are putting strong according to a formula based on the number emphasis on making the “development” of access lines owned by each company. component of R&D more cost-effective, by Their expenditures ranged, in 1992, from shortening the development cycle and get- $125.9 million for Pacific Bell upto$174.8 ting new products to market faster, and million for Bell Atlantic,33 Other income therefore the number of people in “develop- comes from research or services done for ment’ is shrinking. As a result, AT&T independent telecommunications operating officials say, the basic research component companies, government, or vendors, and of the R&D expenditure is probably rising from licensing sales. Together, these ac- relative to the development component. Crit- counted for about 18 percent of total revenue ics dispute this, saying that there has been a in 1992. pronounced shift from the long-range “near- Bellcore’s budget from its inception basic” research for which the old Bell Labs through the current year has grown 4.9 had long been famous, to much more short- percent in constant dollars. (See table 9-5.) It range market-oriented research. To the ex- tent that this is true, it would more likely be increased by 7.5 percent in real terms in the an indirect effect of divestiture, deregulation, shorter period of the RBHCs’ overseas and increased market competition than an expansion, from 1987 through 1992, after effect of alternative investment overseas. having shrunk through inflation. (It is possi- Bell Communications Research, Inc., com- ble that some of this growth is an artifact of monly known as ‘‘ Bellcore," was incorpo- changes in accounting practices that oc- Evidence of rated October 20, 1983, to provide its curred at about this time. ) However, the declining shareholders, the RBHCs, with technical proportion of Bellcore’s income provided by investment in support including research, engineering, and the RBHC owners also changed in that infrastructure and services related to emergency preparedness period; RBHCs contributions grew less than R&D is mixed.. . and national security. Bellcore does R&D in 2 percent from 1987 through 1992. but investment those technical areas where its owners, the George Heilmeier, president of Bellcore, in both is RBOCs, are not in direct competition (i.e., has said that his aim is faster product almost surely basic communications services). Most of its development. He has stepped up research in less than research results are available to all of the information technologies such as object- needed. owners, but occasionally there are “private’ oriented computing and multimedia serv- 32 projects. It also does research for some ices, and is putting less emphasis on physical other telephone industry clients such as Bell sciences. Bellcore ‘‘will move away from the Canada.

31 Peter Coy, op. cit., footnote 27, and William Sweet, “Bell Labs Reorganizes Research for More Competitive Environment,” F%ysics Today, June 1991, pp. 97-102. 32 Gary H. Anthes, “Bellcore in Search of New Ideas,” Cornpufenvor/c/, Feb. 25, 1991, p. 83. For example, U.S. West persuaded Bellcore to keep a project proprietary for 2 years. Page 192 33 Bellcore, 1992 Annual Report. International Investment and Domestic Infrastructure

academic model..."34 and its operating budget may continue to shrink over the next

0 few years. Deflated /0 Revenue Year Revenue revenuea Change from owners Employees Change Several of the RBHCs also have their own ——-— R&D units, apart from Bellcore, in order to 984 848,357 931,748 86 n/a 985 864,626 916,208 -1.7 91 n/a protect the proprietary nature of the R&D. 986 873,930 901,702 -1.2 93 n/a The most elaborate of these is NYNEX’s 987 909,902 909,902 0.9 93 7,652 35 988 984,330 947,838 4.2 92 8,237 -7.6 Science & Technology, lnc., which has 989 ,043,537 962,495 1.5 92 8,124 -1.4 346 employees in four laboratory facilities 990 ,097,198 972,090 1.0 91 8,635 +6.3 and does research in areas such as expert 991 ,139,042 972,709 0.1 90 8,239 -4.6 1992 $1,180,636 $977,752 0,5% 880/0 7,208 -1 2.50/o systems, speech reccognition and synthesis, and wireless technology. U.S. West has a Real change, 1984-1992 = +4.9% real change in owners’ contribution = +17.9% Real change, 1987-1992 = +7,5% real change in owners’ contribution = +1.7% somewhat smaller Advanced Technology — Group, and Southwestcm Bell also has an a 1987 dollars internal R&D staff. The R&D expenditures SOURCE BE LLCORE ANNUAL REPORTS, 1984 TO 1992 for- these organizations are not made public. Tab/e 9-5. petitive markets where the investment Be//core Revenue Determinants of infrastructure horizon is shorter’? and Employees, 1984-92 investment On the other hand, there are good reasons The evidence of declining telephone in- to argue that competition in domestic mar- dustry investment, in infrastructure or in kets and in thc global marketplace is neces- R&D, is mixed and indeterminate, but the sary to maintain high rates of innovation in clues are sufficient to assume that U.S. high-tech companies. industry investment in both is almost surely Those who perceivec a decline in domestic less than that needed to assume the United investment and blame it on the rush of States of continued leadership, and there are telecommunications carriers to take advan- no signs that it is rising There is, at a tage of overseas investment opportunities- minimum, logical justification for raising argue that more rapidly expanding markets two questions: in Europe offer the opportunity for highcr Will investment in infrastructure moderi- returns and more immediate payoff than zation decline, at least in the short term. does modernization of the domestic infra- through competition with investment op- structure. Domestic investments also may portunities overseas? suffer, they suggest, because they must meet Has R&D spending declined because of the inspection and challenge of state regula- the change from a monopoly market, with tors. Since companies must allocatc re- protected rates of return, to highly com- sources among competing interests, a pool of

34 Hellmeler, quoted in Em Ily Sm (t h and Peter Coy, “Pumping up the Baby Bells’ R&D Arm,” Business Week, hg. 5, 1991, pp. 68-70. 35 NYNEX Science & Technology began m 1985 but was Incorporated as a wholly-owned subsidiary In August 1991. It has laboratories In White Plalns, NY; New York City; and Cambridge and Framlngton, Massachusetts. Page 193 Us. Telecommunications Services in European Markets

investment capital (such as the RBHCs’ The most frequently cited impediment is retained earnings) is likely to be invested the Modified Final Judgment,37 which pre- disproportionately in enterprises located in vents the RBOCs from manufacturing tele- economically more favorable environments. communications equipment and offering long- Since local telephone services are growing distance service, and until recently from slowly, RBHCs are looking to expand their offering information services (see chapter 4, 38 portfolios of revenue-producing services, box 4-A). RBHCs claim these restrictions particularly video programming. However, constitute significant disincentives for con- as monopoly providers of local telephone tinued robust investment in the public- service, they currently face a number of switched network. The removal of the MFJ constraints on the services they arc permitted restrictions, they promise, will result in new to offer. and these restrictions are cited as industry investments in the network— significant disincentives for network invest- justified by their entry into promising new markets. This has been interpreted by some ment. people to mean that they would increase The 1992 Economic Report of the Presi- domestic investments at the expense of dent asserted: investments overseas. That would not be . . . it may be regulation that is discour- necessary (telecommunications companies aging firms from investing in new have very high ratings in capital markets). infrastructure. When regulatory barri- Nor would it be likely, given the growth ers are removed, competition and the opportunities projected for overseas markets ability of firms to reap the rewards of (see chapters 3 and 4). their success provide sufficient incen - A U.S. investment analyst, assessing the tives to invest in commercially viable risk that overseas expansion will create a telecommunications technologies. There capital drain on U.S. telephone operators, are firms, however, that are reluctant to concludes that: invest because they cannot be assured In most cases, this risk is minimal and of fully capturing all the benefits of has not been sufficient to warrant 36 their investments. consideration of lower ratings for the

‘G The Economic Report of the President, Transmitted to Congress January 1993, p. 179. 37 After the divestiture of AT&T in 1982, RBOCS were granted the exclusive franchise for local telephone service, which was widely regarded as a natural monopoly, and were kept out of lines of business deemed competitive. Fears of cross-subsidizing competitive or nonregulated markets (equipment manufacturing, long-distance service) with revenue from noncompetitive or regulated markets (i.e., local telephony) informed this policy choice.

3* The manufacturing ban continues to prevent RBOCS from making changes to the software in their switches. The prohibition on long-distance carriage prevents RBOCS from centralizing information services on a single gateway for their entire regions and instead requires that they install database and switching equipment in each local access and t ransport area (LATA). National Telecommunications and Informat ion Administration, The NT/A /ntrastructure Report: Telecornrnun;cafions in the Age of /n/orrnatior?, U.S. Department of Commerce, October 1991, p.215. NTIA has advocated the removal of the line-of-business restrictions contained m the MFJ and the cross-ownership prohibitions on cable-telephone company accepting the BOCS’ promise of deployment of new services and technology. International Investment and Domestic Infrastructure

U.S. telephone subsidiaries. Moreover, Under traditional rate-of-return regulation U.S. regulatory agencies would take a (the prevailing regulatory model for several dim view of any attempt to seriously decades), the carriers had an incentive to weaken the financial health of the local invest in facilities; some critics said it was an Critics telephone companies.39 incentive to overinvest. After divestiture and say that the end of cross-subsidization of local resi- incentive In addition to the MFJ, the local telephone dential rates by business and long-distance regulation companies arc confronted with a tangle of rates, regulators sought to stabilize consumer encourages other federal and state regulatory obliga- prices. Beginning in the late 1980s, more short-term cost tions. The domestic investment plans of the than half of the states adopted some form of reduction telephone companies are subject to the rather than “incentive regulation. ” This is a modified review of state public utility commissions long-term form of rate-of-return regulation, under which (PUCs), whose priorities for telecommuni- investment. cations delelopment may differ from state to the regulators set a base rate of return; state even within an RBOC’s service area. earnings above that rate are allowed but must Regulators have conflicting priorities: in the be shared between ratepayers and sharehold- 40 absence of a competitive market environ- ers. Regulators retain control over the price ment, regulators arc responsible for curbing of basic residential and small business ac- imprudent investments and possible overin- cess, but give the carrier pricing flexibility vestment that would burden customers with on competitive services offered to large unnecessary costs, and at the same time, they companies. The carrier has an incentive to must assure a sufficient level of industry reduce costs and thus increase earnings. 4l investment to prevent telephone service Incentive regulation encourages short- from degrading and to assure that it contin- term cost reductions rather than long-term ues to develop and improve. investment in infrastructure and in R&D,

39 Fitch Investors Service, Inc., “U.S. Telephone Companies Seek Fortunes Overseas,” 1993. 40 Joseph S. Kraemer, “lm proving LEC In cent ive Regulation Plans,” Pub/ic Ufihties Fortnight/y, Feb. 1,1991.

4’ The local exchange carriers are also com Ing under competitive pressure to cut costs. The alternative carriers, such as Metropolitan Fiber Systems (MFS), which are setting up local area networks to serve business customers, can undercut the local carrier because they serve only high volume users with new, high-capac[t y equipment and nonunion workers. (One report says that MFS can install a private line at a cost 40 percent below t hat oft heprimary carrier. Half of t he reduction wassaid to come f rom lower compen sat Ion for employees.) Ron Bohlln, AlIan Roth, and David L. Wenner, “Do LECS Need Magic to Cut Costs?” Telephony, Apr. 19, 1991, p. 31. The move by local carriers to cut costs has so far largely taken the form of reducing the workforce. Paclflc Telesis, for example, has cut Its workforce by 18 percent since 1984 and plans another 18 percent reduction over the next 5 years; this IS a total of about 25,000 jobs out of a 1984 workforce of 77,000. There IS concern that this com pet It Ive pressure on local earners may also discourage or delay investment ininfrast ructure and In R&D. Page 195 Us. Telecommunications Services in European Markets

according to its critics.42 The cost and risk of optics and computerized switches by allow- investment is shifted in part from ratepayers ing them to depreciate their investment in old to shareholders. Cost reductions are easier to equipment more rapidly. The FCC regulates predict and quantify than uncertain future interstate access charges through price caps; revenue from facilities enhancement. these set a mandated ceiling on consumer Some states have recognized these prob- prices and, within that range, telephone lems and arc experimenting with new forms companies can increase their profits (up to of incentive regulation. Tennessee, for ex- about 13 percent) by cutting their costs. If the ample, specifies special network investment rate of return exceeds 13 percent, customer requirements and allows faster capital recov- charges must be lowered to return half of the ery in return for accelerated investment in surplus profit to customers. Big depreciation infrastructure. The most ambitious plans are expenses reduce a company’s reportable in Illinois, New Jersey, New York, Tennes- profits. This can mean as much as $0.50 see, and Washington. New Jersey Bell is additional profit for each additional dollar of investing $1 billion by 1999 to expand depreciation .45 narrowband capabilities and begin installing Telecommunications has become a major broadband network services. Tennessee has factor in corporate site selection, especially a similar 10 year plan to achieve universal for corporate headquarters, airlines, financial ISDN availability in urban areas.43 services, and business services. States are State commissions and the FCC have caught in a dilemma of wanting good tele- another handle on investment decisions communications to attract economic devel- through the rules for equipment deprecia- opment, yet also wanting to keep their tion. PUCs typically require of telephone residential rates low and to reduce their companies very long depreciation schedules intrastate long-distance rates to discourage for net work equipment. This keeps rates low, corporate bypass.46 but also slows down the replacement of old Some consumer advocates insist infra- equipment with modern equipment.44 The structure modernization could be wasteful; it FCC has just proposed new incentives for could benefit only RBHCs and their share- local telephone companies to invest in fiber holders, and not the small businesses and

42 Bohlin, Roth, and Wenner, op. cit., footnote 40. For a counterview, see Chris Gadrowski, “Counterpoint: Don’t Shackle Incentive Regulation,” Pub/ic LMhlies Fortnight/y, Apr. 15, 1991. Gadrowski objects to regulators specifying inputs (investments) rather than outputs (level and quality of services) but acknowledges that incentive regulation can create the incentive to reduce network investment unless it is coupled with penalties for reduced service quality levels (in the form of making refunds to customers). 43 Information provided by Ronald G. Choura of the Michigan Public Service Comm ission and the Alliance for Public Technology, February 1993. 44 In Louisiana PUCV. FCC, 476 US 355 (1986), an FCC order preempting conflicting state depreciation policy was set aside. 45 “FCC Proposes Incentives for Local Phone Companies,” Te/ecom Highlights /nlemationa/, Dec. 16,1992, p. 11. 46 Paul E. Teske, “State Telecommunications Policy in the 1980s,” Po/icy Studies Review, spring 1992, vol. Page 196 11, No. 1, p. 118. International Investment and Domestic Infrastructure

households who will pay a large part of the ices (as discussed in chapter 5). The number costs. Also, it could squeeze out investments of new domestic services continues to in- There is that might otherwise go to smaller and more crease: the last 1() years have seen the no strong innovative companies. The alternative to explosion in facsimile communications, data public policy network modernization, however, appears to networking, and cellular services. New play- encouraging be reliance on very fast, high capacity ers are crowding into the industry, such as planning for the packet-switching services and other new cable TV companies and alternative access networks of technologies, often provided by alternative providers. There is vigorous competition the future. carriers, that will benefit very large corporate among equipment manufacturers, many of users concentrated in some urban centers, which are small, new operations carving out and will offer Iittle or no support for middle- niche markets. Corporations have created sized and small businesses. substantial and finely-tailored private net- At current rates of industry investment. works that arc now being integrated with the the domestic infrastructure may be upgraded public switched telephone network. As the slowly and unevenly. 47 Much more modernization NTIA infrastructure report concludes, the will be on private networks. This at Ieast United States has ‘‘a well-developed, ad- would mean that those who benefit most vanced infrastructure, characterized by a directly will pay. But some economists warn very high access-line density, a robust level that corporations may not promote intercon- of telephone usage, and a heavy emphasis on nectivity at the most desirable levels. Even ‘‘modernization."48 large users may not by themselves generate Meanwhile, there is no strong public enough traffic to justify some of the benefits policy guiding or encouraging planning for that would be possible with broad access. the networks of the future. It is by no means Alternative carriers will be attracted only in certain that the highly competitive market cities large enough to allow several compa- that has developed in the last decade pro- nies, or many companies, to reach econo- vides the incentives necessary for a level of mies of scale. investment--in infrastructure modernization and in R&D—that will be needed to keep the Conclusions U.S. teleccommunications industry and the The argument that the U.S. telecommuni- U.S. telecommunications infrastructure in cations infrastructure is in perilous decline excellent condition. Many economists say a cannot be supported on the basis of publicly competitive market economy does not auto- available information. Usage of the telecom- matically generate the optimal magnitude 49 munications network continues to increase and allocation of R&D. and is significantly higher than in European The evidence is inconclusive at best as to countries. U.S. companies operating in Eu- whether industry investment in infrastruc- rope attest to the general superiority of U.S. ture and R&D has significantly declined in telecommunications and information serv- the short period (about 5 years) of overseas

‘~ Egan and Wlldman, op. ctt., footnote 1, p. 40. “B NTIA, op. cit., footnote 7, p. 197. ‘g R/chard Nelson, op. cit., footnote 13. Page 197 U.S. Telecommunications Services in European Markets

Box 9A. T ELECOMMUNICATIONS INDUSTRY INVESTMENT : SOURCES OF

U N c ERTAINTY OR C ONFUSION

Investment Examples/ categories Caveats explanation

Domestic: Infrastructure Historical Introduction of competition; total market modernization discontinuities includes MCI, Sprint, as well as AT&T. and R&D expenditure Divestiture Separation of Bell operating companies from AT&T. Separation of services from equipment manufacturing. Changes in accounting and Financial Standards Accounting Board reporting procedures changes; comparability of income and expenditure categories before and after change is reduced or uncertain. Acquisitions, mergers, joint AT&T acquisition of NCR; RBOCs entry ventures, sales of company into cellular market. components

Decreasing technological Costs of computer power, fiber cable, costs other components decreasing; possibly more plant/equipment per constant dollar. Technological change Shift from hardware to software with different cost structure for research, de- velopment, deployment; movement to- ward “intelligent networks,” with chang- ing distribution of costs between network and customer premises equipment, also differing depreciation schedules.

expansion, or even whether it has declined as As the debate over the future of communi - a result of divestiture, several years earlier cations infrastructure builds to a head in (although this appears more likely). (See box Congress—with strong sentiment both for 9-A.) The possibility of a sustained decline repealing and for temporarily codifying the in infrastructure investment, or in long-range MFJ restrictions--RBHCs are walking a R&D, merits very close monitoring, by very thin tightrope. In making the case to regulatory agencies and by Congress, for the legislators that the present regulatory condi- next several years. (ion disfavors their core business to the point

Page 198 International Investment and Domestic Infrastructure

Investment Examples/ categories Caveats explanation

Data quality Deregulation and Paperwork Reduction Programs reduce regulatory reporting re- quirements; telecom companies refuse to divulge proprietary data, especially on R&D.

International Industry structure Government ownership vs. private sec- comparisons tor; monopoly vs. oligopoly; geographical scale.

Accounting practices National differences in accounting prac- tices and categories. Regulatory differences Varying degrees and kinds of data kept; varying public access to data. Overly broad reporting Lumping of military, civilian, public and categories private investment or expenditure. Lump- ing of network expansion (addition of access lines) and modernization (techno- logical upgrading).

Inappropriate comparisons AT&T and European equipment man- ufacturers (i.e. mixed services/technol- ogy development vs. pure technology development). RBHCs and European equipment manufacturers (i.e. services providers vs. technology developers).

SOURCE: OFFICE OF TECHNOLOGY ASSESSMENT, 1993. that overseas investments represent signifi- failed to assuage fears about cross-subsi- cantly better options, RBHCs potentially dization. heighten the concern that their captive do- The case cannot be made, from the evi- mestic customers are being neglected. The dence at hand, that R&D expenditures are companies are wary of violating MFJ rules, declining as a direct result of the flow of and the operations for regulated local tele- funds to investment overseas. It is clear, phone service are separated from the nonreg- however, that industry R&D expenditures ulated side of the business. There is no are likely to shrink, or at best to remain flat, evidence of wrongdoing, but RBHCs have in the foreseeable future, and that R&D is Page 199 Us. Telecommunications Services in European Markets

also likely to be more tightly focused on on overseas competitiveness as a result of near-term products and services innovation. unnecessary and unintended domestic policy By industry self-reports, this is an effect of or regulatory constraints. This monitoring the move toward competition in regulated as would probably have to be legislatively well as unregulated markets, and in both mandated. Major carriers have said they domestic and international markets. strongly object to any additional monitoring Many people in the industry argue that or mandatory data reporting. However, the more R&D would be performed or funded by FCC already requires common carriers to the RBHCs if they were not prohibited from report expenditures for R&D as well as for manufacturing telecommunications equip- infrastructure modernization and expansion ment. It is likely that the allocation of R&D in a standard format that could allow com- expenditures across sciences (i.e., physical parison of expenditures over time and inte- sciences as compared with information sci- gration of data across reporting carriers. A ences) might change, but whether the total new legislative mandate would probably be volume of R&D expenditures would in- needed to extend the R&D performance crease is less certain. It should be noted that reporting to the regional Bell holding com- even with the prohibition on equipment panies and to other telecommunications manufacturing in place, there is a strong services providers. Alternately, a new legis- technological linkage between manufactur- lative mandate could allow data now col- ers and users of telecommunications equip- lected by the Bureau of the Census and ment, due to continuing need to modify analyzed by the National Science Founda- network equipment, once it is in place, tion to be aggregated into smaller, appropri- through modular hardware expansion or ately designed categories to reveal long- replacement and generic software revisions.so range trends in telecommunications-related Through Bellcore RBHCs play a central role R&D and make this information available to in the development of technical advisories policy makers in a way that would protect and requirements, specifications and stand- company privacy, Standardized data on all ards for telecommunications equipment that foreign investments would also be needed. will be part of or connected to the public- However, the Bureau of Economic Analysis switched networks and that will support the already collects some information on direct development of services for domestic cus- investment in foreign communicant ions, in tomers and for export to overseas markets. highly aggregated form. The ability of U.S. telecommunications firms New reporting requirements would run to compete in overseas markets, for services directly counter to the strong effort over the as well as equipment, will very likely suffer last decade to reduce corporate reporting if levels of R&D funding and performance requirements (as described in chapter 8), and drop significantly. would possible strain the current budget of Close monitoring is needed to detect any the FCC and the data collection agencies. trends toward harmful domestic effects from Since much of this data is already reported in overseas activities, and any harmful effects one form or another, however, the additional

50 Harris, op. cit., footnote 14. International Investment and Domestic Infrastructure

reporting burden for industry would be tion, which in part depend on the varying small. Government would incur some addi- economic development strategies of their tional costs for processing and analysis. states. As a group, nationwide, they may lack A less direct alternative would be a request both the resources to carry out systematic from Congress for consultation and coopera- and coordinated monitoring. and the com- tion among state regulators, through the prehensive viewpoint to agree on priorities National Association of Regulatory Utility for national and international network devel- Commissioners, with the same end in view. opment, Moreover, this approach is not as The State regulators, by harmonizing their directly applicable to monitoring R&D regulatory practices and reporting require- trends, since this activity is less widely ments, could create a monitoring system and dispersed and the information, considered integrate information about infrastructure more proprietary, may be more difficult to modernization across state boundaries. They extract from telecommunications holding would then be able to develop joint strate- companies. However, unless some action is gies, if needed. for setting infrastructure taken to develop better information, public modernization goals and consumer protec- policy makcrs at both the Federal and state tion strategies. However, as already noted, levels will remain in the dark about poten- state regulators have some conflicting inter- tially damaging trends in telecommunica- ests with regard to infrastructure moderniza- tions investment.

Page 201 Reviewers and Contributors

APPENDIAX

Lester M. Alberthal, Jr, Abdelhak Benkirane Peter Bonfield Chairman, President and CEO Counselor, Technical Cooperation Chairman and Chief Executive Electronic Data Systems Corporation United Nations International ICL plc Telecommunication Union United Kingdom Peter Allen Consultant, Telecom Regulations Keith Bernard Evelyn Boyd American Express Europe, Ltd. Vice President Motorola International & Regulatory Affairs Dennis Amari Cable & Wireless North America, Inc. Maureen Breitenberg Legislative Analyst National Institute of Science and Bellcore Fred J. Bieganski Technology Infrastructure Development Officer Robert W. Anthony Agency for International Development Sir Leon Brittan Research Staff Member Vice President Operational Evaluation Division William Bien Commission of the European Institute for Defense Analyses International Trade Analyst Communities International Trade Commission Robert G. Atkins William R. Brittingham International Trade Specialist Mary Ann Blatch Director Office of Service Industries Chief of Government Affairs Pacific Telesis Group International Trade Administration Readers Digest Joachim Broudre-Groger U.S. Department of Commerce Robert T. Blau Foreign Office Kim M. AuBuchon Director Germany District Manager Policy Analysis C.J. Buckley Federal Government Affairs Bell South Vice President AT&T Kenneth W. Bleakley Communications and Operations Senior Deputy Coordinator Carol Balassa PARS Service Partnership and Director Director Bureau of International Jimmy Burk Telecommunication Services and Trade Communications and Information Director Office of the U.S. Trade Policy Engineering and Planning Representative U.S. Department of State Federal Express Corporation Jim Ball Henning Boe Dan Burton Associate Director Staff Director Executive Vice President office of International Telecom Denmark Council on Competitiveness Communications U.S. Federal Communications Robert R. Bohannon Ellen Burton Commission Managing Director Director HQ/International Communications Federal Relations Malcolm R. Bates American Airlines U.S. West, Inc. Deputy Managing Director The General Electric Co, Bruce Bond David Carpenter Vice President, International Affairs International Trade Consultant British Telecom Czechoslovakia Page 203 Us. Telecommunications Services in European Markets

Ulrich Cartellieri Peter Cowhey Joseph 1. Dionne Member Department of Political Science Chairman and CEO Board of Managing Directors University of California, San Diego McGraw-Hill, Inc. Deutsche Bank AC Rhonda J. Crane Janis Doran Germany Director Policy Analyst Johann Cas Federal Government Affairs Department of Comrnunications Technology Assessment Unit AT&T Canada Postgass, Austria William A. Crane Ambassador Diana Lady Dougan Margaret K. Cassidy Manager Center for Strategic & International Attorney BT Government Relations Studies Worldspan Raymond Crowell John A. Dubret Stu Chiron Director Managing Director Sprint International Industry Government Planning Communications Engineering COMSAT SABRE Computer Services Carin Christian American Airlines IC&C Imre Csorba Deputy Head of Department Georges Dupont Howard L. Clark Jr. Hungarian Telecommunications Project Manager Vice Chairman Company UNESCO, France Lehman Brothers Arpad I. Csurgay Stephen Dutton Warren Clark Deputy Secretary General International Affairs Special Advisor Hungarian Academy of Sciences NYNEX Bureau of International Marion Dabrowski Peter Eisler Communications and Information Manager, Information Technology General Manager Policy ABB Lummus Crest, Inc. Hungirocom Telecommunications, Ltd. U.S. Department of State Hungary Diane Davis John L. Clendenin AEC Solutions Bernard Ennis Chairman, President and CEO Vice President Bell South Corporation Parke Davis Advanced Engineering Department of Communications ABB Lummus Crest, Inc. Kathleen Collins Canada Assistant Director Helle R. Eriksen Jan Degraeuwe Office of International Head of Section Director Communications General Directorate Betelcom, Belgium U.S. Federal Communications Post and Telecommunications Commission Robert Devaney Denmark Peter Courtney Executive Director, International NYNEX Worldwide Services Group Douglas Caffrey Fields ITI International Finance, Ltd. Vice President Ireland Marty Dickens Information Services BellSouth International United Parcel Service Page 204 Reviewers and Contributors

Judith Fincher Hans-Peter Gassmann George V. Grune EDI/CALS Marketing Manager Organization for Economic Chairman and CEO HFSI Cooperation and Development The Reader’s Digest Association, Inc.

Stephen C, Finch Peter Gerard Jan Gruntorad International Telecommunications Deutsche Bank AG Head of Data Communications Users Group Germany Department Charles University United Kingdom Angela A. Gilroy Czechoslovakia Tim Finton Economics Division U.S. Library of Congress Counselor for Telcommunications Trade Wendell Harris Assistant Bureau Chief Bureau of International Paul Glaser International Division Communications and Information Consultant Policy FCC Common Carrier Bureau U.S. Department of State Jack Gleason Office of International Affairs Dale Hatfield James M. Flynn National Telecommunications and Hatfield Associates, Inc. EDI Services Manager Information Agency Gerhard Hausmann United Parcel Service U.S. Department of Commerce Director General Charles E.H. Franklin William R. Godwin Federal Ministry of Post and Head of Division Network Engineering Telecommunications Telecommunications & Encompass Germany Information Policies Douglas Goldschmidt Hanno Hausmann International Chamber of Commerce Alpha Lyracom Assistant Director Gabor Frischmann International Affairs Steven N. Goldstein Deutschc Telekom, Germany Director Program Director Hungarian Telecommunications Interagency & International John F. Healy Company Coordination Senior Advisor U.S. National Science Foundation Martin Fuhr United Nations Development Programme Director of Telecommunications M. Etienne Gorog John Henry The International Herald Tribune Director Office of Telecommunications France Worldwide Networking Practice International Trade Administration IBM France Lynne Gallagher U.S. Department of Commerce Director Natasha Gospic Mary L. Henze Acting Assistant Director General International Regulatory Affairs Staff Manager for R&D Sprint International Public Policy Analysis Community of Yugoslav PT&T Oswald H. Ganley Bell South Richard Grainson Executive Director Ken Herold Administratcur General Adjoint Program on Information Policy Director of Information Technology Regie des Telegraphed at Telephones Harvard University HOK Belgium Page 205 Us. Telecommunications Services in European Markets

Pierre Hessler Lothar A. Kneifel Randolph C. Lumb Chairman Debevoise & Plimpton Vice President IBM France Government Relations Zsolt Kohalmi AT&T Mark Hill Chairman Manager, Business Planning Interagency Committee on Tech Mark MacCarthy PARS Service Partnership Transfer and Export Administration Vice President Ministry of International Economic Government Relations Lyell Holmes Relations Capital Cities/ABC, Inc. Director Hungary Local Area Telecommunications Clyde Manning Fluor Daniel Peter Kral Executive Assistant Software Engineer Consultant BellSouth Corporation Pal Horvath Director General Debra M. Kriete Herbert E. Marks Hungarian Telecommunications Pennsylvania Public Utility Squire, Sanders and Company Company Commission Johan Martin-Lof Casten Jensby Andrzej Ksiezny Director, International Affairs Director Business Development Director Swedish Telecom Telecom Denmark State Agency of Tim May Radiocommunications Volker Jung Freedom of Technologies, Inc. Senior Vice President Poland Doreen F. McGirr Siemens, Germany Joanne K. Kumekawa Bureau of International Laurel B. Kamen Telecommunication Analyst Communications and Information Vice President, Government Affairs Office of Plans and Policy Policy American Express Company U.S. Federal Communications U.S. Department of State Commission Tim Kelly TK. Mclnernay Communications Policy Analyst Ann Lane Deputy Director Organization for Economic Director Global Network Bids Cooperation and Development Federal Relations AT&T Bell Atlantic Network Service, Inc. Earl Kennett James K. McKean Vice President, CCB Programs Lawrence E. Levinson Communications Manager National Institute of Building Senior Vice President The Church of Jesus Christ Sciences Government Relations of Latter-Day Saints Paramount Communications, Inc. Hal Kimball Des McLauglin Office of International Affairs W. Kenneth Lindhorst Vice President National Telecommunications and Vice President, International Services Marketing Information Administration AT&T Telecom Ireland U.S. Department of Commerce John K. Livingstone Andy Mecklinberg Steve Kindel Manager, Correspondent Relations Regulatory Policy Financial World BT North America Bell Atlantic Page 206 Reviewers and Contributors

Rudolf Meijer David Mulcaster Cynthia Nila Principal Administrator Director General, CD&P Telecommunications Policy Analyst Commission of the European Department of Communications Telecom Statistics Community Canada International Trade Administration U.S. Department of Commerce Linda Meyer Jan Muller Meyer Enterprises Czech National Council IT Consultant Tim Nulty Ceska Narodni Rada Senior Economist Loretta Michaels Czechoslovakia World Bank Manager Market Analysis Rupert Murdoch David P. O’Neill Northern Telecom Europe, Ltd. Chief Executive Staff Vice President United Kingdom The News Corp.. Ltd. Telecommunications United Kingdom Inter-Continental Hotels Group Sam Midkiff United Kingdom Managcr Mark B. Myers Communications Planning Senior Vice President Judith O’Neill PARS Service Partnership Corporate Research & Technology Steptoe & Johnson XEROX Corporation Greg Millert William G, Oates Vice President Tom Nadelhoffer Director of Telecommunications Federal Government Affairs Manager, Communications Planning World Headquarters AT&T Worldspan ITT Sheraton Corporation

Mahal Mohan Kaneo Nakamura Janice Obuchowski District Manager Counselor President Government Affair-s The Industrial Bank of Japan, Ltd. Freedom Technologies, Inc. Technology and Infrastructure Philip C. Onstad Eric Nelson AT&T Manager Director of International Affairs International Public Policy Brian Moir Telecommunications Industry International Communications Fisher, Wayland, Cooper, and Leader Associ at ion Association Martin Morell Derek Nicholas Rolf Orrsten Principal Vice President Coordinator International Affairs Network Dynamics Associates, Inc. International Telecommunications Swedish Telecom Systems John Morgan United Kingdom Jiri Orsag Vice President Computer Centre Government Relations Emmanouil Nicolaidis Prague Institute of Chemical Communications Workers of America CEPT Telecom Chairman Technology Hellenic Telecommunications Org (OTE) Czechoslovakia Mike Morris Greece Vice Chairman CEPT Telecom Bruno Oudet Deportment of Trade and Industry Scientific Attache, Information Tech. Embassy of France Page 207 Us. Telecommunications Services in European Markets

David Palmer William Ramage Bert de Ruiter Chief Executive Bechtcl Corporation Head Telecommunications and Financial Times of London Post Department J. Bradford Ramsey Ministry of Transport and Public Works Gabor Patocs Deputy Assistant General Counsel The Netherlands Manager International National Association of Regulatory Alcatel-Standard Electrica, Spain Utility Commissioners Charles Rush Associate Administrator for Scott D. Pearson Gerold Reichle International Affairs Office of the U.S. Trade Deputy Director National Telecommunications and Representative Federal Ministry of Post and Information Administration Telecommunications Kenneth Philips U.S. Department of Commerce Germany Office of Telecommunications Policy Jim Russell Citibank, N.A. Paul Reid US West Newvector Group, Inc. Head Bob Phillips Deputy General Manager Technical Organization Department Thomas R. Rutherford Land Mobile European Telecommunications Assistant Director of Engineering and INMARSAT Standards Institute, France Construction Office of the Assistant Secretary of Mogens Ritsholm Tony Phipps Defense Abt Associates Senior Engineer General Directorate of Post and Anthony M. Rutkowski Paul Pisjak Telecommunications Vice President Technology Assessment Unit Denmark Sprint Postgasse, Austria Frank A. Robert Katrina Saarinen Dietmar Plesse Commstrategies, Int. Chief Inspector Executive Officer Department for Communications Admin. Federal Ministry of Post and Kenneth Robinson Ministry of Transport and Telecommunications Attorney Communications Germany Larry Rocha Finland David Porter Wimbley Allison Tong Goo Martin Salamon Government Affairs Director AT&T Karen S. Rogers Head of Section Director National Telecom Agency Melanie Posey Government & International Relations Denmark Telecommunications Specialist Southwestern Bell Corp. International Trade Commission Dana Sauer Walda Roseman Executive Director Jean Prewitt President Integrated Construction Association Associate Administrator CompassRose, Inc. Office of International Affairs Jeanne Schaaf National Telecommunications and Richard M. Rosenberg Assistant Vice President Information Administration Chairman and CEO Government Affairs U.S. Department of Commerce Bank America Corporation BT North America Page 208 Reviewers and Contributors

Thomas Schnoring Oliver Smoot S. Blake Swensrud WIK GmbH Executive Vice President Editor in Chief Germany Computer and Business Equipment Eastern European & Soviet Telecom Manufacturers Association Report John L. Segall Vice Chairman Anna Snow Paul Teicholz Corporate Planning and Development Commission of the European Director GTE Corporation Community Center for Integrated Facility Stefan Stanislawski Engineering Eugene Sekulow Senior Consultant Terman Engineering Center Executive Vice President Analysis Limited, United Kingdom Worldwide Services Group Richard Thayer NYNEX Paul Startz Director Paul, Weiss, Rifkind, Wharton Federal Government Affairs Suzanne Settle AT&T Office of International Affairs Roger F. Stechschulte National Telecommunications and Director Dana Theus Information Administration Office of Telecommunications International Technology U.S. Department of Commerce International Trade Administration Representative U.S. Department of Commerce Office of Government Affairs Helen Anderson Shaw EDS Director Dan Stefanescu Directeur General (Develop.) Division of International Moira Thornett Telecommunications Ministere des Communications Director, Technical Support Romania National Telecommunications and Corporate Headquarters Information Administration Milan Sterba Holiday Inn Worldwide U.S. Department of Commerce Ingenieur Donald Tice INRIA Rocquencourt, France Irvan H, Shefrin Booze, Allen & Hamilton President Kathy Stewart Svetoslav Tinchev Network Performance Systems AT&T Dept. Head/Project Implementation Jerry Sincoff Ken Stowe Committee of Post Telecom- President Walt Disney Imaginering munications and Information Bulgaria HOK John Streeter Cathy Slesinger Vice President for CSFR Russ Tirella Bell Atlantic International Government Affairs Consultant NYNEX Andras Sugar Greg Tolander General Manager Corporate Director Peter Smith WESTEL, Hungary Manager Application Systems Delivery International Communications David Sun Holiday Inn Worldwide Reuters, Ltd., United Kingdom Assistant Vice President Communications Management CIGNA Page 209 Us. Telecommunications Services in European Markets

Hal Turner Obie Whichard Thomas M. Woods President Chief Research Branch Vice President Rockefeller Center International Investment Division Information Services ITT Telecom Netherlands US, Inc. Bureau of Economic Analysis Halliburton Company U.S. Department of Commerce Anton Valk Robert E. Woodyard Rockefeller Center John White Assistant Vice President PIT Telecom Netherlands, US, Inc. President Communications & Information Rick van Leeuwen Information Technology Group Services Tech. Director Texas Instruments, Inc. Delta Air Lines, Inc. Wide Area Telecommunications Robert M. White Henrikas Yushkiavitshus Lawrence K. Vanston Undersecretary of Technology Assistant Director General for CI&I Technology Futures, Inc. U.S. Department of Commerce UNESCO Olympia Vassiliadou Margaret Wigglesworth Amy Zirkle Chief Engineer Executive Director Manager Hellenic Telecommunications Coalition of Service Industries Government Affairs Organization American Express Company Greece Peyton Wynns Chief Gelencser Zsolt Martin Wassell Industry Analysis Division Financial Analyst Economic Director U.S. Federal Communications Hungarian Telecommunications Policy and Programme Commission Company International Chamber of Commerce Bjorn Wellenius Roxane Wiser Telecommunications Specialist Ameritech International The World Bank

Page 210 Acronyms

APPENDIBX

AEC architectural, engineering, and construction AID Agency for International Development (U. S.) ASST Azienda di Stato per i Servizi Telefonici (Italy) AT&T American Telephone and Telegraph (Company) ATM Asynchronous Transfer Mode ATM Automated Teller Machine BDT Bureau of Telecommunications Development (ITU) BEA Bureau of Economic Analysis, U.S. Department of Commerce BOC Bell operating company BSI BellSouth International BT British Telecom CAD/CAM computer-aided design/computcr-aided manufacturing CCITT Consultative Committee for International Telephone and Telegraph, ITU CEE Central and Eastern Europe CEETEC Central and Eastern European Telecommunications Cooperative Mechanism CEI comparably efficient interconnection CENTREX central exchange CEO chief executive officer CIP Communications and Information Policy (Bureau of, U.S. Department of State) CMEA Council for Mutual Economic Assistance, or Comecon COCOM Coordinating Committee on Multilateral Export Control CSl Coalition of Service Industries DRG Directorate of Regulatory Affairs (France) DSP digital system processing (chips) EBRD European Bank for Reconstruction and Development EC European Community EDI electronic data interchange EDS Electronic Data Services, Inc. EFTA European Free Trade Association ETSI European Telecommunications Standards Institute FCC Federal Communications Commission (U. S.) FLAG Fiberoptic Link Around the Globe (NYNEX) GATT General Agreement on Trade and Tariffs Gbps billion bits per second GEN General European Network GSDN Global Switched Digital Network (AT&T) GSM Global System for Mobile (communications), Groupe Speciale Mobile GTE General Telephone and Electronics GVPN Global Virtual Private Network (Sprint) HTC Hungarian Telecommunications Company IAB Internet Architecture Board Page 211 ICA International Communications Association us. Telecommunications Services in European Markets

IDC International Digital Communications WITS international message telephone services INTUG International Telecommunications Users Group IRI Instituto per la Ricostruzione Industrial (Italy) ISAC Industry Sector Advisory Committee ISDN Integrated Services Digital Network ISO International Standards Organization ITA International Trade Administration, U.S. Department of Commerce ITU International Telecommunication Union IXS interexchange carriers kbps thousand bits per second KDD Kokusai Denshin Denwa Co., Ltd. LAN local area network LEC local exchange carrier MFJ Modified Final Judgement MFN most favored nation (clause) MAN metropolitan area network Mbps million bits per second NAFTA North American Free Trade Agreement NARUC National Association of Regulatory Utility Commissions NREN National Research and Education Network NTIA National Telecommunications and Information Administration, U.S. Department of Commerce OECD Organization for Economic Cooperation and Development OMB Office of Management and Budget (U. S.) ONA Open Network Architecture ON? Open Network Provision OPIC Overseas Private Investment Corporation OSI Open Systems Interconnection PBX private branch exchange PCN Personal Communications Network PCS Personal Communications Services POTS “plain old telephone service” PTO public telephone operator Pi-r Postal, Telephone, and Telegraph (Administration) PUC Public Utility Commission RBHC regional Bell holding company RBOC regional Bell operating company SEED Support for Eastern European Democracies Act SIP Societa Italiana per l’Esercizio delle Telecommunicazioni (Italy) SITA Societe Internationale de Telecommunications Acronautiques SMDS Switched Multi-Megabit Data Service SONET Synchronous Optical Network SS7 Signaling System 7 SWIFT Society for Worldwide Interbank Financial Telecommunications Page 212 TCI Telecommunications, Inc. TPSC Trade Policy Staff Committee (U. S.) UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Program UPS United Parcel Service USTR United States Trade Representative, Office of (U. S.) VPN virtual private network VSAT very small aperture terminal WAN wide area network WATTC World Administrative Telegraph and Telephone Conference U.S. Telecommunications Services in European Markets INDEIX

A Bell operating companies. See also foreign investment in Central and Accounting rates, 68-69 Regional Bell holding companies; Eastern Europe, 124-125, 127 Administrative Procedures Act, 174 Regional Bell operating companies RBHCS international activities, 80-81 Advanced Intelligent Network, 35 effect of market liberalization, 60n Central and Eastern Europe AEC services. See Construction services ISDN plans, 33 causes of decay, 116-117 AIN. See Advanced Intelligent Network R&D expenditures, 185-186 CoCorn, 119-123 Airline reservation systems, 99, 100 Bellcore. See Bell Communications conclusions, 132-133 Alcatel Data Networks, 78 Research, Inc. condition of telecommunications, American Telephone and Telegraph. BellSouth Corporation, 82-83 113-116 See also Regional Bell holding BOCS. See Bell operating companies defining, 1 IO- I 11 companies British Telecom effect of Soviet policies, 112-113 antitrust case, 74 competitors, 49-51 problems with liberalization, 127-129 deregulation, 135-136 effect of market liberalization, 60n regional differences, 111-112 effect of market Iiberali/ation, 60n Syncordia project, 78n role of telecommunications, 109-110 European activities, 75-76, 131 Broadband Integrated Services Digital strategies for liberalization, 123-127 international investments, 71 Network, 30 U.S. involvement, 129-132 R&D expenditures, 191-192 13T. See British Telecom Western approaches to regional relationships, strategy for international expansion, Bureau of Communications and Infor- 1 17- I 19 78-80 mation Policy Central and Eastern European Ameritech, 86 description, 166-168 Telecommunications Cooperative Analog systems, 25n, 26 GAIT negotiation, 153-154 Mechanism, 119 Architectural services, 104-107 structural options, 176-179 CIP. See Bureau of Communications and ARPANet, 41, 43 Bureau of Economic Analysis, 173-174 Information Policy ASST. See Azienda di Stato per i Servizi Bureau of Telecommunication CMEA. See Council for Mutual Economic Telefonici Development, 118 Assistance Asynchronous Transfer Mode, 30 Bush Administration, 164, 172 Coalition of Service Industries, 154 ATM. See Asynchronous Transfer Mode CoCorn. See Coordinating Committee on AT&T. See American Telephone and c Multilateral Export Control Telegraph Cable Communications Policy Act Collection rates, 68-69 Azienda di Stato per i Servizi Telefonici, of 1984, 73 Comecon. See Council for Mutual 53-54 Cable television Economic Assistance market estimates, 66 Common Air Interface, 36 B RBHCS international activities, 81 Common Carrier Bureau, 165 Banking. See Financial services Carter Administration, 160 Common channel signaling, 26 Basic services CCITE See Consultative Committee Communications Act of 1934 market estimates, 64-65 for International Telephone and Federal communications policy, 160 problems with market access, 149-151 Telegraph formation of FCC, 164, 165n BDT. See Bureau of Telecommunication CEE. See Central and Eastern Europe preemption by provisions of NAFTA Development CEETEC. See Central and Eastern treaty, 147n BEA. See Bureau of Economic Analysis European Telecommunications Section 214, 74n Bell Atlantic, 85 Cooperative Mechanism Section 310, 4, 81n Bell Communications Research, Inc., CEI. See Comparably Eflicient Interconnection Communications Policy Board, 176 192-193 Cell relay, 29-30 Communications Satellite Act of 1962, Bell Labs, 191-192 Cellular communications 4-5, 165n

Page 215 Us. Telecommunications Services in European Markets

Comparably Efficient Interconnection, EDI. See Electronic data interchange F 33n, 44 E17A. See European Free Trade Facilities-based suppliers, 64n Congressional considerations Association FASB, See Financial Accounting encouraging export of telecommunications 800 service, 34-35 Standards Board services, 88-89 Electronic data interchange FCC. See Federal Communications policy options, 21-23 description, 103n Commission Construction services, 104-107 market estimates, 66 Federal Communications Commission Consultative Committee for International Encompass Europe, NV, 100 Computer 111 decision, 44 Telephone and Telegraph, 34, 142 Engineering services, 104-107 data collection, 173-174 Coordinating Committee on Multilateral Enhanced services. See YMue-added description, 164-166 Export Control, 119-123 services FCC Decision, 5 Cordless telephones. See Mobile Equipment. See Telecommunications international simple resale, 53 communications equipment requirement of BOCS for ISDN Council for Mutual Economic Assistance, ETSI. See European Telecommunications plans, 33 110 Standards Institute supportof international telecommunications effect on ethnic relations, 112n European Bank for Reconstruction and services, I 54-155 CSI. See Coalition of Service Industries Development, 123 Federal Express Corporation, IOOn European Community, trade agreements, Fiber optics, export restrictions, D Ill 119-120, 122 Data networks, 79-80 European Community Services Directives Financial Accounting Standards Board, Data protection directive, 98 description, 57 189n Data transmission, 94 EC Green Paper, 126, 127 Financial Network Association, 77 Defense Production Act of 1950, 5 Italy ratification, 54 Financial services, 101-104 Demand patterns, 56-59 Open Network Provision Directive, Frame relay, 29-30 Department of Defense 2, 44-45,57 France, telecommunications market, 51 research computer network, 41 telecommunications directives, 126 Freedom of Information Act, 173n telecommunications policy, 167-168 Utilities Directive, 156n Freight transport, 99-100 Department of Justice, 168 European Free Trade Association, 111 Department of State, 166-168 European market G Department of Trade and Industry, 52-53 aggregate telecommunications market, GATT. See General Agreement on Trade Deregulation, worldwide consequences, 54-56 and Tariffs 135-137 description, 47-49 GEN. See General European Network Deutsche Telekom, 51-53 estimates and projections, 64-67 General Agreement on Trade and Tariffs Digital systems, 25n, 27 importance of U.S. trade, 67-70 Agreement on Technical Bamiers to DOD, See Department of Defense long-range demand patterns, 56-59 Trade, 44 DTI. See Department of Trade and market liberalization, 60-63 building an international constituency, Industry market unification, 63-64 142-143 price trends, 59-60 changing international trade relations, E structure, 49-54 141-142 Eastern Europe, See Central and Eastern European Telecommunications Standards description, 143-144 Europe Institute, 42 general principles, 144-147 EBRD. See European Bank for Recon- Eurotel, 130 Government Procurement Code, 156n struction and Development Euroteldev, 118 long-range consequences, 155-157 EC. See European Community Exon-Florio Amendment, 5 movement toward trade policy, 139-141

Page 216 Index

negotiating GATL 15 I -155 Data, 174 L problem of basic telecommunications Interagency Trade Policy Review Group, LANs. See Imcal area networks services, 149-151 169 LATA. See bcal Access and Transport Telecommunications Annex. 147-149 Interexchange carriers, 71, 74-78 Area Uruguay Round, I 1 International Communications Association, based line services General European Network, 96 79, 154 market estimates, 64

General Telephone and Electronics, 71 international ConlpctitiJ’e Cmricr, 5 problems with European networks, Germany, telecommunications market, International Electrotechnical Commission, 93-94 5 I -53 41 n LECS. See bcal exchange carriers Global System for Mobiles, 36 International simple resale, 52-53 LEOS. See Lmw-Earth-orbit satellites Government Procurement Code, 156n International Standards Organization, 41 n Liberalization GSM. See Global S)stem for Mobiles International Telecommunication basic services problems, 149-15 I GTE. See General Telephone and Regulations, 142 defined, 145 Electronics International Telecommunication Union European countries, 60-63 Central and Eastern Europe, I 18 negotiations, 151-153 problems in Central and Eastern Europe, H description, 41 n 127-129 Holiday Inn Worldwide, 10 I purpose, 135, 141 strategies in Central and Eastern Hotel reservation systems, 101 International telecommunications HTC. See Hungarian Telecommunications Europe, 123-127 foreign carriers in U. S., 90 Compan) Local Access and Transport Area, 62n, 73n interexchange carriers, 74-78 Hungarian Telecommunications Company, bcal area networks, 30 investments, 71 I ~~ Local exchange carriers, 71 International Telecommunications Users plant value, I On, 188-189 Group, 34, 79, 154 I Lmng-distance services International telephone traffic, 67-68 IBM, international investments, 72 carriers, 71 International Trade Administration, ICA. See International Communications problems with market access, 149-151 I 70-171 Association Low-Earth-orbit satellites, 72n 1nternct, 43 IEC. See tntcmational Electrotechnical INTUG. See International Telecom- Commission M munications Users Group Incentive regulations, 195-196 Market access principle, 145-146 Industry Sector Advisory Committees, 170 IRI. See Instituto per la Ricostruzione Market liberalization. See Liberalization Infrastructure. See Telecommunications Industrial Market unification, 63-64 infrastructure Iridium project, 72n MCI Institute for Telccomrnun ications Sciences, ISACs. See Industry Sector Advisory European activities, 76-77 163n Committees Execunet Service, 57n Instituto per la Rico~truzione Im!ustriale, ISDN. See Integrated Services Digital strategy for international expansion, 54 Network 78-80 Integrated Services Digital Network 1S0. See International Standards Organization Mercury, 49, 50 Broadband, 30 ITA. See International Trade Metropolitan Fiber Systems, 195n description, 31, 33-34 Administration MFJ. See Modification of Final Judgment Intelligent Nett!ork Italy, telecommunications market, 53-54 MFN, See Most-favored na(ion status description, 28 ITU. See International Telecommunication MFS. See Metropolitan Fiber Systems routing 800 service calls, 34-35 Union Millicom, 72n Interagency Task Force on Services Trade IXCS. See Interexchange carriers Mobile communications

Page 217 U.S. Telecommunications Services in European Markets

cordless telephones, 36 1988 Montreal declaration, 145 OTP. See Office of Telecommunications demand for, 58 1988 Trade Act, 140, 153 Policy description, 30-31 section 301, 156 market estimates, 65-66 USTR mandate to conduct trade talks, P Modification of Final Judgment 155, 169 Pacific Telesis, 85-86 and decline in domestic infrastructure Nippon Telephone and Telegraph, 45n Package delivery systems, 100-101 development, 194 North American Free Trade Agreement, Packet switching, 28-29 effect on international expansion, 72-74 147 Paperwork Reduction Act of 1980, 171- Section II(D)(3), 73n NTIA. See National Telecommunications 172 Montreal declaration of 1988, 145 and Information Administration PCS. See Personal Communications Most-favored nation status NYNEX, 83-84 Services basic telephone service, 149-150 Personal Communications Ser\ices, 30 Central and Eastern European countries, 0 Portable communications. See Mobile 111-112 OECD. See Organization for Economic communications description, 144 Cooperation and Development Postal, Telephone, and Telegraph ad- Motorola, 72n Office of International Communications, ministrations. See also Public Multimedia services, 58 165n telephone operators Multiplexing, 25n, 29 Office of Telecommunications Policy, 179 effect of deregulation, 136-137 Office of the United States Trade ISDN technology, 34 N Representative Price trends, 59-60 NAFI’A. See North American Free Trade GA1’T derogation, 149 Privacy Directive, 98 Agreement international telecommunications Private networks, 35-36, 56-57 NARUC. See National Association of policy, 1 Privatization Regulatory Utility Commission negotiating positions in GATT, 153-155 in Central and Eastern Europe, 126 National Association of Regulatory Utility opening foreign markets, 140 RBHCS international activities, 81 Commission, 22 trade policy, 169-170 PTOS. See Public telephone opcratom National Information Infrastructure, 14 OIC, See Office of International PITs. See Postal, Telephone, and Tele- National Network, 50 Communications graph administrations National sovereignty, 146 Omnibus Trade and Competitiveness Act Public telephone operators National Telecommunications and Infor- of 1988, 172 partnerships with long-distance carriers, mation Administration ONA. See Open network architecture 78-79 assessment of infrastructure deterioration, OND. See Open Network Development public frame relay services, 30 183 ONP. See Open Network Provision strength of European operations, 137n description, 162-164 Open network architecture, 44 Public utility commissions, 195 formation, 160 Open Network Development, 45n PUCS. See Public utility commissions single network transmission, 73n Open Network Provision, 2,44-45, 57 support of telecommunications Open Systems Interconnection model, 41 R services, 155 Organization for Economic Cooperation Rate-of-return regulations, 195 Network management systems, 67 and Development RBHCS. See Regional Bell holding Networks, interoperability, 39-41 cost of modernizing European systems, companies 1934 Communications Act. See Com- 121 RBOCS. See Regional Bell operating munications Act of 1934 role in international agreements, 141 companies 1979 Trade Agreements Act, 139 0S1. See Open Systems Interconnection R&D. See Research and development 1984 Trade and Tariff Act, 139, 172 model Reagan Administration, 164

Page 218 Index

Regional Bell holding companies. See afso role of LJ.S. Government. 9 I T Bell operating companies; Regional travel and transportation services, Telecommunications Annex, 147-149 Bell operating companies 98- Iol Telecommunications costs, 96-97 AT&T antitrust case, 74 Sheraton reservation system, IO] Telecommunications equipment Bellcore R&D, 192-193 Signaling, 26 discriminatory procurement practices, decline in domestic infrastructure SIP. See Societa Italiana per l’Escrcizio 97-98 development, 194 delle Telecommunicayioni export restrictions, 119 international activities, 7 I, 80-87 SITA. See Socicte International de Tele- exporting, 88n regulations effecting international communications Aemnautiques sale of German equipment in U. S., 138n expansion, 72-74 SMDS. See Switched Multi- lMegabit Data Telecommunications infrastructure strategies for international expansion, Service comparisons of modernization 87 internationally, 182-184 Socicta Italiana per l’Escrcizio dclle Tele- Regional Bell operating companies. communicazioni, 53-54 conclusions, 197-201 See a/so Regional Bell holding determinants of investment, 193-197 Societe Intemationalc de Telecommunications companies modernization debate, 181-182 Aeronaut iques, 99 inter-LATA toll service, 62n question of domestic disinvestment, Society for Worldwide Interbank Financial Regional Development Conference, 188-193, 197-199 Telecommunications, 102 1 I 8- I I 9 R&D expenditures, 184-188 SONET. See Synchronous Optical Regulations Telecommunications policy Network European regulatory problems, 97-98 adequacy of data, 171-174 Southwestern Bell, 86-87 and overseas expansion, 72-74 CIP, 166-168 Research and development Soviet Union policies. 1 I 2-1 I 3 conclusions, 174-179 expenditures, 1 84- I 88 Sprint Department of State, 166-168 question of decline in expenditures, European activities. 77-78 FCC, 164-166 1 97_20 1 strategy for international expansion, ITA, 170-171 trends, 189-193 78-80 NTIA, 162-164 Resellers. Sre International simple resale Standards options, 174-179 Rural service, 115, 118 defined, 38-39 overview, 159 development, 108 structure, 160-162 s and the future, 42-45 trade in services policy structure, Satellite business services, 66 networks and interopcrability, 39-41 168-169 Satellite television, 66-67 producers vs. users, 41-42 USTR, 169-170 SEED Act. SCP Support for Eastern Stored-program contro] switching, description, Telecommunications services European Democracies Act 26, 28 changing attitudes toward services trade, Services exports Submarine Cable Landing Act, 4 138-143 construction services, I (M-107 Support for Eastern European Democ- considerations for European export, earnings of service industries, 92, 93 racies Act, 129 1-21 encouraging expansion in telecom- SWIFT. See Society for Worldwide Intcr- defined, 47n munications, 88-89 bank Financial Telecommunications encouraging foreign expansion, 88-89 European regulatory problems, 97-98 Switched Multi-Megabit Data Service, 30 European investment levels, 116-117, financial services, 101-104 119 Switching, 26, 28 policy issues, 107-108 export policy options, 21-23 Synchronous Optical Network, 28 problems with European telecommu- foreign carriers’ operations in U. S., Syncordia project, 78n nications networks, 92-97 89,90

Page 219 U.S. Telecommunications Services in European Markets

modernization of European systems, Transmission systems, 28 U.S.-Canada Free Trade Agreement, 121, 123 Transparency, 145, 147 140-141 problems with European networks, Transportation services, 98-101 U.S. Coordinator for International 92-97 Travel services, 98-101 Communications and Information problems with market access for basic Treaty of Rome, 57n Policy, 166 service, 149-151 Truman Administration, 176 U.S.-Israel Free Trade Agreement, restrictions on access to U.S. market, 140-141 4-5 u U.S. Trade Agreements Act of 1979, 44 trade deficit, 18-19 UNCTAD, See United Nations Conference U.S. West Telegraph Act, 4 on Trade and Development European cellular network, 130-131 Telephone networks UNDP. See United Nations Development international activities, 84-85 implications of change, 37 Program USTR. See Office of the United States infrastructure, 31, 32 Unisource, 78 Trade Representative privatization, 81 United Kingdom Utilities Directive, 156n Telephone penetration international simple resale, 52-53 defined, 59n telecommunications market, 49-51 v levels, 112, 113-114 United Nations Conference on Trade and Value-added services Telephone service Development, 141 description, In, 151 market estimates, 64-67 United Nations Development Program, market estimates, 65-67 operator productivity, 115, 117 118 problems with European networks, 95 problems with market access, 149-151 United Parcel Service, 100-101 Very Small Aperture Terminals, 36 quality faults, 114, 116 United States Virtual Private Networks revenues for European countries, considerations for exporting tele- description, 35-36 117, 120 communications services, 1-21 international expansion, 80 waiting time for installation, 114, 115 encouraging foreign expansion, 88-89 problems with European networks, 95 Television. See also Cable television; foreign carriers’ operations, 89, 90 VPN. See Virtual Private Networks Satellite television formulation of negotiating positions in VSATS. See Very Small Aperture EC directive concerning broadcasting, GATT, 153-155 Terminals 66n international activities, 71-72 Terminal equipment, functionality, 31 international telephone traffic, 67-68 w Three-dimensional computer assisted involvement in Central and Eastern Warsaw Treaty of Friendship, Cooper- design, 106 Europe, 129-132 ation, and Mutual Assistance, 1 I On 3-D CAD. See Three-dimensional regulations concerning international WAITC. See World Administrative Tele- computer assisted design expansion, 72-74 graph and Telephone Conference TPSC. See Trade Policy Staff Committee telecommunications services trade, Wireless communications. See ?vlobile Trade Act of 1974, 139, 172 68-70 communications Trade Act of 1988, 140, 153, 155-156, 169 trade balance, 3, 68 World Administrative Telegraph and Trade Agreements Act of 1979, 139 worldwide consequences of deregulation, Telephone Conference, 142 Trade and ‘Ikriff Act of 1984, 172 135-137 World Bank Trade balance, United States, 68-70 United States v. AT&T, 73n cost of modernizing European systems, Trade policy. See Telecommunications Universal service, 57n 121 policy UPS. See United Parcel Service market liberalization, 123 Trade Policy Staff Committee, 169 Urban service, 115, 118 Worldsource, 76

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*U.S. G. P.O. : 1993-343-283:86959