American Telecom 2006: Directions of Change Eli M. Noam Columbia Institute for Tele-Information Istanbul May 2006 1 Outline 1. Boom, Bust & Volatility 2. Consolidation 3. Broadband and Net Neutrality 4. Unbundling 5. Broadband Industries 6. Emerging Market Structure 2 Recent Phases of American Telecommunications Evolution and Policy • ~10-year phases – 1972-1982 Emergence of long distance competition – 1982-1995 Breakup of AT&T monopoly and clean- up – 1995-2005 emergence of narrowband Internet as mass medium; boom and bust • 2005- broadband convergence and impact on re-write of communications law 3 1. Boom, Bust, and Recovery 4 1990s Were the “Golden Age” of Networks • More electronic information • More users • More innovation (faster, cheaper, more functionality) 5 Boom and Bust 2000... 250 200 150 100 SP500 50 1995 SP500teleco 1996 1997 Source: 19Standard98 & Poor’s Index 1999 2000 Committees, SPGlobaldata.com 2001 2002 1 May 6 …the Bust • Telecom downturn biggest bust since collapse of railroads in 1890s • The Economist: 10 times bigger than dotcom collapse • ¾ of start-ups became gave- ups 7 Telecom’s Paradox • Telecom industry is in crisis in the midst of rapid technological progress and strong user demand 8 “Perfect Storm” or “Fundamental Instability”? 9 “Perfect Storm” Scenario • Slowing economy • Slowing Internet • Criminal managers • Incompetent managers • Dumb investors • Ignorant regulators • Sept. 11 (U.S.) 10 “Fundamental Instability” • Low marginal, high fixed costs • Competition • Price deflation • Lags in supply and in regulation • Credit cycles • Technology shocks 11 Info Sector Crash • The entire information sector-- from music to newspapers to telecoms to internet to semiconductors-- has become subject to a gigantic market crash, in slow motion. • One of the fundamental trends of our time, with far-reaching long- term effects, and it is happening right in front of our eyes. 12 Price Deflation • The main result is that prices for content, network distribution and equipment are collapsing. • Dropping toward marginal cost, which is close to zero and typically does not cover full cost. • Difficult to charge anything for information products and services. 13 Price Deflation Examples • International phone call prices collapsed • The music industry is unable to maintain prices • On-line publishers cannot charge readers • Web advertising prices have collapsed • Software prices dropping 14 U.S. Domestic Long-Haul Capacity Pricing Monthly STM-1 Lease Prices $2,000,000 $1,820,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 LA-NYC $925,000 $1,000,000 Miami-NYC $800,000 $600,000 $400,000 $200,000 $200,000 $100,000 $8,250 $3,889 $0 2000 2003 Sep-04 15 Source: Primetrica, Inc. Telegeography 2004 Average Monthly Revenue Per Minute for Mobile Telephone $0.50 $0.47 Service 1993-2004 $0.44 $0.45 $0.43 $0.38 $0.40 $0.37 $0.35 $0.29 $0.30 $0.25 $0.22 $0.20 $0.18 $0.15 $0.12 $0.11 $0.10 $0.09 $0.10 $0.05 $- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 16 Source: Calculated using Average Local Monthly Bill and Average Minutes of User per Subscriber per Month from Cellular Telecommunications & Internet Association, October 2004. Average Minutes-of- Use/Month (1993-2004) 600 548 h t n 507 o 500 r M e 427 er P 400 380 crib s b u 300 er S 255 P s U 185 O 200 140 136 e M 119 119 125 117 g era 100 v A 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1H 2004 17 Source: Cellular Telecommunications & Internet Association; Calculated using reported billable MOUs, which includes local, roaming, and prepaid minutes October 2004. International Comparisons: Average Minutes of Use Per Month: 3Q01-3Q02 500 439 450 3Q2001 h t 400 3Q2002 n 355 350 Mo r e 300 P U 250 MO 200 177 170 e 155 g 152 a 132 r 150 123 116 120 114 e v 89 A 100 72 50 0 U.S. Japan France U.K. Italy Europe Ge rmany Avg. 18 Source: Linda Mutschler, et al, Wireless Matrix - 9/01 3Q01, Merrill Lynch Equity Research, Jan. 22, 2002, at 3; Linda Mutschler, et al, The Next Generation VII, Merrill Lynch Equity Research, Feb. 21, 2003, at 32-34. 19 RBOC Capital Expenditures 40 35 30 25 illions B 20 $ 15 10 5 0 So urce: JP 1Morgan,990 1991 1992 Morgan 1993 Stanley 1994 1995 Note: Th 1996 is data exclud 1997 1998 es expenditures on 1999 2000 wireless20 facilities.01 2002 2003 20 RBOC Employees 700,000 652,388 593,825 600,000 547,638 461,730 493,902 500,000 370,450 362,740 400,000 300,000 225,040 200,000 100,000 0 1996 1997 1998 1999 2000 2001 2002 2003 Source: “The State of Local Competition 2004” Association for Local Telecommunications Service 21 CLEC Employees 120,000 106,783 100,000 70,000 78,570 76,840 69,247 80,000 56,580 60,000 40,000 20,000 0 1998 1999 2000 2001 2002 2003 Source: ALTS and New Paradigm Resources Group, Inc. Note: Employee totals exclude AT&T and WorldCom. 22 Cable Capital Expenditures 20 $18.1 $16.5 $14.6 15 $11.5 $9.9 llion i 10 $7.6 B $ $6.4 $6.3 5 0 1996 1997 1998 1999 2000 2001 2002 2003 Source: “The State of Local Competition 2004” Association for Local Telecommunications Service 23 Source: OECD’s Economics Department and Directorate for Science, Technology and Industry. 2003 24 • In 2006, Lucent gave up and merged with Alcatel as the junior partner 25 Impact on R&D: 2003-2004 2003-2004 % change Cisco 51.69% Motorola -6.57% Nortel NA Lucent 23.31% Agilent -11.13% Agere 4.50% Corning NA Broadcom -56.34% Avaya -21.95% Qualcomm 76.44% 3Com -7.25% JDS Uniphase -22.32% 26 Telecom R&D • General decline, after b reak-up of Bell Labs and of the monopoly that supported it • Decline of basic telecomresearch support by DARPA (Defense) and National Science Foundation • Decline of telecom equipment industry (Lucent, Nortel, etc) • Partly offset by data equipment industry 27 The Future of Telecom Is Volatility • The real problem is not the present downturn, but that the telecom industry is becoming inherently unstable, volatile. 28 More Trouble Ahead • The information industries will go through boom-bust cycles, of which we have merely experienced the first. • Next: broadband and wireless boom- bust cycles • As societies become information economies, they also become more volatile economies 29 2. The Major Strategy for Stabilization in the US: Consolidation 30 Local Service 3500 HHI 3000 2500 2000 1500 1000 500 0 4 5 88 96 983 98 9 992 9 001 00 006 1 1 1 1 1 2 2 2 31 Long Distance Service 5000 HHI 4500 4000 3500 3000 2500 2000 1500 1000 500 0 3 4 8 2 6 1 5 6 98 198 1 198 199 199 200 200 200 32 3500 HHI 3000 2500 2000 1500 Mobile Telephony 1000 500 0 1983 1984 1988 1992 1996 2001 2005 2006 33 • Next auction, anonymous 34 3500 HHI 3000 2500 2000 Total Telecom Services 1500 1000 500 0 1983 1984 1988 1992 1996 2001 2005 2006 35 Policy Responses to Consolidation • Basically, acceptance of mergers that were unacceptable 5 years ago • Partly because Republican Administration is less interventionist; partly because many firms would not survive • A tacit acceptance of oligopoly as most likely industry equilibrium structure 36 3. Broadband 37 U.S. Supreme Court Decision, July 2005: “Brand X vs. FCC” • Court upholds FCC that cable BB is an “information service” and not a “telecommunications service” 38 Implications • Cable TV companies’ Broadband is unregulated, and need not be open to ISPs, to content providers, or to applications providers • Need not provide unbundled network elements (UNEs) like phone companies do 39 • In Sept 2005 FCC followed up with similar Broadband rules for telecom carriers • Only “Light_touch” regulation for Telco BB 40 • Transmission component of telco BB is not a telecom service, and therefore is unregulated • -for transmission of >200 kbps BB 41 • The FCC approach is inconsistent, because broadband isn’t just telecom with its deregulatory agenda, but converges with broadcast, cable, and other agendas that include other factors. It therfore collides with other FCC policies. 42 Convergence of Media • Regulation and Network Regulation Creates New Substantive Issues, or New Variations of Old Issues 43 Regulatory Issue: Content Restrictions DOOM 44 (http://www.doomnation.com/) (http://ctc.sexzine.net/cgi-bin/ctc/ctc.cgi?63914183::46689417062573::http://www.come.to/sexzine) (http://members.xoom.com/Interleave/frame1.htm) • Here, the FCC under its chairman, who owes his job to the religious right, has been going after broadcasters for indecency. For example, even the loyal Fox network was fined 3.5 million for showing some risque scene. • Whatev er one things of the issue, it sure isnt deregulagtory. 45 Policy Issue: Media Concentration and Power • Economies of scale lead to market power – Telecom – cable – Microsoft – Yahoo/ Broadcast.com – Amazon.com 46 Regulatory Issue: Consumer Protection • Big problem of fraud and misrepresentation – Sellers, advertisers can be remote and anonymous 47 Regulatory Issue: Law Enforcement and National Security 48 • This definition by the FCC of cable broadband services as “information services” is now causing the FCC problems in court when it comes to requirements on VoIP providers for 911 emergency service, law enforcement access ( CALEA), and future universal service fund contributions: all these are set by law on telecom services, not information services 49 • ( And concerning the access of law enforcement to telephone communications, it has been disclosed in recent weeks that the telecom industry has collaborated with the government in monitoring the phone records and conversations of people without court authorizations.